daniel chigunwe
Martin Kadzere
Sugar milling companies in Zimbabwe have launched a legal challenge against Government’s recent decision to increase the revenue-sharing ratio in favour of sugarcane farmers.
The millers argue the new ratio is unrealistic and could have severe consequences for the industry’s viability.
Tongaat Hulett owns the country’s two sugar milling firm, Triangle Limited and Hippo Valley Estates.
In an urgent chamber application filed with the High Court of Zimbabwe, the millers are seeking an order that would set aside the Government’s directive imposing the new revenue-sharing ratio.
The new revenue sharing, known as division and proceeds (DoP) entails a ratio of 80,5 percent: 19,5 percent favouring the farmers. It was previously set at 77:23 percent on recommendation by Ernst & Young in 2016.
The sugarcane millers contend the Ministry of Industry and Commerce does not have the authority to unilaterally determine such ratios.
They argue that the validation process conducted by Baker Tilly, a consulting firm appointed by the Government, was flawed and resulted in an unreasonable and unfair recommendation.
They assert that the Ministry’s adoption of this recommendation is irregular and cannot be sustained.
The millers are also seeking consequential relief, including the reinstatement of the previous revenue-sharing ratio established by the 2016 Ernst & Young division and proceeds report. Additionally, the millers emphasise the new ratio is the highest in the region and globally, potentially jeopardising the financial sustainability of the milling industry.
‘Unavoidable relationship’
By law, the millers are obligated to purchase sugarcane from growers and cannot refuse to do so without a valid reason. This creates an unavoidable commercial relationship between farmers and millers in the production and marketing of sugar and related by-products.
The millers and farmers operate under either a cane purchase or cane milling agreement. In the case of a cane milling agreement, farmers deliver their sugarcane to the millers for processing at a fee.
The sugar produced is then jointly pooled and marketed together with the millers’ sugar, and the proceeds from the sales are distributed based on an agreed-upon, technically determined share of revenue known as DoP.
The DoP is a formula that determines the percentage of revenue from sugar sales that represents the growers’ costs and capital employed, plus their return, and the percentage that represents the millers’ costs, capital employed, plus their return.
The respective revenue share ratios are then applied to pay farmers for their cane delivered to the mills, while the millers retain their portion of the DoP representing a milling charge.
Historically, DoPs have been determined through a mutually agreed process involving an independent, internationally recognised consultant with specialised expertise, typically an accounting firm.
The consultant, acting within defined terms of reference, conducts an independent inquiry that usually spans one to two years to develop a recommendation for an equitable DoP ratio, which the parties then adopt in their commercial arrangements.
The most recent such determination, disputed by miller and farmers was conducted by Ernst and Young (EY) in 2016, which established a DoP of 77:23 percent in favour of farmers.
Circumstances
The dispute began when millers and farmers submitted concerns to the then Minister of Industry and Commerce, Mike Bimha, regarding the EY report’s shortcomings. Unlike the 1999 DoP review, which was mutually agreed upon, Bimha allegedly unilaterally imposed the 2016 EY DoP outcome.
After considering the concerns raised by both parties, Bimha, according to court papers, determined that a comprehensive review of the EY DoP was necessary. However, as an interim measure, Bimha mandated the implementation of the 77:23 DoP ratio in favour of farmers.
He allegedly justified this decision by citing the time and resources required to conduct a thorough review that would address the concerns of both parties. Despite Bimha’s earlier commitment to a comprehensive review, several years passed without any action. The DoP issue resurfaced in 2022 when farmers and millers began negotiating a new milling agreement.
The farmers had allegedly hired a former finance director of Hippo, who had abruptly left the company, to assist them in the negotiations. The millers pointed out Bimha’s previous stance advocating for a review of the DoP, but the farmers insisted on validating the 2016 EY DoP.
The millers argued that the farmers had pressured the Ministry on Industry and Commerce into accepting validation instead of the review proposed by Bimha. Despite the millers’ objections, the Ministry, under pressure from the farmers, adopted a position supporting validation.
In essence, the millers were forced to participate in the DoP validation process by the then Minister of Industry and Commerce, they argued. Consequently, the millers prepared and submitted their submissions regarding the validation exercise to EY in October 2023.
The submission was concise, assuming that EY had prior knowledge of the matter and that the consultants were merely highlighting their concerns. It incorporated references to earlier submissions outlining the millers’ reservations about the 2016 EY DoP report.
In December 2023, EY declined to accept the mandate to validate their 2016 DoP determination, insisting that their report was final. At the urging of the farmers and with the Ministry’s support, Baker Tilly was appointed to conduct the validation exercise that EY had refused.
However, unlike the previous engagement with EY, no new MoU was recorded independently of the existing agreement agreed upon by the parties. This led to disagreements, particularly over the millers’ suggestion for a new MoU, according to court papers.
Baker Tilly was subsequently appointed based on an agreement with the Ministry. They held two meetings with the parties, one to clarify the scope of the validation exercise. Baker Tilly then met separately with farmers and millers. During the meeting with the millers on June 17, 2024, there were essentially no substantive submissions on material issues related to the inquiry, except for Baker Tilly seeking clarification on the industry’s operations.
The meeting allegedly lasted approximately 45 minutes.
The Ministry sent an email containing what they claimed were submissions from both the millers and farmers. Surprisingly, the document labelled as farmers’ submissions was a recent draft dated March 27, 2024, while the millers were restricted to their October 2023 submissions to EY.
The millers sought to update their submissions for the DoP validation process if a new consultant were engaged, as their earlier submissions were tailored for EY, who had prior experience with the exercise.
However, this request was denied, the millers argue. In contrast, the farmers’ written submission of March 27, 2024, which they were allowed to submit, was far more detailed and aligned with Baker Tilly’s requirements compared to the limited submissions imposed on the millers.
Baker Tilly produced their report, addressed to the Ministry of Industry and Commerce dated July 31, 2024.
The miller avers a significant concern arose when they first learned about the validation report’s outcome through the media, rather than from the ministry. They lodged a complaint with the Ministry regarding the issue, but received no response addressing their concerns.
The millers were only summoned to a meeting with the minister on October 7, 2024, where it was announced the report’s outcome. Subsequently, the minister confirmed the decision in a letter dated October 8, 2024 directing the implementation of the DoP, which the report had revised upward to 80.5 percent:19.5 percent in favour of farmers, the court papers say.
The millers argue that the purported validation is fundamentally flawed and grossly irregular for several reasons.
They were not given the opportunity to submit new written materials to Baker Tilly and were restricted to their previous draft submitted to EY in October 2023. This was unfair considering that Baker Tilly lacked the same background as EY, who had conducted the 2016 DoP.
In contrast, the farmers seemed to have free rein to submit fresh, detailed, and tailored written submissions that appeared to have been prepared not only after Baker Tilly’s appointment but also after its preliminary meeting with the parties on March 25, 2024.
The millers argue the process appeared to favour one party over the other, suggesting an unequal treatment of the parties involved.
Additionally, as the millers’ meeting with the consultant was separate from his meeting with the farmers, they were unaware of the discussions between the consultant and the farmers.
Furthermore, the lack of substantial engagement during their own separate meeting with the consultant indicated that their voices may not have been adequately heard in the inquiry.
In its report, Baker Tilly explicitly acknowledged that they did not have access to or review the 2016 EY DoP report, which they were tasked with validating, reads the court papers.
This raises the question of what information they considered if they did not examine the specific document they were supposed to assess and review. Baker Tilly’s report concedes a significant limitation in this regard, and one wonders what they were recalculating and whether they fully understood the rationale behind the figures they were attempting to reassess.
Given the material information acknowledged by Baker Tilly as limitations, a reasonable person in their position would likely not have ventured to proceed with the validation.
Bongani Ndlovu