by Mwanda Phiri and Caesar Cheelo
In the recent stand-off between Mopani Mines and CEC, one is compelled to take sides. In picking a side, we carefully consider commercial sensibilities on the one hand and on the other hand, good business ethics underpinned by sound moral practices that take into consideration the operating business environment.
In May 2017, ERB approved ZESCO's application for a phased 75 percent increase in electricity tariffs. This was to establish cost-reflective electricity prices that: allow for the recovery of costs incurred within the generation, transmission, distribution and supply chain; partially dismantle electricity consumption subsidies that were putting a strain on fiscal resources to the tune of about US$687 million in 2014 and US$640 million in 2015; and promote reasonable rates of return for (re-)investment in expansion, maintenance and rehabilitation required to meet increasing energy demand.
When the first-phase 50 percent hike kicked in for all consumers in May, mining firms were late to join in sharing the burden on the basis of one technicality: their longstanding Power Supply Agreements (PSA). These agreements entered into between the mining companies and CEC and ZESCO span over 20 years. They allowed mining firms, who collectively consume 50 percent of Zambia’s electricity, enjoy tariffs that did not reflect the cost of supplying electricity recently exacerbated by the dramatic changes in Zambia’s economic conditions.
Notably, in the case of Mopani and CEC, a 33 percent tariff increment was effected in 2008 which was in excess of the stipulated adjustment in the PSA. This demonstrates that despite the binding terms and conditions of the PSAs, the parties were able to negotiate for more reasonable adjustments. The contentious issue however concerns the current proposed tariff adjustment of 54 percent which has resulted in the impasse between CEC and Mopani. Although the PSA between Mopani and CEC entered into in 2000 was amended on the 6th March 2015, and is valid until 2040, the agreed tariff and increases during the contract period do not fully take into consideration the cost of supplying electricity.
As other mining companies have done, Mopani must become sensitive to Zambia’s deteriorating economic conditions, poverty situation, and power and fiscal deficits. Insisting on PSA terms irrespective of the local conditions would mean demanding that the Zambian Government and therefore Zambian tax-payers continue to subsidise the mine.
Unlike the majority of mining companies that are now paying higher tariffs for the power they consume, Mopani remains reluctant to bear its fair share of the burden. Instead, it suspended some of its operations in August, leaving 4,700 jobs hanging in the balance. While it is appreciated that a firm’s objective is to maximize profits, using jobs, a politically sensitive issue as a bargaining chip to force Government and CEC’s hand to honour unfair contracts is unjust and insensitive to Zambia’s severe economic challenges. It brings into question issues of fair play and the business ethics of Mopani and its shareholders.
To be impartial, the challenges faced by Glencore Plc, which owns the majority 73.1 percent stake in Mopani Copper Mines Plc must be acknowledged. The Anglo–Swiss multinational commodity trading and mining conglomerate was hit by the commodity price slump in 2015, recording a US$5 billion loss. However as commodity prices rebounded in 2016, the company recovered recording a revenue turnover of US$152.9 billion – about six times the size of Zambia's GDP (US$24.1 billion) – and an annual profit of US$1.4 billion. Meanwhile, Zambia is pining for a US$1.3-1.6 billion bailout package from the IMF.
Moreover, we must not forget that Zambia is still facing persistent energy challenges, thus reiterating the need for increased investments in the energy sector. These can only be achieved if consumers pay their fair share of the electricity they consume. And the reality is that other consumers will face a 75 percent increase by September. It is thus only fair that Mopani equally accepts the 54 percent increment. The onus is upon Mopani and CEC to demonstrate the same spirit seen in 2008, and come to the table to discuss an amicable or mutually fair solution that does not unduly exploit one party or the other. Now is the time to do away with the lopsided PSAs and come up with new, more balanced arrangements that incorporate good corporate governance and business ethics.
Many multinational companies the world over are already using codes of conduct to guide and encourage ethical behaviour and the highest standards of corporate governance. For instance, the OECD have developed guidelines for multinational enterprises designed to provide voluntary principles and standards for responsible business conduct in a variety of areas including employment and industrial relations, human rights, environment, information disclosure, competition, taxation, and science and technology.
Ultimately, although the temptation to maximize profits at all costs can be strong, mining companies and similar multinational corporations need to implement good practices sensitive to the social, environmental and economic performance of the countries they are operating in. It is good business sense to support public policies aimed at encouraging development objectives such as increasing investments in growth-stimulating sectors like energy.