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State of Lesotho dairy industry

maluti maidTABFIN Financial Services was retained by the Lesotho National Dairy Board (LNDB) to undertake a study that would investigate the options of turning around the Lesotho Dairy Products (LDP) company into a financially viable and sustainable enterprise that would satisfactorily serve the interests of the milk producers and consumers in the country.

This assignment enabled TABFIN to look deeply into the affairs of both the LNDB, as a regulator, and the LDP and as a commercial enterprise that is involved in the processing and distribution of milk and milk products.

This was done through the process of perusing through all the relevant literature, interviewing the management of these two organisations and a wide range of stakeholders, such as milk farmers, milk processors and retailers, and indeed all relevant government officials.

As consultants who had delved deep in the issue of the milk industry, our initial reaction was that of amazement when we read the articles, and felt that may be there were some details which had been missed in our research.

In order to verify the new information that came in our direction, it became necessary, therefore, to interview some of the key players in industry, including Tšeliso Tšenoli in particular, with the view to determine the substance and the underlying causes for his apparent discontent concerning some of the recent occurrences within the industry.

Having gained the understanding that we now possess on the operation and dynamics of the industry, we consider ourselves adequately competent to come in between the long running public spat that now appears to potentially degenerate into a personal mudslinging match amongst the industry stakeholders.

We proceed from the premise where we present ourselves as a neutral broker that has as its primary purpose the objective of reducing the distance and promoting understanding between the conflicting parties, by presenting facts and issues in their correct perspective, and removing barriers that prevent parties from talking to each other.

The lack of dialogue on pertinent industry issues, especially around ownership and operations of the Lesotho Dairy Products (Pty) Ltd, which was set up as a milk processing company, created space for facts to be misrepresented and distorted, it is suspected, sometimes for point scoring purposes.

This, regrettably, has the effect that focus was lost on some of the initiatives that are being pursued to maintain or enhance the investment in the processing plant at a level where all facets of production and processing can be domesticated to yield the desired economic benefits.

As is currently the position, the equipment at the processing plant has reached a stage of dilapidation that the processing operations have to be conducted outside the country under a sub-contracting arrangement with Denmar Dairies, whose role is explained later in this paper.

We are doing all this driven by a conviction that this is potentially viable industry that can make an immediate impact on the appalling conditions of unemployment and poverty in the country, provided it is allowed to function efficiently.

In this instance, the logical starting point is to give a little background into the history of the industry, with particular reference to the formation of the LNDB.

Mandate of the LNDB

The Agricultural Marketing Regulations under which the National Dairy Board was established stipulate the functions of LNDB as follows;

?   Prescribe the standards of dairy industry products

?   Grant and withdraw permits of dairy industry products

?  Impose levies and charges on dairy products

?   Ensure quality of dairy products

??Prescribe types, grade and quantities of dairy products

??Promote and enhance the development of the dairy industry

??Utilise funds of the board and effect functions of the board

It is crucial to point out at this juncture that the function of determining prices was transferred to LDP as required by deregulation.

The Regulations that formed LNDB are open for amendment where necessary and, as currently structured, these adequately make provision for the dairy farmers to run the industry, while LNDB operates and remains as the industry regulator.

Share Ownership Structure

In our study of the industry, and talking to a range of the industry players, a conclusion that we arrived at is that the one primary factor that has disturbed the peace of the dairy industry revolves around the Share Ownership Structure, which is central in determining and influencing the power around the direction in which the industry should move or grow.

On this particular subject we prepared a separate report with a clear set of recommendations on how stability could be restored in order to create a solid platform for the Lesotho Processing Plant to perform and thus beneficiate the small milk producers in line with the original intentions of the policy makers.

A brief account surrounding the formation and evolution of shareholding structure may help to underscore some of the very innovative steps that were taken to ensure inclusion of the small milk producer to take part and play a meaningful role in the running of the affairs of the milk producing, processing and distribution architecture.

The Lesotho Dairy Products (Pty) Ltd’s original subscribers in 1987 were the Project Manager from Canada and Director of Livestock, each allocated initial 500 shares.

In 1989, a decision was reached through a documented resolution by the initial shareholders to transfer all of their shares to farmers and their associations, as well as to the Dairy Board, in its capacity as promoter of the dairy industry, in accordance with pre-determined eligibility criteria.

In 1994, the shareholding structure was updated based on the FAO Advisory Study and was accepted by the shareholders of the company.

At that time it was agreed that the shareholding structure would stand as follows: 60 percent allocated to the Apex body of individual farmers’ associations; 20 percent to the Lesotho National Dairy Board, as promoter of the industry; 10 percent to employees of the company and the last 10 percent to the contracted distributor.

The total number of shares was also increased from 1 000 to 4 000.

The responsibility for the encouragement and mobilisation of farmers to form associations was and has always, as a matter of policy, remained that of the Ministry of Agriculture through its agricultural extension service department.

LNDB was also tasked under this arrangement with the responsibility to temporarily hold the unallocated and residual shares.

The investigation into the history around the formation, existence and operations of the farmers associations indicates that the Lesotho National Dairy Farmers Association was formed in 1989 as an apex body, that would then be eligible for allocation of the 60 percent of the shareholding, in terms of agreed shareholding arrangements, but this body was never registered and eventually ceased to function.

Individual members and individual associations continued to run the affairs of LDP outside and without the guidance nor representation of the apex body, as had been agreed in the founding agreement.

A regrettable development was to occur when the Plant Manager, under an arrangement which was established by us, and independently confirmed by Gobodo Forensic Auditors, filed papers with the Law Office effectively changing the shareholding structure under a purported board resolution which had been irregularly obtained.

This matter alone created a governance impasse, which with the agreement with the lawyers a proposal has been made, and is still under consideration for the company to return to the status-quo ante, where the original shareholders can convene to formally adopt a board resolution giving effect to the newly proposed shareholding structure.

Involvement of Denmar Dairies

The operational challenges that beleaguered the Lesotho Dairy Products absolutely rendered it dysfunctional, thus affecting its productive capacity.

It became apparent that the LDP could no longer produce good quality milk and handle the full scope of the milk processing activities because of the dilapidated nature of the aged equipment which would require a lot of money to replace or upgrade.

The LNDB, in collaboration with the Lesotho Dairy Products, entered into an arrangement with a South Africa-based marketing and distribution company called Denmar Dairies, to handle a range of processing and distribution activities which, given the condition of the equipment, the LDP could no longer carry out.

Without this form of assistance and partnership, there is a general consensus within the industry stakeholders that LDP would have completely collapsed.

The arrangement provided for Denmar to process the Lesotho’s originated pasteurised milk and supplement the shortfall with the RSA procured supply and package the entire volume of milk under the Maluti Maid brand.

This intervention was made in pursuance of section 2(h) of Legal Notice no. 51 of 1995. Under this arrangement, Denmar’s contract with LDP to market LDP’s products carries a life of 10 years from 2002 to 2012.

To outsource the distribution function was a conscious decision taken in view of the mismanagement of the LDP’s fleet, among other factors.

In the recruitment of Denmar, a transparent tendering process had been initiated and adjudicated, which resulted in this company emerging as the preferred bidder.

By this time, Denmar had already established a record of distribution history in Lesotho in the realm of dairy and other supplies that required refrigerated transport.

In the turnaround strategy that has been prepared to resuscitate the milk processing plant, it is envisaged that engagement of a strategic partner may be a viable option to pursue, and in that respect an open and transparent process for the recruitment of such a partner is an imperative under the good corporate governance ethos.

We have deliberately avoided, as we did not deem it appropriate to do so in this paper, to address the individual issues that featured in the press recently.

We have responded the majority of these issues as we interacted with various parties across the milk producing sector, and will be willing to share these responses with anyone who may wish to be availed of additional information.

May we conclude by pointing out that we are continuing in our interaction with a range of stakeholders and observers in the dairy industry, and very soon will be making a presentation to the Board of the Lesotho Dairy Products, all this in an attempt to find a lasting solution to the problems that currently confront this crucial industry.

Indeed the experience gathered up to this point has enabled us to fully understanding the dynamics of the industry, but above anything else has spurred us on to play a catalytic role helping to sort and iron out the apparent differences, with the view to finally re-energise the industry to play a meaningful role in addressing strategic issues of poverty alleviation and job creation.

? Tseko A. Bohloa

Chartered Accountants (L)

TABFIN Financial Services

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