Implementing the SME Strategy Action Plan for Developing Afghanistan's Cashmere Sector (February 2011-January 2013)

1. Donors and government must not crowd out private sector involvement and investment Apparent opportunities need to be examined critically to see if there is a plausible answer to why the private sector is unable or unwilling to exploit these opportunities. If there is no sensible answer - and no plausible theory about how the government is able to assist the private sector to USING THE PRIVATE SECTOR TO IMPROVE exploit these opportunities - then the PRODUCTIVITY IN FISH FARMING government should not intervene. In light of this, In Bangladesh, the government traditionally this Action Plan calls for further investigation in a sought to improve the productivity of fish number of areas to see whether this rationale farming through extension services under which exists or whether the government is better public servants provided advice to farmers. advised to partner with the private sector, or step Unfortunately extension service officers had few aside. incentives for good performance and a dysfunctional working culture prevailed.

2. Due consideration must be given to incentives and service delivery channels An analysis of the private sector and the incentives faced by it showed that private input Even where there is a plausible answer as to why suppliers (such as nurseries) had a commercial the private sector is unable or unwilling to exploit incentive to provide useful advice to farmers as a opportunities in a timely manner, before acting, means of improving their performance and of consideration should be given to seeing whether differentiating what they did from their competitors. They were provided with information on improving client productivity 5 which they pushed out with spectacular results. An Action Plan for Afghanistan’s Cashmere Industry February 2011 government can act to change the incentives faced by the private sector enabling it to deliver the required goods or services. There should not be a presumption that Government is the answer; often adjusting the incentives faced by the private sector, or utilising their expertise and existing service delivery channels will deliver a more cost-effective solution.

3. Due consideration must be given to public-private partnerships Even where changed incentives will not deliver a solution, because bringing private sector experience and skills to bear on a problem being faced by an industry or sector is often critical to the development of effective solutions, a private public partnership may be a better course of action than government provision or intervention. As a result, due consideration will be given to this as a possible option.

4. Government must plan appropriately for its exit from the stage As the capacity of the private sector increases, government will face a further challenge: knowing when to step aside. It may be that by underwriting investment in a move up the value chain, the Government is able to reduce the uncertainty associated with that investment, enabling the private sector to confidently invest in similar projects. At this point, government should cease its direct involvement and seek to play a supporting role.

5. Government must maintain its enabling environment role Creating an enabling environment is the key role of government. Other areas where government action may be warranted include: • Transfer of skills and knowledge; • Reducing uncertainty, and consequent risk; • Capturing externalities; and • Provision of public goods. Objectives of the Cashmere Action Plan In addition to the general objectives for the SME Strategy set out above, the objectives of the Cashmere Action Plan are to:

1. Move the industry up the value chain through repatriating key parts of the value chain from neighbouring countries;

2. Increase processing of raw cashmere fibers;

3. Enable producers to earn higher prices for raw fibres;

4. Create a significant number of sustainable jobs;

5. Reduce the cost of high quality inputs for the regional/national carpet/textiles sector;

6. Create the conditions in which there may be an opportunity for the private sector to move further up the value chain into weaving of yarn. Afghanistan’s Action Plan for its Cashmere Sector has been developed jointly by the ministries that have a role in developing this sector. It was finalised after extensive consultation with stakeholders including donors, the private sector and industry associations. 6 An Action Plan for Afghanistan’s Cashmere Industry February 2011 The intention behind this document is to improve clarity, accountability and coordination between stakeholders by setting out a comprehensive plan of support for this sector including specific actions and associated deadlines. Progress against it will be assessed quarterly and while the Action Plan lasts for two years, it will be reviewed periodically to ensure that it remains relevant and includes emerging issues and the government’s proposed response to them. This sector Action Plan will then be formally revised in January 2013. Background to Cashmere Cashmere is the fine soft-haired undercoat of the cashmere goat which can be harvested during moulting in the Spring or from carcases during winter, to manufacture garments. The two main producers of raw cashmere are China and Mongolia. Afghanistan produces 6% of the global supply of cashmere, amounting to 1000 metric tonnes annually and $18 million in value. Figure 4: Global production of raw cashmere4 3% 7% 18% China Mongolia Afghanistan Iran and other 72% Production In 2007 cashmere from only 30% of Afghan cashmere-producing goats was being harvested, with the remaining 70% of Afghan goat farmers unaware of the value of cashmere or the channels for trading the product. USAID’s ASAP (Accelerating Sustainable Agriculture Programme) has made significant efforts to raise awareness of the opportunities for selling cashmere goat hair, reaching over 170,000 goat herders over 2008-9. However, with a goat population of 7.3 million5, there is still potential for Afghanistan to increase the volume of cashmere it produces by focusing on improving harvesting techniques and establishing clear market linkages for producers. Quality There is a range of quality attributes that will determine the price of raw cashmere including diameter, fibre length, colour, curvature (crimp) and purity. The finer and lighter coloured cashmere 4 Cashmere Value Chain Analysis, Afghanistan, Frauke de Weijer, ASAP, USAID, 2007 5 FAO Livestock census, 2003 7 An Action Plan for Afghanistan’s Cashmere Industry February 2011 found in China and, to a certain extent, in Mongolia commands a higher price premium, as the table below indicates: Figure 5: Prices for Mongolian cashmere by quality, USD6 DIAMETER Superior Grade I Grade II Grade III COLOUR 13.0-15.5 micron 15.51-16.8 micron 16.81-17.6 micron 17.61-19.0 micron White 34 31 29 22 Light Grey 34 31 29 22 Grey 33 31 28 21 Brown 33 30 28 21 On average Afghan cashmere is darker with a diameter of 16-17 microns which means it is of a lower quality and cheaper than that of Mongolia and China. To compound this, the majority of Afghan traders mix the higher quality bahari7 cashmere with the lower quality skin8 cashmere to create an average product at an average price. This limits the end use of the cashmere and leads to limited differentiation of quality in the product being exported. Processing The raw or greasy cashmere hair collected from the goat needs to undergo a number of processes to transform it into high end garments. These processes can be summarised as follows:

1. Harvesting (either by combing or by shearing & de-hairing)

2. Scouring

3. Machine de-hairing

4. Spinning

5. Weaving or knitting

6. Manufacturing and finishing An overview of the value chain is provided below: Figure 6: Value addition, US$ by kg of greasy cashmere 6 LeCraw, 2005, quoted in Cashmere Value Chain Analysis, Afghanistan, Frauke de Weijer, ASAP, USAID, 2007 7 Bahari cashmere is obtained through combing or shearing live animals during spring; this hair is clean, with no chemicals applied. The bahari is therefore of a higher quality. 8 Skin cashmere: Obtained from dead skins during winter, this hair is unclean, brittle and has chemicals applied. The skin is therefore of a lower quality. 8 An Action Plan for Afghanistan’s Cashmere Industry February 2011 500 450 400 350 235 300 250 Value Added 200 Production Cost 150 100 100 196 24 50 21 96 64 16 36 0 Greasy De-haired Yarn Sweaters Sweaters (wholesale) (retail) The first stage will be undertaken by farmers in Afghanistan. There are two means through which a farmer can harvest goat hair: Combing: This is a cleaner method that delivers a higher yield and a longer fibre length. However combing is considered more difficult technically by goat herders, and takes more time for inexperienced combers. Moreover, it is a less flexible method as it requires the livestock to be sufficiently near the home to be combed. Shearing and de-hairing by hand: The cashmere is not as clean when sheared and there is a high likelihood of cutting the hair, thereby reducing fibre length. However, shearing is a more flexible approach (the goats can be sheared quickly and the women can de-hair whenever is convenient), and exporters currently express a preference for shearing. Subsequent phases of processing are typically undertaken outside of Afghanistan – in China, Iran or Europe. In recent years China has outlined an aggressive strategy for controlling the value add chain for cashmere, and European companies maintain control of marketing and branding in the retail arena. This makes it difficult for Afghanistan to access the value at these stages of the value chain. However, with expertise from Foreign Direct Investment, opportunities exist for Afghanistan to make inroads in machine de-hairing and scouring; spinning and some basic manufacturing. Trading As mentioned above, Afghan traders mix bahari and skin9 cashmere, with the consequence that Afghanistan has no price differentiation for varying quality of cashmere, with traders and exporters paying a ‘one size fits all’ price for all types of Afghan cashmere. This practice means that Afghanistan misses out on market opportunities at both the high quality and low quality level. Both ends of the quality spectrum are important. Whilst high quality cashmere will command a better price, the World Bank and the CCMI (Camel Hair and Cashmere Manufacturers Institute) predict fast growth in the middle-lower quality range and for blending and manufacturing into cheaper garments. 9 Skin cashmere: Obtained from dead skins during winter, this hair is unclean, brittle and has chemicals applied. The skin is therefore of a lower quality. 9 An Action Plan for Afghanistan’s Cashmere Industry February 2011 More broadly, the current value of imports for carded / combed cashmere fibres reached a healthy $189,841,385 in 201010, according to the UN, with the following countries representing the major global importers of carded / combed cashmere: Italy, Republic of Korea, China, UK and India. The Scope of the Cashmere Action Plan Exclusions A wide variety of factors impede businesses of all types in Afghanistan. While improvements have been made, the environment in which businesses have to operate is often poor: many government processes are overly complicated, bureaucratic and riddled with corruption; reliable supplies of electricity and water are not always available; and industrial land is in short supply. Solving these problems is critical to the success of SMEs and indeed to all businesses in Afghanistan. For the most part, these issues are being dealt with elsewhere, in the Government of Afghanistan’s infrastructure development program, in the Ministry of Commerce and Industry’s review of the legal framework for business and in its work to streamline licensing processes. Many of the issues are province specific and will be picked up in the provincial development plans which are the companions to this and the other 6 sector strategies. There is a broad need to formalise this and other sectors. Once again, this is, for the most part, covered in the Formalisation Strategy being developed by the Ministry of Commerce and Industry (MOCI). Progress to date Much work has already been done in the sector across a number of the priority areas, including: • The launch of Afghan Macau’s operations in Herat in March 2006. This Chinese Joint Venture has established a scouring line and installed mechanical de-hairing equipment. • In 2009, the USAID programme, ASAP, completed an awareness raising exercise for Afghan goat herders, training over 170,000,416 herders and distributing 150,000 combs throughout Afghanistan’s 34 provinces. • In March 2009, the Mazar-i-Sharif International AgFair and Cashmere Exhibition was held to promote Afghanistan’s produce, livestock, and cashmere on the world stage. • In May 2009, the first Cashmere Road Show took place in Panjsher Province, with participation from both U.S. and Afghan government officials • Emergence of more prominent, higher volume traders such as Sodis Masood Co. Ltd, an Afghan cashmere trading company based in Herat that buys quality cashmere from regional goat herders. In 2009 the company sold 20 metric tons of the product to a European buyer, worth $130,000. 10 UN, COMTRADE, 2010, 510531 (Fine animal hair, carded/combed, of Kashmir (cashmere) goats) 10 An Action Plan for Afghanistan’s Cashmere Industry February 2011 Action Plan The Table below describes a number of issues/impediments to growth faced by the textiles industry. For each issue it sets out a policy response, identifies the government agency that is responsible for ensuring that this response occurs and sets a completion date. The Ministry of Commerce and Industry will be responsible for co-ordinating the implementation of the activities outlined below, and for designing a Monitoring and Evaluation framework to track progress against the activities below. Issue No. Action Responsible Completion Agency Date Increasing production Cashmere has 1. Expand USAID’s awareness programmes (including the distribution of combs) to goat MAIL May 2012 traditionally only farmers across Afghanistan. As before, the incentives of low investment and immediate been harvested from income options should be stressed. 30% of the goat The current baseline is 171,416 herders trained – there is now a need to revisit these population herders to re-affirm the messages and to identify any barriers to entry into the cashmere market

2. Link non-harvesting farmers up with established cashmere traders in Afghanistan MAIL (MOCI January 2013 support) Improved grading and quality control No price 3. Government and external agencies/donors to train both producers and exporters on MOCI January 2013 differentiation methods of grading raw cashmere. between Afghan Training in understanding quality and grading could be linked to the second wave of cashmere of varying awareness raising programmes mentioned above quality, and limited knowledge of quality 4. Link processing companies with producer organisations that are able to supply what is MOCI (AISA January 2013 grades required support) Producers do not know how to meet 5. Undertake an assessment of the cashmere characteristics of indigenous breeds in MAIL (MOCI May 2012 Afghanistan (international buyers often prefer to purchase particular types of 11 An Action Plan for Afghanistan’s Cashmere Industry February 2011 Issue No. Action Responsible Completion Agency Date commercial grading cashmere, according to colour, length or diameter of fibre, or style). support) requirements, and buyers are unable to gain reliable supplies of graded cashmere, Exporters mix bahari 6. Capacity building for exporters to demonstrate the benefits of keeping bahari and skin ACCI May 2012 and skin cashmere separate and targeting different markets: • Bahari (high quality) sent to Europe • Skin (lower quality) sent to China Average quality 7. Distribution of information on breeding, harvesting and handling techniques, including MAIL December cashmere from an awareness of the pros and cons of shearing versus combing. 2011 Afghan goat population 8. Feasibility study for the introduction of goat breeds that produce longer, thicker, and MAIL December whiter fibres for the long-term success of the Afghan cashmere industry 2011 Expand processing in Afghanistan Limited processing in 9. Demonstration visits to Macau Cashmere’s operations in Herat by cashmere farmers, MOCI December Afghanistan traders or businessmen who express an interest in expanding their activities in the 2011 trade Limited skills in 10. Encourage investment by reducing the risk of investing by international and local MOCI December processing and investors in processing by identifying suitable government owned facilities which can 2011 manufacturing be leased. A first step for this exercise will be leasing out Government land to experienced investors.

11. Market study into the demand for cashmere garments for the ”fair trade” or artisanal MOCI January 2013 market sector, accompanied by a feasibility study for R&D for the necessary 12 An Action Plan for Afghanistan’s Cashmere Industry February 2011 Issue No. Action Responsible Completion Agency Date equipment and techniques to set up a manufacturing facility in Afghanistan. Assist exporting11 Low income for 12. Profits would increase with a greater differentiation of the quality of cashmere (as MAIL (ACCI January 2013 exporters and poor tackled above) and support in the building of end market linkages to expand the support) market linkages in the operational scale of exporters. international arena - a To encourage this, more direct market linkages with end-buyers will be established by comparison between establishing a cashmere association or guild to act as an agent for the industry in the production price interactions with foreign buyers: and export price of Afghan cashmere • The creation of an association or nationally recognised network of cashmere reveals that the growers and other actors in the value chain would also provide a useful margins for traders channel through which to co-ordinate many of the activities outlined in this are extremely small. document. • Detailed plans for the creation of such a federation could consider starting at the provincial level and then scaling up.

13. Develop a detailed plan for hosting a website on which contact information for buyers MAIL (ACCI May 2012 and sellers can be posted. The website should be linked to the emerging market support) information development systems being developed by MAIL. This should be an open site with a wide geographical coverage, including Asian cashmere suppliers and those in Europe, North American and Australia, Marketing Poor marketing of 14. Develop a strategy for expanding into niche markets such as: MAIL (AISA December Afghan cashmere and MOCI 2011 • “Fair Trade” support) • Handmade by Afghan women 11 For a more detailed outline of activities in this area, the Ministry of Commerce and Industry is developing a Trade Policy to be completed by the end of 2011. 13 An Action Plan for Afghanistan’s Cashmere Industry February 2011 Issue No. Action Responsible Completion Agency Date • Ecological Fibres (no chemical dyes used) Such a strategy should take consideration of involving private sector actors in neighbouring countries and forging partnerships with emerging groups such as Fabindia12 and Fair Trade forums. Moreover, a marketing strategy should also design training programmes to equip the sector with the skills to enter the niche markets referenced above.

15. Develop a global marketing strategy for Afghan cashmere based on lessons learnt from MOCI (with January 2013 donor-funded cashmere marketing projects in Mongolia, Ladakh in India, Kyrgyzstan AISA support) and Tajikistan. This strategy should consider past suggestions including: • Raising awareness about and the reputation of Afghan cashmere in key markets through a cashmere quality communications campaign • Community bulk marketing schemes and pre-season advertisement of prices for quality classes. 12 The Indian company Fabindia now links over 40,000 craft based rural producers to modern urban markets. 14