The Pentagon's process for awarding contracts in Afghanistan is bad for U.S. business, and bad for the rebuilding effort in that embattled country.
Steve LeVine writes on Foreign Policy's Oil and Glory blog that my advisory firm Gryphon Partners -- which focuses on investments in Central Asia and the Middle East -- is "upset that a client has lost an oil deal" in Afghanistan.
Indeed we are upset, but not over the outcome -- losing deals is a normal part of doing business -- and not because the Pentagon failed to "manipulate" the tender on our behalf, as LeVine alleges. Nor do we have a problem with Chinese investment in Afghanistan as such.
We do not believe that Afghans should be required to turn over the development of minerals to the United States as a reward for ongoing U.S. sacrifices in Afghanistan. As my colleagues Alexander Benard and Eli Sugarman explain, we are upset because U.S. taxpayer money was used to set up a process that favored a state-owned Chinese firm against private Western companies. This runs against official U.S. government policy and regulations, which in fact require U.S. government entities to promote American investors' interests overseas.
I am an unashamed advocate of U.S. and Western companies building an economic presence in Afghanistan, Iraq and throughout the region. I decided to establish Gryphon Partners to encourage and facilitate more Western investment in these markets.
In light of its security challenges and weak institutional capacity, Afghanistan in particular needs all the help it can get to attract reliable, responsible foreign investors from around the world. Western companies not only inject advanced technology and business practices into the country in the short term, they generate enduring Western interest in Afghanistan beyond current security-focused government-to-government relations. Western companies have the advantage of being, on balance, less corrupt, more transparent and more attentive to local interests in areas such as employment, technological development, environmental protection and preservation of heritage sites than their Chinese counterparts.
The performance of Chinese companies is improving -- but they have a long way to go.
Developing Afghanistan's natural resource wealth is important. As foreign aid dries up, Afghanistan will become increasingly dependent on mineral and energy development contracts to finance its reconstruction efforts and sustain its security forces. Poor governance has been one of the most persistent weaknesses of the Afghan government.
Promoting efficient and sound practices in lucrative sectors that lie at the intersection of business and government -- a comparative advantage of Western firms -- could yield important gains in encouraging the rule of law and promoting broad-based economic growth. An alternate scenario is that Afghanistan -- already struggling with governance issues -- could succumb to the resource curse, with the country's underground treasures fueling further conflict and a factionalized kleptocracy.
So far, American and Western companies have fared poorly in Afghanistan. The Afghan government has awarded two major mineral development concessions to date. Chinese companies with state backing have won both. The American company Freeport McMoran Copper and Gold lost out in the competition for the Aynak Copper mine.
Afghan government officials reported intense Chinese government pressure in support of its national companies, and other investigations have documented massive malfeasance in the way the contract was awarded.
In the second major award involving Amu Darya Basin oil, no U.S. companies even bothered to compete. But two Western companies were among the finalists.
One was our client Tethys Petroleum -- a publicly-traded British firm with many large U.S. investors. The winner was the China National Petroleum Corporation (CNPC), a state-owned company.
As evidence that Chinese companies "have not gotten the only big early resource deals in Afghanistan," LeVine notes that a consortium led by JP Morgan secured a gold contract in Afghanistan. Though a positive development, the contract is relatively small. And despite JP Morgan's involvement, most of the investors in the deal are not American.
It is certainly ironic that Chinese firms are at an advantage over Western companies due to Defense Department procedures. The Pentagon's Task Force for Business Stability Operations is spending some $20 million of American taxpayers' money to organize the bidding rounds for Afghan mineral resources.
Obviously, the Pentagon team does not seek to hand Afghanistan's mineral resources to the Chinese. But flaws in the Pentagon-backed process mean that state-owned Chinese companies are at an advantage over private companies.
Because they are not accountable to shareholders, Chinese firms can offer better commercial terms based on geopolitical motives rather than profit-driven necessities. The process also does not give points for good business practices in areas such as transparency, local employment, and the environment.
Pentagon rules do not check a bidder's past record in actually fulfilling the promises it makes up front to get a contract. And they does not consider the need for Afghanistan to diversify its investors -- it is not in any country's interest to give its business disproportionately to companies from just one foreign country.
To add insult to injury, Pentagon-paid consultants -- along with CNPC management and the Chinese ambassador to Kabul -- participated in signing ceremonies and photographs celebrating the agreement. U.S. officials in effect endorsed the deal with the American seal of approval.
The U.S. government needs to assist American companies seeking to compete in frontier markets. As Secretary Clinton noted in a recent address, U.S. strategic and economic interests are intertwined in unprecedented ways -- "the economic is strategic and the strategic is economic." Economic statecraft is especially critical in Afghanistan, where important rare-earth minerals contracts will open for bidding in the near future. How these tenders are allocated will implicate core U.S. interests, consolidating gains amidst the withdrawal from Afghanistan, adapting to balance of power changes in Asia, and preserving U.S. economic leadership. Smart U.S. government policies and regulations could leverage Western companies on behalf of these strategic objectives. In assisting Western firms, Gryphon Partners and similar private consultants are doing their part.
The Obama administration and Congress should review what happened in the recent tender and reassess the current Pentagon methodology. At the very least, the United States should not harm itself by financing a bidding process slanted toward state-owned foreign competitors, and then celebrating its outcomes when Americans lose. It is not inevitable that Afghanistan's valuable resources fall into the hands of the Chinese.
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