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Southern Africa Report Archive

Lori Pottinger reports on the gross corruption being exposed around the infamous Lesotho Highlands Water Project (LHWP). (jbv)

vol 15 no 2

Scandal in Lesotho: Caught wet-handed
Lori Pottinger

Printable Version
Southern Africa Report

SAR Vol 15 No 2, February 2000
Pg 16



Lori Pottinger is the Southern Africa campaigns director for International Rivers Network in Berkeley, California. More information on this project and IRN's other Southern Africa campaigns is available at: www.irn.org.

In July, it was revealed in a respected South African newspaper that a dozen major international dam-building companies involved in the World Bank funded Lesotho Highlands Water Project (LHWP) in Southern Africa had lavishly bribed at least one top official on the project, allegedly giving nearly US$2 million in bribes over ten years. The list of corrupt companies reads like a who's who of the dam-building industry (see box for full listing of companies and bribes paid).

At press time, the World Bank had indicated that its anti-corruption guidelines may not apply in this case, saying that the firms involved would not face any rebuke from the Bank unless funds it specifically lent for the project were involved in the bribery. International NGOs have pressed the Bank to take a stronger stance.

"We call on the World Bank to debar these companies until this case is resolved," said Patrick McCully, campaigns director for the Berkeley-based International Rivers Network. And in a December letter to the Swiss Executive Director at the Bank, Swiss NGO Berne Declaration wrote, "We believe that the dam-building companies charged with corruption should be suspended from receiving World Bank contracts while they are under investigation. If the verdict confirms the allegations, the companies should be debarred from the project and any other World Bank funded projects as described in the World Bank procurement guidelines." The group also asked for an independent investigation into the Bank's role in the project, as did an Italian NGO in a letter to Bank President James Wolfensohn.

Lesotho NGOs working on the project are also calling for more accountability from the Bank. "It is the World Bank whose guidelines were used during bidding by the big companies. Now it surfaces that the bid process itself was riddled with bribery and corruption," the NGOs wrote in an October 12 editorial in the Lesotho newspaper The Survivor. "Punishing corrupt multinational companies involved in the Lesotho Highlands Water Project and closely monitoring the implementation of the project's social fund would reassure us that the World Bank's aim to alleviate poverty has meaning for us in Lesotho."

In late December, it was revealed that in addition to the corrupt official, the corporations are also being charged in Lesotho courts for bribing the official. Representatives from some of the companies appeared in court on December 7. The corruption trial is expected to begin in May and run approximately five months.

The LHWP corruption story first appeared in the South African newspaper Business Day, as the Lesotho government's court case against the corrupt official, Masupha Sole, drew near. The charge sheet states that Sole "did unlawfully, intentionally and corruptly accept bribe moneys, over the period February 1988 to December 1998, from Lesotho Highlands Water Project contractors." Sole, appointed CEO of the LHWP in 1986, was suspended in December 1994 and dismissed from his position in 1995. One source told Business Day that contractors paid bribes directly into Swiss and French bank accounts in Sole's name.

Although the companies are being prosecuted for their role in the scandal, the South African water minister in charge of the project, Ronnie Kasrils, has said that the companies will keep their contracts. The South African group Public Services International Research Unit, along with the South African Municipal Workers Union, issued a statement at the October International Anti-Corruption Conference held in Durban, calling for South Africa to prosecute all multinational bribe givers, and impose 5-year bans on all convicted groups and their subsidiaries and their partners.

Project background

The LHWP is Africa's largest infrastructure project, involving five dams (one of which is built and another underway), miles of tunnels through the Lesotho mountains, and a small hydropower component. The project delivers Lesotho's water to South Africa's biggest urban area, which includes Johannesburg and Pretoria. (See SAR, Vol. 13 No. 4 (August 1998), for a previous article on this project.)

The project's social impacts in Lesotho have been especially hard on the rural Highlands communities who have lost fields, grazing lands and access to water sources due to the project. Despite decade-old promises, their livelihoods have not been re-established and poor people have been pushed further to the edge in their struggle for survival.

Widespread corruption on the project is thought to be one reason that the social fund intended to help affected communities undertake development projects has accomplished virtually nothing. A September letter on the corruption scandal by Lesotho NGOs who represent dam-affected people highlighted problems plaguing the project's social programs. "The fund has been and continues to be a tool of opportunistic politicians," write Motseoa Senyane of Transformation Resource Centre and Thabang Kholumo of the Highlands Church Solidarity and Action Centre. "Although the committee designated to select projects to be supported by the social fund has not met even once yet, money from the fund has been used to support ill-conceived projects built by workers hired according to political party affiliation. In Lesotho, we see the same stretch of road repaired; torn up the next week; repaired again the following week; and then torn up once more at the end of the month." The letter goes on, "Punishing the corrupt multinationals involved with the LHWP and closely monitoring the implementation of the project's social fund would reassure us of the World Bank's concern."

Firms deny involvement

A number of the companies involved have denied their involvement in the bribery, despite the strong corroboration of the case's basic facts from the Swiss government. According to reports in the Swiss newspaper SonntagsZeitung, an investigation by the district attorney in Zurich, Switzerland found that 12 firms had paid money directly to the Zurich and Geneva bank accounts of the accused official, or to bank accounts of third parties. The firms' names had been blacked out in the Swiss court documents, but it seems likely they correspond to the 12 firms listed in the Business Day accounts.

The Swiss-Swedish firm ABB has been the most outspoken in its support of the ongoing investigation. The company's CEO Göran Lindahl told a Brazilian magazine in August, "This type of thing cannot be tolerated. Without getting into details, in the Lesotho scandal we have known about problems involving the company since 1987. We decided on our own to cooperate with the prosecutors in Switzerland and in Lesotho. This resulted in the firing of the official responsible." Lindahl is also a commissioner on the independent body the World Commission on Dams, which is currently evaluating the development effectiveness of dams worldwide.

Other companies are being more steadfast in denying their guilt. The Canadian firm Acres International was quoted as follows in Engineering News-Record (82399 issue): "We vehemently deny the accusation," says Robert Witherell, senior vice president of Acres International Ltd., Niagara Falls, Ontario. "Nobody in Acres had any knowledge of any payments to Sole." A nearly completed internal probe has turned up no evidence of bribery, he says.

The Canadian government has been asked to cooperate in the investigation by the South African and Lesotho governments, but an August 20 article in Canada's The National Post revealed that there was no action being taken at that time. Author Patricia Adams wrote: "When I asked Department of Foreign Affairs and International Trade officer Richard Chappell how the Canadian government was treating this case, he stated that it is `not treating this issue at all.' When I asked if Canada would give Lesotho "mutual legal assistance" in collecting evidence for this case, as legislation provides, the Department of Justice's senior counsel in the international assistance group, Kimberly Prost, had `no comment.' When I asked the Canadian International Development Agency, which paid more than $100,000 to Acres International for its work on the Lesotho dam project, what it would do should wrongdoing be established - CIDA has a formal anti-corruption policy - it said it would consult the appropriate Canadian authorities, presumably the same Departments of Foreign Affairs and Justice that are sitting on their hands."

The companies implicated in this scandal are no strangers to allegations of corruption. For example, Spie Batignolles and Sogreah were involved in Kenya's Turkwell Gorge Dam which, because of bribes reportedly paid to Kenya's president and energy minister, cost more than twice what the European Commission said it should have. Impregilo, Dumez and Lahmeyer were involved in Latin America's Yacyretá Dam, which Argentina's President Carlos Menem called a "monument to corruption." Lahmeyer and Impregilo also had contracts on Guatemala's Chixoy Hydroelectric Project, which lost between $350 and $500 million dollars to corruption. And ABB and Dumez worked on Itaipú Dam (Brazil/Paraguay), which has been described as "possibly the largest fraud in the history of capitalism."

All of the companies implicated in this scandal are from countries that have signed the Organization for Economic Cooperation and Development's convention on corruption and bribery, which obliges signatories to adopt national legislation which makes it a crime to bribe foreign public officials. Thus far, none of the governments have pressed charges in this case.

World Bank's role

The World Bank has lent more than $150 million for the project. As the project's problems have accumulated over the years, Bank officials have taken to pointing out that its investment represents just five percent of overall project costs. But if the Bank's financial contribution to the Lesotho project is relatively small, its role in organizing the financing for the project was instrumental in getting it off the ground. The Bank financed the design of the project, and set up an offshore trust in the UK to help other donors circumvent international sanctions against South Africa's then-apartheid regime. The loan was nominally for Lesotho, a country far too poor to qualify for large loans.

According to confidential project documents, the Bank was also responsible for "effective project management, human resource development and sound financial management," in addition to providing for design and construction supervision, the transfer of engineering and other technical skills to local staff, and oversight of social and environmental impacts.

The World Bank has proclaimed that fighting corruption is essential to its mission of reducing poverty and promoting environmental sustainability. But the corruption on this project will test the Bank's resolve in fighting corrupt practices.

The Bank's procurement guidelines state it will "declare a firm ineligible, either indefinitely or for a stated period of time, to be awarded a Bank-financed contract" if the firm is found to have "engaged in corrupt or fraudulent practices in competing for, or in executing, a Bank-financed contract." A Bank "sanctions committee" decides on these matters, and maintains a list of ineligible firms. The listing, found on the Bank's web site, includes nine relatively small companies.

First indications are that the Bank believes its rules may not apply to this high-profile case, because the alleged bribes are not directly tied to bank loans on the project. In a letter to an Italian NGO on the case, Callisto Madavo, Vice President for Africa at the Bank, writes, "the Bank must continue to act in conformity with its own governing rules and guidelines. Due process must be afforded to companies and individuals accused of corruption. ... For these reasons, the Bank can only extend the debarment of contractors to those that were financed by the Bank. We do not have jurisdiction to investigate and declare ineligible every corporation suspected of corruption regardless of its connection to a Bank-financed contract." The bank will certainly lose credibility in its war on corruption if it pursues this narrow view of its obligations.

Moreover, those who monitor corrupt practices believe the Bank needs to take a particularly strong stance on this case. Jeremy Pope, executive director of Transparency International, the Berlin-based NGO that monitors corruption, told the Washington Post: "It's a project the World Bank was involved in, and logic says - if you're bribing, you're bribing; and if you're unfit to be bidding for business, you're unfit."

If the Bank were to debar companies found to have bribed the Lesotho official, it could have huge ramifications on a number of river development schemes. For example, Hochtief, Impregilo and Dumez are involved in the Bank-funded Ertan Dam in China. Acres International, Impregilo, Hochtief, Ed Zublin, Spie Batignolles and Dumez all have contracts on Xiaolangdi Dam in China, the Bank's largest loan to China to date. Impregilo is also working on China's Shanxi Yellow River Diversion Project, which will divert water from the already troubled Yellow River to the mining centre of Datong; the Lower Kihansi in Tanzania; and Ghazi Barotha in Pakistan. Both Acres and Lahmeyer are involved in the Bank-funded Nam Theun II project in Laos. Acres is also building the Owens Falls Extension Project on the Upper Nile in Uganda, and is producing a study of hydropower and other energy options in Uganda with IFC funding. Many of these companies also are working on non-dam power projects with World Bank funding.

The World Bank's fiscal oversight responsibilities on this project should have placed it in a position to uncover this corruption itself. The Lesotho official charged was fired in 1995, and yet bribes allegedly passed from the dam companies to his account as late as 1998. According to internal correspondence between the government of Lesotho and the World Bank, the Bank was aware of serious management problems at least since 1994. A December 2, 1994 letter to the Government of Lesotho from the Bank's Southern Africa Department acknowledges that a management audit of the project had taken place and that two officials, including the one who now stands accused of bribery, were suspended from their duties.

Ironically, as this mismanagement crisis began to unfold, the World Bank voiced its support for the suspended managers in this same 1994 letter, and said that the suspensions "could seriously jeopardize the progress of the project." The Bank's letter even threatened to take legal action against the government for making the management changes without its permission.

What the Bank knew, and when it knew, has ramifications for the untimely approval of the project's second dam, Mohale, now under construction. It was known at the time of approval that this dam's water is not needed for many years - as much as 17 years by some South African water conservation experts - and yet the Bank insisted on moving forward with its loan package in September 1998. One of the Bank's reasons for moving forward prematurely with the project was that contractors were already in place from the first dam, meaning there would be no costs to "mobilize" the contractors for the second dam. Many of these contractors are now alleged to have been bribing on the project for years, information the Bank claims it did not have when the Mohale loans were approved. In fact, the Bank stated in a letter to IRN that it only learned of the bribery in July 1999. But leaked documents out of Switzerland reveal that the Lesotho government requested the Swiss Supreme Court's assistance on the bribery allegations in August 1997. The Bank is either a highly incompetent fiscal overseer of the project, or it is not being truthful regarding its earliest knowledge of the bribery. In either case, a full independent investigation into its role is the only way to get to the truth of the matter.




The following list of companies and the reported bribe amounts paid was published in the July 29, 1999, edition of Business Day (South Africa). All figures in US dollars.

* ABB (Swedish/Swiss) - $40,410

* Acres International (Canadian) - $185,002

* Impregilo (Italian) - $250,000

* Spie Batignolles (French) - $119,393

* Sogreah (French) - $13,578

* Dumez International (French) - $82,422

* Lahmeyer Consulting Engineers (German) - $8,674

* ED Züblin (German) - $444,466

* Diwi Consulting (Germany) - $2,439

* LHPC Chantiers (international consortium) - $63,959

* Highlands Water Venture (international consortium, including Impregilo, the German firm Hochtief, the French firm Bouygues, the UK firms Keir International and Stirling International, and South African firms Concor and Group Five) - $733,404;

* Lesotho Highlands Project Contractors (international consortium which includes Balfour Beatty, Spie Batignolles, LTA, Züblin) - $57,269.


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