Changes in geopolitics can have a substantial and costly impact on large and small business. Seldom is the economic impact on small business considered in government geopolitical actions. This week’s Wall Street Journal articles focused on potential major impacts of minor changes in political winds around the globe. Minor may not be the correct term but I suspect the minor shifts are being blown out of proportion for political gain domestically and internationally.
The real victims of Geopolitics and the rhetoric are small business interests around the world. The news always emphasizes the large multinational companies like Boeing and Aramco. What about the hundreds of small businesses caught in the changes? Their revenues are in the in the hundreds or thousands or few million?
The following story is really about a local business owner and investor with experience surviving geopolitical change kept his business from harm and investment safe. His quote on how he survives the local impact of geopolitics is at the end of the blog.
Currently, MEA Trading, LLC sells industrial equipment into multiple countries in the Middle East through local suppliers serving operations of international corporations. Among these, are corporations from Saudi Arabia, Iraq, Iran, Russia, China, European Countries, and the US. It can be extremely difficult to navigate the changing geopolitical whims of global leadership. If the US decides to sanction a Russian leader, as a small business, we don’t have the resources to determine if these leaders are involved in a Russian petrochemical operation in Basra, Iraq. Perhaps one of the infrastructure projects receiving financing from Saudi Arabia Sovereign Fund is impacted by geopolitical changes due to the recent US Court decision on 9-11 liability. Suddenly both our local supplier and ourselves can be left holding equipment or liabilities for equipment due to lack of funding for the project.
The geopolitical impact can originate with relative minor decisions on the global stage. The actions don’t have to be “huge” to impact local business.
Case in point is the Geopolitical change in Afghanistan during the Gereshk agriculture distribution center project. On the world stage, these were minor decisions. Each decision illustrates how even minor changes can impact the livelihood of hundreds of people. Do you conduct business on an international stage or locally in areas of rapidly changing geopolitical environments. Your business needs to anticipate these changes and how they will impact your business.
The agriculture value chain plan in Southern Helmand Province was to extend the initial test project in Marjeh developing a wheel and spoke structure of small packing houses feeding into a larger central distribution and storage center. A proven agriculture distribution model would provide hundreds of jobs and improve economic efficiencies for hundreds of more farmers in the region. Our organization would provide the initial $3 million funding for the collaborative solution of the central distribution center. Navigating the funding mechanisms, rules and regulations in a war zone is a daunting task. Construction and sustainment was even a bigger challenge. All the agencies, local, and central government were on board. Land rights agreements were in place. Investor interests and private funding for management and sustainment were firming up.
Our organization was fortunate to locate and hire two Agricultural experts from the US. One in leadership and one local expert helped validate our model and ad needed expertise to the local efforts.
Then the Geopolitical climate started to change rapidly. First due to political infighting in the US Congress the funding for our operations was to end. The orders came down from DC that all our projects should be transferred to other government agencies. If the project was to continue I had to find another US Agency willing to take on the responsibility and management of the ongoing project. I had already secured funding for the project. I was required to transfer funding to the organization accepting the responsibility. Neither was an easy task.
Our organization’s comptroller helps me navigate and agreement for transferring the funding with the USMC comptroller. Then I facilitated a memorandum of understanding with USMC to assume responsibility for managing the project. I would continue to assist as possible. USDA would pick up day to day direction of the agriculture issues and US Corps of Engineers the construction.
Example of documentation required for interagency cooperation. MOA with USMC
The second geopolitical decision followed. US leadership now decided to draw down the USMC forces to pre-surge levels. Much of the security umbrella the Marines provided in Helmand was to be turned over the Afghan National Police or Army. Since USMC provide our transportation and security the drawdown left us high and dry without any priority to travel locally.
It also meant that even the US Corps of Engineers and USDA had difficulty getting out to the Gereshk site to manage the construction. Construction ended up delayed 9 months. The nine-month delay and change in security impacted the interest of the private investor. It also delayed the negotiations between the private investor and the central government’s Ministry of Industry that held the rights to the land. No one wants to finalize anything until the work at the facility was completed.
Our leadership in DC managed to secure a reprieve on our funding such that our operation would continue but we were now going to pull out of Helmand to concentrate on higher-profile projects in the North and Western part of Afghanistan.
I was relocated to Kabul leaving the project in the capable hands of the USMC, USACE, and USDA. In Kabul, I would continue to advocate and facilitate the negotiations between the private investor and the Ministry for another 3 years to no avail. The geopolitical decisions created a chain of events that couldn’t be overcome.
The Geopolitical impact created irreparable harm to the project. The investors avoided financial harm primarily due to their knowledge and experience working through geopolitical changes during years of conflict. They reserved their final commitments until all the issues were resolved. The local community we impacted due to the loss of jobs from the earlier bombing of the cotton plant we were refurbishing for the distribution center. The farmers in surrounding communities still had no way to get their produce to the larger markets. The original test packing and sorting facility in Marjeh were now marginalized.
The US taxpayer was out the $3 million dollars spent to refurbish the old cotton mill and new buildings that today remain vacant.
This wasn’t the only project impacted. The Regional Command Center turned into a $36 million monument.
It is difficult to calculate the overall negative impact of the chain of events begun by a couple of minor geopolitical decisions. There were other more visible impacts of these decisions. The new command center for SW Command at Camp Leatherneck was one of the more noted stories. There are now many more as the Taliban continues to take back over the southern territories of Afghanistan.
Is your company doing business in foreign countries and don’t have the resources to analyze the potential geopolitical impact on your operations? Listen carefully to local partners in they have the experience and knowledge for dealing with many of the obstacles.
I asked the local business owner how he managed to survive for 30 years through all the different geopolitical changes in Afghanistan. He told me and I’m paraphrasing: With each new government, whether English, Afghan, Russian, Taliban, or American, I just changed the clothes I wore, my hat, and with the Taliban my beard. That was all each really needed to accept me and allow me to continue my business.
This is especially true in countries with weak central governments and rule of law where government policy can be ineffective or restrictive. International investors and equipment providers are often caught unaware of formal or informal policies that will affect their business operations.
Afghanistan is one of the countries where the central government is weak. My definition of weak is the central government in Kabul has little influence over the outlying provincial governments. Each provincial government is dominated by the local governor, often former warlord, and local district officials. Kabul has little influence over these remote territories and often are afraid to even travel to some of them due to security issues.
The country has a constitution and corresponding branches of government but lacks the resources to enforce many of their laws. Local administration of laws is left to the village elders. The Kabul based central agencies have little contact with local provincial governments. It is clear why outside influences and bad guys can get a foothold in the remote provinces.
I’ve witnessed two approaches for outside investors to gain a business foothold in Afghanistan. One is to start small with a pilot business learning the requirements and customs without a major investment. Over time the investor will expand and grow as they learn the formal and informal systems.
The second is depending on local partners to execute the business on the ground locally. The right local partner can navigate challenges and allow the foreign investor to avoid costly mistakes. Selecting the right local partner can be problematic. “Extreme vetting” is a necessary or cautious approach for testing the new relationship.
Vetting a local partner isn’t much different than vetting a business partner anywhere else in the world. Validating previous work and references is required. Physically visits and meeting with principles is always advised. MEA Trading depends on previous contacts that we have known for years to help us vet new partners for ourselves or our clients. There are organizations like the Afghan-American Chamber of Commerce and US Government Trade organizations that can also help. We are more comfortable with referrals from people we know and have worked with previously.
Gereshk storage and distribution center is a good case study on why investors should be wary in countries like Afghanistan. We marshaled all the expertise and resources available from the ISAF SW Command at Camp Leatherneck. Because of our agency’s ability to move around the country and with contacts in the capital of Kabul it would be my job to facilitate both the central government and private investors participated in the project. Obtaining permission to refurbish a bombed-out cotton mill property for building the new distribution center and cooperation from the government to lease the new property to private investors seemed straightforward enough. Successful development and lease of the property would create several hundred jobs in the community. It would also enable remote villages to transport their farm produce to larger cities for sale.
We had a “big” advantage with the central government cooperation being part of US DOD. They needed our cooperation and funding at so many levels that signing off on agreements for land improvements and construction wasn’t much of a problem. The local district government agreements were also of little challenge. The location of the property to the ring road and Kandahar made it easier to get an Afghan business owner in Kabul interested in utilizing the soon-to-be-built facility for expansion. The USMC, USDA and US Corps of Engineers worked on the design and project plan for a demo of the existing structures and building new structures. I worked on facilitating the investment and sustainment plans.
In a previous blog, I wrote about the test sorting and packing-house in the village of Marjeh. It was proceeding as planned with high expectations for the season’s first produce crop to be processed the following fall. Sites had been chosen for 4 more locations but there needed to be a central storage and distribution center ready before funding and construction of additional sites could begin. All of this was very ambitious for a war zone. Keep in mind commerce continues in war as in peace. It is just much more difficult for all parties involved to continue operations. If successful, the combination of projects to repair the agriculture value chain in Helmand would help counter terrorism and reduce poppy production.
The Bolivian agriculture contractor had worked on the major government test farm in Kabul and with a large fruit juice company. Through that introduction, I began discussing the potential of the southern distribution center. Typical of networking anywhere in the world these introductions to Kabul business owners opened doors and provided insights into successful work with the Kabul government.
Not only was the Kabul businessman interested in managing the Geresk facility, he wanted to install some of his processing equipment in the facility. He processed fruits for juice in Kabul in a modern factory. The packaged juices were distributed throughout Afghanistan except for the southern part of the country. It was too expensive to transport the finished products with no local cold storage and distribution. His plan was to initially produce concentrate in Kabul, ship the concentrate to Gereshk. In Gereshk, he would install TetraPak packaging equipment to fill and package juice for consumers in Kandahar and other southern locations.
He would also install the cleaning, grading, sorting, and packaging equipment for bulk produce for shipment to the UAE. (think apples, carrots, squash, and melons) It seemed like a natural combination utilizing an experienced Afghan business owner to not only manage the facility but invest capital in equipment. We also needed cold storage like that shown below at the juice company in Kabul.
Regulations prevented USG from turning over the facility built with US Tax dollars to a private business owner. The acceptable plan was to turn the facility over to the Kabul government who would, in turn, lease the facility back to the private business. If you have any experience with a business you can probably anticipate the challenges that arise from this type of arrangement. This is where not only local laws and policies but the naïve approach to business from our government gets in the way of success.
The goal was to provide jobs and improve the agriculture value chain. Involving a weak central government and our government regulating what could be done 7,000 miles from DC destined this project to failure.
There was more interest from investors in the facility. As the word spread about its construction other potential suitors came forward. My newly formed network of Afghan business owners and the Bolivian led me to Argentina! A grape/winemaker/raisin processor was looking for grape/raisins to process in their offseason. Southern hemisphere/northern hemisphere weather cycles could be leveraged if he could make the connections with Afghanistan grape/raisin growers. Afghanistan produced some of the best raisins in the world. Our indigenous team had been working with growers in the valley west of Kandahar to improve their yields and quality. Global standards were a little different than local standards for processing, packaging, and shipments.
These producers were having challenges getting their raisins to international markets. It could be a real opportunity for them if we could facilitate the processing and packaging of raisins in Gereshk for shipment to international markets. The Argentinian company was offering to furnish process equipment and training for the Gereshk facility. They needed a dependable quantity and quality of raisins for shipment to Argentina.
Just when it seemed everything was coming together for a successful conclusion leadership in DC started changing their support for us and for the Marines in Helmand. The Marines were to draw down their numbers at Leatherneck turning over security to local Afghan National Police. The director of our agency lost his battle with funding in Congress and decided to leave the task force. That left us with a series of “acting directors” and directions to transition all projects to other agencies. Everyone had to follow the new government policy.
It is probably worth dedicating one blog describing the chaos that occurs once these decisions are made in a vacuum. The impact our agency, all the other agencies we supported, the Afghan government, Afghan business owners, local government, and most of all Afghan citizens was substantial. I’ll include the SIGAR (special inspector general of Afghanistan reconstruction) report to show how politics and government policy changes often ignore the root cause of disasters.