Workshop on Governance, Budgetary and Legislative Protocols governing Treaty between SA & Lesotho in respect of Lesotho Highlands Water Project; with Minister

Meeting report

The Chairperson opened the virtual meeting, welcoming the Members, the Minister and guest delegations. After some brief Committee admin, he handed over to the Minister for his opening remarks, which would then be followed by a workshop presentation by the South African delegates to the Lesotho Highlands Water Project.

Minister’s Remarks

Minister of Water and Sanitation, Mr Senzo Mchunu, introduced some of the issues that the entities will be talking on… [connection lost]

He said that after assessing the challenges, he wrote to his counterpart in Lesotho. Two weeks prior to this meeting, they had a meeting in South Africa, which they (he and the counterpart) believe will go a long way in resolving the current issues. He expressed concern over the impact of the pace of phase two, which is very important because of the threats, particularly in Gauteng by 2027, especially if they do not do anything or if they move with the pace characteristic of the past five years. Therefore, one of the resolutions taken was to change the pace to limit the exposure and avoid the crisis so that by 2027, phase two is completed.

Presenters will give all the details of where hitches were experienced, and how each were resolved, and what would unfold in the coming months. The emphasis would be on legislative implications that I think are not going to be that heavy on our side. But it has been necessary for Lesotho to take some of the matters to the National Assembly process. Hopefully it will go smoothly and open the way for a speedy unfolding of phase two.

Presentation on Phase I and II of the Lesotho Highlands Water Project: Governance, Treaty, Progress and Challenges

Mr Teboho Nkhahle, South African delegate to the Lesotho Highlands Water Project, first acknowledged the presence of the Minister and the Director-General (DG) of the Department of Water and Sanitation. He then expressed appreciation and gratitude at the invaluable support that they provide to the Project delegates to enable them to effectively execute this project.

Mr Nkhahle then apologised for the information overload. The initial impression was that the workshop would be a full day hence the lengthy presentation. The presentation had been revised to accommodate the two hour slot. Should Members require additional information, this can be provided. He said the presentation would focus on the legislative framework, legal instruments governing the project, governance structure or the way from the parties, implementing agency progress on phase two implementation, and the risks thereof.

As the Minister had already indicated, the project was severely delayed, but there were plans to accelerate phase one operations and maintenance. Challenges of the project were legal in nature, funding challenges, and operational challenges. He believed that issues identified by the Auditor-General will be dealt with by the Trans-Caledon Tunnel Authority (TCTA). He would highlight the potential review of the treaty; which matters require attention; what should be reviewed and what is not necessary to review. Thereafter, Members can ask questions. If there was anything else that was needed, it can be addressed.  

The Lesotho Highlands Water Project Treaty was signed on 24 August 1986, and was followed up by several protocols, and six protocols in all; the most important of them all was protocol six, which changed the governance of the organisation. Members will recall that 1986 was the year in which both countries were under administrations that may be defined as being illegitimate. South Africa was under the apartheid government. However, the treaty had withstood the test of time, and is still relevant today. It is a very well-written document: phase one of the project constitutes two sub-phases, phase 1A and phase 1B. Phase 1A is the Katse Dam – the 185 metres high and 710 metres across. Construction of the dam started in 1991; it was completed in 1997, and inaugurated in 1998. There is also a 45 kilometre transfer tunnel and 37 kilometre delivery tunnel taking water from Lesotho, across the Caledon, into South Africa.

Mr Nkhahle said he was one of the lucky people in that he was witness to the first blast on the Casa Dam Foundation, and witnessed the last batch of concrete in 1997. When the project was completed, he was working full-time at the Katse Dam and the transfer tunnel during those years. Fortunately now, he was appointed to this position, by the Minister. Phase 1B is Mohale Dam, which is slightly higher than Katse. So, water gravitates from Mohale into Katse; it is not pumped. There are no pumping costs, and there are about 25 or so metres above Katse. Mohale was completed in 2003 and inaugurated in 2004. There is also an interconnected tunnel, a 38km interconnecting tunnel

In 2005, an agreement was reached between the governments of South Africa and Lesotho to start feasibility studies for phase two. A new agreement was signed between the two countries, which is called a phase two agreement. In 1986, the two countries only committed to the implementation of phase one. There was no indication that any further phases will require supplementary agreements. Hence, the requirement for the phase two. Phase two is currently underway, and completion is expected in 2027.  

In essence, the origin of the water is being diverted from its natural flow, which would have been through the south east of Lesotho into the Eastern Cape and then the Northern Cape and across Namibia, into the Atlantic Ocean. If phase two comes on board in 2027, it will increase the yield from 3 000 to about 3 500 million cubic metres. There is a shortfall experienced – the presentation displayed the shortfall that will continue if the water is used at an aggressive demand. If phase two is delayed, the shortfall is likely to be experienced until around 2050.

There is a requirement in the treaty, for Honourable Members from both countries to domesticate the treaty. The term domesticate means enacting legislation to give effect to the treaty. There are provisions in the treaty that say that if any laws of any of the two parties to the treaty, meaning South Africa and Lesotho, are not aligned to the treaty, those laws have to be changed to align them to the treaty. In order to domesticate the treaty, Lesotho enacted what was called the LHD order number 23 of 1986. In 1999, protocol six, which changed the governance aspects of the treaty, through what was called LHD Amendment Act of 2000. Ever since the phase two agreement was signed in 2011, there has not been a full domestication of phase two in Lesotho; this is one of the issues currently under discussion. This is one of the risks that the Minister alluded to. There are many laws that are applicable to this project, such as the Land Act, which gives access to land to execute the project, and also deals with such matters as resettlement, relocation and compensation of communities displaced by the project. There are also procurement policies aligned to the various legislation. All decisions in the commission are made by consensus. However, the commission is permitted to refer matters where consensus cannot be reached to the designated authorities– the DG and a counterpart in Lesotho, referred to as the principal secretary. They are designated authorities who can also refer matters to the parties as represented by the Ministers, if they cannot reach consensus on any matter.

Three institutions were set up by the treaty, and one is the Lesotho Highlands Development Authority, which is the implementing agent of the project. It was enabled by Article 6(4). The Trans-Caledon Tunnel Authority (TCTA) was set up by Article 6(5) of the treaty and the Lesotho Highlands Border Commission, which was previously called the Joint Permanent Technical Commission (JPTC).

This is the bi-national framework that is reflected in the treaty. There are six protocols: protocol one deals with priorities and relative regimes and calculations. Protocol two deals with the Caledon area, specifically around the Caledon River. Protocol three dealt with cost apportionments in the two countries. Protocol four dealt with the Phase 1A costs and cost allocation, a very complex cost allocation formula that was used to allocate costs between the two countries. Protocol five dealt with LHWP and the Lesotho surveillance for project taxes. Protocol six dealt with governance.  Protocol six took away some of the responsibilities from Ministers and give those responsibilities to the Lesotho Highlands Border Commission. Protocols are amended in some articles of the treaty to reflect the new functions, responsibilities and relationships of the LHDA, TCTA and the Commission.

The main changes that were introduced by protocol six, which is a governance protocol, was renaming the GPTC to what is now called the Lesotho Highlands Border Commission. The protocol also expanded the oversight function of the commission to include the hydropower component of the project. The hydropower component is funded 100% by Lesotho. However, SA still provides oversight on the hydropower because we have an interest in it; if anything happens to the hydropower, the water that is transferred to and from Katse Dam has to bypass it. And the bypass system cannot contain the entire volume that needs to be transferred. 780 million cubic metres per year from Katse to South Africa is currently being transferred. The bypass system can only take about two thirds of that.

The LHWC is currently the only channel of governance that inputs into the project, and it is responsible and accountable to the two governments in the implementation of the whole project. There are very clear lines of authority and accountability. “We have a chief executive who is appointed by the board. The board appoints the chief executive in consultation with the Commission. The board itself is appointed by the Commission and the Commission is appointed by the two governments. Members of the Board in the chief executive appointed a myriad of highly qualified individuals. There is a transparent process of advertisements and interviews that is undertaken, under joint oversight. The TCTA is currently restricted to operations and maintenance functions of the project only - reason being that phase two does not have a physical construction footprint in South Africa. Phase two is entirely taking place in Lesotho; there is no physical construction footprint in South Africa. That is why it [the TCTA] is it is restricted only to operations and maintenance. Through protocol six, TCTA has been given additional functions of providing funding and managing debts to the project.

The LHWC is governed by various legal instruments, including the treaty and the phase two agreement, various protocols, the LHD Amendment Act, and various other amendments. The implementing agencies are the TCTA and LHDA, governed by the Treaty protocol six, the LHD Amendment Act, as well as the governance manual. The manual regulates the relationship between the executive board, as well as various board committees, the delegation of authority and the commission.

The accountability framework for the project is the same for South Africa and Lesotho. There is the chief executive, the board, the commission, and there are DWs. Then there is oversight by Parliament's Portfolio Committee.

The Commission appoints the board as well as the various board committees. The phase two technical committee is actually something that is contemplated in the phase two agreement. It is a requirement of the phase two agreement to have a technical subcommittee. SA has two commission members – one from each side, serving in that committee. Then, there are the TCTA operations and maintenance that also report to the commission. The Project Management Unit (PMU) is an outsourced function. It is sub-contracted to an American consulting firm called CDM Smith, which had an eight-year contract that expired in August. They were given a 16-month extension up to December 2022. The project will then be on the market for a new PMU that does all the terms of reference for engineering projects as well as social and environmental management projects, finances and conditions. There was the possibility of a potential hybrid model only for the core functions of the project management units, which is a dam and tunnel engineering services. The plan is to in-source other non-core functions such as public health, environmental functions and PR.

It is necessary to state that that this project is not funded by water users in the Republic i.e. taxpayers - it is funded by water users. Users will pay municipalities, who in turn pay water board who in turn pay the Department. The TCTA gets the money and pays implementation costs, which is an ongoing cost. The TCTA is also responsible for paying royalties on behalf of the government of South Africa to the government of Lesotho. They also take care of operations and maintenance of the part of the project that is within in South Africa. To reiterate, taxpayers’ money is not used – it is the funds of water users used to fund the project.

Mr Nkhahle spoke to the role of the Department of Water and Sanitation in the implementation of the project. Article 9(1) of the treaty requires that each party, meaning Lesotho and South Africa, nominate three representatives constituting its delegation as well as an alternate for each of the nominated representatives. That means the entire list consists of six members, 16 delegates, and six alternates; three delegates from each country and three alternates for each delegate. The delegation is fully accountable to report to the DWS, through the Office of the Director-General, for its functional responsibilities. Therefore, all the RSA representatives are functionally accountable to and report to the DWS through the office of the Director-General. The DWS determines the resourcing requirements for representatives and ensures that the office is adequately capacitated, able and professionally discharges its duties. Currently, there are four engineers covering both phase one and the main aspects of phase two. This means that there is one engineer for the tunnel, one for the dam and one for the major bridges. These are very competent young engineers who are likely to be involved until the end of the project. There are also environmental experts. There are over 6 000 assets on the books compensated either on an annual basis or a regular basis. Some have opted for lump sum payments, some are getting annual cash payments, and some are getting annual claim compensation. Compensation is something very complex, as well as relocation and resettlement.

Even though a chief delegate is not something that is provided for in the treaty, the two parties have opted to have chief delegates for each of the delegations. The chief delegate is required to lead a delegation. On the South African side, he leads the RSA delegation in the commission, and represents the South African government. The chief delegate also regularly reports on the project risks and progress to the DG and TCTA chief executive officer.

In terms of the key project objectives, including budgets and timeline, specifications and progress simulations, in the Master programme, efficient operation maintenance is monitored. Phase one is complete, but there is still some repair work and some maintenance work taking place. The one thing that has not been covered is the monitoring and measurement of the electricity generated and water delivered to South Africa on a monthly basis. However, there are no deviations from the agreed delivery targets and the payment of royalties is facilitated.

 Project procurement is a very sensitive matter because of the history around procurement. There are very tight procurement principles but enough flexibility to accommodate the requirements from time to time due to the water project being bilateral. Efforts have been made to ensure equitable participation by citizens of each country without compromising the 50/50 sharing of projects in advanced infrastructure works. Procurement policies, principles and regulations have taken into consideration the RSA broad-based black economic empowerment legislation, and incorporated some of the Public Finance Management Act (PFMA) principles around transparency, fairness, equity, and cost efficiencies.

Mr Leon Tromp, Chief Engineer, LHWP, greeted the Members. He said that he had been with the project for a number of years, and it has actually been an honour to see the project develop from the old planning stage right through to where it currently is. He described the work to be undertaken under phase two and the opening up of a new corridor. The decision of a new corridor was because roads on the northern side are being used extensively by the diamond mines and other traffic, and South Africa might then be faced with large continuous operations and maintenance costs if it went with the northern option as opposed to this direct option. At the same time, there are a number of social development projects, that deal not only with the compensation for housing and for relocation but also to comply with a treaty condition that says that the affected community shall not be worse off, and that the level of the standard of life cannot continue to be what it was before. The project has, over the years, been directed by government to ensure these communities are better off up to a limited extent depending on obligations and funding, etc. Environmental mitigation is very important - all loan agreements are very meticulous about that, and there are a wide range of programmes that deal with environmental programmes.

Tenders have been awarded for advanced infrastructure projects that have been done, except for a bridge and shopping and commercial area close to the accommodation area. The designs for the dam and tunnel are complete, and tenders have gone out. There is always a bit of lag between approval and what has been certified through the accounting system.

The dam design and the tunnel designs are complete; the diversion tunnel is 95% complete. There is the normal clearing up of the area, and that will soon be in the process. About 60% of the environmental, social and public health programmes are complete, but it varies from programme-to-programme. For example, some compensation is paid as and when the affected communities are affected; this is done based on a compensation policy that was developed and approved by the two parties. Livelihood restoration is one of those add-ons that are a very difficult item to deal with because as time goes by, one finds that the different age groups have different expectations. This will be an ongoing exercise.

Regarding procurement and how it is shared between South Africa and Lesotho: South Africa is in the lease, so there is still some work from the Lesotho front on some of the matters. There is a programme in place to reorganise some of the future tenders so that Lesotho has the opportunity to catch up and end up with a 50/50 share. The main work is the dam and the tunnel. Article Six clause 17 of the treaty says that South Africa shall have a minimum 50% share of those contracts. In actual fact, phase two, SA is currently in the higher, at 60% just merely for the reason that there is a lot of expertise in South Africa that is not being used.

[He then faced connectivity problems]

Mr Nkhahle said he wanted to make Members aware of something that is not emphasised enough - last week, tunnel prices came in with the prices for the main bridges. The engineer’s estimates have been around 800 million, but the lowest bidder came in at R1.4bn to R1.5bn so already there is a R600 million budget implication for the bridge. Including the tunnel, the budget could possibly increase by as much as R1 billion.  There were also historical tax issues in relation to article 14 of the treaty.

Mr Tromp clarified that the matter of taxes related to the taxes in Lesotho i.e. the Lesotho Revenue Authority. During phase one, it was learnt that it was important that the tax affairs of the project were in order to avoid “bumping heads” with the Lesotho Revenue Authority. For the phase two agreement, the tax arrangements were concluded in terms of article 14. The tax matter was one of the last outstanding items before this agreement was finally agreed on between these two parties. Surprisingly, things went very well until about August 2016. This was when the documents were read differently. It could not happen that a set of rules were applied perfectly for four years and then suddenly there was a different interpretation and payment was stopped – this was serious. It has been a standing item since 2018. There have been various interactions at different levels of the commission, within the Lesotho Revenue Authority, even between colleagues in the delegation. Lesotho is finally in the process of promulgating article 14 into law, after the “baseball” of almost ten years, so that at least seems to be progress in this regard.

Mr Nkhahle said that the only thing that Mr Tromp forgot was one of the commitments made by the Minister and DG to fast track the adoption of this new bill. The bill is now before Cabinet and will be going to Parliament soon.  Lesotho has indicated that it is of the view that the bill will address the concerns around article 14.

The second issue is that of the trust accounts. There was an agreement that all monies under dispute will be put into a trust account and whichever party “comes out tops” in the dispute will then have access to that money. So far, the trust accounts have not been opened but Lesotho has promised the Minister and DG that it would look into the matter. SA is confident the matter [of the trust account] is receiving the highest attention and it hoped the outcome was favourable to SA. 

The third item is about a contract entered into between the government of Lesotho and a German company called Frazer. This company, after winning an arbitration award in the court, decided to attach the royalties that accrue to the government of Lesotho, which are paid by TCTA.

Another matter worth talking about is the Minister’s meeting on 28 October 2021. Last week, the phase two project charter was approved. The SA delegation of authority in the commission was increased to R200 million from R50 million, which was a welcomed move by the DG. This will enable speeding up of some of the decision making and other aspects still under discussion at the DWA. The DG has also committed that DWA will deal with all requests for approval within five days. This is a welcomed move that will ensure there are no further delays in the project and will ensure the project is complete by 2027.   

On recalculation of royalties, operational arrangements, or changing operational arrangements, and the calculation of royalties, is receiving attention. A bilateral committee has been set up with nominations from each side of the border; the first meeting was held on 30 July 2021. The next meeting is scheduled for 12 November 2021 with a view to agree on the approach and timing of the recalculation of the benefits and royalties. It is hoped these outstanding matters are preferably resolved by March 2022.

On the treaty, it is important that Members are aware that there is provision for a review of the treaty, in the treaty itself. It gives a period of 12 years, and according to the history of the LSWP, that treaty was signed in 1986. The major review happened in 1998, which was exactly 12 years later. And that resulted in protocol six, which changed the entire governance structure of the project. In 1999, protocol six was signed and exactly 12 years later, in 2011. That is when the phase two agreement was signed. The agreement was a complete overhaul of the original treaty; it looked at every aspect of the treaty and what required change. There needs to be decision on whether the process of review would start now or soon after the execution of phase two. This would allow for at least a year to ensure there was no disturbance under phase two and ensure at least the contractors, mobilisation and site establishment are achieved.  

Mr Nkhahle said the team is getting a great deal of support from the Minister and DG. He said the relationship was very conducive, and mutually supportive. The reporting line from the LHWP to the DWA had recently been strengthened and he saw it working very well going forward. There were monthly meetings with the DG and an undertaking to meet with the Minister quarterly.

Discussion

Ms R Mohlala (EFF) said that listening to the presentation with regards to the completion of phase two of the LHWP, the Committee was told that it will be finalised in 2027. People did not have water and now some areas in Gauteng were affected by shortage of water. She read that the entity, at some point, met with the Minister of Water in Lesotho to talk about expediting the project. She asked when the project would end because according to her, water was a basic right and everyone must have access to it. There was also the issue of the German company that has some kind of garnishee on the project as a result of Lesotho's failure to defend the matter in court. She asked for clarification on exactly what happened and how much litigation the LHWP faced so far.

Ms N Sihlwayi (ANC) said that she saw a very complicated project and programme involving a scare resource, water. She calculated 35 years of people waiting for water from this project. She was concerned by how long the project was taking, importantly when the impact of the programme was going to be felt by the people in South Africa. The second issue she did not understand was the mutual benefit of the project. The other matter requiring clarity was the purpose of the project – she believed a project of this nature should have very clear monitoring tools. It was a complicated project with many issues. While she appreciated the work of Minister Mchunu in getting the details and intervening on matter, this should not be periodic. There should be a very structured approach that dealt with the issues. One such is the German company and the effective and sustainable implementation of the projects so that there were no surprises in the process.  

There are huge funds that have been presented on the project. She was of the opinion that regulations were stronger than MOUs as huge amounts of money were involved. What is just should be done not just what was wanted by other people.

The Chairperson reminded Ms Sihlwayi that this was a workshop rather than a meeting to make decisions.

Ms Sihlwayi understood but said there was a need for meeting about the problems raised to the Committee, and the recovery plan in place to deal with them.

Mr M Tseki (ANC), on the review of the treaty, agreed with what was presented. He said at our own pace, SA can influence the treaty, of course acknowledging the sovereignty of Lesotho and its input in the treaty. He highlighted the matter of royalties noting that SA could not dictate to Lesotho on what it should do with the royalties. But there has been concern about how the royalties find expression in the ordinary women and men on the ground in communities – SA should engage Lesotho on this. There are issues with workers – he thought SA labour was more expensive and this could present problems for annual contract engagement. The treaty must deal with this to ensure Lesotho labour also benefitted.

He acknowledged the good work the project had done in terms of maintenance of the roads for construction. He emphasised the need to look at the work the TCTA was putting in when the roads were “just handed over” to Lesotho.

He raised the matter of hydropower and how this could be used to benefit SA for electricity generation given loadshedding challenges.

There are spinoffs when it comes to these dams - there is something called beneficiation in South Africa; beneficiation of the previously disadvantaged. What could be advised to derive benefit from the fishery in the dams? It seems that people come to fish and go. Perhaps there could be something in the treaty that ensures that the people of Lesotho in that area benefit from the project.

In terms of business, the other beneficiation involves marijuana. Next to these dams, there could be plantations of cannabis which could be of benefit to both countries. He agreed with Ms Mohlala that in the past, there were cases where power lines would pass rural areas that do not have electricity. During the visit to Lesotho, he noticed the same thing – pipelines are passing by places that do not have water.

Ms Mohlala asked for clarity on taxpayers paying for the project vs. water users. She asked which other countries are envisioned to enter into multilateral agreements for shared water usage in the future.

The Chairperson said that he wants to move on. The reason that the Committee wanted the Minister to attend the workshop is to present the gist of the project and then Members could air their views for the Minister and Department to consider ahead of a formal Committee meeting. He could see that Members were tempted to provide input now and it might not necessarily move matters forward in terms of the workshop.

The Chairperson found the situation of the treaty vs. sovereign laws strange in that he expected the treaty to accommodate the law and not the other way around. It was also said that the TCTA is not going to be involved in the project – would it not be funding phase two? If not, would it not be involved in management of the phase? Did the Chief Executive in Lesotho hold the same power as the Chief Executive in SA? He acknowledged this might just be a matter of semantics.

The Chairperson also expressed dissatisfaction with the fact that the position of Public Relations Officer has been vacant for some time now. He said the public needs to be shown that there is work going on because, if not, there is going to be a problem. He asked what the implications were for the major difference in pricing governing the engineers and the high amounts tendered by bidders. Surely there would be risk if the amount tendered is far greater than was envisaged by the project. Should one not opt for what was stipulated in the adverts? Should people not be bidding based on what had been tagged by engineers for the project, especially for this project? The jump is quite big so this means that everybody is overpricing themselves?

He noted the issue with Lesotho refusing to pay the ‘pay as you earn’ [tax]. He was concerned that R30m was not considered a lot of money. He was also concerned about other taxes and amounts not being paid if this [R30m] was overlooked. This denied SA its benefits from the project. He was worried about the precedent being set. In terms of what Ms Mohlala was saying, can a payment plan be created so that instead of them getting their money in nine months, then maybe they can take half and have it paid back in 18 months?

The Chairperson questioned the timing of amending the treaty and suggested it made more since to begin the process in 2023. He asked what the Department thought about this. This would allow for one year of implementing programmes and then the review can be started. The Committee was interested in hearing about what was workable and take advice from the Department. It might also be appropriate to work with the SA Reserve Bank on the next steps.

Responses

Mr Nkhahle said that he just wanted to make one remark for accuracy on water. There is consensus in the country and it is supported by research done over time, including status quo assessments in terms of water security in the country - broadly speaking, the assessment at its core is that SA is a water scare country, continues to be do and will be going into the future. Things might be a little bit worse – 2035 and 2050 projections are worrying. One additional characterisation of South Africa as a ‘water-scarce country’ has to do with certain parts of the country, or provinces, having sustained drought. For now, the issue is more of ‘how do we manage successfully the available water than actually declaring crisis’. The main focus should be on schools – on managing water resources that are available, including in rural areas, in particular. Looking at the evidence, even areas surrounding big dams, a kilometre or so away from dams, communities are left dry. Those are the areas of improvement in terms of management and then one could look at managing plants and distribution of water throughout without leaks, c changing infrastructure, and so on. If the resource is managed well, the crisis could be avoided for a few years. This is what the focus is.

There was a question on why Lesotho was chosen for this project - Lesotho was seen as the most suitable source of additional water for the Vaal river system due geographic location, altitude, and high rainfall. The water is gravitating towards housing from the highlands, meaning there is no pumping, which would have attracted high energy costs. Members will agree that with the recent spike in energy costs, and given Eskom’s supply constraints, this decision is justified – to have water that simply flows down by gravity rather than water that is pumped. Other alternatives were considered, but the Lesotho Highlands Water Project was found to be the most cost efficient.

Mr Nkhahle said the Fraser matter is sub judice - it is not a project matter. The only reason that the project was pulled into it is because they [Fraser] won an arbitration award in the court of South Africa and decided to attach royalties that are glued to Lesotho, normally paid by the TCTA, to the government of Lesotho. The court compelled the TCTA to pay those royalties not to the government of Lesotho, but to this German company [Fraser]. Lesotho has also taken action to nullify that contract that was entered into between itself and the German company. However there is absolutely no control over what the court is going to decide with regard to that matter.

He noted that the Chairperson raised the issue of public relations – he clarified there is a well-resourced PR function, and even DWA sees itself as a PR function. There were recent engagements on improving positive messaging around the LHWP but these functions exist both in the DWS and the LHDA. However what was needed was a special person sitting within the RSA delegation to deal with a PR function but the [lack thereof] has not significantly compromised the PR function of the project.

On the developments along the river as it flows down into the Vaal, he indicated that there is nothing in the treaty. In fact, the treaty makes permission for both parties, South Africa and Lesotho, to embark on any ancillary developments around the project.

On beneficiation, there is commercial fishery within SA reservoirs in Lesotho. The trout that one buys from Woolworths comes from Lesotho. Some of it is even exported as far away as Japan or South Korea. So there is some degree of beneficiation and the hydropower generation of electricity itself is part of the beneficiation of this project.

He agreed with the point made by a Member on MOUs. There clearly were sufficient legal ways to effect or to have the same effect as regulation. However, the MOU spoken to referred only to the issue of work permits / licences, quarry licences, permits for storage and transportation of explosives – not other matters; other matters are regulated. There are regulations – in Lesotho there is a Water Act, Environmental Act, Labour Act, and many others.

The Committee was requested to hold back on the review [of the treaty] until 2023 to give the Department a chance to implement phase two without any disturbance from the review process. There are projects that have just started, and some that will be starting in January 2022; at least a year is needed to review their effectiveness. There are roads that require maintenance – there was an attempt to hand over some of those roads to the government of Lesotho, but this did not work out.

There is currently a major project, which is called ‘Contract 4026’, to revitalise the roads leading up to Katse Dam. There are quite a number of other roads currently under construction. The only roads that may not need maintenance are the feeder routes. Unfortunately, there are still discussions about whether those roads should be maintained by the project or by the government of Lesotho, because they [the roads] should have been handed over several years ago. One would need to check the records to see what happened.

There are very strong monitoring tools on the project, with various layers of accountability, starting right at the bottom where measurements are taken, to the top of the Commission where some of these reports are approved. There is also a panel of environmental experts that comes to the project twice a year to look at all that is being done, and make recommendations on any improvements required. There are various panels of engineering experts who come and look at both the phase one and phase two, and then advise on whatever gaps or risks they find from time to time. They operate in terms of international standards in everything, including maintenance and quality management and procurement. So this project is very well looked after in terms of monitoring and evaluation.

On marijuana, there is a growing and substantial medicinal cannabis industry in Lesotho at the moment although outside of the project jurisdiction. This space cannot be influenced in terms of the project. However, as said earlier on, there is nothing in the treaty that prohibits ancillary developments. In fact, the project has already embarked on an exercise of demarcating the areas outside the food supply level for various types of industries, and that is still under discussion.

On the gap between engineers’ estimates and the tendered amounts, the current engineers’ estimates were made as long ago as 2016, some in 2018, and included the latest long-term cost planning. However, there are certain time-related cost escalations that were expected. It was expected that, due to the spike in prices, particularly prices of items such as steel and cement, as well as occasions of COVID-19, there would be some increase in the estimated prices of the dam and the tunnel. So the higher than estimated process were not totally surprising. However, going back to the market itself will attract some time-related costs. It takes about eight months to go to the market for a project as big as the dam and the tender. He appealed to Members to not think that the tendered amounts were far off from the estimates. It is an option to go to market but it is an option that has to be exercised carefully. It also involved procurement.

Mr Tromp said that tenders for the bridges, in this case, are presently under review. Once they find the tender to be compliant, or not, then it is the choice of the client to say “we live with it and we are willing to pay the higher price” or “we have got to make a plan B, and we are not (considering it)”. The challenge with this bridge, specifically, is that it forms part of the long term taxes to reinstate between Oxbow and the town of Mogotlho.

Mr Nkhahle said that the LHWP has made a promise that the completion date for phase two will be November 2027. What also needs to be appreciated is that 2027 is not the start of the flow of water. Currently, water is being delivered from Lesotho to SA at a rate of 17 000 litres per second into the Vaal River system. 780 million cubic metres of water is being delivered a year at a rate of 17 cubic litres per second. Although the year 2027 is the target for completion of phase two, phase 1A and phase 1B are already delivering water to RSA.

Mr Tromp responded to the question about the beneficiation for Lesotho - Members should keep in mind the R1.4 billion in royalties on an annual basis were being paid to Lesotho - this a sizable income. Over and above the economic spinoffs, some major companies, distribution fields, etc., also want to get involved. He did not have the exact increase in the GDP [of Lesotho] but this can be provided. What is also important to mention is that the use of the water for further electricity generation is a point on the agenda. The Katse Dam should be able to export a lot of power to South Africa. There is a rural electrification and rural water supply programme already in place

The Chairperson said that he was about to close this portion of the meeting.

Ms Mohlala asked the Chairperson to not close the meeting when some questions have not been responded to. The delegates are responding selectively without reason as to why some questions were not being responded to. Members asked about the litigation the LHWP was involved in but this was not responded to. What was the cost of this litigation? Questions were also asked about tax paid. It was said the water users were paying but there was an understanding that National Treasury disperses the equitable share to water users obtained from taxes. She felt the Committee was being misled.

The Chairperson said there is nothing wrong in Ms Mohlala reminding the delegates that they have forgotten to answer a question, but asked her to not say that the delegates were deliberately misleading; they might have genuinely forgotten the questions.

Mr Tromp said these questions might be better answered by the TCTA as it is their area of expertise as they are responsible for funding of this project.

On litigation, the LHDA has had many cases. He asked if the Member was referring to the labour case or litigation against contracts. Over the years since the project started in 1986, there had been HR cases, compensation cases and litigation against contracts – if there was a specific case Members wanted to know about, the responses could be provided.

The Chairperson said that it is fine.

TCTA: Roles and Responsibilities in the LHWP 

Mr Johann Claassens, Executive Manager: Project Management and Implementation, TCTA, said that he is responsible for implementation of TCTA projects. He is quite familiar with the pseudo- islands water project. He was redeployed to TCTA in 2002 to start implementing some of the TCTA projects, but he remained a delegate on the South African side on the Water Commission.

Mr Percy Sechemane, Chief Executive Officer, TCTA, said that he is struggling with connectivity, as there was load shedding in his area. He said he will let the executive managers deal with the presentation, which will be divided into three parts.

Mr Claassens proceeded with the presentation. As the CEO has said, the presentation will be in three parts. He will start off with the roles and responsibilities, and then his colleague will take the Committee through the project funding arrangements and the challenges thereof. Then, the CFO will take Members through the audit issues.

The TCTA was established to deal with all funding and implementation of the project [LHWP]. Since the mandate was to fund and implement phase one of the project on the South African side, TCTA's mandate has been expanded to liability management of the LHWP, thereby being fully responsible for debt management, raising funding, and servicing debt. Since then, in 2002, the TCTA became a multi-project entity managing a number of other projects augmenting water supply within various systems across the country. The TCTA reports to the Minister of Water Affairs through a stakeholder’s compact, and regular quarterly reporting. So it could be said that the value offering of the TCTA could be considered a one-stop shop for implementation of mega water infrastructure projects. TCTA starts off by assisting the Department in structuring the project, signing off-take agreements and getting borrowing authority, then proceeding with raising funding for the project, before project implementation. After project implementation, TCTA does the liability management of the various projects, setting the tariff every year to amortise the cost of the project over the agreed time period. TCTA also offers advisory services to water institutions. TCTA has a knowledge management department to ensure it remains at the leading edge of developments in the sector.

On the TCTA regulatory environmental framework, this is defined by the National Water Act, the notice of establishment, the treaty, and also the protocols related to the treaty (particularly protocol six), and the phase two agreement that was completed in 2011. Starting with the National Water Act, the Minister has various powers in terms of the Water Act, as it relates to international water management. The Minister may establish products to implement international agreements. The Minister may also add additional functions to this these institutions - certain existing bodies are deemed to be established under this Act; the TCTA is one of those bodies and, more specifically, articles that relate to TCTA under the Water Act, Section 102, used to establish a body to implement any international agreement. In addition to that, TCTA, in terms of section 133, expanded this. There are many responsibilities in the functions of the body, and the financing of the body was also further clarified. The Minister is satisfied with these additional tasks.

TCTA accounts for the various projects separately, and manages each one separately. This was the establishment by the government in 1986. The TCTA is a special-purpose vehicle (SPV).  

TCTA was established to implement Phase One of the LHWP and perform any other functions in terms of clause 24, A and B, and any other additional functions that the Authority may be required to perform in terms of section 132.  The additional functions are referred to as “non-treaty functions” and are to fulfil all the Republic's financial obligations resulting from the treaty, including raising money as well as liability and financial risk management, and then also to perform any other functions that the Minister may direct. For example, TCTA has the added directive to define and implement the river project.

In terms of funding of the Authority, TCTA’s income is derived from the performance of the treaty functions and the non-treaty functions. Loans are integrated into the income derived from investments and also, importantly, money appropriated for its purposes by Parliament. That relates to instances where there is insufficient funding to implement and to perform functions in terms of this post 24 A, which are the fundraising and liability management. So if the TCTA ran out of funding, and cannot repay the debt raised to implement projects, including the LHWP, the TCTA does have recourse for appropriation by Parliament.

The LHWP treaty concluded that South Africa shall, in accordance with the treaty, have overall responsibility for the project situated in South Africa and the security thereof. As Members would know, that is the part that is near Clarence, which is the delivery town up north, and the water release works.

[connection briefly lost]

To this day, although it is the original responsibility of government, South Africa, by way of cross- labour payments to the LSDA and the TCTA, will be responsible for all costs incurred on the water transfer part of the project. What is significant is that, in terms of the treaty, South Africa is responsible for the water transport company and the government of the city is responsible for the hydropower company. So that is why there is a cost allocation process that goes through to areas where the cost of portion between recipients on the South African side, and all costs related to the TCTA are related to water transfer. Given that it is a multipurpose scheme, the cost, as far as phase one is concerned, had to be apportioned between Lesotho and South Africa. This responsibility was then transferred to TCTA on behalf of South Africa to make the cost related payments to the LHDA and not directly through government. What is also important in South Africa in terms of the treaty is that all the borrowings that the TCTA undertakes on the LHWP have the benefit of a direct governmental guarantee; it is a treaty requirement. All loans and borrowings should also be approved by South Africa. This is unique and referred to as ‘implied government guarantee’, but this one has the benefit of explicit guarantee.

Mr Claassens said protocol six of the treaty is quite an interesting protocol, and it has been mentioned before. It is going to fundamentally change the governance arrangements for the project. It provides supplementary arrangements; this was driven by what went wrong in phase one of the project. Members were interested in litigation – he said the biggest litigation on the project related to corruption charges against Mr [Masupha] Sole, who was the CEO of the LHDA at the time. This gave reason and motivation to make changes on the governance structures of the project.

As it relates to the TCTA, the implementation of phase one is complete. The only remaining function for TCTA, in terms of the treaty, relates to the operations and maintenance of that part of the project in South Africa. What was recognised in protocol six was that there is no need to have a comprehensive institutional arrangement, such as the TCTA board reporting to the Commission. What was provided for in protocol six is that TCTA will create a position called ‘Head of Operation and Maintenance’. That position would then report to the Commission, as far as the operation and maintenance activities on the South African side are concerned.

In Article (2) two, there was also recognition at that stage that the TCTA was entrusted with other functions, not subject to the control of the Lesotho Water Commission. Article (a) specifically limits the TCTA function – it is only to operate and maintain maintenance of the project in South Africa. The incumbent will be accountable to the Commission on that part of the project. In terms of the phase two agreement, the first phase of the project, or improvements identified, were taken into account.

The TCTA was responsible for raising funding for phase two of the project. Looking at the original treaty, initially, the LHDA was responsible for raising all funding required for the project in the city, either hydropower or water transfer. The logic applied at the time, when phase two of the agreement was negotiated, was the acknowledgment that the TCTA was well established, known on the market and had the credibility to raise cost-effective funding. The question was whether there is a need for the LSDA to establish a treasury function within Lesotho, or a capital finance section within Lesotho. That then gave rise to a change in thinking, and it provided for both parties to explore the most favourable funding available, either the TCTA or the LHDA. The second provision was that, at that time, the parties did not know what was going to evolve. So the LHDA, in consultation with TCTA, prepared the funding strategy to be approved by the Commission. Specific responsibility was tasked to TCTA to be the sole entity responsible for raising funding within South African markets. The common monetary area was defined as within the region. Predominantly, this relates to South African financial markets. In practice however the TCTA took the lead in funding of the whole of phase two. LSJ has not taken part in any fundraising activities however given that they are the implementing authority, there is a close link between TCTA and the LHDA. In particular, as far as development finance institutions are concerned, there is a deep responsibility on LHDA to comply with those requirements, and to also report on progress to these funding institutions. Although TCTA is the borrower, the LHDA has a significant role to play to ensure that the funding is correctly applied, and also that it met the respective warranties and undertakings as the implementing authority. In conclusion, TCTA’s role and responsibilities in terms of the treaty was expanded through the notice of establishment of 2000, as mentioned, to take on additional functions on behalf of government in terms of the treaty. These, as were defined earlier, were non-treaty functions.

These non-treaty functions, in essence, comprise of the TCTA making cost-related payments to the LHDA for all costs incurred by the LHDA within Lesotho. Mention was made of the royalty payments to Lesotho funding contributions to the LSWC for the operational cost of the RSA delegation i.e. raising funding to meet the RSA financial obligations, financial liability and risk management.

In terms of the audit, the challenge that the TCTA has experienced over the last three years, since the AG took over the audit role of the TCTA, is that the LHWP is the focus point for the AGSA. There were additional requirements on the TCTA to provide justification for expenditure actually incurred by the LHDA. Given that the TCTA is the link to the project, it puts the entity in a precarious situation in the sense that there is always the risk of the AGSA finding some sort of issue that she is not satisfied with, and that could lead to an audit qualification on this year’s annual financial statements, and that in turn will take the entity out of the market, as far as raising cost effective funding is concerned. This is quite a key risk for the TCTA, and it is something the Committee is well aware of. 

Mr Nhlanhla Nkabinde, Executive Manager: Project Finance and Treasury, TCTA, said that the focus of this presentation will be on the funding aspects of TCTA. He will be taking the Committee through the funding aspects of TCTA’s involvement in the project. The focus will be on the social and funding arrangements as well as the progress on them. Even though this is about the LHWP, it is important to note that funding has been expanded to also include the acid mine drainage project, specifically the short-term intervention. The reason for that was because of the interlinkage within the Vaal River system of the acid mine water as well as water security and supply in the water quality developer system. That being said, there will not be too much emphasis on the acid mine drainage, except that all the funding that has been raised also takes into account the capital and operational requirements of the short-term intervention.

For further emphasis on the LHDA role in funding, the treaty recognises that the LHDA may also raise funds. The treaty obligates South Africa to raise funding to pay costs related to payments for implementation of the water transfer in Lesotho - this responsibility has been delegated to the TCTA. If the LHDA were to raise funds on its own, it would have to make repayments on capital and interest. Those are classified as cost-related payments i.e. South Africa would have to make those payments directly. The reason why this is being mentioned is because it has implications if there is a thinking that the control point on the payment for the project is only through the LHDA. If LHDA were to go that route, TCTA would lose direct sight, and that control would be broken. For further emphasis, it is worth mentioning that the founding legislation for the TCTA is the Notice of Establishment Act. This responsibility to make postulated payments to Lesotho is enshrined in that founding statute. It states that the TCTA must fulfil South Africa's obligations arising from the treaty. This is one of the non-treaty functions. In doing so, the TCTA has to make isolated payments to LHDA. In other words, South Africa can make those payments directly to LHDA, or TCTA can make them on behalf of South Africa. In addition to cost-related payments, it is important to also mention royalties that the TCTA also pays on behalf of South Africa, including costs of the Commission relating to the South African part of water delivery, operations and maintenance as well as the water transfer component. The sources of funding for the entity have already been mentioned, and so the focus on income is derived from the performance of treaty and non-treaty functions. There was an agreement between TCTA and the Department called the ‘Income Agreement’. It gives the obligation of sourcing funding to the TCTA; it also speaks directly to capital tariffs on the Vaal River system. It states how much must be recovered from water users through the capsule tariff to pay off all costs of the project under phase one, phase two and any subsequent phases. The agreement makes no further provision for funding of the project i.e. a once-off budget project because there are no allocations made by the Department to the TCTA, or from the fiscus, in terms of a TCTA contribution.

In the case of water boards, these costs are passed onto the municipalities. This includes costs for above ground water, which is sold to municipalities. The said municipalities then treat it and sell it to their consumers. Municipalities then have to pay this bill to the water boards. It is also possible that the municipalities could use the equitable share to contribute to the settlement of bills paid to the water board. Although one cannot say that it happens in all cases or does not happen at all but one would expect municipalities to implement cross subsidisation – perhaps in place of or in addition to using the equitable share, this method could settle the cost of the bulk potable water purchased from the water board.

Regarding loans, the TCTA works to raise funding from the market for implementation of construction activities of LHDA. Payments to creditors come from the income of the functions that have just been described. There is also a government guarantee on those loans, because in the instance that TCTA is not able to derive enough income, or perhaps unable to raise funding, government would have to step in. So in an indirect way, government has a contingent responsibility to ensure the loans are repaid.

If the TCTA is unable to fulfil obligations set out in the notice of establishment, Parliament may appropriate funding so that TCTA continued to meet these obligations. There is a deliberate expression in the treaty, or in the notice of establishment, to make sure that some contractual arrangements provide for TCTA to fulfil its obligations. There are two principal roles: the LHDA, which is implementing the project in Lesotho, and TCTA  which is raising funding and making funding available for implementation activities by LHDA on behalf of the South African government. There is an agreement that was entered into in 2005, originally called the CMA agreement. This agreement is going to be augmented; it has been in negotiation for several years. It is the first agreement that is going to be put in place to enhance and make sure there are controls for how TCTA funding is made available to Lesotho.

Mr Nkabinde said there is a body between TCTA and LHDA. For operational and planning reasons, there needs to be facilitation of funding. The committee regularly meets to ensure that the TCTA has enough funding for the LHDA. The committee also looks at the sharing of information and reporting on the project so that Lesotho can also fulfil its obligations to the funders, because funders want to know what it is being spent and that it is spent wisely and effectively. For that they need LHDA as the implementing agent to be able to provide that information.

Although the principal part of the Finance Liaising Committee (FLC) are TCTA and LHDA, these meetings are also attended by members of the commission from both countries – from South Africa, a representative from National Treasury and the corresponding responsible institution in Lesotho; that would be the Department of Water and Mines, and the Ministry of Finance. Key provisions of that agreement provide for cooperation by LHDA towards the state fulfilling its obligations, which include reporting to the funders, and that LHDA can account for funds provided to it.

In addition to the funding agreement, there has been an introduction of two international DFIs to the project: the New Development Bank, and African Development Bank, for total funding of R4.5 billion. The negotiations on the loans have been concluded, but there is now finalisation of the project agreement. This project agreement is strange in the sense that the LHDA is the user of the funds but is not linked directly to the loan, the TCTA is. Further, there are additional funders that will become parties to the agreement by accession because it puts obligations on the LHDA to implement the project. According to internationally accepted DFI frameworks, DFIs are allowed to exercise their supervision in relation to procurement, environmental and social protections, engineering and how the project is implemented generally. Thus, this project has been acclimated to strengthen the control the TCTA and lenders have on the project. Under that project agreement, LHDA will ensure that funds provided by DFIs are accounted for and that DFIs are satisfied that the LHDA is accounting for the use of those funds.

In addition to the funding agreement, the TCTA is also in negotiations with the Department as the delegated authority in terms of the treaty. This agreement has to be there because it gives effect to the notice of establishment, which makes TCTA the agent of the Department when it comes to making payments to the LHDA.

There is an income agreement that was entered in to in 2001; it provides for TCTA to be paid money by the Department of Water and Sanitation, with the money being derived from tariffs. There are two specific charges: cost of capital charge, and the bulk operations and royalty charge. This agreement is now also being updated and strengthened to take into account learnings from this year’s audits by the AG for a more stringent control environment.

As of 11 June 2021, the outstanding debt was R11 billion, and that amount has come down to just under R10 billion. Part of that is the debt rolled over from phase one. A significant part of the debt was repaid around May 2021, which was the final repayment of a bond of about R10 billion. Current debt is solid. Tariffs are determined on an annual basis through a tariff consultation. Nationally, it is part of the regulatory framework for tariffs. It must be enough that the entity is able to operate within the limits approved by the Minister, acting concurrently with the Minister of Finance.

Regarding the maximum loan that one can have outstanding at any one point in time, TCTA interacts with National Treasury to make sure that there are quick borrowing limits to manage the debt prudently. Fiscally, National Treasury has interests in debt being paid prudently. What that means is that there are times where the current limit is not sufficient, and that TCTA has to go back and ask for it to be extended. This is an ongoing conversation, from time to time, with National Treasury. The intention is to pay the loan over years. However, because current limits do not allow for growth, over a long period of time, the tariffs have been set a little bit higher to manage the payment of debt.

As the project cost reached around R32 billion in May, long term cost of the debt went up to about R36 billion. The funding raised at the moment from the facilities that have been arranged is sufficient to fund the project. The facilities comprise the two DFI loans: R4.5 billion and the R15 billion concluded in May. More importantly, there is cash flow coming from the tariffs levied. With all these factors combined, there are enough facilities to ensure that government obligations of the programme are met. There is a need to expand the programme, the reason for this being that some of the loans have to be refinanced in five years and that was the condition of the DFI loans obtained and the condition for the borrowing limit. Because there will not be enough money in five years to repay and to refinance, everything will be determined by 2030, or thereabout. There is a need for additional funding facilities just to refinance those loans. Secondly, the expansion of costs also needs to be prepared.

Ms Busisiwe Shongwe, Chief Financial Officer, TCTA, reported that during 2020/21, the entity reviewed the accounting treatment of these costs (mentioned above). The reason for this review was necessitated by the entity’s expenses incurred. That posed a challenge in terms of the documentation. As per earlier presentations, the LSDA does not necessarily report to TCTA and TCTA does not have access to the documentation. TCTA reviewed the accounting treatment of those costs. When the financial statements were finalised, the LHDA did not comment. This meant the accounting treatment could not really be changed. During the audit, the AG looked at the entity’s proposed accounting treatment. In terms of data, the AGSA did not agree with what TCTA had proposed. There was disagreement on whether the TCTA is acting as a principal or as an agent. There was also disagreement on the interim benefit – the AGSA saw the benefit as an asset on the TCTA books while the TCTA saw it as a benefit to SA. Another area of disagreement was whether the TCTA is fulfilling its obligations to the country, and whether it assumes the accountability and responsibility of the cost incurred in Lesotho.

In response to the AGSA, the TCTA appointed legal and accounting experts to advise it on what the origin of proposals was, and what the AGSA was indicating. Based on advice received, the TCTA does not have any ownership or control of water sources. Therefore, there is no sale of water, meaning that the entity does not have to recognise the revenue from the delivery of water from Lesotho to the Department. The other is one of assets that have been/are constructed by TCTA on behalf of the Department - they also cannot be included in TCTA’s assets. The payments made to Lesotho do not result in a benefit for the TCTA but for the Republic – therefore this cannot really be recognised as an asset on the TCTA books.  

Another concerning audit issue is related to royalties. This comes from the previous financial year. The royalties paid were not in accordance with the treaty in that there was a potential overpayment on the royalties. It was agreed the matter would be looked into because it is not something that can be done unilaterally by South Africa. This matter has been escalated to the PFDG meeting, since it is not a TCTA matter but one between the governments of Lesotho and SA. This matter has not been resolved; chances are it will be reflected in the AGSA report coming soon.

Discussion

The Chairperson noted it was said that if the TCTA were to run out of funds, be it a case of over budgeting or running out of funds, government would come to the rescue through National Treasury. How then could it be said taxpayers’ money was not being used? As independent as the TCTA is, when there is a problem, such as underperforming, government would have to boost the entity with tax payers’ money.

Mr Tseki started by indicating that he left the virtual meeting during the presentation because he was kicked out, having had loadshedding in his area. He apologised for that. He thanked TCTA for the presentation. In the funding strategy outlined in the TCTA presentation, there were delays in the issuing of a no-objection letter by the Namibian government, in terms of securing the funds - does this mean that the matter has been resolved?

On delays in issuing payments to South African nationals, has this method been resolved by TCTA and the Department in Lesotho? He noted this was a challenge before. Municipalities around the country owe water boards more than R12 billion. Does this mean that TCTA will, in the long run, be affected by these water boards? From the TCTA’s perspective, which water boards owe and how much do they owe? He also asked for clarity on the governance structure of the Commission - who does it report to - the TCTA or the LHDA?

Mr Tseki was not audible due to poor connectivity

Ms Mohlala returned to the question of litigation – she asked the TCTA what its cumulative cases of litigation were. How many cases were there on the project involving the TCTA and what was the cost? What National Treasury guidelines or frameworks govern the budgetary components of the work of TCTA in respect of funding?

Ms Sihlwayi noted the programme is very big. She asked the TCTA how they judged themselves in terms of satisfying the project's needs, or the programme needs, without referencing the funds raised.  

In terms of section 102, the TCTA had to fulfil all financial functions. Lesotho and South Africa have a very clear partnership to ensure the project succeeds. There is a talk of open-ended additional financial functions for only one side to, at times, pay guarantees for build borrowing. Why South Africa alone? Is it by design of the programme? One may be interested to know how it came to that.

She echoed the sentiments of another Member that municipalities have huge financial problems.

In terms of the presentation, is the TCTA able to intervene in other structures where there are financial challenges? Is the reach of the entity beyond this? She asked because of the mutual intention of servicing the people in terms of service delivery so this might extend to roads. She just wanted to check what the responsibility of the TCTA in this regard would be.

For her own edification, she asked for clarity on the royalties and who was being paid. She asked about the challenges surrounding payments and non-payment and court cases, and German companies, and overpayment - what is the institutional arrangement within this particular programme?”

Ms Mohlala noted that the TCTA has entered into an agreement of R5.5 billion with the Development Bank of Southern Africa - these compromised investments and loans from the DBSA. However, TCTA also negotiated other facility agreements with five major banks in South Africa, totalling over R15 billion. She asked for the TCTA and DWS to provide further details on the transaction between TCTA and DBSA as well as agreements with the five major banks in South Africa.

Responses

Mr Nkabinde thanked Members for their questions, and hoped that he captured all of the questions but thought that he may have not heard some of them correctly. If he missed any of the questions, he apologised in advance. Regarding the use of fiscal funds, there is a contingent liability coming from the government guarantee, which means that, if it were to crystallise, then TCTA would indeed receive fiscal funding for the project. This would relieve water users from paying the tariffs, although it has never happened in all the years of the project. If, potentially, the TCTA were not able to raise market funding, there are many reasons that could cause this.  

It is written in the treaty that [the government of] South Africa will provide guarantees. Moreover, if the borrowing limit not given, those are the circumstances under which the state can say “no, we are not able to meet the obligations”, and that is when then the fiscal funding would then have to come through. The failure to raise funding would probably not be because of under-budgeting nor operational losses as the TCTA only does what it is required to. The TCTA does not trade as it is not a trading entity nor does it operate for profit – the TCTA recovers costs towards the development of the project. Towards that objective, the TCTA has fairly extensive reporting requirements to the Department, the Minister, and National Treasury, on how it manages funding. The main reasons the TCTA could fall short on medium obligations will be a) for the already pre-approved and accepted costs of the projects and loans entered into, b) unable to collect money from the Department to service those loans. The reason for not being able to collect that money from Department could possibly be because Parliament has also not been paid by water users’ municipalities, in particular.

This is also linked to the matter of debt exposure - the Department would be placed to speak to the capabilities or abilities of the municipalities and the associated risk exposure although the TCTA is aware of the potential challenges.

Three of the projects that TCTA has funded are industrial customers. This would be for power generation in the pipeline e.g. coal mining by Exxaro. The other customers are Sasol, but the biggest project by far is the Vaal River System (VRS) involving rainwater and many other bulk users. This project forms quite a sizable chunk of SA’s GDP. The other municipalities and projects that TCTA has funded are in KZN, where eThekwini and uMgungundlovu are amongst the three main water users supplied by Umngeni Water. The last one is Cape Town. In terms of credit exposure, it would be fair to look at the credit exposure from those particular municipalities.

To the question from Ms Mohlala regarding funding guidelines, Mr Nkabinde said the regulatory framework under which the TCTA operated was detailed in the presentation.  The TCTA’s authority to raise funding sits with the board. However it must be within a borrowing limit approved by the Minister and National Treasury. National Treasury issues practice notes and instruction notes on regulatory controls and guidelines relating to the conditions for borrowers or what is required for public entities. The TCTA reports quarterly to National Treasury on how it is managing debt, and to give assurance that it is still within the borrowing limit. TCTA also highlights any challenges which might cause debt to increase unexpectedly. TCTA also reports on all underlying assumptions, and costs funded by the project. The TCTA also took over from LHDA under phase one.

 As mentioned, the last instrument was the bond that was paid in May of R10 billion in maturity. In recent years, since 2018, towards the LHWP, R6.5 billion was raised. Most of that was for the redemption of a maturing bond at that time; another part was to provide financing for the LHWP. In May this year, R15.5 billion came from six banks – those banks being DBSA, and the five commercial banks operating in South Africa, including RMB, Nedbank, Standard Bank, Investec and ABSA. He did not have the specific details of the DBSA transaction offhand but said it was quite substantial. It was in two loans. Much of the commercial banks are basically creditors working with capital funding - this was also used for the reduction of phase one, and various maturities stretching from five years prior, needing refinancing. He spoke about the capital markets programme referenced earlier noting the longest maturity of about 20 years. Under the circumstances defined in some conditions, this demonstrates a huge confidence in the water sector in the city, and particularly in the project itself, because lenders were made very aware about the critical importance of this project for the country. The lenders knew they are investing in the economy and in the success of the country.

Mr Claassens added that the response might have missed the no-objection funding from Namibia. This is a condition precedent for loans for phase two coming into effect. The Namibian no-objection is a critical requirement.  Partners should also be in a position to respond to this matter. In terms of background, the Department and Namibia conducted a feasibility study for a dam at the link between the fuel strip dam and the LHWP. To use the full yield of phase two of the Situ Islands Water Project, there needs to be a dam built in the lower Orange River to ensure the downstream water is used and to ensure that history is protected. When the study was done, the Commission at the time submitted documents to Namibia for consideration and signing off. This might be where communication was lost. The matter has been escalated to the Minister, who is now taking the matter up with his counterpart. It is trusted the matter will be resolved soon. There is still time to resolve the matter. The matter might require SA and Namibia to discuss the positioning and size of the dam. The Department needs to play a key role in resolving that matter for this project to proceed.

On work permits, this is a matter that has not been fully resolved and has also been escalated to the Minister.  Undertakings were received from the GIL delegation.  

Regarding the role of the High Commissioner, Mr Claassens explained that the Commissioner is the diplomatic aid of South Africa in Lesotho. He is not a functionary of the district planners on the project. But it is clear that, given the importance of this project and its political significance, the High Commissioner is involved. This is why the Commission, and particularly the RSA delegation, has a direct line of communication with our High Commissioner such that, in terms of implementation of the project, there is no direct responsibility.

 As far as litigation is concerned, he was not sure if the question related directly to the TCTA or if it is relation to the LHDA. As far as it relates to the TCTA, there has been litigation over the years, but mainly in relation to land acquisition. The litigation is mostly administrative dealing with labour matters and the like, but not significant to the extent of the LHDA, for example. It also worth mentioning that litigation was not paid for by the LHDA; it was, in fact, paid for by the Government of Lesotho.

Regarding royalties, royalties are the benefits of the LWHP. In short, the project came about following an assessment by South Africa, on what is the cheapest way, or the most cost-effective way, or most beneficial way of augmenting water for the city. That very same water resource also flows into South Africa, close to high level north into the Orange River. There were two options back in the day for South Africa to consider – the one was to transfer water from the Caledon River into a series of rivers to South Africa, and another was to pump the water from the Orange River into South Africa. There was a feasibility study done by the CIP to answer the joint feasibility study – the parties each appointed consultants in the 1980s. Following the feasibility study, the outcome was that it was cheaper for both to resort to the Highlands Water Project. An equivalent scheme of 70 megalitres per second was also compared - the main benefit of the Lesotho route is that the water flows through gravity from the mountains of the city so there are no pumping costs. The alternative to this was to pump all the way up the river – this would be costly. When two schemes are compared, the LHWP came out cheaper on the basis of capital costs, and operation and maintenance costs. This is termed the net benefit of the project - it was quantified in respect of capital costs and operating costs. The two countries then agreed to share that benefit. Negotiations at the time resulted in Lesotho getting 56% or 54% and South Africa getting 44%. Lesotho would be getting its share through royalties. Royalties have two components: (1) a fixed component paid over a period of 50 years and will end after that period and (2) a maintenance benefit is paid based on the quantum of water delivered through the system.

Costing was done on a water-transfer-only scheme. For the hydropower components, South Africa would pay for the total cost of the water transfer component to Lesotho. In addition, SA would pay Lesotho royalties for the share of the net benefit, which is really calculated on the extent to which the project is cheaper in Lesotho than SA.

The Chairperson said that Ms Mohlala would want to know the amount of debt although he was not certain whether she was referring to debt from the apartheid times or a more recent time.

Mr Sechemane (TCTA CEO) responded and said he wanted to give a different perspective to the question, as it had come up many times, in terms of government stepping in should TCTA run out of money. He said that there are many interpretations around it, but he would like to approach the issue in a manner that speaks to the way Parliament understood how things work. It should be understood that TCTA is a special-purpose vehicle, and with that does not have its own balance sheet. So the work the TCTA does is done on behalf of the Department or the Minister. Once the project has been completed, it is handed over to the Department. The TCTA does not operate without instruction or directive from the Minister. In terms of control measures, Treasury plays a very big role in terms of managing what TCTA does, as well as how much is borrowed. Treasury does this because of the large size of the projects TCTA deals with. There is also the ‘asset and liability unit’ that looks at all assets vs. debt or liabilities TCTA has. This explains the strong link between TCTA, the Department and Treasury.

The LHWP project is different in that the treaty obligates the state (SA) to have an expressed guarantee. That means, in case something goes on, the state has to step in and pay back that money.

Even though the Department instructs the TCTA to build infrastructure, the money is not paid to the TCTA but to the water boards who in turn pay the Department. Something which needs to be “sorted out” is the Division of Revenue Act. It was indirectly referred to but if one thinks about is, there are usually two classes of potential customers or users, one being those commercially viable e.g. TCTA. However it is known that within municipalities, most users are unable to pay. A municipality has two sources of funding – collection of rates and taxes and then allocations from the fiscus. The Division of Revenue Act recognises municipalities as an independent third tier of government. This is why even in Parliament, a portion of the fiscus is allocated for water.

 When it comes to the social component, this is where the state comes in and defines what will be allocated as part of the Division of Revenue Act based on the classification of the municipality. It is known that pressure cannot be placed on the end users. This is why the state would say it is prepared to pay a portion of what is owed or build the kind of infrastructure required. However for those that can afford to pay, this must be done. There are also free basic services, a portion of which is also given to the municipality. These are the dynamics to consider. This is why it is important to consider the bankability [of the project] and bankability is not based on whether the state is coming to help. TCTA cannot be held responsible for municipal debt.

The Chairperson interjected to prevent “politicking” – he felt the answer was good but politics should be put aside to prevent further discussion which would not go anywhere. Members agreed with the answer.

Mr Sechemane responded that he was trying to provide a different perspective. On the matter of Fraser (German company), he hoped the issue would be brought forward but it had nothing to do with the project. The issue concerned the Lesotho government failing to defend a matter between itself and the company in court. TCTA was informed of 27 instances where the government of Germany tried to engage with Fraser and the Lesotho government. He repeated that it had nothing to do with the LHWP. This litigious position is because the government of Lesotho did not do what it was supposed at that time. The litigation presented a very big risk although it did not concern the project.  

Regarding the DBSA, Mr Sechemane said there had been many meetings between TCTA and the Bank to fund projects. The DBSA now has a different mandate in terms of what it funds and does not fund. The issue is risk mitigation – because of the size of the project, funders want to reduce their risk and prefer multiple funders to share the risk. This is why the LHWP is not funded by one bank alone. He put it on record again that DBSA did want to work with TCTA to fund some of the water projects. But when looking at the local market, it has always been very difficult to understand why it is that local banks, especially development banks, do not want to fund a project that is developmental in nature. There has not been much support in prior years in supporting not only TCTA but all water infrastructure institutions. So it is a good sign when there are local grants, especially those with a mandate for developmental projects, such as the water projects. So perhaps there is much debate surrounding how and why certain things are happening the way they are, but it has been a decision of DBSA to look into the water project.

The Chairperson thanked the Members for attending the meeting, and the guest delegation for appearing before the Committee.

The meeting was adjourned.