As His Excellency the President Mr. Edgar Lungu officially opens the 4th Session of the 12th National Assembly, The Policy Monitoring and Research Centre hereby provides the following as our expectations to inform the address to the National Assembly and the country at large.

The following are our expectations:

  • A call for unity in South Africa and the SADC region in general as we build towards implementation of the Continental Free Trade Area. Further, an emphasis for all citizens to continue upholding national values and ethics.
  • Energy Deficit: updates on immediate interventions and resolutions with regards to what is being done to address the power shortages and, also, road map on the status of diversifying our energy sources.
  • Updates on key policy decisions that have been recently postponed: (a) The National Airline – what is the progress and when will it be fully launched? (b) The Sales Tax: what is the way forward for Zambia? Emphasis on more research and refinement. (c) An update on the status of the National Health Insurance Scheme, especially as it relates to universal health for all.
  • Updates on how the country is fairing on the implementation of the 7th National Development Plan and also a call for more commitment to ensure enhanced implementation of the Plan.
  • The current macro-economic situation, economic diversification interventions and job creation, poverty and vulnerability reduction, as well as reducing developmental inequalities.
  • Aspects of a conducive business environment by giving a position on the interest rates and also measures being undertaken by the Government to promote access to finance, especially by the rural community.
  • Updates on the implementation of the e-Voucher and the Social Cash Transfer as well as the performance of other empowerment facilities such as the women and youth empowerment programmes.
  • Updates on what Government is doing to ensure a speedy return to low risk of debt distress and maintaining the debt within sustainable levels.
  • In the agriculture sector, we expect the address to highlight interventions that will focus on increasing agricultural production, stepping up the agricultural diversification programme and improving food security and nutrition.
  • Critical under the mining sector, interventions aimed at promoting value-addition in the sector in a bid to create backward and forward linkages with other sectors of the economy.
  • Trade policy and how it is fairing. What steps has Zambia taken so far to be ready for the Continental Free Trade Area (CFTA)?
  • Enhancement of the industrial clusters and establishment of more youth centres to promote innovation and growth. In the same aspect, the President should also provide updates on the Local Content Policy and any development that have been recorded.
  • A call to the private sector to partner much more with the Government and ease treasury spending.
  • Further call on ministries to enhance working collaborations with policy and research institutions and together collaborate on key development targets as outlined in the National Development Plan.
  • Overall, policy updates, building on from the mid-year Economic Brief by the Ministry of Finance.

The railway system in Zambia is an extensive network of surface transport connecting all major centers of economic activity and is strategically instrumental in facilitating enhanced trade and growth.

However, the railway systems network in Zambia has been operating at a sub-optimal level compared to its capacity.

Tanzania/Zambia Railway Authority (TAZARA) which is co-owned by Governments of Zambia and Tanzania covers approximately 1,900 km from Kapiri-Mposhi Zambia to Dares-slam in Tanzania.

Key Challenges in the Railway Sector:

  • TAZARA and ZRL have insufficient locomotives and wagons. For instance, by 2014, ZRL had a total locomotive fleet holding of 37, out of which 24 were operational and the balance 13 were defective and extensively cannibalized (Rail News, 2017).
  • The average speed of locomotives is about 40km per hour, which is too slow in modern business and commerce.
  • Lack of reliability and has outdated infrastructure characterized by poor maintenance.
  • Lack of coordination with regional railway companies. For instance, there is weak coordination between ZRL, TAZARA, Spoornet and other railway companies in the region.
  • Rail shipments have also been criticized for lacking proper security.

Planned Railway Projects

The Zambian Government has realized the need for transport infrastructure development, particularly road and rail that would open up export opportunities.

  1. The Chipata-Petauke-Serenje Railway line was recently approved for construction to complete the link from the port of Nacala to the existing railway lines in Zambia and thereby establishing Chipata as a dry port on the eastern border of the country.
  2. The Zambian Government has committed itself to the development of railway sector through proposed construction and development of various railway lines as indicated in the table below:

Government Interventions to Increase Railway Freight

  • The Government’s nullification of the concession with the Railway System of Zambia (RSZ) in 2012, which lead to an eighteen percent growth in the traffic of the ZRL between 2012 and 2017.
  • In 2012, the Government decided to allocate about USD 120 million into ZRL in order to increase tonnage capacity and enhance the rolling stock. Consequently, tonnage carried was increased to 732,284 tonnes in 2013 and closed around the 959,956 tonnes in 2014 after ZRL allocated USD 81.8 million towards railway infrastructure and USD 38.2 million towards rolling stock in 2012.
  • In October 2018, The Industrial Development Corporation (IDC) Board had approved an investment of $850 million into rail infrastructure and rolling stock for Zambia Railways Limited (ZRL). The investment was important because it was a wholesome package which attends to the entire capacity constraints of ZRL
  • Government brought into effect the Statutory Instrument to compel transporters of heavy cargo to move 30 percent of bulk cargo from road to railway in January 2018. This was done in a bid to optimize the transport sector and promote the sustainability of rail subsector.

Recommendations

Government has intentions of developing rail spurs in intracity transit systems. As PMRC we recommend that Government should strictly utilize Public-Private Partnership (PPP) to access private financing given the constrained fiscal space. Government needs to further explore other forms of engaging the private sector through;

  1. Service Contracts
  2. Infrastructure Construction and Maintenance
  3. Equipment Ownership and leasing
  4. Management Contracts
  • There is need to dis-bundle the rail line operations, where rail infrastructure development and management are separated from operations by the creation of the Rail Development Agency of Zambia.
  • The Government should continue with the maintenance and upgrading of the rail infrastructure to reach the desired speed of 80 kilometers per hour for freight trains and 120 kilometers per hour for passenger trains.
  • Zambia should engage in Bilateral/Multilateral Railway Route management groups with other countries to collaborate on rail use and infrastructure development to increase volumes and ensure the suitability of the rail sector.
  • Government needs to put in place regulatory bodies to monitor market performance, competition and even safety issues. Currently no regulator is installed in Zambia for the railway sector except the General inspector of railways, based in the Ministry of Communication and Transport.

The Electronic Voucher Farmer Input Support Programme (e-Voucher) was fully implemented during the 2017/2018 farming season after a successful pilot of two farming seasons before. There have been notable implementation successes such as; reduced Government expenditure associated with procurement, transport and storage of inputs. The other successes relate to increased private sector participation in input distribution, beneficiary farmers have wide options of agriculture, livestock and fisheries inputs to choose from and an improvement in beneficiary targeting among others successes.

However, e-Voucher FISP implementation also faced challenges notably; delays in Government funding; complications in deposit capture due to lack of physical presence by some contracted banks in some districts, poor internet connectivity and poor flow of beneficiary information among other challenges. Consequently, Government was prompted to vary the FISP implementation in the current 2018/2019 farming season with fifty-four districts reverted to the old Traditional Direct Supply of inputs while sixty-one districts, have been maintained on the new e-voucher FISP.

Status of FISP implementation in 2018/2019 farming season

PMRC has noted remarkable improvements with the Zambia Integrated Agricultural Management Information System (ZIAMIS) platform performance which previously was characterized with systems crashes, stakeholders’ competence limitations in the use of the code system and slow processing time. ZIAMIS system improvements and other interventions by the Ministry of Agriculture has led to enhanced beneficiary targeting with over 900,000 farmers making the K400 contributions by December 2018 after being given Authority To Deposit (ATD).

We have however, noted a number of challenges that need urgent attention in as much as over 850,000 farmers having redeemed inputs by the end of 2018 through the direct supply of inputs and e-Voucher FISP. The following are the challenges;

  1. Late payments to suppliers under the ‘Direct Supply of Inputs FISP mode’ who in some instances opted to withhold input stocks.
  2. Late payment and backlog of pending payments to some agro dealers which has affected their cash flow and consequently affected operations with some being forced to suspend operations.

These challenges need to be adequately addressed to ensure smooth implementation of E voucher and also attain the programmes broader objectives

As PMRC we earnestly propose that the Government to re-strategize the funding modalities of the FISP and consider upfront complete funding of the entire programme as opposed to the phased funding to assure programme reliability and prompt agro-dealer payment starting with the current farming season. This would ensure sustainability.

To further develop agricultural produce marketing capacity in remote areas and increase the volumes of agricultural produce traded and facilitate fair prices leading to better profits and income to smallholder farmers, Government needs to focus attention on the state of feeder roads in addition to high-ways that have received considerable attention. To ensure effective linkage between the small-holder farmers and markets, Government through the Road Development Agency (RDA) should conduct routine grading of feeder roads.

The effective implementation of FISP given the favorable rainfall forecast for this season should be anchored on reliable and timely funding and resolving other perennial challenges in the sector. This will not only guarantee a bumper harvest to ensure food security but also guarantee peoples’ livelihoods.  Effectively, Food Reserve Agency (FRA) will be in a position to meet 500,000 metric tonnes of maize crop strategic reserves. The country will also have enough crops to export and do away with the costly export bans and administrative export restrictions that deprived the country of the much-needed foreign exchange.

Recommendations

  1. Government should prioritize disbursement of funds with upfront payment to FISP program
  2. The Government needs to formulate exit strategy for the farmers currently on the FISP programme given the improved beneficiaries’ information storage and processing through the Zambia Integrated Agriculture Management Information System (ZIAMIS) database. This will enable Government to cater for as many eligible farmers as possible in the future.
  3. Government should also prioritize the maintenance of feeder roads to link farmers to the markets to further develop agricultural produce marketing capacity.
  4. We encourage Government to continue with the review of districts reverted to the direct input supply especially those that have enhanced agro-dealer capacity so that they are taken back to e-voucher FISP

7th August 2019 marked another milestone in the diplomatic discourse of Zambia. The day marked the official launch of the Sustainable Development Goals Sub-Regional Center for Southern Africa, housed in Lusaka. The launch was graced by the Republican President Mr. Edgar Chagwa Lungu and his counterpart President Paul Kagame of Rwanda. This launch came after the Zambian Government, on 23rd September 2018, signed an agreement to establish the centre in Zambia on behalf of the southern African region in order to foster for the implementation of SDGs in Southern Africa, in line with the principles of the African Union 2063 Agenda.

At continental level, following the adaption of the SDGs in 2015, African countries agreed to establish an African institution to promote the implementation of SDGs. In 2016, the SDG Centre, whose headquarters is based in Kigali Rwanda, was established to further this cause and create partnerships across Africa. The objectives are that all countries were acting together in the pursuit of achieving both the African Development Agenda and the Global Agenda.

The Southern Africa SDG Centre in Lusaka Zambia is a strategic institution that will aid with the speedy implementation of the SDGs in the SADC region. Zambia currently hosts the Common Market for Eastern and Southern Africa (COMESA), as well as United Nations Economic Commission for Africa (Sub Region Office).  Zambia also houses The Economic, Social and Cultural Council (ECOSOCC), an African Union organ. Further, President Lungu is the immediate past Chairperson for The TROIKA, which is the SADC organ on politics defence and security.  All these milestones emphasize the positives of Zambia’s Economic Diplomacy and all-encompassing development approach.

From the above, Zambia continues to score positive strides in its diplomatic relationships, both bilaterally and multilaterally. The establishment of the SDG Centre in Lusaka offers opportunities for Zambia in its implementation of the Global Agenda, AU Agenda 2063 and domestication of the SDGs as the country is implementing the Seventh National Development Plan. Overall, Zambia remains a premier investment destination especially underpinned by the favourable investment climate ranging from political stability, favourable climate, abundant skilled human resources, central location, to its interlink with SADC and COMESA.

The hosting of the Centre in Lusaka offers an opportunity for easy access to information for Government, Academia, Civil Society, research institutions and other stakeholders, especially in relation to SDGs implementation and AU Agenda 2063 indicators for the country and the region, which are essential for decision-making. According to the Seventh National Development Plan, Zambia, in the previous National Development Plans, faced a challenge of lack of data due to the failure of the M&E systems to provide information; therefore, the SDG centre is an opportunity that Zambia can use to capacitate its implementing institutions in data collection through appropriate M&E systems.

With support from the Centre, Zambia will be able to create viable partnerships within and outside the country which are essential in the implementation of SDGs and the National Development Plan.  Additionally, the technical expertise and evidence research findings from the Centre will feed into Government decision-making processes. Overall, the Centre will play a key interlinking role of facilitating collaborations between key institutions in the region, who are all focused towards SDGs implementation. This will further promote integration in the region at institutional level.

Lastly, the housing of the Centre in Lusaka continues to improve the diplomatic status of Zambia and offers opportunity for hosting and housing of several other global and regional centres. This decision further validates Zambia’s stability and peaceful environment which are key drivers for potential international business owners to establish businesses which would benefit the country both socially and economically.

In order for Zambia to harness for opportunities arising from housing the SDG Centre in Lusaka Zambia, there is need for willingness by all stakeholders in the development sphere, to offer support and cooperation for the successful establishment and operations of the Centre.

Zambia’s Economic Diplomacy remains very positive

The sub-sector has over the recent years experienced development making Zambia one of the leading countries in fish farming in the region.  Despite these developments, the sub-sector has still remained in its infancy stage if compared to other sub-sectors in the agricultural sector such as the crop and livestock sub-sectors. The following appear to be some of the factors constraining the sector:

  • To begin with, the aquaculture sub-sector is guided by inadequate policy framework, although Government has developed an aquaculture strategic plan, this plan has not been fully implemented to facilitate for the management of the sector which could enhance fish production.  It is therefore required that Government works with relevant stakeholders to implement best aquaculture management practices which will further develop the sub-sector.  With the introduction of the Ministry of Fisheries and Livestock, there exists an opportunity for improved policy implementation and improved support.
  • Secondly, there have been low levels of investment in the aquaculture sub-sector when compared to other sectors in the economy. However, there is need for a deliberate paradigm shift that would change the development of the sector through research and extension services for meaningful aquaculture development to be actualized spearheaded by the Ministry of Fisheries and Livestock.
  • Lastly, there is fragmented coordination amongst stakeholders leading to delays in the implementation of aquaculture strategies, interventions, and policies. It is therefore important for the Ministry of Livestock and Fisheries to work together with different stakeholders to ensure the effective implementation of initiatives that will increase aquaculture production and productivity.

 

BEST PRACTICE IN AQUACULTURE IN AFRICA

There are a number of countries Zambia can learn from best practice for a successful aquaculture sector such as Egypt. The Egyptian aquaculture sub-sector is currently number ten in the world in terms of fish production and the largest in Africa.  This status has been due to a number of interventions that the Egyptian government has implemented in the last four decades targeted on reducing fish imports due to a reduction in capture fisheries and the realization of the economic opportunities of aquaculture.  In 2010 the Egyptian government designed and implemented a National Aquaculture 2030 Strategy, this strategy focused on the development of freshwater aquaculture with an emphasis on cage fish farming and desert fish farming.

 

In order to achieve the 2030 strategy, the Egyptian government implemented a wide range of policy interventions such as;

  • Efficient use of fresh water for fish production through the recirculation aquaculture method of rearing fish, rather than using open ponds.  The choice of this type of fish farming was considered the best for increased productivity because it is done all year round, low water requirement and little space.
  • Financing for aquaculture- the government has made strides in financing aquaculture, although challenges still exist for small-holder farmers to access finance from formal financial institutions when compared to informal credit providers.
  • The Government has created an environment where it has licensed the establishment of fish feed mills within the country for feed production.

From the Egyptian case, Zambia can adopt the policy implementation of an aquaculture strategy to guide the sub-sector development and the use of the recirculation aquaculture system which will ensure whole year-round fish production which will cushion the gap in supply caused by the fish ban.

Download the booklet here:

www.pmrczambia.com/wp-content/uploads/2018/09/The-Aquaculture-Sub-Sector-in-Zambia-Challenges-and-Opportunities.pdf

The fisheries sub-sector in Zambia plays a significant role in the economy as it offers an opportunity for improved nutrition, income generation, and job creation, resulting in general wealth creation and food security at household and national level.  At national level, the fisheries sub-sector contributes approximately 3.2% to the national Gross Domestic Product (GDP) (Second Agricultural Policy, 2016). Given the abundant water resources that Zambia has, the fisheries sub-sector has been identified as one of the avenues for agriculture and general economic diversification through enhanced and efficient capture fisheries and fish farming. At household level, the fisheries sub-sector is identified as one of the sectors that can provide additional protein. In addition to other sources such as livestock and crops, fish accounts for about 40% of protein intake in rural areas. This sector is key in the efforts towards scaling up nutrition levels, food security, and income generation.  At household level, the fisheries sector contributes to household income through fishing activities as the main economic venture in some parts of the country.

In simple terms, aquaculture is defined as farming and husbandry of aquatic organisms under controlled or semi-controlled conditions. This term refers to the cultivation of both marine and freshwater species which range from land-based cultivation and open water production in cages.  In Zambia fish production through aquaculture is carried out both on land in ponds and in open waters by putting cages in rivers.

The fisheries sector has the potential to produce 150,000 metric tonnes of fish annually but it currently produces about 70,000 tonnes of which 87% of the production comes from capture. Fisheries (Second Agricultural Policy, 2016).   The current fish production in the country has failed to meet the country’s domestic demand for fish, this has led the country to become a net importer of fish.  In 2015 Zambia’s fish imports volume was 77,199 metric tonnes which increased to 126,345 metric tonnes in 2016. (Department of Fisheries, 2017). In terms of net worth of the fish that the country imports, the Seventh National Development plan indicates that in 2011, fish imports were valued at US$ 32,118,412 which increased by 253% to US$113,434,446 in 2015 while the value of fish exports decreased from US$1,081,964 to US$503,649 between 2011 and 2015 (Ministry of National Development Planning, 2017). This increase in fish imports and increase in demand has necessitated the development of fish farming through aquaculture development and promotion. Government, with the help of various cooperating partners such as World fish, Peace Corps, and Caritas Zambia has in the recent years facilitated the development of aquaculture development to drive the agenda of improving nutrition and food security.

Aquaculture is, evidently, one of the avenues which the Government can capitalise on in view of diversifying the Zambian economy from copper to other sectors. The economic benefits that could be accrued from aquaculture development and advancement are further necessitated by the increase in the demand for fish at regional and national level. At its current annual production, the fisheries sector in Zambia cannot meet the required demand for fish.  Aquaculture development and advancement presents a long-term solution for the increased demand for fish. The need for reduced fish imports in the country creates a favourable window of opportunity for appropriate investment into aquaculture technology in order to enhance production and productivity of fish through aquaculture both at commercial and smallholder production.

Download the booklet here:

www.pmrczambia.com/wp-content/uploads/2018/09/The-Aquaculture-Sub-Sector-in-Zambia-Challenges-and-Opportunities.pdf

Zambia must prepare for the various potential challenges that she may face. In order to prepare for the potential increase of migration, various policies may be developed. These policies must be set up in such a way that Zambian citizens are protected from loss of employment; and that immigration of skilled labour is encouraged to ensure that the benefits of these skills are harnessed. Skilled labor allows the country to be efficient in its production and also its ability to develop advanced technological systems and equipment within the country. Zambia also needs to focus on strengthening the facilitation of movement of capital.

As the region becomes a large single market, competition is likely to increase for Zambian producers in particular. It is essential for Zambian producers and businesses to be able to survive in this very competitive market. Research on the potential demands of products that Zambia may have comparative advantage in should be carried out to ensure necessary targeting is done. This will give Zambia an advantage as it services varying customers in different countries. Cost-benefit analysis of the best means of business must be undertaken to ensure efficiency and to benefit from economies of scale. Zambia must also invest in technology and equipment which improve productivity.

Zambia can also mobilize domestic resources in such a way that it can survive the potential short term losses that come with developing the CFTA. In this way, the country may not incur a lot of costs despite the reduction in tariff revenue. The removal of trade barriers is likely to bring about foreign direct investment and more multinational companies that need to be regulated. The issue of cross-border tax avoidance may arise as a result of this. Zambia may avoid this by endorsing a global common reporting standard for Automatic Exchange of Information (AEOI) which allows easier access to financial information to the residence country.

Support must be provided for small scale producers to avoid crowding out by a market run by the private sector. Small scale producers may adapt to the post-CFTA market through enhanced technical, managerial and financial skills and meet industry standards. The Government may assist in the investment of these attributes.

Zambia’s priorities in its trading arrangements are currently focused on interventions that promote value addition, diversification and job and wealth creation. In order to achieve this Zambia has recently developed an export strategy that is focused on ensuring beneficiation for the domestic industry and manufacturing products that will be able to meet the demands of the CFTA countries.

Download the booklet here:

www.pmrczambia.com/wp-content/uploads/2018/12/The-Continental-Free-Trade-Area-CFTA.-What%E2%80%99s-in-it-for-Zambia.pdf

Globally, countries are concluding Mega-Regional Trade Agreements (MRTAs), thus reshaping and changing the global trading landscape in the process. The establishment of the African Continental Free Trade Area (AfCFTA) will allow Africa to strengthen its position vis-à-vis the rest of the world. If the Continental Free Trade Area (CFTA) is successfully implemented, there are opportunities to address regional infrastructure challenges and link Zambia to international markets.  Free movement of capital provides opportunities for both individuals and companies to benefit. It enables integrated, open, competitive and efficient African financial markets and services. For companies, there may be opportunities to benefit from higher investment returns from other African countries. Additionally, low tariffs allow consumers to have access to cheaper products and producers to better enter other African markets. Firms will have access to cheaper raw materials and intermediate goods from other African countries which will reduce their cost of production.

In order to benefit from the integration of markets, African economies must undergo a transition that involves the reallocation of economic resources to areas where their use is effective. This may result in short-run adjustment costs. After trade liberalization countries may experience falling trade revenue shrinkage of certain sectors and temporary unemployment as resources are shifted during this period. Moreover, insufficient financial and institutional capacity of countries may have adverse effects on labour force and small enterprises. Hence, the benefits of free trade area may not be shared equally. For many developing countries a lack of labor mobility between sectors is a key challenge. Support programmes, such as aid for trade and infrastructure investments, could be considered to help the most affected countries, in particular least-developed, landlocked and small economies.

Another challenge to be more likely faced by African countries could be the cost of transporting goods within the continent. African countries can solve this problem by becoming better connected through treaties, road networks as well as railway networks.

The Zambian Government is heading in the right direction as it has embarked on an ambitious programme of infrastructure development.

A free trade area must have Rules of Origin (RoO), that is, criteria for sorting out which products are actually produced within the region and should, therefore, be given FTA treatment such as not paying customs duties. Creation of AfCFTA is likely to encounter some challenges regarding negotiations on Rules of Origin. Much as the current African Regional Economic Communities (REC) have been in existence for some time, bottlenecks have been encountered regarding Rules of Origin. Some RECS are still reviewing Rules of Origin on some commodities. There are dissimilarities between the Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC), Economic Community for West African States (ECOWAS) and Southern African Development Community (SADC) in Rules of Origin (RoO) – Africa’s case is not unique though as there is an absence of an agreed global set of rules (or parameters) guiding the design of rules of origin. The design of rules of origin depends on trade negotiations and often times influenced by certain political and economic factors.

Africa should refrain from adopting EU or US approaches to Rules of Origin (RoO). The simpler and less restrictive the better. It is feasible to have AfCFTA rules of origin if the negotiations take the approach of across-the-board thresholds or general rules for conferring origin. In COMESA for instance, any good can qualify for FTA treatment if the value of inputs from within the region accounts for 35 percent of total value of the good; or the value of inputs from outside the region does not exceed 60 percent of the total value of the good .

However, if the Rules of Origin negotiations take the approach of producing product-specific or list rules, that is, specifying a working and processing required for every single product for it to qualify for FTA treatment; it will definitely be impossible to have Rules of Origin for the AfCFTA in good time.

Zambia has become prone to global and regional risks which have the potential to negatively impact the country’s socio-economic development. The greater the level of integration or interdependence among countries, the greater the potential for a number of risks, such as political turmoil, migration, trade imbalances, illicit trade, infectious diseases and the effects of climate change.  One of the potential challenges from free movement of people may include the increase of human trafficking and smuggling of illegal products. External shocks arising from financial integration and fluctuating commodity prices have been adversely affecting Zambia’s growth parameters. Other risks of concern include terrorism, cyber-crime, and digital misinformation. Arising from this, Zambia faces different effects brought about by regional and global integration. Going forward, the country has to harness the positives of global and regional integration as well as manage the potential risks.

Download the booklet here:

www.pmrczambia.com/wp-content/uploads/2018/12/The-Continental-Free-Trade-Area-CFTA.-What%E2%80%99s-in-it-for-Zambia.pdf

According to UNCTAD, a UN body focusing on trade; in 2010 intra-African trade only made up 10.2 percent of Africa’s total trade. Continental Free Trade Area (CFTA) aims to remove trade barriers in order to improve intra-African trade. To achieve this, the CFTA draft agreement commits countries to removing tariffs on 90 percent of goods with 10 percent of “sensitive items” to be phased in later. The agreement also liberalises services and aims to eliminate non-tariff barriers which hamper intra-African trade. According to a paper by Brenton, nontrade barriers limit access to necessary inputs; for instance, limited access to inputs such as seeds and fertilisers in the agricultural sector. Non-tariff barriers such as lack of competition and unfavourable regulations may hinder access to inputs of production. Clear regulatory systems of inputs and outputs ensures reliable information about the quality of goods and services available.

Though there may be an initial loss of revenue income, the long-term welfare gain is significantly larger. A research paper by UNCTAD suggests that elimination of all tariffs between African countries would take an annual US$4.1bn out of the trading states’ coffers, but would create an overall annual welfare gain of US$16.1bn in the long run. Short term integration and adjustment costs will be incurred in establishing the CFTA. These short term costs include loss in trade tariff revenue, local SME’s vanishing in front of stronger competition, adjusting unemployment, required investment in infrastructure, political and regulatory reforms. Majority of the welfare benefits to be gained from further integration will only materialise in the long run. These include lower import prices, efficient production, output increase, higher value-added jobs and exports, and technological specialization.

With the CFTA in place, the continent can benefit from a single market for goods and services, having free movement of people and investments; which therefore paves the way for accelerating the establishment of the continental customs union and the African customs union. This in turn would bring about the spillover effects from countries that may develop new technologies and skills in response to the single continental market demands. The removal of barriers amongst the countries allows free flow of experts and skills.

The establishment of CFTA could also resolve the challenges of multiple and overlapping memberships. Countries belonging to many Regional Economic Communities (RECs) face multiple financial obligations. Such countries must also cope with attending various meetings, policy decisions, instruments, procedures, and schedules. The customs officials of such member countries have to cope with varying tariff reduction rates, RoO, trade documentation, and statistical nomenclatures. These varying considerations may undermine the effectiveness of customs officials’ overall performance. The overlaps and multiple memberships may also affect the commitment of member countries and consequently the success of any Regional Trade Agreement (RTA). The CFTA can correct this by encompassing the other REIs and progressively harmonising and integrating their activities, in a similar fashion as ECOWAS playing an umbrella role for the sub-REIs in Western Africa.

Furthermore, Countries will benefit from enhanced competitiveness at the industry and enterprise level. When a country has competitive companies within its sectors, the country itself is more likely to have a competitive advantage as a nation competing in a large single market.

African industrial products may have increased competitiveness through harnessing the economies of scale of a continental-wide market. Small African Countries, having access to this large market, will no longer be restricted to producing their traditional products. Better policies and human resources could make them the focus of new manufacturing operations that serve larger markets. Additionally, in the long run, increased competition due to trade liberalizations provides incentives for domestic firms to operate more efficiently. As firms are faced with competitive pressures, they are forced to use their resources efficiently, implement new technologies and innovate in order to survive under the new conditions.

The CFTA may result in increased food security through reduction to barriers on trade in agricultural products. Export restrictions, in particular, decrease food security as farmers may not be able to secure higher prices in neighbouring markets. This may provide incentives for them to shift to producing other crops or reduce output, creating losses to the economy as a whole. This suggests that when a country lifts these restrictions, as would be the case with the CFTA; countries can benefit from the easy access of inputs of agricultural products. This, in turn, contributes to increased food security.

The CFTA may result in increased rate of diversification and transformation of Africa’s economy and the continent’s ability to supply its import needs from its own resources. As the continent operates as a single market, it can obtain import needs from its own resources. Moreover, as the continent develops its infrastructure to support the single market, employment can be provided for its people and development of engineering services can be fostered. Moving away from dependence on raw materials; it also allows the continent’s economies to diversify. The associated technological development, combined with appropriate industrial policies, will lead to the creation of new industries.

Download the booklet here:

www.pmrczambia.com/wp-content/uploads/2018/12/The-Continental-Free-Trade-Area-CFTA.-What%E2%80%99s-in-it-for-Zambia.pdf

Generally, most countries in Africa charge tariffs that are much lower than the actual cost of generating, distributing and retailing electricity. The difference between the tariffs most customers pay and the actual cost of electricity is subsidised by Governments. For this reason, in 2008 Southern African Development Community (SADC) Ministers of Energy were prompted to approve migration of unsustainable electricity tariffs towards cost reflectivity within five years and set a deadline of 31st December 2013. However, by 2015 only Namibia and Tanzania in the 15-country regional bloc had successfully achieved cost-reflectivity, despite an earlier commitment by all member states to meet the objective by 2013.  Consequently, (SADC) energy ministers further extended the deadline to 2019 by which member countries were required to produce road-maps for transitioning their electricity supply industries towards cost-reflective tariffs by 2019 in an effort to improve the sustainability of the sector and create the basis for greater investment in new generation capacity by state utilities and Independent Power Producers (IPPs). Cost-reflective tariff designs send price signals to various stakeholders that lead to better decisions with respect to consumption, production and the expansion of networks.

To this effect, and in accordance with the Electricity Act Chapter 433 of the Laws of Zambia, ZESCO on 22nd March 2019 issued notices to its consumers of its intention to adjust electricity tariffs and connection fees by a weighted average rate of 113 percent and 213 percent respectively. However, on 3rd May 2019, a pronouncement was made that Government deferred ZESCO’s application after consultations with various stakeholders.

The question that begs answers is whether ZESCO’s proposed tariff adjustment over the years is justified?

 

First Cost of Service Study

The first Cost of Service Study (CoSS) was conducted in 2006 with the aim of determining the cost incurred by the country’s vertically integrated electricity utility company called ZESCO in generating, transmitting, distributing and supplying power to various categories of consumers.  The key findings of the study indicated that the electricity tariffs in Zambia were not cost-reflective. The findings further recommended an average increase of tariffs by 45.4 percent in the 2007/2008 financial year. With such a rise the residential customers would have carried the highest increase of the tariff at 147.6 percent, followed by large power customers at 46.3 percent while commercial and services customers increase would have been 2.4 percent and 6.3 percent respectively.  The rationale after reaching cost reflective tariffs has always been that tariffs would be adjusted annually to account for changes in economic fundamentals such as inflation and exchange rate volatiles as the case is with petroleum pricing mechanism in Zambia. In the Petroleum sector, ERB reviews the retail prices of petroleum products every six weeks and each period is supposed to coincide with a new cargo of crude oil procured. As a rule, the ERB only adjusts the price if the cost margins escalate beyond 2.5 percent threshold.  Figure 1 on the right indicates that ZESCO had not made applications to vary its tariffs in some years even when economic fundamentals had arguably significantly changed in the said years. ZESCO has however made several tariff applications since the 2006 Cost of Service Study resulting in the ERB approving average tariff increases of 27 percent, 35 percent, 26 percent,16 percent, 75 percent in 2008, 2009, 2010, 2014, 2017 respectively.  The latest application to increase tariffs was made in March 2019.

 

Second Cost of Service Study

It must be noted that the 2006 study focused primarily on ZESCO which was at that time the producer and supplier of about 96% of the electricity consumed in the country. Significant changes have since taken place in the Electricity Sector in Zambia. There have been new entrants into the sector, such as Independent Power Producers (IPPs), who have invested in power generation with associated higher generation costs. By 2015 the average tariff ZESCO was paying to purchase power from IPPs ranged from USc 7/kWh to USc 13.23/kWh but the average end user tariff charged by ZESCO was USc 6/kWh7. There has also been a growing emphasis on developing the renewable energy resources of the country as stated in the Seventh National Development Plan. However, current electricity prices are well below both economic and financial costs.  To this effect in 2017 ERB embarked the second Cost of Service Study (CoSS) with funding from the African Development Bank (AfDB). One of the key tasks of the study was to determine the appropriate structure and level of tariffs for each consumer category.

A Cost of Service Study was important to ensure that ZESCO’s inefficiencies were not passed on to consumers.  A more reason why the other key deliverable task of Cost of Service Study focused on a detailed review of ZESCO’s cost structure by benchmarking with cost structure of similar efficient utilities with similar technical structure8. The study was going to be the basis on which to determine future tariffs adjustments for categories of consumers. However, the cost of service study was suspended midway by the consultant and by the first quarter of 2019, ERB was still evaluating bids for a new consultant to undertake the Cost of Service study.

Without a CoSS, therefore, it implies that the 2019 proposed tariff hikes by ZESCO with a weighted average of 113 percent may suggest inaccuracies in arriving at the proposed new pricing.   For any successful implementation of tariff hike that is widely acceptable by all stakeholders, the need for an independent Cost of Service study cannot be overemphasized. Availing of all microdata on cost and operations by utilities to all stakeholders reduces resistance to tariff hikes and helps Government to make the right decisions.  Tariff designs should be characterized by transparency, predictability, efficiency, fairness, simplicity, and lack of controversy.

 

Challenges in the Implementation of Cost Reflective Tariffs

 

Decreased Economic Activities

The implementation of cost reflective tariffs will affect different consumer categories differently. The increase in tariffs through the implementation of cost reflective tariffs may lead to decrease in electricity use, which may lead to decreased economic activities as electricity use plays a role in one of input factors. It is therefore imperative that the implementation of cost reflective tariffs is phased to minimize the shocks to the economy. The small enterprises are the most affected mainly due to their lack of resilience and limited capacity to invest in alternative energy sources.

Implementation of cost reflective tariffs is also hindered by the competing expectations between low income consumers afford-ability and utility companies’ desire to recover costs. Consumers expect to receive electricity at an affordable price, while utilities’ argument is that “to provide a good reliable electricity, supply tariffs must be matched with costs”. The rational approach, is for Government to implement gradual movement towards cost-reflective tariffs in order to minimize the impact on poor households.

 

Rural Zambian Population still has less than 5 percent Electricity Access

Cost reflective tariffs risk derailing the goal of achieving 100 percent access to especially for the poor mainly in rural areas where access of rural population has only ranged between 2-5 percent since 1990 as indicated in Figure 5 on the next page. National access to electricity averages at 27 percent with 62 percent of the urban and 3 percent of the rural population having access to power as of 201617.  ZESCO on 22nd March 2019 issued notices to its consumers of its intention to adjust electricity connection fees with a weighted average rate of 213%. If this proposal is approved by ERB, access to electricity would be made worse for the rural population. Rural connections are costly compared to connecting a poor household in an urban area. There seems to be an inverse relationship between providing services to all and afford-ability at least in the short term. One way of providing affordable services to the poor rural population could be through the provision of cross-subsidies given the constrained fiscal space.

 

Politics and Public Resistance

In 2015, ZESCO also applied to increase tariffs by an average of 187 percent which was granted by ERB but later on reversed by the Government after public dissatisfaction. The trend has been the same in African countries such as Ghana, Tanzania, and Nigeria with similar energy sectors structures.

 

Key Recommendations

  1. An industry-wide Cost of Service Study which was commissioned in 2017 but has since been suspended after the contract with the consultant was terminated due to poor performance. Without a CoSS, electricity tariff adjustment suspension by the Government is a welcome move and provides an opportunity for all stakeholders to resolve the concerns raised. However, Government through ERB needs to expedite the process of selecting a new consultant to embark on the cost of service as soon as possible.
  2. Government should ensure that capacity is built among the locals in carrying out CoSS so that subsequent Cost of Service studies are done by Zambians. Besides ERB staff, additional personnel from key relevant stakeholders should be recruited in the study technical team to work with the consultant.
  3. ZESCO needs to periodically publish its costs for public and stakeholder scrutiny to enhance appreciation of its cost structure and operations. ZESCO’s increased revenue translates into significant increase in generation, transmission and distribution expansions visible to all stakeholders.
  4. Government should continue exploring measures to restructure the vertically integrated ZESCO’s business model if the utility company is to be sustainable by possibly unbundling it into separate business units namely; generation, transmission and distribution.
  5. There is need to enhance planning, research and development (R&D) units at both Ministry of Energy and ZESCO to continue exploring least cost electricity expansion plans and integrated resource planning for the country.
  6. Government needs to consider that cross-subsidies for connection fees for low-income groups are borne by other customers (industrial or commercial customers) to ensure that access to electricity by the poor is guaranteed to minimize the economic shocks of cost-reflective tariffs. Government should also consider implementation of cost reflective tariffs in a phased manner.
  7. Government must formulate a “renewable energy policy” to provide for strategies and targets that would develop the renewable energy sub sector and implementation of Renewable Energy Feed-in Tariff (REFIT). REFIT refers to schemes designed to provide certainty to renewable electricity generators by providing them with a minimum price for each unit of electricity exported to the grid over a 15-year period.