Lesotho Highlands Development Authority

The Beginnings

In the early 1950′s the High Commissioner to Lesotho (then known as Basutoland, a British Protectorate) Sir Evelyn Baring, requested a survey of the water potential of the territory, because he realized that it was the only natural resource the land-locked country had in abundance. Sir Peter Ballenden, as Director of Public Works, chose Cape Town- based engineer Ninham Shand to determine the viability of exporting Lesotho’s water to areas of surrounding South Africa that he believed needed augmented supplies.

Shand came up with the Oxbow Project, a scheme that included a high-altitude dam, a hydroelectric power station, and a tunnel through the Maloti. The water in this system would then find its way to the goldfields of the neighboring Orange Free State. South Africa initially rejected this plan, but a mid- 1960s drought saw renewed interest in Lesotho’s offer.

In the mid-1970s, the South African Department of Water Affairs employed MJ Mountain & Partners together with Dr Henry Olivier to map and take rock samples from sites throughout northern Lesotho. However, due to political differences, it was not until 1978 that a Joint Technical Committee comprising experts from both countries began a full feasibility study. In 1983, agreement was reached on a more detailed project layout, which in turn required further joint feasibility studies. These studies were completed in April 1986.

The stage was set for the signing of an agreement that would forge an umbilical cord from the cradle of life in the Maloti to Africa’s engine of industry in Gauteng.

The Treaty

The foreign ministers of Lesotho (Colonel Thaabe Letsie) and South Africa (Mr Pik Botha) signed the Treaty, a contractual agreement governing the design, construction, operation, and maintenance of the Project, as well as the export of water to South Africa, on 24 October 1986, in Maseru, Lesotho.

The Treaty is unique in that it was designed to allow for the disparity in economic development of the countries involved. It was also essential to word the document in such a way that the specific concerns and interests of both countries were all accommodated – no easy task. Finer points dealt with included the volume of water to be delivered to South Africa, as well as a basis for sharing the benefits and a formula for calculating the royalties to be paid to Lesotho.

Importantly, the Treaty also defined the responsibilities of each county as concerns payment for the Project. South Africa was to pay for everything relating to the transfer of the water, including the implementation, operation and maintenance costs of all facilities involved, as well as compensation for the displacement of individuals and communities. Lesotho would finance the hydroelectric power component of the Project.

Over time, six protocols, three of which were envisaged in the Treaty, were added:

  1. Contains the royalty manual (in 3 volumes!), setting out the details of how the royalties due to Lesotho should be calculated.

  2. Deals with the effect of the project on the SACU revenue due to Lesotho

  3. Cost apportionment between Lesotho and South Africa is set out in this protocol.

  4. States supplementary arrangements. These include cost related payments, concessionary finance, insurance and the point at which royalty payment to Lesotho would start. (It was agreed that this would start when the water level in Katse Dam reached 1993m above sea level -which happened in September 1996.)

  5. After lengthy negotiations, the parties agreed on how taxation in Lesotho would apply to the project.

  6. During the course of the project’s implementation, certain changes to its governance became essential. This protocol changed the name of the Joint Permanent Technical Commission to the Lesotho Highlands Water Commission (LHWC), endorsed its responsibility for the success of the project and recognised the changed role of TCTA beyond the auspices of the LHWP.

Know the Facts

Two teams (one from SA and one from Lesotho) drafted text. They comprised of legal experts, senior government officials, specialist consultants and engineers. The final product was a handbook for the implementation of the largest bi-national construction project on the African continent.Since 1986 the treaty has not required any major adjustments, nor has it been necessary to make use of the dispute arbitration mechanism as set out in the document.

Project Authorities

The Treaty sets out the structures that are required to implement the Project on behalf of the two governments.

The Joint Permanent Technical Commission (JPTC) has a monitoring, advisory and approval function with regard to the project implementation in Lesotho. Protocol VI resulted in a revision of the governance on the Project, as well as a re-naming of the JPTC, to reflect its true nature: the Lesotho Highlands Water Commission (LHWC). The LHWC has the responsibility for a bi-national body consisting of three delegates per country, that advices LHDA on design, technical acceptability, tender procedures and documents, cash flow forecasts, allocation of costs and financing arrangements.

The Lesotho Highlands Development Authority (LHDA) was set up to manage that part of the Project that falls within Lesotho’s borders-the construction, operations and maintenance of all dams, tunnels power stations and infrastructure- as well as secondary developments such as relocation, resettlement, compensation, supply of water to resettled villages, irrigation, fish hatcheries and tourism.

The Trans-Caledon Tunnel Authority (TCTA) takes care of the delivery tunnel transporting the water over(or rather, under) the border (the Caledon River) to the Ash River, as well as all structures required to integrate and control the flow of Lesotho water in the river.

The LHDA reports to the Commission on all matters concerning the Project, but the TCTA, with its structures now complete, is only responsible to the LHWC with regard to operations and maintenance issues.

Project Financing

The Lesotho Highlands Water Project (LHWP) is a bi-national project between the Governments of Lesotho (GOL) and the Republic of South Africa (RSA). In terms of the Treaty signed between the two governments, the Lesotho Highlands Development Authority (LHDA) is a parastatal set up on the Lesotho side and charged with the implementation operations and maintenance of the project within Lesotho whereas on the RSA side, the Trans-Caledon Tunnel Authority (TCTA) is mandated to do the same for that part of the project taking place on the RSA territory.

Treaty Provisions with regard to Financing

In addition to the responsibility to implement and operate the project, the LHDA is charged with the task of raising the required financing in respect of approved project components, and in that process ensure that the most favorable terms are achieved. Since the LHDA is not equity based or financed establishment, much of the funding is raised by way of loans.

In terms of the Treaty, the Government of RSA assumes responsibility for the costs relating to the Water Transfer, and as such provides the guarantees required in support of funding for this component. Similarly the Government of Lesotho assumes responsibility for the costs of implementing the ‘Muela Hydro power Component and raises the guarantees to support the secured financing facilities.

The parties to the Treaty, in undertaking to provide guarantees to the lenders, inherently and explicitly assumed responsibility for the servicing of the loans. South Africa in its part appointed the Trans Caledon Tunnel Authority to act as its agent in making debt-service payments related to interest and capital. As far as the loans for the Hydropower Project are concerned, it was arranged that since LHDA would start generating revenue following the commissioning of the hydropower station, all debt-servicing in this regard would be handled by the LHDA on behalf of the GOL.

Role of the bank

The World Bank got involved at the invitation of the Government of Lesotho, primarily to strengthen the latter’s hand in negotiations of the Treaty and appointment of consultants, but most importantly to ensure that the benefits occurring from the project are well managed for the good of all the citizens of the country. With their massive resources and experience in supporting developmental projects, they were all poised to give guidance as to the tendering and contract award procedures and helped to lend credibility that was essential in generating the necessary confidence on the part of the contractors.

The World has lately become very environment conscious and as such lenders and contractors do not want to commit themselves to a contract that may have to be abandoned uncompleted because of sloppy environmental considerations. The World Bank has the capacity to advise to ensure that adequate attention is given to these issues.

The Project Authorities designated the World Bank as a coordinator for the fund mobilisation programme, and their role in this regard once more helped to provide comfort to the lenders to the effect that the project was a worthwhile investment opportunity. For the World Bank to accept status equal to that of other banks (pari-passu basis) in the Trust Security Structure further demonstrated to the commercial banks particularly that the viability of the project was not in doubt.

Project Benefits

Benefits to Basotho

During the implementation of Phase 1, thousands of people at the construction sites and across Lesotho benefited directly or indirectly. Phase 1A was technically complex and required a large variety of specialised skills.

For Phase 1B the focus was on job creation, maximising the contracts awarded to Basotho contractors and consultants, and finding local sources for the provision of goods and services.

The success of this endeavour is visible in the fact that several viable local consultancies have developed, a large number of local contractors have built up sustainable businesses and the local capacity for implementing further phases of the LHWP has increased dramatically.

Benefits to the Lesotho Economy

The contribution of the LHWP to the economic activity of Lesotho has been remarkable. As shown above, royalties, the sale of electricity, the construction activities and SACU revenue have provided an important economic boost to Lesotho.

It is calculated (2002) that the project’s contribution to the economic activity of Lesotho was 5,4% of the GDP. However, if measured against the Capital Account of the Balance of Payments, the impact is even more profound: M585 million of a total of M865 million of the positive balance could be attributed to the LHWP. A stunning 68%!

Benefits to South Africa

The water from the LHWP is used in six provinces of South Africa. It cools the Eskom power stations in Mpumalanga, keeps Sasol and the Free State gold mines operational, supplies the vast industries and sprawling urban areas of Gauteng, provides life to some of the southern towns of Limpopo and the platinum mines of North West, as well as the diamond mines and people of Kimberley and surrounding areas. Under drought conditions, emergency water can, and has been transferred to the Caledon River and to the Eastern Cape and southern Free State through the BloemWater network.

Lessons Learned

The early involvement of the World Bank has been beneficial in many ways. It lent credibility to the project and also greatly assisted the engineering and environmental aspects of the project through the Engineering and Socio-environmental Panel of Experts.

The oversight and implementation responsibilities on a large development project should be clearly delineated and be separate functions.

Costs and benefits need to be shared in an equitable and clear manner. Contracts and financing arrangements require careful planning. Tight procurement processes should be institutionalised to prevent corruption, while whistle blowing should be encouraged.

The Treaty provision to maintain “the welfare of the persons and communities directly affected by the Project” is a powerful guiding principle for socio-environmental policies. Experience has shown that socio-environmental programmes require careful planning, rigorous implementation, and phased exit strategies that are clear to all concerned. It is important to do the environmental impact assessments and action plans before any construction starts. At the same time, resettlement and compensation policies should be clear, transparent and adaptable. Communication channels to the affected communities need to be established and utilised at the outset. A rigorous complaints procedure has to be in place too, so that any concern or grievance can be dealt with as soon as possible. Compensation officers have to be empowered to settle minor claims immediately.