Financing Strategy - Phase 1B                                                                      <<..back

A lot of experience was gained from Phase 1A and valuable lessons were learned which added value and enhanced the financing strategy that was developed for Phase 1B.  Firstly it should be noted that at the time of raising finance for Phase 1B the political situation in RSA had changed. RSA could now attract direct borrowings from the international community. 

Security Structure 

The cumbersome  security structure that was put in place for Phase 1A was no longer relevant.  In its place RSA would issue a direct sovereign guarantee to the banks, thus providing security for all water transfer borrowings by the LHDA.

Deutsche Morgan Grenfell were appointed as Financial Advisors for this Phase but their scope was limited to formulating the strategy for raising foreign funding.  This time around foreign funding was procured to fund foreign costs.  All local costs were to be funded out of Common Monetary Area (CMA) funding, and a separate CMA  funding strategy was developed by the LHDA.

The salient features of the foreign funding strategy are as follows:

1. Direct sovereign guarantee of the RSA was provided to foreign banks as security. 

2. Full Financing for the project to be in place in advance of commencement of major works.

3. Foreign costs to be financed with foreign finance in order to preserve RSA foreign reserves.

4. Contractor – Arranged  Finance – It was a requirement that Contractors should submit offers of 100% of their non- CMA costs.  The Contractors were also required to include “cash” and “financed” prices in their bids.

Stand-Alone Finance

A new concept was introduced into the Phase 1B Financing strategy, which successfully capitalised on the strong bargaining position which LHDA gained in comparison with Phase 1A.  The principle of stand-alone finance was introduced in order to maximise competition amongst banks and the ensure that the most favourable terms are achieved.   This strategy allowed biddens who were not financed to be evaluated and also provided for substitution of unfavourable contractor arranged finance attached to a preferred technical bid.

Sources of Finance

Internal Financing Institutions:  In order to reduce the cost funding, the LHDA had targeted at maximising funding from concessional sources such as the World Bank, EIB, ADB.

Export credit Agencies (ECA)

It was agreed that ECA Finance and associated Commercial Finance should form the core source of finance for  harder construction elements of the project.  The prime strategy of including Contractor-Arranged in the Tender documentation made the ECA’s the natural choice.  The contractors were forbidden from providing any other form of funding.

European Investment Bank (EIB)

EIB Own Resources pocket was identified as highly concessional (up to 40% below EIB’s cost of funds) and would be more appropriate for Matsoku Diversion contract, as EIB preferred to fund discrete projects that are not co-financed.  It was agreed that Lesotho would approach EIB directly, supported by RSA.

IBRD Finance

As in Phase 1A the World Bank involvement in the project was desired particularly by Lesotho, for developmental and monitoring role played by the Bank.  It was agreed that their participation would be limited to ‘softer’ elements.  The use of the Bank’s Partial Cover Guarantee was also considered but later dropped.

African Development Bank (ADB)

ADB would be considered for softer elements of the project, which did  not form part of the critical path. 

·     Bridging from CMA would be put in place by LHDA in advance and all other financiers would provide for re-imbursements in their finance offers.