Meanwhile, Lesotho has a pretty hefty VAT bill.
South Africa pays approximately R230 million monthly in royalties to Lesotho for water from the Lesotho Highlands Water Project, while Lesotho owes R513 million in outstanding value-added tax (VAT) refunds as of February 2024.
These monthly payments drop to around R120 million during periods when water delivery is disrupted.
According to a briefing on Tuesday by the Department of Water and Sanitation to the portfolio committee on Water and Sanitation, the royalty structure operates on a 56-44% split favouring Lesotho.
Teboho Nkhahle, South African Chief Delegate to the Lesotho Highlands Water Commission, confirmed South Africa “started paying the revised royalties in January 2024” following recalculations using updated methodologies.
“We are currently paying around R230 million a month. But in the last six months, because there was no water being delivered and no electricity being generated, we’re paying around R120 million a month.”
The current treaty includes a 12-year review cycle for royalty rates.
Committee members called for external auditing by the Auditor General of South Africa to provide more rigorous oversight.
South Africa’s Water and Sanitation Deputy Minister David Mahlobo indicated willingness to explore such arrangements, stating: “We will mandate our teams that we should find modalities… that are more credible on ensuring that even that institution is on the other side.”
The R513 million VAT debt represents outstanding VAT refunds that Lesotho owes to South Africa.
Nkhahle confirmed that diplomatic efforts are underway to resolve these financial obligations.
Lesotho Highlands Water Project costs escalate to R53.3 billion
The second phase of the Lesotho Highlands Water Project will deliver an additional 490 million cubic meters of water annually to South Africa, supplementing 780 million cubic meters from Phase One.
The water primarily serves Gauteng province.
The project operates under the 1986 treaty between South Africa and Lesotho, with oversight from the Lesotho Highlands Water Commission, comprising six commissioners from each country.
Mahlobo confirmed that the project remains on track for commissioning by 2029, despite recent setbacks, including contractor suspensions due to negligence and concerns over pollution.
“The project is proceeding,” Mahlobo stated, emphasising that different work packages continue simultaneously even when specific components face delays.
The project’s budget has escalated significantly from its original estimates, with current projections at R53.3 billion.
Originally estimated to cost R42.06 billion, the project escalated to R53.3 billion. Mahlobo reaffirmed that water delivery is expected by August 2028, with completion scheduled for September 2028.
Construction progress has reached 77% for major components.
Nkahle explained that the R53.3 billion long-term cost plan already includes R6.2 billion in contingencies.
“This escalation and contingencies [are ]already built into this long-term cost plan, and also furthermore, each contract also has built in contingency,” Nkhahle said.
ALSO READ: Completion date for R53 billion Lesotho Highlands Water Project postponed again
Lesotho Highlands Water Project financial structure
Committee members expressed concern about the impact on water tariffs and the need for transparency in cost management.
“All of us who are very worried, very worried around the issues of cost escalation, some of the cost escalation is because of the issues of contingencies,” Mahlobo acknowledged during the briefing.
South Africa bears all cost-related payments through the Trans-Caledon Tunnel Authority (TCTA), which borrows from markets and recovers costs through water tariffs.
Water tariffs have been negotiated with end users, such as Randwater, “over CPI” to account for escalating costs.
The funding strategy incorporates long-term loans to prevent sharp tariff increases.
Additionally, 33% of project costs are allocated to acid mine drainage treatment, a decision made to protect the quality of water being transferred from Lesotho.
Percy Sechemane, TCTA CEO, confirmed the funding arrangements where South Africa receives “the enduring benefit of water transfer.”
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Contractor suspension and pollution issues
A major contractor was temporarily suspended due to negligence, specifically related to pollution in the construction area.
The suspension was triggered by environmental concerns affecting water quality in the Katse Dam reservoir.
“The contractor was indeed actually suspended. That’s the report we got,” Mahlobo confirmed, adding that the minister had to intervene after the matter became public through media reports.
Nkhahle confirmed that “that suspension has been lifted and the 1,300 workers who were temporarily laid off resumed work this morning.”
The engineer accepted interim measures implemented by contractors, along with a comprehensive remedial plan to address environmental concerns.
Nkhahle clarified that the pollution was “localised and insignificant due to the size of the effluent that was running into the reservoir in relation to the total volume of the reservoir.”
However, he noted it was significant from a construction monitoring perspective.
ALSO READ: Gauteng residents warned to brace for major water disruptions this week
Treaty review and financial management
The current treaty includes a 12-year review cycle for royalty rates, but committee members questioned why reviews don’t occur annually to match maintenance and operational cost variations.
Percy Sechemane, CEO of the TCTA, explained that the lengthy review period provides stability for funders.
“The treaty itself is an instrument that a lot of thought went into from both South Africa and Lesotho,” he said, noting that frequent changes would make financiers uncomfortable about their investments.
Sechemane also confirmed that water tariffs have already been negotiated with end users like Randwater to account for the escalated costs, with increases “over CPI on the South African side so that we can close that gap.”
Lesotho Highlands young professionals’ programme
The Lesotho Highlands Development Authority’s Young Professionals Programme currently has 60 graduates.
However, only five are from South Africa despite 39 being offered opportunities.
According to project officials, South African graduates declined participation due to low stipends and challenging working conditions in the mountains.
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