Report Of The Commission Of Inquiry On Matters Surrounding The Procurement Of Maize By ADMARC From The Republic Of Zambia
February 11, 2017 by Staff Reporter
The President instituted the Commission of Inquiry following allegations of malpractices in the way the maize was purchased from Zambia and how the whole transaction affected maize prices on the local market. The Commission was requested to release its findings and recommendations within a period of thirty days from the date of appointment. The Commission started its work on 10th January, 2017. In order to discharge its mandate, the Commission endeavoured to fulfill three key roles.
(i) to establish whether Government procurement procedures were adhered to in the procurement of maize;
(ii) to ascertain whether there was value for money in the maize procurement; and (iii) to investigate and make findings and recommendation on any matter incidental to and connected to the procurement of the maize.
In conducting this work, the Commission analysed relevant documentation, interviewed key stakeholders, obtained information from interested parties; and travelled to Zambia to verify certain facts that had come to its attention.
The Commission then proceeded to make findings based on the information gathered. It is the finding of the Commission that the procurement of maize, both local and international by ADMARC was flouted with discrepancies. In both cases, Government procedures were not followed. Relevant approvals were not sought from the Board of Directors of ADMARC, and ODPP.
The Ministry of Justice, as legal advisor to Government, was completely bypassed. The Commission considers these omissions as reckless and inexcusable. vi In addition the Commission finds that certain conduct of ADMARC officials in executing the ZCF contract amounts to fraud and exposes ADMARC and ultimately Government to civil litigation.
In terms of value for money, the Commission does not find fault in the pricing of maize. The purchase price from the local market was influenced by market forces including the tendency of local traders who hold stock to influence maize prices as well as forming a maize price cartel. Further IMF proscribes Government subsidies.
The Commission however concludes that ADMARC was grossly negligent in failing to negotiate a lower contract price for the purchase and delivery of maize under the ZCF contract after removing Kaloswe the middle man from the equation and also considering that the maize was to be sourced from Eastern Province of Zambia which is closer to Malawi. Finally, the Commission finds the conduct of the Minister, Hon. George Chaponda, in his dealings with Transglobe, a locally registered company and trader of maize, most inappropriate, suspicious and raising issues of corrupt practices.
Following an outcry from certain segments of the public, including the media, on the manner in which ADMARC Limited procured maize from the Republic of Zambia, His Excellency the State President Professor Arthur Peter Mutharika, in exercise of the powers conferred upon him by Section 89 (1) (g) of the Constitution of the Republic of Malawi as read with Section 2(1) of the Commissions of Inquiry Act (Chapter 18:01 of the Laws of Malawi), appointed a Commission of Inquiry to investigate the procurement of maize by ADMARC.
The Commission, whose appointment was effective 1st January, 2017 was expected to finalise its work and submit a written Report to His Excellency the President by 31st January, 2017. This deadline was later extended to 9th February, 2017. Among the allegations in the public domain was that the incumbent Minister of Agriculture, Irrigation and Water Development Hon. Dr George Chaponda, M.P., in collusion with ADMARC officials, corruptly sourced maize from the Republic of Zambia for sale in Malawi by ADMARC.
It was further alleged that as a result of this corrupt transaction, Malawians have had to buy maize from ADMARC at an inflated price to cover for the sums that the Honourable Minister and other officials benefitted from the deal. The Commission consists of the following persons – (a) Retired Chief Justice Anastasia Msosa, S.C.- Chairperson; (b) Dr Janet L. Banda, S.C. – Member; and (c) Mr Isaac Kayira – Member. 2 Further, the State President appointed Mr Mike Chinoko as a Secretary to the Commission.
This Chapter presents the findings of the Commission. The findings are based on the testimony of witnesses interviewed by the Commission both in Malawi and Zambia; the observations of the Commission as it interviewed the witnesses; and on the analysis of the documentation made available to the Commission. The Commission also found helpful some of the interviews conducted by the Joint Committee of Parliament tasked to investigate the surroundings concerning the purchase of maize by ADMARC from Zambia.
5.1. The Reports on Crop Estimates 2015/2016 The Commission found that there was a genuine belief by both Government and Development Partners that the country would face acute food shortage in 2016 due to adverse weather conditions caused by the El-Nino phenomenon. This belief was supported by the 2015/2016 Agricultural Production Estimates Survey (APES) conducted by MoAIW which projected 8 million as the number of people that would face hunger. Further, the Report of the Malawi Vulnerability Assessment Committee projected that 6.7 million people would face hunger and, hence, shall require humanitarian response. The Reports gave conflicting figures of the number of people who would require humanitarian aid and the tonnage that would be required. This scenario led Government to overestimate the tonnage of maize to be sourced for both humanitarian aid and commercial purposes. The scenario further resulted in MoAIW over providing for, in the Budget Estimates for 2016/2017, the financial resources required for 28 the procurement of maize by NFRA for humanitarian aid. The exaggerated sum of MK29.5 Billion was committed.
5.2. Maize Stocks
The Commission established that as at 1st February, 2016, maize stocks in the country were as followsa) ADMARC -11,350 metric tons of maize against a fluid figure of 50,000 metric tons; b) NFRA – 3,000 to 4,000 metric tons of maize against the required minimum of 75,000 metric tons; and c) LGTPA -26,200 metric tons. The alarming low nature of these figures prompted the MoAIW, as the Ministry responsible for food security, to raise alarm at Cabinet level. 5.3. Cabinet Response The Commission established that, basing on the information before it, Cabinet directed importation of 1,000,000 metric tons of non GMO white maize to offset the maize production shortfall at a cost of K242.8 Billion. Cabinet further directed that the maize should be procured both locally and internationally through ADMARC and NFRA and that each of these two institutions should secure 250,000 metric tons. Consequently, MoAIW and the MoFEPD were instructed to mobilise K131.6 Billion to facilitate ADMARC and NFRA to procure the maize.
5.4. Implementation of Cabinet Directive by Ministry of Agriculture
The Commission established that in implementing the Cabinet Directive, the Ministry came up with the following measures – a) obtained approval from ODPP to procure maize locally; 29 b) floated tenders; c) convened a meeting with the GTPA and invited them to supply maize to ADMARC and NFRA and also to do winter cropping; d) made significant provision for the purchase of maize in 2016/2017 Budget Estimates; and e) worked directly with ADMARC to facilitate importation of maize from Zambia by engaging the Zambian Government through the involvement of the office of the Minister.
The Commission found that the Ministry of Agriculture did not assess correctly the number of people who may need humanitarian aid and as a result of that anomaly, excessive maize was sourced for humanitarian aid through NFRA and WFP, and for commercial purposes. In view of this, currently maize procured by ADMARC locally has no market since people have access to humanitarian maize and private traders have offloaded maize on the local market at lower prices than what ADMARC is offering.
The Commission also found that the two visits taken by the Minister to Zambia were necessary. The first one was to hold negotiations with his counterpart to persuade the Zambia Government to allow the importation of maize by Malawi. The second visit, which happened in the midst of non-performance of contract by ZCF due to ‘allegedly’ the maize export ban in Zambia, was as a special envoy to persuade the Government of the Republic of Zambia to lift the ban. However, the Commission established that the role of the Minister went beyond these two official mandates and bordered on interference with the procurement process. First, the Minister attempted to influence ADMARC as to who should supply maize under the ZCF contract from the Zambian side.
30 The Minister personally asked ADMARC to buy maize from Transglobe, a Malawian company with maize stocks in Chipata. This request was rejected by ADMARC which had signed a contract with ZCF. ADMARC confirmed that Transglobe indeed approached them on several occasions on this matter. Secondly, the Minister advised Transglobe to go and meet officials in the Ministry of Agriculture in Zambia to negotiate an export permit to supply part of the 100,000 metric tons of maize that was agreed in the contract between ADMARC and ZCF.
Correspondence made available to the Commission discloses that indeed Transglobe approached the Ministry of Agriculture in Zambia to obtain export permits through their agent Zdenakie Commodities. Further, in a letter dated 26th October, 2016, the Permanent Secretary in the Ministry of Agriculture in Zambia wrote to the Managing Director of Transglobe informing him that it was agreed that 50,000 metric tons of maize will be exported to Malawi in the name of Transglobe. This letter is attached as appendix 4.
A letter confirming this arrangement was written by Transglobe’s Operations Director, a Rashid Tayub, to the Department of Agribusiness and Marketing in the Ministry of Agriculture in Zambia dated 12th December 2016. This letter advised the Department that the allocation of 50,000 metric tons to Transglobe would be exported under the ZCF contract since the Letter of Credit was in the name of ZCF. The letter further advised that Transglobe had agreed to work with ZCF to export a total of 100,000 metric tons from Zambia. This letter is attached as appendix 5.
The Commission also established that when Hon. Chaponda went to Zambia as a special envoy, a Tayub of Transglobe was also in Zambia meeting with officials in the Ministry of 31 Agriculture. The Commission found two notable things about this development. First, the export ban was lifted. Second, the Ministry of Agriculture in Zambia issued export licences to both ZCF and Transglobe splitting the contract tonnage of 100,000 metric tons that was contracted between ZCF and ADMARC in equal share of 50,000 metric tons with Transglobe.
This development cannot be attributed to coincidence. It raises suspicion in relation to dealings between the Minister and Transglobe. One can therefore not rule out the possibility of corrupt dealings between the two parties. 5.5. Local Maize Pricing The Commission established that the minimum Government approved purchase of maize was K150 per kilogram. ADMARC being a commercial entity came up with a cost of maize and determined the purchase price to be K190 per kilogram for competitiveness with private traders. However, the purchase price of maize that was determined was overtaken by market forces influenced by controls by the IMF, which is against subsidy, and by the grip that private traders have on maize prices.
The Commission established that private traders collude among themselves in relation to maize prices and hold maize stocks to make a kill during very lean periods. The Commission established that these factors forced ADMARC to raise the threshold of the purchase price of maize further to K250 per kilogram for competitiveness with private traders who had pegged their price at K280 per kilogram. The overall average price for the purchase of maize by ADMARC was therefore settled at K232 per kilogram. It is therefore the finding of the Commission that the selling price of K12, 500 per bag of maize set by ADMARC and indorsed by both the MoFEPD and the MoAIW is barely adequate to recoup the actual cost of maize 32 purchased by ADMARC. In the circumstances, the Commission did not find fault with the pricing of maize adopted by ADMARC. 5.6. Implementation of Cabinet Directive by ADMARC 5.6.1 Local Purchase of Maize The Commission established that the Cabinet Directive to source maize both locally and internationally was made known to ADMARC through the Chief Executive Officer, Mr Mulumbe’s attendance of meetings of the Hunger Vulnerability Response Committee comprising of Government Departments and Development Partners and Chaired by the office of the Vice President. The Commission further established that this Directive was not formally communicated to the Board of ADMARC. The Board was only informed of the planned local procurement of maize to counteract the impending hunger situation when management sought the approval of the Board to borrow money from a local bank, CDH Investment Bank, with a Guarantee of the loan from Government. These facts disclose a case of poor corporate governance at ADMARC. The Board approved half of the K50 Billion that was requested and Government guaranteed a total sum of K20 Billion given in two tranches. The Commission established that ADMARC purchased the maize on cash basis from local farmers and traders at its various depots and other mobile centres set up throughout the country. Further, the Commission established that ADMARC has so far purchased 106,000 metric tons to date. This purchase was financed by the loan from CDH to the tune of K24.7 Billion. 33 The Commission did not receive any information indicating that ADMARC complied with the Public Procurement Act in sourcing maize from the local market. Similarly, no documents indicating approvals from the ODPP were made available to the Commission. 5.6.2 International Procurement The Commission established that Cabinet directed that maize procured outside Malawi should be procured from Tanzania where the grain was cheap. The Commission established that ADMARC was unable to procure maize from Tanzania because the grain in Tanzania had a disease called maize lethal necrosis. The Commission also established that Zambia was the only country in the SADC Region which recorded a surplus harvest in the previous season. The Commission was further informed that ADMARC had sourced maize from Zambia in the previous year. The Commission therefore considered the choice of Zambia by ADMARC as a destination for the sourcing of maize logical and sensible in terms of proximity and availability. 5.7. Procurement of Maize from Zambia The Commission established that ADMARC entered into three contracts pursuant to the intention to purchase maize in Zambia.– (a)Kaloswe contract dated 17th June, 2016; (b)Addendum to the Kaloswe contract assigning proceeds to ZCF dated 4th July, 2016; and (c) ZCF contract dated 17th June, 2016. 5.7.1. Kaloswe Contract The Commission established that Kaloswe had a contract with ZCF dated 31st May, 2016. The Commission further established 34 that ADMARC, at the time of signing the contract with Kaloswe, was aware of the existence of the contract between Kaloswe and ZCF. Furthermore, the Commission established that ADMARC signed the contract with Kaloswe without verifying the availability of stocks although this was a procedural requirement. ADMARC relied on the information supplied by Mrs Mhango, the Chairperson of the Grain Traders and Processors Association of Malawi who had a business arrangement with Kaloswe. The Commission also established that Kaloswe entered into a contract with AFRISEED owned by Mrs Mhango for AFRISEED to handle the logistics, including freight of the maize to Malawi at a total contract price of US$10,000,000. The Commission therefore concluded that ADMARC entered into a contract with Kaloswe without due diligence. The Commission established that management of ADMARC entered into the Kaloswe contract without the knowledge of the Board despite the huge sums involved guaranteed by Government. In addition, IPC of ADMARC was not involved at this stage. Further, the Commission established that ADMARC management entered into the said contract without seeking prior approval from ODPP and without the involvement of MoJCA regarding the vetting of the contract as required by the Public Finance Management Act Cap: 37:02 of the Laws of Malawi. The non-compliance with the Public Procurement Act at the time of signing this contract rendered this a misprocurement. The Commission established that after signing the Kaloswe contract on the 17th June, 2016, ADMARC IPC met on the same day and recommended the single sourcing of Kaloswe as a 35 supplier of the maize. However, the Commission noted that the IPC did not identify and consider at least three suppliers nor justify the choice of Kaloswe as required by the Public Procurement Act. Further, the minutes of the IPC were signed by the Chairperson, Mr Feckson Kantonga, who was at the time of the meeting in Zambia. Based on these factors, the Commission finds that the procedure adopted by the IPC of ADMARC was irregular.
The Commission concludes that this process was invalid. Correspondence available to the Commission indicate that ODPP was formally approached for a ‘no objection’ to the Kaloswe contract on saturday the 18th June, 2017 after the Kaloswe contract was signed the previous day. The approval was granted on the same 18th July, 2016 despite the documents submitted to ODPP not complying with the requirements of the PPA.
Further, the Commission noted that there was unnecessary haste in processing the ‘no objection’ which created undue pressure on the office of the ODPP and compromised the proper scrutiny of documents by that office. 5.7.2. Addendum to the Kaloswe Contract The Commission noted that ADMARC entered into an agreement with Kaloswe assigning proceeds under the contract to ZCF.
This formally brought ZCF into the tripartite arrangement. Consequently, a Letter of Credit was established in favour of ZCF on 26th July, 2016. After the letter of credit was established, ADMARC and ZCF started engaging to the exclusion of Kaloswe. ADMARC finally terminated the contract with Kaloswe on 11th October, 2016. The Commission was not satisfied with the reasons given for terminating the Kaloswe contract.
The Commission found the 36 conduct of ADMARC and ZCF in this regard in bad faith, most unprofessional and liable to expose ADMARC and ultimately Government to a civil suit. 5.7.3. ZCF Contract The Commission noted that the contract between ADMARC and ZCF is dated 17th June, 2016. The contract was for the supply of 100,000 metric ton of maize. However, the Commission established that this contract was signed after the Letter of Credit was established in favour of ZCF. The Commission concluded that the contract was backdated, a fact which was also confirmed by ZCF.
The Commission therefore considers that this contract can be challenged on account of fraud. Further, the Commission found that despite the removal of Kaloswe from the picture as a middleman, ADMARC did not negotiate a lower price from US$345 per ton.
The Commission established that for the price of US$345 per ton the maize was to be taken from various distant locations in Zambia including North Western Province. However, under the ZCF contract the whole maize was to come from Eastern Province, which is closest to Lilongwe, and therefore should have significantly reduced the contract price in relation to the cost of transportation from US$80 to US$40 per ton, creating a saving of US$4 million.
The Commission therefore finds that ADMARC was grossly negligent for not negotiating a lower price under the ZCF contract. The Commission also established that for the ZCF contract, ADMARC did not inform the Board and did not seek a specific approval from ODPP on this contract. Rather, the approval sought from ODPP, which was also irregular in similar fashion 37 to the Kaloswe approval, was for the assignment of proceeds from Kaloswe to ZCF. T
he Commission further established that by October, despite the export ban, ZCF did not have maize to supply to ADMARC due to financial constraints. Following the lifting of the maize export ban by Zambia, ZCF entered into a contract with Transglobe to supply 50,000 metric tons of maize to ADMARC on their behalf at a price of US$337.50 per metric ton.
The Commission has established that, as at 31st December, 2016, ADMARC had taken delivery of only 4,512 metric tons of maize under this contract. ZCF has therefore failed to perform under the contract.
5.7.4. ODDP The Commission found that the office of the ODPP did not act professionally in this maize procurement transaction by not adhering to the requirement under the Public Procurement Act in their assessment of the applications for ‘no objection’ on the Kaloswe contract submitted by ADMARC. The Commission noted that the documents from ADMARC were submitted by email containing minutes of IPC that lacked crucial information from which the ODPP could base its decision. Nevertheless, ODPP granted approval in the absence of such crucial information.
5.8. Letter of Credit
The Commission found that no money has been drawn under the Letter of Credit. The Letter of Credit expired on 31st December, 2016. 38 The Commission also established that if there are costs associated with the Letter of Credit, the same will be borne by ZCF after failing to deliver on the contract. Further, the Commission noted that although Government guaranteed this loan, ADMARC has in the past fully serviced the loans on their own under similar arrangements. It is the Commission’s finding that the use of the letter of credit and the way it was structure ensured that Government would not be exposed to financial loss from this arrangement.
39 CHAPTER 6 Recommendations
In view of the findings made in the previous Chapter, the Commission makes the following recommendations –
6.1 MoAIW should improve on the way they conduct crop estimates so that the findings of these surveys should not be misleading but facilitate Government correct and effective response.
6.2. Government must ensure that the strategic grain reserves under the custody of NFRA are always stocked with a minimum of 75,000 metric tons. 6.3. The dealings between the Minister of Agriculture, Hon. Dr George Chaponda M.P., in this procurement process should be further investigated by the ACB as the manner in which Transglobe obtained an export permit from the Ministry of Agriculture of Zambia to supply maize to ADMARC raises suspicion.
6.4. Government should put in place mechanisms to prevent maize price fixing by a private traders’ cartel.
6.5. To the extent that procurement procedures were not followed and contracts were fraudulent entered into by ADMARC Management, the Commission recommends that disciplinary proceeding should be instituted against senior management of ADMARC.
6.6. ADMARC must at all times ensure that corporate governance structures should be adhered to.