Signal Risk on Lesotho – Attachments and detachments

PUBLISHED: Fri, 25 Jun 2021 11:06:32 GMT
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*This analysis was produced by the team at Signal Risk 

After a tumultuous 2020, Lesotho’s economic, political and public health concerns have continued throughout 2021. The most topical development of late pertains to the so-called Frazer debacle, involving the Germany-based solar energy developer, Frazer Solar GmbH, and the government of Lesotho.

On 18 June, local reports confirmed that the government filed an application for a stay of prosecution in the South Gauteng High Court in Johannesburg, South Africa, in an attempt to halt further asset seizures by the German solar energy developer. In addition to the filing, the government of Prime Minister Moeketsi Majoro dispatched a ministerial delegation to South Africa to engage authorities on the matter, and to establish a commission of inquiry into the court order which permitted the asset seizure.

The Frazer fracas

The dispute with Frazer Solar is rooted in a 2018 deal between the government and the solar manufacturer, which went sour due to the actions of Basotho authorities.

Solar aspirations

Frazer Solar was contracted to provide 40,000 solar water heating systems, 20 megawatts of solar photovoltaic capacity, one million LED lights, and 350,000 solar lanterns at an undisclosed cost. The project, which was to be financed by the German government, would have formed the first phase of an initiative aimed at supporting Lesotho’s energy transformation by establishing the country as a net exporter of electricity, while improving domestic electricity security and increasing government revenues.

Sudden breaches

Specific details pertaining to how and when the deal was scuppered are limited; however, in 2019, Frazer Solar took action against the government of Lesotho through the South African legal system. At the time, the company accused Lesotho of failing to “execute the project’s financial arrangement” despite the provision of external financing by Germany.

This, according to Frazer Solar, was among a series of unexplained contractual breaches and general unwillingness by Lesotho to engage in the legal process. In a statement in May, Frazer Solar noted that “the government of Lesotho has been formally notified of these legal proceedings on 25 separate occasions over a period of 25 months since 2019”. This ultimately left the company with little option but to pursue legal action.

Arduous arbitration

In 2020, an independent South African arbitrator awarded undisclosed damages to Frazer Solar. This was affirmed in May, when the South African judiciary declared a default “arbitral award” in favour of Frazer Solar worth EUR 50 million. The judiciary also noted that the company could claim Lesotho’s assets pursuant to the awarded amount.

Reports have since confirmed that Frazer Solar has applied for enforcement of the award in several jurisdictions in which the country has assets, including South Africa, Mauritius, the United States, and the United Kingdom. Assets that are purportedly at stake include water royalties from the Lesotho Highlands Water Project, payments to the Lesotho electricity company by South Africa’s Eskom power utility, and Lesotho’s shareholding in the West Indian Ocean Cable Company.

Calculated disclosure

In the few statements that it has made on the issue, the government has either deflected or denied responsibility. Previously, the government alleged that the deal was finalised under suspicious circumstances. Specifically, Prime Minister Majoro has accused his predecessor, Thomas Thabane, of signing the agreement with no clearance from the finance and energy ministers serving at the time.

More recently, responding to the May ruling, the Majoro administration noted that: “While the government is trying to understand this issue, it urges both the public and its international partners to

remain calm pending investigations”. It also “reassured the public that as a sovereign state, its properties locally and internationally are safe and protected from seizure”.

Conventional conflict

Apart from the Frazer Solar dispute, infighting within the ruling All Basotho Convention (ABC) party continues to weigh on the country’s stabilisation efforts.

Thomas’ resurrection

The latest upheaval began as far back as 09 March, when the ABC’s executive endorsed former prime minister Thomas Thabane as its candidate in Lesotho’s next general elections, scheduled for June 2022; Thabane purportedly remained ABC leader despite stepping down from the premier position in 2020 due to his implication in the murder of his former wife.

He was picked ahead of party chairperson and prime minister, Moeketsi Majoro, and the party’s former deputy, Nqosa Mahao, who led his ouster from the premier position in 2020. Aside from its vote of confidence in the outspoken octogenarian and its faith in his ability to steer the party to victory, the ABC executive did not provide any elaborate reasons for its endorsement of Thabane, or any account of his legal entanglements.

Mahao’s departure

What the move did do however, is highlight a three-way split within the party between sections respectively loyal to Thabane, Majoro and Mahao. This came to a head on 21 April, when Mahao announced his formal split from the ABC and his decision to launch the new Basotho Action Party (BAP). According to Mahao, his decision to abandon the ABC was prompted by infighting within the ruling party, which has crippled its functionality for years; the BAP leader claimed at the time that as many as 20 parliamentarians have pledged to “cross the floor” to the new formation.

This would represent nearly one third of the ABC coalition’s parliamentary seats in the 120-member legislature. Moreover, given the 61-seat governance threshold, it could result in a hung parliament. Tellingly, Mahao pledged upon his departure that he will table a vote of no confidence against Majoro once the BAP members have formalised their split. As of 21 June, this has yet to occur.

Majoro’s fightback

Majoro has not been idle in the face of existential threats to his political aspirations. The prime minister has undertaken two reshuffles in 2021, one in February and the other in June, as he seeks to clear out loyalists to Thabane and Mahao and position his allies in key posts. Portfolios that have been subject to personnel changes include: police; law and justice; local government and chieftainship affairs; communications, science and technology; public service; education and training; and tourism environment and culture.

Big brother’s intervention

Sensing the brewing trouble in the neighbouring kingdom, South African President Cyril Ramaphosa and the Southern African Development Community (SADC) deployed the current minister in South Africa’s presidency, Jeff Radebe, as a special envoy to Lesotho in early May. Radebe engaged with key stakeholders including Majoro, Mahao and King Letsie, in a series of closed-door meetings ostensibly aimed at preventing further disintegration prior to 2022.

Assessment

Recent developments underscore broad instability in Lesotho, which could worsen as the June 2022 elections draw near. Lesotho’s political instability is rooted in the country’s chronically weak institutions and limited resources. This has bred a fiercely competitive political landscape characterised by fluid allegiances and powerplays. In all, the volatile domestic political environment has resulted in the country having had three different prime ministers since 2012, with none serving a full five-year term.

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Economically, infighting within political structures and the Frazer Solar debacle will weigh on Lesotho’s recovery and stabilisation prospects. These looked promising as per data published by

the International Monetary Fund (IMF) in April. According to the IMF, output is expected to grow by 3.5 percent in 2021, after contracting by 4.5 percent in 2020. Fuelling the growth is construction activity, commodity and textile exports, inbound investment in nascent sectors such as cannabis, and the broader normalisation of economic activity. Correspondingly, the debt-to-GDP ratio will decline from 50.3 percent to 49.8 percent in the same period. However, the deficit as a proportion of GDP is expected to deteriorate from 7.6 percent to 9 percent between 2020 and 2021, as short-term expenditures outpace inflows, mostly on account of reduced receipts from the South African Customs Union. The current account balance is also forecast to experience a marginal deterioration from a deficit of 15.5 percent to 16.9 percent, alongside the country’s reserves – which are expected to decline from an average of 3.6 months to 3.4 months of import cover.

That said, this outlook faces acute downside risks. Political infighting will dampen investor sentiment at a time when the country is seeking to attract capital to emerging industries such as renewables, diamonds, aquaculture and cannabis. It will also catalyse general policy inertia as political stakeholders prioritise partisan disputes over economic arrangements. Furthermore, should the South African judiciary uphold the arbitral award to Frazer Solar, the attachment of revenues will hamper the country’s already fragile fiscal position. Of greater concern perhaps, is the reputational impact of the dispute. If the Majoro administration fails to account for the government’s actions, it could deter donors and investors from engaging with Lesotho. Finally, failure to resolve the dispute among textile workers will weigh on the productivity of the key sector, at the expense of national output.