The Aynak Copper Tender: Implications for Afghanistan and the West

The Aynak Copper Tender:Implications for Afghanistan and the West

James R. Yeager, BSc., MBAFormer Consultant to the Ministry of Mines and Industry

during the Aynak Tender

Contributors Eng. M. Mir Ashan Sediq, former Minister of Mines and Industries,

Afghanistan

Mr. Ed Smith; former Head of the Afghanistan Reconstruction Group (ARG)at the US Embassy in Kabul, Afghanistan

Mr. David Garner, former advisor to the Ministry of Mines and Industries,Kabul, Afghanistan

Mr. M. Hassan Alief BSc., MSc., an Afghan-American geologist consultant toHunter Dickenson

Dr. Larry Snee, PhD., Geologist United States Geological Survey (USGS)(retired)

Dr. Robert Shafer PhD., Vice-President of Business Development, HunterDickenson, Vancouver, BC Canada

-and others-

Aynak Tender Writing Project Coordinator

Hon. Don Ritter, Sc. D.

Member of Congress 1979-1993

Business Developer, Afghanistan

Table of Contents

Preface ...........................................................................................................................v

Executive Summary ....................................................................................................7

Copper, Afghanistan and Mining .............................................................................12

Copper in the World Market.........................................................................12

Mining in Afghanistan...................................................................................13

Donor Support to the Afghan Minerals Sector ........................................... 14

Aynak Copper................................................................................................ 16

Development of the Aynak Copper Deposit Project .................................. 17

Institutional, Legal and Regulatory Framework Supporting the Afghan MineralsSector............................................................................................................................19

Minerals’ Legal Framework ...........................................................................21

Minerals’ Regulatory Framework................................................................. 22

Aynak Copper Deposit Tender Process .................................................................. 24

Identification of Aynak Copper Deposit as a Priority Tender................... 25

Tendering the Aynak Transaction Advisor Contract ................................26

Contracting the Transaction Advisor to Implement the Aynak Copper Tender31

Transaction Advisor Responsibilities .......................................................... 32

The Tender Plan and Process ................................................................................... 34

The Aynak Copper Bid Package................................................................... 37

Solicitation of Expressions of Interest to Bid for Aynak Copper Deposit

Rights.............................................................................................................. 38

Pre-qualification of Bidders .......................................................................... 39

Due Diligence of the Bidders for the rights to the Aynak Copper Deposit43

Receipt of Submissions and Evaluation of the Bids ....................................44

Impact of China’s Dominance of Natural Resource Development in Afghanistan.......................................................................................................................................53

Findings and Recommendations .............................................................................. 56

Finding: Data and Information are Essential to Commence Viable Tender

Activities ........................................................................................................ 56

Finding: Deficient and Uneven Donor Support to the Afghan Minerals

Sector .............................................................................................................. 58

Finding: Virtually no Government or Donor Oversight of the Tender

Process ............................................................................................................60

Finding: Technical and Financial Guidelines for Proposals Need to be

More Defined.................................................................................................64

Finding: Due Diligence of Bidders Must be Adequately Conducted.........65

Finding: Sector Governance and Contract Implementation Capacity are

Necessary .......................................................................................................66

Finding: Ancillary Agreements Require Independent Review and

Oversight........................................................................................................67

Finding: Appropriate Public Participation from Start to Finish should be

Required..........................................................................................................69

Finding: Insufficiently Funded Transaction Advisor Consultancy...........70

Finding: Conflicted Transaction Advisor.................................................... 72

Finding: Western companies and Fully Private Firms are not Equipped or

Able to Compete in this Environment......................................................... 73

Annex 1: Acronyms ...................................................................................................76

Annex 2: Definitions .................................................................................................77

Preface

The Aynak Copper Deposit located in Logar Province, Afghanistan, 35 km

south of Kabul, remains as one of the world’s near surface, unexploited

copper deposits. The tender process of this non-renewable and highly valued

deposit commenced as early as 2003 and was ultimately awarded to the China

Metallurgical Group Corporation (MCC) in December 2007. Final contract

and licensing rights have been issued throughout 2008; additional ancillary

works are being reviewed.

The author of this Paper is James R. Yeager, a US geologist. The author

lived and worked in Afghanistan and served as an Advisor to the Ministry of

Mines of the Islamic Republic of Afghanistan during various phases of the

Aynak Tender Process. Although not directly contracted to work on the

Aynak tender, the author was requested to provide assistance at various

times in the tender process of the deposit.

From the data gathered, the author has concluded that the manner in which

the Aynak tender process was conducted could not ensure that its investment

outcome will: (1) generate the actual value of resource development and

revenue return that it should; (2) capitalize on the financial and employment

opportunities that the Deposit offers; (3) support good governance of how

Aynak operations are actually conducted; and (4) provide a good model for

current and future resource development in Afghanistan such as the Hajigak

Iron Ore deposit, oil and gas, other copper deposits, various large coal

deposits, marble, precious metals and gemstones, etc.

This Paper is intended to provide objective observation and constructive

insight into how the Aynak Tender Process was conducted and the

implications of same. It has been prepared pro bono and is intended to

provide insight of the on-the-ground experience.

James R. Yeagervi

This paper has been facilitated by the Honorable Don Ritter, businessman,

investor and market economy builder who brought 30 years experience with

Afghanistan to the writing project. Contributors and Peer Reviewers have

included Eng. M. Mir Ashan Sediq, former Minister of Mines and

Industries; Ed Smith; former Head of the Afghanistan Reconstruction Group

(ARG) at the US Embassy; David Garner, advisor to the Ministry of Mines;

Hassan Alief, an Afghan-American geologist and consultant to Hunter

Dickenson; Dr. Larry Snee, geologist with the United States Geological

Survey (retired); Dr. Robert Shafer, Vice-President of Business

Development for the Canadian company, Hunter Dickenson. All comments

may be directed to, [email protected].

Executive Summary

Understanding of the tendering of the Aynak Copper Deposit by the

Government officials of Afghanistan and by the donors to Afghanistan is a

key to establishing an Afghan minerals industry that will positively impact

the country’s economic, social and political well-being. If changes are not

made in future resource and minerals’ tendering by the Government in

Afghanistan with support of the donor community to ensure significantly

more transparent and market-based processes the integrity of Afghan

mineral resources and optimal fiscal return to the national budget and social

return to the national fabric will be forever lost.

There are few countries in the world known for their (varied) copper

reserves: The United States, Chile, Peru, and Indonesia have large low grade

porphyry copper deposits. Canada is the type location for smaller higher

grade massive sulfide deposits. The Democratic Republic of Congo, Zambia,

Zimbabwe, and now Afghanistan are known for sedimentary hosted copper

deposits. Copper ore deposits cannot be found anywhere; rather the minerals

are formed in the earth’s crust and are deposited is in specific geologic

environments. Total world production of copper in 2005 amounted to

15,100,000 metric tons. By 2008, that production grew to approximately

16,200,000 metric tons. With the demand for renewable energy resources like

wind power and solar power, the demand will continue to increase.

The Aynak Copper Deposit is noted to be the one of the largest unexploited

copper deposits in the world. The copper at Aynak is highly accessible and

surrounded by additional copper prospects. Aynak is a considered a world

class ore body containing at least 240 million tons of material with copper

content averaging 2.4% copper. These known reserves will produce at least 6

million tons of copper. Experts agree that in order to develop the deposit an

initial investment of more than $1 billion over five years is required.

International experts estimate that Aynak royalty revenues could generate

more than $200 million annually for Afghan budget funds over the next 30

James R. Yeager8

years. In a country where the national budget in 2008 was $650 million, this

would have significant impact. Development of the deposit will require

tremendous infrastructure including roads, electrical power, and training of

the local workforce. Upwards of 1500 direct mine jobs are estimated to be

generated out of the Aynak work; indirect employment that includes

transport, mine product processing, production of spare parts, and

community and mine services could be up to 30,000 new jobs depending on

the amount of ancillary activity that are supported by the developing

company.

As early as 2003, World Bank experts assessed the opportunity that Aynak

Copper presented and began to strongly encourage government to develop a

tender plan for this deposit. The British Geological Survey in collaboration

with Afghan Geological Survey experts conducted site visits, reconstituted

Soviet data and prepared an impressive data package. A complicated array of

Afghan Government procurement requirements and personalization of

development priorities on the part of certain Afghan Government officials

resulted in diminished opportunity to ensure that an internationally

experienced Transaction Advisor would be in place to conduct the country’s

first large market tender. As this paper relays, the overall manner in which

the Aynak Copper tender process was conducted was flawed but short of the

Transaction Advisor’s recanting the process, insufficient tangible evidence

exists to void the tender.

The first significant step to legitimately develop the mineral wealth of the

country was finalized in December 2007 with the granting of the Aynak

Copper Deposit rights to China Metallurgical Group Corporation (MCC).

With an initial bid submission of $1.8 billion investment, as of this writing

MCC has provided initial front end payment, higher than experts

anticipated, of $800 million to be paid over 5 years. As part of the bid a

number of ancillary terms were promised by MCC including: the

construction of a power plant, community development infrastructure, roads

and light rail that would transit north to south of the country.

The fact that the Aynak Tender even happened in the current context of

Afghanistan of a country in conflict is admirable. Other tenders will

continue to take place exploiting the resources of Afghanistan to establish an

The Aynak Copper Tender 9

economic base for development. These tenders include the Hajigak Iron Ore

deposit and oil and gas concessions in northern Afghanistan. These tenders,

as was Aynak, are being conducted under the auspices of the Afghanistan

Ministry of Mines.

Perfect Storm of Tender Events. The array of players and issues that impacted

how the Aynak Tender process progressed contributed to the development of

a murky and insufficient tender process. These included: A strong-willed

Minister unrelenting in his preference to see this award through with Asian

partners. A primary donor and embassies with parachuting presence were

overwhelmed, unwilling or simply not attentive to the details of the tender

events until it was too late. The Afghan Government was not prepared in

any way to address the legal, fiscal or contractual aspects required for the

breadth and depth of this project. The Transaction Advisor had never

implemented a project of this scope, did not have the requisite team regularly

engaged, lacked understanding of the Afghan Government setting and was

itself conflicted as it simultaneously implemented contracts as a client to the

Ministry of Mines. There was a set of certain bidders that were for the most

part not sufficiently versed in how to do business in Afghanistan, had not

necessarily done their homework on the setting in which they were bidding,

and relied more on political intervention than the Afghan context. The

consequences may ultimately be that a series of flawed processes have now

taken root in the Afghan minerals sector that will continue to guide sector

development until and unless more transparent and market-oriented

principles are introduced.

At no time, even following months of observing how unprepared and

unaware the Ministry and Government staff were in mine tender processes

and even the technical aspects of the Aynak deposit, did either the

Transaction Advisor, the Government, the World Bank or any Embassy

suggest that the tender might actually be too large under the current

conditions and that perhaps a more gradual approach to tendering the deposit

rights should have been considered.

Premature Tender. The Aynak tender process progressed more quickly than

did Afghan Government and institutional development needed to support

James R. Yeager10

the tender. In market terms, the minerals industry of Afghanistan is in an

early phase of development. While hundreds of mine licenses have been

issued by the Ministry of Mines, no major mines are in production and the

market legitimacy of these licenses is vague. Certain presumptions that the

Government was correctly implementing the process were baseless and failed

to recognize approaches that were based on central planning, conducted

behind closed doors, well outside market-parameters. Members of the Aynak

Tender Evaluation Committee questioned their participation, not having

acquired any skills to understand the tender process or to absorb what aspects

of bid submissions were most essential. This tender was a first; Government

agents could only employ the skills that they possessed, which were based on

an historic legacy of central planning and to some extent, state capture. In

addition, even for most of the international advisors on hand, this was a first

time tender experience. To evaluate the greatest benefit for Afghanistan, the

promises made by the winning bidder must be technically, financially and

socially measured and independently verified by a credible body of experts;

this was not the case for the Aynak Tender.

Insufficient Governance Mechanisms in Place. The Ministry of Mines,

specifically the Minister, firmly controlled the tender process for Aynak and

continues to hold grasp as contract and investment requirements are being

developed. Roles for other government agencies such as environment and

finance, the local Logar community and ancillary business opportunities

remain undefined. An historic lack of market orientation An leaves the

Afghan mining sector without legal, accounting and project finance aptitude;

mining is a high risk business that requires considerable capital investment

and regularized scrutiny of inordinate environmental aspects that include

toxic waste, water, land, and air pollution. The government was not prepared

to implement the tender to ensure a transparent outcome or to monitor the

outcome as the project is implemented.

Insufficient Oversight of the Tender Process. Neither Afghan Government

leadership nor its donor counterparts invested sufficient time or concern

during the Aynak Tender process. There was a sense that once a Transaction

Advisor had been contracted, that it would actually conduct all needed

oversight – for a number of reasons explored herein, that was not the case.


Members of the Evaluation Committee had never been part of a tender

process and were not clear as to what they should be looking for. While the

Ministry of Mines attempted to meet certain legal requirements to conduct

inter-ministerial forums around the tender, these were conducted behind

closed doors, did not necessarily include the appropriate personnel and were

so firmly controlled by the Minister himself that it was impossible for any

divergence of opinion or approach. There were no mechanisms for reporting

this skewed process.

West cannot always meet East. A variety of less than transparent mine

operations are underway throughout Afghanistan with some international

engagement, although with limited Western country company involvement.

The naïveté of the West to the potential for Afghan mining to develop

economic growth will translate into open access to, and dominance of, less

than transparent operations, illegitimate export of valuable non-renewable

products and missed opportunity to build the coffers of the Afghan national

budget through mine royalties and fees. Aynak provides the largest and

current example of this missed opportunity. Where some companies,

including MCC, are able to provide proposals that include an expansive array

of non-mining funding with their home Government support, Western

companies are not so structured. Had the tender documents more clearly

recognized this nuance in global mining bids, more clear terms about bid

parameters and funding mechanisms may have been put in place.

This Paper is intended to provide disinterested observation and constructive

insight into how the Aynak Tender Process was conducted and its

implications. It should provide important information that will alert the

Afghan Government and the international donors as to how an initial

bidding process, if not professionally and consistently handled, rather than

being purely dictated by non-technical bureaucrats concerned only with

dollar amounts and geo-political preferences, an entire chain of events can

emerge as detrimental to the entire outcome of an important tender activity.

Copper, Afghanistan and Mining

Copper in the World Market

Copper1 is a unique material for manufacturing. It is an essential commodity

primarily used for electric wire casing, power turbines – including solar and

wind turbines, power plants, machinery production, housing, and

transportation. In addition, because copper is a malleable metal that has very

unique heat transfer and electrical properties, it is a staple in the building

industry. It is used for copper tubing for all mechanical components in

housing including plumbing, heating, air conditioning, electrical wiring and

telecommunication infrastructure.

For the foreseeable future, copper has a secure market. By 2003, copper prices

had risen from a low of $0.60 per pound to $1.50 per pound, the projected long

term price for copper. Prices continued to rise to bullish levels of up to $4.00

per pound in 2006 and 2008 during the Aynak tender process and then

collapsed as the worldwide recession spread. Even today, China and India are

stockpiling copper for future infrastructure development. Such demand has

kept copper prices above $2.00 per pound. As the United States focuses on

clean energy alternatives, the demand for copper will increase and be used in

wind turbines, solar installations and hybrid cars. Smart electrical grids will

also require significant amounts of copper. Table 1 below shows world copper

production in 2005. Had the Aynak Copper Mine been in full production in

2005, Afghanistan would have ranked within the top 15 world copper

producers at the proposed production rate of 200,000 tons of copper per year,

Aynak would supply 1.3 % of the total world production. The challenge of the

copper mining industry is that to meet world demand every year the copper

industry needs to replace the exploited material on an ever increasing basis.

1 There are few substitutes for copper. Aluminum was used as substitute for copper inhouse wiring in the 1970’s. It failed because the aluminum oxidized and would melt atmoderate temperature. Different types of plastics were used in plumbing, many ofwhich failed over time.


This task requires that at least one deposit, the size of Aynak, would have to

be found on an annual basis.

Table 1: World Copper Production

Mining in Afghanistan

Afghanistan is home to some of the world’s most viable and least exploited

mineral resources; it hosts abundant mineral wealth potentially providing the

world with copper, iron, gemstones, and precious metals2. According to the

United Nations Economic and Social Commission for Asia and Pacific (UN-

2Peters et al, Preliminary Non-Fuel Mineral Resource Assessment of Afghanistan 2007,USGS Open-file report2007-1214.

Copper Production Metric Tons

Rank Country 2,001 2,002 2,003 2,004 2,005

1 Chile 4,739,000 4,581,000 4,904,200 5,412,500 5,320,500

2 United States 1,340,000 1,140,000 1,120,000 1,160,000 1,140,000

3 Indonesia 1,081,040 1,171,726 1,005,831 840,318 1,065,000

4 Peru: 722,305 843,215 831,223 1,035,574 1,009,898

5 Australia: 871,000 883,000 830,000 854,100 927,000

6 China: 605,000 593,000 620,000 752,000 755,000

7 Russia 600,000 695,000 675,000 675,000 700,000

8 Canada 633,531 603,498 557,082 566,491 566,500

9 Poland 474,000 502,800 495,000 531,000 523,000

10 Zambia 312,000 330,000 349,000 426,900 436,000

11 Mexico 371,123 329,874 355,653 405,540 425,000

12 Kazakhstan 470,100 490,000 485,000 461,000 402,000

13 Afghanistan Aynak proposed production 200,000

14 Iran 133,000 133,000 142,000 162,000 197,000

15Papua NewGuinea 218,000 211,311 190,200 173,400 193,000

Other 1,166,909 1,156,908 1,188,723 1,259,707 1,387,369

Grand total 13,700,000 13,700,000 13,700,000 14,700,000 15,100,000

James R. Yeager14

Examples of Mineral Resources inAfghanistan

Coal

Base Metals – copper, lead, zinc, nickel,cobalt

Ferrous Metals - Iron ore, Chromium

Precious Metals – gold, silver, platinum

Gemstones –emeralds, sapphires, rubies,spinel, amethyst, peridot, garnet,aquamarine

Ornamental Stones – lapis lazuli, amber,marble, turquoise, jade, malachite,petrified wood

Construction materials – crushed stone,dolomite, limestone, gravel, sand

Industrial materials – barite, bentonite,borates, dimension stone, kaolin, mica,phosphate

ESCAP) report,3 there are more than 800 mineral occurrences including coal,

zinc, and gold, throughout the country. These occurrences are spread

amongst various regions of Afghanistan, holding great potential for

economic development (See Text Box4). Many of these products are presently

mined in the absence of a transparent

framework for operations resulting in

little to no economic return to

Government.

Considerable mapping and assessment of

Afghanistan’s mineral resources was

conducted during the 1980s under Soviet

rule. Many Afghan engineers and

geologists received mine education in

Rostov, St. Petersburg and the Urals in

Russia as well as worked in Donetsk,

Ukraine and other leading technical

institutes in the region. The Soviets

carefully established Afghan government

agencies for mining including the

Afghanistan Geological Survey. They

provided training for the Afghans based

on Soviet ideology and an approach that relied on central planning and

production-based government operations. This approach dominates the

attitude and thought processes of the Afghan Ministry of Mines leadership

and staff today.

Donor Support to the Afghan Minerals Sector

Other than the World Bank, the international community has been slow to

commit to the legitimatization of Afghan mine operations and development

3 Geology and Mineral Resources of Afghanistan Atlas of Mineral Resources of theESCAP Region, Vol.11, 1995, 85 pages with four atlas maps at scale 1:2,000,000 and1:2,500,000.4 M.L. Vitelli, Energy and Mine Strategy of Afghanistan, Asian Development Bank2007-2008


of improved mining capacity throughout the country. Some of the

assessment and assistance efforts that have been conducted are:

In 2008, the U.S. Geological Survey completed an aerial survey of

mineral resources in Afghanistan, paid for by the Government of

Afghanistan, an estimated $9 million although $17 million was budgeted by

USGS;

In 2003-2007, British Geological Survey staff based at the Afghanistan

Geological Survey provided technical assistance, developed mapping

systems, geo-science data facilities and ordered existing data;

In 2007, under a USAID contract, Bearing Point implemented a Mine

Sector Strategy as part of the Afghanistan National Development

Strategy (ANDS) process;

In 2007, under a U.S. Trade & Development Agency contract, the US

Geological Survey implemented an “Assessment of oil and gas

reserves in the Amu Darya Basin of northern Afghanistan;”

In 2007, USAID implemented a 3 month study through Sibley

International, entitled “Review of Economic Opportunities for Mining

in Afghanistan”5 as part of small and medium size business program;

In May 2006, the World Bank provided a $30 million grant for the

Sustainable Development of Natural Resources Project (SDNRP) for

Afghanistan;

In 2006, the Asian Development Bank financed a Feasibility Study of

the TAPI (Turkmenistan-Afghanistan-Pakistan-India) natural gas

pipeline project;

In 2005, the Asian Development Bank supported a “Natural Gas

Strategy for Afghanistan;”

In 2005, the World Bank financed an Assessment of Oil and Gas

Operations in Afghanistan;

5 As a follow on to this work a USAID contractor has attempted to develop moreinformation on mine opportunities as part of a small and medium size businessportfolio commencing in 2007; USAID funding only supported a brief assessment;results have not been achieved.

James R. Yeager16

In March 2004, the World Bank published “Mining as a Source of

Growth”, a seminal document that alerted Government and donors of

the economic and development value that Afghan mining posed.

As part of these efforts, the British Geological Survey (BGS) and the United

States Geological Survey (USGS) have been working in Afghanistan since

2002. The BGS prepared the Aynak Data Information and Geological Maps.

Both the BGS and the USGS provided technical assistance to rebuild the

Afghanistan Geological Survey (AGS) included the compilation of all the

known technical data and the generation of new maps and airborne

geophysical surveys. The BGS maintained full time staff in Kabul while

USGS staff was based in the United States and made periodic visits to

Afghanistan, primarily limited to Kabul for security reasons. No donor

assistance has been provided to support mine infrastructure development.

Aynak Copper

The Aynak copper deposit is strategically located at the north end of Logar

Province 30 kilometers south-southeast of Kabul. At its closest point, the

deposit’s distance to Pakistan is approximately 65 km to the southeast.

Access from Kabul is provided by driving approximately 15 miles (25 km)

south on the Khost highway and then 10 miles (17 km) on unimproved dirt

roads, for a total of an hour’s drive. The property can be accessed year round

although snow can accumulate to result in interrupted access during spring

runoff. The property’s elevation ranges from 7,300 to 8,500 feet (2,200 to 2,600

meters). The high, dry desert climate with limited rainfall provides sparse

vegetation and abundant rock exposures. Electrical power is not available at

the property. Because of the remote location, communication is by satellite

phone although it is expected that cell phone communication could become

readily available.

Archived data defines the Aynak copper deposit as a “mineable reserve” of

240 million metric tons of material containing 2.34% copper (240 MT at

2.34%), which is considered a relatively high-grade deposit. During Soviet-era

field work, a camp and series of buildings for the storage of the core

(mineralized rock samples from the bore holes) were constructed. Bulk

samples were taken at that time by driving exploration drifts or tunnels for


more than 1,000 feet (300 meters) into the Aynak copper deposit. The tunnels

remain accessible today but the buildings do not. According to Abdul Wasai,

the late Director of the Afghanistan Geological Survey, the Soviet camp had

also served as a training ground for Osama Bin Laden and the camp was

destroyed by a U.S. air attack in 2002. There remain a number of bomb

craters, live and spent munitions on the property and the area continues to

provide a safe haven for Taliban and anti-government forces.6

Development of the Aynak Copper Deposit Project

Starting in late 2001, the World Bank7 working in partnership with the

Transitional Government of the Islamic Republic of Afghanistan helped to

develop an important series of foundation papers targeting key economic

sector of the Afghan economy. These documents were prepared under a

project framework entitled “Securing Afghanistan’s Future.” Mining was

included as one of the framework documents and reference to Aynak Copper

along with the Hajigak Iron Ore deposits was given. Following this work,

World Bank consultants over the course of 18 months conducted an

assessment of the Afghan minerals sector resulting in the publication of the

document “Mining as a Source of Growth.”8 This document firmly pointed

to Aynak as a primary target for the Afghan Government to pursue. It also

emphasized the absolute lack of institutional, legal and regulatory

frameworks in which any mining was being conducted and that these were

essential aspects to be developed before sound mine development could be

pursued. The document is commendable but was unfortunately not

translated into either Dari or Pashtu, the primary languages in Afghanistan.

In September 2005, the legal advisor to the Ministry of Mines prepared the

initial tender documents that would be required by the Government to

contract a Transaction Advisor to implement the Aynak Tender Process.

6 In late 2008, a New York Times journalist scheduled to interview local Taliban inLogar Province was kidnapped and as of this writing has not been returned; it isrumored – and not unlikely - that he has been moved to a border territory in Pakistan.7 The World Bank was established post-World War II to provide financial assistancefor restructuring and reform of developing governments and to facilitate private sectorinvestment in transition economies in accordance with market principles8 March 2004.

James R. Yeager18

The Minister of Mines at that time was unfamiliar with mining and with

procurement.

In May 2006 the Government of Afghanistan entered into an agreement with

the World Bank for a $30 million grant to implement the Sustainable

Development of Natural Resources program (SDNRP). The project was

primarily designed to develop regulatory and commercial capacity at the

Ministry of Mines. The actual flow of project funds that funded a few

international advisors did not commence until August 2006; to date much of

the work to be conducted under this grant has either been stalled by the

sitting Minister9, delayed by World Bank procurement or for other reasons

has not been mobilized.

9Since 2008, where technically qualified experts World Bank consultants have been identified and were based full-

time at the Ministry of Mines, the Minister has not supported their contract renewal.

Institutional, Legal and Regulatory FrameworkSupporting the Afghan Minerals Sector

The institutional, regulatory and legal framework and its implementation

under which Afghanistan’s minerals’ sector currently functions are

insufficient if to support market operations. In the absence of these

frameworks virtually every aspect of minerals’ sector operations – including

tender processes - is vulnerable to corrupt practices. Institutional oversight of

the Afghan minerals sector – including Aynak Copper - is highly centralized

within the Ministry of Mines and relies on established relations and

geographic preference. Despite donor documentation and Government

statements, few of the ministry departments actually operate in accordance

with officially defined roles and publicized strategic scopes of work. In fact,

the governance arrangements in place to support the Afghan minerals’ sector

support entrenched practices and natural monopolies where no legal

framework functions practically exist. There is a sense that commercial mine

functions, i.e., licensing, contracting, are being conducted as if “going

through the motions” in order to fulfill some expectation of market

standards, and that the reality is considerable deal-making and personal

relations are essential to securing mine rights in Afghanistan. Mine operators

complain of having to pay increasing fees to the Ministry of Mines and that

they are closely watched and even micro-managed by the Ministry. Business

is therefore short lived and the focus is to make the deal while you can. The

result is little valuable mid to long term investment, significant damage to

less valuable deposits destroyed and while removing the best and significant

products, damage to the environment and loss of economic opportunity.

James R. Yeager20

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In this context, minerals operations are highly centralized despite the

issuance of mine licenses and use of tender processes. There is an

inconsistency in the application of policy and law as well as inadequate

public information about legal rights and responsibilities that has resulted in

an increasing public distrust of how minerals’ operations are being

conducted. In addition to

Ministry operations, national

reform programs such as the

Afghanistan National

Development Strategy (ANDS)

and Priority Reform and

Restructuring program (PRR),

national investment promotion

through the Afghanistan

Investment Support Agency

(AISA), procurement oversight

by the Afghanistan

Reconstruction Trust Fund

(ARTF), various chambers of

commerce as well as international

embassy staff have intermittently

sought to influence sector

developments, including Aynak.

This array of changing actors has

effectively contributed to a

confusion of roles,

responsibilities, sector strategy

and priorities for development

and has resulted in an absence of

an institutional framework in

which a system of “checks and

balances” is supported. As a

consequence, the Minister of Mines has t

singular leadership role in the sector.

Institutions defined under

the Minerals Law

istry of Mines is the stateority responsible andinistrator for the state property inminerals sector.

r-ministerial Committee –is to beblished to include the Ministry ofes as Chair, the Ministry of

ance as Deputy Chair and otheristries as Members including theistries of Economy, Commerce,

eign Affairs as well as the Nationalncy for Environmental ProtectionPA) and any other members as

ded. The Committee has anortant legal function in mineers.

e Cadastre – to receive androve applications for mineralts; maintain registry books, surveyping on mineral rights. Mineectorate -financial and technicalections and evaluations; inspectts, health and safety review,lities, books and records; orderalties and fines.

ironmental Protection Departmentssue regulations for and monitorironmental compliance in sector.

logical Survey – research, mapping
ineral resources.
aken on a very centralized and


Legal Entitlements under the Afghan

2005 Minerals Law

Minerals License for exploration

Minerals license for exploitation

Authorization for quarry exploration

Authorization for quarry exploitation

Authorization for permanent quarryexploitation

Authorization for tailings exploitation

Authorization for artisanal exploitation

Authorization for treatment, processing,transformation, transportation or tradingof minerals

Minerals’ Legal Framework

The Constitution of Afghanistan provides the legal foundation from which

the country’s resources can develop. The Minerals Law of the Islamic

Republic of Afghanistan was enacted by the Cabinet in July 2005. The Dari

version of the draft bill was enacted into law and the English translation of

the new law was completed in December 2005. Parliament came to office in

early 2006 and has since reviewed various sections of the Minerals Law

although final approval of the law has not been published. The Minerals Law

provides for the public tender of minerals in Afghanistan. The provisions are

drafted using internationally accepted industry standards; the tender of

Aynak Copper was the first time the Government of Afghanistan has

implemented the portion of the

Minerals Law regarding the

competitive tender process on

the international world mining

stage.

All tax and custom regimes

applicable in Afghanistan apply

to mine operations. Royalties

are applied to exploitation

contracts based on a

determination by Ministry of

Mines’ officials. A well-

developed and specific

“Royalties Chart” designed by

World Bank consultants in consultation with Ministry of Mine officials was

not adopted as part of the Afghan Minerals Law which means that each set of

mine license terms will require negotiation per license. The development of a

royalty regime/ policy has been recommended by many advisors to provide

predictability to potential investors in minerals development.10 Commercial

legislation is developing in Afghanistan that will impact minerals

10 Most mine contracts currently in place call for a flat rate based on the gross value ofthe commodity produced no matter what the price of the commodity. A sliding scaleroyalty increases the tax take for the government as the commodity price increases andinsures profitability of the operator as the commodity prices decrease.

James R. Yeager22

operations;11 still, throughout 2008 and into early 2009, the Afghan Parliament

has demonstrated a particular resistance to supporting new commercial

legislation and in effect has stalled these important developments.

The Minerals Law provides a mechanism for the Government to attract

investment by tendering know mineral occurrences such as Aynak. There are

very specific guidelines established to encourage transparency and insure that

all government stakeholders are involved in the process. In the tender process

for Aynak, the law was fresh off the press and had not been tested. The

tender of Aynak was the first time the Government of Afghanistan has

implemented the portion of the mining law regarding the competitive tender

process on the international world mining stage.

Minerals’ Regulatory Framework12

It is important to note that not all mines are on the grand scale of Aynak

Copper and that large-scale mine operations such as Aynak require a

different, if not more rigorous, regulatory environment than artisanal or

small mine operations. For large operations, mine companies will have

diverse skill sets with many experts to insure the compliance with the

regulators. These operations need to be held to a higher standard than

artisanal (small scale) gemstone miners that tend to be, at least in

Afghanistan, family operations. Regulators involved with the small mines

will need to provide technical assistance toward supporting maximization of

production and for small operators to maintain a safe working environment

with minimal environmental degradation.

11 In addition to commercial legislation, the standard provisions of other laws ofAfghanistan apply to the Minerals Legal framework; these include but are not limitedto: labor and environmental laws, Rights of Way requirements, Use of InternationalAccounting Standards (IAS) required, Use of Project Infrastructure (with payment ofreasonable fee) permitted, Requirement to submit and apply Health & Safety plans,Explosive/blasting requirements/norms noted, Preservation of cultural heritagerequirements, Dispute resolution using administrative procedures, and wherenecessary, criminal law applies

12 Initial regulatory framework documents for natural gas were prepared with fundingby the Asian Development Bank (ADB) by Energy Markets, Ltd. of the UnitedKingdom through 2007; that regulatory work is not part of this White Paper review.


The Ministry of Mines maintains a Cadastre and Inspectorate office as well

as the Afghan Geological Survey. While these departments play a role in

how minerals and Aynak operations in specific will be registered, mapped,

reported on and tracked, they remain firmly controlled by the Office of the

Minister and work closely with the Department of Mines at the Ministry.

The World Bank program has supported some capacity building at the

Cadastre and Inspectorate and it had been anticipated that the program

would also support the drafting of at least fundamental regulations needed to

implement the Minerals Law. These drafts were to be in place by August

2008; while some draft regulations have been prepared by international

advisors, they have not been sufficiently developed or adopted. Drafting is

somewhat underway at the time of this writing but staff on the ground

anticipates considerably more time is required, notably in light of the

Ministry of Justice involvement that may follow to review new regulations.

Before any meaningful movement on the regulatory front, Aynak

exploration activities are already underway.

Building market capacity in this area is essential. Aside from regulatory

drafts being in English and requiring translation into the Dari language,

some regularized training is required for Afghan counterparts to absorb the

full intent and consequence of these detailed procedures. From there, the

Ministry of Justice will be required to review the regulations and even

Parliament review and approval will be required. Past experience (i.e., some

earlier attempts to draft oil and gas regulations) has demonstrated that these

processes can take up to two years if the process is even concluded at all -

and that timing is when at least one international advisor and an interested

Ministry leadership are consistently backing the process. Experience has also

demonstrated that intended content can be wildly changed during this

process to ultimately not reflect initially intended content13.

13 This was the case with the Afghan Hydrocarbons Law where at least sevenfundamental legal clauses where in the Dari translation of the law, were so completelydiluted or modified as to negate the intended effect.

Aynak Copper Deposit Tender Process

The Ministry of Mines is the Government agency responsible for the

oversight and development of the Afghan minerals sector. Since 2002, there

have been five ministers that in effect have resulted in five strategic plans for

the Afghan minerals’ sector. The current minister, Mohammad Ibrahim

Adel, who earlier served as Deputy Minister of Mines, is a mine engineer

and has been in office since March 2006. An objective observation is that this

Minister has been the least amenable to international assistance. His training

in the Soviet system where the state should own and exploit mineral deposits

based on the state plan, is counter intuitive to the private sector process of a

profit motive for the investor.

The first post-conflict Minister appointed in 2001 was Juma Muhammad

Muhammadi, an Afghan-American, U.S. citizen and former World Bank

staff member. Minister Muhammadi was highly respected amongst the new

Afghan government officials and although not a mine expert was familiar

with donor processes and possessed a strategic aptitude for economic

development. The Minister was responsible for putting in motion the World

Bank-supported effort to draft Afghanistan’s first Hydrocarbons Law and

Minerals Law as well as to conduct an assessment of the oil and gas sector, to

develop a natural gas strategy and to examine opportunities to divest

government of its mine assets. Minister Muhammadi seemed to possess all

the qualities needed to reconstruction and optimization of the Afghan

minerals sector. In February 2003, Minister Mohammadi was killed in a plane

crash in Pakistan.14

14 The Cessna 402 was on a mission to inspect copper mines in southeastern Pakistan.The cause of the accident remains undetermined. Also killed in the crash was theDeputy Minister and three other Afghan officials, two crew members and SunChangshen, the Pakistan representative of the China Metallurgical ConstructionCompany which operated the Sandaik copper mines in Baluchistan, Pakistan.


Subsequent to this unexpected tragedy, President Karzai appointed Dr.

Mehfooz Nedai,15 a former school teacher. During his relatively brief tenure

at the ministry, Minister Nedai placed much emphasis on the development

of the Afghan industrial sector. Following Dr. Nedai as Minister was

Mohammad Hakim Tuniwal, whose strategic emphasis was on the

development of the cement sector. Since Tuniwal16 was unfamiliar with both

mining and procurement, World Bank advisors took the lead to generate

momentum around the tender of Aynak copper. Upon Minister Tuniwal’s

departure, an Acting Minister was in place until at the end of 2005, President

Karzai appointed Afghan-American Mir M. Ashan Sediq who remained in

office until March 2006 when he was appointed by President Karzai to serve

as the Deputy Minister for Energy and Water. Minister Adel took office in

March 2006, implementing a highly centralized approach to ministry

operations. He surrounded himself with staffer that were not necessarily

technically qualified, and seemed to put into place a series of measures that

ensured a closed-door process around the Aynak Copper Deposit tender. In

his defense, the Minister had been given a task that no one in the country

had ever attempted; his own lack of market training and basis of knowledge

in technical aspects and Soviet industrial approaches could not have provided

him the requisite foundation to conduct a fair open market tender.

Identification of Aynak Copper Deposit as a Priority Tender

As early as 2002, as part of the reconstruction effort commencing in

Afghanistan, World Bank experts recommended to Government that the

development of the Aynak Copper Deposit should be considered as a sector

priority. Based on the March 2004, World Bank publication, “Mining as a

Source of Growth”, which highlighted the potential for Afghan minerals’

resources to be soundly developed, the Aynak Copper Deposit was

definitively identified as a primary economic development target for the

Afghan Government to pursue. It was agreed that the tender of the Aynak

copper deposit would consist of an Exploitation License and an Exploration

15 Dr. Nedai went on to an unsuccessful bid for President in an election that includedHamid Karzai as a candidate in 2005.16 Minister Tuniwal was appointed as Governor in Patika Province and wasassassinated there in September of 2006.

James R. Yeager26

License. The Exploitation License consists of approximately 28 km2 and

surrounds the economic, proven reserve of the Aynak Copper Deposit. This

area encloses two sub-economic copper resources, referred to as Darband17

and Jawhar.18 From an exploration perspective, the existence of Darban and

Jawhar which contain copper mineralization in the same rocks as Aynak

indicate the possibility of additional copper resources in the area. Additional

exploration work will be needed to test this observation.

In September 2005, a World Bank legal advisor and consultant to the

Ministry of Mines prepared the initial pre-tender documents that would be

required by the Government to contract a Transaction Advisor to prepare

and implement the Aynak tender. The funding for this work would be from

the Afghanistan Reconstruction Trust Fund (ARTF) while the World Bank

would fund some advisors through the SDNRP grant funds starting in

August 2007.

Tendering the Aynak Transaction Advisor Contract

The process required to fund the Aynak Transaction Advisor Contract

required that the Ministry of Mines appeal to the Afghanistan

Reconstruction Trust Fund (ARTF) which was implemented at the time in

2007 through the newly formed Ministry of Economy. Partnering with

ARTF was another Government agent, ostensibly responsible for ensuring

strategic procurement and optimizing the use of Government funds, the

Afghanistan Reconstruction and Development Strategy group (ARDS); for a

number of reasons including the personalization of relationships, ARDS

17 The Darband Copper Prospect is located 7 km east of the Aynak copper deposit.Geologically, the prospects are hosted in the same rock formations as Aynak and maycontain additional copper. Exploration work to date has defined an uneconomicresource 665.7 thousand tons of material with a grade of 5.7% copper. This resource willrequire additional work to turn the resource into a reserve.18 The story goes that the Soviets, using the Russian language, were unable topronounce “Jawhar” which means “jewel” in the Afghan Dari language. Instead theSoviets employed the term, “Dzhavkhar”. The Jawhar copper prospect is located 5 kmnorth of Aynak. ; Exploration on the property defined a resource of nearly 80,000 tonsof material with an average grade of 0.74% Cu. Additional exploration work needs tobe accomplished to determine the economic viability of this prospect.


firmly controlled how ARTF worked at that time and which tenders would

and would not be implemented by Government.19

Heavy handed input from ARDS which described itself to Ministry of Mine

leaders as the Government’s “strategic economic experts” resulted in highly

personalized dealings, non-technical handling of important technical content

and a general arrogance about which types of tenders would be supported and

at what funding level by Government with virtual disregard of World Bank,

Ministry and other funder priorities for development in Afghanistan.

Two tenders would be conducted relevant to Aynak: one for a Transaction

Advisor to implement the Aynak Tender Process; and a second for a

Company to conduct the exploration and exploitation rights of the Aynak

Copper Deposit. The first draft of the Aynak Tender sought a consultant to

conduct the Copper Deposit Tender – the Transaction Advisor – was

completed in October 2005, following the traditional tender template

prepared by the World Bank as agreed by the Government and the ARTF.

The document totaled more than 100 pages. The document was submitted by

the Ministry of Mines, according to protocol, to the ARDS staff for review;

despite several requests, for more than four months, no response was

received from ARDS. The then newly appointed Minister, Mir Ashan Sediq,

came to the Ministry in early 2005 and immediately inquired of ARDS and

ARTF as to what the hold up in their response had been. From early 2005

through May 2005 a “back and forth” of letters and approaches was

19 In theory the establishment of the ARTF made sense. Willing donors would placetheir assistance funds in this trust fund and the Government, working with aninternational consulting firm, would conduct tenders and procurements in atransparent and efficient manner, optimizing use of Government funds and buildingGovernment capacity to procure. However, the lack of competency to conductprocurement at the Afghan government level was alarming. The initial consultant toARTF was the British firm, Crowne Agents which, by all accounts had done animpressive job to establish and implement sound and practical procurement protocols,trained staff and provided easy access to its offices and expertise for non-procurementexperts. However, in 2004-2005 when it came time for the renewal of the ARTFimplementing contractor, Government, with strong World Bank input, determinedthat a much less expensive consultancy other than Crown Agents should beconsidered. A lesser cost consultancy had in fact bid for the work to run the ARTF andthe award to manage the ARTF processes went to an Indian firm with experience asthe procurement advisor to the railways in India.

James R. Yeager28

exchanged between the ARDS Afghan-American staff member who served

as the Deputy to ARDS, and the Ministry of Mines. This exchange could

never have been contemplated; it is incomprehensible that the Aynak tender,

recognized as a fundamental to Afghan development went through such

exorbitant micro-management by an ARDS procurement facilitator that

resulted in devastating tender modification, specifically its level of funding.

While World Bank staff estimated that between $600,000 and $800,000 was

required to sufficiently fund a Transaction Advisor, following months of

exchanges, the ARDS declared that he would not accept funding beyond

$400,000. The ARDS individual had no technical basis for using this amount

except that he had to manage a lot of Government funds and, based on his

discretion, did not believe that the Ministry of Mines could manage more

than this amount. Under mounting pressure from the highest levels of

Government to pursue the Aynak Tender Process, neither the Ministry of

Mines nor World Bank fought the funding level.

The following point of dispute between ARDS and the Ministry of Mines

was where the Notice Seeking Expressions of Interest for the tender notice

would be published. The ARDS official would not accept a suggestive

shortlist of mine journals and other international journals prepared with

World Bank inputs from the Ministry of Mines. ARDS instead suggested

Afghan Embassies around the world, and the Kabul Weekly and Kabul

Outlook newspapers, circulated only in Kabul; the first issuance of the tender

only went to the ARDS-preferred scope of publications. Later intervention

by new ARTF leadership expanded the publication to include the suggestive

list of mining and related journals which likely tender candidates would be

reading.

Seven firms submitted Expressions of Interest (EOIs) including those

directly contacted by the World Bank to bid on the Transaction Advisor

tender. Once these EOIs were received, however, as of the due date of

January 30, 2006, only two of these firms actually submitted. The two bids

were:

Behre Dolbear (BDB), Denver, Colorado. One of the oldest, continually

operating, mineral industry consulting firms in the world, which has a

large staff of geologists, engineers, financial analysts, environmental


scientists and social scientists with ten offices throughout the world.

The bid amounted to approximately $1 million.

Gustavson Associates, Boulder, Colorado, a 26 person office that focuses

on oil and gas appraisals and reserves evaluations and qualifying

reports for the mining industry. Gustavson Associates completed some

short-term work on oil and gas assessments in Afghanistan in 2003-

2006 and work in Central Asia and the FSU. Gustavson Associates bid

amount was approximately $400,000.

An Evaluation Committee consisting of an ARTF representative, a World

Bank consultant, and approximately 8 individuals from the Ministry of

Mines was formed to evaluate the technical proposals. ARTF assisted by the

evaluation committee evaluated the financial proposals.

The selection criteria developed by the World Bank and Ministry of Mines

with ARDS and ARTF acknowledgement and agreement that the Aynak

Transaction Advisor would not only be selected based on price. The bid

consisted of a technical proposal and financial proposal. Each set of

documents was evaluated separately. The technical evaluation was completed

prior to the evaluation of the financial proposal. The tender document

included a clear evaluation formula where the technical proposal held a much

greater weight than the financial proposal. Now public information, in the

analysis of the technical proposals completed by the evaluation group, Behre

Dolbear received a score of 94% while Gustavson Associates received a

technical score in the 60% range. Nonetheless, once the overall evaluation

formula was applied, Gustavson Associates received the bid since their

financial proposal of $400,000 was less than half of the BDB financial

proposal.

Of the 10 references supplied by Behre Dolbear, five projects were cited

as ones that BDB brought to successful conclusion with the

privatization of state owned mine enterprises. Of particular interest

were the results of a sixth project, the tender of gold properties in

Nigeria. BDB had won but pulled out of that project due to corruption

in the process. More importantly for this tender than that of BDB’s

technical understanding and experience with copper mining worldwide

James R. Yeager30

was its lengthy experience in preparing and conducting mine tenders

throughout many countries including Jordan, Russia, the Philippines,

Mongolia, Chile, Australia, Brazil and China.

Of the 10 references supplied by Gustavson Associates, the company

brought two projects to a successful conclusion resulting in the

privatization of state-owned enterprises. However, in those two

projects, the company was not involved in all the tasks as required in

the terms of reference as required under the Aynak transaction advisor

tender. Gustavson Associates had never conducted a complete mine

tender.

Gustavson Associates was awarded the contract to serve as the Transaction

Advisor to implement the Aynak Copper Tender based on least cost.

Contracting the Transaction Advisor to Implement the

Aynak Copper Tender

One of the first actions conducted by Minister Adel as he took office in March

2006, was to sign the World Bank $30 million SDNRP grant that would be

channeled to his Ministry toward strengthening institutional arrangements in the

sector. These funds could have been used to support a more transparent and robust

tender processes for Aynak copper – but were not.

The second major action required by the new Minister was to negotiate the Aynak

Copper Transaction Advisor Contract with a US firm, Gustavson Associates. The

negotiations commenced in April 2006 in a format where Minister Adel dominated

the talks as lead negotiator along with 18 members of his staff. At this time, the

Minister told the Transaction Advisor representatives to return home and to return

in two weeks; the World Bank advisor to the MoM reviewed the contract line by

line and attempted to explain its contents to the MoM staff. The tone of these

negotiations in which an author of this Paper was present, was extremely

adversarial on the part of the Minister. He did not hide his dissatisfaction with

earlier oil and gas work that Gustavson Associates conducted or that he lacked

confidence in the firm’s ability to effectively work in Afghanistan. In addition,

new commercial tax laws were not sufficiently understood by either the Ministry

or Gustavson Associates; no one could define how taxes would be collected from

the firm which resulted in prolonged negotiations. Negotiations were completed in

June 2006 and the Transaction Advisor work commenced in August 2006. The

original term of the contract was for 7 months which was ultimately extended.

James R. Yeager32

Transaction Advisor Responsibilities

The work of the Transaction Advisor was defined as a seven part process.

1. Develop a Tender Plan for the Aynak Copper Deposit; the Plan to be

approved by the Minister and Inter Ministerial Committee,

2. Prepare the Aynak bid documents including a model contract,

3. Solicit Expressions of Interest,

4. Evaluate and Pre-Qualify Bidders,

5. Conduct Due Diligence of the bidding firms including the opportunity for

bidders to visit Aynak and gather information from the Government,

6. Receive and evaluate the Bids with the use a pre-approved process, and

7. Negotiate and Award the Aynak Copper Mineral Rights.

Observations. This work was to have been carried out by a team from Gustavson

Associates that included geologists, mining engineers, financial specialists,

environmental specialists, and legal support. While many individuals were

promised to implement this activity as Transaction Advisor, in fact, only one

regular representative participated – a geologist. He was never fully based in Kabul

during the contract and did not have colleagues as part of the Transaction Advisor

Team as promised in the Gustavson Associates proposal. Legal Counsel hired as a

consultant to Gustavson Associates participated to a much lesser extent.

The funding for the Transaction Advisor Contract was estimated by World Bank

experts to require approximately $800,000 but that the amount could be as high as

$1 million. Through the Afghan Government procurement agency, the sum made

available to support this contract was $400,000, a substantially diminished funding

level than should have been available. As a result only 2 companies submitted bids

to conduct his work.

It must be noted that during its time serving as the MoM Transaction Advisor for

the Aynak Tender, Gustavson Associates was also providing advisory to MoM on

identifying potential gas markets as part of an Asian Development Bank contract


as well as working with US Agency for International Development (USAID)

funding to assess gas production opportunities in northern Afghanistan. The

World Bank and ADB work required direct reporting to and approval by Minister

Adel; USAID work did not. Whether attributed to heavy handed decision-making

by the Ministry of Mines, lack of oversight by the World Bank and ARTF or

general neglect of the sector by the Afghan Government and international

community, to select a Transaction Advisor for a project defined to be the largest,

most economic and socially influential in the history of the country “on the cheap”

resulted in irreversible lost economic and social opportunity.

The Tender Plan and Process

The Contract terms for the Transaction Advisor, based on the Request for

Proposal (RFP) prepared by World Bank consultants, provided an overall

framework for what the details of the tender plan should look like. As a

starting point, the Transaction Advisor was directed to (1) conduct due

diligence of the fiscal and regulatory regime of the Aynak Copper Deposit as

a potential tender property and to (2) consult with the British Geological

Survey (BGS) on geologic data support in order to define a Tender Plan.

The Tender Plan would then outline the preferred course of actions across

the proposed five-month program to likely include:

Preparation of a tender methodology and evaluation criteria by which

bidding companies would be pre-qualified and by which final bid

submissions would be scored.

Development of guarantees and bond posting requirements and

corresponding procedures for same.

Determination of which individuals would actually participate in the

evaluation and evaluate bid submissions as well as the development of

rules for evaluation including actions for how consultants to the

process would support the evaluation phase.

Development of required inputs/outputs of selected Afghan

Government agencies throughout the Aynak Copper Deposit tender

process

Observations. An essential but poorly defined guideline set out in the

Transaction Advisor Terms of Reference was that, in addition to close

collaboration with MoM it should interact with other Executive Branch

offices of the Government. The earlier determined underlying need for this

interaction was to ensure that relevant branches of the Government were

consistently part of the tender process, gained a reasonably detailed


understanding of the impact of the Tender and could contribute to the

process as it progressed ensuring that various Government agency and

ministry concerns would be addressed in the evaluation of the bids. The

Transaction Advisor did not reach out to other branches of Government and

in fact was ordered by the Minister not to extend its reach.

Ironically, a credible array of Afghan public and private sector

representatives have expressed concerns to the effect that if more

government bodies had actually had more participation in the process, as

legally prescribed, opportunities for corrupt practices would have increased.

While this may be the case and presents a valid concern related to how the

Afghan government is operating, it does not allay concerns that the Aynak

tender was closed and firmly controlled by one government agency with

virtually no oversight. In implementing the legal requirement to include

other government agencies, four fatal flaws emerged:

1-The Transaction Advisor had only ever worked with the Ministry of Mines and

was not familiar with other Government agencies or ministries or even the

overall structure of the Afghan Government relevant to the Aynak Copper

Tender activities. The Minister assured the Transaction Advisor that he was

regularly meeting with other government agencies and that it was not the

concern of the Transaction Advisor.

2-The Transaction Advisor relied heavily on mine engineers and technical staff with

virtually no consistent legal advisory, project finance or government relations staff

that would ordinarily be well-versed in this approach to tender processes,

notably in a nascent market, to reach beyond the Ministry of Mines.

3-The Minister of Mines in office by the time the Transaction Advisor took on its

role had no meaningful interest or intent to engage other government offices. The

Minister began to meet with Ministry representatives behind closed doors in

early 2008 on an irregular basis. The other government representatives were

low and mid-level; not until pressure to increase government participation

emerged in June 2008 were higher government officials invited into the

process.

James R. Yeager36

4-The Transaction Advisor relied on the Minister’s control of this requirement in

what appears to have been an inexperienced and ignorant approach to doing business

in Afghanistan.

And so, the Tender Plan that the Transaction Advisor, Gustavson

Associates, submitted to the Ministry of Mines, per its contract

requirements, was subsequently approved by the Minister of Mines. The

plan did indicate the need for interactions with the other Ministers.

However, implementation of same was fully conducted by the Minister who

took a heavy-handed approach as to which Government agencies he would

invite to meetings and which level of representation from the various

agencies would be invited – generally mid to lower level officials.

During its initial information gathering trip in August 2006, Gustavson

Associates’ representatives did attempt to set up meetings with the

government agencies that comprise the Inter-Ministerial Committee. The

input of the other ministers that have a vested interest in mineral

development include the Minister of Finance, Minister of Economy, Head of

the National Agency for Environmental Protection, Minister of Foreign

Affairs, and the Minister of Commerce. The Minister strongly informed the

Transaction Advisor that it had no need to meet these individuals this

directive was the first of many to come from the Minister that served to

reduce the transparency of the Aynak Copper Deposit tender process.

Minister Adel states that regular meetings of the Committee were conducted

and, in fact, they were. Over the course of approximately five months,

committee meetings were conducted when he called them and were not

regularly scheduled; they were conducted in his office at the Ministry of

Mines behind closed doors with no Transaction Advisor participation and

with no note-taking or minutes; they were conducted with him stating the

agenda and providing his view of and preferences for the transaction

details20.

It was only toward the very end of the tender process, when increasing

publicity was being given to the Aynak Tender, that a few higher level

20 Various participants reflected on the meetings as “very interesting” but did notconvey that they were actual participants in the tender, rather, that they were beingupdated by the Minister.


meetings of various ministers were called. Neither the Transaction Advisor

or World Bank consultants were invited – or permitted – to be present on the

topic on which they had been actively engaged. No Afghans who were part

of the Tender Process were permitted to speak in the meetings, other than

the Minister. Not one Minister opposed the process, likely for lack of full

understanding of the process, but more likely encouraged by the fact, as

suggested by President Karzai, that Afghanistan was now entering the world

of international tenders and world class bidding. In effect, heads were turned

and Minister Adel emerged as more of a hero than a manipulator of the

process.

The Aynak Copper Bid Package21

The Bid Package prepared by the Transaction Advisor and approved by the

MoM included:

1. Instructions to Bidders describing in detail the bidding procedure, the

content required to submit a bid, the evaluation criteria for bid review

and the overall process for bid submission including the exact date,

time and place to submit the bids.

2. Rules for Negotiation detailing the process by which the Government

would negotiate with the successful bidder including time limitations

and extenuating factors that might either delay or cancel the

negotiation.

3. A draft Model Contract prepared by Gustavson Associates that included

broad terms and conditions under which the successful bidder would

negotiate.

4. Summary of fiscal and regulatory regime aspects taken from relevant

overarching instruments including the 2005 Minerals Law, Extractive

Industries Tax Provisions from the draft Tax Code, Investment Law,

Environment Law, and Customs Law provisions that were in various

stages of development.

21 Proprietary information is not included in this review, nor are conversations directlyconducted during the Evaluation Process, also deemed to be proprietary andconfidential in a tender setting.

James R. Yeager38

5. Technical Data. All relevant technical data on the Aynak Copper

Deposit.

As for technical data to be included in the Bid Package, the British

Geological Survey (BGS), for almost three years, had been working with the

Afghanistan Geological Survey (AGS) to develop data bases on key deposits,

including Aynak. In collaboration with the World Bank as early as 2004, the

BGS worked to gather relevant Aynak materials and in 2006 established a

web site with all the pertinent materials. All the information was provided to

the bidders in electronic format on portable hard disks.

Unlike the advertising for the Aynak Copper Transaction Advisor

consultancy, the advertising of the actual Aynak Copper Deposit bid was

able to be conducted by the Ministry of Mines – not the ARTF. Both the

initial Request for Expressions of Interest (EOIs) and the final Request for

Tender were published by the Ministry of Mines in major international

mining publications such as the Mining Journal. From these postings,

interested parties learned about how they could view the detailed

information at the BGS website. The Transaction Advisor used “PR Wire”

which is a wire service that distributes press releases.

Solicitation of Expressions of Interest to Bid for Aynak Copper DepositRights

As part of the Transaction Advisor contract terms, a dedicated Inter-

ministerial Committee was to approve the Bid Package. This approval would

trigger the Transaction Advisor’s preparation, designing, launching and

managing of the overall tender process. All tender processes were to be based

on “international open-bidding process” standards. The Transaction Advisor

published the Expression of Interest (EOI) in major international mining

publications. Thirteen companies submitted Expressions of Interest.

Observations. Receipt of the Expressions of Interest was conducted by the

Ministry of Mines although the original tender plan called for the

Transaction Advisor to receive the EOIs. Once received, the Minister took

control of the documents, locking them in his office. The Minister assumed

complete control over the documents and the release of the documents. This created


Companies that Submitted EOIs forAynak Copper

Bahana Consortium, AustraliaChina Metallurgical Group, ChinaGeneral Minerals Corporation, USAGreen Mountain Mine ManagementCompany, IranHindalco Industries, Ltd., IndiaHunter Dickenson, CanadaKazinvest Minerals, KazakhstanK Kares Co., Ltd, South KoreaPhelps-Dodge Corporation,* USASK Mining Invest and Development,South KoreaStrikeforce, Ltd., RussiaTyzhpromexport, RussiaZijin Mining Group, China

major transparency problems as the facilitators were not allowed to become

familiar with the material before presenting the information to the

evaluation committee. Originally, there were no constraints regarding the

size of the companies submitting bids. However, as later indicated, during

the evaluation process, it was determined by the Minister of Mines that the

smaller companies would be dismissed as he believed that they lacked the

financial and technical capacity to bring the project to completion.

Pre-qualification of Bidders

In order to conduct a pre-qualification review of bidders, Minister Adel

appointed 14 members that included Ministry of Mines’ staff that

encompassed the Afghanistan Geological Survey, Deputy Ministers, and

other ministry staff (see box). By all observations, the members were

subservient to not only the Ministry of Mines but to the Minister himself. In

addition, a German trained geologist and mine sector advisor to President

Karzai was selected by Minister Adel

and agreed to by the international

advisors to work on the project.

Non-voting members of the group

who acted as facilitators to the tender

process included an economic

geologist with the BGS, an economic

geologist with Gustavson Associates

and an economic geologist and the

World Bank Technical Advisor to

the Ministry of Mines.

On October 28, 2006, 13 Expressions

of Interest (EOI) were received by

the Ministry of Mines from

companies interested in developing

the Aynak copper deposit. In order to show no favoritism on the order of the

evaluation the minister suggested a random draw where each package was

given a number. Members of the evaluation group drew the numbers and the

EOIs were set in the queue. Minister Adel ordered that, instead of opening

James R. Yeager40

all EOIs at the same time, they would be opened in accordance with a draw

to determine evaluation order.

The Transaction Advisor developed a scoring matrix to assess the EOIs

based on 100% total score which consisted of three categories:

1. technical capacity (45%) – broken down to an evaluation of technical

staff and corporate history;

2. financial capacity (45%) – broken down to market capitalization or

demonstrated ability to raise capital and experience/history of

financing large mine operations; history of financing large copper

development; and,

3. work in the region (10%).

Each subcategory of the technical and financial category was given a weight

and was scored from 1 to 5 where 1 indicated poor and 5 indicated excellent.

Each of the 14 Evaluation Committee members scored each company

individually.

The evaluation of the companies started on October 29, 2006 and continued

through November 7, 2006. The Evaluation Committee met daily from 9am

to 5pm with a 1 hour lunch break in the first floor main conference room of

the MoM building in Kabul. The first two days of the Evaluation Committee

work consisted of a refining the scoring methodology, training the evaluators

and conducting mock evaluations – “evaluation training on the job” .The

actual scoring of the EOIs began on November 1 and continued through

November 6. The Evaluation Committee was generally able to evaluate two

EOI submissions per day. No names were used when the data was

presented to the

evaluators.

On November 7,

the Evaluation

Committee

members’ began

to tabulate the

results.

Tabulation

Figure 1: Analysis of EOIs


consisted of a dual data entry system. Both the Transaction Advisor

representative and World Bank consultant maintained the summary spread

sheets who would also address discrepancies as they arose. Each individual

evaluator would bring his “ballot” to the “polling booth.” At each polling

booth which consisted of two computer stations in the ministry conference

room, an outside observer would assist and observe the entry of the scores

from the evaluators. The individual evaluator would read his score and the

data was entered into a spreadsheet. Once all data was entered, the

international advisors began the calculation of scoring and final analysis.

The companies fell into three categories based on size, which for theEvaluation Committee members became known as the “big fish”, the“medium fish”, and the “little fish”. The five large companies scoredbetween 98 and 82, the medium sized companies scored between 45 and 60,the smaller companies scored between 0 and 20. The Committee found that,based on its established criteria for evaluation, “it was obvious that the fourcompanies did not qualify. These companies included: General MineralsCorporation, USA; Green Mountain Mine Management Company, Iran; K Kares Co.,Ltd, South Korea; and, SK Mining Invest and Development, South Korea.

Following some discussion, the Committee selected the top nine companies

as opposed to the top three companies as proposed by the Tender Plan.

Although such a large selection of companies to compile the short list would

require considerable work for the Evaluation Committee, it was agreed that

this approach would provide greater exposure of Afghanistan to the

international mining community. The companies selected to submit bids for

Aynak included (Listed alphabetically by company):

Bahana Consortium (Australia)

Metallurgical Corporation of China (MCC) (China)

Hindalco Industries, Ltd. (India)

Hunter Dickenson (Canada)

Kazinvest Minerals (Kazakhstan)

Phelps-Dodge Corporation* (USA)

Strikeforce, Ltd (Russia)

Tyzhpromexport (Russia)

James R. Yeager42

Zijin Mining Group (China)

Nine of the companies that submitted an EOI were invited through the use

e-mail to continue the tender process and to submit a bid for the rights to the

Aynak Copper Deposit. Three companies withdrew from the bidding. They

included Hidalco Industries of India, Tyzahpromexport of Russia and Zinjin

mining of China.22

Observations

Despite having a legal advisor and available financial advisors to assist with

the evaluation process, the Minister did not want this participation and the

Transaction Advisor did not push for it; thus, and this is a critical point, no

commercial experts participated in the evaluation of EOIs. This approach

continued into the latter phase of bid evaluation and would subsequently

have lasting impact on the contract development as most bidders included

non-core terms beyond technical aspects of copper, i.e., financial guarantees,

community development projects, transport projects, power and heat-

generation projects. The Committee membership did not technically

represent the breadth of the Aynak Copper tender proposals. In addition, as

most proposals had significant tender inclusions on power development, rail

and other transport and community development, it would have been

expected that some technical expertise on these topics would also have been

included in the Committee, but that was not the case.

With respect to weighted average scoring method, it appears that neither the

Minister or Committee members fully understood the method. Although

each of the 14 members individually scored each company, Minister Adel

sought to review each Evaluation Committee member’s evaluation sheets.

The facilitators vigorously opposed the request and insisted that all

evaluations remain individual ballots and no undue pressure be put on the

22 Hindalco Industries was in the process of developing other mines and made acorporate decision not to pursue the Aynak. Tyzahpromexport would not return callsand never indicated why they withdrew. .Zijin, the company indicated that theGovernment of China did not want them to participate since they would be incompetition with MCC.


evaluators to reconsider their scores. After some lengthy discussion, the

Minister agreed.

Due Diligence of the Bidders for the rights to the Aynak Copper Deposit

The expectation of the “due diligence” phase of the Tender Process was that

several things would simultaneously transpire: (1) that the Transaction

Advisor, working with the Ministry of Mines, would conduct due diligence

on each of the six companies that indicated that they would bid for the

deposit rights; (2) that the British Geological Survey (BGS) had prepared all

relevant geo-science data and a data room in Kabul located at the

Afghanistan Geological Survey (AGS) where bidders were invited to visit

and review materials, speak with the BGS and AGS representatives, etc. and

(3) that the bidders would conduct their due diligence by visiting

Afghanistan, the Ministry of Mines, the Aynak site and inquiring on various

levels among government, other international firms and various agencies

facilitating private sector investment in Afghanistan.

In order to distribute the data concerning the Aynak Copper Deposit, each

Bidder was provided a portable hard drive with more than 80 gigabytes of

data. This disk was shipped to each company by courier from Kabul in early

January 2007. This disk not only contained all relevant technical data, but

applicable laws, and logistical information about travel visas, security,

lodging, and entertainment in Kabul, and a site visit; the Tender Plan

originally called for the companies to visit Kabul in January of 2007. The

visit dates were pushed back to April because of the likelihood of adverse

winter weather and the inability to provide the tender package on schedule.

In order to assist the company representatives, at least one staff member

from the MoM was assigned to each company as assigned by the minister.

The companies were divided into groups of three. The schedules were

prepared by the Technical Mining Advisor and approved by the Minister and

the Transaction Advisor. The objective of the visit was to provide each

company the opportunity to make a site visit at Aynak and to talk with each

Ministry represented in the Inter-ministerial Committee and to collect

sample and first-hand information about the deposit. The late Director of

AGS, Abdul Wasai, who had worked at the Aynak site during the 1980s, led

James R. Yeager44

each excursion. Each company was escorted to various ministries to

addresses issues including: taxes, security, environmental constraints, social

development and other factors that were to be included in their bid.

Observations

The fact that due diligence was not conducted on bidders and that actual

track records of bidders, as opposed to their own informational materials,

were not known to the evaluators substantially reduced the credibility of the

process. No independent evaluation of the bidders’ past performance was

considered. In addition, the rapidity with which the actual tender work was

happening left Ministry and donor representative officials to recognize and

appreciate the more than four years of work that the BGS staff in Kabul had

undertaken to reconstitute important geo-science and other technical data

that was essential in the preparation of the Aynak Data Packages. The BGS

prepared this information while training AGS staff which consisted of all the

archived Russian data and was provided in user-friendly electronic format.

For the Transaction Advisor to have suggested January travel to Afghanistan

seems to have been shortsighted and reflected either a lack of understanding

of the country’s annual climate conditions or an oversight in an attempt to

meet rapid tender timing that ultimately delayed the tender process for a

solid four months.

Receipt of Submissions and Evaluation of the Bids

The due date for Final Bid Submissions for the Aynak Copper Deposit rights

was May 28, 2007. Five Bid Submissions were received. The Bahana

Consortium from Australia opted out of the bidding. After their due

diligence visit, the group determined they did not have the capacity to

develop the infrastructure that would be required to bring the project on line

in the timeframe required. The other five companies had financial resources

to complete the project and infrastructure. This is especially true of MCC

which is 44% owned by the Chinese government.

On May 29, 2007, the five bid submissions were received at the Ministry of

Mines. The Minister decided that the earlier Evaluation Committee

membership of 14 members should be expanded to 20. And so, on the same

day the bids were received, 40 Afghans from the Ministry of Mines were


presented to the World Bank consultants for a three day training course on

how to conduct bid evaluations. Some of the members who worked on the

EOIs were retained; some were let go and replaced by new members.

Minister Adel expressed that this way anyone who was possibly “corrupted”

was replaced – by him. The new committee was appointed by Minister Adel.

Missing from the new Evaluation Committee were any representatives from

other ministries of the Inter-ministerial Committee. The reason given by

Minister Adel for this more narrow composition of the Committee, now

predominantly MoM staff was that he had personally been given full

authority from President Karzai to conduct the Aynak Copper Deposit bid

evaluation as he – the Minister – saw fit.

According to the Transaction Advisor’s Terms of Reference, included as part

of its contract terms (i.e., to which MoM agreed), all documents related to

the bid submissions were to be controlled and held by the Transaction

Advisor. The agreed upon intent of this process was to ensure that a third

party would be in charge of the documents and their security and that the

Transaction Advisor would be responsible for any breach of that security.

However, immediately upon receipt of the Bid Submissions, counter to what

had been previously agreed, the Minister took complete control of all Bid

Submissions, locking them in what he described as “a secure file cabinet” to

which he alone had the key. One can only speculate why this was done but

these actions served to shock officials working outside of the Ministry as

well as his own staff and donor observers. At the very least, there exists the

possibility by appearance that the Minister or his staff could have tampered

with the bids; but more indications suggest that highly confidential

information presented by some bidders may have been passed to certain

other bidders.

Gustavson Associates had prepared an evaluation matrix to score the Bid

Submissions. As with World Bank procurement guidelines, the procedure

was to first evaluate the Technical aspects of the proposal (75%) followed by

the evaluation of Financial aspects of the proposal (25%). Each component

had “sub-components”. The technical proposals consisted of the technology

employed by the companies, the environmental protection program, the

social/economic development program, and proposed infrastructure

James R. Yeager46

development. The weight carried by each of the technical components and

the financial component as decided by the IMC and was as follows:

Technical Mine Development Program 20%

Environmental Program 20%

Social/Economic Development Program 25%

Infrastructure Development Program 10%

Financial Benefits to Afghanistan 25%

The bid evaluation process was conducted over the course of four weeks and

was conducted in the MoM main conference room on the first floor. Minister

Adel set the ground rules that (1) no work could be done outside the MoM

conference room and when any work was done and that (2) Minister Adel

would have to be present at all times during evaluation work. The timeline to

complete the evaluation was somewhat fixed by the Tender Plan. The plan

called for 30 days time frame to complete the evaluation of the bid

submissions. Originally the Tender Plan called for the top-scored 3

companies during the EOI phase to be invited to actually submit bids for the

rights to the Aynak Copper Deposit. As earlier indicated, nine companies

were invited to submit Bids and five companies actually submitted Bids.

Because of contractual constraints, the timeframe for evaluation of the five

bids – rather than the intended three – remained the same at 30 days. While

this would require additional preparation time by the facilitators, it was not

deemed by them to be impossible. Because of the Minister’s schedule where

he had other duties including weekly Cabinet meetings, conducted on

Mondays and the half-day work schedule of the Afghan Government on

Thursdays and no work on Fridays, no more than five working days per

week could be utilized for bid evaluation. Added to this, on a daily basis,

when the Minister would be called to an unexpected meeting or to take a

phone call, all evaluation discussions would stop. Moreover, not all

Evaluation Committee members could be present at all meetings at all times.

This created additional lost days, again, within the 30 day timeframe. There

is no record of actually how much down time there was, but one

international facilitator noted that “it was substantial.” Evaluators rarely


commented on any points made. When they did try to express an opinion,

they were verbally cut off by the Minister and prevented from speaking. On

a daily basis, the main dialogue was conducted amongst Minister Adel his

three Deputy Ministers. On one occasion, the Minister of Finance sent over

two western observers to attend the meeting. The Minister turned them

away.

Bid Submission Content. The Evaluation Committee members found that on

the whole, submissions were very comprehensive containing between 150 to

300 pages of detailed documentation. No page limit was set and each

company prepared their documents as they saw fit. Each proposal was

required to have an Executive Summary in Dari that would summarize the

main points of the Bid. As a result, each member of the Evaluation

Committee could obtain an overall understanding of document. The Bid

documents were to be in English so that the Transaction Advisor and those

assisting could read the proposals in detail. The proposals were also required

to be presented in Adobe Acrobat format, they could be searched and

different parts of the proposal could be presented to the evaluators.

Financial Proposals. One task required of the Transaction Advisor was to

analyze each company’s financial data in order to determine if mining costs

were in line with international standards. In Gustavson Associates’ original

Tender Plan, their financial team member was to be in Kabul to assist in the

financial review. Because of general security concerns in Afghanistan at the

time and the added cost to Gustavson Associates, the financial analyst was

not present for the evaluation.

Therefore, in order to accomplish the financial review, the Transaction

Advisor planned to provide the financial data to their analyst via the internet

since all data was provided in an electronic format. However, Minister Adel,

not a computer user, refused to allow transmission of that data to the

financial team member. Without the Minister’s approval, the Transaction

Advisor nonetheless managed to obtain the financial proposals and

forwarded the information to its financial analyst. The analysis of the

financial proposals was part of the due diligence process. It was essential to

determine if mining costs were in line with international standards; if the

royalty stream of payments was accurate; and that the price of copper in all

James R. Yeager48

proposals was the same so the royalty stream and financial benefits would be

consistent

Observations

1. Increase and Change in the Evaluation Committee membership. It appears that

there was virtually little planning from the commencement of the tender

process as to which individuals would serve on the Evaluation Committees,

how and whether they would be trained and how their work would be

monitored and evaluated – beyond the Minister’s discretion. This should

have been a clearly resolved issue from the beginning of the process over

which the Transaction Advisor should have taken the lead. While there

might be some merit to increasing the number of evaluators, a serious

problem with this approach was that the new bid evaluation team members

did not understand the social, economic, technical, financial or

environmental issues involved with a project as complex as Aynak. Minister

Adel’s assertion that he had President Karzai’s authority to appoint

whomever he thought best to serve on the Evaluation Committee was an

entirely false one. This became apparent when the final decision for the

tender was made by the Cabinet as a full extension of the Inter-Ministerial

Committee. The Transaction Advisor nonetheless failed to raise any

meaningful level of awareness to Government, donors or legal authorities

when on its face, this discretion goes against the international tender

standards for which the Transaction Advisor was retained. This approach

also directly contravenes the approved 2005 Minerals Law. The Transaction

Advisor failed to fully research or to understand the legal framework in

which this tender process was being conducted, namely that due to the size

and scope of Aynak, as is the case with most large projects under tender in

Afghanistan to date, the Cabinet will have the final vote on whether a tender

process should move forward or not. In fact, considerable power rests within

the Cabinet and as part of that the High Council of Economic Affairs which

consists of the key economic ministers, including the Minister of Mines.

It would have been consistent for the Transaction Advisor to work with

Cabinet members that would ultimately be engaged in this tender process.

Because the Transaction Advisor did not understand the institutional

framework of the tender, it failed to fully brief the Cabinet, leaving that


work to the Minister who was adept and able to present his side of the

process, himself not an expert in world class market-based tenders.

As stated above, the assertion that Minister Adel had full authority make the

decision to award the mineral license for Aynak was false because the final

decision was made by the Cabinet after it was provided with the

inconsistencies of the evaluation. Observers from the IMC were present

during the evaluation proceedings, but had no say or vote in the proceedings.

This was in direct contradiction to the Minerals Law. It is at this point where

decisions were made, that made the process less than transparent and the

concept of “apparency” – which can be defined as going through the process

saying the right things, but knowing the outcome has been predetermined –

shadowed the proceedings.

2. Minister Adel as Chair of the Evaluation Committee. By acting as chairman,

the Minister effectively squelched any open discussion of competing

proposals; summarized each day’s discussion with his own view; and, finally,

restricted the preparation and discussion time. As the evaluation process

progressed, considerable criticism was given by the MoM Deputy Ministers

participating on the Evaluation Committee of the Western companies and

the Russian Companies. At one point one of the Deputy Ministers suggested

that the Phelps Dodge bid should be rejected because he was aware that the

company had undergone a change in ownership structure and had become

Freeport-MacMoRan23. While Minister Adel did not assign points to the

various categories or “score”, he served as a constant presence during scoring

and all evaluation processes and as one international participant described as

“a forceful Chairman of the Evaluation Committee”. The international

facilitators were advised by Minister Adel that they were not to raise any

negative aspects with respect to the MCC (China) bid submissions. At the same

time, the Minister spent hours identifying negative aspects of the bid

submissions from Western nations.

3. Public-Private Partnerships Will Have the Advantage. A major observation of

how the Tender for Aynak copper rights progressed was that purely private

firms working along strict market operating principles were not as well

positioned as those firms that could offer benefits that generally amass when

23 Phelps Dodge became part of Freeport MacMoRan in March 2006.

James R. Yeager50

partnered with government or state affiliates. Here, a noticeable division

between how bidders from “the West” fared against bidders from “the East.”

The companies coming out of the East displayed a more acute understanding

of the Aynak deposit, knew its history – many had actually explored the site

in the early 2000s, and were able to provide as part of their tender, additional

development assistance that would be funded either by their sister-companies

or their governments. For infrastructure development, the winning bidder,

MCC, offered the construction of power generation, rail and roads and

community development. As a state company, it was able to include Chinese

Government Assistance funds as part of its proposal, almost as if a “Marshall

Plan” for Logar. Western private firms did not have this opportunity.

Western companies recognized the need for the development of additional

power, but took the position that they would study the problem and provide

the required power either financed by debt or through donor programs. They

could not provide an absolute figure since that figure didn’t exist.

Importantly, despite all of the media attention to the MCC proposal to

support infrastructure development, no more than 10% of the overall bid

values covered this.

All bidders except one company of Asian origin provided similar information

indicating the standard methods of providing Environmental Impact

Assessments. One of the Eastern companies failed to adequately address the

issue in their proposal. Only two basic paragraphs covered the statement

saying that the firm would comply with environmental standards. Another

Eastern Company went into great detail quoting acceptable EPA limits of

toxic elements such as mercury, selenium, cadmium, etc. – even though those

trace elements are not present in the host rocks. All of the Eastern

Companies scored higher on the environmental portion of the proposals than

the Western companies.

On the social/economic development portion, Western companies focused

on strengthening the educational system, working with Logar Province to

meet their needs, and building infrastructure as necessary utilizing their own

funds or perhaps working with the IFC and other donors. One of the more

progressive approaches by a Western company was to develop a Technical

Institute for mining patterned after and partnered with the British Columbia


School of Technology. This would instantly have infused today’s knowledge

and approach to mineral development into the Afghan society. One of the

Eastern companies proposed building 3 mosques, providing 5 scholarships per

year for engineers and geologists to study in its home country and a number

of other specific programs. One of the more interesting discussions led by the

Minister at the Evaluation Committee was whether 3 mosques was enough.

4. No Standard Financial Proposal Formats Required. As part of the Transaction

Advisor’s Terms of Reference no standard format for providing information

on operating costs, mine life, production rates, and other factors that define

the financial viability of the proposals was included. Each company

identified a copper price that it believed was feasible or would sell the best for

the evaluation. For example, one company selected a high price of copper so

their 18% straight line royalty payment would look feasible, providing a very

high revenue stream to Afghanistan. Because of the lack of required format

for financial information, the content of the financial proposals submitted by

each company was so varied that it was impossible for the financial analyst

to make any comparable analysis amongst the proposals. As a result, no

critical consistent evaluation of mining costs was possible to carry out. To

fill this gap, a sliding scale royalty rate was a very progressive concept put

forth by World Bank. High royalty when commodity prices are low can

cause projects to become uneconomic. Whereas, when commodity prices are

high, low royalty rates mean that the Government fails to gain a fair share of

the value produced from the deposit. A sliding scale royalty was proposed. .

A sliding scale royalty provides a higher royalty rate when metal prices are

high and a lower royalty rate when prices are low. This insures that the tax

take for the government remains at a constant rate despite metal prices and

insures that the operations are profitable when metal prices are low.

5. Anomalies in the final scoring. All bids were completed in a very professional

manner. All proposals had advantages and disadvantages in the development

of Aynak. No one individual company showed an advantage in every

evaluation category. Yet, in the final scoring, MCC received a total score

greater than 90% while the other companies clustered in the 70 percent range.

This was caused by a number of individual evaluators who gave MCC a

James R. Yeager52

perfect score in all categories. This anomaly does not coincide with a critical

evaluation of the proposals as shown in figure 2.

Scatter Plot - Evaluators

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0 5 10 15 20 25

Evaluator

Sco

re

Hunter Dickinson

Kazakhmys

MCC

Phelps Dodge

Strikeforce

Figure 2

In June 2007, a group of tribal leaders from Logar Province visited Kabul and

stood in front of the Parliament Building, met with the President and the

Minister of Mines to protest the possible award of the Aynak Copper

Deposit rights to a Chinese firm. The Leaders made clear that they sought to

safeguard this precious resource, the surrounding environment and

community residents. They also indicated that should such an award be

made, that they could not guarantee security for the workers of the company.

Impact of China’s Dominance of Natural Resource

Development in Afghanistan

When MCC was awarded the contract to develop Aynak, the ties between

the Asian neighbors was intertwined for the future. China will have greater

influence in the region with the development of the transportation corridor

between the two nations. China’s influence will dominate Logar Province

and the surrounding region. However, such dominance comes with certain

implications.

Salutary aspects of the relationship: China produces much of the consumer

products used by the Afghan people. While most Westerners would scoff at

the often miserable levels of quality, for millions of Afghans living at

subsistence levels, having the pot, pan, space heater or stove is what counts.

Thousands of these Chinese products flood the Afghan stores and markets

providing inexpensive and affordable goods for most of the Afghan

population. Also, Afghan businesspeople are in China doing trade and

developing business relationships at higher levels as well, extending from

agribusiness to electronics and telecommunications. China produces the

necessities that Afghans can afford.

This is the highly advantageous side to the broad economic relationship

between Afghanistan and China. Also, this side is part and parcel of the

legitimate, free and open market economy in Afghanistan. As long as the

market economy holds sway, both countries benefit from the exchange.

The economic and political dimension: When the relationship ceases to be market

economy-driven and a government becomes involved as investor, business

partner and even final arbiter, an uneasy confusion between the economics

and politics of this essential geopolitical relationship emerges that can create

longer-term negatives for Afghanistan’s development. The big industrial

Chinese companies are closely connected to the Chinese government and so

do not always operate within the fiscal or operational discipline of the open

James R. Yeager54

marketplace. This is true for the mines and minerals sector as proven in the

Aynak copper rights’ competition.

Chinese companies are not subject to a Chinese version of the U.S. Foreign

Corrupt Practices Act (FCPA); China is in a position to dominate the future

development of the Afghan mining and natural resources sector because

Chinese firms can package their tenders to include what Western countries

refer to as “foreign aid” – President Karzai and many in the Cabinet

understood this when they initially and clearly stated that the award should

go to the companies whose people and governments were making vast

sacrifices in blood and treasure for the Afghan people. But this signal policy

pronouncement was overwhelmed by the modus operandi of tender process

implementation by the Minister of Mines and the incapacity of the Western

governments to focus on the impact of the tender as it relates to the overall

political economy of Afghanistan.

If the foreign aid of the Western countries was in any way, shape or form

incorporated into the bids of their home companies, formally or informally,

they would win the competition, hands down. That’s because, in addition to

winning financially, the past performance, the track record – something

assiduously prohibited by the Minister of Mines from entering into the

Aynak bid evaluation process – of the Western companies on pivotal social,

environmental, training/employment and political issues, is so far superior

to the Chinese record that Western companies would be much more

competitive. Such would be the case for the major U.S. and Canadian mining

companies. Still, this is not a tender approach that should be supported if to

facilitate transparent market-based operations.

The Political Economy Envisioned for Afghanistan: Donor nations, understanding

the debilitating effects of corruption are spending substantial resources to

create a polity for Afghanistan that is based on rule of law and engagement of

the Afghan people in defining their destiny. Donors understand that to fight

the insurgency, the support of the people will be necessary and that support

will not be forthcoming in conditions of runaway corruption, perceived or

otherwise. The Chinese model of doing business does not support the kind of

open and transparent, democratic capitalism that the international


community has agreed is essential to building Afghan institutions that tend

to engage the support of the people.

Thus, Chinese or “Eastern” dominance of mines and minerals development has the

potential to limit and constrain the very governance reforms essential to fighting the

insurgency. The amount of potential wealth in the exploitation of

Afghanistan’s natural resources will allow those controlling that wealth to

put their particular brand on an Afghan body politic that is already

amenable to engaging with those entities who would purchase rather than

compete for favor.

Conclusions: In sum, there remains, even after Aynak, a stunning lack of

focus, capacity and strength of purpose in policy-making quarters of the

Government of Afghanistan and relevant Western governments regarding

natural resource development in Afghanistan. The World Bank, while

bringing expertise to tenders, simply does not have the political clout – or

mandate – to either define the ground rules for what constitutes financial

contributions to a tender process or to discipline the process once it is

underway. Tendering natural resources in Afghanistan, rightly or wrongly,

presents as a make or break feature of the future economic landscape with

broad implications for the rest of Afghan society.

It is highly recommended that economic policy capacity-building take place

immediately within major Donors, particularly in the realm of natural

resource development and that such capacity be promoted and engaged in the

Afghan governing circles as well. If the goal of the Donors is to stabilize

Afghanistan then the third leg, the economic leg (in addition to the political

and the military) to the three legged stool that constitutes foreign policy

must be strengthened. There is no better place to start than in the mines and

minerals/natural resource sector.

Findings and Recommendations

The purpose of the analysis is to provide a forward looking perspective to

insure that tenders of mineral wealth are truly transparent and that the

benefit of such development is maximized for the host country. It is

necessary that the donor community learn from each experience and

critically evaluate the tender process for the international mineral deposits.

Finding: Data and Information are Essential to Commence Viable TenderActivities

At some point during the tender process, most bidders expressed gratitude

for the information provided as part of the Aynak Data Package. This

technical information was prepared by the British Geological Survey (BGS)

funded by the Government of the United Kingdom, with guided inputs from

Afghan colleagues at the Afghanistan Geological Survey (AGS). The

preparation of the package itself was conducted in such a way by the BGS as

to build local Afghan capacity to understand what information is included

for bidder review and what information is proprietary. The entire process

was conducted over almost four years and relied on information collected

during the Soviet era with informational updates contributed by the BGS

personnel.

However, a finding of this assessment is that information systems and data

retrieval protocols put in place have basically been closed down. In late 2007,

it was determined by the British Government agency that oversees BGS

operations – the National Environmental Research Council (NERC) – that

they could no longer work in Afghanistan due to security concerns24. BGS

24 The initial BGS work was funded by the Department for International Development(DfID) which is part of the United Kingdom Government’s Foreign andCommonwealth Office but the latter work would have required submitting a bid to theWorld Bank for funding. DfID staff did not anticipate and were reportedly not pleasedwith the NERC decision.


representatives on the ground fought to carry on their work but were forced

to leave the country. Minister Adel subsequently ordered the AGS staff to

shut down the server at the AGS office on which BGS had stored detailed

and carefully developed mineral resource information. He ordered that the

server room be locked as well as the library and record room. Consequently,

all technical data which the BGS, and AGS had reconstituted, and where

necessary, translated from Russian into English and all data archived on a

searchable data base was taken out of the public domain.

This single act of the Minister has meant that the unprecedented and

commendable work conducted by the BGS, conducted for more than four

years, now sits locked in a Kabul office building instead of having been

integrated as part of a market-based ministry operation that could facilitate

increased sector transparency, accuracy of data and investor interest.

The assistance approach implemented by the BGS has proven, as compared

to other donors attempting to engage in the sector, to be the most results-

oriented and technically beneficial for the long-term benefit of the Afghan

minerals sector. Full time expatriate staff based in Kabul with considerably

more scope to travel and provide ongoing capacity building than could the

USGS, meant that the BGS work built on existing Afghan expertise while

introducing modern technology and approaches to ensure the sound

development and safeguarding of geo-science data. By including Russian

speaking BGS staff, existing Afghan minerals data, most of which was in the

Russian language, could be reconstituted in English or at least assessed by

technical experts. Finally, unlike the USGS, all BGS data and findings was

stored in Kabul at the AGS offices, not outside the country. This important

step provided important ownership to Afghanistan. Of course the issue now

is that the sitting Minister has chosen to no longer access or build on the data

bank, still, this is an Afghan Government decision as it should be.

Recommendations

Ensure Good Data. Information is power. As the international

community begins to recognize the economic value and development

importance of the Afghan minerals sector for the country, targeted

assistance to realize the benefits of the BGS work and to build on that

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is recommended. This will include close collaboration with the AGS to

provide ongoing IT training, preparation of data packages and overall

storage and information safeguard training.

Re-start the Server. The donor community should work with Minister

Adel to understand the rationale behind closing down the data server

and explore options to restore the system.

Call back BGS. Future geo-science support programs should look to the

BGS model and staff to provide a comprehensive and consistent

assistance approach.

Finding: Deficient and Uneven Donor Support to the Afghan MineralsSector

Since 2001 the donor community, and increasingly Afghan Government

officials, have called for market-oriented development of the country’s

resources, including mineral resources. Afghan and international leaders,

especially the US Embassy, have constantly called for private sector

investment and market entry for non-government funds to promote

economic growth, create jobs and to diversify the economy. These calls

however, have not translated into meaningful development assistance or

legitimate engagement of private investment in the minerals sector.

At a time when the donor community had ample opportunity to hone in on

key economic areas of growth for Afghanistan, i.e., mining, it appears that

the donor community (1) did not want to engage in mining; (2) did not

understand the nexus of Afghan mining and Afghanistan’s economic

development; and (3) opted to focus on other areas of development. While

donors were shoveling funds to support free elections, create micro-finance

programs, to build schools and clinics and to develop programs to support

women’s’ rights, they chose to spend virtually nothing on developing a

traditionally important and proven revenue generating sector of the nation’s

failing economy that could ultimately provide tens of thousands of jobs for

men and women and triple the nation’s national budget in the form of taxes

and royalty payments. One only has to look at the history of Afghanistan

during the Russian occupation in the 1980s when Northern Alliance

resistance operations were effectively funded by the sale of Afghan gems.


U.S. assistance has been provided to generate a body of commercial

legislation that should be applied to minerals operations. However, no

linkages between the effort and the mine sector have been made. There is

virtually no understanding in the Afghan minerals sector as to what and how

commercial legislation applies to minerals contracts. The Minerals Law, an

impressive feat facilitated by the World Bank in 2002-2005 provides

international standards and unprecedented legal guidance for mine contracts.

Unfortunately the law is supported with limited and inadequately prepared

legal staff, regulations or an overall understanding of minerals and

commercial law at the government level. As a result, there exists

considerable opportunity for corrupt practices and for ministry leaders to

interpret the legal framework with virtually no oversight.

At a time when Ministry leadership was in transition, insufficient technical

understanding of Aynak Copper’s wealth for Afghanistan and what amounts

to procurement malfeasance by ARDS, it is tragic that the World Bank and

donor community did not take a stronger line against the ARDS heavy-

handed approach to using Government funds for such a uniquely important

project. The lack of exposure of the Evaluation Committee Ministry of Mine

members to world class mine practices, costing and even what the role of a

Transaction Advisor was, was immense.

The uneven donor support and lack of donor strategy in providing assistance

to Afghanistan’s minerals sector has resulted in the emergence of serious

market gaps that are reflected in how the market presently operates, that is,

based on a system of ad hoc approaches, geographic preferences and

considerable “payments and fees” to the Ministry of Mines, conducted

outside requirements of the Minerals Law.

Recommendations

Comprehensive Donor Minerals’ Tender Process Support. The donor

community should immediately offer and provide tender support as

the Hajigak Iron Ore deposit is being tendered. It appears that the

initial oil and gas tender process may already be near completion. The

World Bank Kabul-based consultant/advisors available to support the

process as part of their overall work have been shut out of the process

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to the point that the Minister has refused to renew certain of their

contracts.

Build Afghan Market-based Legal and Financial Capacity. Should the

donor community opt to support the Afghan minerals sector, its

assistance to build legal and financial capacity in line with the

Minerals and Commercial Laws of the country would be timely.

Preparation of market-based contract terms, contract negotiations,

conducting due diligence and oversight of contract requirements are all

areas requiring capacity.

Finding: Virtually no Government or Donor Oversight of the TenderProcess

While the World Bank spearheaded the effort to educate officials and to

build Afghan Government support for the tender of the Aynak copper rights,

as an institution, it did not provide any actual oversight of the tender process,

instead leaving that oversight to the Government. While World Bank staff

visited Kabul to check on the grant program and would assess the status of

the Aynak tender process, it did not take on or instigate an actual oversight

role for the Aynak tender process. In that the World Bank initially

formulated the tender process concept to which the Afghan Government

agreed and funded the Transaction Advisor Contract as part of the World

Bank/Afghan Government procurement office, this absence of an oversight

role by the World Bank is an area to explore for future World Bank and

donor participation in the sector.

The “hands off” role of the World Bank resulted in the Government’s

leaving oversight to a Government with no experience in conducting this

scope of international market tender which then delegated oversight

responsibility first to the ARDS and then to a single Minister. Aynak

presented a known situation where donors and Government agree that a

particular tender is an essential and critical aspect of the economic

development and wealth creation in Afghanistan and from the get go it was

nickel and dimed by non-technical bureaucrats seeking to have control over

Ministry and donor actions. This was short sighted. The heavy handedness


of the ARDS staff member in the design and costing for the Transaction

Advisor set the entire Tender process off on an initially flawed path.

Minister Adel retained great control over this process. One task under the

Transaction Advisor’s Terms of Reference that was not accomplished was to

provide the Evaluation Committee members with a profile of each of the six

Bidders. Minister Adel indicated to the Transaction Advisor that this was

not necessary. Unfortunately, the Transaction Advisor did not resist this

decision or raise this absolutely critical issue to higher levels of Government.

It would have seemed that the Transaction Advisor, at a minimum, could

have prepared due diligence materials that could have been presented to the

Evaluation Committee as well as to the Inter-ministerial Committee. In

effect, all members had to review was the information provided directly by

the companies themselves with no neutral due diligence information

provided. This failure of the Ministry to critically evaluate the bidders has

emerged as a critical flaw in transparency and validity of the selection

process.

The Minister of Mines, also without any market tender experience, was

known in the Afghan mining community to have strong and stated notions

of which countries he would work with, the levels and types of investments

he sought and which areas of mining he would support for development;

these notions did not necessarily align with best national economy. The

Inter-ministerial Committee that was legally required to be a part of the

tender process was constrained on several fronts: (1) limited information

provided by the Ministry as to the status of the tender; (2) virtually no

understanding of how a market-based tender process is to be conducted; (3)

virtually no knowledge of the Aynak property, its value in the world market,

it’s potential role to contribute to the national economy.

The IMCs role served as one of affirmation for the Minister of Mines.

Rather than oversight of the tender process, because of the way it was

managed, and information that it received about the tender, the IMC

ultimately provided no more than a stamp of approval over the tender

processes based on the Minister’s word that the tender process was properly

being conducted. The Transaction Advisor contracted to facilitate the tender

James R. Yeager62

was consistently beholden to the Minister and itself had insufficient and

ineffective oversight of the Aynak transaction.

The absence of independent oversight, especially conducted by the

Government or a donor, especially in the nascent market infrastructure of

the Afghan economy, resulted in a flawed tender process that was conducted

in an absence of transparency. The process provides no assurance of contract

oversight.

Recommendations

The international community needs to pay attention. In a post-conflict

nation, new to market principles, a tender of the scope and precious

resource of Aynak copper must be treated with consistent and

comprehensive oversight. From start to finish, the Aynak copper

tender processes were conducted in an ad hoc manner with

intermittent international advisors and occasional Afghan government

participation. The only consistent player was the Minister of Mines.

In future, donors and interested embassies must pay considerably more

attention to the tender processes employed to license such vast and

valuable resources. This may be achieved by providing early-on

advisory services to the government, supporting improved commercial

skills and improving public information surrounding the tender

activities both in and out of the country.

Finish what you start. In this case, the World Bank but other donors

may be faulted as well for instigated powerful government action to

support certain activities and then, in effect, removing themselves as

donors from the process. While in theory the Government would then

be deemed to be conducting these tender processes, in reality, the

Government of Afghanistan was not in any way prepared or

sufficiently experienced to take on this daunting copper tender and in

fact, there was an important oversight role for the donor to play.

Where the donors start the process they must be better at ensuring

sound completion.

Establish Independent Oversight. The establishment of an actual

Oversight Committee that is independent of the line ministry and


responsible for regular monitoring of the tender process should be in

place at the start of the tender process. Committee members must be

sufficiently educated on what a tender process entails and a system for

published reporting of the process must be in place. Members must be

independent of the Ministry of Mines and accountable to the donor.

Clarify the full extent of the Role of the Transaction Advisor. The role of

the Transaction Advisor, while not to oversee the tender process but

rather, to implement same, should have included a more firm

commitment to reporting exactly how the tender process was

progressing and to identify areas for immediate improvement of the

process. There are no less than five areas where ordinarily a

Transaction Advisor would have called for more attention from donor

and higher levels of Government, i.e.,

o Minister stored all tender documents in his personal office;

o Minister selected all Evaluation Committee members that only

included his staff and no outside ministry or independent expert

staff:

o Evaluation Committee members had no experience in conducting

a large international minerals tender;

o The Transaction Advisor was told by the Minister of Mines that

it could not meet with ministry officials outside the Ministry of

Mines despite the legal requirement and its TOR requirements

that it effect the operations of the IMC;

o Credible reports that certain bidders either saw or had copies of

parts of other bidders’ tender documents.

Full agreement on a Tender Plan. A realistic tender plan must be agreed

to at the outset of the tender process. The plan must be agreed to not

only by the Ministry and Government officials but also the donors

supporting or facilitating the tender in order to ensure that the form

and format of the tender clearly revealed to bidders and adhered to

throughout the tender process.

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Finding: Technical and Financial Guidelines for Proposals Need to beMore Defined

For as many compliments that the Aynak Data Package received, just as

many questions and concerns were expressed by bidders as to the lack of

definiteness of information as to what the Afghan Government required be

submitted in support of bidders’ technical and financial proposals. General

parameters for submission were developed by the Transaction Advisor.

These parameters were fundamental and basic items that did not sufficiently

distinguish the level of detail or full content expected for evaluation.

It was clear early on in the process that certain bidders had already received

considerable information from the Ministry as to what the ministry

leadership was anticipating in terms of technical development and its

investment and costs – either at the time of this tender or as early as 2001.

These indications reflect either a lack of market sophistication leaving

ministry officials to share its expectations with potential bidders or more

likely, the savvy of ministry leadership to “put the word out” as to what it

sought in the Aynak submissions.

Recommendations

Ensure full tender submission requirements. For an international tender the

size and scope of Aynak, a detailed set of standard parameters should

be provided to potential bidders with respect to what content and

detail is required of their technical and financial submissions.

Establish independent tender oversight body. Higher levels of the Afghan

Government need to be engaged in tenders of this nature. An

independent body that serves as the point of contact for tenders of this

size can be expected to provide significantly more transparent tender

processes than enclosing the tender process solely within one line

ministry.

Financial bid format. Financial bid requirements should be submitted

according to a strict format that will ensure that all financial bids can

be consistently and critically evaluated by a third party. A key role of

the Transaction Advisor is to affirm that statements made by the

bidder make financial sense. The Transaction Advisor must also


provide a comprehensive evaluation of the financial information in

future bids – more comprehensive than was provided for the Aynak

tender.

Finding: Due Diligence of Bidders Must be Adequately Conducted.

The Aynak Tender Plan called for a due diligence process. Just as the bidders

had the opportunity to evaluate the data and information about the Aynak

deposit; it is imperative that the Government has the opportunity to conduct

a critical analysis of the bidders and their submissions. Due diligence was

inadequately conducted throughout the Aynak tender process. It is important

that the evaluation committee and key decision makers have the opportunity

to understand the track history of the bidders as well as an understanding of

the corporate culture and the constraints that guide different companies. For

example, where western companies are generally guided by the Equator

Principles and self imposed reporting to independent third party watch

groups (i.e., International Council on Mining and Metals (ICMM)), other

companies may not operate in this manner. While no company track record

will be without flaws, sufficient independently collected background

information needs to be provided to decision makers.

Recommendations

The Transaction Advisor must conduct Due Diligence of Bidding Firms. The

Transaction Advisor must implement the Minerals Law which

requires that the Government perform an analysis of the bidders. The

analysis should consist of an independent review of the bidders’

international operations. Ideally the research should permit the

Government to talk with regulators of other governments who host or

have hosted the bidding companies in their work in other regions.

Research on ongoing operations by the bidders should include analysis

of the major aspects of the bid submission. The information should be

gathered to include follow through on financial commitments, jobs

created, social responsibility of operations, technology employed, and

the environmental track record of the bidding firm. This analysis

James R. Yeager66

should be conducted by an independent third party with no interest in

the outcome of the tender.

Finding: Sector Governance and Contract Implementation Capacity are

Necessary

Now that the Aynak Copper Rights have been awarded, it has become

increasingly clear that neither the Afghan or expatriate advisors are well-

positioned to ensure that the contract rights are comprehensively in place or

well-monitored. The first example is the fact that the Government has issued

a mine license for the Aynak rights to MCC without having agreed to final

terms on the various “deal-makers” included as part of the MCC bid. These

included: (1) minimum 400MW electricity; (2) rail line from Hairton (on the

Uzbek Border) through the country and into Pakistan; (3) smelter operations;

(4) community development and job creation.

In a country where established laws and mining operation norms are in place,

moving quickly forward with the Aynak Copper license would not have been

extraordinary. However, in Afghanistan where this unprecedented tender

was conducted to solicit sound investment for this unique resource, it is

foolhardy to expect that the full content of the proposal will be implemented

absent firm agreement between the Government of Afghanistan and MCC.

Agreement should have been in place to at least support the fundamental

proposal elements provided as part of the MCC bid which in the end, set the

MCC bid apart from the other bid submissions.

It remains very unclear as to why the Transaction Advisor abandoned the

work of negotiating and implementing the final Aynak Contract Terms.

While the Transaction Advisor provided a general minerals rights contract

template, there was little engagement on its parts with the day to day

negotiating of terms or attempt to protect the interests of the Afghan

Government. This work was included as part of the Transaction Advisors’

scope of work.

Because there is not a lawyer at the Ministry of Mines or in the Government

able to or called upon to implement the Aynak copper deal terms, a

combination of Ministry of Mines and World Bank advisors –all of whom

were mine engineers or geologists – were brought to the table to review legal


content. This approach was irresponsible on the part of the World Bank

advisors and inept on the part of the Afghan Government, nonetheless, the

deal terms moved quickly forward and by all accounts, MCC remains well in

the drivers’ seat of the Aynak deal.

As for contract monitoring, while “Inspectorate” and “Cadastre” offices are

located at the Ministry of Mines, they are not sufficiently experienced in

market contracting and have never been trained to implement the scope and

content of the Aynak contract. These offices remain firmly beholden to the

Office of the Minister.

Recommendations

Re-engage on Aynak. In the near term, the World Bank should re-

engage on the Aynak copper contract issues whether by re-inserting

legal advisory to the Ministry of Mines or more likely, legal advisory

to the Ministry of Finance and Office of the President. In addition,

specific contract monitoring capacity building for the Inspectorate and

Cadastre with respect to Aynak, Hajigak and other large mineral

licenses is recommended.

Transaction Advisor Contracts must be regularly monitored and assessed for

performance to ensure full completion of obligations; where contract

negotiation is not included, another advisory firm may be contracted

but assistance in this area is essential to ensure contract terms that are

fair and appropriate for the counterpart government.

Secure the Government’s legal rights. The Government of Afghanistan

needs to hire an international law firm to conduct its major transaction

business.

Finding: Ancillary Agreements Require Independent Review andOversight

The scope of the ancillary promises set forth in the MCC proposal are such

that they in and of themselves are major infrastructure projects. In a country

such as Afghanistan where infrastructure has been neglected or never even

constructed, to suggest as part of a copper tender that new power facilities,

James R. Yeager68

new rail lines, new roads and new community assets will be developed calls

for a technical and financial level of scrutiny that has been absent.

Who will construct these major infrastructure projects?

Will Afghan jobs be created or will the contractors employ their own

staff?

What kind of investments are required and where will those

investment funds be coming from?

Who will conduct the due diligence of the firms responsible for

implementing these major infrastructure projects?

What is the sequencing for developing these projects with the Aynak

copper deposit development timeline?

Recommendations

Government – beyond the Ministry of Mines - needs to take over the Aynak

Copper Contract Oversight. The work at Aynak may continue for up to

30 years; Government needs to be engaged beyond the Ministry of

Mines at least as this new market develops. Whether a special

Ombudsman’s Office, likely based at the Ministry of Finance, or

another non-Ministry of Mines overseer, it is clear that some vigorous

checks and balances are absent but needed.

Slow down. The Ministry of Mines urgent appeal to Government to

move forward with formally awarding the Aynak Copper rights

resulted in expatriate non-legal staff hurriedly agreeing to facilitate the

licensing process without fair and necessary consideration of how the

entire bid proposal promises would be integrated for the benefit of

Afghanistan. For a nation that has been at war for more than two

decades, there was absolutely no justification for the rapid awarding of

Aynak copper rights – as there is no justification for rapid award of

Hajigak, Oil and Gas or other mineral resources. It is suggested that

Government develop a realistic timeline for minerals’ development

that includes due diligence, fair and open tender processes and market-

based contract negotiations.


Finding: Appropriate Public Participation from Start to Finish should beRequired

By the accounts of Logar Province community members, they have not been

sufficiently informed as to the tender process or development plans for the

Aynak copper deposit. The leaders from Logar Province were at no time part

of the tender process or dialogue surrounding the tender. While Minister

Adel would put aside such claims, the leaders of Logar have firmly indicated

that they were not sufficiently aware or participant to the overall process and

that all they knew was either from media or what they would learn when

World Bank and company representatives would visit the site, making

inquiries about the deposit. Considerable rumor has circulated throughout

the tender process but no consistent engagement of the local community,

including its leadership, was instigated by Government or its delegate, the

Ministry of Mines. The Minister of Mines refused to instigate formal public

information and outreach program or to contract a firm to promote relations

amongst key stakeholders to the Aynak copper development. As a result, he

single-handedly orchestrated the type of information that would be

disseminated, to whom and when.

Recommendations

Establish a Public Information Program. Especially in an emerging

economy where communities have not been exposed to resource

tenders or market development, building public participation is

especially important if to ensure community “buy-in”. It is not too late

to establish an Aynak Public Affairs Office, i.e., at the Ministry of

Mines but it is essential that the information not be controlled by one

of a few officials, and rather, that it generate information exchange

among Government, the Ministry of Mines, MCC and the local

community members.

Transaction Advisor Information Role. The Transaction Advisor should

play a vibrant part of information and outreach processes throughout

the tender process. Short of this, the Advisor may recommend that the

outreach function be outsourced to a contractor but to work alongside

the Transaction Advisor. This did not take place during the Aynak

tender process.

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Build a Cadre of Outreach and Media Specialists. Government and its

expatriate advisors should promote job creation in the form of

outreach and media specialists that would engage with the public and

media as well as Parliament to provide information on the tender

process as well as to solicit concerns. This is a standard procedure for

minerals’ tenders and most international firms employ a staff of

outreach specialists.

Finding: Insufficiently Funded Transaction Advisor Consultancy

From the start, the Aynak tender process may have been doomed. Aside from

Afghan officials never having implemented any level of minerals’ market

tender and government institutions not being in place to support market

operations, the Transaction Advisor was selected based on its willingness to

conduct the work at more than half its competitor and half the expert-agreed

requirement to get the job done. It is astounding that no “red flags” were

waved either by the World Bank or the Transaction Advisor winner itself as

to the insufficiency of funding provided to achieve the expected outcomes.

There appeared an unforgiveable institutional gap in how the World Bank

engaged with the Government at the time of the Aynak Transaction Advisor

award. The Government relied on its ARTF office to conduct the

procurement but the ARTF relied on the decision-making of one ARDS

advisor (now Deputy Minister of Commerce and Industries) who had no

technical or financial experience in the minerals sector. This individual was

wholly responsible, if not entitled, to determine the level of funding that

Government would allocate for the Aynak Transaction Advisor contract.

Despite the World Bank expert recommendations as well as World Bank

funded advisor international experience on how much a transaction effort

would cost under these conditions, the ARDS severed costs to such an extent

that it would be impossible for a full and fair tender process to be conducted

by an internationally experienced firm.

Recommendations

Sufficiently fund key contracts. If the international community seriously

wants to help Afghanistan get back on its feet, it cannot take the nickel


and dime approach that it consistently has to support the minerals -and

other key economic sectors. Either fund the anticipated work to ensure

an appropriate level of quality or do not support the effort at all – the

half-funded effort of the Aynak Tender has not generated the results it

should have, virtually no capacity building has occurred, public trust is

lost as is tremendous economic opportunity for the country.

One individual should not control procurement decisions. It was no secret to

World Bank staff or Government that one individual at ARDS was

controlling cost and content of the Aynak tender contract. At some

point, leadership on the part of the donor or the Government was

needed and did not occur. At no time did the US or other Embassies

become engaged despite their knowledge of events. It is recommended

that an independent donor and government group work together in

future to ensure that this under-funding and individually controlled

contracting not occur again.

Delay contracts when the pieces don’t fit together. The fact that only two

international firms even submitted bids to serve as the Aynak

Transaction Advisor should have caused concern amongst

Government and World Bank staff where ordinarily three bidders are

expected to ensure best quality and competitive bidding. Where one

bidder submitted costs at more than $1 million and the other was

satisfied at $400,000, another red flag should have been acknowledged.

When the Minister of Mines sought to rapidly implement the tender

process, concern should have been expressed and at some point, the

Transaction Advisor should have suggested that the tender be voided

or delayed. It is recommended that the Transaction Advisor needs an

independent venue where it can go to express concern on a regular

basis without jeopardizing its role in the process. It is also suggested

that the Transaction Advisor must take a more certain stand as during

the tender process where flaws are apparent in how the process is

progressing.

James R. Yeager72

Finding: Conflicted Transaction Advisor

The fact that the Transaction Advisor selected to conduct the Aynak Tender

Process was simultaneously implementing two other contracts for the

Ministry of Mines requires careful consideration, understanding and

assessment. At the very least, the scenario conjured serious perception

problems but more assuredly, crossed fiduciary boundaries that led to a lack

of independence and judgment on the part of the Transaction Advisor. The

Advisor is a technically competent, small U.S.-based firm that had earlier

implemented short term Oil and Gas assessment work under World

Bank/USTDA funding in Afghanistan. Following this it was implementing

– at the same time as the Aynak Tender Process – (1) a short-term natural

gas market assessment funded by the ADB and (2) a short term natural gas

assessment work funded by USAID. While these pieces of work were not

copper-specific, they required that the firm work directly with and report to

the Minister of Mines and the same staff that was handling the Aynak

Tender. The Transaction Advisor Contract reads:

3.2. Conflict of Interests. The Consultant shall hold the Client’s

interests paramount, without any consideration for future work,

and strictly avoid conflict with other assignments or their own

corporate interests.

The fact that the firm had more than one contract ongoing with the Ministry

as its counterpart is not solely a reason for it not to serve as Transaction

Advisor. However, there is ample evidence that because of these other

relations and contractual commitments that required Ministerial liaison, the

firm was under pressure to perform in accordance with the Minster’s

demands. The firm did not take a stance on many issues involving the

Aynak tender as it ordinarily should have. The firm’s lack of stance may be

attributed to inexperience, poor judgment or fear of diminished relations

with the Ministry – none of these reasons is acceptable.

Perhaps the greatest example of what could be perceived as a benefit of the

conflict is the fact that without tender, the Transaction Advisor selected to

conduct the Aynak tender, has since been awarded the sole source award to

implement Afghanistan’s Hajigak Iron Ore Deposit tender. Despite all the

difficulties expressed by the Transaction Advisor firm representatives with


respect to working with the Minister of Mines, it did not refuse the sole

source contract.25

Recommendations

Conduct due diligence. It appears that while the selected Transaction

Advisor firm indicated “past experience” with the Ministry of Mines,

counterparts and the World Bank did not fully comprehend the extent

to which the firm was still going to be closely engaged with and report

to the Ministry on other contracts. Improved due diligence of the

bidding firms would have revealed this information and at that time

some serious decisions could have been made as to whether these other

commitments presented conflict or provided opportunity to discuss

how the firm contracts would be best managed.

Assign different reporting counterparts. Because of the way in which the

Ministry of Mines is managed, all decisions are made by the Minister

of Mines; all contract negotiations and contract oversight is conducted

by the Minister. The recommendation is that more delegation of

contract oversight is essential in a country where it is likely that a

lesser number of qualified firms may be available to implement project

work.

Finding: Western companies and Fully Private Firms are not Equipped orAble to Compete in this Environment

Partially because there were no limits placed on the technical and financial

proposal content and partially because of the nature of the firms that bid for

the Aynak Copper Rights, Western companies appear to have the odds

against them when trying to emerge as best-placed to bid on Afghan minerals

rights.

The vast foreign aid package included as part of the MCC and other Eastern

firm bid packages are designed to give the Eastern resource development

companies a competitive advantage over other private sector development of

25 According to dgMarket.com, the sole source, 6 month contract was awarded toGustavson at a lump sum of $564,890.04. http://secure-in.dgmarket.com/tenders/np-notice.do~3705030.

James R. Yeager74

resources. Aid packages intertwined with the development of resources create

a competitive advantage for the state-owned companies such as MCC. In the

bid for Aynak, aid projects such as the development of power plants, roads

and railroads – described if not disguised as infrastructure development –

provided MCC and other state owned enterprises a strategic competitive

advantage in any tender process for mineral development.

The reality is that the bid submissions, while not illegal, did result in the

creation of an uneven playing field as evaluators assessed bids submitted by

the private sector and those of state or quasi-state enterprises. When it

became clear that the Eastern firms, notably MCC of China, were including

broad assistance packages as part of their technical copper bids, western

companies – primarily U.S. and Canadian –sought to engage their embassies

at the last minute in the tender process. These particular embassies had

already lost their informational opportunity. Having avoided full

engagement on the process for years up until then, they held no credibility

with the Ministry of Mines with whom they had developed virtually no

relations – unlike their Eastern country embassy counterparts.

The Aynak experience requires Western governments who provide far

greater aid (apart from the tender) to Afghanistan and respective Western

companies to rethink how their bids are packaged lest Chinese state-owned

and related companies totally dominate the Afghan minerals and other

natural resources sector. The vast amount of money and the sheer size of

these projects with respect to Afghanistan’s GDP along with the Chinese

model of doing business has the potential to swamp the economy and

counteract Western attempts to limit corruption and build a healthy market

economy. Aynak thus has enormous implications for the social and political

future of Afghanistan.

Recommendations

More Definite Tender Submission Requirements. If the Government wants

to distinguish between technically qualified firms and those firms that

can offer the largest most comprehensive investments, it will need to

better define the rules of engagement during the tender process. This

will ensure that each bidder submits the same level of technical and


financial information and that ancillary information may be evaluated

a part from the core submissions.

Western companies need to get serious. If Western companies actually

seek to work in the Afghan minerals sector, they need to be on the

ground with a presence and understanding of the market. Eastern

firms maintain Kabul offices, are frequent visitors to the Ministry of

Mines and are well-versed in the existing geo-science data. Western

firms need the support of their Western governments.

Donor nation Embassy and Assistance Agencies Role. If Western

companies do opt to engage in the investment opportunities that will

continue to emerge out of Afghanistan, their embassies and assistance

agencies need to be much better informed, consistently engaged and

enthused about the opportunities. They need to better understand the

linkages between economic, political and social development and the

investments that these Western firms could bring to the nation. They

need to understand the influence that vast monies, operating under an

“Eastern business model” framework can conflict with many

important Donor and enlightened Afghan goals for Afghanistan.

Finally, ways to incorporate some degree of credit for the far greater

Western donor assistance funding must be developed so as to upgrade

the competitiveness of the bid packages offered by Western companies

to accommodate those State-related Eastern companies which package

foreign aid into their bids.

Importantly, the value to nation-building of Western principles of market

operations, local job training and creation as opposed to large-scale

importation of workers, environmental protection and creating legitimate

frameworks in which to sustain sector operations, need to be better

appreciated by all sides to a tender, private and public.

Annex 1: Acronyms

ADB Asian Development Bank

AGS Afghanistan Geological Survey

AISA Afghanistan Investment Support Agency

ARDS Afghanistan Reconstruction and Development Strategy

ARTF Afghanistan Reconstruction Trust Fund

BGS British Geological Survey

Cu Chemical Symbol for Copper

DFID Department for International Development (United Kingdom)

EOI Expression of Interest

EPA Environmental Protection Agency

GOA Government of Afghanistan

IMC Inter-Ministerial Committee

MCC China Metallurgical Group Corporation

MoF Ministry of Finance

MoM Ministry of Mines

Mt/y Metric tons per year

MW Mega Watt

NEPA National Environmental Protection Agency

RFP Request for Proposal

SDNRP Sustainable Development of Natural Resources Project

TAPI Turkmenistan Afghanistan Pakistan India natural gas pipeline

TOR Terms of Reference

UN ESCAP United Nations Economic and Social Commission for Asia and

Pacific

USAID United States Agency for International Development

USGS United States Geological Survey

Annex 2: Definitions

Bid Package The term used to describe the various documents that any interested

company will receive to review before submitting a proposal (bid).

Concession A lease form that conveys specified national or state permission to a

lessee to explore for or produce minerals from specified properties.

Exploitation The process of winning or producing from the Earth the oil, gas,

minerals, or rocks that have been found as the result of exploration.

Exploration The search for coal, mineral, or ore by (1) geological surveys; (2)

geophysical prospecting (may be ground, aerial, or both); (3) boreholes

and trial pits; or (4) surface or underground headings, drifts, or tunnels.

Exploration aims at locating the presence of economic deposits and

establishing their nature, shape, and grade,.

Geological

Survey

A national or federal institution employed to maintain the geological

inventory and advance the knowledge of geosciences for the benefit of

the wealth and health of the nation.

Geology The scientific study of the origin, history, and structure of the earth

Massive Sulfide

Deposits

Polymetalic ore bodies consisting of massive solid amounts of metal

bearing sulfide minerals such as chalcopyrite, sphalerite, and galena.

They are deposited on the ancient seafloor near sub-aqueous volcanic

vents.

Mine Life The time in which, through the employment of the available capital, the

ore reserves--or such reasonable extension of the ore reserves as

conservative geological analysis may justify--will be extracted.

Ore The naturally occurring material from which a mineral or minerals of

economic value can be extracted profitably or to satisfy social or political

objectives. The term is generally but not always used to refer to

metalliferous material (material containing metal), and is often modified

by the names of the valuable constituent; e.g., iron ore.; ore mineral.

Ore Deposit A natural accumulation of a metal, gemstone or other valuable mineral

substance, sufficiently rich in concentration to be profitably mined.

Physiography Physical geography: the study of physical features of the earth's surface

Porphyry Copper

Deposit

Copper ore bodies which are associated with intrusive rocks where

copper is deposited as disseminations along a stockwork of veins and

fractures. Average copper grade is between 0.4% and 1% Cu . They can be

very large up to 1.2 billion tons of material

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Prospect An area that is a potential site of mineral deposits, based on preliminary

exploration.

Reserve The quantity of mineral that is calculated to lie within given boundaries.

It is described as total (or gross), workable, or probable working,

depending on the application of certain arbitrary limits in respect of

deposit thickness, depth, quality, geological conditions, and

contemporary economic factors. Proved, probable, and possible reserves

are other terms used in general mining practice.

Resource A concentration of naturally occurring solid, liquid, or gaseous material

in or on the Earth's crust in such form and amount that economic

extraction of a commodity from the concentration is currently or

potentially feasible.

Sedimentary

Hosted Copper

Deposit

A sedimentary hosted copper deposit is defined as ore bodies hosted and

deposited is layered rock units

The Aynak Copper Tender: Implications for Afghanistan and the West

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