A worrying development emerged last week at this year’s ZIMEC conference in Lusaka, which, if not addressed, could well result in the failure of Zambia’s plans for diversification.
Mukula Makasa, Director of Enterprise Development at the Zambia Development Agency, told the conference audience that Zambia was now moving away from pure extraction of minerals to adding value to those minerals through beneficiation and manufacture.
“Government’s agenda is now to promote value addition,” he said. “We are trying to create jobs through industrialisation and diversification – that’s where the emphasis is now; that’s the decision we’ve made as a country. I rest my case.”
This is troubling, because diversification in a mineral-rich economy cannot happen in a vacuum; it needs a successful primary economy as a stepping stone.
The merit of a diversified economy is undeniable, and well-informed policies to stimulate downstream sectors are necessary for sustained economic growth. But the view that diversification policies and attracting mining investment are somehow mutually exclusive is highly problematic.
The government is moving towards a policy emphasis on value-addition rather than extraction
According to a Harvard University report, the most important role that mining plays in the diversification agenda, is that it finances strategic investments made by the government. Mines make massive contributions in terms of taxes and royalties, and this can be used by the public sector to develop and grow downstream industries.
Because mines are complex, capital-intensive operations, they also create an environment where human capital and cutting-edge technology can develop, which ultimately makes downstream industries viable. Furthermore, it is the mining companies themselves who are most likely be the new industries’ first and most important customers. New “infant” industries will, at least initially, be dependent on mines to grow and become more globally competitive.
The continued growth of the Zambian mining industry is therefore critical. As the World Bank noted in a 2015 report, Making Mining Work for Zambia: “[Growth] in production will start to slow after around 2019. Along with the decline in production, there will be a decline in government revenue, mining industry jobs and foreign exchange. However, production levels can increase over the long run if there is a new wave of investment.”
John Gladston, Government Affairs Manager at First Quantum Minerals (FQM), Zambia’s largest mining company, picked up this point at the ZIMEC conference. “What worries me in Zambia is there’s no pipeline of mining projects at the moment,” he said. “The early-stage pipeline of projects here in Zambia is so scant that it’s almost empty. This should be a deep worry for Zambia.”
Jackson Sikamo, Chairman of Chibuluma Mines on the Copperbelt, said that he understood the new focus on value-addition, but cautioned that it must be built on the firm foundation of a growing, thriving extractive sector. The government needs to put “attractive investment policies in place” to encourage the kind of high-cost, high-risk exploration programmes which eventually lead to greenfield mining ventures.
“In the absence of a pipeline of exploration programmes, our production at some point will start tapering off,” he said in an interview. “So even if we develop secondary industries in value-addition, they will not flourish because there will be no mineral input into those operations.”
In his conference address, Nathan Chishimba, president of the Chamber of Mines, welcomed the continued ramping up of FQM’s Sentinel Mine to full production, and the progress of Mopani’s $1.1bn modernisation programme. But he referred to them as examples of “green shoots”.
“Those green shoots should encourage the government to do more to make sure they grow into big branches and forests going forward. So, I’d like to send a message to our government that even as we look at where we are going, let’s not consider that it’s all done and dusted; there is still a lot to do.”
Zambia’s attractiveness – or lack of attractiveness – as a mining destination was a recurring theme at the conference. Delegates heard how Zambia was endowed with incredible mineral wealth, yet international investors were not “beating down the door” to come and develop these resources. Why was this?
For the mining representatives present, the major reason was the lack of a low, stable and reliable mining-tax policy, even though they acknowledged the welcome progress that has been made on the fiscal front recently. Also cited were the high cost of power as well as the general cost of doing business in Zambia.
For various international representatives, hostile Zambian media coverage was a factor. “I don’t think many people have mentioned it, but there is the issue of headlines,” said Vuyo Ntoi, Investment Director for Africa Infrastructure Investment Managers, part of the giant Old Mutual financial services group in South Africa and one of the continent’s largest investors in infrastructure projects. “For instance, you had the stories of FQM and the big tax bill – that’s not going to lure any energy or mining investors here.”
An interesting dimension to the conference was the presence of a speaker from Chile. The country is the largest copper producer (5.3 million tonnes in 2017) and is ranked by The Economist Intelligence Unit as “boasting an excellent business environment (in 13th place) on a par with developed economies in North America, Europe and Asia”. It is also a diversification success story: despite a strong policy focus on mineral extraction – or perhaps because of it – mining accounts for less than half of Chile’s exports, and its contribution to overall tax revenues is barely 6%.
Eduardo Lopez, director of the Chilean Copper Commission, outlined the reasons for Chile’s mining success – a simple and investor-friendly mining policy; strong mining rights that are constitutionally protected; and a competitive, stable mining-tax policy that has seen only two changes in more than 20 years.
Zambia clearly needs to diversify its economy and cannot continue to rely exclusively on copper exports for the bulk of its foreign earnings; however, diversification can only succeed if pursued in a way that recognises mining as a vital partner in that process.