Maravi

Mutati ignored Levy's views on CEC sale

Mutati ignored Levy's views on CEC sale
By Amos Malupenga
Friday September 21, 2007 [04:01]

Former energy minister Felix Mutati last year gave consent for CEC major shareholders to offload their shares to a consortium of Zambians contrary to government position and without authority from President Levy Mwanawasa, Post investigations have revealed. Commenting on last Friday’s Post editorial comment that called for a probe of Zesco managing director Rhodnie Sisala concerning his involvement in Zesco and Copperbelt Energy Corporation (CEC) and all the deals in CEC that have disadvantaged Zambians, Zesco sources disclosed during the week that Mutati, who is now commerce minister, would have more explanations to make than Sisala.

The editorial stated that Sisala, a shareholder in CEC, was even unable to deliverCEC to Zesco when the major shareholders in CEC were offloading their shares because he wanted his friends to acquire the shares.

“We also wonder how many people at the Ministry of Energy are participants in the CEC deal. George Mpombo and Felix Mutati who happened to be ministers of energy at the material time need to explain to the nation what happened, why it happened and if also, like Sisala are shareholders in CEC,” the editorial stated.

Zesco supplies power to CEC at heavily subsidised 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 it services CEC almost at a loss.

And Sisala last week complained that it was unacceptable for Zesco to continue subsidising mining companies through CEC when the mines were now making huge profits.

Giving a historical perspective of the power supply on the Copperbelt, a Zesco source said power on the Copperbelt was supplied by a company called Rhodesia-Congo border which was formed in the 1950 as a subsidiary of the mining companies.

According to the source, after Zambia’s independence in 1964, Rhodesia-Congo border Company was renamed as Copperbelt Power Company (CPC) but when the two mining companies on the Copperbelt were merged to form Zambia Consolidated Copper Mines (ZCCM), CPC became to be known as Power Division of ZCCM.

“But in 1997, as you recall, there was that programme by the Chiluba government to privatise the mines,” the source said. “During that process, there was the unbundling programme of the mines. This saw the Power Division of ZCCM becoming CEC.”

According to the source, CEC was formed in November 1997 as a venture between the Zambian government, Cinergy Corporation of the United States of America, National Grid Transco of the United Kingdom and five private investors who are referred to as the Local Technical (LTTPD). These private investors (Sisala, Humphrey Mulela, Aaron Botha, Hanson Sindowe and Charles Milupi) worked for CEC.

“Cinergy Global and National Grid each owned 38.5 per cent shares while the Zambian government owned 20 percent shares through ZCCM Investment Holdings (ZCCM IH),” the source said.

“The private investors owned 3 per cent. But the government also owns a Golden Share with limited specified rights. Therefore, Cinergy Global and the National Grid jointly became the major shareholders in CEC with 77 per cent shares.”

The source said CEC purchases the bulk of Zesco’s electricity and is responsible for the distribution of power to the mines.


“This accounts for 70 per cent of electricity consumption in Zambia,” the source said. “And this bulk purchase contract between CEC and Zesco is for 15 years so it will come to an end in 2012. This is the contract Mr. Sisala was saying there will be need to renegotiate it since the mines are now making huge profits. Basically, the price is US cent 1.7/Kwh which represents a 30 per cent price differential over what Zesco charges other customers.

This CEC/Zesco bulk supply contract represents a CEC significant asset base that can raise their funding requirements.”
But in 2005, the CEC major shareholders gave notice that they intended to offload their shares to a new entity, at the time, called Zambia Energy Corporation (ZEC) who were the potential purchasers of the shares. ZEC, which was incorporated on June 7, 2005 comprises three Zambians in the names of Abel Mkandawire, Hanson Sindowe and Malumo Siyanga. It also comprises an English company called ALDWYCH, DBSA (Development Bank of Southern Africa) and a Dutch development finance institution called FMO, among others.

According to information at the Patents and Companies Registration office, ZEC’s nature of business includes farming, safaris and travel agents, investment and property management, haulage and passenger transport.
According to the source, when this development arose, the government maintained that its objectives of ensuring that the operations and ownership of CEC remained under technically and financially qualified owner would be sustained.

“This was because the government realises the importance that CEC occupies in the development of the country’s energy and mining sectors,” the source said.

“The energy minister at the time, George Mpombo, suggested that for these reasons, Zesco or ZCCM-IH should be allowed to acquire those 77 per cent major shares in CEC or an international company from the UK called Fleming which also expressed interest in the purchase of those shares or indeed other potential suitors in CEC,” the source said.

“I am told President Mwanawasa was also of this view including Mr Sisala who I hear even wrote to Mr Mpombo in this connection.”
However, the CEC major shareholders at the time opted to sell their shares to ZEC.

According to the source, the government through the then permanent secretary in the Ministry of Energy rejected this intended transaction between Cinergy and National Grid on one hand and ZEC on the other. The permanent secretary stated that government would not give consideration to any further proposed sales.

According to the source, this decision was based on the fact that the government had rights of the special (golden) share.
“But some technocrats argued that while the government held the special share to give consent to any change in control of the shareholding, such consent could not be unreasonably withheld,” the source said.

“They suggested that the government would have to give justifiable reasons for such rejection in case the matter was referred for determination by experts. The technocrats further said that shares were a private property and that the special share held by the government in such a transaction could either have positive and adverse impact on Zambia as an investment destination.”

It was also argued that while the government and ZCCM-IH had limited pressure points, they had strengths in approaching the major shareholders in that ZCCM -IH could increase its 20 per cent shares on condition that it offloaded the additional shares on the stock exchange. The source also said the government could also block a change of control of shares in the new shareholder was not financially and technically capable.

“But legal experts also advised that the ability to sell one’s shares was a core right for shareholders and corporate law left it to the market,” the source said. “They said in this case, market existed for Cinergy and National Grid shares.

Therefore, it was suggested with this in mind that while government did not have any say in the sale of share process by the CEC major shareholders, the process could be helped by the government making known its position in order to avoid delays in providing consents required under the special share.”

The source said it was resolved, at this point, that a Task Force team be established under the chairmanship of the Ministry of Energy but with members from ministries of commerce and mines and ZCCM-IH. This team was then to negotiate with CEC’s major shareholders.

“But before this was done, it was resolved that Cinergy and the National Grid should not insist on dealing exclusively with ZEC because they had a duty of being responsible corporate citizens and should therefore give or have given an opportunity for the government to address its concerns on the nature of the shareholder to replace them in CEC,” the source said.

“It was also felt that since CEC occupies an important role in Zambia’s future mining development, adverse long term effects would occur if the transaction was not properly handled.”

And on August 5, 2005, ZCCM-IH held a board meeting where it was re-stated that Cinergy and National Grid was considering selling their 77 per cent in CEC to ZEC. In a letter to President Mwanawasa dated August 8, 2005, mines minister Kalombo Mwansa stated that although CEC was debt-free, its majority shareholders’ intention was to make CEC borrow US $50 million out of which CEC should pay its shareholders a special dividend totalling US $47.9 million.

“The majority shareholders would then sell their shares to ZEC, leaving CEC with the debt,” Mwansa stated. “All CEC assets would then remain as collateral to the debt.” Mwansa further stated that ZCCM-IH was uncomfortable with the collateralisation and payment of the special dividend.

“While ZCCM-IH cannot stop the exit of the majority shareholders from CEC, it wants to see CEC left with the capacity to meet the growing demand of electricity in the mining industry, and with a strategic partner that has experience in the electricity industry and the technological and financial strength to move CEC forward,” Mwansa stated. “Your Excellency, I share the concerns of ZCCM-IH and therefore support its intention to express the concern to the majority shareholders.”

And on September 1, 2005, the then energy minister George Mpombo wrote to President Mwanawasa, expressing concerns that Cynergy and National Grid were disregarding the rule of law in their bid to offload their shares in CEC.

“Today…Mr. A. Sindowe of CEC came to brief me that they are on course with the arrangements to buy 77 percent of the shares,” Mpombo stated. “Mr Sindowe is leading the CEC backed consortium. He further revealed that the US $100,000,000 deal has been supported by ABSA Bank of South Africa and FMO of the Netherlands. The fact that government holds a golden share through ZCCM IH on pre-empt rights basis has been ignored with impunity.

“I stressed to Mr. Sindowe that government will do all it takes to protect the interest of Zambians and will not surrender an inch of its sovereignty to National Grid or Cynergy.”

And another Zesco source revealed that when Felix Mutati succeeded Mpombo, he continued on this assignment but with a different determination and zeal. The source said at one point, there was even an announcement in the media that the majority shares in CEC had finally been offloaded.

Later, Mutati – on behalf of the Task Force team comprising officials from his ministry and those of mines and finance - wrote to President Mwanawasa on March 2, 2006 asking for his guidance on the recommendations by the Task Force team that the government, as a special shareholder, should consent to the sale of CEC shares.

Mutati stated that his team arrived at this recommendation through a series of meetings which established that earlier concerns by ZCCM-IH had been taken care of because Cynergy and National Grid were to sell shares to ZEC without placing CEC in debt.

He further stated that ZEC’s financial and technical competence had been assured by the financial support that included a US$50 million for capital expenditure in CEC, and by a two-year contract for National Grid to continue providing its technical expertise.

Mutati stated that Cynergy and National Grid had informed them that there was room for other investors to take up shares in CEC although this could only be done through the Lusaka Stock Exchange where ZEC would place 22 per cent of their shares.

“It is a condition of the lenders of funds to Zam-En (ZEC) that these shares should be placed in this way. Documentary evidence for this requirement is attached,” stated Mutati.

But in his response to Mutati’s letter, twelve days later, President Mwanawasa stated that he was unable to comment because he was not earlier briefed on the same.

“…I regret that I am unable to comment on this matter on which I would have expected you to brief me before reading in the press that the shares of the two companies have been sold and I assume therefore that that was done with your support ostensibly giving the consent of the Government of the Republic of Zambia to the transfer of the shares,” President Mwanawasa stated. “I am aware that many difficulties will arise but it is my hope that you will be capable of resolving them.”

President Mwanawasa, in another letter to Mutati on March 27, 2006, stated that he was disappointed with Mutati because he allowed the two companies to dispose off their shares without affording ZCCM-IH an opportunity to exercise their option.

He stated that after studying and analysing the necessary documents, he discovered that the transaction (sale of shares) would be based on CEC borrowing US$73 million of which US $47.9 million would “be utilised to pay a special dividend to the current shareholders i.e. a share of US $38.3 million between Cynergy and National Grid US $9.6 million to ZCCM-IH whilst US $2.1 million remains with CEC as working capital”.

“Indeed, this is exactly what the previous Minister (Mpombo) feared would happen as ably explained in his letter dated 8th August, 2005,” President Mwanawasa stated.

He stated that the documents availed to him did not demonstrate ZEC’s officials’ financial standing. He stated that at least they should have provided letters of comfort from their own personal bankers since they were not corporate.

“I do not doubt their personal standing in society but what is important is to give confidence in the business community especially the mines that if anything goes wrong e.g. an accident, the new owners would be in a position to mobilise enough resources to rectify or attend to the problem,” President Mwanawasa stated.

But when reached for comment to confirm whether or not he gave consent for the major shares in CEC to be offloaded without authority from President Mwanawasa or Cabinet, Mutati said on Tuesday that while there was consent from the highest authority, he would rather that the chief government spokesperson responded since that was a government transaction.

However, information minister Mike Mulongoti who is chief government spokesperson, also refused to comment on the matter.

“I was not a chief government spokesperson at the time these things were happening so I might not be conversant with that issue,” Mulongoti said. “But since Hon Mutati told you that there was consent from the highest authority, you contact that highest authority for comment or clarifications.”

And when contacted on Wednesday, President Mwanawasa said: “Yes, I was consulted on that issue but for one and half years, I kept on refusing and later the consent was given without my authority. That’s all I can say for now. Tomorrow (yesterday), I will be leaving for New York. When I return, I will give details on that issue at a press conference.”

Labels: CEC, FELIX MUTATI

posted by MrK @ 6:20 AM