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Country Commercial Guides for FY 2000: Zambia Report prepared by U.S. Embassy Lusaka, released July 1999   Note*

CHAPTER VII: Investment Climate

Background: The long negotiations to privatize Zambia's predominant copper mining parastatal, Zambia Consolidated Copper Mines (ZCCM), continue to cloud the country's economic prospects. Current suitor Anglo-American Corporation may reach an agreement in late 1999, particularly if the Chilean company CODELCO agrees to participate. The Zambian government and IMF reached an agreement in March 1999 on a second Enhanced Structural Adjustment Facility (ESAF). These positive economic steps, along with progress on the democratic governance front, have resulted in renewed Balance of Payments (BOP) support from some bilateral and multilateral donors, and should lead to consideration of further measures to alleviate Zambia's $6-7 billion international debt.

Nonetheless, Zambia's economy remains depressed. The delays in completing ZCCM's privatization contributed to major economic problems in 1998. Inflation increased to 30% for the year, and interest rates climbed above 40%. The economy as a whole contracted by an estimated 2%. Bilateral and multilateral donors' BOP support has been contingent on ZCCM's sale for a number of years, and the absence of BOP support contributed to a 30% depreciation of the local currency (Kwacha). Zambia continued to benefit from substantial project aid.

Politically, Zambia held local government elections in December 1998, the last major elections before presidential and parliamentary elections in 2001. In late 1998, the government also discontinued prosecution of civilians accused of complicity in the 1997 attempted military coup. The ruling MMD party continued dialogue with opposition parties to resolve electoral differences. The violent conflicts in neighboring Angola and Congo preoccupy Zambia's international attention; Angola has asserted that some Zambian officials are involved in supplying UNITA, and President Chiluba has a leading role in developing a cease-fire and settlement in the Congo conflict.

Regulatory Environment

Openness to Foreign Investment: The Zambian government actively seeks foreign investment through the Zambian investment center (ZIC). An investment board screens all proposed investments, and usually makes its decisions within thirty days. The reviews appear routine and non-discriminatory, and applicants may appeal investment board decisions. With an approved investment license, an investor is eligible for up to five expatriate work/residence permits, but in practice companies have had difficulties in securing their allotment. There is no distinction in law between foreign and domestic investors. The privatization process is open to foreign bidders from the point at which companies are advertised.

Conversion and transfer policies: Zambia currently limits over the counter cash conversions of Kwacha into foreign currency to the equivalent of $7,500 for account holders, and $5,000 for others. There are no restrictions on non-cash transactions, or transferring money into our out of the country. Foreign exchange is available at market determined rates.

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. Land, which is held under 99-year lease, may "revert" to the government if it is ruled to be undeveloped. So far, no privately held land has "reverted," but it has occurred for parastatal and university lands.

Dispute Settlement: There have been relatively few investment disputes since the MMD government took office in 1991. The investment code provides that disputants first resort to internal dispute settlement and then, failing that, the parties may go to international arbitration. The state recognizes international arbitration as binding. Zambia is not a member of the International Center for the Settlement of Investment Disputes (ICSID - the Washington Convention). There are no outstanding investment disputes with American companies in Zambia, but a Zambian company with American investment is currently in dispute with the government. The Zambian company, with substantial American investment, has been accused by government of violating regulatory/safety provisions which the company denies. The government has subsequently withheld services, or taken decision contrary to the interests of the company, with the apparent intention of forcing the company from business. Delays in a court hearing of the case have cost the company substantial revenue to date, and may result in the de facto closure of the company.

Government has also intervened in the case of an American investor seeking to force payment of unpaid debt from a private mining company. Arguing that social concerns take precedence, the government indicated it would retaliate against the American company if it pursued its action to collect debt through cutting off supplies. The government offered no alternative, and the issue continues.

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 case of an unjustly jailed U.S. businessman in 1998. The issue was resolved after protracted legal proceedings. U.S. companies have been successful in getting court rulings enforcing their contracts, even against parastatal companies. There is no bankruptcy law in Zambia. Secured interests in property are possible and recognized, but fairly rare. There is no system of recording these interests.

Performance Requirements/Incentives: There are no requirements for local content, equity, financing, employment or technology transfer. The investment act provides general incentives for investments in rural enterprises, farming, and non-mineral exports. Companies listed on the Lusaka stock exchange also qualify for reduced corporate income tax. In response to domestic businesses over Zambia's liberalized trade regime, the 1999 budget introduced some tariff protections for local industry. Some of these tariffs are inconsistent with Zambia's obligations under the Common Market for Eastern and Southern Africa (COMESA) treaty, and Zambia has agreed to repeal those tariffs. There are currently no areas designated as free trade zones or free ports. There is legal provision, however, for the establishment of free trade zones or manufacturing in bond.

Right to Private Ownership and Establishment: There is a right of private ownership of business enterprises. 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.

Protection of Property Rights: Enforcement of property rights in general is weak in Zambia. Planned legal reforms include the strengthening of commercial law and property rights.

Transparency of Regulatory System: Current business laws are outdated and some modern business practices are not covered under current law. Tax laws have improved, but enforcement concentrates on the formal sector, while a large informal sector goes untaxed.

Capital Markets and Portfolio Investment: Government policy generally encourages the establishment of free market financial institutions. Banking supervision by the bank of Zambia has improved over the past two years, with increased capital requirements and stricter enforcement, but a number of shaky local banks still exist. Total assets for Zambia's commercial banks totaled USD 780 million in 1997. Continued high interest rates, in the range of 47% in June 1999, have inhibited credit to the private sector; high reserve requirements have also channeled available capital into government securities.

A nascent stock market continues to expand (there were twelve listed issues as of June 1999), and will benefit from public offerings of privatized parastatal companies. Capital is generally not raised through public stock offerings.

Political Violence: There have been no recent instances of politically motivated damage of projects or installations. Civil disturbances are rare in Zambia and will likely remain so. Unrest in countries bordering Zambia has caused refugee influxes in the past, and contributed to crime near the borders.

Corruption: Zambia has established an anti-corruption commission, but there is little track record as yet. Laws and penalties exist for efficient enforcement. Governmental corruption is a continuing problem, particularly in procurement and contract tendering. It is not illegal or unusual for government officials to win government contracts.

Bilateral Investment Agreements: There are no known bilateral investment treaties.

OPIC and Other Investment Insurance Programs: OPIC insurance is available to U.S. investors in Zambia. An investment incentive agreement with the U.S. OPIC was signed in June 1999. Zambia is a member of the Multilateral Investment Guarantee Agency (MIGA).

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 with the view 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.

Foreign Trade Zones/Freeports: There are no free trade zones. Bonded warehouses are available.

Foreign Direct Investment Statistics: The largest foreign investments in Zambia are from the United Kingdom and South Africa, or involve the South African subsidiaries of multinational firms. Anglo-American (SA) holds a 27% interest in ZCCM and has further interests in food and beverage processing, hotels, agriculture and other businesses. The Commonwealth Development Corporation (UK) has shares in a number of enterprises in agriculture, mining and cement. About thirty U.S. firms have investment or agents in Zambia. At least two major U.S. firms have taken leading positions in Zambian privatization.

Investment Possibilities: The likely privatization of ZCCM to Anglo-American Corporation in 1999 will benefit ancillary industries and service companies. Besides mining, areas which have potential for investment include agriculture, tourism, telecommunications and processing of local raw materials. Zambia is mineral rich and produces about 20% of the world emeralds. The non-copper mining sector holds considerable potential.

Zambia has large tracts of uncultivated arable land with good soil, a favorable climate and generally adequate water supply. The country has numerous natural attractions, including Victoria Falls, relatively abundant wildlife, and a generally pleasant climate which, if marketed properly, attract more tourists. Non-mineral exports, particularly horticultural and floricultural products, have enjoyed strong growth in recent years.

Doing business: The courts in Zambia are reasonably independent, but contractual and property rights are weak and final court decisions can take a long time. Frequent delays and stays can give truth to the expression, "justice delayed is justice denied." In 1998, slow courts and inadequate law enforcement procedures resulted in a case of an unjustly jailed U.S. businessman, who was ultimately acquitted. U.S. companies have been successful in getting court rulings enforcing their contracts, even against parastatal companies.

Transport and communications infrastructure is good by regional standards, but acceptable-to-poor by American standards. Crime is an area of concern. Health facilities are mostly of poor quality; educational facilities vary greatly in quality. English is an official language of Zambia, and is universally spoken by educated Zambians. There is no bankruptcy law in Zambia. Secured interests in property are possible and recognized, but fairly rare. There is no system of recording these interests.