By James Mackenzie and Hamid Shalizi
KABUL, Feb 10 (Reuters) - Eleven years after its first big mining privatisation, the Afghan government has abruptly cancelled the contract, highlighting the unpredictable nature of investing in a sector seen as crucial to the country's economic development.
The Ghori factory in northern Baghlan province is the country's only significant cement producer, and the four million tonnes of cement Afghanistan imports each year is a heavy drag on its aid-reliant economy.
As one of the largest selloffs since the Taliban fell in 2001, it is also a barometer for doing business in Afghanistan, where the conflict with Islamist militants already makes it a daunting place to invest.
The government says it was not properly notified about a change in ownership at Ghori last year, and the company owes it millions of dollars in unpaid taxes and fees since it was privatised in 2006.
"This is a very big legal concern," said Zabihullah Sarwari, a spokesman at the Ministry of Mines and Petroleum.
He said authorities were informed of the sale of the original shareholdings only once it had gone ahead, and had not met or approved the new owner by then.
The government must be notified of ownership changes in advance, in part to prevent front investors buying on behalf of hidden interests.
"The ministry was notified by a simple letter that this person is now the shareholder," Sarwari said, adding that substantial royalties and lease payments were also due.
The new owner was Afghan businessman Javid Jaihoon, who bought out shareholders in Afghan Investment Co (AIC), a group of investors including the brother of then-president Hamid Karzai which had the right to operate the Ghori cement works.
Ever since the initial acquisition in 2006, the project has been dogged by disputes over broken promises, unpaid levies and contract violations. The involvement of Karzai's brother Mahmoud added a political dimension.
"This (the cancellation) was a political decision, although I had paid all government fees and have left cash in an Afghan bank that the government can take," Jaihoon told Reuters. He said he was not acting on behalf of the previous owners.
According to Jaihoon, the decision to cancel the contract was taken without formal arbitration or legal process, and he only found out about it while on a trip to Turkey.
He added he had invested almost $60 million in Ghori and brought it to near-full capacity. It employees 1,500 people and produces 1,200 tonnes of cement a day.
"If you don't like me, OK, but why touch the factory?"
WILL INVESTORS COME?
The ownership of the Ghori plant is up in the air, although it is expected to continue operations for now.
Sarwari said it would be put to international tender, a proposal Jaihoon dismissed.
"Do you think anyone would come to Afghanistan and open a factory?"
But Afghanistan needs foreign investment if it wants to develop industry and mining.
The country has mineral resources estimated anywhere between $1-3 trillion, and President Ashraf Ghani's government has pinned hopes on mining to replace billions of dollars in foreign aid it currently relies on.
It estimates that illegal mining, some controlled by the Taliban and some by unscrupulous businessmen, costs it about $300 million a year in lost tax and royalty revenue.
There is widespread acceptance that major infrastructure projects like the huge Mes Aynak copper mine will only begin operating once security improves and huge transport infrastructure is built.
But foreign diplomats say they are disappointed at the failure to build simpler industries including cement, where Afghanistan has abundant raw materials and strong local demand.
"Obviously it's something Afghanistan should be doing. It's crazy to be importing cement over long distances," said William Byrd, a development economist with the United States Institute of Peace in Washington.
The Ghori case underlines how challenges to developing industry in Afghanistan go beyond security concerns.
From the time the 1980s-era plant was privatised 11 years ago, the government faced accusations it gave the original AIC investors suspiciously generous terms both for the cement works and an associated coal mine.
"Some of the favours granted to AIC border on flagrant violation of even the most basic standards," said a report prepared last year for Integrity Watch Afghanistan, an independent group advocating transparency.
Mahmoud Karzai could not be reached for comment on the deal.
Sarwari said the government was seeking to recover more than $3.5 million in unpaid royalties from the coal mine.
But it remains unclear why it took so long to cancel the contract, given many of the complaints pre-date Jaihoon's involvement.
Two officials with knowledge of the case said the mining ministry, headed by an acting deputy minister after the former minister resigned and with many senior posts unfilled, was struggling to deal with the Ghori dispute.
"The ministry doesn't have the mechanism for registration, it doesn't have the mechanism for inspection. How do you expect they'll go to arbitration?" one asked. (Editing by Mike Collett-White)
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