Parliamentary Public Accounts Committee (PAC) has recommended a review of the Lesotho Flour Mills management agreement within 90 days after hearing concerns of the company’s failure to declare dividends to government.
PAC made the firm recommendation in its report tabled in the National Assembly of Lesotho following the completion of its report on the consolidated financial statements of the government of Lesotho’s three financial years from 2013-2016 and other incidental findings.
The committee also recommended that ministers of finance, trade and agriculture must refrain from interfering in administrative issues after discovery that upon the management agreement expiry in 2018 it was renewed for one year.
Lesotho flour Mills is a milling company owned by Seaboard Overseas and Trading Group holding a majority stake of 51 percent, while 49 percent is held by the Lesotho government.
The milling company used to be owned by the government of Lesotho until it was privatised in the late 1990s and this prompted the new shareholders agreeing to Seaboard managing the company through ten-year management contracts.
But it emerged lately that since 1998, under Seaboard, the milling company never declared any dividends to the government of Lesotho when one of the former representatives of the government of Lesotho to the mill’s board Ramahooana Matlosa in 2017 resigned and protested the company seemed to be manipulating its financial statements and practicing transfer pricing.
Now, in a report, the Public Accounts Committee says the milling company has been asked by government to declare dividends since 2012.
The PAC report points that the milling company has not been obliging to the request by government claiming to be running a loss.
The Committee’s report reads that “therefore there was a plan that its contract would not be renewed upon the expiration in 2018. But the Basotho nation was concerned that Lesotho Flour Mills is operating in 2019”.
The Committee also notes in its report that there is a “suspicion that seaboard has been inflating the operation costs deliberately in order to avoid declaring dividends and has also been engaged in transfer pricing activities.
“Furthermore, it was discovered that the company is run by its shareholders, prompting suspicion that profits are deliberately not declared”.
The committee report also highlights that during its inquiries it made a surprising discovery that company’s contract was renewed for one year in December 2018 by the Ministers of Finance, Trade and Industry and Agriculture and Food Security, as alleged by the principal Secretaries of these Ministries.
The Committee noted that the ministers’ actions were irregular in that “Procedurally, this was not supposed to be the case”.
In its inquiries, the Committee said it interviewed former Minister of Trade and Industry Tefo Mapesela who corroborated its suspicions about Seaboard’s management of the milling company.
The Committee said Mapesela concurred with their suspicions that Seaboard “indulges in extensive manipulation of financial statements and transfer pricing to a paint a negative financial picture which negates the payment of dividends”.
“He highlighted that it is true that the government of Lesotho had been planning to seek the review of the management agreement/contract with Seaboard which seemed to be disadvantageous to the government of Lesotho in the sense that the agreement allowed seaboard to appoint its own Chief Executive Officer (CEO) and run the operations of the LFM; thus prompting a greater possibility of financial manipulation and transfer pricing with buy services from their holding or sister companies.
“The last time he was involved in this issue was in a meeting where it was proposed that the Cabinet would be informed about the intention to review the management contract of LFM with the other two stakeholders,” said the Committee in its report.
The Committee also noted that Finance Minister Moeketsi Majoro clarified the whole situation regarding the existence of Lesotho Flour Mills.
The committee said Dr Majoro explained Lesotho and seaboard are guided by a Shareholders Agreement which has no expiry date with the assumption being that they would be shareholders till the collapse of business.
“The other guiding tool is the Management Agreement which expires after every ten years. It expired for the second time in 2018.
“Hon Majoro agreed with the views expressed by Hon Mapesela about the skewed benefits enjoyed by seaboard and the other partners.
“Seaboard had been enjoying the benefit of running the company on behalf of the other shareholder.
“That is where manipulation of the financial statements and transfer pricing are suspected to be practiced by seaboard,” the Committee learned in its interview with Dr Majoro.
The Committee also notes in its report that Dr Mojoro—in response to the irregular one year renewal of the management agreement—indicated they were advised by the directors to renew the Management Agreement for one year to give time for all the partners to review the management Agreement and put in place a Board that will work for the interests of all the shareholders.
“He further explained that Lesotho Flour Mills had realised profits of about M35 million for the past two years, but there were always bottlenecks that used to avoid paying dividends.
“Last year, Lesotho Flour Mills wanted to declare dividends to the tune of M400, 000 of which Majoro rejected because it was too little. He is adamant that their Management Agreement must be abolished.
“Hon Majoro also reiterated the concern expressed by G8 countries about multi- national companies like seaboard which practice transfer pricing and avoids paying taxes.
“Again, he indicated that the Organisation for Economic Co-operation and Development (OECD) has provided Lesotho with a template that is able to test transfer pricing. This is intended to assist the government to see which companies are practising transfer pricing so that actions could be taken in time,” said the Committee in its report.
When quizzed about the milling company, the Principal Secretaries of the Finance told the Committee they were now working on legal frameworks with the milling company to map out a way forward.
“She indicated that they are in the process of reviewing and renegotiating the shareholders’ agreements at the beginning of the financial year 2019/2020 in preparation for the implementation in 2020/21,” said the Committee in its report.