LESOTHO: 2010 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 11 MASERU 000448

SIPDIS

STATE FOR EB/IFD/OIA;
TREASURY FOR DO/JWALLACE
COMMERCE FOR ITA/JKOZLOWICKI
USTR FOR JKALLMER
OPIC FOR RO'SULLIVAN

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC LT
SUBJECT: LESOTHO: 2010 INVESTMENT CLIMATE STATEMENT

REF: STATE 124006

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Summary

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1. Embassy Maseru submits the following information for
Lesotho's 2010 Investment Climate Statement. Lesotho is open to
foreign direct investment (FDI) and views FDI as a means to
drive growth, improve international competitiveness, and obtain
access to foreign markets. Virtually all business sectors are
open to foreign investors. No government approval is required,
and there are almost no restrictions on the form or extent of
foreign investment.. Most investment currently originates from
East Asia, and 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 views FDI as a means to
drive growth, improve international competitiveness, and obtain
access to foreign markets. Virtually all business sectors are
open to foreign investors. No government approval is required,
and there are almost no restrictions on the form or extent of
foreign investment. 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
because they predominantly favor investment in manufacturing.
The Government of Lesotho (GOL) is under pressure to revise
relevant laws affecting investors in various sectors.




3. The Lesotho National Development Corporation (LNDC),the main
parastatal of the Government of Lesotho, which falls under the
Ministry of Trade and Industry, Cooperatives and Marketing, is
charged with implementation of the country's industrial
development policies. LNDC provides assistance to foreign
investors; publishes information on investment opportunities and
services it offers to foreign investors. It also offers
incentives, assistance with work permits, and logistical support
for relocation. These can be viewed on its website:
http://www.lndc.org.ls.




4. Ninety percent of FDI flows into export-oriented
manufacturing. FDI in manufacturing alone created 45,000 jobs in
2008; however, employment in the sector has declined to 36,000
jobs in 2009 due to the global economic meltdown. 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

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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
three commercial diamond mines, namely Lets'eng Diamonds,
Liqhobong, and Kao diamond mines. Lets'eng Diamonds is a
partnership between a South African-owned company and GOL. The
mine employs about 70 people, 90% of whom are Lesotho nationals.
Liqhobong and Kao diamond mines are partnerships between GOL and
a European and Gibraltan mining company respectively. Operations
at these mines were suspended at the end of 2008 due to falling
rough diamond prices. Four other mines, namely Mothae,
Motse-Tsoeu, Lemphane and Kolo, are being prospected at
different parts 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, GOL is granted 8% of gross
sales royalties and a share of dividends due to its equity
shareholding in the three mines. GOL has 30% equity shareholding
in Lets'eng Diamonds, 25% in the Liqhobong diamond mine and 7%
in the Kao Diamond Mine with provision for this to increase by
13% to 20% if GOL decides to have a larger stake in the company.
Three laws: the Mines and Minerals Act (2005); the Precious
Stones Order (1970); and the Mine Safety Act (1981),provide a
regulatory framework for the mining industry.




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, permits, imports, and exports clearances 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.






10. Measure Year Index/Ranking

TI Corruption Index 2009 89 (out of 180)

Heritage Economic Freedom 2009 49.7 (151 out of 179)

World Bank Doing Business 2010 130 (out of 183)

MCC Govt Effectiveness 2009 81%

MCC Rule of Law 2009 90%

MCC Control of Corruption 2009 92%

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MCC Fiscal Policy 2009 88%

MCC Trade Policy 2009 20%

MCC Regulatory Quality 2009 52%

MCC Business Start Up 2009 67%

MCC Land Rights Access 2009 55%

MCC Natural Resource Mgt 2009 11%



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The Origin of Foreign Investors

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11. Lesotho's apparel sector is entirely East Asian and South
African-owned and currently employs about 36,000 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.




12. 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.




13. 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.




14. 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.




15. 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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16. Lesotho has traditional foreign exchange controls but is

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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.




17. 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.




18. 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.




19. There are no restrictions on converting or transferring
funds associated with an investment into a freely usable
currency and at a legal market clearing rate. However, for loan
repayments an investor needs to notify the bank at the beginning
of an investment that the capital for that investment is a loan,
they also need to disclose the terms of the loan. The current
average delay period for remitting investment returns such as
dividends, return of capital, interest and principal on private
foreign debt, lease payments, royalties and management fees
through normal, legal channels is two days, provided the
investor has submitted all the necessary documentation related
to the remittance.



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Expropriation and Compensation

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20. 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.




21. 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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22. 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.




23. 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 and Incentives

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24. There are no incentives for and no performance requirements
imposed specifically on foreign investors as a condition of
investment. However, there are a number of financial incentives
available to manufacturing companies establishing themselves in
Lesotho, such as unimpeded access to foreign exchange, export
finance facility, and long-term loans.




25. The Lesotho tax system also heavily favors investment in
manufacturing. Corporate income generated from exporting
manufactured goods outside the Southern African Customs Union
(SACU); is taxed at 0%. There is a permanent maximum
manufacturing tax rate of 10% on profits and there is no
withholding tax on dividends paid to non-residents from
manufacturing profits. There is also free repatriation of
profits derived from manufacturing companies. Corporate income
in all other sectors is taxed at 29% and there is a further 25%
withholding tax on non-resident dividends. There is a credit
facility for value added tax (VAT) on imports, which provides
input tax credit upon importation and local purchasing of raw
materials and capital goods for manufactures. Moreover, only
industrial buildings and mining qualify for depreciation
allowances for taxation. Buildings for services, tourism,
farming, etc., are not depreciable. Infrastructure such as land
improvements and site services also do not qualify.




26. Lesotho has double taxation agreements with the Federal
Republic of Germany, the Republic of South Africa, Mauritius and
the United Kingdom.



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Right to Private Ownership and Establishment

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27. 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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28. 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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29. 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.




30. Generally there is adequate regard in the courts for equal
treatment of foreign investors who are in dispute with national
parties or the government.




31. 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.




32. 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.




33. 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.




34. 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.




35. The Ministry of Trade and Industry also introduced a "One
Stop Shop" where all services required for the issuance of
licenses, permits and imports and exports clearances 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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Efficient Capital Markets and Portfolio Investment

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36. Lesotho has a small financial system that is closely tied to
South Africa through the Common Monetary Area. There are three
foreign-owned banks: First National Bank, Ned Bank and Standard
Lesotho 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 which includes the
establishment of a credit bureau. Industrial and commercial
credit is provided by the Lesotho National Development
Corporation (LNDC) and foreign investors are able to get credit
on the local market. LNDC's mandate is to promote and facilitate
foreign investment.



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Competition from State Owned Enterprises

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37. Lesotho privatized all state owned enterprises (SOEs)
including telecommunications, banks, utilities, government
transportation, and the radio airways following the adoption of
the privatization Act of 1995. However, in 2004 the government
established a government-owned bank which is mandated to access
financial services to Basotho living in urban and rural areas of
the country who do not have bank accounts. In 2008, the
government also introduced state-owned buses in the public
transportation sector. The SOEs senior management reports to an
independent board of directors. They are required by law to
publish an annual report and to submit their books to
independent audit.




38. Private enterprises are allowed to compete with public
enterprises under the same terms and conditions with respect to
access to markets, credit, and other business operations, such
as licenses and supplies.



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Corporate Social Responsibility

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39. There is a general awareness of corporate social
responsibility among both producers and consumers. Investors
mostly give back to the society during the winter season and
during the "Festive Season" around Christmas. Foreign and local
enterprises tend to follow generally accepted corporate social
responsibility (CRS) principles such as the OECD Guidelines for
Multinational Enterprises. Firms who pursue CSR are viewed
favorably by society.



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Political Violence

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40. 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 and 2009, but there has
not been politically-motivated damage to projects. 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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41. Investors reported that corruption is not a significant
factor for foreign investors. Anti-corruption legislation was
passed in 1999 and is being effectively implemented through an
autonomous anti-corruption unit called the Directorate on
Corruption and Economic Offences (DCEO). Lesotho signed and
ratified the UN Anticorruption Convention in 2005 but it is not
yet a signatory of the OECD Convention on Combating Bribery.




42. A case from the early 1990s involving corrupt government
officials and bribe-paying by foreign corporations engaged in
constructing the multimillion-dollar, World Bank-funded Lesotho
Highlands Water Project (LHWP) was concluded recently. The
former top Lesotho diplomat assigned to the multibillion LHWP
and his deputy have been sentenced to ten (with five years
suspended for three years) and six years (with eighteen months
suspended for three years) imprisonment respectively after they
were found guilty of accepting bribes from an international
construction company.




43. International nongovernmental "watchdog" organizations
operate in the country. Lesotho ranks 89 out of 180 countries in
Transparency International's Corruption Perceptions Index for

2009.



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Bilateral Investment Agreements

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44. Lesotho has bilateral investment protection agreements or
treaties with the United Kingdom and Germany which entered into
force in 1981 and 1985 respectively. In 2004, Lesotho also
signed a bilateral investment agreement with Switzerland, for
the promotion and protection of investment. This agreement has
not entered into force yet. The three agreements have already
been posted in full on the UNCTAD website.




45. Lesotho does not have a bilateral investment treaty or a
bilateral taxation treaty with the U.S. and there are no
taxation issues of concern to U.S. Investors.



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OPIC and Other Investment Insurance Programs

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46. 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. The
Mission does not have a bilateral agreement providing for OPIC
program and does not budget for OPIC claims in its official
budget.


47. Lesotho is a member of the Multilateral Investment Guarantee
Agency (MIGA). In 2000, MIGA issued guarantees to Imperial Group
(Proprietary) Limited of South Africa for its investment in the
partial privatization (60 %) of the government's Plant and

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Vehicle Pool Service Unit.



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Labor

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48. 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.




49. 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.




50. 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 Trade Zones/ Free Trade Zones

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51. There are no free trade zones in Lesotho.



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Foreign Direct Investment Statistics

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52. Comment: The latest Private Capital Flows (PCF) Survey
report is for 2007. The 2008 PCF report is still being finalized
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 2009 survey is
still ongoing. The compilation of PCF data currently has a one
year lag. End comment.




53. Lesotho's FDI statistics for 2007 are estimated as follows:



FDI Stock (in Million Maloti) 700.50

(in Million USD) 94.66



Stock as % of GDP 6.02



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GDP in Million USD 1,571.72 (2007 GDP at current prices)



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2007 Direct Investment Capital Flows by Industry Sector

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In millions of USD % of GDP

Mining and Quarrying 24.94 1.59

Manufacturing 34.78 2.21

Building and Construction 0.32 0.02

Wholesale and Retail Trade 4.93 0.31

Transport and Communications 26.38 1.68

Finance and Insurance 2.69 0.17

Real Estate and Business 0.62 0.04

Total Capital Flows 94.66 6.02



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2007 Direct Investment Capital Flows by Country of Origin

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In millions of USD % of GDP

South Africa 38.72 2.46

Taiwan 7.06 0.45

Netherlands 2.90 0.18

China 0.64 0.04

United States 15.32 0.97

Switzerland 0.45 0.03

Belgium 5.26 0.33

United Kingdom 24.30 1.55

Total Capital Flows 94.66 6.02



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2007 Direct Investment Abroad

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Stock in Million Maloti 188.05

Stock in Million USD 25.41

Percentage of GDP 1.62



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2007 Direct Investment Abroad by Industry Sector

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Sector in M Maloti in M USD %GDP



Manufacturing 166.93 22.56 1.44

Wholesale & Retail 0.37 0.05 0.00

Transport & Comm. 2.57 0.35 0.02

Finance & Insurance 0.88 0.12 0.01

Total Claims Abroad 188.05 25.41 1.62



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2007 Direct Investment Abroad by Country of Destination

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Country in M Maloti in M USD % GDP



South Africa 47.43 6.41 0.41

Taiwan 99.71 13.47 0.86

Netherlands 39.81 5.38 0.34

Switzerland 1.09 0.15 0.01

Total Claims Abroad 188.05 25.41 1.62



Sources:



FDI: Central Bank of Lesotho; Report on Private Capital Flows
Survey 2007



GDP: Bureau of Statistics; 1998-2008 National Accounts
Publications



Exchange rate period; 2007 average 1USD = M 7.40
POWER