What are the main factors Zambia needs to address to make the country an attractive mining destination, unleash billions of dollars of foreign investment and create a stronger economy?
The question featured prominently in the Zambia International Energy Conference and Exhibition (Zimec), held in Lusaka on 23-24 June 2016.
A stable mining policy regime – particularly taxation of mines – is probably the most important factor, because it affects the willingness of investors to commit their capital to new mining ventures.
Ina Ruthenberg, Zambia country manager for the World Bank Group, said Zambia’s mining policy had changed several times in recent years. She described policy instability as a “vicious circle” that reduces investment, raises costs, stalls new projects and raises the regulatory burden on the industry – which ultimately leads to more policy instability.
Calling for the building of trust and common interest between the parties, she said: “The World Bank stands ready to help. But leadership must come from government and the industry.”
Jyoti Mistry, director and tax specialist at PriceWaterhouse Coopers in Lusaka, cited Chile and Botswana as good examples of countries with stable mining policy regimes. They had used their mining revenues over the years to build up considerable stabilisation funds, which have proved useful during commodity-price downturns.
Mistry said a sound, stable mining policy is all the more important as the mining industry competes for investment with other less risky sectors, such as the digital economy. Mining is considered a high-risk investment and takes many years to produce a return, while the digital economy can produce higher returns in less time.
A reliable and affordable energy supply emerged as a second key factor for increased mining investment in Zambia. Mining consumes about 50% of the country’s energy supply, and power-generation capacity has not been able to keep pace with economic and population growth – barely 22% of the Zambian population has access to electricity.
Clement Sasa, manager at the Office for Promoting Private Power Investment (part of the Ministry of Energy and Water Development), unveiled a range of power generation projects planned for the next 5 to 10 years, and beyond. These range from coal and hydro projects both large and small, to solar, geothermal and biomass.
Manda Mwale, senior manager in renewable energy from the Copperbelt Energy Corporation, said: “The power shortage has created a new momentum to redouble investments in the energy sector, and private capital and investment are expected to play a key role. It is not possible for government to do it alone.”
These new power projects cannot come soon enough for the Zambian mining industry. Matt Pascall, director of operations at First Quantum Minerals (FQM), Zambia’s largest mining company, said the company’s new Sentinel mine in North-Western province was still not receiving electricity through some 600 km of new power lines it had built, at a cost of $95 million. This has constrained the mine’s ability to operate at full capacity, affecting output and jobs.
“The administrative efficiency of government is a key factor in facilitating investment”
The administrative efficiency of government is another factor which helps to unlock mining investment – and indeed, investment in general. The faster various government departments are able to grant land-title to potential investors, and approve the various permits and licences, the sooner new business ventures can get off the ground. Untenable delays, on the other hand, can try the patience of investors and put projects at risk.
FQM’s Pascall said a number of potential investors in Kalumbila, where the Sentinel mine is based, had given up starting shops, farms, hotels and other businesses because it had taken more than four years to approve land-title. In response to a question, Clement Sasa, manager at the Office for Promoting Private Power Investment, also conceded that land-title could be problematic for the mini-hydro projects that are being planned, as many of them are situated on traditional land.
Mining investment is one thing, but it is equally important for a country to make the most of that investment so that it benefits its citizens – and that is all about fiscal policy. This point was made by Anand Rajaram, Zambia country director for the International Growth Centre (IGC).
Fiscal policy involves the decisions that a government makes about the collection of tax revenue, and how that revenue is spent. Rajaram cited the fiscal policy of Chile, a major copper-producing country, as a good example. There, stringent fiscal rules ensure government does not overspend during periods of high copper prices, and that surpluses are put into a stabilisation fund and a pension reserve fund. These surpluses had generated savings of $14.8 billion by April 2016, protected social programmes during the downturn, and ensured that infrastructure and portfolio investments were efficiently invested.
In contrast, Rajaram said that Zambia had not “grasped the opportunity” of the mining-investment boom of the last 15 years. According to him, despite high copper export revenue and high levels of tax revenue from mining, Zambia’s deficit and debt levels had grown sharply, and there had been no saving during the boom to help cushion the country in a downturn.
Rajaram’s conclusion was that “Zambia needs to strengthen institutions for fiscal management; make binding commitments to deficit reduction; and make some hard choices to eliminate waste and inefficiency.”
The point was echoed by Tobias Rasmussen, resident representative of the International Monetary Fund (IMF). He said that Zambia needed “credible plans” to control government over-expenditure amidst reduced revenue earnings, which was responsible for the surging fiscal deficit. “What’s key at the moment is to have that medium-term plan which in a credible way addresses the fiscal imbalances,” he added.