1. The project

The Lesotho Highlands Water Project (LHWP) is a major transnational project consisting of a system of dams and tunnels to store and transfer water from the catchment of the Orange river in the Highlands of Lesotho to the industrial heartland of South Africa, the Gauteng / Johannesburg area; it also comprises a Hydropower Plant at Muela, which is basically a spin-off of the water transfer.

Following a Treaty signed in 1986 between Lesotho and South Africa the project is being implemented in several phases by two dedicated institutions: the Lesotho Highlands Development Authority (LHDA) in Lesotho and the Trans Caledon Tunnel Authority (TCTA) in South Africa, both dedicated public sector bodies. All water transfer components are defined by the Treaty as South Africa's responsibility (notably for project costs), whereas Lesotho is in charge of the electricity component.

Being very large, the project is being carried out in Phases: Phase 1A comprised the Katse and the Muela Dams as well as water transfer tunnels; this phase was implemented between 1990 and 1998 and is in full operation. The Muela hydropower plant is not part of this project definition. Phase 1B consists essentially of the Mohale Dam, the Mohale Tunnel and the Matsoku Tunnel and Weir; works started in 1995 and are scheduled to be completed in 2003. Subsequent Phases are planned but have not yet been decided upon and are likely to follow only in a few years' time.

2. Benefits for South Africa and for Lesotho

Lesotho remains one of the least developed countries in the world with no major natural resources except for water of which it consumes less than 6% domestically. Government's strategy was therefore to maximise the benefit from the sale of the excess water. Savings in realising the LHWP have been split between the two countries with 56% being allocated to Lesotho, in the form of royalties from South Africa. These payments are estimated to average at approximately EUR 33m per year for both phases of the LHWP. This corresponds to 4% of GDP and 10% of total Government Revenues, representing a considerable source of revenue for the funding of development projects in Lesotho.

South Africa is an arid country with periodic droughts and a very unevenly distributed rainfall. Moreover, the availability of water is very unequal with a considerable part of the population still without access to safe water and adequate sanitation. Prior to the LHWP the chronic shortage of water was particularly acute in the Gauteng area with its large industrial activity and its numerous townships. While this region with a population of more than 10 million generates almost 60% of the national GDP, it is one of the very few metropolitan areas in the world not established along any natural body of water. An active and urgent search for additional water resources had therefore become of prime importance and interbasin water transfers had been identified as the least cost solution leading to the comprehensive LHWP. Compared to a situation "without project" or with another project, Phase 1A and 1B of the LHWP results in savings to South African water users estimated at USD 30 million per year.

3. Project Cost and EIB's financial support

Funding for both phases is heavily dominated by "Water Bonds" being raised on the South African capital market.

Following an earlier decision to grant EUR 3.5m for the preparatory phase, the Board of Directors of the European Investment Bank approved in 1993 and in 1998 financing contributions to the respective phases of the project of in total EUR 20m for phase 1A and EUR 99 million for Phase 1B.

The EIB's operations in Lesotho are part of a mandate given by the European Union's Member States within the framework of the second financial protocol of the Lomé IV Convention. The EIB's financing has the full support of the European Commission and the European Member States, who, through a committee of representatives, mainly from the Ministries for development cooperation were unanimously favourable.

The cost of phase 1A amounted to EUR 1.5 billion and attracted external funding from European export credit agencies (USD 380m), the World Bank (USD 69m), the EU Commission (EUR 50m) and the EIB (EUR 23.5m; EUR 3.5m from risk capital resources for the initial feasibility study, EUR 15m from risk capital resources and EUR 5m from the EIB's own funds) Phase 1B is [currently] estimated at EUR 1.1 billion and has a similar funding pattern with, however, a larger amount (EUR 99m) made available by the Bank.

4. Environmental and social issues

The project is being built in the sparsely populated Lesotho Highlands where 357 households have been resettled during Phase 1A and around 450 will be affected by Phase 1B. Knowledge of how best to address the various effects of large dams has evolved considerably over the last fifteen years and the LHWP is no exception: specialised research was undertaken for the project, the findings of which were incorporated into its design, and extensive efforts have been made throughout its implementation and operation to keep up with the latest scientific findings, procedures and measures, in close co-operation with and under the guidance of the World Bank.

Prominent examples in this regard include the studies carried out for In-stream Flow Requirements, and the lessons learned on compensation issues under Phase 1A, which have been taken into account for developing improved measures for Phase 1B; note that the enhanced compensation policy has been applied retroactively to Phase 1A.

The compensation policy is comprehensive and covers amongst others (i) Losses of Physical Assets (houses, kraals, graves etc.) ; (ii) Losses of Agricultural Resources (arable land, trees, crop etc. held by individuals) compensated by land-for-land, cash annuities, grain and pulses provision, etc.; and (iii) Losses of Community Resources (schools, public infrastructure, water supplies, clinics etc.).

EUR 115 m funding, representing more than 10% of total phase 1B, is exclusively devoted to environmental and social components, which is substantial.

Together with other funds generated by the project (e.g. tax receipts during construction) water royalties are being deposited into a dedicated Revenue Fund. This fund is being audited on a regular basis and its spending policy closely monitored by the World Bank. So far its focus has been on community identified labour based infrastructure thus benefiting the population of Lesotho as a whole and the poor in particular.

Overall, EIB considers that the Highland people's quality of life will be enhanced - even if they have to resettle - as a result of much improved infrastructure created by the project, re-training and other social welfare and employment creation measures, as well as compensation, on all of which they have been consulted and to which they are party.

5. Alleged Irregularities and subsequent audits

As early as 1994 and on their own initiative, the Project Authorities took swift action: after a Management Audit had found initially comparatively minor issues, the CEO was suspended.

Further detailed investigations followed which found irregularities in the course of implementing Phase 1A; these concerned notably the discovery of deposits on private bank accounts in Europe and South Africa. The findings prompted a series of legal steps, including the opening of court cases in 1999 against a number of companies and individuals.. The proceedings are ongoing; one person is currently in jail.

In addition to its regular monitoring, in 2000 the EIB commissioned an audit on its own initiative in order to determine possible implications of irregular practices on the project components it had funded under Phase 1A (there were no alleged irregularities under Phase 1B). This Audit was closely coordinated with the European Commission and with OLAF, the specialised EU antifraud institution, and concluded that:

  • there was no direct or specific misuse of EIB funds; 
  • indirect misuse of EIB funds could not be proven: for each of the contracts financed by the EIB real services and goods had been delivered to the project.

To ensure full transparency, EIB's Audit of Phase 1A was made available to OLAF and the Lesotho Prosecution authorities.

As regards Phase 1B, EIB commissioned consultants to carry out detailed on-site monitoring, which has given the project a "clean bill of health", monitoring of this phase continues in close coordination with the World Bank.

The EIB's recently revised Guide to Procurement (also published on this website) stipulates measures to combat corruption in the procurement process . Article 3.5 relates to Operations outside the EU, and provides the Bank additional powers if needed and appropriate. The powers provide notably for the rejection by EIB of a promoter's preferred choice for award of contract if it determines that prohibited practice has been engaged in, as well as cancellation of all or part of a loan if prohibited practice is discovered in contract award and/or management.