Reconstruction of the sugar sector in Afghanistan

Reconstruction of the
sugar sector in Afghanistan
Sustainable economic
development is the
basis for social, political
and human
development. Private
investment is needed
to sustain economic
development. However,
in a country like
Afghanistan which is
still on the verge of
being a «failed state»,
private investment is
subject to high risks. In
such cases Public
Private Partnership is
probably the most
appropriate tool
because acting alone
neither the state nor
private business has
the capacity to solve
the arising problems.
Combined efforts can
achieve remarkable
results, as the case of
the «sugar factory» in
Baghlan province shows.
Dr Klaus Klennert
InWEnt – Capacity Building
International, Germany
Rural Development, Food, and Consumer
Protection
Wielinger Straße 52
82340 Feldafing
Klaus.Klennert@inwent.org
entwicklung & ländlicher raum 2/2007
Foto: Kiermayr
Sugar is needed in every country, but
even more so in Central and Southern
Asian countries where tea with
lots of milk and sugar is the national beverage.
Today Afghanistan needs to import
at least 400,000 tons of white sugar
each year and demand is increasing.
Having to import sugar is an additional
burden for already scarce foreign currency
resources. Until 1991, part of the
demand for sugar had been satisfied by
the sugar factory in Baghlan province.
During the following civil war period the
sugar plant was closed but not destroyed
or ransacked. After the Taliban regime
had been ousted in 2002, it was proposed
to the Government of Afghanistan to
resume sugar production at Baghlan, as
the general conditions were rather
favourable.
Baghlan after the Civil War
Since 2003, the security situation in Baghlan
has been rather peaceful. The population
in general supports the Government
in Kabul, there have been no open feuds
between rival leaders, and the military
presence of the German ISAF Forces has
filled the existing power vacuum for the
Thanks to a close PPP
collaboration sugar production
in Afghanistan could be
reinitiated. A proud sugar beet
farmer in the province of
Baghlan.
time being. However, 22 years of war and
civil war had destroyed the physical and
institutional infrastructure of the country
to a large extent, but less so in the Northern
provinces. Furthermore, the province
of Baghlan historically was quite industrialised
having had a textile plant, a cement
factory, a dairy, a silo and a sugar plant, of
which buildings and equipment still existed.
Sugar production since 1940
In the early 1930s, the Kingdom of
Afghanistan had decided to establish its
own sugar industry in the country based
on sugar beet production. A feasibility
study showed that the region of Baghlan
was best suited for sugar production
offering adequate soil, sufficient water,
coal and lime. The Banke Millie Afghan
(BMA) founded the Baghlan Sugar Factory
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Schwerpunkt
(BSF) in 1934 as a share holding company.
86 percent of its shares were held by BMA,
while the rest was owned by about 100
members of the Royal and industrial elite
of the country.
In 1940, the sugar beet processing plant
went into production. To provide for the
raw material, many farmers in the area
had to be practically forced to grow sugar
beets, as they had not known the crop
before. But when they realized the regular
return from sugar beet production they
increased the production up to 96,214
tons in 1977 on 4,132 hectares, enabling
the BSF to produce up to 12,500 tons of
white sugar.
By-products such as molasses and beet
pulp proved to be additional assets. They
became the base of a thriving livestock
breeding and dairy business converting
the BSF into a vertically integrated agroindustry
business. Throughout these
years, the German Company KWS SAAT
AG had supplied the BSF with appropriate
seeds along with technical assistance on
best sugar beet production techniques.
The end of this success story began to
unfold in 1976, when Afghanistan’s socialist
government nationalized all commercial
banks and became the de facto owner
of the BSF. During the war against the
Soviet army, sugar beet production went
drastically down as many farmers left the
fields to join the fight against the invaders.
Also, the Soviets had occupied the
BSF and used its large concrete area for
parking and maintenance of their tanks
and trucks.
In 1991, sugar production came to an end.
However, the former employees and
workers protected the BSF against looting
and destruction knowing that it might
employ them again sometime in the
future.
Private sector engagement
after 2002
The future of the BSF began to take shape
in 2002, after the North Alliance had ousted
the Taliban government with US support
and after the international community
had pledged to support the peace
and reconstruction process with their military
presence and billions of dollars in
financial and technical aid. Based on their
long existing cooperation with Afghanistan,
the German company KWS SAAT AG
offered the Government of Afghanistan
to examine the possibility of rehabilitating
the BSF plant in 2003. The challenges
which had to be dealt with were four fold
and their outcome was uncertain: The
state owned enterprise had to be privatised
and supplied with new funds, the 65
years old plant and equipment had to be
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Foto: Kiermayr
refurbished after more than 12 years of
standstill, commercial sugar beet production
had to be reintroduced to the farming
communities on a broad scale, and
qualified personnel had to be found or
trained to manage the sugar plant.
KWS SAAT AG committed itself to the project
and to invest one million euro, even
though it had never invested in sugar factories
before. In 2004, KWS managed to
find four private Afghan investors who
were willing to contribute two million
euro each to rehabilitate the old sugar
factory. But the Afghan entrepreneurs
would hardly have committed themselves
The old and the new sugar
plant in Baghlan.
to such an extent if, prior to this, KWS
SAAT AG had not collected almost all
kinds of public support. The risk of investing
in post war Afghanistan under such
insecure circumstances and with such an
insufficient infrastructure would have just
been too high for the private sector to carry
alone. So a good example of a PPP-project
came into being, involving not only
German, but also Afghan public and private
actors.
Public sector support
At the International Donors’ Conference
for Afghanistan in Berlin in spring 2004,
the Government of Afghanistan asked
donors and private companies for assistance
in reviving the sugar production in
Baghlan. The German government took
up this opportunity to start a future oriented
cooperation with the private sector
to create realistic alternatives for poppy
production in the region. The Deutsche
Investitions- und Entwicklungsgesellschaft
GmbH (DEG) co-financed a Feasibility
Study of KWS SAAT AG in 2003. The
study concluded that it would be technically,
financially and socially feasible to
rehabilitate the Baghlan Sugar Factory
and to reinitiate sugar beet cultivation. An
investment capital of 17 million euro was
required. DEG offered to contribute 2 million.
The Government of Afghanistan
offered to privatize the BSF and to become
a shareholder. Its share was brought in
through the real estate, the buildings and
usable equipment which were valued at
4.6 million euro. The Food and Agriculture
Organization of
the UN (FAO) was
ready to provide
1.3 million euro for
seeds, agricultural
equipment and
expertise with
means sponsored
through the German
Trust Fund.
The German Centre
for International
Migration
(CIM) agreed to
upgrade the local
salary of the foreign
engineer
needed to lead
the technical renewal
of the sugar plant and for its first
years of operation. InWEnt – Capacity
Building International, Germany – supported
the qualification of future Afghan
personnel for the sugar factory through a
special PPP-Project with KWS. It consisted
of two activities: upgrading the qualifications
of Afghan engineers to become sugar
technologists and training Afghan
farmers to become field advisors and
coordinators for the envisaged contract
farming.
Reconstruction process
In October 2004, the New Baghlan Sugar
Company, Ltd. (NBSC) was founded as the
first privatized state company of
Afghanistan with a share capital of 13.6
million euro, held by four Afghan entrepreneurs,
KWS SAAT AG and the Islamic
Republic of Afghanistan. In summer 2005,
DEG joined the company with investment
capital of an additional 2 million euro.
Renewal of the technical equipment
started in fall 2004, but was interrupted
in summer 2005 for several months by
threats aimed at the foreign personnel
during the period of parliamentary elections.
Peace as necessary condition for the
success of a PPP-project became obvious
again.
entwicklung & ländlicher raum 2/2007

Qualification of Afghan personnel for the
sugar plant had to be organized as well. In
2004, KWS SAAT AG and InWEnt agreed to
train four to six Afghan engineers in sugar
producing technology at the «Sugar
Institute» of the Technical University of
Berlin. But it proved to be very difficult in
the war torn country to find candidates
who had the academic qualifications and
were willing to work later in the province
of Baghlan. From among a large number
of applicants only two could be selected.
These two chemical engineers completed
the difficult training in Germany with success
and one has already proven his competence
during the first sugar campaign
in November/December 2006. But still
seven additional experts and technicians
had to be hired from Germany and even
Hungary, Slovakia and Iran to run the first
sugar processing after 15 years of interruption.
Therefore, an urgent need exists
for more trained engineers from Afghanistan
to manage the sugar plant in the
coming years, as foreign personnel is difficult
to find for such a remote work place
like Baghlan. Sustainability of the NBSC
requires at least an Afghan middle management
in the long run.
To reinitiate sugar beet production in the
area, KWS SAAT AG had conducted agricultural
field tests since 2003 to find out
which sugar seed and production technologies
are most appropriate for the
region. These field trials formed the basis
of a KWS/InWEnt training of agricultural
field advisors and demonstration farmers
with the objective of having them to supply
the sugar plant with a sufficient quantity
and quality of sugar beets. The cooperation
of the KWS sugar beet engineer
with the FAO expert of Afghan origin,
holding a Ph.D. in Agriculture, became a
deciding factor of the successful renewal
of sugar beet production in the area.
In 2006, about 270 farmers planted sugar
beet on contract basis on 246 hectares for
the NBSC. 39 percent of this acreage was
leased by the NBSC and released to small
farmers. The rest of the area was cultivated
by small farmers directly. 63 percent of
the sugar beet plots were smaller than
1 hectare, a fact that shows one of the
main difficulties in organizing a timely
and sufficient supply of beets to the
NBSC.
Another issue was irrigation. The sugar
beet area in Baghlan region is completely
irrigated. Due to the long dry summer of
2006, a number of sugar beet fields ran
dry. Different plant diseases caused a third
problem. As a consequence, almost half of
the drilled area produced no or very little
yields. To compensate the farmers for
their losses and to get enough beets for
the first pilot sugar campaign, a second
sugar crop was tried right after the wheat
harvest for the first time in June 2006.
This experiment proved to be a complete
success yielding 50-75 tons per hectare,
results which are comparable with German
yields.
From these two crops, 3,700 tons of sugar
beet could be delivered to the NBSC in
November and December 2006 as a result
of the first pilot sugar campaign after 15
years.The NBSC could produce 300 tons of
white sugar of good quality. 300 Afghan
workers were employed in the factory. The
270 farming households included the
NBSC improved the living conditions of
about 4,000 people already in its first
year of production. Compared to the situation
in 2003 this constitutes a remarkable
success as result of an excellent private-public
partnership. But if the NBSC
wants to meet the production figures of
the 1970s, there is still a lot to be done
both in the plant itself and convincing
more farmers to grow sugar beet.
Foto: Kiermayr
Conclusion
The results of this large PPP-project are
promising, in particular considering the
manifold problems which had to be overcome.
Providing income and employment
to a large number of people cannot be valued
highly enough in a situation like in
Afghanistan where there is such high
unemployment and widely spread poverty.
In addition, sugar beet cultivation once
fully developed may offer a realistic
chance to prevent poppy production from
gaining additional ground in the region. A
public-private win-win situation has been
achieved based on the following critical
factors of success:
� A rather peaceful regional situation;
� The thriving role of KWS SAAT AG;
� Support by the German and Afghan
public sector;
� Engagement of the Afghan private sector;
� Qualified personnel, but mostly of foreign
nationality;
� Training of local personnel at different
levels;
� Continuing field trials and field monitoring;
� Contract farming under the coordination
of NBSC field advisors.
These success factors of the PPP-cooperation
have to be retained at large. Only the
dominance of the foreign experts has to
be slowly reduced. A first step is that
NBSC is supposed to take over the leading
role from KWS. But more qualified Afghan
personnel are badly needed for the management
of the plant as well as to help
tackle the agricultural challenges.
If peace will stay on in the region, the New
Baghlan Sugar Company may well
become again a vertically integrated agroindustrial
enterprise with a wide variety
of products based on an integrated farming
system similar to or even better than
the pre-war situation. The positive effects
on the private side could also lead to
achieving the objectives of the public side,
i.e. to secure the livelihoods of 12,000 people,
to reduce the poppy cultivation and to
save foreign currency. These aspects of the
PPP-Project will not only contribute significantly
to the rehabilitation of an important
sector of the Afghan economy, but
also to the stabilization of the young
democracy in the province of Baghlan.
Turning «swords into
ploughshares» or tanks
into sugar beets seen in
the background.
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