The first of the unbalanced pieces from the latest ZIPPA Journal. In this entry, Grant Gatchell fails to construct a balanced assessment of the current mining regime. The article moves from the incoherent (e.g. it fails to recognise that stability is built on "public acceptability") to the ridiculous (e.g. shockingly suggests that we need to give mining companies more incentives) :
Security of Mining Developments - the Key to Future Investment, Grant Gatchell, ZIPPA Journal 2009, Commentary:
What is special about 1st of April 2008? People who are concerned about Zambia's mining industry regard this day as of crucial importance, but for completely different reasons. This date marked the enactment of the Mines and Minerals Development Act, 2008. The Act repealed its predecessor of 1995, scrapped the Development Agreements made under it, introduced a new mining tax regime and included provisions which aimed to promote the involvement of Zambians in the industry. The country as a whole congratulated itself on the withdrawal of what were seen as overgenerous benefits, which had been conceded too easily to foreign investors, and on the projected revenues to follow. But most foreign investors in the industry responded by cancelling or deferring capital expenditure and by slashing exploration programmes. Why did they respond in this way?
It was not due to spite or resentment, nor even to reduced profitability, but because this unnegotiated, unilateral cancellation of their contractual rights shattered their confidence in the dependability of the Zambian Government. When assessing a country's attractiveness for investment, the key ingredients of a mining policy fall into three main categories:
1. Stability of legislation.
2. Security of tenure of mining rights.
3. Incentives and guarantees for investment.
Let's look at the status of these three ingredients.
Stability of legislation
The Mines and Minerals Development Act of 1995 was amended by subsequent Acts no fewer than eight times, and finally replaced by the 2008 Act. This new Act has already been amended twice. By these frequent changes Zambia has shown the international business community that it cannot safely rely on stable legislation.
Security of tenure of mining rights
Security of tenure lies at the core of any assessment of a country's attractiveness to investment within a competitive environment. This is particularly true for exploration, which is the future of Zambian mining. Create uncertainty here, and serious investors already in the country will cancel or curtail their exploration programmes.
Many potential investors will go ahead only if they are confident that licences obtained will remain in their possession as reliable concessions to explore for the commodities stated.
The 2008 Act has a number of problems. Probably the most contentious provision allows for applications for mining rights within an existing right, subject to consent from the holder of the right.
Furthermore, consent cannot be unreasonably withheld and, in the event of denial of consent, the applicant has the right of appeal, but there is no provision for appeal by the holder of the mining right.
Imagine the situation where a portion of your mining licence where you have invested, say, USD500 million has been awarded to another company resulting in compromised security and integrity of your operation. Having suffered this, would you expand existing operations or develop a new mine elsewhere in the country?
In exploration the situation is even worse, as many mining rights have actually been granted within prospecting licence areas without consent from the holders. This has been going on since around 2004, even though the legislation was passed in 2008.
Administrative opacity is a problem worthy of a paper on its own: it is one of the greatest threats to security and to building trust. The 2008 Act removed the entitlement of the holder of a prospecting licence to the grant of a mining licence following successful exploration. This entitlement is an important internationally recognized pre-requisite for exploration. Indeed, why would one risk millions of dollars in an already high-risk business if one is not entitled to a licence to mine what one finds?
The requirement for the holder of a mining licence to possess an annual operating permit may seem innocuous. However, the potential for separating ownership of a resource from permission to exploit it is very worrying. In practice, it would be (and actually has been) a small legal step to nationalize the resources of an established mining operation while relegating the current owner to contract mining and mineral processing.
The requirement to obtain written access agreements from traditional rulers and legal occupiers of land is also disquieting, as the relationship between surface and mineral rights can be difficult to determine. No access agreement means no right of entry to your mining right and, once again, there is only limited recourse to appeal. This has led to situations where explorers have been held hostage by individuals looking for a large financial return before the first borehole is even drilled. Even worse, access agreements have been arbitrarily cancelled after millions of dollars have been invested.
Incentives and guarantees for investments
At the time of privatization of the copper mines, the Government and its advisors considered it essential to provide binding Development Agreements in order to instill sufficient confidence for the large investments required to revitalize the sector. The 2008 Mines and Minerals Development Act cancelled the agreements and removed the Minister's power to enter into any agreement for the grant of a mineral right. From the industry's perspective, by unilaterally canceling the Development Agreements, Zambia has shown the international business community that it may not be able to rely upon legally binding agreements. Sadly for Zambia the current Mines Act contains no provisions governing incentives and guarantees for investment. In a highly competitive world where it is essential to actively attract investment, this is a glaring omission.
Current mining legislation contains many provisions which entail uncertainty. The greatest offenders concern security of tenure, while the greatest omission relates to investment guarantees. Both are features essential for the development of a vibrant mining industry, and they require urgent review, benchmarking against international best practice. Without such a review trust will not be rebuilt. Until this is done, do not expect responsible large-scale, high-cost, high-risk exploration, which is desperately needed in order to find deposits that can replace the aging, high-cost mines of the Copperbelt.