Event Report | June 21, 2016

Afghanistan Reconnected: Cross-Border Cooperation at a Critical Juncture

Afghanistan’s image on the global stage is currently dominated by significant security and governance challenges, the faltering peace process and a lack of substantial economic development. These factors also make Afghanistan the second-largest country of origin in the current refugee crisis facing Europe. In light of this negative international perception of Afghanistan, a number of significant developments towards reconnecting the country to the economy of the region are largely overlooked. The EastWest Institute’s (EWI) high-level conference “Afghanistan Reconnected: Cross-Border Cooperation at a Critical Juncture,” held on June 3-5, 2016 in Istanbul, analyzed the ongoing progress in regional energy projects; the development of alternative shipping ports in Iran and Pakistan in cooperation with India and China, achievements and setbacks in terms of cross-border transit, and the growing role of joint chambers of commerce. The discussions among practitioners from the region produced recommendations on how governments, the private sector, and the international community should capitalize on opportunities to contribute to the stability and prosperity of Afghanistan and its neighbors.
 
The EastWest Institute—with the support of the German Federal Foreign Office and in partnership with The Union of Chambers and Commodity Exchanges of Turkey (TOBB)—held the conference “Afghanistan Reconnected: Cross-Border Cooperation at a Critical Juncture” on June 3-5, 2016. Time and location of the meeting were chosen to make the conference a side event to the Istanbul convention of the intergovernmental “International Contact Group for Afghanistan” and to benefit from the interaction between interested government representatives and participants. Chaired by EWI’s Vice President for Regional Security Ambassador Martin Fleischer, the conference set the stage for experienced political and business leaders from Afghanistan, China, India, Iran, Pakistan, Tajikistan and Turkey to discuss necessary reforms to unlock Afghanistan’s, and the region’s, economic potential. The event sent an encouraging signal that business interaction can help bridge animosities between countries, promoting shared interests and a shared economic vision for the region. The main topics discussed included:

Trade and Transit
Afghanistan presents a number of opportunities for regional cooperation and connectivity. Resource-rich and strategically-located, the country could potentially provide both material and transit routes to enhance and facilitate regional and international trade. However, still-complicated relations between countries in the region impede what would otherwise be a natural use of Afghanistan’s resources and position. Nonetheless, progress has been made on a number of issues in the past three years, namely cross-border trade and transit. Between Pakistan and Afghanistan, problems with visa facilitation, goods declarations, insurance, and bank guarantees have been lessened through actions by national and trans-national chambers of commerce. For example, goods declarations are now transmitted electronically, and insurance claims generally yield much more compensation than they did prior to the intervention of the Pakistan Afghanistan Joint Chamber of Commerce and Industry (PAJCCI). Lengthy delays at ports have been reduced across the board, and partial shipments of Afghan imports are now allowed to cross the border. However, the current border crossing dispute and heightened tension between Afghanistan and Pakistan illustrate the fragility of this progress and demonstrate the necessity of serious efforts to ensure positive neighborly relations.

Numerous large Indian corporations have set up franchises in Afghanistan, though problems remain regarding the gathering and accessing of market information. To further stimulate foreign business investment, Afghanistan needs to make consistent and reliable information and documentation available to its trading partners and investors regarding its tax regime and policies on trade, foreign direct investment, and licensing, as well as ensure that its potential partners are aware of whom to approach for specific needs, such as land allocation. Gaps in this type of knowledge, as well as in the understanding of connectivity in the region, make fixing problems more challenging. Furthermore, the lack of an organized financial sector and poor performance of banks impedes foreign businesses looking to operate in Afghanistan; companies unable to find local sources of financing are often discouraged from doing business in the country.

Corruption on both local and national levels remains a prevalent problem in Afghanistan and in the region, hampering progress in numerous sectors. A system with laws that grant discretionary powers to specific officers, groups of officers, or agencies with little to no oversight or arbitration allows corruption to flourish. Introducing a system that involves tiers of officers and third-party arbitration—such as from a chamber of commerce—could help to curb this. 

The role played by chambers of commerce on a national and transnational level is significant and growing. Many issues facing businesspersons in Afghanistan and its neighboring countries—such as a limited awareness of policies and opportunities, an overwhelmingly negative international perception of the country, and a lack of engagement of the private sector across borders—could benefit from increased involvement and engagement of national and trans-national chambers of commerce. Participants stressed the effectiveness of trans-national chambers, such as PAJCCI, and advocated for the creation of a regional chamber of commerce, which would include Iran and India in addition to Afghanistan and Pakistan, to facilitate business-to-business resolution of problems. 

Mutual misunderstandings arise in the region because of minimal bilateral and multilateral connections with neighbors; business networks can play a valuable role to alleviate this and foster regional integration. Private sector participation can both facilitate Afghan growth and development and encourage and increase regional cooperation. However, at present, Afghanistan’s private sector is largely disorganized. Engaging the private sector creates connections, contributes to the alleviation of cross-border misunderstandings and enables the achievement of results beyond government’s reach. 

Energy
Participants emphasized the importance of energy cooperation to the region, highlighting the potential for alleviating seasonal power supply scarcity issues and encouraging cooperation with economic incentives based around the cross-border transmission of energy. Strategic energy projects can be used to create political impetus to cooperate within the region. However, a lack of formal trans-border cooperation undermines efforts that are currently underway, and the fragile security situation in parts of Afghanistan places the safety of infrastructure in question. 

Regional energy projects should be backed by large energy-importing countries. In this context, Indian involvement in the regional energy equation is fundamental. With falling energy prices and the resurgence of Iran as a key energy supplier, exporting states should have a regional powerhouse able to absorb large quantities of primary energy. The diversification of energy exports from Central Asian states is imperative for these countries if they do not want to lose out to more competitive suppliers. A balanced regional energy equation will require the involvement of both China and India as energy buyers.

The Chinese “One Belt One Road” (OBOR) initiative stands to greatly contribute not only to trade and investment but also to the regional energy market; increased demand will be a positive factor for energy suppliers, particularly as the initiative will increase China’s demand for oil and gas on the basis of renewed growth in 10-15 years. OBOR has the potential to unlock Central Asia’s hydrocarbon resources and bring them to the international markets. New infrastructure linkages will create new interdependencies, which will mean a more conducive environment for the region as a gas exporter.

However, greater political stability and security will be necessary to attract investors and ensure the safety of the infrastructure projects. The Turkmenistan–Afghanistan–Pakistan–India (TAPI) pipeline is intended to go through fragile South-West Afghanistan and Pakistan’s unstable Baluchistan. TAPI is expected to cost 12 billion USD and will be partially funded by the Asian Development Bank (ADB). ADB will provide only a small fraction of necessary funds; the remainder is expected to come from the private sector. At this point, energy companies view TAPI as a gamble due to the operational uncertainty and high risks linked with security threats. It should be noted, though, that similar regional projects have been successful in other parts of the world if backed by political will and financial support, including from international donors. Once realized, these projects have contributed greatly to the stability of the host countries and have led to further interstate cooperation.

Progress on the Central Asia-South Asia-1000 (CASA-1000) electricity transmission project has been slow, as well. Afghanistan is presently working to change the project from a 3-converter to a 2-converter project, to overcome potential compatibility issues and extend the list of potential hardware suppliers. The government is also discussing the sovereign guarantee that is being demanded for the project; as a transit country Afghanistan must focus efforts on protecting the power supply coming into the country.

Demand for electricity in Afghanistan is expected to rise tremendously; at present, only 20 percent of Afghans have access to electricity and the government remains the main stakeholder and provider of funds in the power sector. Furthermore, properly enforced laws and regulations are needed to regulate the power sector in Afghanistan, and this should be accompanied by sovereign guarantees for the power plant and infrastructure companies. Private industry involvement in the form of construction, financing, and maintenance of infrastructure should be encouraged. Independent power projects and public-private partnerships represent an opportunity to meet the rising demand for electricity, but the government must give confidence to the investors that these projects will come to fruition.

Afghanistan represents opportunity in the regional energy market as both a supply state and a transit route. Additionally, Afghanistan’s integration into the regional market will be a win-win solution for both the country and South Asia. Trans-border pipelines and energy projects are crucial to regional integration and political cooperation. For instance, South and Central Asia face energy shortages and trans-Afghan energy projects can reduce the current energy deficit and contribute to the region’s energy security. Such energy projects also stand to help peace prospects for the country and increase the impetus for political cooperation within the region. 

Regional Initiatives and New Opportunities
Major projects and international agreements, including TAPI and CASA-1000 as well as the Afghan Pakistan Transit and Trade Agreement (APTTA), remain a centerpiece for economic cooperation in the region. Participants agreed that the resulting economic incentives will continue to drive regional cooperation in a positive direction. The December 2015 breaking of ground on the TAPI pipeline was a significant achievement; however, slow progress on CASA-1000 and the failure of the APTTA negotiations to include Tajikistan and India indicate that much work remains to be done in this field. States involved in these initiatives should avoid disruptions due to political reasons; political and economic relations between states should be kept distinctly separate to ensure mutual economic progress and incentivize continued regional cooperation. However, a number of emerging initiatives look to offer a chance for new regional agreements. China’s OBOR initiative, currently involving Pakistan through the China-Pakistan Economic Corridor, seeks to revitalize the old Silk Road and presents an opportunity for Afghanistan to connect with the rest of the region. Participants recommended that Afghanistan should explore opportunities for linkages with OBOR. In addition, the reemergence of Iran as a player presents new opportunities for engagement in Afghanistan’s development process.

The opportunities presented by the new, growing involvement of China and Iran in the region stand to alter the realities of cross-border trade and transit, shifting the most expedient routes and providing better market access for Afghan exports. Development on Iran’s Chabahar port could potentially redirect some Afghan trade from Pakistan to Iran, through which Afghan goods could more easily reach the lucrative Indian market. The Chabahar port could indeed allow Afghan goods to reach New Delhi in five days total, nearly halving the transit time when sent through Pakistan. However, participants agreed that the developing ports of Chabahar in Iran and Gwadar in Pakistan should be viewed as complementary, and not as competitors. In fact, Pakistan’s geographical location and trading history with Afghanistan will likely allow it to remain the country’s most prominent commercial partner regardless of opportunities offered by other neighbors. Furthermore, the construction of a direct road connection from Gwadar to the Afghan ring road could provide an incentive for continued use of Gwadar. Connection to Gwadar would afford Afghanistan a linkage with projects related to China’s “One Belt One Road” initiative, and would contribute to the viability of the Gwadar port itself. In addition, Chinese administration of the Gwadar port could potentially allow many Afghan-Pakistani bureaucratic issues to be worked around. At the moment, there does not seem to be much Chinese interest in the construction of a straight road from Gwadar. However, if China truly has an interest in expanding its reach in the region, it could be an option they may eventually pursue. 

Background
Since 2013, EastWest Institute’s Afghanistan Reconnected Process has focused on promoting the win-win potential of enhanced regional economic and political cooperation in order to foster not only development, but also security and stability in Afghanistan and greater Central and Southwest Asia. EWI established a long-standing network of high-level representatives from governments, parliaments, and the private sector from Afghanistan, China, India, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkey, Turkmenistan, Uzbekistan, Europe, and the United States, as well as from regional and international organizations.

Through a series of high-level consultations, sponsored by the governments of the United Arab Emirates and of Germany, the Process provides this network with a platform to identify and overcome major obstacles to regional trade and transit. The practical recommendations for policy reform resulting from this process have been presented to the governments of Afghanistan, India, Pakistan and Tajikistan in the course of 2015.

The event in Istanbul is part of a review phase of the Afghanistan Reconnected Process, during which the EastWest Institute is taking stock and sharing the progress of the region with the international community, as well as future needs to support the stability and prosperity of Afghanistan and its neighborhood. A comprehensive report outlining policy recommendations derived from this process over the last four years will be issued in late summer of 2016. The next phase of the process will focus on engaging Afghanistan’s neighbors and addressing their strategic role, i.e. on the opportunities of a post-sanctions Iran, and on how to assure that China’s “One Belt One Road” policy also benefits Afghanistan.

For more pictures from this conference, click here.