SOL-306-13-000034_-_RADP_NW_-_2FBO_-_Attachment_J.20_-_Northern_Economic_Corridor_Study_ASMED_March_2012.pdf

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Northern Economic

Corridor Study

March 2012

This publication was produced for review by the United States Agency for International Development. It was prepared by the prime contractor for the Afghanistan Small and Medium Enterprise Development project, DAI.

AFGHANISTAN SMALL AND MEDIUM ENTERPRISE DEVELOPMENT (ASMED)

USAID Contract: 306-C-00-07-00503-00

USAID COTR: Farid Ahmad Barkzai

Submitted by: DAI

7600 Wisconsin Ave., Ste. 200

Bethesda, MD 20814

Submitted to: Afghanistan Mission

U.S. Agency for International Development

Kabul, Afghanistan

DISCLAIMER

The authors‘ views expressed in this publication do not necessarily reflect the views of the United

States Agency for International Development or the United States Government.

CONTENTS

EXECUTIVE SUMMARY ................................................................................................... II

INTRODUCTION

ECONOMIC CORRIDORS

PRINCIPLES OF ECONOMIC CORRIDOR DEVELOPMENT

FOUR MAJOR STEPS IN THE EVOLUTION OF AN ECONOMIC CORRIDOR

NORTHERN ECONOMIC CORRIDOR

HAIRATAN-MAZAR RAIL LINE

NORTHERN CORRIDOR ROAD TRANSPORT NETWORK

FUTURE TRANSPORT PLANS

NORTHERN DISTRIBUTION NETWORK

CAREC CORRIDOR PROJECT

DEMOGRAPHIC CONSIDERATIONS

TRADE WITH UZBEKISTAN

TARGETED SECTORS

TRANSPORTATION AND LOGISTICS SERVICES

Logistics services and port operations Transport services Air cargo

LIGHT MANUFACTURING AND AGROPROCESSING

Industrial Parks Light industry sectors

CONSTRUCTION MATERIALS

Imported Domestic production

PILGRIMAGE AND TOURISM

Pilgrimage tourism Contemporary tourism

BENEFITS OF ECONOMIC CORRIDOR DEVELOPMENT

COMPLEMENTARY DEVELOPMENT INTERVENTIONS

TRANSPORTATION AND LOGISTICS SERVICES

SME LIGHT MANUFACTURING

CONSTRUCTION MATERIALS

PILGRIMAGE AND TOURISM

CONCLUSION

ANNEXES

BIBLOGRAPHY

METHODOLOGY

LIST OF INTERVIEWEES

USAID ASMED-SUPPORTED ENTERPRISES IN BALKH

COMPANIES IN GORIMAR INDUSTRIAL PARK

COMPANIES IN SHADIAN INDUSTRIAL PARK

ASMED VEHICLE FLEET LEASING STUDY – FINDINGS AND CONCLUSIONS

IMPORT PROCEDURES AT HAIRATAN

NON-TARIFF BARRIERS TO AFGHAN-UZBEK TRADE

FIGURES

Figure 1 - Northern Economic Corridor

Figure 2 - Hairatan Railway map

Figure 3 - Current and proposed border crossing points

Figure 4 - Afghanistan-Turkmenistan Pipeline Bridge at Keleft

Figure 5 - The Northern Distribution Network

Figure 6 - ADB-CAREC Corridors

Figure 7 - Afghanistan trade with Uzbekistan in 2010 (Afghan CSO 2009)

Figure 8 - Targeted sectors along the Northern Economic Corridor

Figure 9 - Most frequently cited roadblock locations

Figure 10 - Future airport of Mazar-e Sharif after rehabilitation

Figure 11 - Dashte Shadian Industrial Park

Figure 12 - Gorimar Industrial Park

Figure 13 - Estimated origins of flour in Mazar-e Sharif market

Figure 14 - Ghori Cement Company in Pul-e Khomri

Figure 15 - Historical and religious tourism sites along the Northern Corridor

Figure 16 - Shrine of Hazrat Ali (Blue Mosque) in Mazar-e Sharif

Figure 17 - Khwaja Muhammad Parsa Mosque (Green Mosque) in Balkh

Figure 18 - Noughumbas Mosque in Balkh

Figure 19 - Bagh-e Jahan Palace and Garden complex in Kholm

Figure 20 - Takht-e Rustan Throne and Cave complex in Samangan

TABLES

Table 1 - Hairatan to Mazar-i-Sharif railway

Table 2 - Power costs from various sources (2010)

Table 3 - Provincial prices for construction materials in Afghanistan (in Afs)

Table 4 - Current and potential tourism sites along the Northern Corridor ii

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EXECUTIVE SUMMARY

To inform future programming to encourage economic development in Afghanistan‘s Northern

Region, USAID commissioned a study of the Northern Economic Corridor. A particular focus is on potential for industrial development around Mazar-e Sharif as well as the impact of new rail line liking Mazar-e Sharif with Uzbekistan through the border town of Hairatan.

Development of any economic corridor requires certain pre-existing conditions and must follow specific steps:

The corridor must already have economic potential, usually based on location, natural resources and / or population

If potential exists, a transport backbone, especially road and air links, and often rail, must be developed first

Associated industries, trade and supporting infrastructure and institutions must be developed alongside the transport backbone as the economy develops

In all cases, primary goal is to help coordinate public and private-sector interventions to promote economic growth

Two important investments provide the economic context for the development of the Northern

Economic Corridor; 1) Recent ADB investment to asphalt the northern portion of the Highway 1

Ring Road have had a catalytic effect in the Northern Provinces in linking producing regions with processing centers and domestic markets development, and 2) the opening of Afghanistan‘s first railway line linking Mazar-e Sharif to suppliers and markets in Uzbekistan, Central Asia and Europe.

The Northern Provinces also form a significant industrial base, centered primarily in Mazar-e Sharif, but industrial and manufacturing facilities for various sectors also exist in Sheberghan, Samangan, and

Pul-e Khomri.

Between 50-70% of all ISAF goods by value brought into Afghanistan were imported through

Hairatan in 2010. Up to 70% of Afghanistan‘s imports in 2009 also came in through Hairatan and iii

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comprise mainly fuel, construction materials and foodstuffs. While ISAF imports account for a significant amount of cross-border trade through Hairatan, the NATO withdrawal in 2014 will also cause an equally significant outflow of goods from Afghanistan back to NATO countries. This retrograde ―retro-trade‖ will cause a market-distorting spike in the market demand for transport and transit services across Afghanistan and particularly along the Northern Corridor.

Several sector-specific constraints still exist that prevent the private sector maximizing the advantages that the Northern Corridor provides.

The transport sector is constrained by a lack of investment in truck stock, driver training, insurance services, high import/export costs and burden, and domestic road checkpoint harassment.

The manufacturing and agroprocessing sector is significantly constrained by lack of affordable power, which further stymies investment in improving capacity and production in other nascent industries.

The construction sector is plagued by the same problems as the manufacturing sector, but also cannot compete with products “dumped” on the market by Pakistan, as well as higher quality imports from CIS countries. Potential investment opportunities in cement, gypsum, and wood processing lie unexploited.

The pilgrimage and tourism sector is constrained by a lack of strategy, market information and site development.

The investment in the Northern Economic Corridor is the most recent development in supporting economic growth in the Northern Provinces but future investments in the power, agroprocessing and manufacturing sector are needed to allow private enterprises to maximize the potential of the

Northern Corridor.

The Bottom Line: What needs to be done to maximize the benefit of the Northern

Corridor?

Extend city power to the Gorimar

Industrial Park

Support a Northern Provincial Trade Fair

Integrate SMEs into supply chains of larger companies

Incentivize investment in agroprocessing of wheat and high-value horticulture

Support opening up new border crossing points at Keleft (Turkmenistan) and

Kaldar (Tajikistan)

Renegotiate the Hairatan Railway management contract

Support truck leasing enterprises

Establish and empower an Afghan Roads

Authority and Afghan Rail Authority

Accelerate development of the

Sheberghan Gas Field Development

Project

Re-bid the Ghori Cement Company to new investors

Explore options to establish glass and float glass manufacturing

Improve road transport governance along the Northern Corridor

Develop and market tourist sites in Balkh, Mazar-e Sharif and Kholm

Support study tours to other countries with Shia pilgrimage

Support ADB efforts to promote customs cooperation between Afghanistan and neighboring CAREC countries

Support establishment of a master planned multi-modal junction in

Naibabad

Link the Northern Corridor with the proposed Baghlan-Kunduz Agricultural

Corridor

INTRODUCTION

As a lower-income land-locked country, one of the keys to Afghanistan‘s economic growth lies in its ability to trade with its neighboring countries and to access global markets. Afghanistan has great potential in both agricultural goods and mineral resources and it is situated in an area of strategic importance that links South Asia, Central Asia, and the Middle East.

Recently, the North of Afghanistan has received a significant investment in the form of a new railway connecting Uzbekistan through the border at Hairatan, with the provincial capital of Mazar-e Sharif.

Combined with recent ADB investments to finalize asphalting of the Highway 1 Ring Road in the

North, an opportunity now exists to develop the institutional, commercial and trade capacity to create a Northern Economic Corridor.

The North is a center for industrial capacity, energy generation and transmission, transport and logistics, and agriculture and agroprocessing. In the past, the Northern Provinces benefitted greatly from industrial, energy, and transport investment by the USSR and other socialist countries.

However, this capacity has deteriorated after years of neglect and conflict. New investments in the transport, agroprocessing, manufacturing, and real estate sectors show willingness from the private sector, but also expose lingering policy constraints that limit economic growth.

The Northern Economic Corridor is critical to the development and stabilization of the Northern

Provinces, and by extension to the rest of Afghanistan. Linking producing regions with processing capacity with intermediate and end markets will lower the cost, time and risk to do business in the region and integrate Afghanistan‘s burgeoning economy with those of its neighboring countries. The development of the economic corridor infrastructure in Afghanistan could also have the important effect of normalizing the social and economic situation, and at the same time undermining the position of extremists and drug criminals. The transformation of Afghanistan into a transit hub between Central Asia and South Asia and the Middle East would be in the interests of Afghans at all levels. Extensive development of the network would stimulate the flow of trade between these areas via Afghanistan. This would lead to an improvement in the employment situation in Afghanistan and hence to an increase in income for the Afghan population.

This report will provide a recent accounting of the status of economic corridor development (as of

February 2012), a contextual description of the Northern Economic Corridor, a briefing on the principles of economic corridor development, an economic background of the Northern Provinces, an analysis of four specific sectors in the region, and a series of strategic and programmatic recommendations to optimize the benefit of corridor development. This study is targeted to USAID and other donors looking for programmatic recommendation on economic corridor development, specifically with respect to the four targeted sectors: transportation and logistics, SME light manufacturing, construction materials, and pilgrimage and tourism.

ECONOMIC CORRIDORS

Economic Corridors have been in existence as long as there has been trade. Probably the oldest trade network still in use is the Silk Road. Indeed, the Northern Economic Corridor is part of this most notable example.

Economic corridors are meant to attract investment and generate economic activities along a region, usually with the aim toward development. They are meant to provide two fundamental attributes for development: lower distribution costs and improved land supply for economic activities. However, physical links and logistics facilitation must be in place in the corridors for them to achieve these aims.

PRINCIPLES OF ECONOMIC CORRIDOR DEVELOPMENT

Definition

An economic corridor is much more than a road. Economic Corridors consist of clusters of industries, traders & infrastructure, with transport links to regional and/or international markets. In addition to the enterprises that comprise the private sector along the corridor, public sector institutions and local, regional and national government also play a role in implementing and supporting an enabling environment for businesses to trade along the corridor. Civil society also plays an important role in the form of business associations and chambers of commerce to organize the private sector and effectively represent their interests to the government.

Economic Corridor development strategies aim to rehabilitate underperforming corridors by:

Helping to configure and coordinate large scale infrastructure and economic investments in a region;

Ensuring that all activities promoting trade and investment-led economic growth; and

Promoting higher-value products and improved competitiveness in the broader region.

Success factors

Various factors contribute to the success of corridors achieving the development objectives intended. For example, the geography of the area in which a corridor is located is an important factor. The corridor must have pre-existing economic potential, including: natural resources, population density, proximity to markets, favorable geography for transport, weather, etc.

The private sector must be heavily involved in contributing to the objectives of the corridor – in most developing country environments the public sector and /or donors do not possess enough capacity or the mandate to fully support the corridor. Public resources must also be prioritized carefully – not just funding, but political support and buy-in at all levels, from the Ministry to the village cooperative. It is vital that all stakeholders understand the objectives, roles, responsibilities and benefits of corridor development.

As an output of corridor development, the benefits of growth should be shared across the population in all geographies, not just in urban areas. The producers, processor, traders, and end consumers should benefit – this includes all economic groups (farmers as well as businesses, micro-businesses and SMEs, not just large ones)

Risks

Economic corridor development often fails several reasons, many of which will be challenges in

Afghanistan:

Political instability

Uneven government/donor buy-in

Limited capacity to develop or manage the process

Weak investment climate and poor regulatory environment

Weak or non-existent private sector

Pre-mature marketing of corridor without properly scoping costs and benefits

Donor myopia, e.g., focusing on transportation without addressing productivity enhancement

Corridor supply chain and bottlenecks

The trade and transport costs borne on enterprises along transport corridors depend much more on operations and governance than on infrastructure capacity. Many countries have thousands of kilometers of paved roads, but suffer from low road transport governance.

Few traders in Afghanistan have access to the door-to-door logistics infrastructure that has developed in industrialized countries. Instead, they depend on an extended sequence of disparate operators, with varying procedures, agencies and services, all prone to rent-seeking and overregulation. Enterprises face not only multiple clearances, but also transloading from one vehicle to another, exposing cargo to damage or pilferage.

Improving transport infrastructure is key to alleviating trade constraints, but concurrent support to improve road transport governance along the corridor is also needed.

From the business point of view, the low reliability and unpredictability of the transit supply chain can be more of a constraint than the actual transit time. The many steps, actor, fragmented control and communication, and the varying (yet still low) quality of services makes the supply chain unpredictable, which makes it difficult to plan and increases risk. These risks give rise to additional inventory, emergency shipments, suspended operation, and lost markets.1 For goods that are inputs into a processing operation, processors highly value on-time delivery. The risks of high unreliability costs to the trader or the manufacturer in a land-locked country like Afghanistan are likely to greatly discourage investment, expansion of the scale of an enterprise, or start of new export initiatives in the region. Processing and other light industry faces a double penalty compared to traditional commodity exports or production in a coastal country because both shipping exports and importing inputs, equipment and parts are dependent on the trade corridor.

Impact of improved transport infrastructure

Historically, the low availability and quality of transport infrastructure has been cited as the primary cause of the high transit times and low competitiveness of trade for landlocked countries.

The sustainability of transport infrastructure maintenance is, and has always been, a problem for developing countries with limited fiscal resources. This is because the low volumes of traffic generally does not allow for the recovery of costs of maintenance, especially in areas that handle the least amount of traffic. Recent World Bank studies have shown that even a relatively well-managed road fund could cover only routine maintenance needs because of structurally low traffic and that donor funds would be continually required to fund maintenance needs.

FOUR MAJOR STEPS IN THE EVOLUTION OF AN ECONOMIC

CORRIDOR

Transportation backbone

Building or rebuilding the region’s transportation infrastructure

The Northern Economic Corridor will focus on four sequential objectives o Connecting Hairatan with Mazar by rail o Establishing a multimodal junction in Naibabad o Developing additional border crossing points with Turkmenistan at Keleft, and with Tajikistan at Kaldar.

o Eventually extending rail west to Sheberghan and southeast to Kabul

Trade development

Facilitating trade, developing value chains, and providing additional infrastructure for export

The goal is to focus on industries where the Northern Region already has advantage, such as light industry, transit and agricultural products

Economic corridor

Adding other economic, social and political dimensions on top of trade and transport

1 World Bank, Connecting Landlocked Developing Countries to Markets, 2011

For example, developing new industries and educational reforms needed to create the right skills for that industry

Spatial corridor

Expanding the benefits of trade and economy over a broader geographic area and to a broader group of the population

This will include developing secondary road networks, stronger local institutional structures

NORTHERN ECONOMIC CORRIDOR

Two important investments provide the economic context for the development of the Northern

Economic Corridor; 1) Recent ADB investment to asphalt the northern portion of the Highway 1

Ring Road have had a catalytic effect in the Northern Provinces in linking producing regions with processing centers and domestic markets development, and 2) the opening of Afghanistan‘s first railway line linking Mazar-e Sharif to suppliers and markets in Uzbekistan, Central Asia and Europe.

The Northern Provinces also form a significant industrial base, centered primarily in Mazar-e Sharif, but industrial and manufacturing facilities for various sectors also exist in Sheberghan, Samangan, and

Pul-e Khomri.

The Highway 1 Ring Road connects these industrial centers together as well as with Kabul and other major cities. A northern spur also connects Mazar-e Sharif with Uzbekistan through the border crossing point of Hairatan. A significant percentage of Afghanistan‘s imports crosses this border, but is constrained by high costs, administrative burden and wait times.

There is a strong rationale for supporting the development of the Northern Economic Corridor:

Accesses Northern Afghanistan and promotes international market and logistic linkages;

Encourages transit between CIS countries, South Asia, and the Middle East, as well as further afield to

China and the EU.

Draws security forces to a volatile area experiencing increasing insurgency presence;

Improves domestic linkages between the North and the rest of the country

Provides market access to raw materials and producing areas along corridor

Improves livelihoods of the people who live in the area through increased employment and income

Increases access to social services for underserved populations

Facilitates construction of complementary infrastructure projects

Supports feeder roads improvement

Catalyzes development of additional border crossing points

Geographically, the Northern Corridor traverses the provinces of Jowzjan, Balkh, Samangan and

Baghlan and connects the cities of Ankhoi, Sheberghan, Balkh, Mazar-e Sharif, Kholm, Samangan and

Pul-e Khomri. The corridor is also contiguous with the northern portion of ADB‘s Ring Road improvement project in 2008-2009.

Figure 1 - Northern Economic Corridor

Although Mazar-e Sharif experiences a high level of development, growth and stability the rural areas

(even as close as Balkh city, 20km away) remain removed from this economic growth due to the limited processing capacity in the region and export capacity to northern markets through Hairatan.

Unfortunately, the security situation around the corridor area has not allowed a social survey at the household level.

HAIRATAN-MAZAR RAIL LINE

Afghanistan has long been the missing link between the rail networks of China, Central Asia, South

Asia and the Middle East. All of Afghanistan‘s neighboring countries have fairly well-developed railway networks, however, Afghanistan has never had a functioning rail system. Railway projects were started several times in the 19th and 20th centuries, by British and then Soviet authorities, only to be abandoned for political reasons.

The Amu Darya River forms the border between Uzbekistan and northern Afghanistan. The only fixed crossing between the countries is the Soviet-built Friendship Bridge, which carries a road and single-track railway. The bridge leads directly to the Hairatan freight terminal on the Afghan bank of the river, but the border is a bottleneck. Currently, freight must be transshipped from rail to road in

Hairatan, and the transport infrastructure cannot cope with expanding trade and the delivery of humanitarian aid and military cargo.

Figure 2 - Hairatan Railway map

The Friendship Bridge is now busy, with freight trains of up to 75 wagons bringing petroleum products, building materials, machinery and agricultural products into Afghanistan. Traffic in 2009 amounted to 4000 tons/month, and the total flow of goods from Central Asia to Afghanistan is predicted by the ADB to increase from 25,000 tons to 40,000 tons per month over the next few years, with goods including oil and fuel, wheat and flour, fertilizer, construction materials, agricultural and off-highway equipment and consumer goods.2 At the present, little merchandise is exported from Afghanistan and most wagons leave empty.3

Hairatan is a rail terminal and large transportation hub for goods coming from former Soviet

Republic and even from Europe via railway. The Hairatan hub plays an important economic role not only for the Northern Provinces, but for the entire country. However, the Hairatan hub does not have modern equipment for uploading and downloading containers and other cargo. There is no infrastructure present to support efficient operations: staging areas, parking lots, warehouses, cranes for loading and unloading are all of low quality and quantity to handle the volume of trade and not used effectively. Only large-scale companies have private terminals and other infrastructure on their own compounds. Small and medium enterprises completely depend on large-scale companies for services. Due to lack of basic infrastructure, there are hundreds of trucks standing on the road sides every day.

The road between Hairatan and Mazar-i-Sharif has been improved in recent years, but it cannot meet the requirements of national and regional traffic and a railway has been built to supplement

2 Proposed Asian Development Fund Grant Islamic Republic of Afghanistan: Hairatan to Mazar-e-Sharif Railway

Project, Asian Development Bank, September 2009

3 An exception being the occasional shipment of raisins or other dried fruits and nuts current truck transport.4 As well as increasing freight capacity and reducing transport costs, replacing road transport with rail will reduce accidents and pollution, and cut road maintenance costs.

The railway is expected to have a significant economic impact, as almost half of Afghanistan‘s imports pass through Hairatan.5 The ADB is the major donor of this investment and estimates that the opening of the railway will quadruple capacity at the border.6 Recent investments by the ADB include an upgrade of the rail freight facilities at Hairatan, including a transshipment terminal and institutional support for the development of a wider plan for the rail sector.

The new railway is already carrying both commercial and military supplies to international military forces in Afghanistan, and will bear most of the retrograde ―retro-trade‘ when ISAF withdraws in

2014. Routes to Afghanistan through central Asia avoid the security issues of passing through

Pakistan to southern Afghanistan, but do suffer from the need to cross the multiple borders between Europe and Afghanistan, with the attendant delays, costs, bureaucracy and political disruptions.

Table 1 - Hairatan to Mazar-i-Sharif railway

Length 73.47 km

Start Friendship Bridge, Hairaton (east of Termez, Uzbekistan)

End Gur-e-Mar (18 km east of Mazar-i-Sharif)

Gauge 1520 mm

Cost US$170m

(Asian Development Bank US$165m, Afghan government US$5m

Completion construction November 2010 contractual date June 2011

The 73.47 km alignment starts at the Friendship Bridge then runs parallel to the Hairatan –

Naiababad road and a 330 kV electricity transmission line. It then crosses the Highway 1 Ring Road east of Naiababad, turning west to terminate to the south of the village of Gur-e-Mar, 18 km east of

Mazar-i-Sharif and not far from the airport and near Camp Marmal. Further expansion into the city, its industrial parks and factories should enable goods to be taken straight to Mazar-e-Sharif, avoiding the queues and significantly increasing the volume of goods that can be transported. The Naibabad

Rail Station was officially opened on February 3rd, 2012 with one crane in use by ASTRAS.

The rail line is effectively an extranational extension of the Uzbek rail network, with construction and current operations implemented by Uzbekistan Railways under a three-year management contract. The track and rolling stock follow Uzbek technical standards, and thus the standards found across the countries of the former USSR. The single-track 1520 mm Russian gauge unelectrified line is designed for speeds of 80 km/h. Passing loops are provided every 20 km, and are 1.7 km in long to accommodate 100 wagon trains. It is expected that one or two trains a day will use the line, and clearances will be suitable for double-stack containers.

4 Hairatan to Mazar-e-Sharif Railway Project : Afghani., Is Rep. Of, Asian Development Bank

5 ADB-Funded Railway to Help Afghanistan Improve Regional Links, Boost Growth, Asian Development Bank, 30 September 2009

6 Philip Wood, Railway to Regional Integration, Asian Development Bank, 30 March 2010

The Afghanistan Railway Authority, which is waiting for approval from the Afghanistan presidential cabinet, will be set up to monitor and regulate the railway industry in the country. In July 2011 the

Afghan Minister of Aviation & Transport, and the Afghan Minister of Public Works, announced the creation of the autonomous authority of the Afghan railways, building on the example of SNCF, the

French operator.7

NORTHERN CORRIDOR ROAD TRANSPORT NETWORK

In Balkh and other Northern Provinces, construction of the primary roads was performed primarily through support from the Soviet Union from 1965-1975 with little expansion or maintenance until

2003. Since 2003 the ADB has been the lead institution in the development of the road network in the North.

Figure 3: Northern Economic Corridor (detail)

From 2004 to 2008, the Northern Economic Corridor was reconstructed and asphalted by the ADB for $96.94m with a $20m grant from the Japan Fund for Poverty Reduction. As a result, traffic increased, travel times from Kabul to Mazar-e Sharif were reduced from 14 hours to 6 hours, and vehicle operating costs decreased by 9%. This translated in a reduction in the transport cost for about 9 million inhabitants of seven surrounding provinces and to international transit traffic as well.

The last 200km portion of the Highway 1 Ring Road is currently under reconstruction and asphalting between Sar-e Pul and Maimana, and is expected to be completed in 2014.

The current state of the Northern Corridor road is good with light traffic between Mazar and

Sheberghan, moderate traffic between Pul-e Khumri and Mazar, and heavy traffic between Mazar and

Hairatan. The road is primarily an undivided highway with one lane in each direction with no central median with the exception of some portions of the road in urban areas. On the rehabilitated road, traffic safety has decreased since rehabilitation. The shoulders of the road are not paved and light

7 Le modèle français au service du développement des infrastructures ferroviaires afghans, Communique du presse de Ministre français de l‘Ecologie, du Développement durable, des Transports et du Logement, 2011 traffic tends to use the paved lanes. The speed of vehicles has increased because of the improved pavement. There are many bazaars along the road, where shops are only a few meters from the pavement and vehicles overtaking each other from both sides are hazardous to pedestrians and light traffic.8

Some challenges exist with the new improvement of the road however. First, it is not clear to what extent the current configuration of the road is adequate for future increased traffic as foreseen by road traffic studies conducted. As the road is primarily an undivided highway with vehicles of different sizes and speeds using it, overtaking is common and current Afghan driving practices increase the risk of an accident. When an accident or breakdown does occur (primarily tire punctures and overheating of large trucks), there is inadequate shoulder room to move the vehicle out of traffic. Onsite vehicles repairs are common and usually lengthy, thus causing significant congestion until the vehicle is repaired or removed.

Furthermore, the funding and implementation of operations and maintenance in the future is also unclear. Interviews with the Ministry of Transport and Ministry of Public Works have commented that they lack the financial resources, equipment and institutional capacity and trained personnel to carry out maintenance of the road. The GoIRA has pledged to allocate sufficient funds for routine and periodic maintenance and axle load controls, as envisaged in the project design and covenanted in the ABD Loan Agreement, comprising $265 million for road maintenance, but has only been able to allocate $20m from 2009-2013. A master planning unit has been established in MPW and a road maintenance pilot project was planned under the Japan International Cooperation Agency‘s program.

The Government is considering the establishment of an independent road fund for road maintenance, creating an off-budget revenue system (toll collection, user charges, etc.) Without regular maintenance however, the serviceable life of the roads will be drastically reduced, compromising sustainability.9

In Balkh province alone, primary roads to the market in Mazar still require asphalting. These districts are: Kaldar, Shortepa, Marmul, Kishindeh, and Zari

FUTURE TRANSPORT PLANS

According to the ADB-supported Central Asia Regional Economic Co-operation (CAREC) project, the Northern Corridor Railway is to be extended westward to Sheberghan, Andkhoy, Maimana, and eventually to Herat.

8 Afghanistan: Emergency Infrastructure Rehabilitation and Reconstruction Project, ADB, 2009

9 Afghanistan: Emergency Infrastructure Rehabilitation and Reconstruction Project, ADB, 2009

Figure 4 - Current and proposed border crossing points

Future additional border crossing points

Because Mazar-e Sharif is close not only to Uzbekistan but also to Turkmenistan and Tajikistan, plans have been developed by the ADB and the Ministry of Planning to develop two additional border crossing points with Turkmenistan at Keleft and with Tajikistan at Kaldar. These borders do not yet formally exist, but there is political will on both sides of the border of the respective countries to develop new crossing points and to promote regional trade integration. Both of these future border points are within a few kilometers of the South-Central Asian Rail Line

The border crossing point of Keleft with Turkmenistan is currently the most feasible border to develop among the two. There are roads on both sides of the border and in 1967, the Soviets built a single suspension pipeline bridge to deliver gas from Sheberghan to the Turkmen SSR and in previous years, Keleft was a major customs point for goods barged across the river.10 Another major advantage is that the Turkmenistan Railways line is situated on the opposite bank of the river.

Afghan-Turkmen relations are excellent, and according to statements made by President Karzai‘s office following a meeting between Presidents Karzai and Berdimuhamedov in Türkmenbaşy in

January 2012, design studies for the second Keleft Turkmenistan – Afghanistan railway line have been completed, and work will start ―soon‖ and that a design and full study of a separate project involving the establishment of an 84 km of railway extending across the Atamyrat-Ymamnazar in

Turkmenistan to Akina-Andhoi in Afghanistan had been finalized with actual work expected to begin soon.11 Traders in Mazar-e Sharif also comments that Turkmenistan is more connected to Western markets and that truckers experience lower road harassment than Uzbekistan. UNOPS has currently contracted to gravel the road to Keleft and to build needed bridges over culverts.

10 The pipeline bridge is not currently configured for road or rail traffic.

11 Afghan and Turkmen Presidents Vow to Implement Critical Projects, Office of the President, Islamic

Republic of Afghanistan, 26 January 2012

Figure 5 - Afghanistan-Turkmenistan Pipeline Bridge at Keleft

The proposed border with Tajikistan at Kaldar is not as developed as Keleft. Although the governments of Afghanistan and Tajikistan have already agreed to open a border crossing point at that location, no road or bridge yet exists. Furthermore, it is not yet determined if the road to

Kaldar will originate from Naibabad or be extended from Hairatan, although the latter is more likely from a cost and logistics point of view.

NORTHERN DISTRIBUTION NETWORK

The Northern Distribution Network (NDN) -- a network of road, rail and air routes that traverses

Central Asia states -- came into being in early 2009. It was developed as an alternative to a Pakistani supply line that had become increasingly vulnerable to ambushes. Despite higher transit costs, the

NDN carries close to 75 percent of all non-military items bound for Afghanistan. In addition, more than 60 percent of Coalition Forces‘ fuel needs are transited through Central Asia. Pakistan‘s decision to close another supply route means that the NDN‘s strategic importance is only going to grow in the coming months.

Figure 6 - The Northern Distribution Network

The NDN was designed by the US Department of Defense to be a safer re-supply option than trucking goods and fuel through Pakistan. The Pakistani route has become increasingly vulnerable in recent years to Taliban attacks. The NDN comprises of a rail link starting in Latvia going through

Russia, Kazakhstan and Uzbekistan; a road route via Kyrgyzstan and Tajikistan for goods initially delivered to the Manas Transit Center near Bishkek; and a Caucasus pathway that ferries cargo from the United States and Europe by sea to the Turkish port of Metin, as well as to Poti in Georgia, for onward delivery across the Caspian Sea into Afghanistan.

A November 14, 2011 sources-sought notice posted on the US government‘s Federal Business

Opportunities website indicates that the German-run Camp Marmal near Mazar-i-Sharif will be substantially enlarged to facilitate a ―Northern Distribution Network hub‖ at a cost earmarked to be between $10 million and $25 million.

Pakistan has closed its re-supply route on two previous occasions to protest US or NATO military activities -- for almost two weeks in 2010 and again for 3-days in April 2011. This time, officials in

Islamabad insist that the closure is permanent. Policy-makers in Washington have long planned for such a contingency. Since 2005, many US government contracts have specified that fuel should be sourced from countries north of Afghanistan. By 2010, northern sources were a requirement in tenders that cited potential ―mission failure‖ due to disruptions in Pakistan.12

12 Afghanistan: The Pressure Is Now on Central Asian Supply Route; eurasianet.org, 2011

CAREC CORRIDOR PROJECT

The Northern Economic Corridor is also part of the ADB‘s Central Asia Regional Economic

Cooperation (CAREC) Corridor project.13 The six CAREC corridors link the region's key economic hubs to each other, and connect the landlocked CAREC countries to other Eurasian and global markets. The CAREC Transport and Trade Facilitation Strategy presents an aggressive investment plan to upgrade all six transport corridors to international standards by 2017. CAREC 2020—the strategic framework for the CAREC Program, 2011–2020—lays out the next phase of priority investments in transport infrastructure along the corridors. CAREC expects additional investments over the coming decade to complete the infrastructure network and begin the process of developing the transport corridors into logistics corridors and—ultimately—economic corridors. Each corridor improves access for CAREC countries to at least two large Eurasian markets; and the warm-water ports of Karachi and Gwadar in Pakistan open up truly global trade opportunities.

Figure 7 - ADB-CAREC Corridors

TRADE WITH UZBEKISTAN

As imports on the Northern Corridor currently come through Hairatan, it‘s worth describing some of the factors that impact trade and transit with Uzbekistan.

13 The 10 CAREC countries are: Afghanistan, Azerbaijan, People's Republic of China , Kazakhstan, Kyrgyz

Republic, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan.

While ISAF imports account for a significant amount of cross-border trade through Hairatan, the

NATO withdrawal in 2014 will also cause an equally significant outflow of goods from Afghanistan back to NATO countries. This retrograde ―retro-trade‖ will cause a market-distorting spike in the market demand for transport and transit services across Afghanistan and particularly along the

Northern Corridor.

Once the withdrawal is complete, trade levels after 2014 are unknown, but what is known is that it will be a fraction of current trade. This will affect economies of scale and business planning for the transport sector as well as projected returns on investment for transport projects like the extension of the railway system and the planned Naibabad multimodal junction.

Uzbekistan‘s uncommon position as being double landlocked is one of the key impediments for increasing their own economic growth since higher transportation costs lower competitiveness of goods and profits for exporters. Afghanistan stands to benefit from Uzbek transit trade by providing the shortest way to the sea ports in Iran and Pakistan. Transiting through Afghanistan is twice shorter than the route to the ports in the Black Sea, and three times shorter than the roots to the

Baltic Sea ports; and almost five times shorter than the route to the Nakhodka in the Pacific Ocean.

Under the CAREC framework, Uzbekistan and Afghanistan are interested in diversifying the transport corridors and maximizing the use of all types of transport to support economic growth and development.14

Recent data from Afghanistan‘s Central Statistics Organization (CSO) suggests that Afghanistan‘s licit trade with the Central Asian republics is now surpassing trade with Pakistan and India. Still stronger trading ties are being built with Uzbekistan. For much of the 2000s Afghanistan-Uzbekistan trade did not even enter into the statistics. Now, Afghan imports from Uzbekistan exceed US$ 876 million, up from US$ 167 million in 2007/2008 and figures below US$ 100 million prior to that. Meanwhile, imports from Pakistan have decreased over the past three years from US$ 431 million in 2007/2008 to US$ 308 million in 2009/2010, which is about equal to imports from China, reaching US$ 360 million in 2009/2010. True, Afghanistan‘s exports are still heavily directed toward Pakistani markets and from 2005 to 2010 the value of this trade has remained in the bracket between US$ 200 million and US$ 300 million.15 Sizeable customs revenues also accrue the Afghan government as customs duties in 2009/2010 made up around 3 percent of GDP, equaling an income of at least US$ 400 million.

The regional trading network is up and running but Afghanistan currently has little export capacity and exports through Hairatan are comprised primarily of fresh fruits, dried fruits and nuts. . As

Afghanistan develops its vast energy and mineral resources, valued at US$ 1 trillion by audits, export markets are available in China, India, and elsewhere with transit available via the CIS countries and

Afghanistan‘s southern neighbors. Although development approaches promote high-value horticulture and handicrafts as driving development of export capacity, only the export of minerals and extractives will achieve the economies of scale needed to improve trade capacity and increase customs revenues.

14 Afghan Transit: How Uzbekistan can Win Peace and Spur Economic Growth; Uzbekistan Center for

Economic Research, 2011

15 Afghanistan‘s Trade with Central Asia Revives, Central Asia-Caucasus Institute, 2011

Figure 8 - Afghanistan trade with Uzbekistan in 2010 (Afghan CSO 2009)

TARGETED SECTORS

The Northern Economic Corridor traverses an area of significant economic potential. The map below illustrates some of the selected sectors and their geographic base of operations. For the purposes of this study, focus will be given to four targeted sectors: transportation and logistics, light manufacturing and agroprocessing, construction materials, and pilgrimage and tourism.

Figure 9 - Targeted sectors along the Northern Economic Corridor

TRANSPORTATION AND LOGISTICS SERVICES

Logistics and transportation services are fundamental to both Afghanistan‘s rebuilding efforts and its future economic growth. Increased government spending is targeted at transit trade, linking the country to major markets. Expansion of the sector supports the reconstruction‘s massive influx and distribution of materials and goods, and a return to increasing export volumes of products made in

Afghanistan. The tradition of private transport services continues with new momentum as investors set up ventures to take advantage of several new and existing airlines and a private truck fleet estimated at about 50,000 or more. Air transport is robust, driven by both commercial and ―duty-exempt‖ goods, and overland transport is benefiting from progress on road conditions and customs.

The efficient movement of goods—by land, air and sea—will link the country‘s major commercial centers to fully serve the domestic economy, the region and global markets in Europe, the US and worldwide. Specialized sub-sectors for investment include:

Small package and document handling

Land, air and sea transport

Warehousing and distribution, and provision of “duty-exempt” supplies

Freight forwarding, customs clearance, and travel agency services

Construction/improvement of road infrastructure

Afghanistan‘s large and growing market for basic logistics and transportation services presents a ground-floor opportunity for new providers. This opportunity is open to domestic and foreign firms of all sizes and origins, including entrepreneurs. While investment in the sector is increasing, the field is virgin territory for many services. The timing is right to cultivate customers and establish a ―first mover‖ advantage. Early investors in the sector report modest start-up costs and relatively low overheads, and even smaller operators are moving large volumes of freight.

Opportunity also exists in specialized services, such as cold cargo and perishables storage, overland transportation, truck maintenance, and customs facilitation. Agents sourcing raisins report the need for appropriate storage facilities, and carpet exporters are looking for reasonably priced cargo space.

The requirement for customs agent certification in the new customs code also provides opportunity for companies willing to train and certify customs agents on a large scale. In addition, Afghanistan‘s rapidly developing telecom infrastructure—including internet links via satellite—enables enterprising investors to upgrade and expand in logistics. Logistics providers are expected to quickly move to offer their customers the advantages of new technologies and capabilities.

Logistics services and port operations

Hairatan is the primary northern port for importation of consumer goods, construction materials, foodstuffs, petroleum products and ISAF materials. Inbound freight from Uzbekistan and other worldwide origins is channeled through Hairatan via rail and truck. Goods of Afghan origin and that in-transit from Pakistan are exported on river barges and trucks; rail exports do not play a significant factor at this time.

Slow freight clearance increases the cost of goods, delays delivery of inputs, and the confusion of clearance procedures increases bureaucracy and corruption. Exports are negatively affected, particularly perishable items, but also other items such as dry fruits and nuts, carpets, licorice roots, raisins, leather, etc. In addition, there are a number of economic development opportunities for

SMEs that are not currently serving existing needs in Hairatan. This includes freight and transport service provision, maintenance and repairs for trucks and other equipment, hotels, restaurants, etc for freight transportation providers.16

16 Hairatan Freight & Transport Report, DAI ASMED, 2011

Commercial freight trucks – tractor/trailer combinations, multiple axel flat beds, fuel oil and petroleum carriers of various shapes, lengths and capacity crowd Hairatan‘s Main Street from the first police checkpoint to the ports entrance. Along Main Street many small merchants and vendors established their business presence – some with legal licensing, others as squatters. Auto, truck and tire repair, welding, carpentry, bakers, cafes, machine shops, general grocery stores, produce vendors and others serve the needs of truckers arriving from all parts of Afghanistan and perhaps

Pakistan as well. Opportunities exist for SMEs to provide repair and maintenance, construction, tire repair and recycling.

A sophisticated transportation system is the base of private sector development. Balkh Province, and

Mazar, in particular, has a unique advantage – it is the only place which has a railway connection with

Uzbekistan and further Central Asia and Europe. In addition there is good road connection with

Kabul, Jalalabad, and Pakistan; there is also reconstruction of an international airport. That is why it is very likely that investors are interested in investing in this logistical and transportation hub.

Unfortunately there is lack of information about different investment opportunities in logistical/transportation hub(s) like Hairaton border, Naibabad Junction – Kabul – Mazar and airport.

In order to make investors aware of investment opportunities in this important area, there is a need to develop a concept, a master plan, of logistical hub(s) and then propose investment to different elements of the hubs. This is needed to prevent chaotic construction and to keep the logical sequence of services in the logistical hub.

Implementation of this intervention will focus on packaging investment opportunities in logistical or transportation hub(s) like Hairaton, Naibabad Junction – Kabul – Mazar and airport. The package will have to either refer to possibly an existing master plan or facilitate creation of a master plan. The investments could be managed through the creation of a ―thematic‖ industrial park. Because of its potential scale, there might be also a need to create a separate ―port authority‖ to managethe entire area.

It is essential to define the capable organization to manage implementation of this project, but there is a need for assistance of international and local experts.17

As a relatively new border point, the required governance and operational framework has either not been established, or is not implemented in accordance with the respective framework. USAID‘s

ASMED, TAFA, and EGGI projects have all conducted studies on upgrading and optimizing certain aspects of the Hairatan Port.

Hairatan currently serves as the headquarters for most of the transport and logistics sector in Balkh

Province, due primarily to the presence of the intermodal rail-road ports and the recent relocation of the Directorate of Customs in 2011. However, field visits to Hairatan and interviews with transport stakeholders reveal a chaotic institutional and physical environment, dominated by the large stakeholders and pervasive mistrust.

A major constraint on the transport and logistics sector is the overall enabling environment and governance of operations in Hairatan – both on the Uzbek side, as well as on the Afghan side.