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Private investment key to success of 'New Silk Road' after 2014

News analysis by Dena Sholk
Though Northern Distribution Network (NDN) is being used for military purposes, it must shift to private sector to thrive post-2014

WASHINGTON, DC - Wednesday, April 25, 2012 - A few weeks ago, Central Asia Newswire discussed the potential benefits of harnessing the improvements in transportation infrastructure along the Northern Distribution Network (NDN) as the basis of the U.S. State Department’s regional development strategy termed the “New Silk Road” (NSR).

The policy calls for a reduction in trade barriers, the harmonization of transportation systems, and the synchronization of customs policies and practices between the Central Asian states and Afghanistan.

Upgrading and harmonizing Central and South Asia’s infrastructure requires significant private sector investment and expertise. Yet, with the proposed withdrawal of NATO’S ISAF (International Security Assistance Force) contingents from Afghanistan in 2014, and the reduced need for the Northern Distribution Network (NDN) as a military supply line, comes a key consideration for private firms in the region: what are the incentives to stay beyond 2014?

According to Thomas Sanderson, Co-director of the Transnational Threats Project at the Washington, D.C.-based Center for Strategic and International Studies (CSIS), it will be difficult to convince western firms to continue to operate in an unstable region without ISAF acting as “big daddy.”

With political support, coupled with the willingness and ability to spend billions of dollars a week on the war in Afghanistan, ISAF has played this role in Central Asia.

As such, ISAF military logistics planners and diplomatic personnel regularly engage with custom officials, local businesses, parliamentarians, and ministry personnel. Informally, members of ISAF forces developed personal relationships with local officials and suppliers, which helps promote U.S. diplomatic aims and strengthen ties along the NDN.

While ISAF’s presence in Central Asia has not been devoid of problems, as evidenced by the tension between Kyrgyz and U.S. officials stationed at Manas Transit Center, its presence in the region has served as a vote of confidence to risk-averse investors entering an unknown marketplace.

Sanderson notes that some firms will determine whether to stay in Central and South Asia beyond 2014 in part by projecting potential profits vs. the costs rendered by high-security requirements and other factors associated with conducting business in such a harsh environment.

If the costs of maintaining a private security force, constructing rail and road linkages, and providing a secure supply of electricity and clean water are offset by revenue generated from mining, then firms will continue to invest in the region, Sanderson says as an example.

The few firms with the operational capacity and cash to absorb such costs, in addition to providing under-the-table bribes, and still turn a profit are state-sponsored firms from China and India. Chinese companies in particular have the financial backing of the state and are therefore able to engage in high-risk business decisions that would otherwise frighten the private sector, the analyst says.

Once ISAF is out, Chinese firms possessing a dominant market position will assume the role of “big daddy”, Sanderson says. As such, Chinese firms, with their style of vertical management and adherence to different standards of business practices and ethics, will play the role of an authoritarian enabler, not a disciplinarian.

“Basic economic and geopolitical value judgments will determine investment decisions,” Sanderson asserts. Firms will measure costs against profits. While providing an important boost in foreign direct investment (FDI) for the region’s economies, Chinese investments will wreak “steep environmental and social costs” on local populations, he adds.

Quantifying the Costs and Challenges

Without ISAF, and in particular the U.S., there is no player in the region capable of ensuring adherence to good business standards as well as safeguarding assets.

Former Afghan Ambassador to the U.S. and President of Capitalize LLC, Said Jawad, echoed Sanderson’s sentiments in an interview, noting that western firms are more responsive to public pressures about their business ethics, interactions with local communities, and environmental practices than are their Chinese or Indian counterparts.

“We want Western firms who have to adhere to good practices such as the Foreign Corrupt Practices Act. This is good for Afghanistan,” Jawad noted. Similarly, most Afghans do not care about the race of the investors’ skin or the flag that is flying, but are concerned with how investments affect their employment opportunities and quality of water, he added.

Convincing cautious, risk-averse firms to invest in Afghanistan’s immediate post-conflict environment is no easy task. For investors, the main concerns are access to market, security, transport and logistics.

“The departure of ISAF forces in 2014 is not the determining factor for firms contemplating investing in Afghanistan,” Jawad adds. “Investment calculations account for the long-term political, institutional, and security vision for Afghanistan – how stable will it be in 2014?”

That question will also weigh heavily on the minds of company leaders looking to expand into the Central Asian market.

Infrastructure vs. Institutions

Despite improvements in regional infrastructure, the intransigence of authoritarian regimes in resisting regional coordination stands in the way of the NSR becoming reality. Constructing infrastructure is one thing, but obtaining the support and commitment of political leaders at the highest levels of power to adjust domestic trade and customs policies in order to promote regional cooperation is quite another.

Both Sanderson and former Ambassador Jawad note the significant political barriers to regional cooperation. In order to overcome the numerous “political, historical, personal” issues between the Central Asian regimes to implement the NSR, Ambassador Jawad says there is a need to focus on transit corridors rather than on broader policy themes. 

The emergence of trade and transportation corridors will satisfy the demands of private investors seeking greater market access without getting bogged down in the technicalities and complexities of Central Asian politics, he says.

One way in which the NDN has helped establish the groundwork for the NSR is through the “backhaul-2” (BH2) concept established by the Geneva-based International Road Transport Union (IRU), which would establish an independent fleet of 1000-1500 trucks to transport U.S. army goods from Europe and Asia to Afghanistan, and vice versa.

According to an IRU Background Paper obtained by Central Asia Newswire, state-controlled management companies or public-private partnerships (PPPs) would be established to manage the BH2 routes under the control of auditing representatives designated by the U.S. Government. These management companies would then lease Russian KAMAZ trucks to transport goods to and from Ulyanovsk to Afghanistan.

But improved management of borders is also essential in the overall success of the NSR project, Philippe Elghouavel, a former UNDP official who now consults with the New York-based GPRA group, said in an interview with Central Asia Newswire.

“There was a potato famine in Tajikistan, because there was a very harsh winter,” he says.

“Kyrgyzstan sent trucks full of potatoes but were stopped at the border. These countries have to make sure borders are open to products while they also have to control drug trafficking. Trade is not easy…because of the way they are managing borders.”

In that vein, the most critical factor to the NDN’s success is the willingness of political elites to “buy in at the top political levels”, former Ambassador Jawad notes. More often than not, delays at the border by ministry officials are caused because there is no clear direction from the top political leaders as to whether shipments are allowed.

But the U.S. is encouraged by progress on its NSR policy initiative, Deputy Secretary of State for South and Central Asia Geoffrey Pyatt said in remarks in the Kazakh capital Astana on Saturday.

“The New Silk Road isn’t a theoretical construct – it is already being built,” he said.

“As I deliver these remarks, electricity from Uzbekistan and Turkmenistan is powering small businesses and government buildings in Afghanistan; rail connections are being built between Kazakhstan, Turkmenistan and Afghanistan and a new rail line from the Uzbek border to Mazar-e-Sharif has been completed; Turkmen, Afghan, Pakistani, and Indian officials are also actively negotiating a pricing agreement for the TAPI gas pipeline, which will one day ship billions of dollars worth of natural gas from energy-rich Central Asia to energy-hungry South Asia.”

Why not engage?

Improvements to regional transport infrastructure are welcome and should be continued. But physical infrastructure alone will not lead to a successful NSR development. The creation and development of institutions and a collective appreciation for the value of collective gains from policy integration and coordination are critical to the success of the plan.

“Once each country realizes that there is an alternative route to the one through its territory, and that if it wants to get in on all that continental transport brings it will have to be competitive. This is definitely happening, albeit slowly,” Chairman of the Central Asia-Caucasus Institute at The Johns Hopkins University, S. Frederick Starr, emphasizes.

It remains unclear whether Western firms will invest in the NSR region post-2014 without ISAF acting as “big daddy.” More apparent are the political incongruities between Central Asian regimes. To overcome the region’s challenging politics, firms and policymakers should focus on the development of transit corridors which will at least allow some form of investment inflows.

Still, convincing Central Asian regimes, particularly the security-obsessed leadership in Uzbekistan, to entertain a policy of freer transit corridors will be a long shot.

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