31 March 2020 was a day of high expectations in the energy and mining sectors. A big announcement which potentially would change the complexion of the two sectors in Zambia was being awaited. The proclamation that came however was received with mixed reactions by the players in the two sectors and the general public. Zesco and its biggest electricity off-taker, Copperbelt Energy Corporation PLC (CEC), a company listed on the Lusaka Stock Exchange, had failed to reach an agreement on the renewal of the Bulk Supply Agreement (the “BSA”) which was expiring that same day.
Minister of Energy Mathew Nkhuwa announced that the negotiations between the two companies had collapsed and hence, the BSA had come to an end. The Minister, however, in a bid to reassure the public, stated that “from 12th of February 2020, a combined team from IDC, Zesco and relevant government departments have been sitting at a round table with CEC to negotiate a new short-term agreement to facilitate continuity of power supplies as a long term mutually beneficial relationship was being worked out.”
He however lamentably stated, “Sadly, after weeks of negotiations, we have to note that the end of these negotiations is still not in sight even a few hours before the expiry of this agreement. Notably, there are disagreements concerning the effective tariffs for both the power supplied to CEC as well as reciprocal transmission- service charges also known as wheeling charges, amongst others. These factors are critical in achieving a commercially sustainable power supply relationship between Zesco and CEC”.
Commentators and the general public went wild with one group speculating that the government had plans to take over CEC like what happened to Zamtel and Konkola Copper Mines (KCM), while others felt the CEC was being greedy by trying arm-twist ZESCO into accepting their conditions. However, both the government and the CEC have remained optimistic that an agreement will be reached in the near future as they both get back on the table in the not so distant future.
How did Zesco and CEC get to this point
The BSA commenced on 21 November 1997, between the Government of Zambia, the CEC, and Zesco Limited to facilitate electricity supply to the mines on the Copperbelt as well as the domestic customers in the mining townships and surrounding areas. It was initially scheduled to expire after fifteen years in November 2012. The BSA was however further extended under the first amendment for some additional years from 31 March 2000 to give it an effective twenty-three (23) year life span, ending on the 31st of March, 2020.
Like most of the negotiations done and signed during the privatization period of the Chiluba government, the carrot that was dangled to lure international capital was ‘cheaper’ electricity through the newly created entity that would ensure that international capital to get a predictable return on investment. This entailed that only the CEC could supply all mining and mining related activities thereby creating exclusivity that was restrictive as it ensured no other player could enter that geographical market.
Now at the time, the competition law of Zambia was in its infancy and this was permissible. However, following the passing of the 2010 Act, Section 8 of the Competition and Consumer Protection Act (the “CCP Act”), prohibits agreements that restrict competition. This, therefore meant that come the end of the contract, the rights they enjoyed at the genesis of the contract would be a tough sell if they ever went back to the round table for a new deal.
For a long time, it has always been a common belief that ZESCO has been supplying power to the CEC at lower rates than they charge other consumers, including domestic customers. This has been raised by the general public, ZESCO and government who believed that time had come for ZESCO to apply Cost Reflective Tariffs to all its customers and CEC inclusive.
According to an article authored by the current Permanent Secretary in the Ministry of Information and Broadcasting Services Amos Malupenga during his time as a reporter at the defunct Post Newspaper on 21 September 2007, Zesco had been supplying power to CEC at heavily subsidized rates. In the article, Mr. Malupenga stated that “Zesco supplies power to CEC at heavily subsidized rates for CEC’s onward supply to the mines at huge profits. This in turn has an adverse effect on Zesco customers who have to pay high electricity tariffs to keep Zesco afloat as its services CEC almost at a loss.”
In the same article, Malupenga quoted a ZESCO source who confirmed that the Managing Director of Zesco Rhodnie Sisala had complained about the low tariffs paid by CEC. Mr. Sisala stated that, “it was unacceptable for Zesco to continue subsidizing mining companies through CEC when the mines were now making huge profits.
It was therefore imperative the new Bulk Supply Agreement should take all these concerns in consideration and achieve what everyone has been crying for.
The Government’s Position on the Matter
On Wednesday 11th October 2017, the then Minister of Energy David Mabumba, announced policy measures that were being taken to migrate electricity tariffs to cost reflectivity for all customer categories. “Madam Speaker, in December, 2016, negotiations were held between ZESCO, the Copperbelt Energy Corporation (CEC) and the mining houses in good faith on moving tariffs towards cost reflectivity and achieving closure on all outstanding billing issues by January, 2017”, read the speech by the Minister, available on the National Assembly website. “Madam Speaker, arising from the negotiations, the interim average mining tariff was determined at US$9.3/kWh effective January, 2017, pending the conclusion of the cost-of-service study”.
After 20 years of the contract, the pricing of electricity was now a topical contentious discussion. The Minister further stated that, “Of the fifteen mining customers, twelve agreed to migrate to the new tariff while Kansanshi, Kalumbila and Mopani Copper Mines (MCM) were reluctant”.
Foreign capital was bound to raise an issue as the history of the tariff in the contracts for power signed were structured during the privatization era and were meant to provide incentives to the new mine owners by guaranteeing low electricity tariffs for the life of the BSA. This entailed exposing an electricity supply industry to unsustainable pricing to accommodate ‘big capital’.
Possible points of departure during the 8 weeks of negotiations
The CEC – Zesco BSA came to end on the 31st of March 2020 after 23 years following failed negotiations by the two to enter into a new agreement.
“This Bulk Supply Agreement has run its full course, and it has not been a happy one for ZESCO, the Government or the public whom it represents”, read a statement from the Minister of Energy’s Speech in Lusaka on the final day of the contract.
The Minister of Energy in his statement on the final day for the BSA, indicated that “this Bulk Supply Agreement, which was initially scheduled to expire after fifteen years in November 2012, was further extended under the First Amendment for some additional years from 31 March 2000 to give an effective twenty-three (23) year life span up, ending at midnight, today the 31st of March, 2020”.
Statements from both the Ministry Energy through the Minister’s speech and CEC Plc’s Market announcement on the Stock Exchange News Service (SENS) released on 1st April 2020, indicated that negotiations for a new agreement post the expiry of the BSA commenced in early February 2020. However, after weeks of negotiations, the two parties were unable to agree on certain terms.
Points of departure according to Government
On the Government side, the reasons for the impasse included agreeing on the tariffs and tenure of the contract. “There are disagreements concerning the effective tariffs for both the power supplied to CEC as well as reciprocal transmission- service charges also known as wheeling charges, amongst others”, read an extract of the speech by the Minister of Energy. “additionally, and most importantly, it has come to government’s attention over the last few days, that CEC is in fact not even willing to sign an agreement with a twelve (12) month tenure, which has been the basis of all negotiations conducted by the two parties over the last seven (7) weeks and, which was initially proposed by Government and ZESCO”.
According to the Minister, “these factors were critical in achieving a commercially sustainable power supply relationship between ZESCO and CEC.” This is consistent with the Government’s desire to achieve cost reflectivity based on the aforementioned speech that was made by the Minister of Energy to parliament when the elephant in the room (“Cost Reflective tariffs for All!”) was brought up.
Points of departure according to CEC
On the CEC side, their opinion on the failure to reach an agreement was that there were proposals that were made in the new contract that would affect the company’s ability to continue being a going concern. “At end of day on 31st March 2020, the parties had not reached agreement on account of certain terms seen as key requirements from either side and which so far are not acceptable to either party”, read a statement issued CEC on SENS. “On its part, CEC has faced some terms being demanded by the GRZ team which, if accepted, would be injurious to the CEC business and impact its ability to continue operating as a going concern”.
Despite CEC not mentioning tenure of the new agreement, based on the Minister’s statement, and our assessment of points of departure, it can be believed that CEC does desire a longer-term agreement. A longer-term agreement can be deemed favorable on CEC’s part as it ensures that capital intensive investments can be executed with the comfort of security of tenure of supply of electricity.
Bullish on reaching an agreement
Despite that failure to sign an agreement, the CEC remains resolute that a deal will be made. “In CEC’s view, achieving a mutually acceptable power supply agreement between the parties remains of strategic importance to the electricity sector and the country. Therefore, CEC remains confident that the parties will use the next several weeks to narrow the negotiation gap so as to achieve the much-required new power supply agreement between them.
Life after the BSA
Power continues to flow to the Copperbelt and the mine companies through the CEC network despite the epilogue of the BSA. However, in light of no agreement being signed, the CEC now receives power based on conditions set out by ZESCO over the short term. “Consequently, commencing at 00:01 hours on Wednesday, 1st April 2020 and thereafter, ZESCO shall continue to provide continuous and uninterruptable power supply to CEC for Copperbelt based customers under conditions as proposed by ZESCO on an interim basis”, explained the Minister of Energy on what would happen from 1st April 2020.
We continue to monitor the position and looking forward to the parties getting back to the table and hopefully agree to an agreement that will ensure a win-win for all.
About the author
Edwin Goli Mulenga is Chartered Accountant, Corporate Banker, Investment Advisor and Public Speaker with over 15 years of Finance and Accounting, Agriculture and Corporate Banking covering Relationship Management, Credit Origination, Debt Structuring, Structured Finance and Syndication. He has a track record of working with multi-stakeholders and cross-sector groups in local and international organizations.
Edwin has is well networked in various business segments, corporations, multinational companies, development organizations, aid agencies, financial institutions, SMEs, professional bodies and the public sector.