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

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Summary
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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.

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Openness to Foreign Investment
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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.

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The Origin of Foreign Investors
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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.

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Conversion and Transfer Policies
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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.

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Expropriation and Compensation
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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.

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Dispute Settlement
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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.

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Performance requirements
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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.

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Right to Private Ownership and Establishment
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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.

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Protection of Property Rights
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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.

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Transparency of the Regulatory System
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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.

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Efficient Capital Markets and Portfolio Investment
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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.

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Political Violence
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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.

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Corruption
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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.

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OPIC Insurance Program
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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.

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Labor
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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.

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Foreign Direct Investment Statistics
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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)

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2006 Direct Investment Capital Flows by Industry Sector
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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

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2006 Direct Investment Capital Flows by Country of Origin
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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

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2006 Direct Investment Abroad
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Stock in Million Maloti 361.04
Stock in Million USD 45.30
Percentage of GDP 3.52

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2006 Direct Investment Abroad by Industry Sector
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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

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2006 Direct Investment Abroad by Country of Destination
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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