September 2007

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

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

3. ASMED GEOGRAPHIC FOCUS

4. ACTIVITY OVERVIEW TO DATE

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. MARKET LINKAGES - EXAMPLE Sec. Gutierrez inaugurates the Afghanistan International Carpet Fair, August 26, 2007 • 1st 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

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

8. SHEEP STOCK AND WOOL PRODUCTION – PHASE 1 • Afghanistan produces 20% of the wool needed for carpet production • To produce 100,000 m2 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. 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. 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. 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. 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. 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 m2) • 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. 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