DEVELOPMENT
IN THE ENERGY SECTOR IN LESOTHO – LESOTHO UTILITIES REFORM PROJECT (LURP)
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In order to allow sufficient time for the highly complex transactions that will lead up to the privatisation of the Lesotho Electricity Corporation (LEC), the Government of Lesotho has reached agreement with SADELEC for the extension of their management contract of the LEC for a further period of 18 months from 1 April 2003 under the auspices of the LURP. Initial studies for the restructuring of the energy sector in Lesotho have revealed daunting challenges that have to be overcome to achieve the targets of rapid acceleration of access to electricity in the Mountain Kingdom. The regulatory regime that will play a central role in the implementation of the ambitious programme is being established. Plans are afoot for the Chief Executive of the Lesotho Electricity Authority to be in post from 1 June 2003 or very soon thereafter. Concurrently an Advisor to the Lesotho Electricity Authority has been appointed and will also assume duty on 1 June 2003. It is anticipated that with these key appointments the energy sector restructuring programme will begin to move at a more rapid pace to address all the major issues of the sector including tariff adjustments, rural electrification, and provisions for more active private sector participation. The management contract of the LEC has already achieved significant results in the areas of auditing of the accounts of the Corporation for past years, collection of outstanding arrears, introduction of pre-paid meters and new billing system for credit-metered customers, as well as staff rationalisation and training. Over ten thousand new connections have been made in the past twenty-four months significantly reducing the backlog of the new connections. Privatisation Unit Maseru 21 May 2003 MEMO FOR FILE LESOTHO ELECTRICITY CORPORATION PRIVATISATION (LEC) In the course of a telephone conversation to-day, 17 February 2003, the Principal Secretary informed me that at a meeting with the Ministry of Finance officials to consider the proposals for the 2003/4 Budget, the Minister of Finance had indicated that he was still expecting alternative proposals on the privatisation of LEC from the Sales Advisory Group as the original Privatisation Scheme proposing divesture of a Majority Shareholding along with transfer of LEC assets to a Private Sector investor was unacceptable. Apparently the Minister understood that the principal outcome of the meeting with Demba Ba of the World Bank in December 2002 had been that the Sales Advisory Group would prepare alternative proposals based on a Concession-type Strategy as the Government was not willing to part with the “assets” of LEC. Regarding his own personal involvement, the Minister said that he had expected to be approached by Mr. Demba Ba in Washington D.C. but Mr. Demba Ba had not taken the initiative. Therefore there had been no consultations between him and the World Bank on the Privatisation Scheme. The Principal Secretary said that Mr. Khethisa would be getting in touch with the Privatisation Unit to clarify the Minister’s expectations. She emphasised however that the Government seemed resolved to retain the physical assets of LEC. M.T. MASHOLOGU DIRECTOR, PRIVATISATION UNIT 17 FEBRUARY 2003 CONFIDENTIAL Notes for File PRIVATISATION OF LESOTHO ELECTRICITY CORPORATION (LEC) Arrangements had been made by the Office of the Minister of Finance for a meeting where the Honourable Ministers of Finance and of Natural Resources would be discussing with the Privatisation Unit the contents of a letter dated 7 October 2002 addressed to the Principal Secretary for Natural Resources by Lesotho Steel Products (Pty) Ltd. In the letter Lesotho Steel expresses interest in a concession arrangement for Lesotho Electricity Corporation. 2. While trying to make contact by telephone with the Honourable Minister for Natural Resources, the Honourable Minister for Finance made the following informal remarks to the Director of the Privatisation Unit: 1. Caretaker Contractor of LEC: The Minister felt that the management of LEC was inadequate because the Managing Director was apparently refusing to meet the Commissioner of Revenue to discuss the outstanding Sales Tax owned by LEC. The Minister felt that he personally had to write to the Managing Director of LEC to express his concern over what he turned the negative and insensitive attitude of the Managing Director. 2. Concession Option: The Minister said that he wished the Privatisation Unit could adopt a more open-minded stance on the Concession Option because he had noted that the Privatisation Unit was not willing to consider a Concession arrangement for LEC as a viable option. When the Director responded that Government was bound by a policy agreement with the World Bank on this issue, the Minister responded that he had discussed the issue with the World Bank in Washington DC, and he had been assured that the World Bank would have no objection if the government changed its strategy and opted for a Concession. He himself felt reluctant to champion a strategy which implied parting with LEC assets to a Strategic Investor. The Director replied that a Concession would have the handicap that the Government would be encumbered with depreciation and maintenance costs and eventual disposal costs at the end of the concession period. The Minister said that these were minor concerns compared with alienation of the assets. The Minister stressed that he felt strongly that the Concession Option had not been considered seriously in the past and that it was not too late to raise it as a viable alternative. 3. Lesotho Steel: With regard to the Lesotho Steel expression of interest the Minister said that he had noted that Lesotho Steel had neither the management skills and experience required nor capital. Nevertheless they were interested in participation, and this would have to be by special arrangement with a strong Strategic Investor or by way of a special empowerment programme. In his view the strategy would not be changed only because Lesotho Steel had expressed interest in a concession. 4. Rural Electrification: Finally the Minister mentioned that he was still dissatisfied with what he had been told as plans for addressing rural electrification into the future. He would feel more comfortable in piloting the Privatisation Scheme through Cabinet if he were assured that adequate plans for rural electrification showing expected financial implications could be table at the same time. The Director responded that it was premature to insist on this aspect as work was just beginning on pilot sites for rural electrification and it would take time before all the necessary data had been collected and the rural electrification strategies determined. 5. Next meeting: When it transpired that the Minister for Natural Resources would not be able to attend, the Minister of Finance decided that meeting should be rescheduled to another time which would be notified. Privatisation Unit 13 November 2002 NOTE FOR FILE: MEETING WITH MR. G.T. MONAHENG OF LESOTHO STEEL ON WEDNESDAY 6 NOVEMBER 2002 The meeting was held at the request of Mr. Monaheng. It took some time for Mr. Monaheng to finally state that he had requested the meeting in order to explore the possibility of Lesotho Steel participation in the privatisation of Lesotho Electricity Corporation (LEC). It was then that he disclosed that Lesotho Steel had written to the Principal Secretary for Natural Resources and subsequently had a meeting with the Honourable Minister of Natural Resources in an effort to forestall sale of LEC to Eskom without Basotho participation. Mr. Monaheng said that Lesotho Steel fully appreciated that the privatisation of LEC called for substantial technical and managerial resources as well as capital resources which Lesotho Steel did not have. Their best hope of participation would be in association with a strong external partner as had been the case in their participation in the extension of the LEC grid to Mokhotlong where Lesotho Steel was in partnership with ABB. 2. I tried to reassure Mr. Monaheng that Basotho participation in the privatisation of LEC would be most welcome and the proposed approach entailing partnership with a strong external investor seemed to be acceptable. At this stage however the Government was still considering the most appropriate privatisation strategy which would form the basis of bid invitation. I indicated that informally Eskom has shown interest but I was not aware that any formal commitments had been made to sell LEC to Eskom, or any other strategic investor. It was up to Lesotho Steel to position itself strategically to be able to enter into partnership with a strong strategic investor when the call for bids was made. 3. Mr Monaheng then asked if financial assistance for Basotho bidders could be available from the Privatisation Proceeds Account to enable Basotho to participate in the privatisation process. I indicated that there was no easy answer to this question as the entire matter of a Venture Capital Fund was still under consideration. 4. Finally Mr. Monaheng emphasised that the discussions between Lesotho Steel and the Honourable Minister of Natural Resources had been inconclusive in that the Minister had not had time to give them a clear signal as to the Government’s intentions. Privatisation Unit, 7 November 2002 Concession versus Sale: Although the Lesotho Utilities Reform Project was negotiated on the basis of a commitment to a sale, it is worth assessing the alternative of a long-term concession. Both imply a long-term commitment and both may achieve capital investment, but in all likelihood not to the same extent. The sole actual difference is that a concession has no transfer of assets and this could be a limiting factor as to both the nature and magnitude of the capital investment; but as with a sale, the concessionaire has full rights of use over the assets and over the revenue that they generate. The other difference is one of perception: both parties may perceive a concession as being easier to get out of. This perception leads to both parties weakening their commitment to the arrangement, which is counter to the interest of customers. This may be overcome to some extent by rigorous and onerous termination clauses, penalizing early termination but this also makes the monitoring of concession to be more onerous and demanding. Both routes would, in Lesotho, see the operator subject to the same rigorous regulator framework, which provides for penalties to be paid to Government for failure to meet the contractual commitment of the Strategic investor, whether as owner or concessionaire. The key question that should be asked is: what would the Government do with the Lesotho Electricity Corporation when it is handed back after 25 years? If there is a desire to residual liability after that period then a concession is appropriate. If not, then a full asset sale is the more effective immediate solution, which also makes for a cleaner definition of roles between the Strategic Investor and the Government. 2. Local Participation: Privatisation whatever form it takes can be directed to include greater local participation through regulation and other mechanisms such as tax incentives. The draft Privatisation Scheme was discussed by the Private Sector Advisory Committee at its meeting on Thursday 25 April 2002. After a lengthy discussion in which serious queries and concerns were raised primarily about the rationale for the proposed 33% tariff increase, the justification for the proposed 80.20 shareholding, the reasons and effects of the monopoly in the service area among others. The Committee eventually agreed that the Privatisation Scheme be recommended for con sideration by Cabinet. The Committee stressed that its understanding was that the Privatisation Scheme was an intermediate stage which merely provided guidelines for the continuation of the search for a strategic investor, and that Cabinet would have the opportunity to make a final pronouncement on the negotiated package with the potential investor selected through the competitive bidding process. INTRODUCTORY PRESENTATION BY SALES ADVISORY GROUP OPENING REMARKS BY M.T. MASHOLOGU To-day’s Introduction Presentation by the Sales Advisory Group is yet another important landmark in the restructuring of Lesotho Electricity Corporation. We therefore welcome all present, and we particularly appreciate your having found time for this interaction in your busy schedules. The restructuring of the Lesotho Electricity Corporation is a process not an event, and there will surely be other interactions of various kinds with the Sales Advisory Group before their complex assignment is completed. We in the Privatisation Unit think that the Time Factor is also very important in this assignment, and we believe that facilitative interactions of this kind will help us to meet our tight schedules for completion of the restructuring. Since this is the day for introductions I should like to seize the opportunity to introduce Mrs. Elena Ntšeli, Senior Economist in the Privatisation Unit, who is the anchor person for the Lesotho Utilities Reform Project (LURP). Mrs Ntšeli has a team of colleagues around her, which includes the current speaker. 2. Objectives: The key objectives of LURP in the restructuring of the electricity sector are to improve and expand the delivery of electricity in Lesotho by involving the Private Sector. 3. Landmarks: Power Sector Policy Statement: October 2000 Date of Gazette Notice: June 2001 Date of launch of Lesotho Utilities Reform Project: May 2001 2 4. The restructuring Process: The restructuring process involves • Legislation – up-dating legislation that governs the electricity sector and the establishment of an independent sector regulator, the Lesotho Electricity Authority (LEA), to ensure that electricity services are provided efficiently, with maximum outreach and at competitive prices to ensure that consumer welfare is protected; • IMTF – the engagement of a private sector management team, the Interim Management Task Force (IMTF), to run the Lesotho Electricity Corporation (LEC) for a period of eighteen months aimed at improving the managerial, technical, commercial and financial performance of LEC in preparation for LEC’s eventual privatisation; • SAG – Recruitment of a Sales Advisory Group to assist with: (i) drafting of secondary legislation to supplement and enable implementation of the new electricity legislation, and (ii) divestiture of LEC to the private sector. The SAG assignment will be implemented under the auspices of the Lesotho Utilities Sector Reform Project, which is jointly funded by the World Bank, the African Development Bank, and the Lesotho Government. 5. Progress to date: • Legislation – Lesotho Electricity Authority Bill was enacted by the Parliament at the end of 2001, and is awaiting Royal Assent; • IMTF – in place since 1 February 2001 and has achieved significant progress in some of the matters relevant to the divestiture assignment such as Auditing of LEC Accounts for past years. 6. Projected divestiture time frame: Second half of 2002 Time frame elements: Information gathering and analysis Consultations/Negotiations Approvals Appointments of staff of Regulatory Authority 7. The Privatisation Unit requests co-operation and assistance to Sales Advisory Group in execution of their complex assignment which they will explain this afternoon. Privatisation Unit Maseru 100 LESOTHO UTILITES REFORM PROJECT FINANCING OF LESOTHO ELECTRICITY CORPORATION RETRENCHMENT PACKAGES The Privatisation Unit Budget allocation from the Government of Lesotho for the current financial year includes an amount of M4.8 million towards the cost of retrenchments at Lesotho Electricity Corporation. If the worst came to worst, the projected shortfall of M3.6 million in the Lesotho Electricity Corporation budget for retrenchment costs could be covered from the amount provided by the Government of Lesotho under the Privatisation Unit Budget (according to the Lesotho Electricity the expected cost of retrenchment is M9.6 million, and Lesotho Electricity Corporation had budgeted M6 million from own resources). World Bank Contribution: I. The idea of the Government of Lesotho financing the shortfall on the Lesotho Electricity Corporation budget for redundant staff retrenchment costs was reached after the World Bank seemed to be changing its position several times leading to uncertainty. The uncertainty is apparently still unresolved at this stage. II. Essentially the World Bank began with an indication that it would pay all the Lesotho Electricity Corporation staff retrenchment costs. Subsequently the Lesotho Utilities Reform Project appraisal mission in September 2000 clarified that the World Bank was not in a position to provide funds directly for the retrenchment packages of Lesotho Electricity Corporation staff. Later on realising that the potential magnitude of retrenchment package costs could be as high as Maluti 12 million, the World Bank indicated that it could instead consider providing funds for Lesotho Electricity Corporation’s operating expenses equivalent to the actual retrenchment costs. Subsequently the World Bank made yet another clarification to the effect that it would not provide funds for Lesotho Electricity Corporations Operating Costs but rather it could provide financing for the procurement of goods related to ongoing work of Lesotho Electricity Corporation (Cables, switches, poles etc) that would be at least equivalent to the estimated retrenchment package costs. III. The commitment of the World Bank to the financing of the cost of the Lesotho Electricity Corporation retrenchment packages remains unclear, but efforts are continuing to obtain final clarification from the Task Manager. The Government of Lesotho will eventually have to decide whether this option is still worth pursuing, or to settle on financing the shortfall from the budgeted amount in the Privatisation Unit budget. The important thing is not to delay the implementation of the retrenchment programme which is scheduled for completion by the end of 2001. Privatisation Unit 11 September 2001 Paragraph 2 Redrafted In Section 9 (Page 64) and in other appropriate sections, please ensure that, as aptly described at your presentation of the Inception Report to the Government of Lesotho, the proposed connection fee policy covers all categories of customers (all householders and commercial customers) and related payment options of fees for all customer categories, and is not limited to low income customers only. NOTE FOR FILE RE: MR. BALDEH’S CONTRACT Mr. Baldeh telephoned on Thursday 15 March 2001 at 2.25 p.m. 1. Travel Arrangements to Maseru: Mr Baldeh proposes to flight from Dakar to Johannesburg to Maseru on South African Airways leaving Dakar on Sunday 25 March and arriving Maseru on Monday 26 March, 2001. The request that Mr. Baldeh was making was whether Privatisation Unit could arrange a PTA for him. I promised to revert with an answer on Monday 19 March 2001. 2. Comments on IMTF Inception Report: Mr. Baldeh promised comments on IMTF Inception Report by Thursday next week. 3. Termination Notice: After further discussion on the possible implications of the 3-month Notice of termination, Mr Baldeh and I agreed to go back to the original one-month Notice by either party. M.T. MASHOLOGU DIRECTOR, PRIVATISATION UNIT 15 March 2001 Privatisation Unit Private Bag A249 Maseru 100 DRAFT PRESS RELEASE 24 January 2001 For Immediate Release TEL: 317902 The Privatisation Unit has announced that the Government of Lesotho is collaborating with the World Bank and the African Development Bank in a new project to improve the management and delivery of electricity in Lesotho. The new project which is entitled the Lesotho Utilities Sector Reform Project will include the engagement of a Management Team to run the Lesotho Electricity Corporation for a period of eighteen months during which the backlog of audited accounts will be brought up to date from 1996 when the Corporation’s accounts were last audited. In addition the Management Team will be responsible for accelerating new connections. The project will also install pre-paid electricity meters in up to six thousand households. It is expected that at the end of the eighteen-month period a new Strategic Investor will have been identified to take over the operations and expansion of the Lesotho Electricity Corporation with substantial private sector involvement. The provision of efficient and affordable electricity has been identified as one of the key requirements for industrial development and job creation in Lesotho. The connection of more households to the electricity supply will also improve the quality of live and preservation of the environment. The Lesotho Utilities Reform Project is being launched immediately. Privatisation Unit Maseru 100 NOTES ON MEETING WITH THE MINISTER OF NATURAL RESOURCES During the holiday period the Director of the Privatisation Unit had a chance encounter with the Minister of Natural Resources at a social event. The Minister took advantage of the encounter to notify the Director that the Director of Energy, Mr. Kanetsi, had been trying to contact the Privatisation Unit since 20 December 1999 on the Minister's instructions to seek the Unit's help in preparing bid proposals for the Management Contract for Lesotho Electricity Corporation. The Minister disclosed that he had approached the South African Minister of Energy and Mines to request Technical Assistance for Management of Lesotho Electricity Corporation, and he had received a positive response subject to the Government of Lesotho finding resources to pay for the Technical Assistance. The Minister had then approached the World Bank and surprisingly had been advised that there should be at least 3 bids before any funding could be considered. I had the distinct impression that the Minister thought that there were funds under the Privatisation Project to sponsor the Lesotho Electricity Corporation Management Contract. To the best of my knowledge the Aide Memoire of the latest World Bank Review Mission indicated that there are no funds for this purpose. 2. The second matter on which the Minister spoke was the Regulatory Legislation for Water and Energy. The Minister said that he was satisfied with the drafts he had seen, and had already spoken to the Prime Minister about early submission of the drafts to Parliament. It seemed to me that the Minister was unaware that the draft still has to be cleared with the Law Office and Cabinet before submission to the Cabinet. 3. I chose not to debate the issues raised by the Minister at what was after all a social occasion during the holiday period. I have recorded the main points of the discussion as they will need to be cleared with the Director of Energy in the first instance. M.T. MASHOLOGU DIRECTOR, PRIVATISATION UNIT 7 JANUARY 2000 |
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