VII. Investment Climate Openness to Foreign Investment The Zambian government actively seeks foreign investment, and hosted investment missions from a number of countries including the United States in the last two years. Officials have visited several countries promoting Zambia as an investment site. An updated investment law more conducive to foreign investment has been put into place. --An investment board screens all proposed investments both domestic and foreign. The current law provides special incentives for investments in certain broad "desirable" categories--agriculture, rural areas, tourism, export-oriented, or import substitution. The board makes decisions in an expeditious manner, usually within thirty days. The reviews seem to be routine and non-discriminatory, but there is the potential for discrimination. Applicants may appeal investment board decisions. --In general, little distinction is made between foreign and domestic investors. --The privatization process is open to foreign bidders from the point at which companies are advertised. Many foreign firms are minority shareholders in parastatals with pre-emptive rights. Most have or plan to exercise those rights. Foreign firms are generally treated on par with local investors, although in some cases management buy-out offers get some preference. --The investment law does not discriminate between foreign and domestic investors. --There are virtually no government financed or subsidized R&D programs. --With an approved investment license, an investor is eligible for up to five expatriate work/residence permits. In general work/residence permits are difficult to acquire, and there have been a number of cases of people applying for investment licenses solely to acquire work permits. --Tax incentives include: Income taxed at only 5 percent for the first five years of an investment made in a rural area; farming dividends are tax exempt for five years; in the special incentives areas -- agriculture, rural, exports, tourism or import substitution there is an exemption on customs and sales tax for machinery and equipment. --There are no preferential export policies, however exports from Zambia get special treatment under the US GSP system, and in the European Union under the Lome Convention. Imports to Zambia from countries in the COMESA get preferential duties. Conversion and Transfer Policies Zambia recently repealed its exchange control act removing all restrictions on conversions of kwacha into other currencies and all restrictions on transferring money into or out of the country. Foreign exchange is generally freely available although there is a possibility that a run on demand for foreign exchange could deplete supplies enough to make foreign currency unavailable. To date there has generally been plenty of foreign exchange available to meet demand. The embassy purchases currency at the official rate. The official rate is a floating rate based on a weighted average of the prevailing rates at commercial banks. Expropriation and Compensation Investments may only be expropriated by an act of parliament relating to the specific property expropriated. The law says compensation must be at a fair market value. Methods for determining the market value are ill defined. There have been no expropriations of business since 1989, when several mills were nationalized. The courts have since ordered that they be returned to their previous owners. There is no sign that expropriations are likely to take place in the future. Land, which is held on 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 happened to parastatal and university land. Dispute Settlement: There have been relatively few investments disputes. One involving U.S. investors has been over Masstock, which had a debt swap agreement with the previous government, which the new government has refused to honor after ceasing all debt swaps across the board because of their inflationary effect. Instead the government has put some equity into the project, but the investors still feel they have not received the full value of the original agreement. The courts in Zambia are reasonably independent, but contractual rights and more especially property rights are weak in Zambia. Nonetheless, U.S. companies have been successful in getting court rulings enforcing their contracts even against parastatal companies. Commercial laws are scheduled to be revised in a general program of law reform, but the reforms are still some way down the road due to capacity constraints; i.e. a shortage of legal drafters. There is no law on bankruptcy; bankruptcies are rare in Zambia. Secured interests in property are possible and recognized but fairly rare. There is no system of recording these interests so checking if a property is already securing a loan is very difficult. The Investment code provides that disputants first resort to internal dispute settlement and if that fails then the parties may go to international arbitration, which the state recognizes as binding. The Country is not a member of the ICSID. Performance Requirements and Incentives To qualify for incentives the investment must be in one of the five areas noted earlier--agriculture, rural areas, tourism, export oriented, or import substitution. In addition, mining has been added to the act to offer incentives for investment in mining. The investment must also be made for the investment described in the application. Only a limited number of work permits for expatriate staff may be obtained for any one investment, usually 5. Investors are required to maintain proper financial and accounting records and may be required to allow the director general of the investment board access to those records. Investors must commence operations of the business enterprise within 12 months of license approval and notify the Investment board of commencement. Investors may apply for extensions for commencement of business. There are no requirements for local content or equity, financing, employment, or technology transfer. Right of Private Ownership and Establishment There is a right of private ownership of business enterprises. There are no longer any business ventures reserved solely for the government. However, firms in telecommunications have as yet been unable to get licenses for new or competing services. There are licensing requirements for the establishment of some kinds of business and registration is required of all businesses. Some businesses require that people with local qualifications are on the board or in management. For example, to register an engineering company, two board members must be engineers licensed in Zambia. 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. Although policy is to have competitive equality, in practice parastatals still often are ordered to favor other parastatals in contracts for goods and services. Protection of Property Rights Property rights in general are weak in Zambia. Intellectual property rights are nearly nonexistent. planned legal reforms include the strengthening of property rights. The government is aware of the necessity to improve intellectual property rights in order to attract investment. Zambia's patent laws conform with the requirements of the Paris Convention for the protection of industrial property of which Zambia is a signatory. It takes a minimum of 18 months to patent an item or process. Duplicative searches are not done but patent awards may be appealed on grounds of infringement. Trademark protection is adequate. Copyright protection is limited and does not cover computer applications. There are fines for revealing business proprietary information but they are not large enough to discourage disclosure. Laws and Procedures Current business laws are outdated and many modern business practices are not covered under current law. Many procedures lack transparency. The government is keenly aware of the need to modernize and streamline regulatory procedures. Steps have been taken to improve the Registrar of Companies and the Bureau of Standards. In some cases there are de facto changes where current laws are simply not being applied, for example in gemstone mining. Tax laws have improved, but tax enforcement concentrates on the relatively small formal sector, while the large informal sector goes completely untaxed. Labor laws raise labor costs and are a further incentive to keep businesses and employment outside the formal sector. Some bureaucratic procedures are reasonably transparent, but many others are not and considerable red tape and delays are the norm for many standard procedures. Capital Markets and Portfolio Investment Currently the capital market in Zambia is severely restrained by high real interest rates. Effectively only short term borrowing is available, with no medium or long term borrowing occurring. A stock exchange has been established which allows companies to raise capital through the issue of shares. Credit is allocated on market terms and foreign investors may borrow on the local market. However, government lending to parastatals or semi-official bodies is seldom recovered. The private sector has access to all borrowing instruments available, but such instruments are limited in type. Accounting systems are based on the British system. The regulations for portfolio investment are new and the system is still being formed. The stock exchange is only a few months old. Some banks offer investment funds in property and other investment areas. Regulation seems adequate. There are no figures available on bank assets. Overall the banking system appears to be fairly sound, but there are too many banks operating (over 20) for such a small economy to support. Many are profiting from the high return on treasury bills and the spread between their earnings and the interest they pay out. When interest rates and spreads fall smaller or weaker institutions will not survive. There are no shareholding patterns used to restrict foreign investment through mergers or acquisitions. There are no laws which authorize companies to restrict foreign shareholding. There are no efforts to restrict foreign participation in setting standards. There are no practices of private firms to restrict foreign participation or control of domestic enterprises. 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 continue to be. Unrest in several countries bordering Zambia have caused an influx of refugees, and have increased crime and border incidents in the areas bordering Zaire. Bilateral Investment Agreements No known bilateral investment treaties. Investment Insurance programs OPIC Insurance is available to US investors in Zambia. Zambia is a member of the Multilateral Investment Guarantee Agency (MIGA) Labor There is an abundance of unskilled labor, adequate semiskilled labor and a shortage of skilled and professional workers. Foreign employers describe their Zambian employees as, for the most part, bright, quick to learn, and hard working. AIDS is epidemic in Zambia and the already scant skilled labor force appears to be hardest hit. The government adheres closely to ILO conventions. Labor-management relations vary somewhat by sector. Strikes are becoming less frequent as inflation falls. Labor laws which mandate that employers provide housing to all employees and very high pay outs to retrenched employees, drive up labor costs and keep hiring to a minimum. Foreign Trade Zones/Free Ports. There are currently no areas designated as free trade zones or free ports. The Investment act provides for such zones and foreign firms would have equal access. Capital Outflow Policy The exchange control act has been abolished. There are no regulations pertaining to investment outside the country. Foreign Direct Investment Statistics: There are no consolidated statistics on direct foreign investment in Zambia. Several parastatals have partial foreign ownership and at least one hundred foreign companies have some investment in Zambia, including 26 US firms. The investment center approved applications for over USD 136 million in hard currency investment in 1992 and for USD 292 million in 1993. So far only USD twelve million has been approved in Jan-Mar 1994 of which USD 11 million was foreign investment. The sectors attracting the most investment are manufacturing, agriculture and transport. In 1994 that pattern has changed to services, construction, and transport. Foreign firms investing include British, Dutch, French, Germans, Indians, South Africans, and Zimbabweans. Foreign investment by Zambians is an underground statistic as until recently Zambians were not allowed to externalize funds. Estimates of Zambian held capital overseas usually run about USD 300-500 million. Major Foreign Investors The largest foreign investors in Zambia are Anglo-American, which holds a 27 percent stake in ZCCM and has further interests in food processing, hotels, trading, agriculture, and other businesses; Lonrho, which has ventures in agriculture, mining and services; and the ITM group which includes the Meridien banks, and Chibote Farms in agriculture and food processing. The Commonwealth Development Corp has shares in a number of enterprises and just acquired a majority shareholding in Chilanga cement. Traditionally the private sector in Zambia has been dominated by foreign firms with most large Domestic firms being parastatals. Twenty-six US firms have subsidiaries in Zambia including Mobil, Caltex, Johnson and Johnson, Colgate, Coca Cola, Crown Cork, Phelps Dodge, Citibank and Price Waterhouse. At least three of these US firms are considering or planning to increase their investments in Zambia. A number of new US companies are considering investment in Zambia.