LESOTHO: 2008 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 05 MASERU 000029

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SUBJECT: LESOTHO: 2008 INVESTMENT CLIMATE STATEMENT

REF: STATE 158802

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1. SUMMARY: Embassy Maseru submits the following information
for Lesotho's 2008 Investment Climate Statement. The Kingdom of
Lesotho is open to foreign direct investment (FDI) and generally
treats foreign investors favorably. With most investment
originating from East Asia, FDI in Lesotho is primarily
channeled into export-oriented manufacturing, specifically
textiles and garments for the U.S. market. Lesotho's investment
climate is favorable with regard to currency conversion,
monetary transfer policies, and a lack of undue burdens on
investors. The primary weaknesses of the investment climate are
its underdeveloped legal framework for investors and the need
for land reform. Overall, Lesotho has maintained an inviting
posture with regards to FDI, and remains "open for business."
END SUMMARY.

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A.1. Openness to Foreign Investment
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2. Lesotho is open to foreign direct investment (FDI) and
generally treats foreign investors favorably. However,
Lesotho's legal framework with regards to FDI is not well
developed, and thus problems exist with regards to transparency
and consistent application of the law. Lesotho has found
success in attracting FDI to its export sector, and foreign
investors in the apparel industry have created new jobs and
contributed to poverty reduction. Current business taxation and
regulation provisions only partially address investor needs, and
the Government of Lesotho (GOL) is under pressure to update
relevant laws affecting investors in various sectors.


3. Ninety percent of FDI in Lesotho flows into export-oriented
manufacturing, a sector stimulated largely by the U.S. African
Growth and Opportunity Act (AGOA). This FDI created an apparel
sector which now provides approximately 40,000 jobs. The single
largest investment is believed to the US$90 million capital
infrastructure investment of Nien Hsing Group in Taiwan.
Foreign firms in Lesotho concentrate their production on a
narrow range of products, such as knit apparel and blue jeans.
Foreign companies also invested smaller amounts in footwear
manufacturing, electronics components assembly, food processing,
and miscellaneous small-scale manufacturing.


4. Lesotho's telecommunications sector has attracted
considerable FDI. An international consortium composed of ESKOM
Zimbabwe's Econet Wireless International and Mauritius Telecom
now own 70% of Telecom Lesotho. Lesotho has a relatively high
penetration of telephone connectivity relative to its low per
capita income. Communications services have been extensively
modernized and expanded over recent years, although significant
portions of mountainous rural Lesotho remain without such
services.


5. FDI in air transportation has not been successful. The
parastatal Lesotho Airways closed in 1997 due to its inability
to attract FDI. Air routes to and from Maseru are now handled
exclusively by South African Airways. Foreign investors have
not pled significant capital in the tourism sector, including
activities aimed at protecting the natural environment and
ecological attractions.


6. FDI in the mining sector has experienced a recent revival
through the opening of Lets'eng Diamonds, a partnership between
a South African-owned company and the Lesotho Government. The
mine employs about 50 people, most of whom are Lesotho
nationals. A European mining company and the GOL jointly
operate another mine in Liqhobong, as well as the Kao kimberlite
pipe in Butha Buthe District. South African companies are
currently prospecting the Kolo mine in southern Lesotho. In its
attempt to attract FDI in the mining sector, the GOL offered a
number of concessions to foreign investors including VAT
exemptions on inputs used during construction and withholding
tax exemptions on dividends and interests payments. In return,
the Government of Lesotho is granted an eight percent royalty on
gross diamond sales, a 12.5% equity interest in joint ventures
with foreign companies, and a 12.5% share of dividends. Major
diamond finds in 2006 and 2007 generated worldwide media
coverage.

The Origin of Foreign Investors


7. Lesotho's apparel sector is entirely East Asian and South
African-owned, and currently employs approximately 40,000
people. Two factories are under Taiwanese ownership, two are
owned by Hong Kong concerns, one is Singapore-owned, and eight
are owned by South African firms. The rest of the approximately
19 factories are owned by PRC investors. None are under local

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ownership. South African FDI is present in footwear factories,
four electronics firms, the Sun Hotel chain, air transportation,
insurance, telecommunications, financial services, and mining.
FDI from other countries includes Canadian mining interests and
U.S. and Chinese investment in food processing industries.


8. Lesotho's success in attracting FDI has been limited largely
to export-oriented manufacturing. No foreign ownership at any
level, including positions on boards of directors, is permitted
in reserved trading license businesses (i.e., small scale retail
and services operations). The restrictions on foreign
involvement in small scale services provision and manufacturing
are perceived as instruments of immigration control, as there is
a great deal of political sensitivity regarding small business
owners from Asia. Many trading businesses and all medium to
large manufacturing businesses are open to FDI. Nevertheless, a
relevant trading or industry license is required and must be
renewed annually.


9. Generally, foreign investors are treated equally with
domestic investors. One significant exception is a prohibition
on foreigners holding land lease titles (land may not be
purchased in Lesotho, as all land is officially owned by the
crown). Lesotho has no legal provisions discriminating among
various FDI source countries. Lesotho's membership in SADC does
not lead to preferential treatment for investors from other SADC
countries. Lesotho's standards of foreign investment protection
are good in practice, but the legal framework guaranteeing these
norms is weak. For example, there is no foreign investment law,
and Bilateral Investment Treaties (BITs) have been concluded
with only two countries -- the United Kingdom (1981) and Germany
(1985).

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A.2. Conversion and Transfer Policies
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10. Lesotho uses traditional foreign exchange controls, though
its participation in the Southern Africa Common Monetary Area
(CMA) restricts the independence of its monetary policy. The
CMA includes Lesotho, Namibia, South Africa, and Swaziland.
Under the CMA, the South African rand, alongside the Lesotho
loti, is legal tender in Lesotho. Under CMA rules, the loti
should be exchanged at a one/one ratio with the rand, and the
rand/loti peg must be maintained with reserves in rand and other
foreign exchange. There are no exchange controls between
Lesotho and South Africa, but CMA members agree to enforce
exchange controls with third parties.


11. The Government of Lesotho delegates authority to commercial
banks to undertake current account transactions, and Lesotho has
acceded to Article VIII of the International Monetary Fund.
However, dividend payments still require the Central Bank
approval. The Central Bank of Lesotho (CBL) maintains direct
powers of approval over foreign exchange requirements for all
capital account transactions including FDI, capital
disinvestment, and contracting and servicing offshore debt.
There has never been a case of CBL blockage of such transfers.
Lesotho is a member of the Southern African Common Policy on
approval of foreign loans. However, policies on foreign
borrowing are not strongly developed as there is insufficient
foreign borrowing by resident businesses.

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A.3. Expropriation and Compensation
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12. Lesotho's constitution states that the acquisition of
private property by the state can only occur for specified
public purposes and in exchange for full and prompt
compensation. Any party subject to such expropriation has the
right to appeal the action or the compensation offered to the
nation's High Court. The constitution does not address whether
compensation may be paid abroad in the case of a non-resident.
Under existing constitutional provisions, several mining
companies filed a case against the Lesotho Water Highlands
Project and its financiers alleging that their mineral lease
rights were unlawfully expropriated without compensation when a
new dam flooded a potential mining area. Lesotho's courts found
in favor of the Lesotho Highlands Water Project and its
financiers, stating that all proper regulations and
notifications were followed prior to the dam construction.

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A.4. Dispute Settlement
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13. Foreign investors have full and equal recourse to Lesotho's

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courts to settle commercial and labor disputes. The nation's
courts are regarded as fair and impartial in cases involving
foreign investors. In complex commercial cases, overseas judges
may be invited to the bench. Under Lesotho's BIT agreement with
United Kingdom, an investor may take a dispute with the
Government of Lesotho to international arbitration, but the BIT
agreement with Germany does not address this issue. Lesotho is
member of the Multilateral Investment Guarantee Agency (MIGA)
and has acceded to the Convention on Settlement of Investment
Disputes between States and Nationals of Other States.

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A.5. Performance Requirements
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14. There are no blanket incentives specifically for all
foreign investors and no performance requirements imposed
exclusively on foreign investors as a condition of investment.
The principal business taxes in Lesotho are income tax, customs,
excise duties, and value added tax. Corporate income taxes
heavily favor investment in manufacturing, as income is taxed at
zero percent and there is no withholding tax on dividends paid
to non-residents. Income in all other sectors is taxed at 35%,
and there is a further 25% withholding tax on non-resident
dividends. Moreover, only industrial buildings qualify for
depreciation allowances. Buildings for services, tourism, and
farming are not depreciable. Also, infrastructure such as land
improvements and site services do not qualify.

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A.6. Right to Private Ownership and Establishment
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15. Foreign entities have the right to establish enterprises in
Lesotho, but many types of new businesses require specialized
licenses (see section A.8. below). Lesotho has no competition
law or overall competition regulator. Instead, under the
industrial and trading licensing system, a business can apply
for protection from competition for up to 10 years.

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A.7. Protection of Property Rights
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16. Lesotho generally respects international intellectual
property laws and is a member of the World Intellectual Property
Organization (WIPO) and the African Intellectual Property
Organization (AIPO). Patents are rarely issued in Lesotho, but
trademark protection is often sought and granted. Intellectual
property protection is regulated by Industrial Property Order
and the Copyright Act of 1989. The law protects patents,
industrial designs, trademarks, and copyrights. There is no
apparent enforcement of intellectual property laws with regards
to copyrighted music or films.

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A.8. Transparency of the Regulatory System
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17. The judicial system is fair and competent in commercial
matters. The government is willing to supplement the bench with
foreign judges in cases requiring specialized expertise.
Generally, there is adequate regard for contracts with foreign
parties and equal treatment of foreign investors before the
courts in disputes with national parties or the government.


18. Corporate law is based on the Companies Act of 1967 which
provides reasonable standards for corporate behavior. However,
it has been criticized as both incomplete and overly complex.
Technical improvements were incorporated in a 1998 draft of a
revised law, though it was never passed by parliament.


19. The regulatory framework for utilities is modern, while
many analysts judge mining regulations to be outdated.
Lesotho's current mining legislation gives the authority to
grant land rights to the King and traditional chiefs upon the
recommendation of a Mining Board, rather than to a government
ministry. Financial services regulation is sufficient.
However, the industrial and trading license system, which
requires licenses for 44 types of business, long ago lost its
original purpose of protecting new firms from competition. Some
enterprises can require up to four licenses for legal operation.


20. The Lesotho Telecommunications Authority (LTA) acts as an
independent regulator of the telecom industry. The LTA sets the
conditions for the entry of new competitive operators, although
it maintains Lesotho Telecom's monopoly on fixed line and
international services.

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21. Current banking regulations do not grant the Central Bank
of Lesotho power to direct interest rates, exchange rates,
margins, or the range of services offered by banks operating in
Lesotho. This is due to the currency peg with the South African
rand, which both relinquishes Lesotho's leverage with regards to
monetary policy and creates a lower political risk environment
for banking investment.

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A.9. Efficient Capital Markets and Portfolio Investment
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22. Lesotho hosts three foreign-owned banks: First National
Bank, Ned Bank, and Standard Bank (the latter bought a 70% share
in state-owned Lesotho Bank). The financial base of these banks
are sound, as they are supported by a large foundation of
foreign-based capital. Judgments as to the market-orientation
of credit provision by these banks are difficult as very little
credit is extended to local consumers. Industrial and
commercial credit is provided by the parastatal Lesotho National
Development Corporation (LNDC). The LNDC's mandate is to
promote and facilitate foreign investment.

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A.10. Political Violence
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23. Rioting and violence associated with an attempted coup
d'etat in 1998 still cast a shadow over today's investment
environment. The country has made considerable strides in the
intervening decade to consolidate and strengthen democracy, but
there is room for improving investors' confidence. Following a
free and peaceful February 2007 general election, Lesotho
experienced several civil disturbances and general strikes
associated with a political impasse over the allocation of
parliamentary seats. In the wake of June 2007 attacks by
unknown gunmen on the residences of prominent government and
political leaders, the Government of Lesotho imposed a two week
long dusk until dawn curfew in Maseru. Political tensions
between governing and opposition parties continue, but the
national political atmosphere is generally calm.

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A.11. Corruption
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24. Investors reported that corruption is not a significant
factor affecting their investments. Anti-corruption legislation
passed in 1999 was implemented through the creation of an
autonomous anti-corruption unit, the Directorate on Crime and
Economic Offenses (DCEO). The Government of Lesotho actively
prosecutes corruption cases at various levels of authority,
including cases against the former Principal Secretary of
Justice and Constitutional Affairs, a former Deputy Commissioner
of Police, and various foreign and domestic parties engaged in
the Lesotho Highlands Water Project.

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A.13. OPIC Insurance Program
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25. The Overseas Private Investment Corporation (OPIC) insured
one American investment in Lesotho, Seaboard Corporation's joint
venture with Lesotho Flour Mills, which began operations in 1998
and currently employs approximately three-hundred people. This
is OPIC's sole current activity in Lesotho.

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A.14. Labor
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26. Lesotho's employers operate under the Labor Code Order of
1992 which regulates terms of employment and requirements for
worker health, safety, and welfare. It was amended in 2004 to
address HIV/AIDS policies in the workplace. Unionization is
permitted. The law created an independent Directorate of
Industrial Dispute Prevention and Resolution. Statutory minimum
wages are set annually by the Ministry of Labor and Employment
in accordance with recommendations from a Wages Advisory Board
including worker, management, and government representatives.
In 2001, Lesotho ratified ILO Convention 182 on the Prohibition
and Elimination of the Worst Forms of Child Labor and Convention
138 on Minimum Age of Employment.


27. The Labor Code Order of 1992 requires every non-citizen
employee or self-employed person to have a valid work permit. A
work permit is issued by the Labor Commissioner who, by

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regulation, must be satisfied that no qualified Lesotho citizen
is available for the position. The statutory maximum duration
of a work permit is two years.

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A.16. Foreign Direct Investment Statistics
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28. Lesotho's FDI statistics since 2000 are estimated as
follows:

Year 2000 2001 2002 2003

FDI Stock
in M Maloti 218.3 242.91 282.72 316.61

FDI Stock
in M of $ 31.18 34.7 40.38 45.23

FDI as %
of GDP 0.03 0.04 0.07 0.05

GDP Purchasers'
Prices in M of $ 986.66 863.33 603.5 982.625



Year 2004 2005 2006 2007

FDI Stock
in M Maloti 343.68 364.37 623.00 745.03

FDI Stock
in M of $ 49.09 52.05 89.00 106.43

FDI as %
of GDP 0.03 0.04 0.06 0.07

GDP Purchasers'
Prices in M of $ 1419.85 1438.94 1445.71 1481.89


Source: FDI Stock data from the Central Bank of Lesotho, GDP
data from the Bureau of Statistics Website (National Accounts)


29. Lesotho's FDI data is incomplete and does not currently
meet the needs of policy makers. The Central Bank estimates FDI
using information received from Lesotho National Development
Corporation (LNDC) and, as such, the data sometimes include
planned (not actual) projects, leading to possible
overestimation. This data does not capture the reinvestment
element of FDI inflows. By confining this data to initial
equity investments, the figures ignore later investments
financed by retained earnings from foreign companies already in
Lesotho. This could also lead to an underestimation of FDI
volume.
NOLAN