Zambia mining law reform may deter private investment

The proposed reform, contained in the Minerals Regulation Commission Bill, aims to establish a new regulator to oversee and regulate mineral-related activities and to ensure transparent and efficient management of mineral resources.

However, the bill has prompted concerns in the mining industry around its potential to deter mining investment in Zambia. Two industry bodies, the Association of Zambian Mineral Exploration Companies and the Zambia Chamber of Mines, have issued a joint statement calling for amendments to the bill, as the bill in its current form will revert Zambia to “long-term policy instability and mining investment stagnation”, as well as “drive up the perception of investment risk in Zambia”, according to the statement.

Under the current proposals, the Bill will enable the state to “acquire” an interest in an exploration license before the license is granted to a private party. If viable mineral deposits are identified and the private party converts the exploration license into a mining license, the state will retain its interest.

In addition to the rights over exploration licenses, the Bill will also empower the Minister of Finance to “acquire” mining rights for investment by the government over “identified areas”. These “identified areas” will essentially be reserved for investment by the state and won’t be subject to the normal application process to acquire the rights.

Edward James, anti-corruption and bribery law expert at Pinsent Masons, said that the potential effect of the proposed legislation is that the state will be able to get an early foot in the door and there is an increased risk of corruption.

“It is unclear how the law, if passed, will be implemented in practice, but the risks for manipulation are apparent. For example, the state could potentially exercise its powers to designate ‘identified areas’ in such a way that it gets an inside track into owning the mining rights over areas that private companies invest in prospecting under exploration licenses. The potential effect is that a private company spends the money needed to determine that mining is viable whilst the state could then swoop in and take part of the ownership of the right to mine,” said James.

With the new powers given to the new regulator, the scope for corruption is also clear, according to James. “Officials who hold the power to step into license areas could use the threat of doing so to exploit bribes from private companies that could lose out if the state were to step in. Another point of corruption risk would be the point at which the state sold its interests as officials could seek to privately benefit from the sales,” he added.

Zambia’s move to amend its mining regulations follows a similar development in Botswana, which has also recently proposed mining law amendment. Under Botswana’s current mining law, the government has the option to acquire a 15% shareholding in any mining project upon the granting of a licence. The proposed amendment aims to increase local ownership in mining projects. If the government chooses not to exercise its option to acquire the shareholding, the mining companies will reportedly be required to use their “best endeavours” to dispose of 24% to citizens or citizen-owned companies.

“Zambia seems to be following a wider trend where governments in Africa are looking to increase government ownership and local participation in mining. The fears over how the new law may be implemented could result in the country missing out on the opportunity to ramp-up production to supply the growing demand fuelled by the energy transition,” said Sylvia Tonova, international arbitration and investor-state dispute settlement expert at Pinsent Masons.

“When there are changes to laws that potentially impact ownership and investments rights of companies – particularly foreign-owned companies – the risk for potential disputes invariably increases. Investors require certainty and assurance that they will get fair and equitable treatment if they spend money to unlock natural resource reserves,” she said.

Zambia, which is Africa’s second largest copper producer, has recently announced it aims to boost its annual copper production from the current level of 800,000 metric tons to 3 million metric tons by 2031.

Apart from the proposed reform, Zambia is facing “a tricky tight rope” in light of its recent actions around the Vedanta Resources Konkolo Copper Mines, said Tonova. The mine was seized under the regime of the former government that accused Vedanta of not investing to expand copper production. This led to a five-year legal battle for the private company to regain the ownership of the mines and smelter seized.

“The new regime under President Hakainde Hichilema has agreed to hand the mine back to Vedanta, but the damage to investor confidence may remain,” she said.

“Whilst the growing trend in mining across Africa creates some risks, these can be managed through practical steps. The first step is for miners to understand their legal rights based on the upstream corporate structure of their investment and the bilateral or multilateral investment treaties in place. Looking at these should form part of the pre-investment due diligence. The second step is for miners to ensure they get proper advice on when and how to restructure their investments in mines to maximize their chances of a successful claim or a settlement with the government if forced to exit,” said Tonova.

James added: “The African continent has immense potential that can be unlocked. It is only fair that countries benefit from their mineral wealth but there are of course increased risks when power is concentrated in the hands of individual decision-makers. There is a balance to be struck between the risk and reward. The risks are typically not unmanageable provided companies adopt a sensible approach to compliance and put in place basic steps to avoid being an easy target for corruption.”