VZCZCXRO0640
RR RUEHBZ RUEHDU RUEHJO RUEHRN
DE RUEHMR #0029/01 0371145
ZNR UUUUU ZZH
R 061145Z FEB 08
FM AMEMBASSY MASERU
TO RUEHC/SECSTATE WASHDC 3528
RUCPDOC/USDOC WASHDC 0010
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUCNSAD/SADC COLLECTIVE
RUEHMR/AMEMBASSY MASERU 3941

UNCLAS SECTION 01 OF 05 MASERU 000029 
 
SIPDIS 
 
SIPDIS 
 
DEPT ALSO FOR EB/IFD/OIA, AF/EPS, AF/S; 
PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB PGOV USTR OPIC KTDB LT
SUBJECT: LESOTHO: 2008 INVESTMENT CLIMATE STATEMENT 
 
REF: STATE 158802 
 
MASERU 00000029  001.2 OF 005 
 
 
¶1.  SUMMARY:  Embassy Maseru submits the following information 
for Lesotho's 2008 Investment Climate Statement.  The Kingdom of 
Lesotho is open to foreign direct investment (FDI) and generally 
treats foreign investors favorably.  With most investment 
originating from East Asia, FDI in Lesotho is primarily 
channeled into export-oriented manufacturing, specifically 
textiles and garments for the U.S. market.  Lesotho's investment 
climate is favorable with regard to currency conversion, 
monetary transfer policies, and a lack of undue burdens on 
investors.  The primary weaknesses of the investment climate are 
its underdeveloped legal framework for investors and the need 
for land reform.  Overall, Lesotho has maintained an inviting 
posture with regards to FDI, and remains "open for business." 
END SUMMARY. 
 
------------------------------------ 
A.1.  Openness to Foreign Investment 
------------------------------------ 
 
¶2.  Lesotho is open to foreign direct investment (FDI) and 
generally treats foreign investors favorably.  However, 
Lesotho's legal framework with regards to FDI is not well 
developed, and thus problems exist with regards to transparency 
and consistent application of the law.  Lesotho has found 
success in attracting FDI to its export sector, and foreign 
investors in the apparel industry have created new jobs and 
contributed to poverty reduction.  Current business taxation and 
regulation provisions only partially address investor needs, and 
the Government of Lesotho (GOL) is under pressure to update 
relevant laws affecting investors in various sectors. 
 
¶3.  Ninety percent of FDI in Lesotho flows into export-oriented 
manufacturing, a sector stimulated largely by the U.S. African 
Growth and Opportunity Act (AGOA).  This FDI created an apparel 
sector which now provides approximately 40,000 jobs.  The single 
largest investment is believed to the US$90 million capital 
infrastructure investment of Nien Hsing Group in Taiwan. 
Foreign firms in Lesotho concentrate their production on a 
narrow range of products, such as knit apparel and blue jeans. 
Foreign companies also invested smaller amounts in footwear 
manufacturing, electronics components assembly, food processing, 
and miscellaneous small-scale manufacturing. 
 
¶4.  Lesotho's telecommunications sector has attracted 
considerable FDI.  An international consortium composed of ESKOM 
Zimbabwe's Econet Wireless International and Mauritius Telecom 
now own 70% of Telecom Lesotho.  Lesotho has a relatively high 
penetration of telephone connectivity relative to its low per 
capita income.  Communications services have been extensively 
modernized and expanded over recent years, although significant 
portions of mountainous rural Lesotho remain without such 
services. 
 
¶5.  FDI in air transportation has not been successful.  The 
parastatal Lesotho Airways closed in 1997 due to its inability 
to attract FDI.  Air routes to and from Maseru are now handled 
exclusively by South African Airways.  Foreign investors have 
not pled significant capital in the tourism sector, including 
activities aimed at protecting the natural environment and 
ecological attractions. 
 
¶6.  FDI in the mining sector has experienced a recent revival 
through the opening of Lets'eng Diamonds, a partnership between 
a South African-owned company and the Lesotho Government.  The 
mine employs about 50 people, most of whom are Lesotho 
nationals.  A European mining company and the GOL jointly 
operate another mine in Liqhobong, as well as the Kao kimberlite 
pipe in Butha Buthe District.  South African companies are 
currently prospecting the Kolo mine in southern Lesotho.  In its 
attempt to attract FDI in the mining sector, the GOL offered a 
number of concessions to foreign investors including VAT 
exemptions on inputs used during construction and withholding 
tax exemptions on dividends and interests payments.  In return, 
the Government of Lesotho is granted an eight percent royalty on 
gross diamond sales, a 12.5% equity interest in joint ventures 
with foreign companies, and a 12.5% share of dividends.  Major 
diamond finds in 2006 and 2007 generated worldwide media 
coverage. 
 
The Origin of Foreign Investors 
 
¶7.  Lesotho's apparel sector is entirely East Asian and South 
African-owned, and currently employs approximately 40,000 
people.  Two factories are under Taiwanese ownership, two are 
owned by Hong Kong concerns, one is Singapore-owned, and eight 
are owned by South African firms.  The rest of the approximately 
19 factories are owned by PRC investors.  None are under local 
 
MASERU 00000029  002.2 OF 005 
 
 
ownership.  South African FDI is present in footwear factories, 
four electronics firms, the Sun Hotel chain, air transportation, 
insurance, telecommunications, financial services, and mining. 
FDI from other countries includes Canadian mining interests and 
U.S. and Chinese investment in food processing industries. 
 
¶8.  Lesotho's success in attracting FDI has been limited largely 
to export-oriented manufacturing.  No foreign ownership at any 
level, including positions on boards of directors, is permitted 
in reserved trading license businesses (i.e., small scale retail 
and services operations).  The restrictions on foreign 
involvement in small scale services provision and manufacturing 
are perceived as instruments of immigration control, as there is 
a great deal of political sensitivity regarding small business 
owners from Asia.  Many trading businesses and all medium to 
large manufacturing businesses are open to FDI.  Nevertheless, a 
relevant trading or industry license is required and must be 
renewed annually. 
 
¶9.  Generally, foreign investors are treated equally with 
domestic investors.  One significant exception is a prohibition 
on foreigners holding land lease titles (land may not be 
purchased in Lesotho, as all land is officially owned by the 
crown).  Lesotho has no legal provisions discriminating among 
various FDI source countries.  Lesotho's membership in SADC does 
not lead to preferential treatment for investors from other SADC 
countries.  Lesotho's standards of foreign investment protection 
are good in practice, but the legal framework guaranteeing these 
norms is weak.  For example, there is no foreign investment law, 
and Bilateral Investment Treaties (BITs) have been concluded 
with only two countries -- the United Kingdom (1981) and Germany 
(1985). 
 
-------------------------------------- 
A.2.  Conversion and Transfer Policies 
-------------------------------------- 
 
¶10.  Lesotho uses traditional foreign exchange controls, though 
its participation in the Southern Africa Common Monetary Area 
(CMA) restricts the independence of its monetary policy.  The 
CMA includes Lesotho, Namibia, South Africa, and Swaziland. 
Under the CMA, the South African rand, alongside the Lesotho 
loti, is legal tender in Lesotho.  Under CMA rules, the loti 
should be exchanged at a one/one ratio with the rand, and the 
rand/loti peg must be maintained with reserves in rand and other 
foreign exchange.  There are no exchange controls between 
Lesotho and South Africa, but CMA members agree to enforce 
exchange controls with third parties. 
 
¶11.  The Government of Lesotho delegates authority to commercial 
banks to undertake current account transactions, and Lesotho has 
acceded to Article VIII of the International Monetary Fund. 
However, dividend payments still require the Central Bank 
approval.  The Central Bank of Lesotho (CBL) maintains direct 
powers of approval over foreign exchange requirements for all 
capital account transactions including FDI, capital 
disinvestment, and contracting and servicing offshore debt. 
There has never been a case of CBL blockage of such transfers. 
Lesotho is a member of the Southern African Common Policy on 
approval of foreign loans.  However, policies on foreign 
borrowing are not strongly developed as there is insufficient 
foreign borrowing by resident businesses. 
 
------------------------------------ 
A.3.  Expropriation and Compensation 
------------------------------------ 
 
¶12.  Lesotho's constitution states that the acquisition of 
private property by the state can only occur for specified 
public purposes and in exchange for full and prompt 
compensation.  Any party subject to such expropriation has the 
right to appeal the action or the compensation offered to the 
nation's High Court.  The constitution does not address whether 
compensation may be paid abroad in the case of a non-resident. 
Under existing constitutional provisions, several mining 
companies filed a case against the Lesotho Water Highlands 
Project and its financiers alleging that their mineral lease 
rights were unlawfully expropriated without compensation when a 
new dam flooded a potential mining area.  Lesotho's courts found 
in favor of the Lesotho Highlands Water Project and its 
financiers, stating that all proper regulations and 
notifications were followed prior to the dam construction. 
 
------------------------ 
A.4.  Dispute Settlement 
------------------------ 
 
¶13.  Foreign investors have full and equal recourse to Lesotho's 
 
MASERU 00000029  003.2 OF 005 
 
 
courts to settle commercial and labor disputes.  The nation's 
courts are regarded as fair and impartial in cases involving 
foreign investors.  In complex commercial cases, overseas judges 
may be invited to the bench.  Under Lesotho's BIT agreement with 
United Kingdom, an investor may take a dispute with the 
Government of Lesotho to international arbitration, but the BIT 
agreement with Germany does not address this issue.  Lesotho is 
member of the Multilateral Investment Guarantee Agency (MIGA) 
and has acceded to the Convention on Settlement of Investment 
Disputes between States and Nationals of Other States. 
 
----------------------------- 
A.5. Performance Requirements 
----------------------------- 
 
¶14.  There are no blanket incentives specifically for all 
foreign investors and no performance requirements imposed 
exclusively on foreign investors as a condition of investment. 
The principal business taxes in Lesotho are income tax, customs, 
excise duties, and value added tax.  Corporate income taxes 
heavily favor investment in manufacturing, as income is taxed at 
zero percent and there is no withholding tax on dividends paid 
to non-residents.  Income in all other sectors is taxed at 35%, 
and there is a further 25% withholding tax on non-resident 
dividends.  Moreover, only industrial buildings qualify for 
depreciation allowances.  Buildings for services, tourism, and 
farming are not depreciable.  Also, infrastructure such as land 
improvements and site services do not qualify. 
 
--------------------------------------------- ---- 
A.6.  Right to Private Ownership and Establishment 
--------------------------------------------- ---- 
 
¶15.  Foreign entities have the right to establish enterprises in 
Lesotho, but many types of new businesses require specialized 
licenses (see section A.8. below).  Lesotho has no competition 
law or overall competition regulator.  Instead, under the 
industrial and trading licensing system, a business can apply 
for protection from competition for up to 10 years. 
 
----------------------------------- 
A.7.  Protection of Property Rights 
----------------------------------- 
 
¶16.  Lesotho generally respects international intellectual 
property laws and is a member of the World Intellectual Property 
Organization (WIPO) and the African Intellectual Property 
Organization (AIPO).  Patents are rarely issued in Lesotho, but 
trademark protection is often sought and granted.  Intellectual 
property protection is regulated by Industrial Property Order 
and the Copyright Act of 1989.  The law protects patents, 
industrial designs, trademarks, and copyrights.  There is no 
apparent enforcement of intellectual property laws with regards 
to copyrighted music or films. 
 
------------------------------------------- 
A.8.  Transparency of the Regulatory System 
------------------------------------------- 
 
¶17.  The judicial system is fair and competent in commercial 
matters.  The government is willing to supplement the bench with 
foreign judges in cases requiring specialized expertise. 
Generally, there is adequate regard for contracts with foreign 
parties and equal treatment of foreign investors before the 
courts in disputes with national parties or the government. 
 
¶18.  Corporate law is based on the Companies Act of 1967 which 
provides reasonable standards for corporate behavior.  However, 
it has been criticized as both incomplete and overly complex. 
Technical improvements were incorporated in a 1998 draft of a 
revised law, though it was never passed by parliament. 
 
¶19.  The regulatory framework for utilities is modern, while 
many analysts judge mining regulations to be outdated. 
Lesotho's current mining legislation gives the authority to 
grant land rights to the King and traditional chiefs upon the 
recommendation of a Mining Board, rather than to a government 
ministry.  Financial services regulation is sufficient. 
However, the industrial and trading license system, which 
requires licenses for 44 types of business, long ago lost its 
original purpose of protecting new firms from competition.  Some 
enterprises can require up to four licenses for legal operation. 
 
¶20.  The Lesotho Telecommunications Authority (LTA) acts as an 
independent regulator of the telecom industry.  The LTA sets the 
conditions for the entry of new competitive operators, although 
it maintains Lesotho Telecom's monopoly on fixed line and 
international services. 
 
MASERU 00000029  004.2 OF 005 
 
 
 
¶21.  Current banking regulations do not grant the Central Bank 
of Lesotho power to direct interest rates, exchange rates, 
margins, or the range of services offered by banks operating in 
Lesotho.  This is due to the currency peg with the South African 
rand, which both relinquishes Lesotho's leverage with regards to 
monetary policy and creates a lower political risk environment 
for banking investment. 
 
--------------------------------------------- ----------- 
A.9.  Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----------- 
 
¶22.  Lesotho hosts three foreign-owned banks: First National 
Bank, Ned Bank, and Standard Bank (the latter bought a 70% share 
in state-owned Lesotho Bank).  The financial base of these banks 
are sound, as they are supported by a large foundation of 
foreign-based capital.  Judgments as to the market-orientation 
of credit provision by these banks are difficult as very little 
credit is extended to local consumers.  Industrial and 
commercial credit is provided by the parastatal Lesotho National 
Development Corporation (LNDC).  The LNDC's mandate is to 
promote and facilitate foreign investment. 
 
------------------------ 
A.10.  Political Violence 
------------------------ 
 
¶23.  Rioting and violence associated with an attempted coup 
d'etat in 1998 still cast a shadow over today's investment 
environment.  The country has made considerable strides in the 
intervening decade to consolidate and strengthen democracy, but 
there is room for improving investors' confidence.  Following a 
free and peaceful February 2007 general election, Lesotho 
experienced several civil disturbances and general strikes 
associated with a political impasse over the allocation of 
parliamentary seats.  In the wake of June 2007 attacks by 
unknown gunmen on the residences of prominent government and 
political leaders, the Government of Lesotho imposed a two week 
long dusk until dawn curfew in Maseru.  Political tensions 
between governing and opposition parties continue, but the 
national political atmosphere is generally calm. 
 
----------------- 
A.11.  Corruption 
----------------- 
 
¶24.  Investors reported that corruption is not a significant 
factor affecting their investments.  Anti-corruption legislation 
passed in 1999 was implemented through the creation of an 
autonomous anti-corruption unit, the Directorate on Crime and 
Economic Offenses (DCEO).  The Government of Lesotho actively 
prosecutes corruption cases at various levels of authority, 
including cases against the former Principal Secretary of 
Justice and Constitutional Affairs, a former Deputy Commissioner 
of Police, and various foreign and domestic parties engaged in 
the Lesotho Highlands Water Project. 
 
----------------------------- 
A.13.  OPIC Insurance Program 
----------------------------- 
 
¶25.  The Overseas Private Investment Corporation (OPIC) insured 
one American investment in Lesotho, Seaboard Corporation's joint 
venture with Lesotho Flour Mills, which began operations in 1998 
and currently employs approximately three-hundred people.  This 
is OPIC's sole current activity in Lesotho. 
 
------------ 
A.14.  Labor 
------------ 
 
¶26.  Lesotho's employers operate under the Labor Code Order of 
1992 which regulates terms of employment and requirements for 
worker health, safety, and welfare.  It was amended in 2004 to 
address HIV/AIDS policies in the workplace.  Unionization is 
permitted.  The law created an independent Directorate of 
Industrial Dispute Prevention and Resolution.  Statutory minimum 
wages are set annually by the Ministry of Labor and Employment 
in accordance with recommendations from a Wages Advisory Board 
including worker, management, and government representatives. 
In 2001, Lesotho ratified ILO Convention 182 on the Prohibition 
and Elimination of the Worst Forms of Child Labor and Convention 
138 on Minimum Age of Employment. 
 
¶27.  The Labor Code Order of 1992 requires every non-citizen 
employee or self-employed person to have a valid work permit.  A 
work permit is issued by the Labor Commissioner who, by 
 
MASERU 00000029  005.2 OF 005 
 
 
regulation, must be satisfied that no qualified Lesotho citizen 
is available for the position.  The statutory maximum duration 
of a work permit is two years. 
 
------------------------------------------- 
A.16.  Foreign Direct Investment Statistics 
------------------------------------------- 
 
¶28.  Lesotho's FDI statistics since 2000 are estimated as 
follows: 
 
Year              2000     2001     2002     2003 
 
FDI Stock 
in M Maloti       218.3    242.91   282.72   316.61 
 
FDI Stock 
in M of $         31.18    34.7     40.38    45.23 
 
FDI as % 
of GDP            0.03     0.04     0.07     0.05 
 
GDP Purchasers' 
Prices in M of $  986.66   863.33   603.5    982.625 
 
 
 
Year              2004     2005     2006     2007 
 
FDI Stock 
in M Maloti       343.68   364.37   623.00   745.03 
 
FDI Stock 
in M of $         49.09    52.05    89.00    106.43 
 
FDI as % 
of GDP            0.03     0.04     0.06     0.07 
 
GDP Purchasers' 
Prices in M of $  1419.85  1438.94  1445.71  1481.89 
 
 
Source: FDI Stock data from the Central Bank of Lesotho, GDP 
data from the Bureau of Statistics Website (National Accounts) 
 
¶29.  Lesotho's FDI data is incomplete and does not currently 
meet the needs of policy makers.  The Central Bank estimates FDI 
using information received from Lesotho National Development 
Corporation (LNDC) and, as such, the data sometimes include 
planned (not actual) projects, leading to possible 
overestimation.  This data does not capture the reinvestment 
element of FDI inflows.  By confining this data to initial 
equity investments, the figures ignore later investments 
financed by retained earnings from foreign companies already in 
Lesotho.  This could also lead to an underestimation of FDI 
volume. 
NOLAN