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 You are in: Under Secretary for Economic, Energy and Agricultural Affairs > Bureau of Economic, Energy and Business Affairs > Finance and Development > Organization > Investment Affairs > Investment Climate Statements: 2005

Zambia

2005 Investment Climate Statement - Zambia

Overview
Zambia has a generally positive investment climate, although progress toward an open economy has been intermittent over the last three years. During the 1990s, Zambia opened its doors to foreign investment, reduced government intervention in commercial activities, privatized over 258 enterprises and eliminated many market distortions. The impact of these progressive policies, however, was undermined by persistent fiscal deficits and corruption. This led many Zambians to lose confidence in the efficacy of economic liberalization. These doubts provide partial explanation for the Zambian government's decision in 2002 and 2003 to seek alternatives to privatization of the national railroad and the national electricity and telecommunications utilities. In 2003 and 2004, however, the Zambian government increased dialog with the private sector and placed a new emphasis on attracting investment.

Economic development in Zambia continues to face two principle challenges: the HIV/AIDS epidemic and over-reliance on copper mining. Persistent high inflation and poor infrastructure also depress growth. Despite these problems, Zambia experienced positive GDP growth for the fifth consecutive year in 2004, with 4.6% GDP growth. Inflation dropped from 27% in 2002 to 17% in 2003, partly as a result of falling prices for the staple of the Zambian diet, maize. Despite rising oil prices, fiscal and monetary discipline allowed Zambia to maintain an inflation rate of less than 18% in 2004.

For the past thirty years, copper production had been declining steadily from a 1973 high of 700,000 tons to a 2000 low of 226,192. The decline was the result of poor management of state-owned mines and the lack of investment. With the privatization of the mines in April 2000, the downward trend in production and exports was reversed. Copper production increased to 337,000 metric tons in 2002 and 350,000 metric tons in 2003. The 2002 pullout of Anglo-American Corporation, the major shareholder in Zambia's largest mine, Konkola Copper Mines (KCM), raised doubts about the future of the Zambian copper sector. The Zambian government identified new investors for KCM and other copper assets in 2003, and their participation, along with the development of new mines, is expected to increase production further over the next few years. In addition, the Kansanshi mine in North Western Province will begin production in 2005, following almost $100 million in investment by First Quantum Minerals.

Implementation of Zambia's Poverty Reduction Strategy Paper (PRSP) has received support from multilateral and bilateral donors. The Paris Club of major bilateral creditors has provided Zambia significant debt service relief, and Zambia is moving toward debt forgiveness under the Highly Indebted Poor Country (HIPC) initiative. Donors have generally accepted Zambian government requests to revise commitments to privatize remaining parastatals as a condition for further support.

Openness to Foreign Investment

The Zambian Government actively seeks foreign investment through the Zambian Investment Center (ZIC), intended to be a one-stop resource for international investors interested in Zambia. Despite the ZIC's billing, investors must seek permits and licenses from a number of other agencies in addition to ZIC.) An investment board screens all investments for which incentives are requested, and usually makes its decision within thirty days. The reviews appear routine and non-discriminatory, and applicants have the right to appeal investment board decisions.

In addition to compliance with the Companies Act No. 26 of 1994, a foreign company must, within 28 days of the establishment of its place of business in Zambia, file its list of directors, constitution, and local representative with the registrar of Companies.

There is no distinction in law between foreign and domestic investors, with the exception of the retail sector, which is closed to foreigners. The privatization process is open to foreign bidders from the point at which companies are advertised. There are no restrictions on foreign investment in the Lusaka Stock Exchange (LuSE), and foreigners may invest on the stock exchange on comparable terms as Zambians. Although there are no legal distinctions between foreign and domestic investors, companies seeking licenses or concessions or investors bidding for privatized companies are encouraged to commit to local participation. It is not clear how such commitments are weighed when decisions are made.

The judicial system has a mixed record in upholding the sanctity of contracts. Judicial processes are lengthy and many magistrates are not knowledgeable about commercial law.

The Zambian Investment Act is under review, and some proposed amendments aim to increase regulation of the business community and support Zambian entrepreneurs by restricting the role of foreign investors. These regressive proposals, however, appear to be losing favor, and fears that the investment climate might seriously deteriorate are subsiding.

Conversion and Transfer Policies

Investors are free to repatriate capital introduced into Zambia as well as to externalize dividends, management fees, interest earned, profits earned, technical fees and royalties. All earnings by expatriates can also be externalized without difficulties. In summary, there is no exchange control in Zambia for anyone doing business as either a resident or non-resident. Additionally, there are no restrictions on non-cash transactions.

In July 2003, the Zambian Finance Minister announced that he was considering placing new restrictions on repatriation of profits. By January 2005, no restrictions had been introduced.

In response to sharp depreciation of the Kwacha, the Bank of Zambia in 2001 put measures in place to stabilize the exchange rate. At the same time, over-the-counter cash conversion of Kwacha into foreign currency was restricted to a $5,000 maximum for account holders and $1,000 for others.

Expropriation and Compensation

Investments may only be expropriated by an act of parliament relating to the specific property expropriated. The law states compensation must be at a fair market value, although the method for determining fair market value is ill-defined. Compensation shall be convertible at the current exchange rate. In addition, investors are guaranteed that investments will not be adversely affected by any changes in the Investment Act for a period of seven years.

Land, which is held under 99-year leases, may "revert" to the government if it is ruled to be undeveloped. So far, no privately held land has "reverted."

Dispute Settlement

There have been relatively few investment disputes since the MMD government took office in 1991. The investment code stipulates that disputants must first resort to the Zambian High Court for internal dispute settlement. Failing that, the parties may go to international arbitration, which the state recognizes to be binding. Zambia is a member of the International Center for the Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL).

Previous disputes involved delayed payments from parastatals for goods and services and the delayed deregistration of a US-owned aircraft despite contractual obligations.

Disputes have arisen over awards of game management areas for hunting concessions, and U.S. investors have complained that processes in this sector lack transparency.

The courts in Zambia are reasonably independent, but contractual and property rights are weak and final court decisions can take a long time.

There is no bankruptcy law in Zambia. Secured interests in property are possible and recognized, but fairly rare. There is no system for recording these interests.

Performance Requirements/Incentives

There are no requirements for local content, equity, financing, employment, or technology transfers. The Investment Act provides incentives for investments in rural enterprises, farming, and non-mineral exports (see below). Although performance requirements are not imposed, authorities enforce commitments made in applications for investment licenses. For example, the government is currently requiring that an international firm licensed to operate a cellular telephone network live up to a commitment to offer 41% of shares on the local market.

General Incentives and Taxation: Foreign investors receive national treatment under the tax system. Income from farming is taxed at a rate of 15%, below the standard corporate tax rate of 35%. In addition, that portion of income which is determined by the Commissioner of Taxes to originate from the export of non-traditional products is taxed at a rate of 15% (traditional exports are all mineral exports of copper, cobalt, lead, zinc, gold, and silver).

Work Permit Requirements: Notwithstanding the provisions of the Immigration and Deportation Act, an investor who invests a minimum of $250,000 or equivalent in convertible currency and who employs a minimum of ten persons is entitled to a self employment permit or resident permit. Investors operating in Zambia must obtain a residence permit (the ZIC provides assistance in obtaining this), in addition to other licenses/certificates, which may be required, depending on the sector (timber, tourism, and mining are some examples of sector requiring special permitting). With an approved investment license, an investor is eligible for up to five expatriate work/resident permits, but in practice, companies have had difficulties in securing their allotment. Contractors and consultants entering the country on business visas are subject to entry refusal or deportation if their cumulative working time in Zambia exceeds the permitted duration. Those coming regularly to Zambia to carry out work are required to apply for work permits.

Capital Allowances: Buildings used for manufacturing, mining, and hotels qualify for a depreciation allowance of 5% per year plus an initial allowance of 10% of the cost in the year in which the building was first used.
Equipment, machinery, and plants used exclusively for farming, manufacturing, and tourism qualify for a depreciation allowance of 50%.
Capital expenditures on farm improvements qualify for a farm improvement allowance of 20% per year for the first five years.
The depreciation allowance of non-commercial vehicles is 20% (straight-line depreciation).
Expenditure on other assets used in creating income qualify for a depreciation allowance of 25% (straight-line depreciation).

Special Incentives: Investors who qualifies in one of the five categories below shall be entitled, in addition to the general incentives, to an exemption from customs duties and sales duties on all machinery and equipment (excluding motor vehicles) required for the establishment, rehabilitation, or expansion of that enterprise:
Exporters of non-traditional products which result in net foreign exchange earnings;

Producers of products for local agriculture use and the production of agricultural commodities related products for export;

Businesses engaged in tourism resulting in foreign exchange earnings in excess of 25% of the gross annual earnings of the business unit;

Businesses engaged in an import substitution industry using a significant proportion of local raw materials resulting in net foreign exchange savings; and Businesses located in a rural area.

Right to Private Ownership and Establishment

There is a right of private ownership of business enterprises and there are no business ventures reserved solely for the government. Private entities may freely establish and dispose of interests in business enterprises, but investment board approval is required to transfer an investment license for a given enterprise to a new owner.

Private enterprises in competition with public enterprises have occasionally complained that the playing field is not level when they compete for licenses or concessions.

A subsidiary of a foreign company is regarded as a Zambian company. The legal liability of the parent company is limited to the amount of capital committed, together with any guarantees provided.

Protection of Property Rights

The Investment Act assures investors that property rights shall be respected. No investment of any description can be expropriated unless Parliament has passed an act relating to the compulsory acquisition of that property. Also, in the case of expropriation, full compensation shall be made at fair market value and shall be convertible at the then current exchange rate. In addition, investors are guaranteed that investments will not be adversely affected by any changes in the Investment Act for a period of seven years.

Trademark protection is adequate. There are fines for revealing business proprietary information, but fines are not large enough to penalize disclosure adequately. Copyright protection is limited and does not cover computer applications.

Zambia' patent laws conform to the requirements of the Paris Convention for the Protection of Industrial Property, to which Zambia is a signatory. It takes a minimum of 4 months to patent an item or process. Duplicative searches are not done, but patent awards may be appealed on grounds of infringement.

Zambia is a signatory to a number of international agreements on patents and intellectual property, including the World Intellectual Property Organization (WIPO), Paris Union, Bern Union, African Regional Industrial Property Organization (ARIPO), and the Universal Copyright Convention of UNESCO. National laws are generally adequate in protecting intellectual property rights, and there has been effective recent enforcement against pirated musical and video recordings as well as software. Small-scale trademark infringement occurs for some small packaged gods through copied or deceptive packaging.

Enforcement of property rights is weak in Zambia, and courts have little experience dealing with commercial litigation. Planned legal reforms include the strengthening of commercial law and property rights.

Transparency of the Regulatory System

The government has made strides toward introducing transparent policies to foster competition, but complaints arise. Questions have arisen in recent years regarding the award of game management areas, failure to respect existing development agreements, and the fairness of competition between parastatals and private firms, particularly in the power sector.

Labor laws provide extremely generous severance benefits to workers, slowing investment.

Although the Zambia Investment Center seeks to serve as a "one stop shop" for investors, in practice red tape associated with licenses and permits presents problems. In some sectors, scores of licenses are required to run a business.

Proposed laws are not published in draft form for public comment. Instead, proposed new regulations are discussed in stakeholder consultations.

Though the underpinnings for an efficient system to handle court disputes exist, Zambian courts are relatively inexperienced in the area of commercial litigation. This, coupled with the large number of pending commercial cases in the system, impedes the regulatory system from being prompt and transparent. Some measures, mainly incentives to solve disputes by mediation, have been implemented in an attempt to clear the backlog, but have so far found limited success. Corruption is also a problem in the judicial system.

Capital Markets and Portfolio Investment

A) Banking Sector

Government policy generally encourages the establishment of free market financial institutions. Banking supervision and regulation by the Bank of Zambia (BoZ), the central bank, has improved over the past few years. Improvements include revoking licenses of insolvent banks, denying bailouts, limiting deposit protection, strengthening loan recovery efforts, and upgrading the training and incentives of bank supervisors.

Although some improvements have been registered over the past year, credit to the private sector is expensive and available only for extremely low-risk investments. One factor inhibiting lending is a culture which viewed failure to repay a loan as at worst a minor transgression. In addition, until recently, high returns on government paper encouraged commercial banks to invest heavily in government debt. Some financial institutions restrict credit to Zambian-registered companies, but foreign ownership does not disqualify a loan applicant. Banks provide hard currency credit only for investments aimed at producing goods for export.

B) LuSE

The Lusaka Stock Exchange (LuSE) opened in February 1994 and is structured to meet the G-30 recommendations for clearing and settlement system design and operations. Since its inception, the LuSE has offered trading in equity securities, and in March 1998, the LuSE became the official market for trading in government bonds. Investors intending to trade in a listed security or government bond are now mandated to trade via the LuSE. The market is regulated by the 1993 Securities Act, which is enforced by the Securities and Exchange Commission.

41. The market capitalization of the LuSE for 18 listed companies tripled in 2003 from $246 million to $768 million. Trading averaged eight trades per day, with a daily average volume of 1,250,000 shares. Bond trading in 2002 was double the value of stock trading.

42. There are no restrictions on foreign investment in the LuSE and foreigners may invest on the same terms as Zambians.

Political Violence

Zambia has no recent history of political violence. Civil wars in the neighboring countries of the Democratic Republic of the Congo and Angola occasionally led to cross border incidents, but these occurred in remote areas and their impact was limited to rural populations.

Corruption

During the 1990s, corruption undermined the economic stability of Zambia. The problem pervaded Zambia, form the top down, ranging from senior government officials abusing the privatization process to local policemen committing extortion. The current administration has launched a campaign to uncover past abuses, punish perpetrators, and recover assets. Petty corruption, however, remains common, as low salaries for government employees undermine efforts at reform.

The government established an Anti-Corruption

Commission to investigate allegations of misconduct and in 2002 set up a Task Force to spearhead efforts to hold accountable officials from the previous administration. At the President's urging, Parliament lifted former President Frederick Chiluba's immunity from prosecution, and he is among those charged with various offenses.

Transparency International has an active Zambian chapter.

Bilateral and Multilateral Investment Agreements

Zambia has signed bilateral reciprocal promotional and protection of investment protocols with most of the Common Market for Eastern and Southern Africa (COMESA) and the Southern Africa Development Community (SADC) member states. In November 2001, COMESA signed a Trade and Investment Framework Agreement with the United States, in which Zambia is included. Zambia also has a bilateral investment treaty with Switzerland (1995). On October 2, 2000, Zambia became a beneficiary of the African Growth and Opportunity Act (AGOA), a framework for U.S. trade, investment, and development policy for sub-Saharan Africa.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) is a U.S. government agency that provides project financing and investment insurance for U.S. investors. The OPIC/Zambia agreement was signed in June 1999. Zambia is also a signatory to the Multilateral Investment Guarantee Agency, which guarantees foreign investment protection in cases of war, strife, disasters, other disturbances, or expropriation. In June 2001, the World Bank extended credit in the amount of $5 million for starting the African Trade Insurance Agency. This institution, which is open to all African states that are members of the African Union, provides exporters with political risk insurance for trade transactions.

The Embassy uses approximately $2 million in Zambian Kwacha per year. Kwacha are purchased at the market exchange rate, which has ranged from 4500 kwacha per dollar to 5000 kwacha per dollar over the past two years.

Labor

There is an abundance of unskilled labor, and adequate semi-skilled labor. Skilled and professional workers are in short supply. Wages are not controlled. The government adheres closely to ILO conventions, and has revised labor laws to conform to international practice. Labor-management relations vary by sector. Strikes are not uncommon in the public sector, or parastatal industries, particularly related to delayed payment of wages or benefits.

Foreign trade zones/free ports

An investor may apply to be appointed and licensed by the Commissioner General to establish and operate a bonded factory under Section 65 of the Customs and Excise Act. In 2002, the government amended the Customs and Excise Act in order to accommodate tax free zones, and passed the Export Processing Zones Act to provide incentives for investors in export processing zones. However, the application of the Export Processing Zones Act was suspended in 2004 because of concern about its potential impact on revenue.

On October 31, 2000, the Common Market for Eastern and Southern Africa Free Trade Area (COMESA FTA) was launched. Zambia and eight other participating countries in the region are working toward limited currency convertibility among members to reduce transaction costs and to make the region more competitive. In 2001, the Zambia Revenue Authority (ZRA) implemented a zero tariff for the COMESA FTA.

Foreign Direct Investment Statistics

The Zambia Investment Center (ZIC) compiles data on investment commitments from investors who obtain investment licenses at ZIC. These data do not show actual FDI flows or stocks, and should not be considered an accurate measure of investment. These are the only FDI data available in Zambia.

Investment Commitments by Sector (dollars)

Sector 2003 2004
Agriculture 37,120,802 34,638,242
Construction 10,148,500 2,801,340
Manufacturing 31,382,430 45,809,110
Financial Inst. 106,500 -
Transport 20,160,968 3,685,292
Mining 656,766 14,547,563
Service 3,829,468 15,393,883
Tourism 17,541,500 6,626,545
Total 120,946,934 123,501,975

Investment Commitments by Country (thousands of dollars)

Country 2003 2004
Australia 1,000,000
Australia/Bermuda 3,670,000
Great Britain 3,879,224 14,162,933
China 2,941,416 14,026,245
Holland 1,461,084 900,000
Canada 250,000
Congo DR 389,000
Greece 755,000
Cyprus 133,493
Denmark 102,304 450,000
Italy 457,600
Belgium 370,000
Ireland 370,200 122,850
Israel 390,000
Lebanon 8,999,795 1,453,000
South Korea 360,000
Korea 164,400 1,161,000
Mauritius 2,000,000
Malawi 210,000
Norway 243,000
Botswana 2,325,000
Namibia 217,700
Yugoslavia 150,000

Uganda 100,000
Somalia 522,500
South Africa 44,751,380 3,434,785
South Africa/Mauritius 245,000
Saudi Arabia 1,495,000
Switzerland 17,250,000
Sweden 300,000
Peru 6,925,430
Jordan 391,000 430,000
United States 450,000 1,960,000
India 3,669,183 975,240
Zambia 1,449,000 8,877,698
Zambia/South Africa 3,748,000
Zambia/Britain 673,375
Zambia/Australia 3,509,900
Britain/South Africa 455,000
Nigeria 103,000
Zimbabwe 38,279,873 17,569,086
Zim/South Africa 751,500 1,480,800
Britain/Zimbabwe 1,732,300 512,340
Zimbabwe/Zambia 2,124,000

Zimbabwean investment is concentrated in agriculture ($17,061,086). South African investment is concentrated in services. Chinese investment is concentrated in manufacturing.

First Quantum Minerals owns 80% of a new mine near Solwezi and will invest $163 million in Kansanshi. Kansanshi is expected to begin production in 2005 and yield an average of 100,000 tons per year over its first 16 years of operation.

On March 31, 2000, Anglo American Corporation (AAC) acquired the Konkola and Nchanga copper mines and the Nampundwe pyrite mine from Zambia Consolidated Copper Mines (ZCCM), through a new subsidiary called Konkola Copper Mines. In late January 2002, AAC informed the government that it would withdraw from its investment in KCM. AAC cited financial losses linked to declining world copper prices and failure to secure funding for the Konkola Deep Mining Project (KDMP), which was the main basis for its investment in Zambia in March 2000.

Vedanta Plc acquired a 51 percent shares in Konkola for $48.2 million on August 19, 2004. Vendata is required to provide a standby funding commitment or guarantee to KCM of $220 million, so that if in the next nine years, the cash flow of KCM is negative, KCM could call on the guarantee to cover the negative cash flow. Under the agreement, Vendata cannot withdraw until 2008 and is obliged to pay an exit fee and provide management to KCM for one year, should the group decide to leave.

Major investments into Zambia outside the mining sector include:

Copperbelt Energy Corporation: a fully-vested electricity distribution company worth USD 40 million, owned by Cinergy of Ohio, National Grid of the UK, and the Government of Zambia.

Dunavant Cotton: a wholly-owned subsidiary of Dunavant Cotton of Tennessee, worth approximately USD 25 million.

National Milling: a wholly-owned subsidiary of Seaboard Corporation of Kansas, representing an initial investment of over USD 20 million.

Web Resource

Zambia Investment Center: http://www.zic.org.zm/

World Bank Snapshot on Zambia's Business Environment:

http://rru.worldbank.org/DoingBusiness/ExploreEconomies/Bus

inessClimateSnapshot.aspx?economyid=207


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