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Cabinet guarantees M2.4 billion loans for unvetted companies

Billy Ntaote

Against the advice of Minister of Finance, Moeketsi Majoro, Lesotho cabinet has approved a whopping M2.4 billion for yet flawed sports facilities project as the country prepares to host Africa Union Sports Council (AUSC) Region 5 games in December 2020.

Majoro had noted in a secret cabinet memorandum to cabinet huge risks of the project due to lack of feasibility studies, proper procurement processes and a time constraint compromising professionalism and quality of the infrastructure to be constructed.

MNN Centre for Investigative Journalism heard during proceedings of the Parliamentary Public Accounts Committee (PAC) that Majoro had raised red flags on this project warning there “are huge risks involved…given the approach used in the infrastructure financing model”.

Majoro feared the cumbersome M2.4 billion loan threatened Lesotho’s debt sustainability. He said the magnitude of debt to be incurred pushes the debt stock towards upper limits of debt.

He urged the loan guarantee would limit Lesotho’s ability to acquire debt for fiscal operations in future and therefore recommended renovation of Setsoto Stadium to reduce the risk.

He added a number of key assessment tools, procedures and strategies have been flawed with this project.

For Lesotho to successful host these games, it needs to have a sports village that can house 3000 participants, a 21000-seater stadium fitting for athletics and a multipurpose indoor sports arena for 41 sporting codes.

The country is also required to finalise any infrastructural developments three months prior to the games kick-off, being before July 2020.

Appearing before the PAC, Deputy Principal Secretary of finance, ‘Mamakopoi Letsie, said despite Majoro’s advice, cabinet memorandum was issued approving a M2.45 billion loan agreement guarantee between government and Property 2000, a South African property development financier.

The Centre has learned from highly placed sources that Majoro had to take the developers’ requests for government guarantee to Cabinet allegedly under duress after being outvoted by his colleagues in cabinet sub-committee on whether the infrastructure development must continue or not.

Again, the Centre heard during the committee’s proceedings that the government loan agreement guarantee issued to Property 2000 was for three companies to secure loans with the financier and develop requisite properties for the hosting of the AUSC Region 5 games.

Property 2000 is a South African real estate agency, accredited credit provider and a property developer.

The Ministry of Finance argues engagement of the three property developers, Nepco Two Consortium (PTY) Ltd, MFT Lesotho (PTY) Ltd and Design Edge (PTY) Ltd grossly violated procurement processes.

For both Nepco Two Consortium and MFT Lesotho, incorporated this year, cabinet has approved 100 percent guarantee for them to access M760 million and M785million loans with a 30 years maturity at 3 percent interest rate.

But for Design Edge, 50 percent guarantee and 50 percent government loan were granted for its M898 million loan with 30 years maturity, 3 percent interest rate and a grace period of five years.

“It appears like Finance Minister was under duress on this, but he will be the one to tell this committee what transpired together with his Sports ministry counterpart,” said the committee chairperson, Selibe Mochoboroane, in the face of Letsie’s revelation.

Mochoboroane was worried that Public Procurement and Advisory Division (PPAD) as a strategic office in procurement was not involved in the engagement of the three companies.

He said there is a need for the origins of the whole project to be ascertained as there seems to have been too much political decision making involved without feasibility studies and violating procurement processes.

Another finance ministry official, Khotso Moleleki, Director of Public Debt and Aid Management, told the PAC memorandum to cabinet from the finance minister titled: Financing agreement and guarantee agreements between government of Lesotho and Property 2000 PTY LTD for 2020 region 5 games reflected the minister’s approval of the project amid serious concerns against it.

In this Memorandum, it was revealed to the committee that Majoro had said, “I recommend that cabinet approve the negotiation of Lesotho government and property 2000 for 2.4 billion”.

Notwithstanding above approval, Majoro is this memorandum could not mince his words criticising this project.

“…nonexistence of a feasibility study has compromised the ability of the Ministry of Finance to determine the affordability, viability, value for money, proper risk assessment, proper project cost, financing model assumptions, the maintenance and sustainability of the infrastructure.

“Procurement and sourcing procedures have been undermined. Expression of interest was used.

“Project implementation and timeliness, time left brings into doubt the professionalism, quality of the infrastructure to be constructed,” said Majoro in the memorandum.

Legal advice that chronicled the flaws in the development

Prior to issuing his cabinet memorandum, Minister Majoro, the committee heard, was issued with a detailed legal advice by his ministry’s legal team in a memo to Principal Secretary dated 8 August 2019, referenced FIN/POL/C.5/6, penned by N Ramokhele.

The memo was titled: Request for abstinence of the Ministry of Finance participation from Lesotho 2020 AUSC Region 5 Games Projects.

The memo chronicled the irregularities observed by the finance ministry officials in the engagement of the three developers by the government of Lesotho represented by the Ministry of Gender, Youth, Sports and recreation.

In the memo, the legal team identified that the project is flawed with procedural discrepancies with fiscal, legal and regulatory implications.

Ramokhele noted in the memo “we are informed that the infrastructure development of the projects was procured through an expression of interest which is irregular given the magnitude of the project”.

She further said it is not clear why procurement under these transactions was not followed because it has resulted in government “affording potential developers to set terms and conditions as they deem fit”.

“The Expression of Interest (EOI) is meant to test the market and the alleged addendum to convert it into Request for Proposals (RFP) is unheard of in supply chain practice.

“Government of Lesotho has issued carte blanché EOI to the market without necessary limitations. Despite the irregularity, the potential investors were not evaluated hence the absence of evaluation report but rather a disappointing scoresheet.

“At this stage, the Ministry of Finance has not seen neither the Tender Panel Report nor the Preferred Bidder award letters,” Ramokhele said as she pointed out the elusiveness of the basis for recommendation of the potential developers.

She noted that the custodian of Procurement in Lesotho through (PPAD), Ministry of Finance, is unable to confirm the competencies of the three contracted developers.

A Ministry of Gender, Youth, Sports and Recreation Planning Director, Pheko Moshoai, who said he was in charge of the procurement processes that led to the engagement of the three companies argued due process was followed when asked by the Committee.

Moshoai said Ministry of Finance was duly furnished with the basis for engagement of the developers.

But PPAD Director Likotsi Leseli said the entity was not part of the procurement in the AUSC games infrastructure development.

Leseli also told the committee that PPAD has not seen the evaluation report of the bidders for the project amid claims by Moshoai that all was above board.

Leseli told the committee there is hierarchical interference that causes problems in procurement in government that was in play in the hiring of the developers.

“The entities are all eight months behind commencement of the works in terms of the timelines provided in their response to the EOI,” Ramokhele highlighted in the memo.

Ramokhele, in the memo, went on to say it is not known at least to Ministry of Finance how such risk will be mitigated otherwise Lesotho “risk sub-standard unsafe facilities”.

She also asked the Ministry of Public Works and Transport to advise accordingly, but the Centre has learned the Ministry failed to review costs of the project.

Ramokhele also noted that legal due diligence is not done including but not limited to: any pending litigation on the entities and their partners not vetted, nonexistence of legal processes such as insolvency, business rescue proceedings or judicial management, etc have not been verified.

“…there is no board authorisation for parties handling negotiations to ensure adherence to corporate governance and to determine legality of acts of such persons should anything arise.”

She said government of Lesotho is exposed by assuming unknown and uncalculated risks and there is need to insulate itself with “performance guarantee, notarial bond for movables, maintenance bond to show commitment from the potential developers among others”.

She also noted the costing of the projects entirely depends on the developers’ estimates; therefore, the Government of Lesotho remains vulnerable to over-costing of these projects without justification.

“There is a possibility of cost escalation due to unforeseen costs. The cash flow projections are not based on facts simply because the financial proposals attached are not financial models which cannot determine the viability of the project into 30-35 proposed years.

“The bankability of the projects cannot be determined hence no accredited financiers seem to be interested in these projects.

“Property 2000 was allegedly converted from a close corporation into a company only last year. The fiscal implications including its solvency cannot be determined under the new regime it has opted for. In addition, it is not known whether indeed it is a trustworthy financier.

“The commercial viability is not known and will never be known without the feasibility; Government of Lesotho will just be signing a blank cheque and tying future generations in undesirable debt that we created. In the absence of baseline study by Ministry of Public Works and Transport, potential fiscal implications are not known,” she said in the memo.

Ramokhele’s memo to the Principal Secretary, in highlighted letter, said: “we wish to inform you that since this is not a PPP, Ministry of Finance should not be participating in this exercise save of procurement of sovereign loan which we feel that Public Debt and Aid Management Unit ought to perform due diligence.

“Having articulated all procedural discrepancies, it is not advisable for Government of Lesotho to furnish any sovereign guarantees to any of the proposed developers”.

Ramokhele recommended that normalisation should be done within the confines of the law.

“Procurement process should be followed and adhered to accordingly. The Ministry of Gender, Youth, Sports and Recreation should perform needs assessment, feasibility study, project scope and clear risk matrix as well as Environmental and Social Impact Assessment (ESIA).

“These are critical components. Anything outside these requirements remain invalid and cannot be substantiated by any empirical evidence. Otherwise we reiterate the upgrade of existing infrastructure due to time limitations,” said Ramokhele.

But, the Ministry of Gender, Youth Sports and Recreation acting Principal Secretary Mabataung Khalane argued it was the first time for her to know the long list of concerns from the Finance Ministry before the public accounts committee.

Khalane argued the project received a go-ahead from cabinet after it was tweaked to fit procurement requirements with an addendum.

“We initially thought it was a Public-Private Partnership but later on it was discovered it cannot be, it must be a loan not PPP. Work has already started on the sites designated for the various infrastructure developments and we believe we are on time and we will meet the set deadlines,” Khalane said.

The PAC continues to hear more evidence on the engagement of the developers for the AUSC region 5 games.

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