THE parliamentary Public Accounts Committee (PAC) has called for review of the arrangement that government signed with Lesotho Flour Mills (LFM) operator, Seaboard Overseas and Trading Group within 90 days.
Seaboard, which is the majority shareholder in Lesotho Flour Mills (LFM), is believed to have inflated prices of goods and services to avoid paying dividends to the government.
The suspicion was raised by the Public Accounts Committee (PAC) in its report on the consolidated financial statements of the government for the 2013/14 to 2015/16 financial years, which was tabled before the National Assembly on Friday.
With Seaboard running the operations of LFM on behalf of other shareholders, PAC said it has reason to believe that the organisation indulges in extensive manipulation of financial statements and transfer pricing to paint a negative financial picture which negates the payment of dividends.
LFM, which is the largest milling company that produces bread flour, maize meal, packages sugar and produces animal feed, has consistently failed to pay dividends to government since 2002, citing that its operational costs are higher than its revenue.
“The agreement between Lesotho Flour Mills and the government must be reviewed within 90 days,” the PAC report reads in part.
“The committee suspects that Seaboard Overseas and Trading Group, which holds a majority stake in LFM (50 percent), did not serve the interest of Lesotho which owns 49 percent.
“The suspicion is that Seaboard has been inflating the operation costs deliberately to avoid declaring the dividends and has 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 report, which is awaiting adoption by the August House continues; “Honourable Tefo Mapesela, the then Minister of Trade and Industry, was also interviewed in connection with this issue. He also agreed with the committee’s suspicions that Seaboard indulges in extensive manipulation of financial statements and transfer pricing to paint a negative financial picture which negates the payment of dividends”.
“He highlighted that it is true that the government had been planning to seek the review of the management agreement/contract with Seaboard which seems to be disadvantageous to the in the sense that the agreement allowed the company 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 by buying services from their holding or sister companies.”
The PAC also suggested that the review of LFM management contract with the government may have influenced Mr Mapesela’s transfer from the Ministry of Trade to that of Defence.
“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 other two shareholders. Thereafter, he was reshuffled to become the Minister of Defence and National security.
“Hon Dr. Moeketsi Majoro clarified the whole situation regarding the existence of Lesotho Flour Mills. He explained that Lesotho, Seaboard and the third partner are guided by Shareholders’ Agreement, which has no expiry date; the assumption is that they would be shareholders till the collapse of the business.
“The other guiding tool is the Management Agreement, which expires after every 10 years. It expired for the second time in 2018. Hon. Majoro agreed with the views expressed by Hon. Mapesela about the skewed benefits of running the company on behalf of other stakeholders. That is where manipulation of financial statements and transfer pricing are suspected to be practiced by Seaboard.
“He indicated that they were advised by the director to renew the Management Agreement for one year to give time for all partners to review the Management Agreement. The negotiations are expected to start in April 2019.
“He reiterated that stand point of the government that they want to do away with the management agreement and put in place a board that will work for the interests of all stakeholders. 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 they used to avoid paying dividends.
“Last year, LFM wanted to declare dividends to the tune of M400 000 of which Minister 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 the G8 countries about multi-national companies like Seaboard which practice transfer pricing to avoid paying taxes. Again, he indicated that the Organisation for Economic Cooperation and Development (OECD) has provide Lesotho with a template that is able to test transfer pricing. This is intended to assist the government to see which companies are practicing pricing so that actions could be taken in time,” the report said.