24 April 2019

Lesotho Flour Mills Licence Controversy Sucks in Ministers

The country's largest milling company, Lesotho Flour Mills (LFM), is embroiled in fresh controversy after it emerged yesterday that its contract of its major shareholder, Seaboard Overseas and Trading Group, had been renewed without cabinet approval. The former Minister of Trade and Industry, Tefo Mapesela, yesterday alleged that Seaboard continued to employ the transfer pricing method to avoid paying the government dividends.

Mr Mapesela, who was moved to the Defence and National Security minister in a December 2018 cabinet reshuffle, made the claims when he appeared before the Public Accounts Committee (PAC) yesterday. He appeared along with Gender and Youth, Sports and Recreation Minister Mahali Phamotse who had been summoned to explain how she had illegally hired 66 teachers in 2015. Dr Phamotse served as the Education and Training Minister in the previous regime that was headed by former premier Pakalitha Mosisili.

For 19 years up to last year, the LFM attracted widespread criticism over its failure to pay the government dividends with its major shareholder, Seaboard, being accused of using an offshore tax haven and transfer pricing to avoid paying the government.

The transfer pricing is allegedly carried out through the use of a Seaboard subsidiary based in the Bahamas, a tax haven that has the exclusive right to handle the procurement of grain for the multinational company.

LFM was established in 1979 and privatised in 1998, when multinational agro-processor Seaboard Overseas and Trading Group and a sister company bought a controlling stake for about US$10 million, while a 49 percent stake remained with the Lesotho government.

Headquartered in Kansas, United States, Seaboard runs milling facilities in South America, the Caribbean and Africa, among other locations.

LFM operates in four product categories namely: Lesotho Farm Feeds Mills for animal feed; Flour Mills with products like cake flour, easy bake and others; Lesotho Maize Mills which produces maize meal and samp and the Lesotho Sugar Packers which packages sugar.

Under the management agreement, Seaboard provides a managing director, director of finance and administration, a technical director "and such other staff as may be agreed with the (company) for a yearly US$300 000 (about R3.99-million) management fee adjusted in line with inflationary charges."

The management contract provides that for all trips to LFM beyond the annual inspection and consultation visits, the Lesotho company must reimburse Seaboard to the tune of US$500 (about M6 659) per day per employee.

Seaboard failed to declare dividends for 19 years.

Former LFM board member, Ramahoana Matlosa, claimed that the company's inability to generate sufficient profits to pay dividends had been a "deliberate strategy".

Mr Matlosa complained that the joint venture between the government and Seaboard did not serve the interests Lesotho.

"Seaboard indulges in extensive manipulation of financial statements and transfer pricing to paint a negative financial picture which negates the payment of dividends," Mr Matlosa alleged. In response, Seaboard said the allegations were "misplaced and inaccurate".

However, at a joint sitting of Lesotho's senate and national assembly during the presentation of the 2018/2019 budget estimates last year, Finance Minister, Moeketsi, mentioned LFM as one of the government's corporate partners that "have not consistently declared profits or dividends".

"Basotho are very concerned about this and have openly called for a review of the government's shareholding in these companies.

"It is also notable that companies that have struggled with profits happen to extensively use management contracts and buy services from their holding or sister companies," Dr Majoro said at the time.

However, the government eventually handed Seaboard a short lifeline by awarding it a one-year contract extension with effect from 1 January 2019. This was after Seaboard had resolved to pay dividends to its shareholders after the posting profits of M33, 5 million and M26 million for financial years ending October 2016 and 2017 respectively.

However, controversy surrounds the renewal of Seaboard's contract with Mr Mapesela yesterday telling the PAC that he was not aware how this was done without cabinet approval.

Mr Mapesela was summoned by the PAC in his capacity as a former Trade and Industry minister after the Principal Secretary in the Ministry of Finance, Motena Tsolo, told the Selibe Mochoboroane-led PAC that Seaboard's contract had been renewed despite previous concerns about dividends.

Mr Mochoboroane said Ms Tsolo told the PAC that the contract - which ended in December 2018 - was renewed by Mr Mapesela, Finance Minister Dr Majoro and Agriculture and Food Security Minister Mahala Molapo.

"The principal secretaries (of Trade; Finance and Agriculture), through the principal secretary of Finance, gave evidence before this committee regarding the contract between the Lesotho Flour Mills and the government. Lesotho Flour Mills had not declared dividends to the government for many years on the grounds that it was not making profits. Lately it has communicated that it is making profits.

"We were schooled that sometime in 2013/14, the then Minister of Finance, Leketekete Ketso, deputised by 'Matsepo Ramakoae, met with the Agriculture and Trade ministers. Serious concerns were raised and it was agreed that the contract would be reviewed after its expiry.

"Now the issue is that the contract ended in December 2018, giving government the opportunity to review it and ensure that concerns that were raised are dealt with. Instead of doing that, the contract has been renewed and unlike in the past where the contract was signed by principal secretaries, this time the renewed contract has been signed by the ministers (of Trade; Finance and Agriculture)," Mr Mochoboroane said.

While admitting that the PAC did not have the contract in its possession, Mr Mochoboroane asked Mr Mapesela to clarify the issue on the basis of evidence supplied to the PAC by Ms Tsolo.

Mr Mapesela replied by saying he was surprised that the contract had been renewed without cabinet approval. He denied appending his signature to the renewed contract, saying the renewal must have been done after he was moved to the Defence portfolio. He said that the cabinet was supposed to have first scrutinised and approved the contract because of serious concerns about the payment of dividends and the terms of the contract which allowed Seaboard to appoint most of the senior managers.

Mr Mapesela also accused Seaboard of moving money out of the country through transfer pricing.

He explained transfer pricing as a system where companies used their own subsidiary companies to secure services in order to appear as if though they were operating at a loss and thus avoid paying dividends.

"On top of its shareholding, Seaboard has a management contract that enables it to hire the chief executive officer. As you rightly put it, the Lesotho Flour Mills had not paid any dividends to the government. Although the government is represented by three ministers on the board of directors, Seaboard dictates everything and uses transfer pricing to hide the profits.

"At the time I was Trade minister, we agreed that the contract especially the management contract would be reviewed to strip Seaboard off the powers to engage the chief executive officer. At the time I left the ministry, the contract had not been renewed.

"A revised contract should have been interrogated by the cabinet. I am not aware that the contract has been renewed and I am still expecting it to be presented before the cabinet. If the contract was renewed, I was not a signatory to that and it has not been approved by the cabinet as per the initial agreement," Mr Mapesela said.

Efforts to obtain comments from Dr Majoro and Mr Molapo were unsuccessful as they were unreachable on their mobile phones.

Meanwhile, Dr Phamotse denied any wrongdoing in the recruitment of 66 teachers in 2015. She told the PAC that the then cabinet approved a for a pilot project of placing teachers in government and community schools after a survey report had shown that schools were not filling vacancies for many years.

"I didn't do the placements of teachers illegally, the cabinet approved the exercise. Under the pilot study, placements were done after all the necessary procedures were followed. Positions were not filled for years and monies allocated for those vacancies would be returned (to the treasury). I didn't hire my relatives," Dr Phamotse said.

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