The State of the Construction Industry in Afghanistan

 

By Sayed Aziz Azimi

 

On December 11, 2014, Sayed Aziz Azimi, founder and CEO of Technologists, Inc. (Ti), moderated a panel discussion on the state of the construction industry in Afghanistan as part of the 2014 U.S-Afghanistan Business Matchmaking Conference, an annual event organized by the Afghan-American Chamber of Commerce in Washington, D.C. The following is an edited summary of Mr. Azimi’s opening remarks.

One could argue that the post-9/11 reconstruction of Afghanistan has been even more successful than the Marshall Plan reconstruction of post-World War II Europe. In Afghanistan the construction industry has been one of the many success stories of the reconstruction effort, ranking in importance with telecommunications, banking, and media companies in its positive impact on the lives of the Afghan people.

The recent history of the Afghan construction industry is one of complete transformation. It is a fact that we do not have reliable statistics on the construction industry in the years before September 11, 2001, but it is fair to say that before 9/11 there was no structured construction industry in the country. By 2013, however, the Afghan Investment Support Agency (AISA) counted as many as 6,540 registered construction companies in Afghanistan, and there probably were a lot more.

Even so, this rebuilding has not been without its problems. As the number of construction projects grew quickly, for example, the quality of many public- and private-sector projects declined dramatically. In my opinion the primary cause of this decline is the common practice of subcontracting original contracts to second-, third-, and even lower-tier subcontractors. After each party in the hierarchy of contractors takes his cut of the budget, there simply is not enough money left for the subcontractor actually performing the work to do a quality job. In many cases, projects were left incomplete or were completed not even close to their original intended purposes.

An additional problem is what I call a “first-world procurement system” whose paperwork and bonding requirements exclude many qualified Afghan companies from competing for projects. The current system tilts the playing field in favor of large firms that can meet the administrative requirements to win awards but often have little interest in actually performing the work. This system does not take into account the possibility of completion or quality of work.

Construction financing has yet to arrive in Afghanistan in any formal way. Banks in Afghanistan currently charge interest rates of 18 percent or higher for business loans, putting Afghan firms at a huge disadvantage compared with their foreign competitors. And the new Afghan government’s plan to impose a value-added tax (VAT) adds a new level of uncertainty.

Despite these problems I still see tremendous opportunities for the construction industry in Afghanistan. Of course, the days of the large-scale building of military bases and government facilities all over the country for clients like the U.S. Army Corps of Engineers (USACE) are over. Even so, there is a huge amount of new work to do building critically important infrastructure—road, pipelines, railways, transmission lines, and much more. At present most local firms do not have the bureaucratic, administrative, or financial capacity to take on this work. Clients and donors need to recognize these obstacles and work with local Afghan firms to overcome them. If they do—and if Afghan firms have the agility to respond to new opportunities, the future of the Afghan construction industry can be very bright indeed.