Original article at McClatchy | Nov 14, 2010 | Full Story
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By Jonathan S. Landay

KARKAR COAL MINE, Afghanistan "” Shovel-wielding miners in rags and plastic shoes, some with the protruding ribs and work-ravaged pallor of labor camp prisoners, toil deep inside this remote northern mountain, harvesting coal for some of the country's most powerful businessmen.

Outside, other workers tip coal-filled trolleys down a hill, cloths tied about their faces against choking black dust. On the heap below, a barefoot boy separates large lumps by hand while colleagues toss shovelfuls of chips into a truck. Goats nose for weeds in tangles of moldering steel cables and rails.

The coal dug here fires Afghanistan's only working cement factory, a strategic industrial asset 150 miles north of Kabul that should be supplying building material for much of the country, generating cash and jobs and improving the lives of some of the world's poorest people.

Instead, the Ghori Cement Factory and the nearby Karkar Coal Mine have become symbols of the corruption, nepotism and mismanagement that pervade President Hamid Karzai's government, hobble the U.S. effort to rebuild Afghanistan, and fuel the Taliban-led insurgency that now threatens both sites.

"The factory was handed over to people who are a mafia," Baghlan Governor Abdul Majid, a Karzai appointee, told McClatchy in an interview in Pul-I-Khumri, the provincial capital, last month.

The powerful businessmen who control the cement plant, Karkar and three nearby mines, never had the financing to run the venture, but their close relatives are two of the country's most powerful men.

Mahmoud Karzai, the CEO of the Afghan Investment Company, which runs the enterprises, is the brother of the president, and Abdul Hussain Fahim, the AIC vice-chairman, is the brother of the former defense minister, Mohammad Qasim Fahim, now the first vice president.

Until January 2009, when he was ousted in a failed takeover bid, their senior partner was Sherkhan Farnood, the head of Kabul Bank, which was taken over by the government in September following allegations of insider loans and real estate speculation in Dubai.

A U.S.-funded study estimated the cost of modernizing the Soviet-era cement plant at more than half a billion dollars, but the trio raised only $22.25 million in cash. Stockholders borrowed as much again from the Kabul Bank, in which Mahmoud Karzai and Abdul Hussain Fahim are partners. Even so, President Karzai's cabinet approved 49-year leases on the state-owned plant and mines in 2006.

Nearly five years later, Ghori is churning out less than 1/25 the cement that AIC pledged to produce. Karkar is a devastated sprawl of dust-blown wreckage and neglect where workers fear that their next shift could be their last.

"All they gave us were oily promises," said Gul, 35, who asked that his last name be withheld, after emerging from Karkar's fetid tunnel, his face, torn pants and bare, concave chest encrusted with coal dust. "We are never sure if we will come out alive. It is our choice to go in, but it's up to Allah if we come out."

Jonathan Landay talks about Afghanistan's rampant corruption.

How Mahmoud Karzai, a U.S. citizen, and Abdul Hussain Fahim gained the leases is a tale involving cronyism, alleged regulatory violations, boxes of cash and intervention at the highest level of the Kabul government.

The squandering of an Afghan national resource has allowed Pakistani cement giants to corner a market with a demand estimated this year at nearly 4 million tons, driven in large part by U.S. military construction projects.

This is also a tale of how two of the most influential members of the Afghan elite who live in palatial villas in Kabul and Dubai reneged on promises of better conditions for fellow countrymen struggling to feed their families on salaries of about $3 a day.

"Before this group took control of the factory, they told us they would change our lives and would make our lives better," said Mohammad, a veteran Ghori employee who asked that his last name be withheld. "These people who have spent their entire lives at this factory, what has been given to these people?"

A McClatchy investigation revealed a dubious process of awarding the leases and multiple failures by the firm to fulfill its written commitments. The leases, moreover, contained no provisions to nullify the deal for non-performance.

A parliamentary committee looking into the deal amid allegations that the U.S.-backed privatization of state enterprises was steering state assets to the friends and relatives of top officials ended in bloodshed. A mysterious November 2007 bomb blast in Baghlan killed those six parliamentarians and more than 60 other people.

Mahmoud Karzai said he won the leases fairly and blamed the debacle on the denial of financing by international lenders. He told McClatchy that "ridiculous" Afghan ministers also undermined the project by supporting "ridiculous taxation" and "ridiculous laws" that discourage international investment, while giving preference to Pakistani cement makers.

"If we were really doing the right thing, we'd shut this down. Shutting this down means that 400 to 500 people would be without a job," he said. "We don't have the money."

He said AIC would sell its leases to any company that gives "us our money back. They could take it or make us their minority partner for the money we have spent."

The Ministry of Mines wouldn't answer McClatchy's questions, either in person or by telephone. The ministry has begun an investigation into the affair, according to a person with direct knowledge, who asked not to be further identified to avoid retaliation.

Four people with direct knowledge said that AIC won the leases because of its top officers' political connections. Their aim, these people said, was to secure control of one of Afghanistan's key national assets and either sell the leases for a profit or entice a major multinational into a joint venture.

"It was such a bad deal," said a Ministry of Mines adviser who requested anonymity to avoid retaliation. "It was just wrong, wrong, wrong. Everyone was complicit. It's tragic. It was a sham."

"They are just thieves. They got this mine and cement factory through deception," charged Rasoul Khan, chairman of Baghlan's provincial council and an AIC critic. "They are doing the same with the coal mine and the cement factory as they did with Kabul Bank."

Mahmoud Karzai launched his quest for Ghori and Karkar on Sept. 26, 2005, in a meeting in Dubai at which he and more than 80 other Afghan businessmen agreed to kick in $500,000 each to capitalize AIC. The goal, the Afghan Embassy in Washington said in a press release, was to help "resurrect the Afghan economy" and create jobs by stimulating the investment of more than $100 million in coal mining and cement.

They acted three months before experts of Box International Consulting, of Richardson, Texas, had even visited the site to determine the feasibility and costs of modernizing the cement plant, under a study financed by the U.S. Trade and Development Agency.

By February 2006, when AIC was formally established in Kabul's diplomatic enclave of Wazir Akbar Khan, many of the original investors had bailed out, Mahmoud Karzai said. The 34 who remained included Farnood, Mahmoud Karzai and Abdul Qasim Fahim.

The ministry adviser and the first person with direct knowledge said that Karzai and other AIC shareholders began lobbying senior Ministry of Mines officials for the Ghori and Karkar leases. Then-minister Mir Mohammad Sediq rebuffed their overtures.

"We didn't know, because Box hadn't finished the report, what was in the best interests of the government of Afghanistan and the people of Afghanistan," said the person with direct knowledge. "They (AIC) knew it (Ghori) was a relatively important asset. They simply wanted to get their hands on it."

In March, "an emissary" from President Karzai arrived at the ministry and told Sediq that he was being fired, this person said.

In April, President Karzai named Sediq's deputy, Mohammad Ibrahim Adel, a Soviet-trained mining engineer, as his replacement.

Within days, Adel decided to award the leases for Ghori and Karkar to AIC in response to what the Box report called "an unsolicited proposal." It was approved after an hour's review, not the 15 days required, according to a witness, who asked to remain anonymous to avoid retaliation.

The proposal mirrored Box's recommendations, three knowledgeable people said, because someone apparently was leaking to AIC the details of Box's periodic interim reports. But there was one crucial difference with the AIC plan: the financing.

AIC was capitalized for $45 million: $22.25 million in cash and $22.25 million in Bank loans, Mahmoud Karzai said.

But the final Box report in August 2006 estimated the Ghori project's costs at around $570 million. It recommended the renovation of two kilns at Ghori I, completion of a two-kiln unit at Ghori II and construction of a modern Ghori III unit and a new coal-fired 25-megawatt generating plant.

The successful bidder, the study said, would have to "invest a minimum of 50 percent of the costs of the project" and secure the rest of the funds from the World Bank or another international lender.

As soon as it became known that Mahmoud Karzai would get the nod, interest from the other possible investors "evaporated considerably" and further talks began to look "pointless," the Box study said.

The Box study, which examined the AIC proposal and those of four other companies, warned that Mahmoud Karzai had "declined to provide specifics evidencing the financial capacity of the individual members of AIC."

AIC met a requirement for a $25 million bond with boxes of cash, unloaded from a truck at the ministry's headquarters, the anonymous witness said.

The day after winning the leases, the ministry adviser said, AIC sought a World Bank loan for $140 million "” the precise amount AIC's lease pledged as investment in the cement plant. The loan request was turned down.

Adel, the mines minister, was fired last year amid charges that he accepted some $30 million in bribes in return for awarding a $3 billion copper mining contract to a state-run Chinese firm, which he denied.

When McClatchy visited last month, only one of Ghori I's kilns was working, producing about 200 metric tons of cement daily, far less than the 5,000 that AIC planned. Ghori II is complete, but it isn't operating because the mines aren't producing enough coal, Mahmoud Karzai said, adding that he expects the plant to begin operating early next year.

Construction of Ghori III and the power plant hasn't begun.

"The investors didn't know anything," said Abdul Karim Farokh, the plant's engineer, in an interview. "The should have first asked me."

As Farokh spoke in his office, an aide interrupted to say that a letter had arrived from the Hezb Islami insurgent group demanding 20,000 Afghanis, or $440, a week or it would shut down the nearby quarry that supplies gypsum, a critical ingredient in cement.

"If we can't get gypsum, then we can't produce cement," said Humayan Ali, the plant's technology manager. "If we stop, we can't pay our workers. And then they can't eat."

(McClatchy special correspondent Hashim Shukoor in Kabul, Afghanistan, contributed to this article.)

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