A large and landlocked country in the centre of southern Africa, Zambia benefits from being Africa’s second largest copper producer and a strong services sector but is challenged by high levels of poverty. Business leaders identify the economic environment, currency risks/inflation and government support and policies as their greatest concerns. Kelvin Chungu, managing partner at audit firm Nolands, Zambia, discusses what it’s like operating on the ground in Zambia. This article is an excerpt from The Africa List Business Barometer.
The area of significant focus for a number of audit firms in Zambia is servicing the traditional services lines of audit, tax and accounting. Notwithstanding that, a number of firms in Zambia have advisory practices offering risk, IT and transaction advisory services, however in many cases, the personnel that are engaged to do the work in the advisory space tend to be outsourced from places like Zimbabwe and South Africa and partly on account of that we think those are particular areas we can effectively compete in because of our reach as Nolands and because of the way we are structured.
Opportunity in business education: providing a more diverse advisory service
In the audit sector, there is immense competition and a sort of price war centred on undercutting of audit fees. In this regard, the regulator, the Zambia Institute of Chartered Accountants (ZICA) is currently working on a statutory minimum fee to be charged for external audit service that is aimed at averting this practice. However, looking at their current proposals, our assessment is that this will ultimately result in the cost of accessing external audit services in Zambia being quite expensive relative to other countries in the region.
However, beyond the traditional services, we see opportunities in providing corporate training. In this space, we are providing training in International Financial Reporting Standards (IFRS), International Public Sector Accounting Standards (IPSAs), corporate governance, valuation, risk and internal audit as a separate service line. This is a relatively unique structure in the sense that there are not like many other firms engaged in providing audit, tax and accounting services who also have a separate training service line in one house.
Cost of credit
One of the significant challenges in Zambia is the cost of credit to the private sector, partly on account of the current local national debt position and government arrears to the private sector.
The cost of debt to the private sector is augmented by the high yields obtained from the government securities which have crowded out the private sector. Meanwhile government arrears to the private sector have resulted in inflated non-performing portfolios for a number of banks, which in itself forces banks to drive up the cost of credit. In this regard, the government arrears to the private sector of around K15 billion ($982 million) is huge relative to our GDP. As a result, this is negatively impacting a number of businesses because of its adverse multiplier effect on private companies’ cash flows, leading to a significant lag in terms of receiving and affecting their sales revenue.
Seizing Zambia’s competitive advantage
If we, in Zambia, do not upscale investment in skills training in industries that give us competitive advantage and begin to create innovative ways of increasing access to capital, we will not be able to compete with international companies, particularly if we open up our markets. There is a need for us as a country to seriously reflect on our competitive advantages and realign our resources to focus on these areas.
We have been predominantly a copper producing country since time immemorial, notwithstanding that, we have a high proportion of fresh water rivers and lakes and waterfalls in the region, which would make the enhancement of our production of hydro energy resources a competitive advantage for us, despite the droughts that we have experienced in recent years.
Additionally, there are other opportunities in the energy sector to invest in renewable alternative energy sources in wind, gas, biofuel or solar. As a practical point, we need to be generating a minimum of around 3,000 megawatts of power by 2021, in Zambia, an addition of over 1,000 megawatts from our current capacity to successfully service the local sector. There are further opportunities to export power to some of our neighbouring countries.
There are also substantial opportunities in agriculture, the mining sector, the tourism sector, and untapped opportunities in the service sector. These are what I would call our barely exploited opportunities that are basically lacking capital, technological know-how and entrepreneurial supportive structures.
Opening up Zambia
Zambia’s potential in the coming years is significantly understated, and this might come as a surprise to a lot of people given the sustained mistaken focus on the country’s structural economic risks. The next five years will be massive. My assessment is that with the current public sector-led road infrastructure development positively opening up the country, countrywide fibre cable connectivity, development in the telecommunication tower projects, office space infrastructure development and upgrading of capital city’s roads, it will attract significant foreign direct investment to Zambia which will open up untapped opportunities.
One just needs to look at the current developments in Lusaka, which has become a construction site from the unfettered upgrading of the inner roads linkage and office space development to understand the possibilities. In the next two to five years the current developments will ease road congestion, provide more inexpensive office space and ultimately lead to increased human capital productivity for private businesses.
If communication and movement is easier and access to modern amenities is enhanced, I see an increase in the potential to attract investment from within the region, including internationally. The increased productivity as a productive factor of the current infrastructure development will likely begin to be seen over the next two to five years and should open up a lot of direct opportunities in the service sector and the agricultural sector.
Implementing international standards
I worked in Guernsey in the Channel Isles, UK and Bermuda for over 11 years and came back in June 2012. On my return I immediately enrolled with ZICA (Zambia Institute of Chartered Accountants) to become one of their training resources and for the last five years I have been involved in facilitating IFRS, international auditing standards and IPSAs workshops.
I passionately wanted to do this because I saw a huge awareness gap and so, as a firm, we have built on that and have been providing training in various cities to a number of different corporates.
I then began to see the potential to, not only focus on accounting and audit, but to also extend our focus into risk, valuation, audit and corporate governance.
Stabilising the kwacha
A current significant challenge in Zambia is the stability of the kwacha. We are low on international reserves – less than two months, and this is having an effect on the strength of our kwacha.
Positive infrastructure development
On the positive end, I think a major event in Zambia has been the significant infrastructure development, especially the road networks, particularly in towns, as we have had significant traffic congestions on major inner city roads and my biggest concern was the loss of productivity as a consequence. As a firm, our employees are meant to be going to meet clients as an imperative and for most of the time, they are getting stuck on the road which means our productivity is adversely affected.
The development will also make Lusaka much cleaner, more modern and will likely attract tourists to take an extended interest and stay longer. The improvement in the outlook of the city in itself will likely create opportunities for investors, who are used to modern amenities and services, to want to come here in the first place. I am optimistic about it.