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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: 2006

Zambia

2006 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.  This change in emphasis

continued through 2005.

 

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

economic growth for the sixth consecutive year in

2005, with a 4.3% real increase in GDP.  Inflation

dropped from 30% in 2000 to 20% in 2002 and has since

remained below this level.  Despite rising oil prices,

fiscal and monetary discipline allowed Zambia to

maintain an inflation rate of 16% in 2005.

 

For thirty years, copper production declined

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 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 but also opened

the way for new investors.  In 2004, Vedanta Resources

replaced AAC as the majority shareholder in KCM.

Other leading investors in Zambia's mining industry

are Glencore International, Equinox Minerals, and J&W

Investments.  Fresh capital investment from these and

other sources has increased Zambia's copper

production.

 

Implementation of Zambia's Poverty Reduction

Strategy Paper has received support from multilateral

and bilateral donors.  In April 2005, the

International Monetary Fund (IMF) and the World Bank's

International Development Association (IDA) provided

Zambia significant debt service relief and debt

forgiveness under the Heavily Indebted Poor Countries

(HIPC) initiative.  Zambia is the 17th country to

reach the HIPC completion point.  Zambia has received

approximately $6 billion in debt relief.

 

In July 2005, the G-8 agreed on a proposal to

cancel 100 percent of outstanding debts of eligible

HIPC countries to the IMF, African Development Fund,

and IDA.  Zambia will be among the beneficiaries of

this additional multilateral debt relief.

 

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.  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, though there are some restrictions

on foreign participation in the retail sector.  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, 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 lack legal experience.

 

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.  Earnings of

expatriates can also be externalized without

difficulty.  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 December

2005, no restrictions had been introduced.

 

Over-the-counter cash conversion of kwacha into

foreign currency is restricted to a $5,000 maximum for

account holders and $1,000 for others per transaction.

 

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 of

International Trade Law (UNCITRAL).

 

Previous disputes involved delayed payments from

state-owned enterprises 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 procedures 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.  Slow courts and

inadequate law enforcement procedures resulted in the

unjustified jailing of a U.S. businessman in 1998.

The issue was resolved after protracted legal

proceedings.

 

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 AND 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 10% of its 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 that 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, a

foreign national 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 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 sectors requiring special

permits).  With an approved investment license, an

investor is eligible for up to five expatriate

work/resident permits, but in practice companies have

had difficulty securing these.

 

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.  Capital expenditure

allowance on the growing of coffee, tea, bananas,

citrus fruits, or similar plants qualifies for a

development allowance of 10 % per year up to the first

year of production.  A farm work allowance of 100%

applies to expenditure on farmland such as stumping,

clearing, prevention of soil erosion, boreholes,

wells, water conservation, and aerial or geographical

surveys.  The depreciation allowance for non-

commercial vehicles is 20% (straight-line

depreciation).  Expenditure on other assets used in

creating income qualifies for a depreciation allowance

of 25% (straight-line depreciation).

 

Special Incentives: Investors who qualify 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 agricultural use

and the production of agricultural commodities or

other agriculture-related products for export;

-- Businesses engaged in tourism resulting in foreign

exchange earning 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;

-- 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's 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 four 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 goods

through copied or deceptive packaging.

 

Enforcement of property rights is weak in Zambia,

and courts have little experience 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 from time to time.  Questions have

arisen in recent years regarding the award of game

management areas, the enforceability of existing

development agreements, and the fairness of

competition between state-owned enterprises and

private firms.

 

Labor laws provide extremely generous severance

benefits to workers, which can impede 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 cases, scores of licenses are

required to run a business.

 

Proposed laws are usually not published in draft

form for public comment.  Instead, there are

stakeholder consultations at which proposed new

regulations are discussed.

 

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, keeps the

regulatory system from being prompt and transparent.

Some measures to promote resolution of disputes by

mediation have been implemented in an attempt to clear

the backlog.  The courts support alternative dispute

resolution, including a mechanism for binding

arbitration.  In 2004, the High Court established a

commercial division to adjudicate high-value claims.

This fee-based system has accelerated resolution of

such cases.

 

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 of tolerating loan default, which many view as

a minor transgression.  In addition, until recently,

high returns on government securities 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

credit denominated in foreign currency only for

investments aimed at producing goods for export.

 

B) Lusaka Stock Exchange

 

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, and enforced by the Securities

and Exchange Commission.

 

The market capitalization of the LuSE for 20

listed companies tripled from $768 million in 2003 to

$2.1 billion in 2005.  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.

 

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, from 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 has an Anti-Corruption Commission

to investigate allegations of misconduct and in 2002

it formed a Task Force on Corruption 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 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.  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 (MIGA), 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 (ATI).  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 ranged between 4800 and

3200 over the course of 2005.

 

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.

 

FOREIGN TRADE ZONES/FREE TRADE ZONES

 

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.  It also 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 a monetary

union to reduce transaction costs and to make the

region more competitive.  In 2001, the Zambia Revenue

Authority implemented a zero tariff for the COMESA

FTA.

 

FOREIGN DIRECT INVESTMENT STATISTICS

 

The 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)

(January to November)

 

Sector                          2004                             2005

Agriculture                    34,638,242        27,116,118

Construction                 2,801,340                      4,933,500

Manufacturing   45,809,110                    113,866,848

Transport                      3,685,292                      7,152,392

Mining                          14,547,563        62,483,548

Service                         15,393,883        19,302,162

Tourism                        6,626,545                      21,968,196

Health                           -                                   44,617

Total                             123,501,975      256,867,381

 

Investment Commitments by Country (dollars)

(January to November)

 

Country                      2004           2005

Australia                  -           1,000,000

Australia/Canada           -             300,000

Australia/Bermuda       3,670,000         -

British Virgin Islands     -           2,201,702

Great Britain           4,162,933     13,684,173

Great Britain/USA          -             220,000

China                  14,026,245     40,813,107

Holland                   900,000        100,000

Canada                    250,000      3,034,548

Congo DR                  389,000        334,000

Greece                     -           1,070,000

Cyprus                    133,493         -

Denmark                   450,000        677,000

Italy                     457,600         -

Iran/Australia             -             950,000

Belgian                    -             160,000

Ireland                   122,850         -

Israel                    390,000         -

Lebanon                 1,453,000      5,466,719

Kenya                      -          25,145,000

Korea                   1,161,000         -

Mauritius               2,000,000        424,095

Malawi                    210,000         -

New Zealand                -             395,000

Norway                     -             243,000

Botswana                2,325,000         -

Namibia                   217,700         -

Yugoslavia                150,000         -

Uganda                    100,000         -

Somalia                   522,500         -

South Africa            3,434,785      9,552,326

South Africa/Mauritius    245,000         -

Saudi Arabia            1,495,000         -

Singapore                  -           2,000,000

Spain                      -             367,024

Switzerland            17,250,000         -

Sweden                    300,000        278,000

Peru                    6,925,430         -

Portugal                   -             160,000

Jordan                    430,000         -

France                     -             120,000

France/USA                 -             515,190

United States           1,960,000        793,000

UAE/SA/Ireland             -             512,000

India                     975,240     60,528,500

Tanzania                   -             146,000

Zambia                 8,877,698      61,582,808

Zambia/Chinese             -           1,150,000

Zambia/India               -             832,000

Zambia/South Africa    3,748,000         175,000

Zambia/Britain           673,375         445,000

Zambia/Australia       3,509,900          -

Zambia/Denmark             -              54,920

Zambia Kenya               -             176,050

Zambia/German              -              54,000

Britain/South Africa     455,000          73,147

Nigeria                  103,000           -

Zimbabwe              17,569,086       5,717,265

Zimbabwe/South Africa  1,480,800      14,259,500

Britain/Zimbabwe         512,340       1,258,000

Zimbabwe/Zambia        2,124,000         547,101

 

The Zambia Investment Centre issued investment

certificates to a total 125 projects between January

and November 2005.  This compares well with the 120

projects that received investment certificates in

2004.

 

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,

which was the main basis for its investment in Zambia.

 

Vedanta Plc acquired a 51 percent stake in KCM for

$48.2 million on August 19, 2004.  Vedanta 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, Vedanta 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.

 

KCM has announced that an estimated $400 million

will be used to expand its smelter and improve

underground operations.  The improvements in KCM's

production capacity will push underground ore

production to six million tons per annum from the

current levels of two million tons.

 

Major investments into Zambia outside the mining

sector include:

 

-- Copperbelt Energy Corporation:  an electricity

distribution company worth $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 $25

million.

 

-- National Milling: a wholly-owned subsidiary of

Seaboard Corporation of Kansas, representing an

initial investment of over $20 million.


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