Complex mining legislation may hinder investment

Despite the Zambian government’s programme to diversify the economy – into such sectors as tourism and agriculture – the mining and natural resources sector, particularly the copper mines, remain the most substantial potential contributor to growth and development in Zambia, says law firm Beech Veltman CEO Warren Beech.

However, he highlights that the primary concerns for investors in Zambia are the complexities surrounding mining law, constrained infrastructure, as well as unreliable electricity supply.

The primary law governing mining in Zambia is the Mines and Minerals Development Act (MMDA), which must be read with the MMDA Amendment of 2016. This legislation gives substantial powers to the Director of Mines, the Director of Mine Safety and the Director of Mining.

Beech notes that the Zambian mining regulatory environment is complex. “There is a host of other legislation that directly affects the mining industry which must be complied with.”

In addition to the usual mining laws pertaining to granting of rights to prospect and mine, reserved minerals, environmental protection, mining taxes and royalties, and health, safety and worker-compensation laws, Zambia also has certain customary laws, particularly in terms of rights held in relation to land, he notes.

Moreover, government has been rigorous in its pursuit of securing taxes from mining companies, encouraging them to pay taxes to stave off potential legal redress, he notes.

“Some mining companies have not agreed with the position adopted by the Zambian Revenue Authority, and have resorted to the courts.”

Further, several mining companies operating in Zambia have expressed the view that the mining tax regime has significantly increased the tax burden, which, in turn, has impacted on the viability and sustainability of their operations, notes Beech.

“This has caused some mines to be placed under care and maintenance, owing to the compounded effects of the increased tax burden, cyclical demand, copper prices, and of course, the impact of Covid-19.”

He points out that the effective tax rate on mines appears to be one of the highest in the world and, as a result, Zambia’s tax regime will be one of the most significant stumbling blocks going forward.

“If copper prices increase, this could result in taxes being levied at rates greater than the mines’ profits. This impacts on viability in the short to medium term, and on the long-term sustainability of the mines that can continue to operate, despite the tax regime.”

Moreover, the current tax regime is also likely to impact decision-making regarding exploration and expansion projects, he adds, warning that high effective tax rates are likely to dissuade investors.

“Most of the active mining companies in Zambia are attempting to address concerns regarding the tax regime through constructive engagement with government. Unless this engagement results in positive outcomes, the tax regime is likely to place even greater pressure on the mining sector, which is already staggering under the impact of Covid-19.”

Going Forward

Beech highlights that Namibia, similar to Botswana, enjoys a relatively stable investment environment.

As a result, these countries are likely to attract better investment than Zambia, unless Zambia urgently addresses industry concerns, primarily those concerning taxes and electricity supply.

He adds that Zambia also faces significant environmental challenges associated with mining, including pollution and degradation of the environment.

Beech, however, points out that Zambia has, over the years, significantly enhanced its environmental laws and enforcement mechanisms, to boost compliance.

He adds that Zambia’s small-scale and artisanal mining sector – although broadly regulated – contributes to the overexploitation of resources, as well as pollution and degradation.

“To address this, the regulatory regime will need to be amended to accommodate small-scale and artisanal mining, and make it even easier for these sectors to regularise and comply.”