Financing Strategy - Phase 1A                                                                      <<..back

As the task of raising finance for this complex project was anticipated to be an intricate process, during the planning of the Phase 1A, the LHDA was well advised to appoint financial advisors of international repute and standing who would facilitate contact with attractive sources of funding. Appointment of financial advisors was done through an international and open competitive bidding process as required by the procedures of the World Bank as sponsors of the assignment, and Standard Chartered Merchant Bank of UK, now styled as West Merchant bank following their acquisition by a German Bank, were selected for this complex task. The advisors commenced their assignment with an information gathering exercise by obtaining views of all the key parties in the financial sector in the Common Monetary Area. Knowledge and understanding of the key requirements as well as the features of the project and financial markets were essential in facilitating the evolvement of a funding strategy. The first recommendation of the Advisors was a Finance Working Group as it was called, to be formed to provide guidance at a policy level to the programme and fund mobilisation. This Working Group had representation from the two Governments’ relevant Ministries or Departments, Central/Reserve Banks as well as other regional consultants to ensure that all facets of the economy and legalities that have bearing on this process were fully catered for.

Key Considerations:

The strategy that was formulated and that was accepted by the parties had the following key features:

Maximization of Foreign Finance

As South Africa, and indeed the entire Common Monetary Area (CMA), was faced with foreign exchanges shortages which even led to a unilateral debt-standstill, it was not only desirable but imperative to raise as much foreign finance as possible to ensure that the anticipated foreign costs would be funded without the region’s balance of payments position being adversely affected. So the thrust of this strategy went slightly beyond just matching foreign costs with foreign finance, as it ensured that there was some residue of foreign finance that would help alleviate the stress that the foreign reserves position was faced with.

Full Financing for the Project

Before works could be ordered to start on the main construction contracts, it was important for full financing to be in place. This was purely to guard against certain components of the project not proceeding, or even the whole project being abandoned for the reasons of inadequate funding.

Marketing of LHWP as a Lesotho Project

Although South Africa stood and still stands to gain a lot from the project, it would not have been prudent for an active participation to be played by RSA in terms of liaising with donor and construction communities.  There was financial benefit to be derived from this strategy in that Lesotho, because of its socio-economic situation, is able to attract favourable interest rate terms with export credit agencies (ECA’s).  Although RSA was responsible for providing guarantees and servicing the loans eventually, it never had a credit or borrowing relationship with the ECA’s.  RSA is therefore benefiting from the lower financing costs which Lesotho was able to obtain because of its classification in the OECD category 111.

Contractor – driven Finance

Another important aspect of the financing strategy was the invitation of bids with arranged sources of finance as this placed the responsibility for the search for financiers virtually in the hands of the contractors.  Again this strategy reduced the possibility of direct contact taking place between RSA and the donor/contractor fraternities, which would have probably delayed the funds raising programme.  Volume 1.2-Project Financing and Tender Evaluation Brief, of the Tender Documents outlined the  requirements for this tendering approach.  The evaluation criteria for the tenders therefore took into account the attractiveness of the financing proposed or brought along by the contractors.  A bonus system was built into this criteria to reward those contractors who were able to bring along more than the required off-shore finance, in this instance, to satisfy the objective of maximising foreign finance.  Involving the contractor in the financing arrangements would ensure that the necessary chemistry amongst all parties to the implementation of the contract was achieved.  The contractor would therefore be placed in a position where he could retain a fair amount of influence on the lenders that he has invited to provide support, and this intervention would be vital in sorting out any misunderstanding that might crop up between the LHDA, as the borrower, and the relevant lender.

Use of Concessionary Finance

A lot of international interest and support was extended to the project during the engineering phase, especially in view of the social benefits that citizens of the two countries stood to derive from its implementation.  This commitment manifested itself through soft financing offers that were received from bi/multi-lateral agencies to finance especially technical assistance that was aimed at strengthening the institutional capacity of LHDA.  Since that funding was provided directly to Lesotho, a provision was made in the Treaty that such funding, to the extent that it was used for the Water Transfer component, should be on-lent to RSA on the IBRD terms. Besides achieving this financial benefit through tapping this source of funding, the project gained a lot of mileage in marketing itself through this network of financiers.

Financing Strategy for ‘Muela Hydropower Project

'Muela Hydropower Project represents in physical and financial terms about 10% of the total Phase 1A. Because of its strategic importance, in view of the fact that it would supply Lesotho with almost all of her energy needs, in spite the fact that it proved to be marginally viable, the decision was to maximise use of concessionary finance for the construction of (especially) the civil works. Such funding came from sources like European Union, who provided grant funding to the MHP, and who were identified or requested to play a lead role in mobilising financing for this component. For the electro-mechanical contracts the strategy was to invite bids with finance as was the case in the Water Transfer component.