SOCIAL RESPONSIBILITY COST ESTIMATION MODEL FOR MINERAL INVESTMENTS IN GHANA

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Asian Journal of Business and Management Sciences Vol. 1 No. 1 [173-188]

SOCIAL RESPONSIBILITY COST ESTIMATION MODEL FOR MINERAL INVESTMENTS IN GHANA Peter Arroja Eshun Mining Engineering Department University of Mines and Technology, PO Box 237, Tarkwa, Ghana [email protected] , [email protected] Daniel Mireku-Gyimah Mining Engineering Department University of Mines and Technology, PO Box 237, Tarkwa, Ghana [email protected] Issaka Yakubu Geomatic Engineering Department University of Mines and Technology, PO Box 237, Tarkwa, Ghana [email protected] ABSTRACT The boom in mining activities in Ghana has come along with social conflicts and environmental degradation. Another public concern is the direct negative effects of mining on local communities who are mostly deprived of their livelihood without sustainable alternatives. These concerns are the major social risk factors that are inherent in the mineral investment climate of the country and should be critically analysed and managed by mineral investors and the government. This paper gives a quantitative direction in estimating the social responsibility cost of mining in Ghana. By incorporating this cost in the economic evaluation process, the social viability of mineral projects can be assessed right from the pre-feasibility stage. It further recommends the institutionalisation of social responsibility trust fund to be managed by independent trustees selected from the mining company and the local mining community. Key Words: Corporate Social Responsibility, mineral investment, mining communities, social responsibility cost

INTRODUCTION Ghana possesses diverse mineral wealth ranging from major exploited minerals such as gold, diamond, manganese, bauxite, salt, sand and gravel, to less exploited minerals such as iron, limestone, copper, kaolin, bitumen and now the new oil find. To offer incentives to investors in the mining industry, the Minerals and Mining Laws was passed in 1986 under the Economic Recovery and Structural Adjustment Programmes. Among its provisions were generous capital allowances and manageable income taxes. The law has further been liberalised by the reduction of income tax from 35% to 25%, removal of Additional Profit Tax and the reduction of the range of royalty rates from 3% - 12% to 3% - 6% in 2006, all in an attempt to attract foreign investment which has resulted in the revitalisation of the industry. The boom in mining activities in Ghana, however, comes with attendant problems such as social conflicts and environmental degradation. Another public concern is the direct negative effects of mining on local communities who are mostly deprived of their livelihood without sustainable alternatives. These concerns are the major risk factors that are inherent in the mineral investment climate of the country and should be critically analysed and managed by mineral investors and the government right from the economic evaluation stage of mineral projects in the country.

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In the effort to meet some of the demands of the local mining communities, mining companies have pursued different and diverse policies on Corporate Social Responsibility (CSR). According to Guahyia-Ababio (2004), with particular reference to AngloGold Ashanti Obuasi, the implementation of the policy on corporate social responsibility has not been well planned and pursued with consistency. Hitherto, it has been left solely to the discretion of management without any input whatever from the community. He further opined that in any discussions on the concept of corporate social responsibility, great care must be taken to define the word "Community" or "Social" in such a way that benefits under "Corporate Social Responsibility" are not extended to the nation as a whole, but to the very people and area whose lands are being exploited for the benefit of the nation. This is as a result of the fact that the local people bear the brunt of all the degradation of the environment that comes with mining operations and that the nation as a whole gains disproportionately from the taxes of all types and dividends that accrues from mining companies to the State. No portion of these is specifically allotted for the development needs of the degraded local environment. Taking cue from such criticism Newmont Ghana Gold Ltd has demonstrated commitment to responsible corporate social responsibility by carefully constructing the Ahafo Social Responsibility Agreement with the local community of its Ahafo mine (Zisch, 2004). But as Guahyia-Ababio (2004) concluded in his submission that expression of intent in the form of proposals and guidelines is one thing; actualising the proposals and guidelines is another. His misgivings are echoed in several publications (Aubynn, 2003; CSRM, 2006; Hilson, 2006; Obara and Jenkins, 2006; Jenkins and Obara, 2006; Boon and Ababio, 2009; Atuguba and Dowuona-Hammond, 2006). This paper therefore proposes a uniform estimation method of social responsibility cost of mining in Ghana. This will help investors take pragmatic steps to address the legitimacy of the local mining communities‟ claim of sharing the benefits of mining and to transparently gain the needed social licence that will guarantee productivity and integrity. THEORIES TO ANALYSE AND EXPLAIN CORPORATE SOCIAL RESPONSIBILITY Stakeholder Theories The stakeholder theory holds that it is imperative that companies consider the needs, interest and influence of those affected by their policies and operations. The stakeholder theory of the firm is thus used as a basis to identify those groups to whom the firm should be responsible. As described by Freeman (1984), the firm can be described as a series of connections of stakeholders that the managers of the firm attempt to manage. Freeman‟s classic definition of a stakeholder is “any group or individual who can affect or is affected by the achievement of the organisation‟s objectives”. Stakeholders are typically divided into primary and secondary stakeholders. Clarkson (1995) defines a primary stakeholder group as one without whose continuing participation the corporation cannot survive as a going concern. The primary group including shareholders and investors, employees, customers and suppliers, together with what is defined as the public stakeholder group: the governments and communities that provide infrastructures and markets, whose laws and regulations must be obeyed, and to whom taxes and obligations may be due. The secondary group comprises those who influence or affect, or are influenced or affected by the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival. The major divide within stakeholder theory is whether it is a coherent theory or a set of theories (Treviño and Weaver, 1999). Effectively, the divide is whether stakeholder theory is a normative theory based upon largely ethical propositions or an empirical/instrumental/descriptive theory (eg Donaldson and Preston, 1995; Jones and Wicks, 1999). This remains contentious as posited by Jones and Wicks, 1999; Freeman, 1999, Donaldson, 1999; Treviño and Weaver, 1999; and Gioia, 1999. In terms of the issue

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of social responsibility, the central issue is whether stakeholder analysis is part of the motivation for business to be responsible and, if so, to which stakeholders. Hamil (1999), adopting Donaldson and Preston‟s (1995) typology, finds that corporate giving is nearly always instrumental. An important question that has been addressed is to which groups do managers pay attention? Mitchell et al. (1997) develop a model of stakeholder identification and salience based on stakeholders possessing one or more of the attributes of power, legitimacy and urgency. Agle et al. (1999) confirm that the three attributes do lead to salience. Thus, we might anticipate that firms would pay most attention to those legitimate stakeholder groups who have power and urgency. It is not surprising that mining companies will address their tax and royalty obligation to the government than to care for the local mining communities. Social Contracts Theory Though the profit motive of business is understood and accepted, society does not accept it as an excuse for ignoring the basic norms, values, and standards of being a good citizen. Companies are expected to be responsible stewards of community resources working toward the growth and success of both their companies and their communities. Gray et al. (1996) describe society as “a series of social contracts between members of society and society itself”. In the context of CSR, an alternative possibility is not that business might act in a responsible manner because it is in its commercial interest, but because it is part of how society implicitly expects business to operate. Donaldson and Dunfee (1999) develop Integrated Social Contracts Theory as a way for managers to take decisions in an ethical context. They differentiate between macro-social contracts and micro-social contracts. Thus a macro-social contract in the context of communities, for example, would be an expectation that business provide some support to its local community and the specific form of involvement would be the micro-social contract. Hence companies who adopt a view of social contracts would describe their involvement as part of „societal expectation‟. Mining companies thus try to support some social causes and meet self-imposed obligations instead of addressing the actual needs of the communities. Legitimacy Theory The idea is that companies operate under the mandate of society, which could be withdrawn if they are not seen to be doing what society expects of it. In this case, companies must constantly evolve and adapt to the changing needs and expectation of society or risk losing society‟s mandate, otherwise known as „social license‟. Suchman (1995) defines legitimacy as „a generalised perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions.‟ Bringing together, prior literature on legitimacy management – including the strategic tradition of resource dependence theory (Pfeffer and Salancik, 1978) and the institutional traditions (DiMaggio and Powell, 1983), he identifies three types of organizational legitimacy – pragmatic, moral and cognitive. He also identifies three key challenges of legitimacy management – gaining, maintaining and repairing legitimacy. Suchman points out that “legitimacy management rests heavily on communication” – therefore in any attempt to involve legitimacy theory, there is a need to examine some forms of corporate communications. Gray et al. (1996) note that legitimacy is not necessarily a benign process for organisations to obtain legitimacy from society. She argues that an organization may employ four broad legitimation strategies when faced with different legitimation threats: 1. Seek to educate its stakeholders about the organisation‟s intentions to improve that performance. 2. Seek to change the organisation‟s perceptions of the event (but without changing the

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organisation‟s actual performance). 3. Distract (ie manipulate) attention away from the issue of concern. 4. Seek to change external expectations about its performance. Thus there is a need to examine any particular corporate behaviour within its context and in particular to look for alternative motivations. A converse view to this, ie not that business uses its power to legitimate its activity but, rather that society grants power to business which it expects it to use responsibly is set out by Wood (1991): „Society grants legitimacy and power to business. In the long run, those who do not use power in a manner which society considers responsible will tend to lose it‟. In effect, this is a re-statement of the concept of a social contract between the firm and society. In the view of this paper, local mining communities have natural ties to the mineral deposit and have the legitimacy and social contract with mineral investors. These are the pillars on which this paper builds the model for estimating the social responsibility cost of mining in Ghana. ESTIMATION OF SOCIAL RESPONSIBILITY COST OF MINING IN GHANA The annual Social Responsibility Cost (SRCn) of mining is proposed firstly to identify the local mining communities as direct beneficiary of mining and secondly to secure the community‟s support in creating the needed peaceful atmosphere for the survival and profitability of mineral projects. The cost therefore comprises two components: 

A percentage tied to the annual gross mineral produced (SRCm); and



A percentage tied to the annual operating profit (SRCop).

The general formula is therefore given by: SRCn = SRCm + SRCop



… (1)

where: SRCm = ( MP)(SRFm )

… … (2)

MP = Annual gross mineral produced (g) SRFm = Social Responsibility Factor on mineral produced  P  $16/g $0.03/g,  SRFm  0.02P  0.29 ($/g)  $16/g  P  $64/g … … (3) $1.00/g  P  $64/g  P = Unit price of processed ore ($/g) SRCop = (OP)(SRFop)

… … (4)

OP = Operating Profit = Revenue – Royalty – Operating Cost – Interest … (5) SRFop = Social Responsibility Factor on operating porift = 0.5 to 2.5% The value of SRFop depends on the project‟s location, the local community‟s expectation for infrastructural and human resource development, and the extend to which the project interferes with forest and games reserves, rivers and waterbodies, road and railways, and cash crops. Representations of these themes are shown on five maps of Ghana (Figures 1 – 5). The maps are divided into 330 sectors. The Social Responsibility Factor on operating profit (SRFop) ranging from 0.5% to 2.5% is assigned to each of the sectors of the five maps depending on the perceived impact of the mining activities on

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the communities. Interpolation between 0.5% and 2.5% is applied where necessary. The lower bound of 0.5% is assigned to a sector where there is insignificant impact (0% coverage or no trace of the theme in the sector). The 0.5% is to compensate for the displeasure of mining activities on the communities such as noise, vibration and overpopulation. Table 1 gives the clue behind the assignment of the SRF op to the various sectors on the maps. Figure 6 presents the average composite SRF op for each sector of the country to be used for the estimation of the second component of the social responsibility cost of mining in Ghana. Using sector 250 as an illustration: 1. The social responsibility factor for interference with forest and games = 1.5% 2. The social responsibility factor for interference with rivers and waterbodies = 1.0% 3. The social responsibility factor for interference with roads and railways = 1.5% 4. The social responsibility factor for interference with crop zones = 2.0% 5. The social responsibility factor for contribution to development = 2.5% 6. The average composite factor representing SRFop = 1.7% as shown in Figure 6. APPLICATION OF THE MODEL Project Location The Sikaman Gold Concession (made hypothetical for the sake of privacy) is bounded by latitudes 6° 20' N and 6° 15' N and longitudes 2° 05' W and 2° 00' W. The concession lies within the Upper Denkyira District in the Central Region and the Amansie West District in the Ashanti Region of Ghana. A small portion of the concession is at Nkronua in the Bibiani District in the Western Region of Ghana. Figure 7 shows the location of the concession on a Regional map of Ghana. Estimation of the Social Responsibility Cost of the Sikaman Gold Project Table 2 presents the economic parameters of the project and a spreadsheet computation of the annual social responsibility cost. Estimation of the social responsibility cost for the first year (SRC1) has been used to illustrate how the computation was done. Estimation of the Social Responsibility Cost on Mineral Produced (SRCm) The gross mineral produced (MP) is estimated as:

 1  L T   MP   g r   1  D 

… … … (6)

where T = Tonnage of ore produced per year (t/yr or m 3/yr); g = Mill head grade (g/t or g/m3); r = Mill recovery (decimal or percentage); L = Ore loss (decimal or percentage); and D = Ore dilution (decimal or percentage). From the Project‟s economic data in Table 2

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 1  0.051 080 000  MP   2.40.8 = 2 073 600.00 g 1  0.05   From equation 3, SRFm is estimated as: SRFm = 0.02(25.72) – 0.29 = $0.22/g Thus, from equation 2, SRCm is estimated as: SRCm = (2 073 600.00)(0.22) = $ 456 192.00 Estimation of the Social Responsibility Cost on Operating Profit (SRCop) Annual gross mineral revenue (GR) is a product of the annual gross mineral produced and the unit price. Hence GR is estimated as: GR = (MP)(P)

… … … (7)

GR = (2 073 600.00)(25.72) = $53 332 992.00 Royalty payment = 5% × GR = 0.05(53 332 992.00) = $2 666 649.60 Operating Cost = $19 066 000.00 Annual Interest Payment (I) assuming loan is to be repaid on equal installment over the life of the mine is estimated as: n -1  L  In   L      i  N   

… … … (8)

where L = Loan capital ($) N = Project life (yrs) i = Interest rate (%) n = Year of interest payment From the Project‟s economic data in Table 2 1-1   22 144 800.00   I1  22 144 800.00      12%  $2 657 376.00 9    

From equation 5, the operating profit (OP) is estimated as: OP = 53 332 992.00 - 2 666 649.60 - 19 066 000.00 - 2657376.00 = $28 942 966.40

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From the geographic location of the Sikaman Gold Project (Figure 6) and the composite SRFop map of Ghana (Figure 7), SRFop of 1.7% is applied to the annual operating profit. Thus, from equation 4, the SRCop is estimated as: SRCop = 28 942 966.40  0.017 = $ 492 030.43 Finally, from equation 1 SRC1 is estimated as: SRC1 = 456 192.00 + 492 030.49 = $948 222.43 (as obtained in cell C16 of Table 2). CONCLUSIONS This paper makes a contribution to the estimation of the actual cost of social responsibility of mining by considering two cost components. The first component which is estimated within the range of $0.03/g – $1.00/g of the mineral produced depends on the gold price range of $16/g – $64/g. This is to take care of the ties the mine local communities have with the mineral deposit, making them direct beneficiary of mineral projects within their enclave. The second component estimated between 0.5 – 2.5% of the operating profit, depends on the location of the mineral project and its effect on five socio-environmental economic themes namely: interference with forest and game reserves, rivers and waterbodies, roads and railways, crop zones; and contribution to development. This component is to sustain the livelihood of the mine local communities and thus secure their commitment in creating a peaceful environment for productivity. RECOMMENDATIONS The following recommendations are made to improve the social responsiveness of mining in Ghana: 

Mineral investors must consciously estimate the social responsibility cost of mining and incorporate this in the initial economic evaluation process for the real viability of mineral projects to be known before embanking on mineral projects in the country.



The social responsibility cost must used to institute a social responsibility trust fund to be managed by independent trustees selected from the mining company and the local mining community.



The Government must enact explicit regulations on corporate social responsibility to protect the interest of mining communities.



In the face of globalisation and international trade, mining communities should be prepared to co-exist with mineral investors by identifying their developmental needs and sustenance, and thus consciously bargain for mutual existence with commensurate benefits.

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http://www.revitalization.org /csrm/Reports.htm. CSRM (2006). Mining communities’ perspectives on corporate social responsibility in Ghana - A case study of Tarkwa, Kenyase, Daaman, Bogoso, and Nsuta. Mining Report. Retrieved 21 June, 2010 from http://www.revitalization.org/csrm/Mining_Report.htm. Aubynn, E. A. (2003). Community perceptions of mining: An experience from Western Ghana, (Unpublished master’s thesis). University of Alberta, Edmonton Canada. Boon E. K. & Ababio F. (2009). Corporate social responsibility in Ghana: Lessons from the mining sector. Proceedings of the 29th Annual Conference of the International Association for Impact Assessment, Accra, Ghana. Clarkson, M. B. E. (1995). A stakeholder framework for analyzing and evaluating corporate social performance. Academy of Management Review, 20, 92-117. DiMaggio, P. J. & Powell, W. W. (1983). The iron cage revisited; institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48, 147-160. Donaldson, T. & Dunfee, T. W. (1999). Ties that bind, a social contract approach to business ethics. Harvard Business School Press, Boston. Donaldson, T. & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20, 65-91. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Pitman Publishing, Boston. Freeman, R. E. (1999). Divergent Stakeholder Theory. Academy of Management Review, 24, 233-236. Gioia, D. A. (1999). Practicability, paradigms, and problems in stakeholder theorizing. Academy of Management Review, 24, 228-232. Gray, R., Owen, D. and Adams, C. (1996). Accounting and accountability; changes and challenges in corporate social and environmental reporting, Prentice Hall, London. Guahyia-Ababio, N. A. (2004). Community stakeholders and mining industry. Proceedings of the Conference on Corporate Social Responsibility in Ghana: Extending the Frontiers of Sustainable Development, 1415. Hamil, S. (1999). Corporate community involvement: A case for regulatory reform. Business Ethics: A European Review, 8(1), 14-25. Hilson G. (2006). Championing the rhetoric? Corporate social responsibility in Ghana's Mining Sector. Greener Management International, 53, 43-56. Jenkins H. and Obara, L. (2006). Corporate Social Responsibility (CSR) in the mining industry – the risk of community dependency. Proceedings of the Corporate Social Responsibility Conference. Retrieved 25 June 2010 from www.crrconference.org/downloads/2006jenkinsobara.pdf. Jones, T. M. & Wicks, A. C. (1999). Convergent stakeholder theory. Academy of Management Review, 24, 206221. Mitchell, R. K., Agle, B. R. & Wood, D. J. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22, 853-886. Obara, L. & Jenkins, H. (2006). Land use disputes in Ghana’s mining communities: Developing sustainable strategies. Sustainability and Society Working Paper Series No. 36, The Centre for Business Relationships, Accountability. Pfeffer, J. & Salancik, G. (1978). The external control of organizations: a resource dependence perspective. Harper & Row, New York. Suchman, M. C. (1995). Managing legitimacy: Strategic and institutional approaches, Academy of Management Review, 20, 571-610. Treviño, L. K. & Weaver, G. R. (1999). The stakeholder research tradition: Convergent theorists - not convergent theory. Academy of Management Review, 24, 222-227. Wood, D. J. (1991). Corporate Social Performance Revisited. Academy of Management Review, 16, 691-718. Zisch, B. (2004). A model for developing social responsibilities and good community relations: The Newmont experience. Proceedings of the Conference on Corporate Social Responsibility in Ghana: Extending the Frontiers of Sustainable Development, 6-8.

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Forest and Game Reserves National Boundary Sector

©Society for Business Promotion Figure Research 1 Segmented Map of Ghana showing Forest and Games

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River Waterbody

Figure 2 Segmented Map of Ghana showing Rivers and Waterbodies

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Figure 3 Segmented Map of Ghana showing Road and Rail Networks

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Asian Journal of Business and Management Sciences Vol. 1 No. 1 [173-188]

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Figure 4 Segmented Map of Ghana showing Cash Crops

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Asian Journal of Business and Management Sciences Vol. 1 No. 1 [173-188]

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Figure 5 Segmented Map of Ghana showing Level of Development

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Asian Journal of Business and Management Sciences Vol. 1 No. 1 [173-188]

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Figure 6 Composite SRF2 for Mineral Investment in Ghana

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Asian Journal of Business and Management Sciences Vol. 1 No. 1 [173-188]

Sunyani

Kumasi Ho

Sikaman Gold Concession Koforidua

Accra

Cape Coast Takoradi

Lake Regional Capital

Figure 7 Sectional Map of Ghana showing the Location of the Sikaman Gold Concession

Table 1 Clue for the Assignment of SRFop on the Map of Ghana Theme

2.5

2.0

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1.0

0.5

SRF (%)

1

Forest and game reserves

100%

75%

50%

25%

0%

2

Rivers and waterbodies

100%

75%

50%

25%

0%

3

Roads and railways

100%

75%

50%

25%

0%

4

Crop zones

Min cocoa

5

Development

Max cocoa None

Note: The percentage (%) denotes the area covered by theme in a sector on the segmented map of Ghana.

Shea nut Oil Coconut palm District Regional capital capital 100% coverage area  Catastrophic impact 75% coverage area  Major impact 50% coverage area  Moderate impact 25% coverage area  Minor impact 0% coverage area  Insignificant impact

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Table 2 Social Responsibility Cost Estimation for Sikaman Gold Project A 2 3 4 5 6 7

B

C

D

E

F

Equity Capital =60%

= US$ 33,217,200.00 Annual production =1,080,000 t

Project Life

= 9 yrs

Loan Capital =40%

= US$ 22,144,800.00 Mill Head Grade

= 2.40 g/t

Interest Rate

= 12%

Gold Price

= US$ 25.72 /g

= 80%

SRF1

= US$ 0.22 /g

Total Capital Investment

= US$ 55,362,000.00 Dilution

= 5%

SRF2

= 1.7%

Working Capital

= US$ 3,813,200.00

= 5%

Total Operating Cost (per yr)

= US$ 19,066,000.00 Percentage Loan = 40%

Recovery

Ore Loss

G

H

I

J

K

8 9 10 11 12 13 14 15 16

Item

Year

1

2

3

4

5

6

7

8

9

0.00

53,332,992.00

53,332,992.00

53,332,992.00

53,332,992.00

53,332,992.00

53,332,992.00

53,332,992.00

53,332,992.00

53,332,992.00

Royalty , 5%*GR

0.00

2,666,649.60

2,666,649.60

2,666,649.60

2,666,649.60

2,666,649.60

2,666,649.60

2,666,649.60

2,666,649.60

2,666,649.60

Operating Cost (OC)

0.00

19,066,000.00

19,066,000.00

19,066,000.00

19,066,000.00

19,066,000.00

19,066,000.00

19,066,000.00

19,066,000.00

19,066,000.00

Interest

0.00

2,657,376.00

2,362,112.00

2,066,848.00

1,771,584.00

1,476,320.00

1,181,056.00

885,792.00

590,528.00

295,264.00

Operating Profit (OP)

0.00

28,942,966.40

29,238,230.40

29,533,494.40

29,828,758.40

30,124,022.40

30,419,286.40

30,714,550.40

31,009,814.40

31,305,078.40

Social Responsibility Cost (SRC)

0.00

948,222.43

953,241.92

958,261.40

963,280.89

968,300.38

973,319.87

978,339.36

983,358.84

988,378.33

Gross Revenue (GR)

0

Less:

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