Zambia’s position in the latest Fraser Index has plummeted. The country’s placing in the index, which measures how a country is seen as a mining investment destination, has fallen from 30 to 58 – a very big drop.

You may be tempted to ask: “Does this matter?” The answer is that it does. Although the index is not based on hard data – but rather the perceptions of mining company executives – these perceptions influence investment decisions.

If a country is perceived as a risky investment destination, international companies will not build mines, factories, or open branches of their businesses in that country. One would be entitled to again ask: “Does this matter?” The truth is – it does.

International investment into any country should be welcomed. International investment – especially fixed investment (where investments lead to the construction of factories, or mines, or other fixed assets) – has many positive outcomes.

Increased investment leads to more jobs, can boost the productivity of the receiving country, creates additional tax revenue for the government, as well as seeing the transfer of skills and technology to people and businesses in the host country.

A study by the African Development Bank found that international investment in the primary sector (such as mining) also results in positive outcomes for human development indicators such as health, education and living standards. Now, if a country is not perceived as a place where investors will want to put their money, this will have a damaging effect on jobs and economic growth, and will, overall, be negative for a country. So being an attractive investment destination is something that should be strived for.

International investment results in positive outcomes for health, education and living standards. 

The Fraser Index measures the attractiveness of a country for international mining investors. It is published annually by the well-respected Canadian think-tank, the Fraser Institute. The latest index was released in February 2018 and shows that Zambia is no longer one of the world’s top 50 most attractive mining destinations.

Mining industry executives and managers are asked their opinion on fifteen issues that contribute to investment attractiveness. These include uncertainty around existing regulations, uncertainty around environmental regulations, the legal system, the tax system, availability of skills and labour, labour regulations and political stability. The answers are then collated to determine how attractive a particular jurisdiction will be for mining investors.

As shown above, in the latest index, Zambia was ranked 58th out of 91 jurisdictions, nearly 30 positions down on the previous year’s survey, when the country was ranked 30th (out of 104 jurisdictions). Zambia’s ranking in Africa has also declined – from 5th place in the previous survey to 7th place.

Finland tops the global mining index. Ghana (ranked 22nd overall) and Mali (25th) are the top mining jurisdictions for investment in Africa, followed by the 43rd-ranked Botswana.

The highest-ranked country in Africa in the last survey, Ivory Coast, saw a precipitous drop in the latest survey. In 2016 it was ranked 17th overall and first in Africa, but is now 78th in the world, and 11th in Africa. Reasons for this almighty decline were trade barriers, regulatory uncertainty, political instability, and labour issues.

According to the index, there were three main reasons for Zambia’s decline. These were its taxation regime, the poor state of its geological database, and, rather worryingly, political instability. Zambia has long been considered a haven of peace among unstable neighbours that include undemocratic Angola, the perennially conflict-ridden Democratic Republic of Congo, and economically precarious Zimbabwe.

Over the past ten years Zambia’s ranking on the index has been broadly downward. There were significant improvements in 2014 and 2016, but each time this was followed by a fairly large fall the following year. The survey may also reflect investor sentiment regarding policy decisions made by governments in a previous year.

What lessons can Zambia draw from this year’s Fraser Institute rankings?

The main one is that perceptions matter, and that seemingly isolated developments in areas like policy, taxation and political stability can combine to produce a dramatic reappraisal of a country’s desirability as a mining investment destination.

And when this happens, investors are reluctant to build new mines or expand existing ones, which in turn reduces the economic and fiscal contribution the industry makes to the economy. Ironically, this cancels out the desired effect that the harsh policy, tax and political changes were intended to produce in the first place.

The bottom line is that political and economic decisions taken by host governments do not exist in a vacuum; they have an effect that is both real and immediate on their mining industries and on general investor perceptions. The annual Fraser Index is a timely reminder of this.

See also:  Solwezi lures foreign investment