SOL-306-13-000034_-_RADP_NW_-_2FBO_-_Attachment_J.21_-_Herat_Economic_Corridor_Study_November_2011.pdf

Herat Economic Corridor Survey

AFGHANISTAN SMALL &

MEDIUM ENTERPRISE

DEVELOPMENT (ASMED)

November 2011 This publication was produced for review by the United States Agency For International Development. The prime contractor for the Afghanistan Small and Medium Enterprise Development project, DAI, prepared it.

HERAT ECONOMIC CORRIDOR STUDY

BY DAVID FISCHER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

Herat Economic Corridor Study

This publication was produced for review by the United States Agency for International Development.

The prime contractor for the Afghanistan Small and Medium Enterprise Development project, DAI, prepared it. Use or disclosure of the data contained on this page is subject to the restrictions on the title page of this proposal.

Contents

1. EXECUTIVE SUMMARY

2. INTRODUCTION

3. ECONOMIC CORRIDORS

3.1 PRINCIPLES OF ECONOMIC CORRIDOR DEVELOPMENT

3.2 FOUR MAJOR STEPS IN THE EVOLUTION OF AN ECONOMIC CORRIDOR

4. METHODOLOGY

5. WESTERN REGION IN CONTEXT

5.1 DOMINANT SECTORS

5.2 REGIONAL MARKET DYNAMICS

6. HERAT ECONOMIC CORRIDOR

6.1 ROAD IMPROVEMENT PLANS

6.2 TRAFFIC AND TRANSPORT

6.3 SOCIOECONOMIC CONDITIONS

6.4 GENDER CONSIDERATIONS

7. BENEFITS OF ROAD IMPROVEMENT

7.1 AGRICULTURE

7.2 EXTRACTIVE INDUSTRIES

7.3 LIGHT INDUSTRY AND SERVICES

7.4 AGRICULTURE SECTOR DEVELOPMENT

7.5 ENABLING ENVIRONMENT

8. COMPLEMENTARY DEVELOPMENT INTERVENTIONS

9. CONCLUSION

10. ANNEXES

10.1 ANNEX 1: LIST OF INTERVIEWEES

10.2 ANNEX 2: DISTRICT ECONOMIC ASSESSMENTS

10.3 ANNEX 3: RECOMMENDED FUTURE ANALYSIS

prepared it.

Figures Figure 1 - Wheat farm in Herat using mechanization and irrigation Figure 2 - Herat's primary markets Figure 3 - Herat Economic Corridor traverses nine district centers Figure 4 - Current condition of the road between Herat and Obe Figure 5 - Afghanistan primary highway network Figure 6 - Herat-Kabul Highway Figure 7 - Herat Economic Corridor Figure 8 – Transport disruptions in Herat Figure 9 - Economic Corridor links producing areas with markets and processors Figure 10 – Snowbound vehicles between Chaghcharan and Kabul Figure 11 - Dara-e Takht village Figure 12 - Net income of high-value horticulture on an owner-operated 1-ha farm Figure 13 - Geological Study of Afghanistan estimated mineral resources Figure 14 - Herat Mineral Resource Map Figure 15 - Doost Marble Company quarry, Chisti Sharif Figure 16 - High transport costs dictate mineral export competitiveness Figure 17 - Minaret of Jam Figure 18 - Phases of complementary development initiatives Figure 19 - Herati producer employing appropriate technology

Tables Table 1 - Agricultural, handicrafts and small industries in Herat Table 2 - Light industry in and around Herat Table 3 - Economic Corridor contribution to Herat's economy Table 4 - Economic corridor policy reform areas Table 5 - Agriculture policy reform areas Table 6 - Extractive industry policy reform areas

This publication was produced for review by the United States Agency for International Development. The prime contractor for the Afghanistan Small and Medium Enterprise Development project, DAI, prepared it. Use or disclosure of the data contained on this page is subject to the restrictions on the title page of this proposal.

1. Executive Summary

To encourage economic development in Afghanistan’s Western Region, USAID commissioned a study of the Herat Economic Corridor. A particular focus is on the 380km portion of the transport route linking Herat, Chisti Sharif and Chaghcharan.

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

In this case, the Herat Economic Corridor shows significant economic potential:

• The location has excellent links to domestic and international markets. It has been described as the backbone of the region, linking Herat with Ghor, Badghis and eastern provinces; connecting to Iran and Turkmenistan.

• The corridor accesses rich natural resources including agriculture (wheat, high value horticulture) and extractives (marble, coal, iron, copper). The road is especially important as it is the primary route by which these resources reach processing facilities, customers and / or export hubs in the more developed province of Herat.

Chisti Sharif 160km

Salma Dam 170km

Obe 95km

Chaghcharan 385km

This publication was produced for review by the United States Agency for International Development. The prime contractor for the Afghanistan Small and Medium Enterprise Development project, DAI, prepared it. Use or disclosure of the data contained on this page is subject to the restrictions on the title page of this proposal.

• The road travels through high-population regions with population density, education & skills required for successful corridor.

However, the regional economy is hampered by the poor quality of the road. The 160km trip from Chisti Sharif to Herat takes ~20 hours in an empty truck and over two days for a loaded marble truck. Travel times can be longer or impossible during the four-month winter season. Hence, the economy is slowed in many ways:

• Transport costs for goods on the current road are ~60% higher than costs along a paved road

• Projects that are dependent on the road (the Salma Dam, for example) are delayed, meaning a continued shortage of power and water

• Ghor and Badghis provinces are increasingly cut off from Herat, which should be a destination for goods coming from the east

Constructing a new asphalt road is a critical and high-payback first step in developing the economy in the west. The estimated cost of asphalt road is $500,000 per kilometer – totally $80m from Herat to Chisti Sharif; and $113m from Chisti Sharif to Chaghcharan. The various benefits that the improved road would bring to the region include:

• Accelerating the marble industry which has potential to grow from $10m to $450m per year

• Accelerating completion of the Salma Dam: estimated to irrigate 75,000ha of land and provide 45MW electricity capacity

• Demonstrated potential for agricultural products to supply Herat market and beyond

• Creation of >1,000 jobs for duration of project, and 20-50,000 in the long-term

• An increased and growing tax base for public sector revenue generation

• Increased security through higher presence and better livelihoods

• National road linkages linking with Ghor and, eventually, Kabul

• Feeder road development for rural areas

• Access to healthcare, education and social services for underserved populations

In order to maximize the benefit of corridor development on the region, several development interventions are recommended:

• Agricultural collective organization

• Appropriate technology investment

• Skills training and workforce development

• Market linkages and information

• Extension services

• Post-harvest handling and storage

• Cold chain development

• Community processing

• Agribusiness enabling environment

• Extractive industry enabling environment

This publication was produced for review by the United States Agency for International Development. The prime contractor for the Afghanistan Small and Medium Enterprise Development project, DAI, prepared it. Use or disclosure of the data contained on this page is subject to the restrictions on the title page of this proposal.

ii

• Economic corridor management and operations

• Regional trade integration

• Industrial development

In addition, several policy reform interventions are also proposed to create an enabling environment

Many products are grown and/or sourced along the Economic Corridor, but under these development interventions, some will benefit from the corridor more than others:

• Fresh grapes, pomegranates, peaches and plums command a much higher price in Herat and in export markets than other horticulture. Further, they respond well to a properly managed cold chain. This sector also contributes a great deal to on-farm employment as well as additional potential employment in the form of value-added processing.

• Saffron also has an extremely high price per kilogram, enough to potentially incentivize producers away from poppy cultivation, which is still ongoing in the area.

• Tomato processing and sericulture in Karukh is already performed by several women’s organizations, and can provide women’s livelihoods in the communities along the corridor

• Marble is already being mined along the corridor and processed into export quality in the Herat Industrial Park. Improvement of the corridor can maximize investments made and contribute to catalyzing the region’s extractive industry.

The upgrading of the Herat Economic Corridor is very likely the most important component in the efforts to develop the local economy and socio-economic conditions in the region. It is difficult to see the area make any significant development without appropriate transport infrastructure. Fortunately, there appears to be the required financing and capacity to build the road. The supporting development interventions that come afterwards will be critical to leverage the advantages that the road provides to increase the livelihoods of the people along the corridor and to support the economic integration of the Western Region with the rest of Afghanistan and the global economy.

The Bottom Line: If they build it, will they come?

Yes, but only with complementary support activities in:

• Selected product support

• Production improvements in quality and quantity

• Market linkages

• Value-added processing

• Enabling environment

• Regional trade integration

• Industrial development

• Social services

• Linkages to Ghor and Kabul prepared it.

2. Introduction

The Western region of Afghanistan (Herat, Badghis, Farah & Ghor Provinces) retains a number of traditional industries, agriculture and especially a well-established tradition in trans-shipment of goods. Furthermore, the many formerly powerful industries that have fallen into disrepair (cotton processing, textiles, etc.) and several emerging industries (saffron & marble), offer significant opportunities for economic growth in the region.

However, despite generally good levels of security throughout the region, which are generally permissible for travel and project implementation, much of the economic activity in the region is currently centered in and around Herat City.

Herat City enjoys a relatively good physical infrastructure (24 hour electricity, well maintained roads, a well serviced domestic airport, etc.) and the City’s business community also enjoys decent access to finance, a well-educated population, exposure to neighboring countries and a tradition in trading. These determinates have resulted in the rapid and expanding development of SMEs in the surrounding area. Yet despite experiencing a similar level of security and its close proximity to this industrial hub, the eastern districts of Herat (and Ghor province) remain significantly removed from this economic growth, due to their lack of infrastructure, particularly the lack of an all-weather road connecting the region to Herat City.

In part as a result of the work by the USAID ASMED Project in developing the significant marble resources in Chisti Sharif District and the ongoing construction of the Salma Dam, there is now a very tangible opportunity for the development of an important economic corridor between Herat City and Chisti Sharif District (and possibly all the way to Chaghcharan, Ghor Province). The potential impact the corridor would have on the Western Region is being recognized by an increasing number of actors, including the growing number of actors in the marble sector. As a direct result of this awareness the Government of the Islamic Republic of Afghanistan (GIRoA), has made the construction of an all-weather road between Herat City and Chisti Sharif District a top priority in the region.

In order to leverage the support for such an initiative, and to assist the integration of ASMED (and other development projects) activities into a coordinated effort to maximize the resultant economic impact, it is necessary to accurately determine the impact of the Economic Corridor on the region as a whole.

3. 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 Herat 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.

3.1 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.

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

3.2 Four major steps in the evolution of an economic corridor

Transportation Backbone

• Building or rebuilding the region’s transportation infrastructure

• The Herat Economic Corridor will focus on three sequential objectives o Connecting Chisti Sharif with Herat o Connecting Chaghcharan with Herat, once the route is determined o Eventually connecting Herat with Kabul

Trade Development

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

• The goal is to focus on industries where the Western Region already has advantage, such as marble and agricultural products

Economic Corridor

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

• 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

4. Methodology

The Economic Corridor Study methodology was constrained somewhat due to the fact that the security situation did not permit primary data collection of economic activity along the corridor. However this constraint was largely resolved through intensive interviews of stakeholders and value chain actors that frequently utilize the corridor and incorporation of their anecdotal evidence of the challenges and opportunities in developing the corridor. In order to conduct an analysis of the economic and political issues regarding the development of an economic corridor and to make recommendations on potential development interventions, the following activities were performed.

Transportation and Infrastructure Analysis

1. Assess state of Western Region transportation, including both inter-region and cross-border links;

2. Assess key supporting infrastructure, especially access to water and power;

3. Gather information from government, donors and other stakeholders to see what activities are already underway;

4. Based on findings and on trade analysis, make recommendations on necessary improvements; and

5. Place particular emphasis on a) portion of east-west corridor between Herat and

Chisti Sharif, and b) economic impact on marble producers and supporting enterprises.

Trade Assessment

1. Assess regional business, with particular emphasis on the impact that improved infrastructure will have;

2. Use both primary and secondary information and also take into account cross-border trade issues; and

3. Make sure that recommended industries / interventions are linked with activities already underway.

Sector Assessment

1. Value chains analysis to understand different actors and their dynamics;

2. Competiveness in terms of revenue, cost base, and market potential; and

3. Policy environment to identify sector-specific enabling environment constraints.

Recommendations

1. Prioritized set of interventions on both the trade and transport side;

2. Estimated benefits;

3. Implementation timing and other considerations; and

4. Next steps for longer term development.

5. Western Region in context

The Western Region of Afghanistan is an important part of the country as it forms much of the breadbasket of agricultural products, as well as handling trade with Iran and Turkmenistan. Afghanistan’s Western Region has tremendous advantage in that it is increasing trade with several regional markets: Central Asia, South Asia, and the Middle East though Iran and Dubai. The increase in regional trade is creating new markets for raw materials and primary products, especially in large emerging economies such as India, UAE, and Russia.

Private Sector

Herat’s business community enjoy relatively decent access to finance, exposure to neighboring countries and a tradition in trading, which supports the rapid development of SMEs in the province.2 In 2005 the Herati business community established an industrial park outside of the city and adjacent to the airport. The park is now a hub for private sector business operations, with 180+ active businesses, employing approximately 10,000 workers from more than 15 types of industries. Next to Kabul, no other Afghan city has such a concentration of light industrial production.3

Current Road Infrastructure

Herat is not yet tightly integrated with the economies of other major Afghan cities. For instance, 223 kilometers of the Afghan Ring Road that will connect Herat to Mazar-e-Sharif has still not been completed.4

Current Power Infrastructure

Herat currently imports all its power predominantly from Iran but also buys power from Turkmenistan. An important development is a hydroelectric dam currently under construction. The $180m Salma dam is located 170km northeast of Herat and will be built over the Harirud River near Chisti Sharif. It was first planned in the 1960s with construction commencing in 1976. It will be 550 meters in length and 107 meters in height and store

2 Operational Conditions at the Provincial Level – Western Region, US Embassy 3 Strategy for Herat’s Economic Development, TFBSO 2011 4 Ministry of Finance, “Asian Development Bank Provides $353.5M to Complete Final Sections of Afghan Ring Road and Tajik‐Afghan Powerline,” January 19th, 2011 more than 633 million cubic meters of water. When completed, the dam will supply 42 megawatts of power, thus augmenting the current power supply to Herat City, and pave the way for irrigation of 200,000 acres of land in the area. According to the Herat Directorate of Energy and Water, power electric poles have been installed along 143km from Chisti Sharif District up to Khaja Saheb Ansar area. The required power generation turbines have already been installed in the dam and the installation of transmission lines to the villages and districts is continuing. The Herat Directorate of Economy estimates that the dam will be completed by mid-2013.

Currently, the Indian construction company is experiencing difficulty transporting construction materials in a timely and low-cost manner to the building site. In addition, they are experiencing ongoing security incidents causing additional delays. Further adding to this complication is the sentiment that this security instability is being supported, either directly or indirectly, by Iranian entities. Herati stakeholders believe that Iran is supporting these insurgents because the ability of Herat to generate their own power and to control the flow of the Harirud river would pose a detriment to the Iranian power company that currently sells power to Herat, as well as to Iranian users of water from the Harirud river.

5.1 Dominant sectors

Due to its history, position, and geography, the Western region has a distinct economic profile, when compared to the rest of Afghanistan. According to the Task Force for Business & Stability Operations’ “Strategy for Herat’s Economic Development”, three priority economic sectors hold the potential to drive such growth and prosperity for Herat during the coming decade:

1. Agriculture

2. Extractive industries

3. Light industry

Agriculture

Herat has a thriving agriculture sector supported by relatively abundant sources of water and fertile river valleys. Once world-famous for the quality of grapes and other products grown in the area, a visit to Herat City markets today testifies to the diversity and quality of high-value agriculture crops cultivated in the province. Herat is one of twelve provinces in Afghanistan that maintains a wheat surplus and there is ample opportunity to increase the amount of land under cultivation in the province.5 Furthermore, as farmers report higher yields and feel that the food security situation is improving, many are inclined to devote more of their land from producing staple foods to high-value horticulture.

Agriculture is the foundation of Herat’s economy, representing an estimated ~35 percent of provincial output and ~70 percent of employment.6 Herat has the potential to add an estimated $125 million to $270 million in annual agricultural output over the next 10 years (equivalent to approximately 10 percent to 25 percent of current provincial economic output).7

More than 90% of the population along the Herat Economic Corridor depends on agriculture for their livelihood. Most are subsistence-level farmers with little mechanization and even less commercial acumen. When farmers are fortunate enough to have a surplus crop, they usually sell it on the regional market at a price dictated by the traders.

According to the USAID RAMP Final Report, farmers tend to be small, diversified producers with land holdings of approximately four jerib—less than one hectare. The farmers’ first production priority is subsistence, followed by commercial interests. Opportunities for farmers lie within increased productivity/yields and reduced losses. In Herat (as in many Afghan cities), the population has increased dramatically in the last ten years, resulting in competing land uses for natural resources. Diminishing land resources combined with increasing land prices deter small-holder farmers from increasing their production base.

Wheat and livestock comprises the primary agricultural production in the Western region.

Most of the production is on a small scale, with occasional large leaseholds granted to entrepreneurs or returning Afghan émigrés. The wheat farm in Figure 1 is owned and managed by a returning Afghan businessman.

Figure 1 - Wheat farm in Herat using mechanization and irrigation

5 Ministry of Agriculture, Irrigation and Livestock, “Afghanistan Prospects Report,” May 26, 2010 6 Ministry of Rehabilitation and Rural Development population and employment figures, 2008 7 Strategy for Herat’s Economic Development, TFBSO 2011

The Western Region’s provincial breakdown of primary agricultural products is:

• Herat: Agriculture (mainly wheat, saffron), livestock, tomato, carpet (kilim), marble & trade

• Farah: Agriculture (wheat, barley), embroidery

• Ghor: Primarily livestock, with some nuts, fruit and honey as well, embroidery

• Badghis: Agriculture (wheat, barley, pistachio), cattle

As described above, wheat one of the predominant crops in and around Herat. Much of the wheat in the Western Region is rain-fed, although the area between Herat and Chisti Sharif has significant irrigation from the Harirud River. However, for various reasons, the wheat grown in this area is of a lower quality than imported wheat and Herati bakeries must mix in imported flour with domestic flour to obtain desired results. In addition, the current low price for wheat on the global market has depressed producer’s ability to earn income from the crop. As a result of the low quality and low prices, the Ministry of Agriculture is trying to move farmers to crops other than wheat, especially in areas dependent on rain-fed agricultural.

In addition to wheat, Herat also produces the following products in Table 1.

Table 1 - Agricultural, handicrafts and small industries in Herat

Staples Industrial Fruits Vegetables Herbal products

Handicrafts Small industries

Animal product

Wheat Cotton Grapes Potatoes Licorice Carpets Honey Eggs

Corn Sugar extract

Pomegranates Onions Carav Kilim Silk Milk

Rice Sharsham Melons Tomatoes Asfitida Embroidery Karakul skin Yogurt

Maize Sesame Plums Carrots Zerk Pottery Dried sugar Whey

Beans Tobacco Almonds Cauliflower Aniseed Pelisse Confectionary Dried yogurt

Vetch Olives Walnuts Spinach Hyssop Jewelry Sugar candy Butter

Peas Cherries Leeks Chicory Shawl making

Wool

Extractive industries

The major extractive industry along the Economic Corridor is the Chisti Sharif Marble Mine, located 130km from Herat. The mine is owned by the state, through the Ministry of Mines, with concessions granted to US, EU and Iranian companies. The quality and quantity of deposits in Chisti Sharif provides a comparative advantage, which the industry can leverage to build a competitive advantage.

Because the white marble is of top quality and very similar to Carrara marble from Italy, buyers in the Gulf Countries, U.S., Italy and neighboring countries are already purchasing this marble and demand for it exceeds available supply. Currently nine white cities are being created in Turkmenistan using Afghanistan white marble which has replaced imports of Italian marble. As perhaps the only source of high quality white marble in the region, Afghanistan enjoys a comparative advantage with other regional competitors based on the availability of raw materials and with respect to Italy as a result of its proximity to the market. The high value of the marble will cover the higher costs of any inefficiency while the enterprises fine tune their operations.8

Historically, marble has been mined in this area using dynamite. This method, while inexpensive, results in low-quality irregular-sized boulders with a side effect of creating a significant amount of waste and seismic microcracks in the remaining un-mined marble, further lowering the quality. Recently, one world-class company has started mining operations using professional, world-class techniques and equipment, and four additional companies have started production operations at the mine in the summer of 2011.

Transport remains an important bottleneck for the marble industry. Because the road is currently unpaved, it takes a truck two days to transport 40 tons of marble to the processing facilities in Herat. Moreover, because of seasonal flooding, the road is impassable from February to May each year. 9

Because 40% of Afghan marble is lost under foreign processing, Afghan marble enterprises are needlessly absorbing the cost of transporting this soon-to-be-wasted marble. Until suitable processing and value addition can be invested in Afghan enterprises, improvement of the road transport network and lowering the transport cost is an immediate way to reduce cost basis.

8 MOCI, Implementing the SME Strategy: an Action Plan for Developing Afghanistan’s Marble Industry, 2011 9 The road is reportedly closed due to spring flooding. Site assessment visits, July 11, 2010

Light Industry

The light industry sector includes a variety of small- and medium-sized enterprises across a number of different industries.10 In addition to being an important sector in its own right, light industry adds downstream value to products in other sectors. Currently, this added value is often lost to regional competitors like Iran, Pakistan and Dubai.

Virtually all light industry in the region is concentrated in and around Herat City, with a particular concentration in the Herat Industrial Park, near the airport. The light industry sector includes a variety of small- and medium-sized enterprises, with some examples in

Table 2. The Industrial Park is a great asset to the city and provides a lever for significant economic advancement. The light industry sector has the potential to contribute an estimated incremental $515 million and nearly 35,000 jobs to the Herat economy over the next 10 years (equivalent to more than 40 percent of current provincial output).11

Table 2 - Light industry in and around Herat

Food and beverages

• Soda and juices

• Bottle water

• Meats and vegetable processing

• Spices and salt processing

Tobacco

• Cigarettes

• Pan

Textiles and handicrafts

• Carpets

• Cotton processing

• Handicrafts

Apparel • Clothing

• Outerwear and other garments

Leather

• Bags

• Belts

• Shoes

Motor vehicles

• Motorcycles

• Motorcycle parts

Furniture

• Couches

• Chairs

• Tables

• Wood paneling

10 Herat Industrial Park company registry 11 Strategy for Herat’s Economic Development, TFBSO 2011

Chemicals • Soap and other washing liquids

• Cosmetic products and other consumer goods

Rubber and plastics

• Tires

• Plastic products

Nonmetallic mineral products

• Marble

• Drywall and gypsum

• Cement

Fabricated metal products

• Steel and metal works

5.2 Regional Market Dynamics

Herat has four primary markets: the domestic market, and three primary international markets. Each of these markets has specific trading dynamics, product demands and historical relationships with Herati enterprises. As such, Herati enterprises have an opportunity to reclaim their trading linkages and further deepen their engagement with these markets.

The domestic market is currently segmented into 1) the market in and around Herat and the Western Region, and 2) the north, south and east of Afghanistan, including Kabul. While Herat’s image outside of Afghanistan is not differentiated from the rest of the country, within Afghanistan Herat is renowned for its agricultural products, especially its fruits, nuts, and marble. Within the District, the areas around Obe and Chisti Sharif are well-known for their grapes, plums, nuts, as well as for domestic tourism as a rural idyll for family picnickers and day-trippers from Herat.

The South Asian market, comprising primarily Pakistan and India is an important market for Herati goods. While Afghanistan imports many global goods through Karachi in Pakistan, barely any goods produced in Herat are exported back through Karachi. Most Herati exports are traded through Iran and Turkmenistan, as discussed below.

The Central Asian market, including Russia, is also a growing market for Herati agricultural and mineral exports. Afghanistan’s border with Turkmenistan is three hours from Herat, and Herati enterprises are already exporting grapes, tomato paste, marble, and other goods to Central Asia and Russia.

The market to the west, comprising Iran is an important market for Herat, not so much as a population of end consumers, but as a market of traders. Goods must go through Iran first before they are exported through Bandar Abbas port or overland through Turkey to Europe, Dubai, and other global markets.

Figure 2 - Herat's primary markets

Ultimately, Herati enterprises will need to develop a keen understanding of these markets to invest in production and processing capacity to serve these markets. Historically, carpets and kilims from around Herat have commanded a premium on global markets for their handicrafts. More recently, market linkages are being created for grapes and other fruits with Russia and Dubai, and with Italy and Turkmenistan for white marble from Chisti Sharif.

In order for Herati enterprises to grow and develop, they will need to grow and develop the market linkages they have with these important regions. Herat’s historical position as a crossroads of trade can once again be claimed, and now developed even further.

Trade with Turkmenistan

From 2009-2010, Afghanistan’s exports to Turkmenistan increased from $277m to $357m, an increase of 22%. The main imports from Afghanistan are food items, transport vehicles and spare parts, construction materials, some chemical products and other goods. This growing trade is a sign that Herat’s export market is starting to diversify away from exporting primarily through Iran, and is exploring alternatives. The Herati private sector cites frequent rent-seeking and arbitrary delays by Iranian officials. Concurrently, Turkmenistan is enacting reforms in trade and the general business environment making it easier to export and transit goods to the growing market in Russia. Development of road and rail connections will facilitate this increase in trade as well.

Competitive Dynamics with Iran

An underlying concern felt by Herati public and private sector alike is the influence of Iran on commercial, political, and security issues. Many Herati business owners complain about the effect of so-called Iranian dumping of goods at low prices on the Afghan market. Due to this intense competition, once Afghan businesses close down, Iranian enterprises increase the price to a level higher than when they first entered the market. This has happened most recently in the example of Herati production of tomato paste. In addition, Herati enterprises also complain of sealed and bonded cold storage containers being opened and/or disabled by unscrupulous Iranian authorities.

Afghan enterprises cannot afford to engage in a price war with Iranian companies, and therefore choose to exit the market. Once Iranian companies feel that they can control the market for a particular product, they usually increase the price to levels higher than before the price war, or decrease the quality of the product – either way, earning an increased margin.

Herati enterprises also feel that the Iranian government is even directly or indirectly influencing Herati processors by withholding or raising the price on Iranian inputs like packaging. This constrains the ability of Herati enterprises to fully compete in the market place and prevents Herati private sector expansion.

The response of the Herati private sector has been to advocate for import tariffs and/or quotas on Iranian goods, but this has not been implemented by the Government – and thankfully so. The focus of the public, private and civil society should be on developing the competitiveness of Afghan enterprises so that they can compete in an open market with goods and services from outside the country. Adopting protectionist measures will not enhance Afghan competitiveness and may even provoke an unfavorable reaction. Indeed, because Afghanistan is a landlocked country, it is dependent on maintaining good relationships with its neighbors to export goods to global markets.

6. Herat Economic Corridor

Although Herat City experiences stability, security, education, industry, trade and growth, the rural areas of the eastern districts of Herat (and Ghor province) remain significantly removed from this economic growth, due to their lack of infrastructure, particularly the lack of an all weather road connecting the region to Herat City. In spite of this distance from the market, significant agricultural and extractive industry potential exists in the areas around Obe and Chisti Sharif.

Figure 3 - Herat Economic Corridor traverses nine district centers

Figure 4 - Current condition of the road between Herat and Obe

In response to this potential source of economic growth, the government has made the construction of an all-weather road between Herat City and Chisti Sharif District a top priority in the region. Furthermore, the construction of an all-weather road to Chisti Sharif will contribute to the development of a direct road from Herat to Kabul, linking the central regions of Afghanistan and reducing the time and cost to travel between the two major cities.

Figure 5 - Afghanistan primary highway network

According to USAID, as a result of the work in part by ASMED in developing the significant marble resources in Chisti Sharif District and the ongoing construction of the Salma Dam, there is now a very significant opportunity for the development of an important economic corridor between Herat City and Chisti Sharif District (and possibly all the way to Chaghcharan, Ghor Province). The potential impact the opening up of this corridor would have on the whole region is being recognized by an increasing number of actors, including the growing number of actors in the marble sector.

There is a strong rationale for developing an economic corridor between Herat and Chisti Sharif and beyond.

• Accesses Central Afghanistan and promotes national unity

• Increases security in a volatile area

• Provides a shorter route to Kabul by 230km

• Provides market access to agricultural and mineral sectors along corridor

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

• Increases access to social services for underserved populations

• Facilitates construction of the Salma Dam and other potential infrastructure projects

According to the Infrastructure Development Institute of Japan, the road works would generate employment through extensive subcontracting and inclusion of drainage, erosion protection and routine maintenance works contracts that require manual labor. This will restore normal traffic operations on the main road network and help to facilitate the transport movements on the key import/export links and main corridors while preparing for a broader program.

Most road building occurred in the 1960s, funded by the U.S. and the Soviet Union. The two superpowers built roads to tie Afghanistan into their own respective commercial and economic spheres. Since 1978 most of the road network has deteriorated significantly as a result of war and lack of maintenance. The highway system requires almost total reconstruction, and the regional roads are in a state of disrepair. Significant numbers of bridges and other road structures were damaged causing a serious bottleneck in the flow of traffic. The extent to which roads are seeded with land mines is also unclear.12

Figure 6 - Herat-Kabul Highway

Currently, the driving distance from Herat to Kabul is 1067km. Paving the road will reduce it to 837km, a reduction in time, fuel and cost of 22%.

12 Afghanistan Present State of Transport Infrastructure, Infrastructure Development Institute of Japan, 2002

KabulHerat

Distance saved: 230km

Figure 7 - Herat Economic Corridor

6.1 Road Improvement Plans

The road between Herat and Chaghcharan is currently built out of gravel and according to those that have experienced it, is in “very poor” condition with numerous washouts and significant erosion.

According to the Directorate of Public Works, a Turkish engineering company has been engaged to implement the engineering study. As of October 2011, 60km of surveying has been completed and the remainder is projected to be completed at the end of November.

After a three month review process, construction of the road is expected to be put out to bid in five to six portions, to be constructed simultaneously. In preparation for the road paving, they have begun grading in the summer of 2011, and as of October have covered 17km.

The pre-engineering estimated cost of paving the road is $500,000 per kilometer. This high unit cost is due primarily to the high cost of transporting materials as well as the mountainous terrain in which the road will be built. The Directorate has $20 million to fund the road, with the rest of the funding coming from a soft loan through the Italian PRT and possible other sources. Using the pre-engineering cost estimates, the cost to develop the road to Chisti Sharif is $80 million, and to Chaghcharan an additional $113 million.13

13 These estimates are based on the SIDA‐funded Pre‐Feasibility Study in 2005. It is likely that costs may rise to $800,000 per kilometer for work in 2012.

Chisti Sharif 160km

Salma Dam 170km

Obe 95km

Chaghcharan 385km

6.2 Traffic and Transport

The current state of the Herat Economic Corridor is deplorable. Portions of the road are frequently washed away or eroded. This causes mechanical stress on the trucks resulting in tire punctures, suspension and frame damage, which increases transport times and costs significantly. Furthermore, trucks falling into the river are also a common occurrence, resulting in a total loss of the cargo.14 In winter, trucks hardly ever travel the route due to snow and rain, which increasesthe danger of tipping over. In addition, truckers experience an average of three burst tires per trip. At $700 per tire, this is a major blow to their income, especially when they need to replace one every 2-3 months due to the rough road surface.

Figure 8 – Transport disruptions in Herat

Traffic on the corridor is moderate with 100 vehicles travelling between Herat and Chisti Sharif, each way. A 2009 traffic survey found that roughly 600 people per day travel on the road in cars, vans and buses. This figure is expected to double or even more than triple when the road is completely paved between Herat and Kabul.

In terms of security, truck drivers plying the route remark that security is increasing as a result of government troops having more of a presence due to the fact that there are now five manned checkpoints between Herat and Chaghcharan. While the authorities occasionally ask for ‘baksheesh’, the drivers are glad to pay it as it is not a significant cost and they see it as an incentive to maintain the police force in these remote areas. Transport delays mean that a significant proportion of Herati agricultural production is lost due to spoilage every season. Some reports suggest up to 70% of crops can be lost in a season to such wastage.15

14 On average, one truck per day falls into the river. Seven marble trucks have been lost in 2011. Although driver error may be one of the causes, the poor condition of the road is the major cause of these types of accidents.

15 Strategy for Herat’s Economic Development, TFBSO 2011

6.3 Socioeconomic Conditions

The villages along the proposed corridor report that there are virtually no community-based activities present although the villagers expressed a need for this. There is currently very limited management of common properties such as irrigation systems, roads, grazing areas etc. In some 45% of the villages, there had been or was presently an activity, supported by external NGOs, such as digging of wells and installation of pumps, road upgrading, supply of seeds and food support. The NGOs present were Afghanaid, ARAA, DACAAR, CHA, World Food Program, WFP, CRS and the Red Cross. Reasons for the lack of village based activities indicated were poverty, instability and lack of communications. Bad health was also a recurring theme. These factors in combination prevented the village from engaging in communal activities such as maintenance of irrigation systems, the community groups claimed.16

6.4 Gender Considerations

To ensure comprehension of the needs of women and the benefit of a road to them, this report draws on the research performed by the Ansari Rehabilitation Association for Afghanistan (ARAA) in 2006 in 28 villages between Herat and Chisti Sharif along the proposed corridor. ARAA found that none of the villages had any special women’s organization, nor were there any female members in the local, village council, the Shura.

In general, ARAA’s discussions with the Women’s groups gave a similar list of problems facing villages in general and the women in particular: lack of schools, both in quality and quantity; lack of accessibility to clinics; illiteracy and the need for training and project work such as literacy, rug weaving, tailoring and other handicrafts, and marketing of these items.

At the moment, tasks normally under the responsibility of the women are, in order of time required: collection of firewood, fetching water, helping the husband in farm work and weaving

Based on the survey, women in the villages remark that the primary benefit of road improvement to them is to create better access to the market, especially for the handicrafts that they produce locally. During the construction of the road, the village would support and assist in security, assuming that they would be employed by the contractor for bringing sand, etc. The women emphasized that they did not expect any job opportunities from the road project for women, but insisted that the men should be employed. Overall, the

16 Pre‐Feasibility Study of the Herat‐Chaghcharan Road in Afghanistan, SIDA 2006 upgrading of the road is…