Caspian Business Journal

The Surge in Central Asia’s Military Contracts: Who Can Benefit?

The introduction of new regulations by the Obama Administration now means that businesses in Central Asia can bid for military contracts. Michael Druckman takes a look at how entrepreneurs are set to benefit from the move.

The United States spends $1 million a year on each of its troops posted in Afghanistan. That money goes to some things that must be paid for in the United States: their training; their the salaries; and their weapons. But it also goes to things that could be procured in the region: food, fuel, and housing. U.S. President Barack Obama in February ordered 17,000 U.S. troops in Afghanistan and 30,000 more in December – more than doubling the number of U.S. military personnel stationed in what some have called “the graveyard of empires.”

Whoever are those doing business in Central Asia might think about the politics, morality, and wisdom of that escalation, they should also be aware, that it presents huge opportunities. The (re)establishment of a network of supply chains that run through the former Soviet Union to troops in Afghanistan, and the adoption by the Pentagon of new procurement rules have cleared the way for the U.S. military to buy millions of dollars more worth of goods in Central Asia. Washington DC-based think tank the Center for Strategic and International Studies (CSIS) estimates that the U.S. military’s “demand for non-military supplies in 2010-2011 will be 200%-300% more than [in] 2008.” To profit, entrepreneurs just need to learn how to win those contracts.

The Northern Distribution Network

Until last year, more than 70% of supplies for U.S. troops fighting in Afghanistan arrived by boat in Karachi and were then hauled overland some 1,200 miles to Peshawar and across the Khyber Pass. In the summer of 2008, that supply route came under increasing pressure, though, which “started off as merely annoying petty thefts but became ever more organized and coordinated with gunmen regularly blowing up bridges, roads, and trucks,” according to a September 1 article by the Central Asia-Caucasus Analyst, published by Johns Hopkins University.

As the US force in Afghanistan expanded in early 2009, the Pentagon began to work hard to establish a network of alternative supply routes, called the Northern Distribution Network (NDN). These new routes stretch thousands of miles from ports on the Baltic and Black seas – where cargo ships land containers of military supplies – across Russia and through Central Asia, entering Afghanistan from Uzbekistan and Tajikistan, according to the CSIS. These routes use many of the same roads, rails, and ports built by the USSR to fight its war in Afghanistan. The network also includes air hubs at Uzbekistan’s Navoi Airport and Kyrgyzstan’s Manas Airport.

The first rail shipment of non-lethal supplies routed through the NDN entered Afghanistan in late March of 2009 after transiting Russia, Kazakhstan and Uzbekistan, according to the Congressional Research Service. Since then, more than 5,000 supply containers have been shipped to the war theater via the NDN, U.S. Deputy Assistant Secretary of Defense for Afghanistan, Pakistan, and Central Asia David Sedney told a Senate Committee on Foreign Relations subcommittee in December. “We will expand this number in 2010 to meet the new demand,” he said. “These new supply routes from the Baltic and Black Seas through Central Asia have provided an urgently needed supplement to the single route through Pakistan that had been used exclusively since 2001,” wrote S. Frederick Starr, chairman of the Central Asia-Caucasus Institute at Johns Hopkins University. “It was also hoped that the NDN would be less subject to the armed attacks unexpected delays and pilferage that have hampered the movement of goods along that same Karachi Peshawar road.”

Local Procurement

In part to keep the NDN free from the sort of petty banditry and armed assaults from which the Khyber Pass route has suffered, Defense Department officials decided to launch a local purchasing program. “To encourage a positive response [to the NDN], the U.S. embassies in the region announced that the United States hoped to purchase many non-military goods locally to transport to troops in Afghanistan,” according to the Congressional Research Service.

The Pentagon also hoped to get the governments and peoples of formerly Soviet Central Asia involved in the war effort in a positive way, to integrate Afghanistan into the region’s trade networks, and to save money. After all, why ship goods all the way from America that could be bought in Central Asia? Local procurement could reduce costs and ease the strain on the long supply lines stretching across the world.

“We save money on shipping, while local economies benefit from increased trade,” Sedney told the Senate subcommittee. “We think [it's] important both for the cooperation with local governments, the benefits to the local economy, and it’s also a way to more economically address the needs we have in Afghanistan.” Launching a broad local purchasing effort in Central Asia, however, required cutting through some red tape, changing some regulations. In early 2009, Pentagon officials started making key decisions that cleared the way. Reporters working for the Open Society Institute’s online news site Eurasianet.org learned some of the details of this decision-making process through documents it obtained with a Freedom of Information Act request this fall.

An April memo from U.S. Central Command  (CENTCOM) commander Gen. David Petraeus ordered procurement officers to “make every attempt, within operational, legal and regulatory constraints, to use [South Caucasus/Central and South Asian States'] services and products.” And then Deputy Defense Secretary William Lynn in December signed a waiver lifting the “procurement prohibition” of section 302(a) of the 1979 Trade Agreements Act, “which had prevented Central Asian contractors from obtaining Defense Department contracts,” according to Eurasianet. Meanwhile, the real experts had already started to work on the details. They gathered on October 22 for a conference at the McNamara Headquarters Complex near Washington D.C. – named after Defense Secretary Robert McNamara, who oversaw the escalation of the Vietnam War – to plan for the escalation of the Afghan War. Called “SC/CASA Local Procurement Deep Dive,” the conference included representatives from the US Defense Logistics Administration, US Central Command, the U.S. Transportation Command, U.S. Department of State, and the Office of the Secretary of Defense, U.S. Trade Representative, Defense Procurement and Acquisition Policy Office, General Services Administration, and the Joint Contracting Command-Iraq/Afghanistan, among other agencies.

“We are here … to talk about purchases in the South Caucasus and Central and South Asian States,” Defense Logistics Agency Director Navy Vice Admiral Alan Thompson said in his opening remarks. “I think that many of you know that is an important inducement to host nation support for the Northern Distribution Network, which was brought on line as a way of increasing the shipment of needed supplies into Afghanistan.” Though many see benefits in the local procurement drive, some analysts say it won’t do much to help regular people in the region. Given Central Asia’s reputation as a world-class center for corruption, they expect many contracts to members of the ruling elite of Central Asian countries: friends, relatives, and cronies. But Defense Department spokesman Lt. Col. Mark Wright told Eurasianet that “The Joint Contracting Command Iraq/Afghanistan is well-positioned to insure that the award and administration of contracts in theater are properly executed … This [NDN] will just be a normal commercial network.”

Opportunities

This local procurement drive will bring big money to Central Asia. In Afghanistan, where local purchasing is already the rule for the U.S. military, the U.S. Agency for Economic Development procured $280 million worth of goods and services from Afghan companies last year, employing 20,000 Afghans, according to U.S. Ambassador in Afghanistan Karl Eikenberry. Meanwhile, the U.S. military has awarded  $1 billion in contracts to Afghan companies to build and service military facilities, according to the CSIS.

Already, as part of the establishment of the NDN, tens of millions of dollars have started flowing to Central Asian governments. For example, the new deal the U.S. struck with the Kyrgyz government for the use of its facility at Manas Airport – after some hard bargaining that included a declaration by the Bakiyev government  in February that the Americans had 180 days to vacate the base – involves $60 million in rent, $30 million in infrastructure improvements, $30 million in air traffic control system upgrades at the airport, $20 million for counter narcotics operations, and $10 million for counter terrorism, according to the Congressional Research Service. The U.S. government is spending money on other things for the base, too: construction and repair of infrastructure, water supply, and jet fuel. The jet fuel supply contract is worth some $170 million a year, according to the Central Asia-Caucasus Analyst.

But to take advantage of these and other contracts, local business people need to meet certain guidelines. They can be vague, acronym-filled, and boring. For example, according to Defense Department rules contractors must be able to document that the supplier or source is “positioned for success,” meaning: “(1) they must be capable of shipping or delivering a substantial portion of the anticipated monthly volume at a reasonable price; (2) they must meet an acceptable quality standard; (3) they must be financially capable of performing; and (4) they must not pose unreasonable risk,” according to CSIS. Now what does that mean? To walk would-be local suppliers through the process, US embassies, chambers of commerce, and military facilities across the region have been organizing workshops and seminars.

For example, the base at Manas, known to U.S. government types as “Transit Center Manas” held a seminar October 15 at the Hyatt hotel in Bishkek. “Most Kyrgyz companies would like to get into government contracting, but they don’t know how to and what we are looking for,” said Staff Sgt Courtney Frederick, 376th Expeditionary Contracting Squadron, according to the Air Force press service. More than 200 local Kyrgyz business people attended the seminar, including representatives of construction companies, food suppliers, manufacturers, and transportation firms. “Hopefully, with this seminar, we’ll get a bigger list of vendors to choose from when bidding for contracts. The seminar will also help them further their business, not just in Kyrgyzstan, but in Afghanistan, Iraq, and everywhere the U.S. government is sanctioned,” said Capt. Duke Santos, director of contracting for the 376th Expeditionary Contracting Squadron, who organized the seminar.

This effort to get Central Asian entrepreneurs involved in supporting the Afghan War is a high priority. Tatiana Gfoeller, the U.S. ambassador to Kyrgyzstan, spoke at the October 15 seminar in Bishkek. “Several Kyrgyz companies are already working with the Transit Center, and it is my hope and expectation tht this conference will help others [do so], too,” she said. “This helps your business, while also helping the U.S. government obtain the best quality and price for these contracts … I have no doubt that our military will find many advantages buying Kyrgyz.”

Speakers at the seminar covered topics from business ethics to which types of contracts are available, from how to write winning bids to upcoming projects that will go out for bids. It was one of at least four such seminars in Kyrgyzstan last year, including three others in Bishkek and one in Kyrgyzstan’s second city, Osh. Participants told the U.S. Air Force press service they found the workshops useful. “If everything goes well, our company is able to secure a contract with the U.S. government, there’s a lot of things we can learn from them. We are looking forward to furthering our relationship while working with the Transit Center and the U.S. government,” said Mira Kalybekova, of the Ak-Beta Wool Felt Clothing Company. “I think this is a very good opportunity for the Kyrgyz people,” said Nelly Yen of the Waybs Business Consultant Company. “I believe with more contacts from the U.S. government and with a lot of companies cooperating with the U.S. government, it will make our economy more fruitful.” T

hose who were unable to attend one of the seminars in Central Asia but are interested in supplying local goods to the U.S. military in the region may want to visit: Federal Business Opportunities, Doing Business With the Department of Defense, and The Defense Logistics Agency. However, the information infrastructure for local procurement in formerly Soviet Central Asia is underdeveloped. By comparison, a nonprofit called the Peace Dividend Trust has smoothed the process of finding local suppliers in Afghanistan with its online marketplace, which caters to the U.S., UK, and Canadian aid agencies.

Eikenberry, the American ambassador in Kabul, and Gen. Stanley McChrystal, the American military commander in Afghanistan, have both endorsed the site and urged U.S. government agencies to use it. The site allows buyers to find local Afghan business people marketing goods and services ranging from solar panels to photocopying, laundry service to courier service, heavy machinery to coal, and food to beverages. Perhaps the creation of a similar site, focused on formerly Soviet Central Asia, presents a business opportunity.