1. INVESTMENT OPPORTUNITIES IN AFGHAN CARPET SECTOR Afghanistan Small and Medium Enterprise Development ASMED September 2007

2. 2 DISCUSSION OUTLINE ASMED BACKGROUND PROGRAM SUPPORT TO CARPET INDUSTY VALUE CHAIN ANALYSIS INVESTMENT OPPORTUNITIES GDA POSSIBILITY OPIC/ASMED GDA

3. 3 ASMED GEOGRAPHIC FOCUS

4. 4 ACTIVITY OVERVIEW TO DATE

5. 5 ASMED SUPPORT TO CARPET INDUSTRY Training and capacity building Export Readiness Program Product quality improvement Assisting associations in advocacy Re-establishing market linkages Support in creation of collateral material for marketing –Website, brochures, banners Establishment of a business information center –Overseas importers directory –Carpet trade data base and design bank Participation in international trade fairs Organizing in-country carpet fairs Potential grant and GDA (PPP) support

6. 6 1 st International Carpet Fair $4 million sales (orders) Co-sponsors –EPAA –Afghan Carpet Guild –Kabul Carpet Association Participation –DoC Delegation Facilitated by ASMED 11 buyers $1.6 million sales (orders) –Secretary of Commerce –110 exhibitors – 50 international buyers MARKET LINKAGES - EXAMPLE Sec. Gutierrez inaugurates the Afghanistan International Carpet Fair, August 26, 2007

7. 7 CARPET VALUE CHAIN Adequate operating capital (LoC) needed.

8. 8 SHEEP STOCK AND WOOL PRODUCTION – PHASE 1 Afghanistan produces 20% of the wool needed for carpet production To produce 100,000 m 2 of carpet: –1,400 MT of raw wool needed –280,000 new sheep required Cost of $28 million Low investment priority Iraq potential source

9. 9 IDENTIFIED GDA OPPORTUNITY: IRAQ AND AFG Vertically-integrated firm with both Afghan and Iraqi investors who are also American passport holders High-quality Iraqi wool would be cleaned by a defunct state-owned enterprise undergoing privatization –Indications are that this will be a low-cost supplier Export of cleaned wool to Afghanistan where it moves through the manufacturing process Sales of finished carpets occur in high-value markets where these investors have existing relationships

10. 10 SHEERING AND CLEANING OF WOOL – PHASE 2 Without a large stock of sheep improvements in this stage are precluded Margins are thin in any case Occurs typically only over 4 weeks per year (late April through late May) Not an investment opportunity

11. 11 SPINNING OF WOOL – PHASE 3 Machine spinning represents a significant immediate investment opportunity –No known machine spinning occurs in Afghanistan Mostly in India, Pakistan and Iran –Demand is strong and consistent –Requires a total capital outlay of only $700,000 $820,000 net revenue in YR-1 $1.3 million/yr from YR-2 onward –Strong consistent demand and modest capital investment is a low- risk combination

12. 12 DYING OF WOOL – PHASE 4 Margins are thin Little value added in this stage Lack of affordable gas fuel a constraint –Fire wood used ($140,000 value) –Not environmentally friendly Alternative means to be explored Not an investment opportunity

13. 13 WEAVING OF UNIFINISHED CARPETS – PHASE 5 Adds the most critical contents for saleable product: –Unique designs –Esteemed history of weaving 10,000 weavers (100,000 m 2) –Management of labor force difficult –Existing networks and relationships already exist –Third most profitable stage Refer to Exhibits 2 and 3 Second highest value addition High input costs Low investment opportunity

14. 14 CARPET FINISHING – PHASE 6 Greatest investment opportunity Nearly all finishing and export occurs in Pakistan –Accounts for 60% of value addition –85% of annual net revenue in the value chain Investment for cut & wash facilities in AFG is modest –$200,000 to $500,000 for 100,000 m2 of finished carpets –Adequate credit needed $10.5 million for unfinished carpet $3.5 million for transport Net revenue $11 million in YR-1 Customs/export challenge