Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
Exercise: Water, water everywhere!
The company negotiators
Overview
The three government departments (environment, mining and the attorney general’s office)
will have to spend some time formulating their position which – when approved by the
Premier – will be the basis of their negotiation with you.
You also have to prepare an initial position. The CEO has put together a team of senior
executives – a corporate finance officer, a corporate development officer and a corporate legal
officer. Each one of you has been put on the negotiating team because of your particular areas
of expertise.
You should assess the impact of the Premier’s plan and develop a response as a basis for
discussion with the two others on your negotiating team. There has already been discussion
within the management team to generate a number of possible options. You have taken these
options back to your respective specialist areas within the company and have evaluated each
one (giving each a nominal value in the range of plus 10 to minus 10). This will enable you to
establish your negotiating priorities when you meet with the other company negotiators to
develop an overall position to put to government.
Before you meet with the government representatives you will have to get approval of your
negotiating approach by the CEO. He will want to know what you expect to achieve by way
of an outcome. Once you have CEO approval, you can then prepare for your meeting with the
government representatives. If at any time in the negotiations new proposals are generated,
these should be matched against the values of those already identified. Should it be necessary,
your ‘CEO’ will attribute a value to a new proposal.
As the negotiations progress, you may be required to report back to the management group
and if you reach an agreement with the government representatives this will have to be
presented to the CEO for final approval before you can commit to it.
(The lecturer should act as the CEO and your immediate boss, if required)
Good negotiating
Cambridge University Press
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
The company perspective
The company has to consider two main aspects to this issue: 1) What is the impact upon the
company’s standing in the community and its reputation as a good corporate citizen, and 2)
what is the impact of the proposal on the company’s profit?
The company currently has a good reputation and has the support of the local business
community and the representatives of the local first nation group. It has invested heavily into
building these good relations, not only through community projects and local purchasing, but
also through local employment schemes. However, the area also has great tourist potential,
and while in the past no one in their right mind would want to go to somewhere as cold as the
Hudson Bay for a holiday, now areas such as this are beginning to feature as progressive
recreational areas. It will only be a matter of time before this develops in the area – some of
the far-sighted business and community leaders are beginning to realise this and are therefore
likely to support the Premier’s water initiative. Furthermore, if the present government does
win the next election (a distinct possibility) then it will not have been wise to oppose the
Premier on what would look like a purely selfish commercial interest stance.
The company cannot rely on the Federal government, despite its expressions of support. It is
likely to take the issue and use the company for its own political ends in supporting the
current opposition party in the forthcoming provincial elections.
On the other hand, its corporate citizenship would be upheld by campaigning against arbitrary
government (after all this is not some African dictatorship!), and the rule of law underpins
commercial certainty – particularly in a capital-intensive industry like mining. The Provincial
and Federal governments both rely on mining royalties.
The commercial issues in relation to the expansion project are not straightforward. The
options are:
1. To halt the expansion project and work the mine with its existing capacity
2. Complete the project then mothball it
3. Complete the expansion and operate at the higher capacity.
Cambridge University Press
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Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
If the political realities are such that new water regulations come into force it, then the
objective is to minimise and/or delay the impact of any outcome on the company’s bottom
line.
The company’s revenue is determined by its output of copper, and the price of copper is set
by the London Metals Exchange. The demand for copper is such that the company expects to
be able to sell all the ore extracted from the expanded mine. The technology of mineral
extraction is such that the output of the mine is directly proportionate to the level of water
usage (eg. a 50% cut in water usage reduces annual output by 50%).
Cambridge University Press
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Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
Corporate finance officer
You have been placed on the negotiation team to monitor the cost impact of any proposed
solution. The Chief Financial Officer has a bit of a reputation around the company for his
protection of the profit stream – he guards it so tightly you would think that any reduction in
profit has to be paid for out of his own pocket! His view is that ‘the economics of this will
win out in the end over any other competing interests’. The possible outcomes are listed
below, with an attributed value based purely on a financial perspective. You can anticipate
that others on the negotiating team will value some of the outcomes differently.
The CFO will be keeping a close eye on the progress of the negotiations. (You know that he
has assured the CEO that he had nothing to worry about so far as the financial aspects are
concerned.) Then, with other members of the negotiating team you will have to report to the
CEO to secure his approval of any proposed solution.
Your first task is to decide what position you will take to the pre-negotiation meeting with the
two other executives (some options are provided below). Outline your position and key points
on a separate sheet to give to the CFO for approval, prior to meeting your negotiating
colleagues.
Some options
These options suggest how the water restrictions issue might be resolved.
Financial value
1. The Premier’s plan is introduced before the next election
-10
The proposed 50% reduction in water extraction would reduce the current operation and
would impact directly on the bottom line. If implemented, the reduction in mine output
as a result of the water restrictions would convert the existing plant’s profitability from
$51.5 million per annum, to a loss of $7.5 million. The lower operating costs of the new
mine barely offset this. Even a break-even solution is financially unacceptable.
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
2. The plan is introduced with a review
The impact is dependent upon the option chosen.
2.1 The restrictions are enforced but may be reduced once the review is conducted -9
Initially this would have the same impact on the bottom line as option 1 above. But
once the 50% reduction rate has been enforced any reduction is going to look politically
weak, so you don’t really expect any longer term lessening of the financial impact.
2.2 Partial implementation of the plan (eg. 25% reduction pending the review)
+1
A 25% reduction in water extraction reduces current output and therefore impacts upon
the bottom line – the effect will be to reduce the existing plant’s profitability from $51.5
million per annum to around $22 million; but the expansion mine would be profitable.
So while it is acceptable, it is a thoroughly unpalatable outcome.
2.3 No implementation until review completed, then a percentage to be set as determined by
the review
+5
This is the ideal ’defer’ solution as there would be a delay in implementation (which
might also be watered down in its impact). As there is current or short-term financial
impact, this option can be presented as a good solution financially.
3. The plan is introduced but companies are allowed to maintain full or partial extraction
rates, on the condition that they provide offsets.
This would mean the company could proceed with the expansion, provided both it was
offset along with the existing mines water usage.
3.1 Desalination plant at Hudson Bay area

+2
Capital cost of $650 million (capital costs on all these projects would be spread
over twenty years)

Annual operating cost of $17.5 million

Cost impact per annum (650/20 +17.5) = $50 million

A plant like this would offset the existing mine and expansion’s water usage.
Cambridge University Press
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
Fund water conservation elsewhere in the Province especially in the south where demand for
water is greatest.
Each proposal has its costs (and impact on profit)
3.2 Desalination plant in the south
+2
To operate a plant to the south of the country would imply less tight control, more local
management and labour costs, hence an extra $5 million per annum operating costs.
3.3 Groundwater extraction project

+3
There are significant aquifers in Manitoba so there have been a number of proposals to
extract more water from aquifers in the lakes area of the Province

The capital cost of a 10 million litre project is $50 million.

Annual operating cost $1 million

Cost impact per annum per project (50/20 +1) = $3.5 million

It looks like the sort of project that could easily have a cost blow-out when it comes to
operating the project.
3.4 Canal/pipeline
+4
There have been a number of proposals to transport water, for example from Lake
Winnipeg to the more densely populated area at the south of the Province. Costs are
expected to be around $250 million, with an annual operating cost of $5 million. Cost
impact per annum (250/20 +5)= $17.5 million.
3.5 Establish a water research centre
+9
A research centre with $50 million over five years would have a cost impact of $10
million per annum, but it hardly counts as an ‘offset’.
4. The restrictions plan is introduced for new mines, but existing mines are required to
‘offset’ their water usage.
This means the extension can only operate at 50% (ie, would be profitable but only
marginally). Overall profit would be reduced from notional $140 million to around $58
million, further reduced by whatever the cost of the offset is. This means that whatever
the offset option the financials for the company are poor.
Cambridge University Press
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
The existing mine has to be offset by projects totalling around 50-60 million litres.
4.1 Desalination plant north
-5
4.2 Desalination plant south
-5
4.3 Groundwater projects (need six)
-3
4.4 Canal/pipeline
-1
4 5 Research centre
-1
5. A new water resources commission is set up
+9
This is a ‘defer’ solution so it’s better than implementation. It’s almost certain that
existing projects would escape any impost, and any financial impact on new projects
would be delayed or even avoided – particularly if the expansion was near completion.
6. The Premier’s plan is an election policy issue to be implemented after being re-elected
-9
If the Premier is re-elected then the financial costs would only be delayed.
Cambridge University Press
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
HUDSON COPPER MINE - FINANCIAL SUMMARY
Current mine operation
Expected life (years)
Construction cost
Daily output (tonnes)
Annual output (90%)
Forward copper price (US$/t)
Output value pa (US$/t)
Operating costs/t
Operating costs pa
Construction Overheads (cost/exp life)
Royalty payments (% of revenue)
Profit pa
Water usage (litres pa)
$
Effects of water restrictions
reduction
50%
1,200
394,200
6,000
$
25%
197,100
295,650
2,365,200,000
1,182,600,000
1,773,900,000
1,892,160,000
66,666,667
354,780,000
51,593,333
946,080,000
66,666,667
177,390,000
-7,536,667
1,419,120,000
66,666,667
266,085,000
22,028,333
164,250
246,375
1,971,000,000
985,500,000
1,478,250,000
1,511,100,000
75,000,000
295,650,000
89,250,000
755,550,000
75,000,000
147,825,000
7,125,000
1,133,325,000
75,000,000
221,737,500
48,187,500
140,843,333
-411,667
58,718,333
70,215,833
4,800
15
120,000,000
Water lease
Max amount of water extraction
Annual cost of lease
25 years (20 years to run)
220m litres pa
$35m pa
Expansion
Expected life (years)
Construction cost
20
1,500,000,000
Daily output (tonnes)
Annual output (90%)
Forward copper price (US$/t)
Output value pa (US$/t)
Operating cost/t
Operating costs pa
Construction Overheads (cost/exp life)
Royalty payments (% of revenue)
Profit pa
Water usage (litres pa)
TOTAL PROFIT, mine + expansion
Total profit, existing mine and 50% expansion
Cambridge University Press
$
15
1,000,000,000
1,000
328,500
6,000
4,600
15
100,000,000
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
Corporate development manager
You are an engineer by background, so one reason you have been placed on the negotiation
team is to call on your expertise for the practical implementation of any proposed solution.
Your current role is in corporate services working with the corporate services director on
profiling and building the reputation of the company. The director is fully aware of the
political and social implications of the company’s activities, and is committed to advancing
the corporate image of the company – particularly in the Hudson Bay area. The possible
outcomes are listed below, with an attributed value based purely from the perspective of the
proposal’s impact on the company’s reputation. You anticipate that others on the negotiating
team will value some of the outcomes differently.
You will have to report back to the director on the outcome of the negotiation. You know that
he is battling hard at the corporate level to consolidate a corporate social responsibility profile
within the company, and so he wants a strong result from you. With other members of the
negotiating team you will have to report any proposed agreement the CEO for formal
approval. Your first task is to decide what position you will take to the pre-negotiation
meeting with the two other executives (some options are provided below).
Outline your position and key points on a separate sheet to give to your director for approval,
prior to meeting your negotiating colleagues.
Some options
These options suggest how the water restrictions issue might be resolved.
Reputational value
1. The Premier’s plan is introduced before the next election
+2
The proposed 50% reduction in water extraction would reduce the current operation and
would impact directly on the bottom line. However, the company could put effort into
being seen to embrace the Premier’s initiative and therefore enhance its environmental
credentials. Essentially with this and the options under minus two, the company can
salvage something positive out of an otherwise negative situation.
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
2. The plan is introduced with a review
+2
The difficulty with a review is that the company will be seen as opposing the
government on the issue. Nevertheless some reputational benefit might be extracted.
2.1 The restrictions are enforced but may be reduced once the review is conducted +2
2.2 Partial implementation of the plan (eg. 25% reduction, pending the review)
+2
2.3 No implementation until review completed, then a percentage is set as determined by the
review
+1
This looks to be a better ’defer’ solution, but paradoxically if the review is dragged out
and drifts off the public agenda, there is not much the company can do to look good.
3. The restrictions plan is introduced but companies are allowed to maintain full or partial
extraction rates on the condition that they provide offsets through other water saving
projects.
This option gives the company the opportunity to be seen to be taking the initiative and
implementing environmental/community projects.
The offset projects might be:
3.1 Desalination plant at Hudson Bay area
+7

Capital cost of $650 million

Capacity 110 million litres per annum

A costly exercise, but it would clearly stamp the company as being at the
forefront of the water conservation issue.
Fund water conservation elsewhere in the Province especially in the south, where the water is
needed.
3.2 Desalination plant in the south
+7
Similar construction costs but you believe that operating costs might be higher in the
south. However, the same reputational benefits would flow.
Cambridge University Press
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
3.3 Groundwater extraction project
+7
There are significant aquifers in Manitoba so there have been a number of proposals to
extract more water from aquifers in the lakes area of the Province. These are relatively
small in terms of capital cost (around $50 million) and water flow (10 million litres per
annum), but they do give a good ‘on the ground’ opportunity to the company to show it
is doing something practical about the water resource issue.
3.4 Canal/pipeline to the south
+7
There have been a number of proposals to transport water, for example from Lake
Winnipeg to the more densely populated area at the south of the Province. But there is
a big debate raging about whether canals or pipelines ‘work’. The estimate is a cost of
$250 million to build (though operating costs are low), but for only 50 million litres per
annum. Even so, this would again provide the company with a positive opportunity.
3.5 Establish a water research centre
+4
Someone suggested putting $50 million into a research centre. While it might do good
work, unless it is very clearly identified with the company (which it won’t be – it will
probably have to be linked to a university or somewhere else) then the beneficial
reputational impact for the company will be diluted.
4. The restrictions plan is introduced for new mines, but existing mines are required to
‘offset’ their water usage.
The distinction between new and existing mines probably impacts on the economics of
the operation, but the opportunities for the company to build its environmental and
sustainability credentials are the same.
4.1 Desalination plant north
+7
4.2 Desalination plant south
+7
4.3 Groundwater projects,
+7
4.4 Canal/pipeline
+7
4 5 Research centre
+4
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
5. A new water resources commission is set up
+3
Could use the commission processes to promote the company image, but it might be
found having to promote two competing priorities – economics versus community
benefits.
6. The premier’s plan is an election policy issue to be implemented after being re-elected -1
This would place the company in an even more difficult position. The company would
not be able to support the Premier’s position in the election campaign. If the Premier’s
party won then the new proposals might be even harsher.
Cambridge University Press
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
Corporate legal officer
You have been asked to be involved in this negotiation because of the legal dimensions of the
issue. Your remit, as explained to you quite bluntly by the CEO (to whom you report
directly), was to “fix this thing”. The possible outcomes are listed below, with an attributed
value based purely on the legal perspective, particularly around the legal point of existing
contracts being unilaterally altered. You can anticipate that others on the negotiating team
will value some of the outcomes differently. You will have to report back to the CEO to get
his endorsement of any proposed agreement.
Your first task is to decide what position you will take to the pre-negotiation meeting with the
two other executives. Outline your position and key points on a separate sheet to give to the
CEO for approval, prior to meeting your negotiating colleagues.
Some options
These options suggest how the water restrictions issue might be resolved.
Legal value
1. The Premier’s plan is introduced before the next election
-10
This is the worst possible outcome – there is no legal precedent for unilaterally
changing contractual terms through legislative provision. It will deter future business
investment.
2. The plan is introduced with a review
The impact is dependent upon the option chosen.
2.1 The restrictions are enforced but may be reduced once the review is conducted -8
2.2 Partial implementation of the plan (eg. 25% reduction, pending the review)
-6
Both these options set an adverse precedent, but the ‘reviews’ will allow opportunity
to rework the issue and, hopefully, reduce its future impact
2.3 No implementation until review completed, then a percentage set as determined by the
review
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-4
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© Ray Fells 2010
Effective Negotiation
Exercise: Water, water everywhere! The company negotiators
The ideal ’defer’ solution as the review can take forever, or be subject to appeal, legal
challenge, etc. But the legislation would be on the statute book in some form.
3. The restrictions plan is introduced, but companies are allowed to maintain full or partial
extraction rates on the condition that they provide offsets.
-2
You understand that this would mean the company could proceed with the expansion as
well as maintain existing production at the mine. The ‘offsets’ – presumably other water
conservation projects – are really only a ‘tax’ on the company. If the legislation is
shaped that way it is more palatable legally (if not financially!). You understand there
are several options – desalination plans, pipelines, etc. Whatever the option, the legal
aspects are just the same.
4. Plan introduced for new mines but existing mines are required to ‘offset’
+2
The requirement that existing mines ‘offset’ is still a problem legally but is far more
manipulatable, given that the core of the legislation will apply only to new mines (a
legitimate legal position).
5. A new water resources commission is set up
+10
A ‘defer’ solution that has no legal impact on current contracts.
6. The Premier’s plan is an election policy issue to be implemented after being re-elected +10
A risky outcome. While it might be possible to work on having the policy set aside
after the election (ie. banking on the continued demand for minerals, increased
prosperity, etc), a strong vote for the government will increase the Premier’s resolve.
Legally this is a non-contestable outcome.
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© Ray Fells 2010