• Government Seeks 26% Stake: Government plans to acquire a 26% stake in all future mining projects, with negotiations underway to retrofit existing agreements
• Impact on Mining Sector: The policy shift may deter investment, undermine property rights, exacerbate high operating costs
• Regional Comparison: Zimbabwe's proposed policy diverges from regional peers, where governments...

Harare- Last week, in an interview with global media outlet Bloomberg, the government hinted at plans to introduce a 26% shareholding in all future mining projects and also negotiate with the already settled ones. This comes after President Mnangagwa abolished the 49%:51% indigenization policy under Mugabe.

As a result of this abolishment announcement by President Mnangagwa in 2017, FDIs shot up rapidly in 2018 to US$745 million, which was a 338% increase. Unfortunately, they fell by 62.8% in 2019 post the violent 2018 national election.

In 2020, the government of Zimbabwe (GOZ) enacted amendments to the Indigenization Act, effectively exempting diamonds and platinum from the purview of indigenization requirements, which mandated majority ownership by indigenous Zimbabweans.

Although the revised legislation appeared to grant the GOZ considerable latitude to designate minerals for indigenization in the future, a subsequent joint statement issued by the ministers of finance, mines, and industry in February 2021 provided reassurance to investors, explicitly stating that no minerals, including diamonds and platinum, would be subject to indigenization.

This policy recalibration has yielded a significant uptick in Foreign Direct Investments (FDIs), with year-over-year increases of 66%, 59%, and 49% recorded in 2021, 2022, and 2023, respectively.

“There is a general position which is there like in the case of mining we need to move to a level where we reach 26% shareholding in most of the big projects,” Pfungwa Kunaka told Bloomberg in an interview.

“We have some situations where there are already some existing mines and new mines that we will come on board. A lot of these things would take negotiations with the investors that are on the ground.”

However, how will this 26% shareholding mean for miners?

This means that any new mining company setting up operations in Zimbabwe will be required to give the government a quarter of its business. Additionally, the government plans to renegotiate existing agreements with current mining companies to also acquire a 26% stake.

To illustrate this, let's consider a mining company that generates $100 million in annual profit. If the government acquires a 26% stake in this company, it will be entitled to 26% of the company's annual profits. This translates to $26 million, leaving the company with $74 million.

Zimbabwe's new policy aims to increase government control and revenue from mining activities, aligning with regional countries that are also seeking to maximize their benefits. Zambia, for instance, announced a strategy this year where a state-owned company will control at least 30% of future critical minerals mines, despite opposition from the Chamber of Mines, which claims it will undermine property rights.

In Tanzania, the government receives at least 16% of mines for free, with the option to acquire up to 50%. Namibia requires 15% of new licenses to be locally owned, while Ghana sets aside 10% of mines for the government. Ghana also took a 13% free stake and an option to buy another 6% in its first lithium mine.

Botswana's law allows the government to buy 15% of mining projects, with a proposed law that would compel mines to sell 24% to citizens if the government doesn't take up its options.

However, though the policy of acquiring a 26% stake in all future mining projects may seem feasible, it affects the property rights, a crucial aspect of attracting Foreign Direct Investments (FDIs) and one of the key challenges that have impacted FDI efficacy in Zimbabwe.

Property rights refer to the legal rights and interests individuals or organizations have over tangible or intangible assets. In the context of mining, property rights encompass the rights to explore, extract, and utilize mineral resources. The proposed policy would effectively dilute these rights, potentially discouraging investment and undermining the sector's growth.

Furthermore, Zimbabwe's mining sector is already beset by high operating costs, exacerbated by exorbitant taxes and royalties. For instance, the country's 10% royalty on diamonds is the highest in the region.

Additionally, the 25% export surrender requirement, which involves exchanging foreign currency for the local currency at an overvalued rate, has been likened to "daylight robbery." RioZim, a prominent mining company, reported losing a staggering 51% of its revenue due to this policy and electricity deficits.

The financial burden on mining companies is substantial. According to the Chamber of Mines, 20% of miners' revenue is lost due to electricity costs. When combined with the proposed 26% government stake and 13% export surrender portions, a company generating $100 million would forfeit $20 million to electricity costs, $26 million to the government, and $13 million through surrender portions.

The electricity conundrum further exacerbates the challenges faced by Zimbabwe's mining sector, as the government's directive for miners to create their own energy by 2026 will necessitate substantial investments in power generation infrastructure, thereby increasing operational costs.

These requirements, which are not typically imposed on miners in other nations, will render Zimbabwe's mining sector less competitive, as miners in other countries are often incentivized with favourable policies and subsidies to encourage investment and growth.

It is worth noting that Zimbabwe's tax and royalty regime is already among the highest in the Southern African Development Community (SADC) region. The Confederation of Zimbabwe Industries (CZI) recently ranked Zimbabwe as the third most complex country to operate in, citing the need for high taxation.

Such conditions are uncommon in other countries, making it challenging for Zimbabwe to adopt this policy without jeopardizing its mining sector's competitiveness.

The mining sector is a pivotal contributor to Zimbabwe's macroeconomic framework, exerting a profound impact on the country's GDP, foreign exchange earnings, and fiscal revenue. As a key driver of economic growth, the sector's 13% contribution to GDP signifies its critical role in stimulating economic expansion.

Furthermore, the sector's dominance in export-oriented activities, accounting for 60% of total exports and over 60% of export earnings, renders it a vital component of Zimbabwe's trade balance and balance of payments.

From a fiscal perspective, the mining sector's contribution of over 20% to government revenue highlights its importance in supporting public finance and facilitating the implementation of fiscal policy. The sector's employment footprint, encompassing over 38,000 formal jobs and more than 500,000 artisanal and small-scale miners (2022 stats), also reflects its significance in terms of labour market outcomes and poverty alleviation.

In light of these considerations, the proposed 26% government stake in mining projects assumes heightened significance, with potential implications for the sector's competitiveness, investment attractiveness, and overall economic performance. As such, policymakers must carefully calibrate this initiative to ensure that it achieves the desired objectives without compromising the sector's viability or Zimbabwe's broader economic interests.

Therefore, it is evident that the government cannot simply adopt a "copy and paste" approach to policymaking, blindly replicating measures implemented in other nations without considering the unique circumstances and challenges prevailing in Zimbabwe's mining sector.

A more nuanced and context-specific approach is necessary, one that takes into account the sector's distinct characteristics, such as the high costs associated with electricity generation and processing requirements, to ensure that policies are tailored to support the sector's growth and competitiveness.

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