Leveraging Policy Reforms
Leveraging Policy Reforms to Unlock Critical Mineral Production
Context
Predictable taxation, streamlined licensing, and transparent regulation are critical for attracting investment in the mining sector. Across Southern Africa, countries with abundant copper, cobalt, and other critical mineral reserves are reforming their policy frameworks to meet rising global demand for these resources, which are essential for electric vehicles, renewable energy systems, and other low-carbon technologies. Common challenges include volatile tax regimes, complex licensing systems, low levels of geological mapping, and limited downstream value addition.
One example is Zambia, a leading global producer of copper and cobalt, which accounted for ~3% of global copper output in 2023.[i] The country has recently introduced a series of reforms aimed at revitalizing its mining sector, increasing production, and attracting investment.
In recent years, the government introduced a series of reforms, aimed at revitalizing the mining sector and boosting the production of critical minerals. The decade old legislation, the Mines and Minerals Development Act, has been replaced with a new one which is focused on streamlining regulation under a centralized body and enhancing local participation.[ii]
Challenge
Despite having large reserves of mineral resources, particularly critical minerals, Zambia’s mining sector faced several challenges:
- Uncertain policy regime: Zambia was struggling with a high tax regime, complex set of laws and regulatory hurdles in the mining sector which prevented investments. Mining tax laws were volatile and changed frequently in response to movements in the price of copper. Royalty rates have witnessed abrupt increases in the past, there has been double taxation on mineral royalties and a 5% import duty was levied on copper concentrates.[iii]
- Macroeconomic conditions: Zambia was the first country to default on its external debt after the COVID-19 pandemic, after years of taking on debt (Debt-GDP ratio being ~115%) and increasing loans to unsustainable levels. The key reason for debt was a lack of diversification in the economy and heavy reliance on copper mining. Volatility in the price of copper led to fiscal and trade imbalances.[iv]
- Underinvestment in exploration & mapping: Almost 45% of Zambia’s land has not been geologically mapped and 55% of it had been mapped almost 25 years ago. Macroeconomic woes have further exacerbated the underinvestment in exploration by private companies. The mining potential is severely untapped and to further develop the sector, mining companies require support in exploration to discover new deposits.[v]
- Low value addition: Reliance on exports of unprocessed minerals has led to limited value adding downstream processing activities. This has also led to a resource nationalism approach, where the import duty on copper concentrates was levied.[vi]
Approach
To address these challenges, the government of Zambia has enacted a series of policy reforms:
- National Mineral Resources Development Policy 2022: Addresses policy challenges by promoting transparency in licensing, stabilizing taxation, incentivizing exploration through Public Private Partnerships, formalizing artisanal mining, fostering local ownership and enhancing mineral value addition[vii]
- Zambia’s Budget of 2023: Introduced tax reforms such as a reduction from 10% to 7.5% of the property transfer tax on mineral rights, allowing for deductions of mineral royalty tax for mining companies, and introducing presumptive taxation for Artisanal and Small-scale mining as a percentage of revenue[viii]
- Minerals Regulation Commission Act 2024: Centralizes regulatory functions under the Minerals Regulation Commission, streamlines licensing with a one-stop system, and introduces stricter compliance measures to prevent speculative license holding. It also expands mining rights for locals and introduces a Property Transfer Tax for mining rights, stabilizing government revenues[ix]
Conditions
There are several factors that enabled Zambia to undertake the reforms to uplift the mining sector
- Increasing importance of critical minerals: Copper exports, amounting to ~70% of the country's total exports in 2022, have always been the key economic driver. The government setting up an ambitious target of increasing copper output to 3million tons by 2032, from 700,000 tons currently, increased the need for fast paced reforms[x]
- Political will: The election of a new President in 2021 and the new government’s focus on the mining sector created an opportunity to enact major legislative reforms
- Strategic partnerships: Investments from mining companies such as Rio Tinto, First Quantum, and International Resource Holdings, alongside the US led effort on infrastructure projects such as the Lobito Corridor, necessitated mining sector reforms[xi]
Observed Impact
Countries that implement comprehensive reforms often see early improvements in investment climate, exploration activity, and production.
In Zambia, initial results include:
- Production growth potential: Government projections indicate copper output could rise to 1 million tonnes by 2026 through expanded mining investment.[xii]
- Improved licensing processes: Integration of ICT and enhanced stakeholder collaboration has increased transparency, efficiency, and accountability.[xiii]
- Stable taxation environment: The reformed property transfer tax and royalty deductions have improved investor confidence while increasing the government’s revenue share.[xiv]
- Strengthened partnerships: Mercuria Energy Group has partnered with Zambia on a metals trading venture to secure access to key resources.[xv]
What’s Next for the Southern African Region
Recent reforms in the region highlight lessons for other mineral-rich countries to align their policies with the increasing demand for critical minerals and unlocking their mining potential.
- Stabilizing tax regimes: Stable and predictable taxes are necessary for attracting foreign investment in the mining sector. Any uncertainty makes it difficult for investors and impedes the development of critical mineral value chains.
- Local processing: Legislative changes that support local players and formalize artisanal mining can allow the countries to capture more value locally, without the need for explicit export bans.
- Global partnerships: The right set of policy reforms can pave the way for partnerships with mining companies, governments from other countries as well as Development Finance Institutions to support the mining sector.
[i]https://www.csis.org/analysis/recommendations-building-zambias-copper-industry
[iii]https://www.csis.org/analysis/recommendations-building-zambias-copper-industry
[iv] https://www.csis.org/analysis/recommendations-building-zambias-copper-industry
[vi] https://www.csis.org/analysis/recommendations-building-zambias-copper-industry
[viii] https://www.csis.org/analysis/recommendations-building-zambias-copper-industry
[x] https://www.csis.org/analysis/recommendations-building-zambias-copper-industry
[xi] https://www.csis.org/analysis/recommendations-building-zambias-copper-industry
[xv] https://www.mining.com/web/mercuria-partners-with-zambia-on-metals-trading-venture/