Zambia: Where East meets West

Nestled at the heart of a cluster of large, resource-rich neighbours hungry for food, energy and spare parts, Zambia’s grand plan is to become a regional trading and logistics hub. Copper from the mines will feed factories rolling off coils of cable for export, new highways will be busy with trucks transiting goods along trade corridors and rivers will power plants exporting clean energy into Southern Africa.

In a country where copper is king and China is paymaster, this push to diversify away from both is slowly bearing fruit. Though still dwarfed by earnings from the metal, non-traditional exports such as sugar and cement passed the $1bn mark in 2010 for the first time (see graph). Take copper out of the equation – the bulk of which heads to Switzerland – and 60% of Zambia’s exports are traded within Africa. The numbers are surprising. Zambia does more trade with the Democratic Republic of Congo (DRC) than it does with China – $1.8bn vs. $800m at the end of 2010.

“If you are going to move your things too far, then you remove your competitive edge,” Felix Mutati, the trade and industry minister, told The Africa Report. Trade agreements and non-tariff barriers with neighbouring countries are a lot easier to negotiate than complex export licences to the West. “I can, for example, sell green peas to DR Congo, but to sell the same green peas and export them to the US I’ve got to go through a pest-risk assessment that will take 18 months to three years,” says Mutati.

Such regional thinking is percolating into Zambia’s sales pitch. “When you’re talking of the viability of road projects, you don’t just look at the traffic destined for Zambia,” says Andrew Chipwende, director general of the Zambia Development Agency (ZDA). “Look at the cross-country traffic that is passing through Zambia going to other countries.” In March, a new $25m Zambia-DRC border post opened at Kasumbalesa, following a public-private partnership (PPP) with Israeli group Baran Trade and Investment, financed by the Development Bank of Southern Africa. The government has a full book of other PPPs and toll roads waiting for similar investor partnerships.

Big hydropower projects should bring more megawatts on line to feed the copper mines and to export through the Southern African Power Pool. A joint venture between state-owned utility ZESCO and India’s Tata at the Itezhi-Tezhi dam plans 120MW by 2013, while China’s Sinohydro is due to start construction of a 600MW hydroelectric station at Kafue Gorge with a $1bn loan from the China Development Bank. In an effort to reduce Zambia’s 90% dependence on hydropower, India’s Nava Bharat Ventures got the go-ahead in March to buy a 65% stake in Maamba Collieries, where it plans to invest $600m in a coal-processing plant and 300MW coal-powered thermal power plant.?

A new approach to attracting investment

It will be 20 years this November since Frederick Chiluba’s Movement for Multiparty Democracy (MMD) swept aside the one-party state of Kenneth Kaunda. The flurry of privatisation that followed has now all but dried up. The last big deal was signed in 2010, when LAP Green, a subsidiary of Libya’s sovereign wealth fund, paid $257m for a 75% share in Zamtel, the state-owned telecoms company. Finance Minister Situmbeko Musokotwane is waiting for confirmation from the UN on whether sanctions on Libyan assets mean LAP Green’s profits should be diverted into a fund to safeguard them for the Libyan people.

Now the government’s sights have turned from privatisation to greenfield investment. Since 2007, a Chinese special economic zone (SEZ) at Chambeshi on the Copperbelt has brought in $800m of investment from companies largely focused on adding value to copper before its export to China. Smelters will soon begin feeding a new Chinese copper-cable company on site. There are currently 23 companies in the SEZ – 20 of them Chinese – with a final target of 52. Mutati says he has confidence in the Chinese: “So far, whatever they’ve committed to, they have been able to deliver.” ?

The government has been watching and learning. It is now preparing its own 2,100ha Lusaka South Multi-Facility Economic Zone (MFEZ), but went to Malaysian firm Kulim, rather than the Chinese, to draw up the master plan. In an effort to increase its stake in the investment, the ZDA hopes to persuade investor companies to take an equity share. Indian pharmaceutical company Cadila has already expressed interest.

Thanks to surging copper prices and an accommodating attitude to foreign investors, President Rupiah Banda has managed to keep up his predecessor Levy Mwanawasa’s momentum since he took office in 2008. He will be reminding Zambians of this as he hits the campaign trail ahead of elections to be held before September. The economy has grown on average 6.4% a year since 2006, and is projected to expand by another 6.6% in 2011. Investment continues to flood in, with $4.7bn of approved projects signed in 2010. Zambia sat at number 76 in the World Bank’s 2011 Doing Business ranking and was named one of the top 10 global reformers, having eliminated 92 business licences, which Banda says saved the private sector K68.8bn ($14.7m).??

Finances in good shape

Where there were paltry foreign reserves 10 years ago, today Zambia has $2bn worth. In March, both Standard & Poor’s and Fitch gave Zambia a B+ sovereign credit rating, putting it on a par with Angola, Ghana and Kenya. The government aims to launch its first $500m Eurobond by September, but Bank of Zambia governor Dr. Caleb Fundanga cautions there must be projects ready for when the money starts to flow. “We are also alive to the fact that it is not a licence to borrow uncontrollably,” he said.

Dependence on aid has fallen from 30% of the budget three years ago to 17%. A corruption scandal at the health ministry in 2009 cooled relations with donors, and as Zambia nears the threshold to become a middle-income country, it is expecting more aid cuts to follow. There is as yet no stabilisation fund to save copper revenues for when the chips are down, though Musokotwane maintains “we definitely will set one up”.

The past five years have seen a doubling in GDP per capita, to $1,237 in 2010. To meet the needs of a burgeoning middle class, Zambia’s retail sector is racing ahead like the side-car of a South African motorbike led by ShopRite and Pick n Pay. Zambians complain the shelves of the South African-owned shopping malls are filled with unwanted cast-offs, but this is a stellar improvement from the apartheid years when the borders to the south were completely closed.

Ahead of the elections, ministers are quick to downplay accusations from the opposition Patriotic Front that foreign investors, especially the Chinese, get special treatment. While complaints continue over poor treatment of workers at Chinese-run mines, animosity has grown to the entry of small-scale Chinese entrepreneurs in the restaurant, retail and chicken-rearing sectors. In Lusaka’s Kamwala market, Chinese traders selling cheap imported goods have caused Zambian second-hand clothes sellers to lose business.

There has been little real skills development. Mabel Mung’omba, director of the Citizens Economic Empowerment Commission, points to skills shortages in manufacturing, construction and financial management. With its eyes on the election, the government introduced a new preferential procurement instrument in April that will award foreign investors extra points in tender processes if they contract local firms. Public construction works up to K20bn will also be reserved for Zambian companies.

The government’s approach has been to build and build. It plans to have a hospital in every district by 2016, and education resources are going to building schools. But hospitals and schools don’t run themselves. More investment in human capacity is needed. When it comes to the local private sector, Mung’omba is hopeful foreign competition will catalyse Zambians into upping their game. As she tells her small business clients: “If it’s not the Chinese today, it will be your neighbour tomorrow.”

This article was first published in the June 2011 edition of The Africa Report