Business Environment

Doing business in Afghanistan can be very rewarding. Even smaller investments may generate high profits in a short period of time. And yet, at least for the time being Afghanistan remains a challenging environment even to the most experienced professionals. Access to local know-how and to informal networks is decisive. Careful analysis of market potentials and best strategies for business development are strongly recommended before setting up operations, and sufficient time should be spent on networking to understand local business practices and to find the right partners.

Obtaining Visa & Work Permits

Short term business visas are available at the Afghan Embassy in your country for single and double entry. Multiple entry visas may be issued for a period of three or six months. You need a valid passport (validity more than six months) and a company or sponsorship letter. In case of a business journey the name and the address of the commissioning firm or person are required. For further details and applicable fees, refer to the Afghan Embassy in your country. For updated information on Afghan Embassies and consular services around the world, refer to http://www.afghangovernment.com/Embassy.htm

If you are holding a valid business license with AISA our investor support extends the service of applying for and / or renewing a work visa for your foreign staff. AISA charges US$10 as service charge

To extend your Visa within Afghanistan you will be charged USD 10 per month for a single entry visa and USD 30 per month for a multiple entry visa. Visas “on arrival” are not available at present but they will be in the near future. Please contact the Afghan Embassy before you leave home. Foreign employees in Afghanistan will need a work permit from the Ministry of Labour and Social Affairs. The employer has to apply for his employee to get a work permit which will be granted for one year. The work permit can be extended within Afghanistan for another year if the employer extends the work-contract with his employee.

Labour

With unemployment rates estimated to be as high as 50 % in Kabul and even higher outside the capital, labour in Afghanistan is available at cheap prices. It is easy to find unskilled labour, and local recruits are highly motivated and very willing to learn. Competition among employers is higher as far as general management skills and English language are required. Technical know-how and engineering knowledge are relatively scarce, given that the country suffered nearly three decades of war and economic isolation. Tensions in the labour market tend to be alleviated by returning Afghan professionals and their children who grew up and have been educated mainly in Pakistan, UAE, Iran, UK, USA, and Germany. Investors should, however, still be prepared to invest substantially in the further technical education of its local workforce.

Average monthly salaries in Kabul are about USD 75-100 per month, with wages much lower outside the capital. Educated Afghan professionals, fluent in English, Dari and Farsi (Dari is the commercial language of Afghanistan and very close to Farsi or Persian), earn up to USD 1.000 per month. Most civil servants are still getting paid USD 40-50 per month - a taxi driver in Kabul may earn up to USD 300 in the same period -, making it difficult for the public service to recruit and retain skilled staff.

Empirical data also suggest that it is more difficult for international companies than for domestic businesses to find the right people. This may partly reflect higher profiles requested by international companies, but it also refers to the still highly informal character of the Afghan labor market and the difficulty for international businesses to get quick and easy access to local networks. Across all industry sectors, there are no state-obligate benefits, no social security system, and no retirement funds. Employers are, however, expected to cover other benefits such as meals at the workplace and transportation allowances.

Salaries are generally paid in cash US dollars. The minimum working age is 15 for commerce and light industry work, and 18 for heavy industry. Official working hours amount to 40 hours per week, for underground work, such as mining, it is 35 hours per week. Night shifts are to be max. 11 hours and overtime allowance is 25% over the regular salary. Workers receive double salaries during holidays which amount to 20 days anually and to 30 days annually for minors. 30 days unpaid vacation is optional. Sick leave is 20 days per year. In case of sickness for more than 3 consecutive days, a physician's statement is required. A new employment and labor code is currently being drafted.

Following two recommended institutions who can assist you with your manpower needs:

Agency Coordinating Body For Afghan Relief  www.acbar.org

Employment Services Centre
www.employmentservices.org.af

Office Space & Industrial Plots
 

Rents for commercial space and prices for industrial plots have been soaring within the last three years in the major business centres of Afghanistan, reflecting strong economic recovery and short property supply. Prices have literally skyrocketed in Kabul, where international organisations and embassies establish their permanent base, the renascent private sector sets up offices and shops, and the government refurbishes dilapidated buildings.

In the center of Kabul, smaller showrooms and modest offices were rented at USD 1,500 per month by the end of 2001, while rents went up to USD 9,000-10,000 by the end of 2004. Even if recent IMF and government figures indicate a sharp slowdown in rents from January to June 2005, prices tend to stay at a very high level for the time being. Supply will catch up only slowly with strong demand in Kabul, which has grown from less than one million inhabitants in 2001 to 3-4 million by mid-2005 and is expected to become a leading regional business hub in the years to come.

As for industrial plots, there will be a wide range of attractive investment local options in the longer run, as most land in Afghanistan is owned by the government and privatization is an issue to come. For the time being, however, accessing government land still is a highly individualized process characterized by many individual government agencies owning, leasing, and selling land in a nontransparent and inconsistent manner. The private property market works largely on a negotiated basis. Title disputes are common, procedures for leasing or selling land vary widely, and recourse and judicial settlement are difficult and can stretch on for years.

First-phase projects include the Bagrami Industrial Park, a 24 hectare (52.8 acres) park located 7 km east of central Kabul; Mazar Industrial Park, a 26 hectare (57.2 acres) park located 7 km north of Mazar-e-Sharif; Kandahar Industrial Park, a 15 hectare (33 acres) park located 10 km east of Kandahar. A second phase of projects is also underway, which includes Industrial Parks in Kamari, a 120 hectares park located 13 km from central Kabul; Sinjet Dara Industrial Park, a 120 hectare park located 7 km south of Charikar; Deh Sabz Industrial Park, a 750 hectare park located 5 km north of Kabul Airport. Third-phase projects are in the pipeline.

The new industrial parks provide a combination of high quality infrastructure and services, unavailable elsewhere in Afghanistan, including clean land title, reliable electrical power supply, 24 hour security, paved roads, central water and sewage system, and professional management.

The works for the first three parks have been initiated with USD 10 million funds from USAID in 2004. First plots in the Bagrami Industrial Park reaching from 1,000 to 4,500 square meters have been sold to 34 successful bidders out of 200 applicants and 93 shortlisted businesses, generating revenue of 1.6 million USD. Certificates of ownership have been handed over in August 2005, allowing the new owners to set up their facilities immediately.

Power, Water and Sewage Infrastructure

Basic services such as electric power, water and sewage infrastructure are still very limited in Afghanistan. Most companies use own power generators, and even were state or municipal services are available, companies heavily rely on their equipment due to frequent breakdowns of the network. There are no fixed rates for power to date, with prices between companies and government being negotiated on a case-by-case basis. Similar conditions apply to water: Companies generally drill their own wells and then pump for free.

They may also purchase water from another company or locate near rivers and other sources of natural water. No waste water services are available in Kabul for the time being. Reliable infrastructure for businesses will be available, however, in the 20 new industrial parks which are being set up throughout the country.

Telecommunications

Recent research among Kabul-based businesses indicates that it still takes an average 116 days in Kabul metropolitan area to get a fixed phone line. Quality is very low, outreach remains limited. Unsurprisingly, only a third of all companies in the Kabul area invest into land lines, while everyone uses mobile communications. In fact, mobile phoning in Afghanistan is privately run as a profitable business since 2002. Coverage has been extended to most major cities, whereas satellite phones are more reliable as soon as you leave urban areas. Pre-paid phone service is available the same day.

International roaming is possible to more than 40 countries. Service quality is judged to be good, while both services and prices are expected to get better as two new operators (Lebanese based Investcom and Saudi Al Houbi Telecom) will enter the market by the end of 2005. Internet services for companies are generally available within several days or few weeks in Kabul, and there are currently three providers offering direct satellite internet access.

Transports & Logistics

Poor roads, arbitrary road closings, unloading and reloading at the borders, poor condition of vehicles, custom delays, arbitrary rules and regulation in Afghan countryside, difficult access to insurance for shipments - these are the most pressing issues in Afghanistan’s transports & logistics sector today. Views of local and international investors do not differ significantly in this respect.
Air transport is to date the best way to bring goods into the country - 74 % of goods arrive on time and practically none get lost.

Commercial goods entering the country by road, rail and sea take an average of 9 days to pass customs at the border of Afghanistan, and companies indicate that unofficial payments to customs officials and multiple customs checks in the country are the norm. Better services and cheaper prices, however, can be expected in the years to come: High profitability of the sector and expected new market entrants as well as the strategic importance of transports & logistics to the entire region will put significant pressure on reconstruction and ongoing custom reforms.

Financing & Insurance

Like nearly everthing else in Afghanistan, the country’s financial sector is being (re-) built from the ground up. Major successes include the institutional recovery of the Central Bank of Afghanistan and the introduction of a new and stable currency in 2002.

While sector reform will go on for the next years, international banks such as Standard Chartered, National Bank of Pakistan, Habib Bank (Pakistan), Punjab National Bank (India), Aryan Bank (Iran) Afghanistan International Bank (managed by Dutch ING, controlled by by ARC Companies LLC, Constellation Business Group Inc., Rahmat Group, Marco Polo Gulf Trading FZE, Asian Development Bank, Overseas Private Investment Corporation), First Microfinance Bank (Aga Khan Fund for Economic Development, Deutsche Kreditanstalt für Wiederaufbau, International Finance Corporation) have entered the market.

Available banking services include domestic and international money transfers, letters of credit and other trade services, savings and current accounts. Selected credit products and financing instruments are available for specific targets such as donor-financed reconstruction projects, cross-border trade of basic consumer goods, fuel or construction supplies as well as (mainly rural) micro-financing programmes.

Elementary credit products for small and medium enterprises – such as account over-drafting, bridge loans anticipating future payments term, loans for new machinery, and financing of production facilities and new ventures - are still rare. Current reluctance of banks to engage more strongly in SME business, project and investment financing in Afghanistan stems from the continuing lack of enforceability for loan agreements and lack of collaterals. Even when collateral in the form of land or property is offered, current systems of deeds and property rights enforcement makes it difficult to know if a property can be considered to be legally owned.

Banks also refer to yet non-existing insurance, which makes loaning for purchase of machinery and equipment particularly risky. Banks therefore respond more positively to joint-ventures managed by international partners who offer guarantees and collateral in their home countries.

New developments in the sector include the availability of long-term political risk insurance offered by the Multilateral Investment Guarantee Agency (MIGA) to foreign investors and foreign financial institutions, located abroad or in Afghanistan, who make loans to local Afghan businesses. Coverage is available against transfer restrictions, expropriation, war and civil disturbance, breach of contract.

Also, a first venture capital fund has been set up: The Afghan Renewal Fund – backed by USAID, ADB, and UK-government owned CDC – will initially offer USD 20 million for SME funding in different sectors, with project fundings between USD 500,000 and USD 5 million.

You won’t find it so hard to secure financing if you engage in trade or procurement in Afghanistan. Standard banking products and services for trade are available, and large scale contracting and procurement are being financed by international donors following international standards. Several international banks have entered the Afghan market.

Financing is more difficult to obtain if you wish to start or expand your operations in Afghanistan. Given the continuing lack of enforceability for loan agreements and collaterals, access to international development funding and public private partnerships have proven to be crucial for industrial project and (foreign) direct investment finance in Afghanistan. In fact, the Asian Development Bank (ADB), the International Finance Corporation (IFC) and private organizations such as the Aga Khan Development Network have all invested in private sector projects. Recent investments include the New Afghan Project for Cotton and Oil Developpement (USD 10 million) in Mazar-E-Sharif and Kunduz to be fully financed by l’Agence Francaise de Développement (www.afd.fr) as well as a first generic medicine factory near Kabul and the rehabilitation of a sugar plant in the Baghlan area, both being co-financed by the German government under its Private-Public-Partnership Programme

(www.deginvest.de/english/home/range_service/ppp).

Please directly consult with the government agencies in your home country to learn more about funds that potentially can be used to co-finance your investment in Afghanistan. The Overseas Private Investment Corporation (www.opic.gov), for example, has a USD 100 million line of credit available to help US companies of all sizes to invest in Afghanistan.

Further potential co-funding for your investment is available if your proposal relates to the specific agenda of a major development agency operating in Afghanistan. Potential investors in food processing and related services, for example, may consider applying for funds of USAID’s Rebuilding Agriculture Markets Program (RAMP) as this programme targets the entire value chain of the food business. You will find more details on RAMP at www.ramp-af.com.

The Afghan Renewal Fund is the country’s first venture capital fund. It is backed by USAID, the Asian Development Bank and UK government-owned Capital for Investment Group (www.cdcgroup.com). The fund deliberately targets small and medium-sized investments in different sectors as these promise high profitability with fast growth and quick returns. It initially offers USD 20 million, with project fundings reaching from USD 500,000 to USD 5 million. Given the lack of a vigorous capital market to facilitate profitable exit from the business, the fund’s exist strategy is built around management buyouts, utilizing the by-then strong cash flows of the business to fund the deal. For further information on the Afghan Renewal Fund write to the Fund’s managing director Pierre van Hoeylandt at pvh@acap.com.af.

AISA has collected a comprehensive set of information about financing options for foreign investors. Please contact our Investor Support Department for details.

Protecting your Ideas and Settling Business Disputes

fghanistan is still recovering from a period of nearly three decades of war and devastation. Unsurprisingly, many issues of state building still remain on the agenda. While the international community helps with financial and technical assistance to push for major reforms in many sectors, respective law-making has been slow. Much of the legislation that will affect your business and is urgently needed to foster investment and growth is still under discussion.

Laws in the pipeline include the following: Partnership Law, Corporate Law, Contracts Law, Registration of Foreign Patents Act, Trademark Articles, Law on the Protection of Copyrights and Neighboring Rights, Commercial Arbitration Law, Commercial Conciliation (Mediation) Law, Anti-trust and Unfair Business Practices Law, Bankruptcy Law, Labour and Employment Law, Insurance Law.
For the time being, Afghanistan offers you a very pro-business minded environment with higher risks and higher profit margins. You will experience first mover advantages in many market segments, but you will have to deal with several important or even essential issues on a case-by-case basis without being able to rely or refer to standard procedures. Protecting your ideas in Afghanistan at this stage is still difficult, and settling of business disputes tends to be complicated.

An updated overview on lawmaking in Afghanistan (Law Progress Chart) can be found at www.en.aicc-online.org. For more detailed information on laws which may affect your business, call AISA investment managers.

AISA’s Investor Support Department offers arbitration services for our registered investors for conflicts related to their business. Please contact us for details

Taxes & Incentives

The International Monetary Fund and the World Bank have been modernising the Afghan tax regime creating a more effective and transparent system that follows international standards. Major changes have been introduced in April 2005:

Corporate Income Tax

Corporate income tax is a flat tax of 20 % of net taxable income. Net taxable income is computed by deducting all ordinary and necessary business expenses from gross income. Corporate rates apply to legal entities such as corporations, limited liability companies, and some types of partnerships

Personal Income Tax

Resident natural persons are taxed on income from all sources worldwide, including but not limited to wages, salaries, rents, certain types of partnership income, royalties, etc. Non-residents are taxed on all income with its source in Afghanistan. The annual tax rates are as follows: Personal income up to 12,500 AFS (USD 29) will be exempted. Incomes of more than 12,500 AFS and less than 100,000 AFS will be charged 10 % income tax. Incomes above 100,000 AFS will be charges 20 %.

Wage Withholding:

Employers with two or more employees are required to withhold tax from their employees' salaries/wages based on the above rates. These rates are pro-rated based on the frequency of payment (monthly, weekly, etc.). Wage/salary earners with only one employer and no other sources of income are not equired to file an annual tax declaration. A wage earner who has more than one employer or additional sources of income must file an annual income tax declaration.

Income Tax for Sole Proprietors:

Sole Proprietors Self-employed individuals must file a tax declaration, and are allowed to deduct all ordinary and necessary business expenses to compute net taxable income. Tax at the 10% and 20% rates is then computed on net taxable income above 150,000 and 1,200,000 afghanis per year, respectively. This is the same tax-free threshold given to wage earners.

Withholding Tax on Rental Services:

This is a pre-payment of landlords' income tax. Legal entity tenants and natural person tenants conducting business at the rented property, and paying more than 15,000 Afghanis per month in rent are required to withhold the tax at the time the rent is paid. The tax is 20% of the rent payment. The landlord is responsible for reporting rental income on his annual income tax declaration and paying tax annually at appropriate rates depending on entity type (legal person or natural person). Ordinary and necessary expenses of maintaining rental property are allowable as deductions against rental income. Tax withheld and paid by the tenant is allowed as a credit when the annual tax declaration is filed.

Business Receipts Tax:

A 2% business receipts tax is imposed on gross receipts of all types of income of corporations and limited liability companies, except for rents, royalties, commissions, fees, interest, dividends, and similar income, which is taxed at 5%. In addition, a 10% on gross receipts for businesses with over 50,000 afghanis income per month is imposed on service providers in the following sectors:

  •     Passenger airline services
  •     Telecom services, including Internet
  •     Hotel services
  •     Restaurant services

The tax paid is deductible from gross income in arriving at taxable income for income tax purposes.

Custom Tariffs:

A new customs code has dramatically reduced and simplified the very large number of ad valorem and regionally-specific customs duty rates to six major national categories: 2.5 percent (essential food and non-food products), 5 percent (raw materials and capital goods), 8 percent (petroleum sector), 10 percent (semi-manufactured products), 15 percent and 16 percent for respectively luxury and non-priority products.

Tax Holidays for Investors:

To limit lost revenues, and to encourage investment in Afghanistan the originally in 2002 granted tax holiday provisions to investors have been repealed and new measures such as competitive depreciation rules and loss carry-forwards have been introduced. All tax concessions in laws other than the Income Tax Law ceased to have any effect as of 2004, June 21. Further information: www.mof.gov.af/tax.

Repatriating Capital and Profits

Private investors have the right to transfer their capital and profits out of Afghanistan. They may sell the enterprise and may transfer their capital and proceedings of the sale outside the country. These rights and respective procedures have been guaranteed by the new investment law as issued in 2002 and amended in 2005. Additionally, the Multilateral Investment Guarantee Agency (MIGA) which is a member of the World Bank Group offers insurance against major political risks such as transfer restriction, expropriation, war and civil disturbance, breach of contract by the host government.

Please note that the investment law covers all areas of investment except investments in construction of pipelines, telecommunications infrastructure, oil and gas, mines and minerals, as well as heavy industries, which will be regulated under separate legislation. MIGA’s Afghanistan Investment Guarantee Facility (AGIF), however, covers all sectors and is designed primarily to facilitate small and medium-size investments.

Marketing

As everything else in Afghanistan, commercial marketing is just emerging. It would, however, be a fatal error to underestimate Afghan consumers in their ability to value quality and price and to shift preferences or change style. As markets develop quickly, we recommend careful analysis and definition of your marketing strategy before entering the market.

For some first and very valuable insights into consumer habits, changing preferences, regional differences and existing marketing practices in sectoral markets such as food and construction, refer to the recent UNDP study on cross-sectoral opportunities for small and medium enterprises (Market Sector Assessments – SME Development, UNDP 2005, at www.undp.org/afghanistan).
Afghanistan’s telecommunications sector offers yet another interesting marketing story to study: The country’s second mover in mobile telecommunications, Roshan, invested heavily in marketing and brand building when entering the market in 2003. It is one of the country’s largest advertisers, and has won the 2005 Global GSM Award for the Best Marketing Campain at the mobile industry’s leading annual event in Cannes, beating other companies such as Motorola USA and Vodafone UK.

With the market entry of further two competitors in 2005-2006, marketing may be expected to intensify further. For further information on mobile telecommunications, please check:

Corruption

More than two-thirds of the 159 nations surveyed in Transparency International’s 2005 Corruption Perceptions Index (CPI) scored less than 5 out of a clean score of 10, indicating serious levels of corruption. While perceived corruption in Afghanistan (rank 117 out of 159) is high, the situation is still much better than in neighbouring Kyrgyz Republic, Uzbekistan, Pakistan, Tajikistan and Turkmenistan. The average annual amount per company used for bribes is estimated at USD 35,000.
AISA is ready to assist you in all stage of investment implementation to reduce red tape and prevent any kind of corruption.

Living Conditions

Personal safety is generally judged to be good, both by Afghan businessmen and expatriates alike. Schools, health care and recreation receive low rating, particularly among expatriate staff.

The Living costs are high: Paucity of comfortable accommodation in Kabul has pushed rentals sky-high, meaning expatriate staff housing can cost anything from USD 1,000 for a small traditional house to USD 5,000 per month for a house with almost international standard.

Much of the country's cultural infrastructure like museums, zoos, parks, gardens, and publicly accessible palaces and monuments were destroyed during the war years. Travel is still not possible to many places throughout the country. But there are some possibilities to organize savty trips to particular places. For example a day trip from Kabul to explore one of Afghanistan’s greatest treasures: The Bamiyan Buddha Complex (UNESCO World Heritage Site) with the Buddha reliefs that have been destroyed by the country”s former Taliban regime in 2001 and are currently under archeological examination to take an inventory of the damage. In the breathtaking Bamiyan Valley there are many caves with cave murals waiting to be explored.

Cultural live is recovering, while quality of life still suffers from overall poor economic conditions and political fragility. International organizations still do not allow staff members to take their families into Afghanistan. Many Afghan returnees, too, prefer to keep their families outside the country for the time being.

Although spare-time activities are very limited at present, golfer should not renounce in Kabul. Near the centre of the city there is the Kabul 9-hole golf course with a beautiful new Club House. The Pro, Mr. Afzal Abdul had a handicap of zero. The Club House is at the western end of Kharga Dam and Afzal Abdul can be connected on 079 02 9011.

Security

Security risk factors have been reduced to a manageable level in much of Afghanistan. The country has forged a new constitution and freely elected its president and parliament.

Substantial progress has been made in disarmament, demobilization and reintegration of former combatants. A new army is being built from scratch; major reform of the police is underway.

"Security has been a chronic problem in many regions. But since 2001 September 11th, we all know that violence can strike anywhere - at any time. There are no more safe havens in the world, and we have to live with this fact. But it is clear: For business to operate there must be a reasonable level of security and enough government control to provide basic law and order. The risk factors must be reduced to a manageable level."
Heinrich v. Pierer, President and CEO Siemens AG, at the UN Security Council on 5 April 2004

The international community has recently reconfirmed its committment to the further stabilization in the country: Up to 15,000 soldiers of the International Security Assistance Force (ISAF) will help the central government to further strengthen its control over the country and guarantee basic security over the years to come as increasing crime, warlordism, the illicit opium economy, the continued presence of terrorist elements and insecurity in neighbouring countries constitute onoing threats to rapid political and economic progress. Confidence in a peaceful and prosperous future is strong in Afghanistan - the privately financed boom in residential construction throughout the country may be its best indicator.

Also, recent research among private investors shows that security risks are perceived to be much lower by national business than by international companies. Security is mainly a top issue for foreign companies before entering the market.

However, once they establish their operations in the country, security ranks far behind other issues such as infrastructure, financing, recruitment and red tape. Common security measures in Afghanistan include alarm systems and posting watchman at factories, offices and residences.

An average of USD 23,000 is spent annually where companies decide in favour of extra security measures and regular safety audits, which are reported to be imposed by international headquarters rather than requested locally.

Perceived and real risks in Afghanistan can be reduced by following some basic rules which apply to all critical regions: Strongly rely on local employees who best know their country, their culture and local circumstances. Send only a minimum number of expatriates to the region, which should be carefully chosen considering all religious, ethnic and cultural factors. Closely cooperate with national and international authorities to take the right decisions at the right time. Be sure that you wish to enter the market to stay, but be prepared to pull back if danger prevails.