Lesotho Highlands Water Project: Briefing

Meeting report

WATER AFFAIRS AND FORESTRY PORTFOLIO COMMITTEE
20 March 2001
LESOTHO HIGHLANDS WATER PROJECT: BRIEFING

Chairperson: Ms B P Sonjica

Documents handed out
Committee Report on a Study Tour to Lesotho Highlands Water Project (See Appendix 1)
Transcaledon Tunnel Authority Slide Presentation on the Lesotho Highlands Water Project (if this takes too long to download e-mail PMG for document)

SUMMARY
The Committee were addressed the governance of the Lesotho Highlands Water Project, its financing and how the project has impacted on the socio-economic conditions of the countries, especially any development in Lesotho. Also discussed was the issue of compensation for those people that had to be resettled.

MINUTES
Mr W Croucamp (Chief Director: International Projects, Dept. of Water Affairs & Forestry) noted the 1986 Treaty between South Africa and Lesotho. This Treaty had been amended by the adoption of Protocol 6, which changed the governance of the project. The object of the Protocol was to realise improved efficiency and to get better control over the project.

The Governance.
The Department of Water Affairs and Forestry is the designated Department within the South African Republic to be involved in the project. The Ministry of National Resources is the Lesotho body tasked with the implementation of the project. The Lesotho Highlands Water Commission is the body responsible for monitoring the implementation of the project, providing approval on behalf of the two countries and reflecting the views of the governments of South Africa and Lesotho during the implementation of this project.

The Lesotho Highlands Development Authority is tasked with the responsibility of implementing, operating and maintaining the project on the Lesotho soil. The TCTA (TransCaledon Tunnel Authority) is a South African body that has authority to implement the project on South African soil. One section of the TCTA reports to the LHWC because Lesotho has an interest in the tunnel operation. However, the bulk of the work of the TCTA is not subject to the joint control of the LHWC - it reports directly to the South African Minister about debt management, risk management and fundraising for the project.

Phases of the Project
When the treaty was signed in 1986 it had to look over a period of 50 years regarding what was to be developed and how much water could be transferred. The treaty provides for more than one phase - it mentions five phases to deliver water to the Vaal River system. Both countries committed themselves to building phases 1A and 1B. Phase 1B is now under construction. Phase 2 is to be decided upon before there can be any further development. There would have to be a preconception study regarding the desirability to proceed with the project. This study might be completed at the end of the year 2003. However the timing for implementation will be determined by the projected demands of the Vaal River system taking into account water demand management, water conservation, impacts of demographics such as population growth etc. Projections on future demand are constantly updated.

Compensation Policy
Mr Reggie Tekateka (RSA Chief Delegate, Lesotho Highlands Water Commission) outlined a situational background to the project and said that the LHWC is a body in which both the South African and the Lesotho representatives jointly sit to oversee the implementation of this project. Therefore, the interests of both countries are at play. For South Africa, the project is a cheaper method to transfer water to South Africa to augment South Africa's needs. For Lesotho, this is a development project.

With regard to the compensation policy both countries are obliged to compensate the affected communities as both communities and the environment were affected. The Commission is aware of the impact that this project has on the environment, especially since it was agreed to at a time when the environmental movements were picking up momentum in the early 1980s. He indicated that their legal obligation on the project flows from the Treaty, particularly Article vii (18) which provides that the affected communities must maintain a standard of living not inferior to that prior to the time of first disturbance.

The overall objective of the project is to satisfy the legal obligations, to facilitate and provide mechanisms of participation to the people and communities affected by the project and to ensure that compensation is applied uniformly. He mentioned alternative projects such as replacement housing that have been constructed for this purpose.

Compensation options include relocation, land for land and, where this form of compensation is not possible, annual cash payment options. Other forms of compensation include the construction of schools, clinics and community halls.

Special provisions are made for vulnerable households, such as those that are headed by males over the age of 50 years and those that are headed by females. With regard to Phase 1A, 4000 people were compensated. It is anticipated that the number will be higher than this as more people are identified.

Challenges
Among some of the challenges that Mr Tekateka identified were the late approval of the Environmental Action Plan, limited land for replacement, failure to link community relocation and development programmes, slow implementation of the project and capacity challenges in Field Operation Branches.

Opportunities
- linking compensation, development and income generation
- to promote an approach that uses compensation to encourage the achievement of community driven and sustainable development projects
- to promote community-based tourism projects and enterprises
- building community capacity to manage their own development projects.

Discussion
Mr J Arendse (ANC) asked if there were any overtures from the Lesotho government to have more control over the project as the project is located on Lesotho soil. Was there any strain between the two countries working together on the project after the South African invasion of Lesotho in 1998 and if there was any negative impact, what was it?

The Chairperson added that it was proper to ask that question provided that the discussion would not be driven toward politicking about the incident.

Mr Croucamp (DWAF) replied that Lesotho has in the past desired to have more control over the project than the Republic of South Africa. However, this has since been ratified by Protocol 6, which attempts to achieve a pro rata control over the project. Care has been taken to appoint competent and skilled persons to manage the project, not political appointees. The new structure allows the Commission to direct the Board to influence the LHDA in the projects' implementation.

Ms Martie Van Rensburg (TCTA) added that Lesotho is not paying for the water transfer costs of the project.

Regarding the issue whether South African invasion of Lesotho in 1998 affected or strained the development of the project, Mr Tekateka replied that it only affected the project only insofar as communications and other day to day activities were impeded by activity (upheaval) in the country. It did not have an impact on the relations between the Lesotho and South African on the Commission.

Mr S Phohlela (ANC) asked a question based on compensation of alternative land and asked whose land was the Lesotho Highlands Water Commission dispensing to the affected communities.

Mr Tekateka replied that the Lesotho Highlands Water Commission does not own any land in Lesotho save that which has been earmarked for the project implementation. The Commission only makes provision to buy land to the willing seller for the purposes of resettling the affected communities.

Mr S Simmons (NNP) asked if there was any proportion contributed by the South African government toward compensating the communities affected by the project.

Mr JF Van Wyk (ANC) wanted to know whether there were any affected communities on the South African side of the project and if they have been assisted with any compensation that Mr Tekateka had alluded to. He also wanted to know if there are any steps taken to overcome the challenges that hinder the implementation of the project.

Ms Van Rensburg replied that the project has had a much smaller impact in regard to having affected the communities on the South African side, only a 22 kilometer tunnel, which ends in Free State, has been constructed. This has had a smaller impact so far. It has also had a smaller impact on the communities.

Regarding challenges that hinder the implementation of the project, Mr Tekateka replied that the heading challenges was wrong. This was only a list of issues that they would have liked to have seen go better in the past.

Mr MJ Phala (ANC) asked if the project presented any job opportunities for South African citizens.

The Chairperson added on Mr Phala's question and asked if there were any job opportunities created, and how have the South Africans benefited from these opportunities. She also asked if the project has contributed towards human resources development both for the Lesotho and South African citizens. She also asked if the Treaty contained any provision that binds or forces the two countries around the maintenance and operations of the project so that it can be sustained.

Mr Tekateka replied that the project has contributed towards human resources development as many of the fellows involved in the project were trained for the project and they are involved with major corporate engineering companies. Therefore this has contributed in human resources development.

Mr Croucamp (Dept. Water Affairs & Forestry) added that the project has been of major benefit to the Lesotho citizens. He referred to statistics that had been compiled regarding project 1A and said that it generated 400 million wages paid to Basutho workers. At the LHDA some Basutho employees have earned about 270 million in wages throughout phase 1A only. Some 68 million went to subcontracts with Lesotho local businesses. 16 million went into consultancy contracts.

Regarding whether the project has presented any job opportunities for South Africans, preference was only given to Lesotho citizens. If there were Basutho qualified to do the work and, if the work was situated in Lesotho, the Basutho were given first preference.

Mr DS Maimane (ANC) wanted some clarity on who finances the project.

2001 A Water Odyssey
Ms Martjie van Rensburg (TCTA) indicated that the Treaty provides that South Africa shall be responsible for the payment of water transfer costs. That responsibility was delegated to the Transcaledon Tunnel Authority to act on behalf of the government. The Transcaledon Tunnel Authority reports to the Minister of Water Affairs and Forestry about the implementation of the programme.

Lesotho Highlands Water Distribution
The blue coloured arrows represent the areas that the Vaal Dam river system supplies water to and the orange coloured arrows represent the areas to which water can be diverted in emergency circumstances.

Phase 1A Project Cost R9.3 billion
There was no funding from the National Governmet. This project was funded from outside private sector sources.

Phase 1B Project Cost
An estimated cost of completion is R6.5 billion.
Phase 1B is smaller than 1A is constitutes about two thirds of the cost component.

Funding Sources
The fiscus was not approached to fund the project.
The project has been mainly funded by the Forex Market i.e. founding from outside the domestic market which consist in export credit loans and commercial loans.
Local Market consists in the Bond Market, Other Loans and Commercial Paper Programme. Some of the loans are government guaranteed. Other Loans are mainly from the Development Bank of South Africa

Phase 1A Sources of Funding
Sets out the graph representing how this portion of the project has been funded.

Phase 1B Sources of Funding
Constituted by only 3% export credit component and a relatively large multilateral component because some funding has been obtained from the European Investment Bank, which is a development funding institution.

Composition of Liabilities
Liabilities total an amount of R14 billion as at 31 January 2001. The graph reflects the proportional representation of liabilities due.

Debt Maturity Profile and Liability Curve
All projects that have been funded with private sector funding there is a need to be able to repay the debt.
This graph reflects that the project debt must be repaid twenty years after completion of construction. Phase 1B construction will have been completed by 2004 - it is anticipated that the debt will have been paid by 2024, 20 years after completion of construction. This would have an impact on water tariffs - see slide entitled example of tariff.

Timing of New Schemes
Phase 1A will be sufficient to supply under the lower demand curve probably until 2020. Another scheme will deliver water to the Vaal River system till about 2034. The last curve is a demand curve that will depend on population growth and economic growth in the area and the efficiency of water demand management.

Royalties
These are based on the projected cost saving between building the project and a comparable scheme that would have delivered 70 cubic meters per second.
The sharing of the benefit was done 56% Lesotho and 44% South Africa. Lesotho has received royalty payments to the amount of 455 million. The benefit for South Africa was that there have been lower construction costs.
Fixed royalty = capital cost saving
Variable royalty = lower operation and maintenance and electricity cost - based on the amount of water delivered to South Africa.

Discussion
The Chairperson asked if the project was an investment opportunity for South Africa.

Ms van Rensburg replied that this project is an investment opportunity to South Africa as its aim is to secure water supply. Mr Tekateka added that the project is an investment opportunity for both countries. Moreover, South Africa is contributing to the economic development of small Lesotho. South Africa is investing in goodwill to show its neighbourliness with regard to a small country such as Lesotho.

Mr Mathebe commented that the Lesotho Acting Minister of Natural Resources mentioned that the Government of Lesotho has also contributed to the financing of the project. He wanted to know if Ms Van Rensburg could comment on this.

Ms van Rensburg replied that Lesotho has accepted financial responsibility for the hydropower portion of the project for which it is required to pay R1.3 billion. There has been some donor and concessional funding involved.

Mr Mathebe asked that because TCTA is not related to the central government and that it is the main body tasked with raising funding for the whole project, what control does the government have over TCTA to ensure that the whole project does not collapse?

Ms van Rensburg replied that the Board of the TCTA has been appointed by the Minister of Water Affairs & Forestry, TCTA reports directly to the Minister about the implementation of the project on an annual basis. TCTA is a government enterprise as it falls under Schedule 2 of the Public Finance Management Act. This means that it has close interaction with National Treasury.

The meeting was completed.

Appendix 1
Report of the Porfolio Committee on Water Affairs and forestry on the study tour to Lesotho Highlands Water Project

INTRODUCTION
1. A Multi-party delegation of the Portfolio Committee on Water Affairs and Forestry embarked on a study tour to Lesotho Highlands Water Project from 23/25 February 2001.The tour was organized and partially paid for by the Trans Caledon Tunnel Authority (TCTA) but our hosts were the Lesotho Highland Development Authority(LHDA) - who are the Lesotho partners in the Lesotho Highland Water Project. The Chief Executive Officers of both the TCTA and LHDA accompanied us throughout. The efficiency, hospitality and friendliness were all of the highest order.

The names of the members of the Portfolio Committee on Water Affairs and Forestry are as follows:

· Ms B P Sonjica [Chairperson]
· Ms T E Leshivha
· Mr D S Maimane
· Mr P M Mathebe
· Mr M M Masala
· Ms P K Mathoagae
· Ms M L Ngwenya
· Mr M J Phala
· Mr G B D Mclntosh
· Mr S Simmons
· Bishop M S Mogoba
· Ms C Dudley
· Ms N Tshoma [Supporting staff]
· Mr A B Myeni [Supporting staff]

1. OBJECTIVES
The objectives of this study tour were to get an overall picture of the project, to observe the benefit to the local community and also observe the benefits of this project to South African community.

2. MEETING WITH THE SA COMMI5SIONER AND ACTING MINISTER ON NATURAL RESOURCES
The first meeting was held at Maseru Sun. The committee was given an overall picture about the whole project. The significant of this project to both countries namely Lesotho and RSA was also highlighted.

It was mentioned that a treaty between Lesotho and South Africa governs the project. The treaty is unique in that it was designed to allow for the disparity in economic development also defined the responsibilities of each country as concerns payment for the project. Project implementation is entrusted to parastatal bodies in each country. The Lesotho Highlands Development Authority (LHDA) is responsible for that part of the Project within Lesotho, whole the Trans-Caledon Tunnel Authority (TCTA) fulfils the same role in SA.

In terms of the Treaty, the Joint Permanent Technical Commission (JPTC) was established. The JPTC is a bi-national body with monitoring, advisory and approval powers with regard to key issues related to Project implementation design of the water, tender procedures and documents, the allocation of costs and financial arrangements:

3. BACKGROUND
Water is a strategic resources required for the sustained economic development in the Gauteng Province. Projections have shown that, in the year 2000, in the Gauteng Province had accommodated 42% of the urban population of the Republic of South Africa.

The Gauteng Province was originally solely dependent on water from the Vaal River. Vast economic developments, together with the said projections, have however necessitated procurement of additional water for the Region. Since 1974 substantial transfers from the Tugela Basin and neighboring rivers have already been supplementing the Vaal Dam.

In the meantime, South Africa was compelled to turn to its neighbour, the Kingdom of Lesotho, which is richly endowed with water, resulting from a high annual rainfall in highlands. The Senqu (Orange) River seemed to be the most viable possibility for further waster transfers.

Feasibility studies were undertaken since the early I950s on the possibility of diverting the Senqu's headwaters under gravity to the upper reaches of the Voal River. After evaluation of more than 2000 variations of several

Alternatives, the final proposals for the transfer of water from Lesotho to supplement the Vaal Dam were endorsed in 1986, and the Lesotho Highlands Water Project came into existence.

4. FUNDING AND FINANCE
In terms of the treaty, South Africa is responsible for paying all water transfer related costs and Lesotho for hydroelectric power and ancillary development projects within Lesotho

The Government of the Republic of South Africa has directed TCTA to pay all costs incurred on the water delivery component of the Project as a whole. In addition, the TCTA was directed by the Department of Water Affairs and Forestry to undertake the financial risk management delivery component of the Project, on behalf of the RSA.

Repayment of the water transfer debt relies on the revenue from water sales to Vaal River system water users. This revenue is based on a tariff charged to actual water usage, not volume delivered and was phased in over time, to ease increases in municipal water tariffs.

Phase IA of the LHWP cost approximately R9, 7 billion, including interest payments. This amount was funded as follows:
· RSA long - and short-term capital money markets 46%
· Export credits secured by foreign contractors 26%
· Offshore commercial loans 4%
· The Development Bank of Southern Africa 6%
· Direct funding from the South African government 5%
· World Bank 5%
· Concessionary loans from aid agencies 8%

Phase lB of the LHW, the total forecast cost is R6, 5 billion, funded as follows:
· RSA capital markets 62%
· World Bank 7%
· Development Bank of South Africa 8%
· Hong Kong Shanghai Bank Corporation 7%
· European Investment Bank (Matsokuj 6%
· European Investment Bank (Mohale) 8%
· Government of Lesotho 2%

The main contracts are divided as follows phase lA - Katse Dam - Transfer Tunnel: Katse to "Muela hydro - power plant phase 18 - Mohale Dam -interconnecting Tunnel joining Mohale to Katse and Matsoku.

5. TRANSFER TUNNEL
Water enters this 45 km - long tunnel through the operating gates of the 98m - high intake Tower, of which only the access bridge platform deck and operating room remain above the surface level of waters of Katse Dam, within sight of Malibamatso Bridge. Water can be taken from four different depths, depending on the level of the reservoir.

6. BENEFITS OF BUILDING THE LHWP
The decision to proceed with the LHWP was based on the calculation of its cost compared to the next most viable alternative in 1986. The figures shows that the LHWP would be more that R2, 3 billion less expensive than the arrange. Voal Transfer scheme. It was decided to split the benefit 56/44 between Lesotho and South Africa respectively. The Lesotho benefits would be paid as annual export earnings.

The LHWP increases the quality of the water in the Vaal River system, which has suffered deterioration from continued re-use and industrial effluent. Tf~e Project offers ore at possibilities for further development. Tourism in the Mountain Kingdom increase exponentially as visitors come to see Project itself, as well as the nature reserves and other features associated with it. In a country with rising unemployment, the Project provided work for people, worth a further 3000 fobs having so far being provided for Basotho workers during Phase 18.

Training facilities for these and future workers will ensure that these benefits are long-term. Phase 1 B will have provided direst jobs for an estimated total of 4000 people by its completion. During contraction of Delivery Tunnel North in Clarens area a variety of jobs were provided to inhabitants of the Eastern Free State, More that 1500 construction jobs were provided during the construction phase all across the Eastern Free State.

The infrastructure in Clarens, Fouriesburg, Ficksburg and lady brand benefited directly through the construction of new border crossing and improved amenities, community halls, clinics houses, a railhead and improved water supply sanitation system. Subsequently, tourism has developed within the newly created Maloti route, providing opportunities for entrepreneurs in the travel, hospitality and transport industry.

Water from the LHWP has provided the impetus to riparian rammers along the Ash, Leibenbergrulei and Wolge rivers to plant higher income crops for the export market.

The high quality of water is providing more that the anticipated supplementation of domestic and industrial needs of South Africa's industrial heartland.

7 SOUTHERN AFRICAN CUSTOMS UNION
The Union benefits form the project in the LHWP increases the need for various goods and services, which former three countries in the partnership can provide, as exports, to Lesotho.

Lesotho benefits from the taxes and daubers on their imports, in addition to the goods and services themselves. Increased revenues from the cross-border trade have bolstered the Lesotho economy since the project started. The increase in disposable income has increased demand for foodstuff, white goods, building material and vehicles that are sourced from SA.

8. ENVIRONMENT AND SOCIAL SERVICES
The environment and social services group is a business unit established within Lesotho Highlands Development Authority, which has been set up and is responsible for Planning and implementation of mitigation programmers as result of project impacts brought about by the Lesotho highlands Water Project.

This unit also deals with the followed factors: construction mitigation, resettlement, compensation, development, public healthier, natural environment and Heritage and emergency prepared ness pollution abatement, site rehabilitation site lands capping, croplands community impact avoidance.

9. THE NATURE RESERVES
The Protected areas developed by the LHDA are of three categories:
National Parks, Heritage Dites, environmental information and Education. These nature reserves offer spectacular scenery, and an exciting range of eco-tourist pursuits including watching Bearded Vulture at Bokong, studying wetlands and their animal and plant associations

And going on batons in sub-alpine and alpine mountain pastures in and within close proximity to the Nature Reserves. The Nature Reserves have cultural, archeological and heritage sites which can be enjoyed as well as pony trekking, hiking trails, nature interpretation trails, walking, and climbing. Carefully managed and sensitively placed picnic sites, camping and overnight facilities are available in the Reserve.