Security Structure for Phase 1A                                                                    <<..back

The LHWP was commenced at the time that South Africa was a political outcast internationally, and in the circumstances direct dealings in terms of guarantee arrangements were avoided by the financing community.  A structure was then conceived thus eliminating the possibility of this direct contact but retaining all the principles that are otherwise inherent in a direct guarantee arrangement.

Firstly, a Trustee by the name of Law Debenture Trust Corporation, based in London was appointed by the LHDA, to make an undertaking that due amounts will be paid on time and in the right quantities.  Such a document was identified as the Trust instrument. 

The principle at the centre of this guarantee structure is that of ‘Pari-Passu’, which simply means that every party to the arrangement will be treated equally, and no lender will be accorded a preferential status.  The acceptance of this principle by the World Bank was a great source of comfort for the other off-shore lenders. 

The cost of setting up this peculiar and cumbersome financing structure was certainly enormous.  The reason for it being brought about was that the parties to the Treaty were breaking new ground everytime and this evolved appointment of consultants for each aspect of the work.  To achieve a congruence of objectives from all key players demanded perseverance and determination, and this was driven by factors such as RSA’s requirement for water and Lesotho’s need for development funding and support. 

The guarantee structure is operating very well although it is proving to be somewhat expensive.  All debt payment notices/requests are routed to LHDA for onward transmission to TCTA in the RSA.  All care is taken to ensure that no information is lost in the process, but the possibility of something going wrong or astray will always exist. 

In order to cover themselves against the possibility of default, the lenders have insisted on the inclusion of very onerous conditions in their loans, all of which are cross-linked, so that a default on others and this may give rise to a disastrous situation of the project.  This has necessitated development of robust loan convenant monitoring systems by LHDA so as to avoid possibility of an even of default occurring. 

Systems to ensure that payment to contractors are made in accordance with agreed currency proportions and contract terms have been developed and are working well.  However, operation of these systems needs close monitoring as any change in the currency proportions may lead to a situation where one currency may get depleted ahead of schedule while inversely other currencies remain unutilized.  Payments to contractors have in most cases been suffered as a result of delays.  This is brought about by the fact that money is not moved on-shore in order for payment to be effected, instead, instructions are transmitted to the lending banks to transfer funds into the contractors’ accounts. 

There is also a mechanism for monitoring adequacy of funding which serves to give project authorities advance warning of indications if more funding has to be raised for any component of the project.  LHDA has experienced a situation where, because of a large variation order on tunneling works, additional funding had to be secured.  In terms of the Trust Arrangement LHDA has first of all to approach banks and lenders who are part of this structure to raise any such funding.  It is only in the event where such banks are not able to provide the requested finance that LHDA can start looking at other alternatives.  The process of going through the Trust Arrangement even for additional financing is so time consuming that the danger of running of foreign financing becomes grave.