Zambia is one of many mining countries that does not score well on governance. This compromises new mining investment, hampers efficient collection of taxes and reduces the overall contribution of mining to the economy.
That’s according to the third edition of Role of mining in national economies, a 2016 report by the International Council on Mining and Metals (ICMM).
Citing a definition formulated by the World Bank in its Worldwide Governance Indicators, the report identifies three key components of governance:
- the process by which governments are selected, monitored and replaced
- the capacity of the government to effectively formulate and implement sound policies
- the respect of citizens and the state for the institutions that govern economic and social interactions.
“Good governance generally implies that the rule of law is respected, corruption is kept in check, political institutions are stable, government is effective and citizens are able to hold government to account,” the report says.
Good governance has “a dramatic effect” on the magnitude of the economic and social contributions of the mining sector, and is also linked to higher levels of Gross Domestic Product (GDP) per capita – a measure of the average income of the population.
“A country that is well governed is more likely to negotiate good terms with mining companies; to collect, manage and spend revenues effectively to generate broad-based growth and development; to create the enabling environment to enhance employment; and to succeed in using mining to catalyse longer-term economic diversification,” the report says.
It also identifies a positive correlation between the quality of a country’s governance, and its investment attractiveness. “Governance matters not just for current investments, but also for future potential investments,” the report says. “Poor governance is therefore likely to constrain the amount of investment that a country receives.”
Companies contemplating a major mining investment in a foreign country place huge value on good governance. In their assessment, good governance means there is a greater probability of consistent, fair treatment over the life of their investment; they can be more confident of the safety of their employees and assets; and they can count on greater transparency around their contribution to the economy.
The report ranks the quality of governance of the top 50 MCI (Mining Contribution Index) countries – i.e. those where mining makes a significant contribution to the national economy; Zambia is one of them. The two key factors measured in the rankings are government effectiveness and regulatory quality, as defined in the Worldwide Governance Indicators (WGI).
Zambia is towards the bottom, scoring 36 out of 100 in government effectiveness and 32 in regulatory quality. Towards the top of the rankings is Chile, the world’s largest copper producer, scoring 84 on government effectiveness and 92 on regulatory quality. Botswana stands out as the highest-ranked African country, scoring 65 in government effectiveness and 72 in regulatory quality.
“In summary, the evidence shows that good governance is lacking in many of the top 50 MCI countries: 74 percent rank in the bottom half of the WGI effectiveness score, 66 percent rank in the bottom half of the WGI regulatory quality score and 78 percent of those covered by the [broader Resource Governance Index] are rated at levels below that considered satisfactory for good governance of natural resources,” the report says.
Zambia scores 36 out of 100 in government effectiveness
However, all is not gloom, and the report highlights a number of positive signs.
“Many countries have strengths to build on, such as relatively strong scores on ‘institutional and legal setting’ and ‘safeguards and quality controls’. They therefore have some of the key foundations in place to build upon for improved governance in other areas.”
The report also highlights initiatives such as the Extractive Industries Transparency Initiative (EITI). The initiative makes available to the public all production figures, tax payments, licenses, contracts and other key minerals extraction data in a signatory country. Zambia has long been a signatory, and the seventh annual report of the initiative in Zambia (ZEITI) was released last December.
“Companies can also play their part by recognising limited government capacity in countries where they operate, and do their part to enhance governance, for example, by agreeing to disclosure as a means to enhance transparency and accountability in government revenues, or by taking steps to build capacity in local governments,” the report says.
In this regard, the Zambian mining industry is on record as strongly supporting the EU-funded Mineral Production Monitoring Support Project. This project is designed to build institutional capacity within the Ministry of Mines and Minerals Development; to improve the regulation and monitoring of minerals production, and information transparency and sharing between the industry and government departments.
Over time, these improvements should allow the “already fairly substantial government revenue and employment contributions from mining” to have a larger and more sustained positive impact on economic and social outcomes, the report says.
An important implication of the ICMM report is that good governance is a two-way street, where investors trust governments to be efficient and fair, and governments trust investors to contribute to national development.
SEE ALSO: Good Governance, Great Outcomes