- It is of great concern to note that despite showing a positive picture, the mining industry has not stimulated corresponding growth in other sectors. The performance of this sector will now be assessed on the basis of growth of linkages with other sectors and impact on the lives of ordinary Zambians. ( President Edgar Lungu, August 2018)
- Zambia is rich in minerals but we haven’t fully managed to convert that wealth for the benefit of the people. We need to know where to improve and what changes to make so we can harness this wealth to benefit not only current, but also future generations of Zambians.(Ina Ruthenberg, Zambia World Bank Country Manager, 2016)
- China frankly faces up to the new circumstances and new problems in Sino-African relations. We will strengthen mutually beneficial cooperation with African countries in agricultural, manufacturing and other spheres, helping these countries convert their resource advantages into developmental advantages.( Chinese President Xi Jinping,2013)
- Both economic theory and recent empirical evidence suggest that FDI has a beneficial impact on developing host countries. But recent work also points to some potential risks: The potential risks do appear to make a case for taking a nuanced view of the likely effects of FDI. Policy recommendations for developing countries should focus on improving the investment climate for all kinds of capital, domestic as well as foreign. (IMF’s Finance and Investment Magazine)
By Kalima Nkonde
The expectation from Zambians was that following the liberalization of the economy and the unprecedented privatization of the 1990s through to the dawn of the 21st century, the country would have started reaping the benefits by now from foreign direct investment (FDI). Alas, ordinary Zambians have not benefited in terms of raising their standards of living with improved education, health, social benefits and other economic benefits. While the shareholders of foreign companies have become richer, the custodians of copper and other mineral resources and land are wallowing in poverty.
In 1990, Zambia had an estimated FDI of $2.655 billion. By 2017, the quantum of FDI had reached an estimated $16.973 billion which is an increase of 539 % or an average annual increase of 20% per year. Zambia’s FDI is dominated by large mining investments from Canada, Australia, United Kingdom, Switzerland, USA and China mainly by large infrastructure projects.
The evidence of the fact that Zambia has not benefited is there for all to see based on the current dire economic statistics of the country, mismanagement not withstanding. The total estimated all inclusive public debt as recently announced by the ministry of finance is about $16 billion with about $9.4billion in foreign debt. The economic growth for 2018 is projected at 4.5%, unemployment is at an all time, foreign reserves are in precarious position of $1.8 billion, Zambians are likely to be subjected to over 17 taxes and levies in total moving forward, the latest fiscal deficit is about 7.6% .This clearly shows that FDI has not trickled down into the domestic economy directly and indirectly through multiplier effects.
In order to understand properly how Zambia has not benefited from FDI, it is important that the FDI analysis is divided into the two main categories: private foreign direct investment which is mainly dominated by companies from Western countries, and the Chinese Government, through its State Owned Enterprises. Both types of foreign direct investments have not sufficiently benefited ordinary Zambians nor sufficiently impacted the economy in a positive way.
Foreign direct investments from Western countries in Zambia are concentrated in mining. According to the World Bank, mining accounts for 12% of Zambia´s GDP and 70% of total export value and it constitutes 62% of foreign direct investment and so the analysis takes mines as representative of other private foreign investors in terms of impact on the economy. Zambia has not benefited sufficiently in four main areas: job creation, foreign exchange, tax revenue and promotion of supply chain industries. This view is not only supported by the writer, but also government, civil society, donor agencies and the World Bank.
Job creation
Mining Foreign direct investment has not brought much benefit through job creation thus contributing to the high poverty levels in Zambia. There are a number of factors that have contributed to this. First and foremost, mining technology has advanced in the 21st Century such that most of the tasks that were done by humans are now being done by machines reducing the need for workers in certain areas.
Secondly, unlike in the 20th Century when the old Zambian mining houses like ZCCM used local suppliers located on the Copperbelt towns like Kitwe and Ndola, the current ones import millions worth spares parts and other supplies from outside. Mining companies have not been interested in the growth of indigenous firms that might supply them with products and services for production but instead have opted to import these goods and services from overseas affiliates thus exporting jobs to foreign countries. In addition, there have not been any forward linkages in terms of industries developed to add value to copper which could have created additional jobs.
Thirdly, there is suspected widespread corruption in the issuing of work and resident permits as evidenced by some foreign workers who have permits and doing jobs that can be done by Zambians. The Zambian immigration and labour laws are not being enforced due to suspected widespread corruption in these departments, thereby denying citizens’ jobs.
Insufficient Tax revenue
Foreign direct Investment in mining which accounts for 62% of total investment FDI in Zambia has not benefited ordinary Zambians as far as revenue generation through taxation is concerned. It is generally agreed that Mining houses are not paying sufficient taxes to cater for social needs such as health, education, water and sanitation and for development projects. This low revenue contribution by mines and other foreign investors, has partly contributed to the $16 billion public debt and a myriad of taxes levied on ordinary Zambians to cover for the revenue shortfall.
In order to put mining contribution to the Zambian treasury in perspective, it is vital to compare Zambia with two neighbouring countries. In Namibia, mining revenue contribution to government revenue is about 25%, whereas Botswana mining contribution to government revenue is 45% .On the other hand, Zambia’s mining contribution to Government revenue is estimated at a paltry 4% of GDP.
There is no doubt that the mining sector has not been paying its fair share of taxes and have been involved in sophisticated tax avoidance schemes using highly skilled accountants and lawyers. There are mines that have been here for over twenty years and have never paid any income tax as they declare tax losses all the time but in the meantime their shareholders abroad do receive dividends. The former Minister of finance, Mr. Alexander Chikwanda alluded to this in his speech to Parliament in 2015, when he bemoaned the lack of benefits from mining.
“Sir, despite Zambia being endowed with vast mineral resources, the country has not realised maximum benefits from the sector’s potential to support growth and enhanced socio economic development. The House may wish to note further that the contribution of the mining sector revenue as a percentage of GDP remains low at 4 percent. Similarly, the contribution of the mining sector to the national budget has remained minimal even after the Government doubled the mineral royalty rate from 3 to 6 percent. Further, provisions on capital allowances and carry forward of losses eliminated potential taxable profits. Mr. Speaker, the tax structure was simply illusory as only two mining companies were paying Company Income Tax as most of them claimed that they were not in tax-paying positions.”
The Zambian government’s attempts to extract sufficient benefits from mining through taxation have all miserably failed. The following are four taxes that government has attempted to impose but later reversed, after mines black mailed government: 5 % Windfall tax, Mineral royalty tax of 20%, VAT rule 18 revision and 7.5% copper concentrate import tax. All the reversals were done 100% without extracting any concessions from the mines. The negotiation strategy was poor on the part of government because of not engaging experts to negotiate deals. How do you move from 25% maximum Windfall tax to zero, 7.5% Copper concentrate tax to zero, 20% Open pit Royalty tax to 9% without getting anything in return. These were bad deals, period.
Insufficient Foreign exchange earnings
In theory, copper mining contributes 70% to Zambia’s export earnings. This figure is misleading as very little comes back in the country as it is retained by the mines. This is due to the lop sided development agreements, whose renegotiation is long overdue. If sufficient export earnings were to come back in the country, the kwacha could have been stronger. And as a country dependent on imports, the cost of living to ordinary Zambians will be much lower than it is now due to cheaper imports.
The issue of Zambia deriving insufficient benefits from copper exports one that is independently confirmed by the International Monetary Fund (IMF) in one of their country report.
“Care is needed with the interpretation of the export shock in the case of Zambia. Given that not all the copper export proceeds return to the country because most mines are foreign owned. Staff estimates that at least 40% of exports do not return to the country.” The IMF report noted.
According to Opposition Green Party Leader, Peter Sinkamba, as quoted by Lusaka Times of 27 August, 2018, very little foreign exchange from copper exports came back to Zambia in 2017.
“Last year, Zambia exported US$8.1 billion worth of goods around the globe. Of this figure, copper contributed US$6.1 billion, accounting to 75.7% of total exports. You will note that the mining sector contributed more than US$6 billion. Ask me how much of that money hit the accounts in Zambia and you will be shocked, less than a billion hit the accounts here at home,” he said.
Lack of forward and backward linkages
Zambia has not benefited from the FDI from the mines as the sector is not contributing to the development of backward and forward linkages through the mining supply chain. Mines have not actively promoted the establishment or expansion of indigenous firms that might supply them with intermediate products but instead opt to import these goods from overseas even from affiliates.
In 2016, the World Bank Mining Investment and Governance (MInGov) Study, observed the following: “Throughout the survey, key stakeholders noted the need for the mining industry to more effectively use local products and services. Currently there is no national supplier development policy for the industry. Consequently, 95% of goods and services used by the mining industry are imported.”
On the other hand, there has also not been any forward linkages through the establishment of manufacturing and processing industries to add value to the raw material – copper- which could have resulted in not only creating jobs but to transfer various technologies to Zambia.
Structure of Chinese foreign direct investment
In regard to Chinese State Owned Enterprises (SOE) investments in infrastructure projects, despite the contracts being in billions of dollars, the impact on Zambian in terms of benefits in the short to medium term is very little as the 4Ms- money, material, men and machinery-involved in the projects, benefit the Chinese economy by and large with little multiplier effect in Zambia. Chinese investment in Zambia is approximately $4billion.
The money from Chinese loans does not come to Zambia but remains in China to purchase materials and machinery. In addition, Chinese Contractors on infrastructure projects, in large measure, use their own skilled and unskilled labour. Zambians employed on these projects are mainly those doing low skilled, low paying jobs like digging trenches, and in the process there is very little skills transfer to locals.
In addition, the fact that there are no joint ventures formed between Chinese and Zambian companies like China requires all foreign investors investing in China, there is no technology transfer to Zambian companies so as to build capacity for Zambians to enable them build their own roads, power stations, airports etc in future like the Chinese do at home. Although the Zambian government requires all Chinese companies doing infrastructure projects in Zambia to sub-contract 20% of their work to Zambians, this requirement is not complied with by Chinese SOEs.
The net effect of all this is that ,there are no sufficient jobs, no foreign exchange, no skills transfer, no technology transfer and no linkages to other sectors linked to the so called construction “boom” by Chinese infrastructure projects which is apparent in the Zambian economy.
How Zambia can benefit from foreign direct investment
In general, for Zambia to benefit from foreign direct investment, two broad strategies are required. First, there is need for a Mining Sector Development Strategy. Zambia has a national development plan, but no mining sector development plan. The mining development strategy should address the issues raised in this article. Secondly, there is also a need for a Chinese Cooperation Strategy which should address the issues raised in this article and my last article “How China is slowly colonizing Zambian economy.”
In the writer’s experience with a successful African country, as a Private Sector Development expert, these strategies ought to be preceded by carrying out in-depth studies. The resulting Consultancy reports should subsequently be subjected to wide consultations with major stakeholders. The practice of most organized and economically successful countries is to ensure that major policy initiatives are preceded by detailed studies which should form the basis of rational decision making in order to avoid embarrassing policy reversals. In the short term, some of the actions that government can do are outlined below.
In conjunction with the mining houses and other stakeholders, government should develop a local supply strategy. The need for such a strategy is supported by the World Bank Study, Mining Investment and Governance (Min Gov).Foreign suppliers to mines are captive companies and if Zambia was smart, as part of negotiations to reduce, for example, the Royalty tax from 20% to 6% or other mining tax concessions, Government could have demanded, as part of bargaining, that mining houses compel or persuade their suppliers to relocate their industries to Zambia and thus provide jobs and transfer skills to Zambians as themselves are no longer creating many jobs due to automation. Alas, government caved in without getting anything in return.
The issue of captive suppliers relocating to Zambia is not theory and has been proved by one Mining house- Mopani Copper Mines in 2014. One such joint venture supported by MCM is between Shawonga Enterprises Limited of Zambia headed by London Mwafulirwa and ZINPRO Engineering of South Africa which have partnered to form ZINPRO Zambia Limited, to specialise in shaft and structural steel rehabilitation works. ZINPRO Zambia Operations Director, London Mwafulilwa hailed MCM for supporting joint ventures which would benefit the country.MCM Chief Executive Officer Danny Callow was quoted by Lusaka Times of 28 July,2014 that the Company was encouraging formation of joint venture partnerships between local contractors and internationally-recognized foreign firms wishing to do business with the mining company.
“We have a deliberate policy that encourages foreign manufacturing companies wishing to do business with us to partner with local companies or involve Zambians in their shareholding structures. This, we believe, will help build capacity of local companies, encourage skills transfer and give a competitive edge to the local firms while improving quality and efficiency,” said Mr. Callow.
In terms of promotion of forward linkages, government should also consider heading hunt for investors in car electric batteries to locate to Zambia as raw materials in terms of copper, cobalt and manganese. The electric car revolution is on the horizon and the time to act is now. China is at the forefront of this revolution. The other industries for adding value to copper which can be developed include: wire and cables, roofing and plumbing, Public health Anti microbial products as the Copper motor rotor. These will create jobs which copper mining is not producing due to technological advances but also promote exports and transfer technology.
In order to maximize revenue from multinationals, Zambia should consider assistance from the donor community especially Scandavian countries by temporarily outsourcing the management of Zambia Revenue Authority like Britain helped us in the establishing of the ZRA in the first place. There is need for cultural change at ZRA so that the suspected corruption and poort work ethic is stamped out. This piece meal introduction of ridiculous taxes aimed at Zambians and leaving the elephants in the room-multinationals- is not only unfair but political suicide.
There is also a need to change the current Mining tax unit to Transfer pricing and Mining unit so that other multinational corporation are also monitored with regard to transfer pricing and Tax avoidance. In order to make it effective, the unit should be manned by highly skilled personnel with experience in mining, tax avoidance and transfer pricing schemes of multinationals. The reason why mines have been getting away with “murder” is that Zambia does not have highly skilled mining tax experts.
Conclusion
There is no doubt that the benefits of foreign direct investment to the host country far exceed the costs. The benefits, however, depends on how the host country negotiates its deals with Multinationals and how it monitors compliance with agreements signed, stands up to the arm twisting and blackmail attitudes of multinationals and how its people resist the temptation of being bought and corrupted by foreigners thus betraying the country.
As Zambians, we should accept and take collective responsibility for not having benefited from FDI like other countries have. We should learn the lessons, correct mistakes of past failures and not blame investors. Foreign investors including the Chinese are here to advance their own interests. There are not charities. It is up to us to negotiate better deals and not go cap in hand and give in to blackmail. The threats of them pulling out resulting in loss of jobs and revenue should be taken with a pitch of salt. The experience of other countries like China as well as those in Africa- Botswana and Tanzania-have shown that if you stand your ground to the arm twisting and blackmail by investors, they are ready to negotiate win-win deals as they need us as much as we do, especially after they have pumped in billions in investment in money, material and machinery, which they cannot easily forgo by pulling out.
The overriding reason why Zambia has not benefited from foreign investment is because of greed by Zambians especially in public service from the bottom to the top who have sold their souls to the mining houses, the Chinese and other foreign investors by putting their personal interests above those of the nation and future generations. We have to be honest with ourselves that we are our worst enemies and people in charge of self guarding our national interests have been compromised.
There is no country in the world that was developed by foreign investors only, not even our “beloved” China. If no action is taken, the country will continue to be a producer of raw materials, a trader and an importer of products which can easily be manufactured locally. The high level of unemployment and poverty levels will continue, and at some point, the youth bubble will burst. Do not say you were not warned. The writer is a Chartered Accountant by profession and a Private Sector Development expert. He is an independent finance and economic commentator/analyst. He has lived in England, South Africa and Botswana for over 25 years.
