Project Financing

Introduction

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.