The Zambian government is prioritizing administrative reform and tackling the ease of doing business to stimulate investment in energy and mining
Zambia is determined to regain its position as the world’s biggest copper miner and is putting numerous reforms in place to encourage foreign and local private sector investment, the country’s Minister of Commerce, Trade and Industry, Chipoka Mulenga, said.
He was addressing the “Spotlight on Zambia” seminar hosted by Zambian legal firm Musa Dudhia & Co and Webber Wentzel in Sandton on Tuesday, 16 November 2021.
Minister Mulenga said the priority sectors that the government is targeting are energy, mining and tourism.
In energy, the focus is to diversify the energy mix towards renewable sources and reduce dependence on hydro-electric power. A new Green Economy Ministry has been created to address the renewable energy sector. Zambia will make the necessary changes to policy and legislation to encourage international skills and investment.
It will also reform its petroleum sector, with an emphasis on harmonizing trade policies with neighbouring countries to ensure they are the priority sources of petroleum imports. In electricity, government is putting cost-reflective tariffs in place and plans to invest in generation and distribution.
“We have learnt that taxing sectors will not grow the economy, we have to allow business to flourish by offering attractive and consistent policies, especially to those with capital-intensive projects,” he said.
In mining, the government’s target is to raise current output of 800,000 tonnes/year of copper to three million tonnes a year by 2026 and regain the top slot in global copper mining. To encourage investment in new and existing mines, effective 1 January 2022, it is reintroducing the full deductibility of Mineral Royalties Tax, as well as increasing the permitted carry forward of unutilized interest expenses from five to 10 years and allowing a 50% per year capital allowance deduction for mineral processing equipment. There will be a zero withholding tax on dividends from mining operations. Government is reviewing the mining tax regime to create a stable, predictable and competitive environment.
“This will be the most desirable government you have ever worked with,” he assured the audience.
Nitesh Patel, a member of the Zambia Economic Advisory Transition Team, said the administration’s current agenda contained a number of priorities.
The first was economic transformation and job creation, through the development of a range of sectors, apart from mining. A new SME Ministry has been created to foster entrepreneurial activity. A second priority was civil service reform, to create a better functioning civil service. Almost all the politically appointed permanent secretaries have been sacked and replaced with qualified, experienced personnel. A third was environmental sustainability, and a welcome development was that Zambia was granted a billion pounds of sustainable funds at COP 26. A new Ministry of Green Economy and Environment has been established.
A fourth priority for the New Dawn administration was to tackle Zambia’s $14.5 billion external debt crisis. A likely rescheduling of debt was imminent, with discussions under way with euro bondholders. A fifth priority was fiscal discipline, particularly the removal of costly fuel and fertilizer subsidies which were generating large profits for middlemen, the elimination of wasteful spending on infrastructure and improvement in revenue collection.
Education and skills development are key, Patel said, and the government is recruiting 30,000 teachers and healthcare professionals. A new act on infrastructure development of rail and roads, involving the private sector, will be introduced. Roads will be tolled and there will be commercialization of some state-owned entities.
Apart from incentives for the mining sector, the government has also introduced new tax incentives for Multi-Facility Economic Zones, e.g. zero dividend withholding tax for 10 years and special corporate income taxes, starting at 0% for the first ten years.
Feedback from the private sector
In a panel discussion, Jonathan Veeran, a partner at Webber Wentzel, said lessons that Zambia could learn from South Africa’s mistakes included the importance of policy certainty, economic succession planning and creating a conducive environment for foreign investors.
Governments need to take a long-term view on mining, and increasing taxes and royalties was not the best way to realise the sector’s benefits, Veeran said. It was better to focus on creating permanent jobs and subsidiary industries. By planning for mine closure, it was possible to avoid creating ghost towns. Creating the most encouraging environment for investment in mining entailed having a transparent policy environment with clear timelines for processing permits and well-trained administrators.
Veeran added that governments could create a “one-stop shop” to facilitate liaison with the various regulators involved in processing different mining permits. Foreign investors will not wait 3-4 years for permissions to begin mining – they will go elsewhere.
Fraser Alexander CEO Keith Scott said the main opportunities for miners in Zambia lay within existing resources, as well as new developments, in minerals such as copper, gold, manganese and zinc. Arshad Dudhia, managing partner of Musa Dudhia & Co, added there was more potential in emeralds, rare earth minerals and cobalt.
Scott said the right enabling environment would decrease the cost of copper mining, allowing existing mines to extend their lives. In a mature mining country like Zambia, there were plenty of opportunities to mine waste dumps, an activity with environmental as well as economic and social benefits.
He said mining was energy-intensive. The power system should provide a mixture of baseload and renewable power, and, as in South Africa, miners should be allowed to generate some of their own green power. Mining companies wanted to understand not only the costs of mining, but also the carbon costs.
Kachinga-Wankunda Phiri, business development lead at Enel Green Power, said the Zambian government could facilitate private participation in energy generation, either by facilitating projects where IPPs could transact directly with end-users such as mines, or by procuring power directly from IPPs to sell to end-users, which is done in South Africa. Government could also do both.
Key considerations for Enel were a country’s political/economic stability, and Zambia had demonstrated a smooth transition from one government to another; a robust legal and regulatory framework that supports private participation; and, where government was procuring power directly, Enel looked for a transparent, structured and competitive process.
He said the credibility and creditworthiness of an offtaker was important, and some questions around Zambia’s power utility, Zesco, remained.
On the legislative side, Zambia’s electricity grid needed a guaranteed open access framework, Phiri said, as currently access could be refused by the national utility. There should also be a regulatory framework on how pricing of that access would be calculated.
Clement Chiwele, the Chief Engineer in Zambia’s Office for Promoting Private Power Investment in the Ministry of Energy, said the government wants to ensure that the mining sector, which consumes about 54% of the country’s power, has sufficient for its needs. Currently there is a power shortfall of about 300 MW, which is constraining both existing and new mining development. In recent years, drought has limited power generation from hydro-electric sources.
Zambia has only realized about 2,000 MW of its potential 10,000 MW of hydro-electric power resources, Chiwele said. At present, hydro power provides about 84% of the mix and solar power only about 4%, but there was infinite potential for more solar power, as well as more potential from wind and geothermal sources. The government will revise its policies to provide more guarantees for financing renewable energy generation by the private sector.
Also needed to encourage mining exploration is a good-quality digital geoscientific and mining cadastre, which needs to be easily accessible, Scott said. Global funding is available to undertake more extensive mapping. Zambia could use international conferences to brand itself as an investable mining destination, which has been done successfully by countries like Australia and Burkina Faso.
Arshad Dudhia pointed out that Zambia already has the right laws to encourage investment but it was critical to execute them efficiently. One quick win would be to fix the existing mining cadastral system. Another would be to clarify the ownership of mining waste deposits, which has become a major issue with several cases currently before the Court of Appeal. The government needs to pass legislation to make it clear who is entitled to sell that waste.
A third quick win would be to make appointments to the Mining Appeals Tribunal. The current process involves an appeal to the Minister, then to the Tribunal and finally to the courts. But since the Tribunal is not functional, it is preventing matters from moving to court, Dudhia said.
Minister Mulenga said the government understood that multiple licences, causing delays in processing, meant opportunities were being lost. The intention was to migrate to a “single licence” policy in the first quarter of 2022. He also appreciated the industry’s concerns about the urgency of setting up the Tribunal. Names of appointees were currently being considered by the Ministry of Mines.