LESOTHO 2009 INVESTMENT CLIMATE STATEMENT

UNCLAS MASERU 000015 E.O. 12958: N/A TAGS: EINV EFIN ETRD ELAB PGOV USTR KTDB OPIC LT SUBJECT: LESOTHO 2009 INVESTMENT CLIMATE STATEMENT REF: 08 STATE 123907 -------------- Summary -------------- ¶1. Embassy Maseru submits the following information for Lesotho's 2009 Investment Climate Statement. Lesotho is open to foreign direct investment (FDI) and generally treats foreign investors well. With most investment originating from East Asia, FDI in Lesotho is primarily channeled into export-oriented manufacturing, specifically textiles and apparel for the U.S. market. Lesotho's investment climate is favorable with regards to currency conversion, monetary transfer policies, and lack of undue burdens to investors. The main weakness of the investment climate is an under-developed legal framework for investors and the need for land reform. Lesotho has maintained an inviting posture with regards to FDI overall. -------------- Openness to Foreign Investment -------------- ¶2. Lesotho is largely open to FDI and treats foreign investors well. However, the country's FDI policy and legal framework are not well developed enough to enhance transparency and consistency. Lesotho has been more successful than most other least-developed countries in attracting FDI - predominantly export-oriented investment. Foreign investors in the apparel industry have created new jobs, particularly for females, and contributed to poverty reduction. Current business taxation regulations only partially address investor needs. The Government of Lesotho (GOL) is under pressure to revise relevant laws affecting investors in various sectors. ¶3. The Lesotho Revenue Authority (LRA),through support from the United States Department of Treasury Office of Technical Assistance, is working on capacity-building in tax laws and application of those laws to address the bad practices that arise from a lack of codified standards and a staff with inadequate knowledge of how to interpret and apply tax laws. ¶4. Ninety percent of FDI flows into export-oriented manufacturing. FDI in manufacturing alone has created 45,000 jobs. The single largest investment is believed to be around $90 million in capital infrastructure by the Taiwanese Nien Hsing Group. Lesotho's export-oriented FDI gives it an advantage that needs to be built on. Foreign firms in Lesotho are highly concentrated in a very narrow range of products such as knit apparel and jeans. Foreign affiliates have also invested small amounts in footwear, electrical products, electronics, television assembly, food processing, and other manufacturing products such as plastics and umbrellas. ¶5. The telecommunications sector in Lesotho has also attracted FDI. The consortium of ESKOM Zimbabwe's Econet Wireless International and Mauritius Telecom have a 70% share of Lesotho Telecom. Lesotho has a high penetration of telephony relative to per capita income. Such services have been extensively modernized and expanded in recent years. ¶6. FDI in air transportation has not been successful. Lesotho Airways is now managed and handled by South African Airways for flights from Maseru to Johannesburg, and tourism has not been exploited, especially in activities aimed at protecting the natural environment and ecological attractions. ¶7. FDI in diamond mining has been revived by the reopening of Lets'eng Diamonds which is a partnership between a South African-owned company and GOL. The mine employs about 70 people, 90% of whom are Lesotho nationals. A European mining company and GOL operate another mine, Liqhobong, and the Kao kimberlite pipe in Butha Buthe district. These South African companies are also prospecting the Kolo mine in the southern area of the country. In its attempt to attract FDI to the mining industry, the GOL has offered a number of concessions, including VAT exemptions on inputs used during construction, and exemptions from withholding taxes on dividends and interest payments. In return, Lesotho is granted 8% of gross sales royalties, 12.5% equity interest in the company, and a further 12.5 % share of dividends. ¶8. Generally, the GOL continues to recognize the need for the Kingdom to be competitive in regional and international markets. To achieve this goal, the government has embarked on structural reforms that aim at improving the investment climate. Initiatives include private sector competitiveness programs under the Millennium Challenge Corporation and the World Bank, as well as modernizing customs processes through technical assistance from the USAID Southern Africa Global Competitiveness Hub. Specific activities include modernizing bank payment systems; introducing national ID's; creating credit facility for manufacturers; and modernizing land tenure systems. Customs processes will include minimizing the number of procedures required to clear consignments, both for export and import clearance purposes. ¶9. The Ministry of Trade and Industry also introduced a "One Stop Shop" where all services required for the issuance of licenses and exports are housed under one roof. This has reduced the number of days to start a business from 92 days to 30 days. The Ministry is committed to developing this facility further to increase efficiency and expedite the procedures and processes needed to compete in the exporting business. Developments will extend to simplifying and expediting the issuance of work and residence permits to reduce the turnaround time. -------------- The Origin of Foreign Investors -------------- ¶10. Lesotho's apparel sector is entirely East Asian and South African-owned and currently employs about 45,000 people. Two factories are under Taiwanese ownership, two are owned by Hong Kong, one is Singapore-owned, and eight are owned by South African firms. South African FDI is present in footwear factories, four electronic firms, Sun Hotels, air travel, insurance and telecommunications, financial services, and mining. ¶11. Lesotho's performance in attracting FDI has been creditable by regional standards. It is commendable that the bulk of FDI is channeled into the manufacturing sector and most of that investment goes into export activity. FDI entry in business and consumer services is now restricted in the case of small scale retail and personal services businesses. No foreign ownership or even board directorship by a non citizen is permitted at any level in these restricted businesses. However, there are foreign-owned small retail businesses which were established before the present restrictions. These restrictions on small-scale services and manufacturing businesses are instruments of immigration control. Lesotho is sensitive to the entry of small business owner-operators from abroad, especially from China and West Africa. If such businesses were established, this would officially be perceived as an unwelcome level of economic migration. ¶12. Many trading businesses and all substantial manufacturing businesses are open to FDI. Nevertheless the relevant trading or industry license is required and must be renewed annually. ¶13. In most aspects of "normal business," foreign investors are on an equal footing with Basotho investors. An exception is the prohibition on ownership of land lease titles by foreign investors. Lesotho has no legal provisions that discriminate among home countries. It is a member of SADC, but this does not lead to preferential treatment for investors from these countries. ¶14. Lesotho's standards of treatment and protection of specific interest to foreign investors are good in practice, but the legal framework guaranteeing these norms is weakly developed. There is no foreign investment law. Bilateral Investment Treaties (BITs) have been concluded with only two countries, the United Kingdom in 1981, and Germany in 1985. -------------- Conversion and Transfer Policies -------------- ¶15. Lesotho has traditional foreign exchange controls but is also controlled by its membership in the Southern Africa Common Monetary Area (CMA). The CMA is comprised of Lesotho, Namibia, South Africa and Swaziland. Under the CMA the South African rand is legal tender in Lesotho. Under CMA rules the loti should be exchanged at par with the rand and the rand/loti peg must be maintained. Lesotho must hold reserves in rand and other foreign currencies. There are no exchange controls between Lesotho and South Africa but CMA members agree to have exchange controls with third parties. ¶16. Lesotho has partly liberalized the capital account. Controls on the current account were abolished in 1998 while limited controls on the capital account were adopted in 1993. ¶17. Commercial banks have been delegated authority to undertake current account transactions and Lesotho acceded to Article VIII of the International Monetary Fund. However dividends payments still require Central Bank approval. The Central Bank maintains direct power 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 blockage of such transfers, and shortages of foreign exchange that could lead to blockage are highly unlikely given net international reserves of $1 billion in 2008, which is equivalent to eight months of import cover. Lesotho is a member of the Southern African Common Policy on approval of foreign loans. However policies on foreign borrowing are not strongly developed on the grounds that there is little foreign borrowing by resident businesses. The Central Bank and the Lesotho National Development Corporation (LNDC) monitor international capital inflows. There are no restrictions on converting or transferring funds associated with an investment into a freely convertible currency through a legal clearing agent. -------------- Expropriation and Compensation -------------- ¶18. The constitution provides that the acquisition of private property by the state can only occur for specified public purposes. Further, the law provides for full and prompt compensation. Affected persons may appeal to the High Court as to whether the action is legal and compensation is adequate. The constitution is silent as to whether compensation may be paid abroad in the case of a non-resident. ¶19. In one incident, mining companies filed a case against the Lesotho Water Highlands Project, alleging that the plaintiff companies hold mineral lease rights located within the geographic area of land that was inundated as a result of the construction of Katse Dam. The companies claimed that the said rights have been unlawfully expropriated by the GOL without any compensation. -------------- Dispute Settlement -------------- ¶20. Foreign investors have full and equal recourse to the Lesotho courts for commercial and labor disputes. Courts are regarded as fair and impartial in cases involving foreign investors. Complex commercial cases may be heard by foreign judges. Privatization has introduced a number of investment agreements and these provide for international arbitration to settle disputes. Under the BIT with United Kingdom, an investor may take a dispute with the Government to international arbitration. The Germany BIT is silent on this issue. ¶21. Lesotho is a member of the Multilateral Investment Guarantee Agency and has acceded to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. -------------- Performance requirements -------------- ¶22. There are no incentives for and no performance requirements imposed specifically on foreign investors as a condition of investment. ¶23. The principal business taxes in Lesotho are income tax, customs and excise duty, and value-added tax. Corporate income tax heavily favors investment in manufacturing where income is taxed at 0% and there is no withholding tax on dividends paid to non-residents from manufacturing profits. 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 for taxation. Building for services, tourism, farming, etc., are not depreciable. Infrastructure such as land improvements and site services also do not qualify. -------------- Right to Private Ownership and Establishment -------------- ¶24. Lesotho has no competition law or overall competition regulator. Instead, under the industrial and trading licenses system a business can apply for protection from competition for up to 10 years. -------------- Protection of Property Rights -------------- ¶25. Lesotho respects international intellectual property laws and is a member of the World Intellectual Property Organization and the African Intellectual Property Organization. Patents are rarely issued in Lesotho but trademark protection is often sought and granted. Intellectual property protection is regulated by the Industrial Property Order and the Copyright Act of 1989. The law protects patents, industrial designs, trademarks, and grant of copyright. The Law Office is responsible for enforcement of copyrights. -------------- Transparency of the Regulatory System -------------- ¶26. The judicial system is fair and competent in commercial matters and the government is willing to supplement the bench with foreign judges in specialized cases. ¶27. Generally there is adequate regard in the courts for equal treatment of foreign investors who are in dispute with national parties or the government. ¶28. Company law is based on the Companies Act of 1967 which provides reasonable standards for most purposes but is believed to be incomplete and complex. Technical improvements were incorporated in a 1998 draft of a new company law and were circulated to stakeholders but a new law has not been introduced. ¶29. The regulatory framework for utilities is modern, but it is outdated for mining. Lesotho mining legislation gives authority to grant titles to the King and Principle Chiefs upon the recommendation of a Mining Board. Financial services regulation is also up to date but the industrial and trading license system is archaic. Industrial licensing long ago lost its original purpose of protecting start-up firms from competition. Trading licenses are required for 44 types of business. Some enterprises can require up to four licenses for one location. ¶30. Telecommunication: Lesotho's Telecommunications Authority is the sector's independent regulator. The authority sets conditions for entry of new competitive operators. Currently it allows Lesotho Telecom to maintain a monopoly for fixed-line and international services. ¶31. Banking and other financial services: Banking regulations do not give power to the Central Bank to give directions as to interest rates, exchange rates, margins, or the spread of services offered. This is because of the currency peg with South Africa and hence Lesotho has lost its leverage on monetary policy. This creates a low political risk environment for banking investment. -------------- -------------- Efficient Capital Markets and Portfolio Investment -------------- -------------- ¶32. Lesotho has three foreign-owned banks: First National Bank, Ned Bank and Standard Bank, which bought a 70% share in state-owned Lesotho Bank. According to a recent IMF report, the banks in Lesotho are well capitalized and very liquid. However, credit provision is very low and this is going to be addressed through structural reforms under the private sector development component of the Millennium Challenge Corporation Compact. Industrial and commercial credit are provided by Lesotho National Development Corporation (LNDC). LNDC's mandate is to promote and facilitate foreign investment. -------------- Political Violence -------------- ¶33. Following the February 2007 general elections there were civil disturbances that led to a few stay-aways and protest rallies by opposition parties in 2008. Political tensions between governing and opposition parties still exist but the national political atmosphere is generally calm. -------------- Corruption -------------- ¶34. Investors reported that corruption is not a significant factor for foreign investors. Anti-corruption legislation was passed in 1999 and is being implemented through the creation of an autonomous anti-corruption unit. -------------- OPIC Insurance Program -------------- ¶35. OPIC insured one American-owned company: Seaboard Corporation's joint venture with Lesotho Flour Mills. Seaboard started operations in 1998 and currently employs about 300 people. OPIC can encourage United States investors to consider exploring new investment opportunities in other sectors. -------------- Labor -------------- ¶36. Lesotho's Labor Code Order of 1992 regulates terms of employment and conditions and for worker health, safety, and welfare. It was amended in 2004 to include HIV/AIDS policies in the workplace. Union organization is permitted. There is a full-time and independent Directorate of Industrial Dispute Prevention and Resolution. Statutory minimum wages are fixed annually by the Ministry of Labor and Employment with recommendations from a tripartite Wages Advisory Board. Minimum wage setting is sensitive to the textile and garment industry's need to maintain competitiveness. ¶37. In 2001, Lesotho ratified both the ILO Convention 182 on the Prohibition and Elimination of the Worst Forms of Child Labor and Convention 138 on the Minimum Age of Employment. The Labor Code Order of 1992 and its subsequent amendments are the principal laws governing terms and conditions of employment in Lesotho. ¶38. The Labor Code Order of 1992 requires every non-citizen employee or self-employed person to have a work permit. A work permit is issued by the Labor Commissioner, who must be satisfied that no qualified Lesotho citizen is available for the position. The statutory maximum duration of a work permit is two years. -------------- Foreign Direct Investment Statistics -------------- ¶39. Comment: The first Private Capital Flows (PCF) Survey was done in 2006. Before 2006 the LNDC provided estimates based on deal approvals. This data sometimes included planned projects which had not been executed. As a result, data provided before 2006 is incomplete and inaccurate, and it did not indicate the magnitude, the composition, or the sectors within which capital was flowing. ¶40. At this time, the 2007 PCF report is still at the printers and the Central Bank would not release the data to the post because it is not considered official until the Minister of Finance and Development Planning approves it. The 2008 survey is still ongoing. The compilation of PCF data currently has a one year lag. End comment. ¶41. Lesotho's FDI statistics for 2006 are estimated as follows: FDI Stock (in Million Maloti) 1,213.03 (in Million USD) 152.20 Stock as % of GDP 11.8 GDP in Million USD 1,288.46 (2006 GDP at current prices) -------------- -------------- 2006 Direct Investment Capital Flows by Industry Sector -------------- -------------- In millions of USD % of GDP Mining and Quarrying 16.44 1.28 Manufacturing 88.86 6.90 Building and Construction 2.26 0.20 Wholesale and Retail Trade 7.94 0.62 Transport and Communications 35.97 2.79 Finance and Insurance 0.15 0.01 Real Estate and Business 0.21 0.02 Total Capital Flows 152.20 11.81 -------------- -------------- 2006 Direct Investment Capital Flows by Country of Origin -------------- -------------- In millions of USD % of GDP South Africa 80.28 6.23 Taiwan 55.94 4.34 Netherlands 3.58 0.28 China 1.47 0.11 United States 8.22 0.64 Singapore 2.15 0.17 Belgium 0.12 0.01 United Kingdom 0.43 0.03 Total Capital Flows 152.20 11.81 -------------- 2006 Direct Investment Abroad -------------- Stock in Million Maloti 361.04 Stock in Million USD 45.30 Percentage of GDP 3.52 -------------- --- 2006 Direct Investment Abroad by Industry Sector -------------- --- Sector in M Maloti in M USD %GDP Manufacturing 361.74 45.39 4 Building & Const. 0.04 0.005 0 Wholesale & Retail -1.63 - 0.20 Transport & Comm. 0.88 0.11 0 Total Claims Abroad 361.03 45.30 4 -------------- -------------- 2006 Direct Investment Abroad by Country of Destination -------------- -------------- Country in M Maloti in M USD % GDP South Africa 97 12.28 1 Taiwan 253.82 31.85 2 United States 9.31 1.17 0.1 Total Abroad 361.04 45.30 Sources: FDI: Central Bank of Lesotho; Report on Private Capital Flows Survey 2006 GDP: Bureau of Statistics; 1998-2007 National Accounts Publications Exchange rate period; 2006 average 1USD = M 7.97 NOLAN