VII. INVESTMENT CLIMATE Lesotho maintains a sound regulatory and investment policy environment, but political instability in 1994 has diminished its ability to attract the employment-generating investments needed to consolidate good macroeconomic performance. Openness to Foreign Investment The Lesotho Government welcomes and seeks to encourage foreign investment. The Lesotho National Development Corporation was created in 1967 to act on the Government's behalf in promoting and helping to finance the establishment of industry in manufacturing, mining and tourism. LNDC has since expanded its operations into all areas of investment. Until recently, investment in certain industries determined to be strategic to Lesotho's industrial development -- generally, low-technology industries susceptible to technology transfer and those making use of indigenous raw materials such as wool and mohair -- required a local partner. This is no longer the case, and foreign investors may own 100 percent of their investment. The lack of local entrepreneurial strength has meant the government is under no pressure to exclude foreign investment to the advantage of local investors. Foreign investments are screened in a routine, non-discriminatory manner. LNDC may delve more deeply into an investor's financial background and qualifications in cases in which LNDC participation is sought. Lesotho has no specific fiscal or other incentives available to foreign investors. In 1990, special tax rates for so-called "pioneer industries" were abolished in favor of a lower, across- the-board corporate profits tax rate of 15 percent for manufacturers. (Other corporations pay progressive rates up to the top marginal rate of 40 percent.) LNDC can make available to investors, foreign or local, improved industrial sites and/or equity in line with its mandate of encouraging investment. As a member of the rand Common Monetary Area, Lesotho's local currency, the loti (pl: maloti), is fully and freely convertible at par with the South African rand. There is no discrimination against imports, exports or foreign exchange transactions by foreign investors. Transfer Policies There are no restrictions on the transfer abroad of funds associated with an investment, with the following exception: profits earned on capital raised within the local banking system may be required to obtain foreign exchange licensing from the Central Bank before transfer abroad. Dividends transferred abroad are subject to a ten percent withholding tax. There is no queuing for foreign exchange, given the Loti's free convertibility with the Rand. Expropriation and Compensation Lesotho has no history of expropriation except for public purposes, in a non-discriminatory manner. There is no history of nationalization of private investments. Dispute Settlement In 1992, the Government declared void a mining concession previously granted to a foreign company interested in prospecting for diamonds, and prohibited by law any suit for compensation this company might bring in Lesotho's court system. The circumstances under which the concession was granted are controversial; it was alleged that the concession had been granted by a senior government official, since departed from government, who sought advantage in an eventual expropriation. The foreign investor charged arbitrary treatment, and has not pursued the case in Lesotho's High Court, which has not yet ruled in the matter. In more conventional foreign investments, the Government has no history of disputes. Lesotho is a member of the International Center for the Settlement of Investment Disputes, and has expressed its readiness to accept binding international arbitration of investment disputes. Performance Requirements Lesotho imposes no performance requirements on foreign investors. Right to Private Ownership and Establishment Foreign and domestic entities may wholly-own business enterprises, and freely acquire and dispose of interests therein. Private enterprises are in free competition with public enterprises with respect to access to markets, credit and other business operations. The government has not rejected foreign participation in the privatization of state-owned enterprises, although practical experience in this regard is limited. Property may be long-term leased, but not owned, neither by foreigners nor nationals. Protection of Property Rights Lesotho's Industrial Property Order (1989), Copyright Order (1989) and Industrial Property Regulations (1989) are the bases for legal protection of intellectual property rights. Patents, valid for 15 years from date of application, have rarely been issued in Lesotho, but trademark protection is widely sought and granted. Lesotho is a member of WIPO and the African Regional Intellectual Property Organization. Regulatory System Lesotho's weak regulatory system generally does not hinder competition, nor inordinately distort business or investment practices, although government policies in the parastatal- dominated agroindustrial sector have tended to protect public investments. Bureaucratic procedures cannot be described as streamlined, but are not inconsistent with procedures prevailing elsewhere in Africa. Capital Markets and Portfolio Investment Credit is allocated on a market basis without discrimination with regard to an investor's nationality. Lesotho has a nascent capital market consisting primarily of transactions in government bonds; business activity is not sufficient to support capital market activity beyond the banking system. Legal, regulatory and accounting systems are consistent with international norms. Political Violence In May 1991, foreign-owned retail establishments were targeted in riots that were quelled by Lesotho security forces after a number of deaths. In 1994, successive mutinies within the army and police led to increased insecurity and a brief spate of generalized looting in early May 1994. In contrast, South Africa's successful 1994 transition to democracy has raised expectations of a broad easing of political tensions affecting business throughout Southern Africa. Bilateral Investment Agreements Lesotho has none. A draft U.S.- Lesotho Bilateral Investment Treaty has been under consideration by the Lesotho Government for several years. Investment Insurance Programs Lesotho is a member of MIGA. OPIC conducted an investment mission to Lesotho in 1989, resulting in one current and one prospective U.S. investment here. OPIC insurance is available for Lesotho. Labor Labor is widely available but skill levels vary. Keeping skilled or professional workers can prove difficult in Lesotho's economic climate as higher wages often are available in neighboring South Africa, causing a steady skills-drain across the border. Lesotho is a member of the International Labor Organization. The ILO has considered alleged abuses against trade unionists working on the Highlands Water Project and elsewhere in the formal sector. A preliminary ILO finding held Lesotho at fault in some areas. Labor relations within the Highlands Project have been tense, particularly since 1993, over wage and benefit scales. Foreign Trade Zones Lesotho has none. Capital Outflow Policy There are no impediments nor incentives to outward direct investment from Lesotho. Foreign Direct Investment Statistics LNDC compiles data on those foreign investments that involve LNDC guarantees, equity, or other support. These investments can safely be assumed to represent the vast majority of investment flows into the country. The following static data represent LNDC-associated foreign investment stock in Lesotho as of end 1991: Sector Country Projects Value Textiles South Africa 13 7,388 Taiwan 11 20,783 Switzerland 1 725 Hong Kong 1 725 Zimbabwe 1 725 Agro-Ind South Africa 5 3,478 UK/Netherlands 1 13,043 Zimbabwe 1 815 USA 1 1,724 Services South Africa 7 4,221