Document of The World Bank FOR OFFICIAL USE ONLY Report No: 81069-LS INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 8.7 MILLION (US$13.1 MILLION EQUIVALENT) TO THE KINGDOM OF LESOTHO FOR A SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT OCTOBER 3, 2013 Finance and Private Sector Development AFCS1 Country Management Unit Africa Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: 81069-LS
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED CREDIT
IN THE AMOUNT OF SDR 8.7 MILLION
(US$13.1 MILLION EQUIVALENT)
TO THE
KINGDOM OF LESOTHO
FOR A
SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT
OCTOBER 3, 2013
Finance and Private Sector Development AFCS1 Country Management Unit Africa Region
This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information
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CURRENCY EQUIVALENTS
(Exchange rate effective as of September 16, 2013) Currency unit = Maloti
US$1 = M 9.78 US$1 = SDR 0.66
LESOTHO GOVERNMENT FISCAL YEAR April 1 – March 31
ABBREVIATIONS AND ACRONYMS
AFTFE AFTP1 AGOA BEDCO BoS CAS CBL CIB CPAR CQS CRA
Africa Technical Financial and Private Sector Development Unit for East and Southern Africa Africa Technical Poverty Reduction and Economic Management Unit for Africa African Growth and Opportunity Act Basotho Enterprise Development Corporation Bureau of Statistics Country Assistance Strategy Central Bank of Lesotho Credit Information Bureau Country Procurement Assessment Report Selection based on Consultants’ Qualifications Credit Reporting Act
EA ERR ESMF ESMP FBS FDI FSDS GDP GoL IBRD ICB IDA IFC IFRs IFMIS IPF IPMP LCH
Environmental Assessment Economic Rate of Return Environmental and Social Management Framework Environmental and Social Management Plan Fixed Budget Selection Foreign Direct Investment Financial Sector Development Strategy Gross Domestic Product Government of Lesotho International Bank for Reconstruction and Development International Competitive Bidding International Development Association International Finance Corporation Interim Financial Reports Integrated Financial Management Information System Investment Project Financing Integrated Pest Management Plan Lesotho Co-operative Handicrafts
iii
LCS LEAP LHHA LNDC LTDC M MAFS MCA MCC MDP M&E MFLR MoF MSME MTEC MTICM NBFIs NCB NPV NSDP PDO OBFC ORAF PFM PFMA
Least Cost Selection Lesotho Enterprise Assistance Program Lesotho Hotel and Hospitality Association Lesotho National Development Corporation Lesotho Tourism Development Corporation Maloti Ministry of Agriculture and Food Security Millennium Challenge Account Maseru City Council Ministry of Development Planning Monitoring and Evaluation Ministry of Forestry and Land Reclamation Ministry of Finance Micro, Small and Medium Enterprises Ministry of Tourism, Environment and Culture Ministry of Trade and Industry, Cooperatives and Marketing Non- Bank Financial Institutions National Competitive Bidding Net Present Value National Strategic Development Plan Project Development Objective One-Stop Business Facilitation Center Operational Risk Assessment Framework Public Financial Management Public Financial Management and Accountability Act
PIM PMU PPA PPAD PPP PPR PSC PSCEDP QBS QCBS RETOSA SACU SADC SADP SBD
Project Implementation Manual Project Management Unit Project Preparation Advance Procurement Policy Advisory Division Public Private Partnership Public Procurement Regulations Project Steering Committee Private Sector Competitiveness and Economic Diversification Project Quality Based Selection Quality- and Cost-Based Selection Regional Tourism Organization of Sothern Africa Southern African Customs Union Southern African Development Community Smallholder Agricultural Development Project Standard Bidding Documents
SMEs TOAL TSA
Small and Medium Enterprises Tour Operators Association of Lesotho Tourism Satellite Account
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Regional Vice President: Makhtar Diop
Country Director: Asad Alam Sector Director: Gaiv M. Tata Sector Manager: Irina Astrakhan
Task Team Leader: Smita Kuriakose
v
LESOTHO
SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION
TABLE OF CONTENTS
Page
I. STRATEGIC CONTEXT .................................................................................................1
A. Country Context ............................................................................................................ 1
B. Sectoral and Institutional Context ................................................................................. 2
C. Higher Level Objectives to which the Project Contributes .......................................... 5
II. PROJECT DEVELOPMENT OBJECTIVE ..................................................................6
A. PDO............................................................................................................................... 6
B. Project Beneficiaries ..................................................................................................... 6
C. PDO Level Results Indicators ....................................................................................... 7
III. PROJECT DESCRIPTION ..............................................................................................8
Project Components ............................................................................................................ 8
A. Project Financing ........................................................................................................ 24
Project Cost and Financing ............................................................................................... 24
B. Lessons Learned and Reflected in the Project Design ................................................ 24
IV. IMPLEMENTATION .....................................................................................................26
A. Institutional and Implementation Arrangements ........................................................ 26
B. Results Monitoring and Evaluation ............................................................................ 27
C. Sustainability............................................................................................................... 27
V. KEY RISKS AND MITIGATION MEASURES ..........................................................28
A. Risk Ratings Summary Table ..................................................................................... 28
B. Overall Risk Rating Explanation ................................................................................ 28
VI. APPRAISAL SUMMARY ..............................................................................................28
A. Economic and Financial Analysis ............................................................................... 28
B. Technical ..................................................................................................................... 30
vi
C. Financial Management ................................................................................................ 31
D. Procurement ................................................................................................................ 32
E. Social (including Safeguards) ..................................................................................... 32
F. Environment (including Safeguards) .......................................................................... 33
Annex 1: Results Framework and Monitoring .........................................................................35
Annex 2: Detailed Project Description .......................................................................................40
Project Components .......................................................................................................... 40
Annex 3: Implementation Arrangements ..................................................................................68
Annex 4: Operational Risk Assessment Framework (ORAF) .................................................91
Annex 5: Implementation Support Plan ....................................................................................94
Annex 6: Detailed Project Costs .................................................................................................98
Annex 7: Detailed Economic and Financial Analyses ..............................................................99
Annex 8: Team Composition ....................................................................................................116
Annex 10 MAP ..........................................................................................................................118
List of Figures
Figure 1: Trends in Sectoral Distribution of GDP ......................................................................... 1
List of Tables Table 1: Doing Business Indicators ................................................................................................ 3 Table 2: Domestic Credit to Private Sector (as a percentage of GDP) ........................................... 4 Table 3: Project Cost Allocation .................................................................................................. 24
vii
.
PAD DATA SHEET
Lesotho
Second Private Sector Competitiveness and Economic Diversification Project (P144933)
PROJECT APPRAISAL DOCUMENT.
AFRICA
AFTFE
Report No.: PAD672.
Basic Information
Project ID Lending Instrument EA Category Team Leader
P144933 Investment Project Financing
B - Partial Assessment Smita Kuriakose
Project Implementation Start Date Project Implementation End Date
31-Oct-2013 31-Oct-2018
Expected Effectiveness Date Expected Closing Date
31-Jan-2014 30-Apr-2019
Joint IFC
No
Sector Manager Sector Director Country Director Regional Vice President
Irina Astrakhan Gaiv M. Tata Asad Alam Makhtar Diop .
Borrower: Ministry of Finance and Development Planning PO Box 14966, Maseru 100, Lesotho
Contact: Mr. Mosito Khethisa Title: Principal Secretary Tel: 22323703 Email: [email protected]
Responsible Agency: Ministry of Trade and Industry, Cooperatives and Marketing PO Box 474, Maseru 100, Lesotho
Contact: Mr. Moahloli Mphaka Title: Principal Secretary Tel: 22317454 Email: [email protected] .
Project Financing Data(in USD Million)
[ ] Loan [ ] Grant [ ] Other
[ X ] Credit [ ] Guarantee
Total Project Cost: 15.00 Total Bank Financing: 13.10
Total Cofinancing: Financing Gap: 0.00 .
Financing Source Amount
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BORROWER/RECIPIENT 1.90
International Development Association (IDA) 13.10
Total 15.00.
Expected Disbursements (in USD Million)
Fiscal Year 2014 2015 2016 2017 2018 2019 2020 0000 0000
Annual 0.70 1.50 2.75 2.75 3.30 2.10 0.00 0.00 0.00
Cumulative 0.70 2.20 4.95 7.70 11.00 13.10 13.10 0.00 0.00 .
Proposed Development Objective(s)
The development objective of the proposed project is to contribute to the development of selected non-textile sectors resulting in increased private sector investment, firm growth and job creation. .
Components
Component Name Cost (USD Millions)
Improving the Business Environment 3.56
Supporting Economic Diversification 8.95
Project Implementation Support 2.04.
Institutional Data
Sector Board
Investment Climate Practice .
Sectors / Climate Change
Sector (Maximum 5 and total % must equal 100)
Major Sector Sector % Adaptation Co-benefits %
Mitigation Co-benefits %
Industry and trade General industry and trade sector
50
Industry and trade Other industry 40
Finance SME Finance 10
Total 100
I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. .
Themes
Theme (Maximum 5 and total % must equal 100)
Major theme Theme %
Financial and private sector development Micro, Small and Medium Enterprise support
50
ix
Trade and integration Export development and competitiveness 30
Financial and private sector development Other Private Sector Development 20
Total 100 .
Compliance
Policy
Does the project depart from the CAS in content or in other significant respects?
Yes [ ] No [ X ]
.
Does the project require any waivers of Bank policies? Yes [ ] No [ X ]
Have these been approved by Bank management? Yes [ ] No [ ]
Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]
Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] .
Safeguard Policies Triggered by the Project Yes No
Environmental Assessment OP/BP 4.01 X
Natural Habitats OP/BP 4.04 X
Forests OP/BP 4.36 X
Pest Management OP 4.09 X
Physical Cultural Resources OP/BP 4.11 X
Indigenous Peoples OP/BP 4.10 X
Involuntary Resettlement OP/BP 4.12 X
Safety of Dams OP/BP 4.37 X
Projects on International Waterways OP/BP 7.50 X
Projects in Disputed Areas OP/BP 7.60 X .
Legal Covenants
Name Recurrent Due Date Frequency
Description of Covenant
.
Conditions
Name: Type
Description of Condition
Team Composition
x
Bank Staff
Name Title Specialization Unit
Smita Kuriakose Economist Task Team Lead AFTFE
Dobromir Christow Operations Officer Operations Officer AFTFE
Thomas Farole Senior Economist Senior Trade Specialist AFTP1
Hannah R. Messerli Senior Private Sector Development Specialist
Senior Private Sector Development Specialist
AFTFE
Paula F. Lytle Senior Social Development Specialist
Senior Social Development Specialist
AFTCS
Jose C. Janeiro Senior Finance Officer Senior Finance Officer CTRLA
Lungiswa Thandiwe Gxaba
Consultant Consultant AFTA2
Christiaan Nieuwoudt Finance Officer Finance Officer CTRLA
Chitambala John Sikazwe
Procurement Specialist Procurement Specialist AFTPE
Anthony Molle Senior Counsel Senior Counsel LEGSO
Antonia Preciosa Menezes
Private Sector Development Specialist
Private Sector Development Specialist
CICBR
Tandile Gugu Zizile Msiwa
Financial Management Specialist
Financial Management Specialist
AFTME
Francesco Strobbe Financial Economist Financial Economist AFTFE
Puja Guha Consultant Consultant AFTFE
Yeshareg Dagne Program Assistant Program Assistant AFTFE
Tanangachi Ngwira Senior Country Program Assistant
Senior Country Program Assistant
AFTFE
Non Bank Staff
Name Title Office Phone City
.
Locations
Country First Administrative Division
Location Planned Actual Comments
1
I. STRATEGIC CONTEXT
A. Country Context
1. Lesotho is a lower middle-income country with per capita gross national income of US$1,210.1 The economy has grown at an annual rate of 3 percent in per capita terms—modest for its income level but comparable to the rest of the Southern African Customs Union (SACU) region, the African continent, and small states.2 The accompanying structural changes have involved shifts from subsistence agriculture and remittances toward natural resources, manufacturing exports, and services. The main growth engine before 2007 was manufacturing exports, mostly from the textile and apparel industry. Since then, public investment has taken over as the main driver. The manufacturing sector’s contribution to Gross Domestic Product (GDP) declined from about 20 percent in 2006 to 11 percent in 2011 (Figure 1)—the result of stagnation in the textile and apparel sector after the global economic crisis, increased competition from low-cost Asian producers, and the rapid growth in other sectors, notably mining.3
Figure 1: Trends in Sectoral Distribution of GDP
Source: BoS and Staff Estimates
2. The country now finds itself at a crossroads– requiring new engines of growth, a more streamlined role of the state and the emergence of a dynamic private sector. Lesotho’s economic growth has been predominantly export led. The global economic crisis highlighted Lesotho’s economic vulnerabilities and the urgent need to accelerate progress in laying the foundations for economic competitiveness and export diversification4. Lesotho has one of the least diversified export baskets, not only with excessive reliance on textiles, but within the sector excessive reliance on a small range of products, largely to the US market through African Growth and Opportunity Act (AGOA). Since 2008, the reductions in the US demand for textiles and the 1 2011 Atlas GNI per capita. 2 Small states are defined as sovereign countries with a population of 2 million or less. Favaro, Edgardo M., (2008), Small States, Smart Solutions, World Bank Press, Washington D.C. 3 GoL, 2011. 4 Country Assistance Strategy for Lesotho: 2010-2014, Washington DC: World Bank.
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decrease in the global demand for diamonds forced some textile producers to close and some mines to suspend operations highlighting Lesotho’s vulnerability and underlying the need to diversify.
3. Economic growth has not been adequately inclusive, resulting in high concentration of poverty in rural areas, persistent high levels of inequality, and widespread unemployment. Unemployment stood at 24 percent in 2008, among the highest in the world. Only 230,000 of the 608,000 employed people engage in formal wage employment. The rest are in informal activities, and they are often paid in-kind. Preliminary Government estimates based on the 2010/11 Household Budget survey show that the national poverty head count rate stood at 57.1 percent and the Gini Coefficient based on consumption stood at about 0.53. 4. Poverty is concentrated in rural areas that, despite poor soil quality and rainfall, remain home to about three quarters of the population, indicating underutilization and misallocation of labor resources. The critical challenges of inclusive growth, a sustainable and effective public sector, and access to quality service delivery define Lesotho’s core development agenda. A necessary condition to achieve inclusive growth is job creation, particularly in low-skilled sectors.
5. The National Strategic Development Plan (NSDP) seeks to establish the pre-conditions for high, sustainable, and private sector-led economic growth and faster job creation. The plan’s targets include long-term GDP growth of 5 percent per year and creation of 50,000 private-sector jobs. The plan also recognizes that the most effective way out of poverty is through high, sustainable and private sector-led economic growth coupled with faster job creation. It recognizes that the sustainable engines of growth are agriculture, manufacturing and tourism. In addition, it mentions that Lesotho needs to exploit better its comparative advantages such as: a) its location within South Africa, which provides access to its markets and advanced infrastructure that creates links with the rest of the world; b) trade preferences; and c) a relatively large, young, competitive and literate human resource base.
6. The proposed Second Private Sector Competitiveness and Economic Diversification Project aims at supporting the Government’s strategy by (i) improving business environment; (ii) increasing access to finance; (iii) supporting investment promotion in new sectors with increased backward linkages to the local economy and (iv) targeted support to new growth sectors such as horticulture and tourism that have tremendous potential for job creation and poverty alleviation.
B. Sectoral and Institutional Context
7. Lesotho’s private sector growth is hindered by a number of factors. Improving the overall business environment will be essential to attracting new Foreign Direct Investments as well as fostering a vibrant domestic private sector. The NSDP acknowledges an “uncompetitive business environment” as one of the most binding constraints to the growth of private enterprises, adversely affecting both foreign investment and the growth of local small and medium-sized enterprises (SMEs). All quantitative measures (Global Trade Reports, Doing Business Indicators, and Enterprise Surveys) suggest that business regulations are a serious constraint to growth
3
(Table 1). Lesotho’s Ease of Doing Business rank was 136 out of 185 countries in 20135. While Lesotho has made important reforms, notably in streamlining the process of starting a business, reflected in its improved overall ranking – by 17 places – in the 2013 Doing Business rankings it still lags behind many of its competitors. There remain a number of factors that hinder private sector growth, at almost every business stage – from accessing land to obtaining construction permits, engaging in cross-border trade with South Africa, and accessing finance. The country is losing ground to be competitive as several reform-minded African governments have implemented policies to cut high transaction costs. Productivity enhancements are essential to support the growth of real wages, and, therefore incomes and living standards.
Table 1: Doing Business Indicators
Ease of Doing Business Rank
Starting a Business
Dealing with Construction Permits
Registering Property
Getting Credit
Protecting Investors
Trading Across Borders
South Africa 39 53 39 79 1 10 115 Botswana 59 99 132 51 53 49 147 Namibia 87 133 56 169 40 82 142 Swaziland 123 165 41 129 53 128 141 Mozambique 146 96 135 155 129 49 134 Lesotho 136 79 140 157 154 100 144 Zimbabwe 172 143 170 85 129 128 167 Source: World Bank 2013 Doing Business Report
8. The manufacturing sector was until recently a growing source of employment, and remains critical for job creation. While FDI in the textile and apparel industry has delivered employment, the expected backward linkages to the local economy have been limited, with practically no spin-offs or subcontracting activities. The challenge facing Lesotho’s private sector today is twofold: (i) the need to diversify into other sectors by attracting FDI into new sectors and (ii) establishing stronger linkages between FDI and the local SMEs. 9. Lesotho is faced with an unemployment rate of 24 percent, with nearly two thirds of its labor force in the informal sector principally engaged in subsistence agriculture. In this context, focusing on commercial horticulture could be an important source of employment. The sector is a critical route to employment for the unemployed and those engaged in subsistence agriculture and could be particularly important in creating job opportunities for women. This is particularly important in light of the fact that despite efforts made by the Government of Lesotho (GoL) to assist farmers through subsidies on agricultural inputs, productivity has not responded positively which to a large extent is due to poor farm management practices6. This project aims at transforming strategic areas in Lesotho into major producers and exporters of early variety tree crops. Supporting the commercial horticulture sector will be a vital source of job creation and poverty alleviation bringing smallholder farmers out of subsistence farming into commercial farming. In addition, the project will also help facilitate targeted product development and
5 World Bank 2013 Doing Business Report 6 GoL National Budget Speech 2013/14. “Promoting Growth for Economic and Social Development”
4
productivity improvements in the tourism sector that can in turn lead to increased job creation and foreign exchange.
10. Private sector growth is dependent on businesses being able to access credit at an affordable price. The level of financing to the private sector in Lesotho is low (Table 2). Domestic credit to the private sector (as a percent of GDP), that is measured by loans and trade credit that establish a claim for repayment is low in Lesotho, compared to other countries in the region. 11. The 2011 FinScope study reported financial inclusion among SMEs remains a significant constraint to the country’s growth and its effort to reduce poverty. The FinScope finding that 85 percent of Lesotho’s businesses are unbanked is a particularly high priority issue because these businesses are a primary source of future employment opportunities and economic growth. Despite recent improvements, financial sector reforms and innovations are required on both the demand and supply side to provide services at a level necessary to enable SMEs and underserved individuals to contribute more significantly to growing the economy, increasing employment and raising living standards.7
Table 2: Domestic Credit to Private Sector (as a percentage of GDP)
Year Lesotho South Africa Sub-Saharan Africa
2008-2012 15.3% 142.2% 61.4% (2011)
2003-2007 13.7% 153.8%
Source: World Development Indicators Database 2013, The World Bank
12. The NSDP notes that the main challenges for Lesotho are to increase financial inclusion of businesses and access to credit; to develop a broad and deep secondary market for bonds; and to diversify the market to allow development and trading of different instruments. There is a relatively small banking sector in Lesotho, predominantly foreign owned. Of the four banks currently operating, three are subsidiaries of South African banks (Nedbank; Standard Bank; and First National Bank) and one is a government-owned bank (Lesotho Postbank). The banks are regulated by the Central Bank of Lesotho (CBL), although they usually adhere to South African standards for internal regulation (which are stricter standards). The banking sector serves approximately 38 percent of the adult population, through 42 branches. Despite a rapid increase
7 Lesotho Financial Sector Development Strategy (FSDS), 2013.
5
in the number of physical locations of branches and automated teller machines, significant regional disparities remain.8
13. The banking system contribution to GDP increased by 6.2 percent over the 3 years ending December 2012, while GDP, in current prices, has grown by 11.1 percent during the same time period. Despite their slow growth, banks have significantly increased their contribution to financial inclusion since 2009, increasing loans outstanding over the 3 years by 27 percent per annum and raising its loan deposit ratio from 43 percent to 57.1 percent as of December 2012. Following the reform of land titling, particularly the issuance of leasehold titles, bank lending has sharply increased9 showing how structural reforms can benefit the credit environment.
14. Several important further reforms remain to be undertaken in order to improve credit extension. These include the establishment of a credit bureau, the introduction of a legal framework and national registry for security over moveable property, and the enactment of a new insolvency statute10. The lack of these elements has resulted in a tight credit environment, whereby banks’ exposure is high and there is no effective way of tracking a borrower’s credit history. The proposed Second PSCEDP aims to address some of these issues to enable greater access to credit especially to the local SMEs by increasing the available financing instruments available to them.
C. Higher Level Objectives to which the Project Contributes
15. The proposed operation is integral to the Bank's assistance to Lesotho as outlined in the Country Assistance Strategy (CAS) which covers a four-year period (FY2010-14) and the Country Partnership Progress Report (2013). The CAS focuses on three broad areas of engagement: (i) fiscal adjustment and public-sector efficiency; (ii) human development and service delivery; and (iii) competitiveness and diversification. The CAS was developed within the context of the Government's strategy for growth and sustainable development, expressed in the GoL’s National Vision 2020 and the Interim National Development Framework. The CAS is also well aligned with the World Bank Strategy for Africa that focuses on competitiveness and employment as one of its two themes. In addition, this operation is relevant to the NSDP covering 2012/2013-2016/2017.
8 In Maseru there are about 10 branches and ATM locations for every 100,000 people, whereas in Mokhotlong, for example, there are only two branches and ATM locations for every 100,000 people (Finmark Trust, FinScope Consumer Survey Lesotho 2011). 9 In the 3 months ending March 31, 2013 banks’ loan portfolio increased by over M 357 million (a 38 percent annualized increase) raising the combined loan/deposit ratio to 63.8 percent (Background Technical Note to the Lesotho Financial Sector Development Strategy 2013) 10 Lesotho Financial Sector Development Strategy (FSDS), 2013.
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II. PROJECT DEVELOPMENT OBJECTIVE
A. PDO
16. The objective of the proposed project is to contribute to the development of selected non-textile sectors resulting in increased private sector investment, firm growth and job creation.
B. Project Beneficiaries
17. The Project will directly increase incomes and livelihoods for smallholder farmers, unemployed and underemployed Basotho population, and local handicrafts artisans. Further it will benefit Micro, Small and Medium Enterprises (MSMEs), commercial enterprises and government agencies such as Lesotho National Development Corporation (LNDC), Lesotho Tourism Development Corporation (LTDC), Basotho Enterprise Development Corporation (BEDCO), the Central Bank of Lesotho (CBL), Maseru City Council (MCC), Ministry of Trade and Industry, Cooperatives and Marketing (MTICM), Ministry of Forestry and Land Reclamation (MFLR), Ministry of Agriculture and Food Security (MAFS), Ministry of Tourism, Environment and Culture (MTEC), Ministry of Justice and Human Rights, Ministry of Law and Constitutional Affairs, and Ministry of Development Planning (MDP) as follows:
(a) Local businesses (particularly MSMEs): The implementation of the business registration and industrial license bills, as well as the introduction of a streamlined process to obtain construction permits would increase efficiency and reduce associated transactions costs of all businesses functioning in Lesotho. Further, the activities under the access to finance sub-component will directly benefit the unbanked population who do not have access to immovable assets and to Micro, Small and Medium Sized Enterprises (MSMEs) that will be able to secure collateralized loans against movable property. Local MSMEs will also benefit from the sub-component that aims to increase linkages between foreign firms and local entrepreneurs as well as from access to business development services through the matching grants fund that aim to improve their skills to enhance their efficiency, productivity and access to markets.
(b) Smallholder farmers: Smallholder farmers with access to land in a suitable microclimate, soil conditions and access to water who are selected to participate in the project either through the establishment of associations or farmers’ companies for establishment of commercial orchards on their land will benefit from the investments in the horticulture component that aims to improve their livelihoods and increase food security amongst the rural farmers. This will be done through the production of high value tree crops with the aim of developing a competitive value chain for tree crops. These small-scale farmers will benefit from a range of incentives and technical support to convert their land to fruit orchards, with an expected per hectare revenue of approximately US$8,500 annually after the third season growing to US$30,500 in the fifth season. A half-acre nursery producing 40,000 seedlings per season can generate up to US$54,600 annually. The
7
comparison income is US$220 from one hectare of maize.11 Local community members will benefit directly from employment and indirectly through increased economic activity in the otherwise depressed rural economy. With an expected size of 30 hectares, the future farmers associations or companies will create approximately 200 seasonal jobs at minimum wage (currently LSL53/day). The smallholder farmers will also benefit from the initiatives being piloted under the access to finance component that include the creation of a movable collateral registry which would enable greater access to credit to these farmers.
(c) Unemployed and underemployed Basotho: The support provided under the horticulture and tourism components will increase opportunities for skills development and employability of the local Basotho workforce that are currently relying on low skill and low productivity handicrafts sector or on subsistence level farming.
(d) Government agencies: The Project will support strengthening the institutional capacity of LNDC by the Technical Assistance that will be provided to pilot a Public Private Partnership (PPP) transaction for the new industrial estate site as well as by providing an in-house advisor to help implement the new investment promotion strategy. Technical assistance will also be provided to the Central Bank under the access to finance component with specific focus on the establishment of the credit bureau; implementation of the leasing regulations; and the establishment of the movable collateral registry. Capacity building will also be provided to the MCC, LTDC and the four ministries that will be involved in the project implementation namely MTICM, MTEC, MAFS and MFLR.
C. PDO Level Results Indicators
18. The success in achieving the PDO will be reflected by the following indicators: (i) increase in jobs created in selected non-textile sectors; (ii) number of direct beneficiaries of the project (of which women); and (iii) increase in domestic enterprises created/ registered in non-textile sectors.
19. The proposed intermediate output indicators include (i) decrease in the number of days required to obtain a construction permit from the Maseru City Council; (ii) Credit Bureau established and operational; (iii) increase in non-textile investments in the industrial estates; (iv) coverage of registered lodging operations under the star grading system; (v) tourism information center established and operational; (vi) increased incomes of participating farmers; and (vii) share of firms supported by LEAP that increased sales by greater than 10 percent after a year of support.
11 Global Development Solutions: Tree Crop Production in Lesotho: Business Plan for the Pilot Farms.
8
III. PROJECT DESCRIPTION
20. The proposed project aims to build on reforms initiated under the Private Sector Competitiveness and Economic Diversification Project (PSCED) as well as reforms in new areas to support government priorities that would lead to greater private sector development. This will be achieved through improved business environment, greater access to finance, supporting investment promotion activities in new sectors and enhancing linkages to domestic SMEs and improved economic diversification in the economy through targeted support to new growth sectors such as horticulture and tourism that have tremendous potential to create sustainable jobs and improve livelihoods. The project design has been informed by the recent World Bank (2012) technical assistance note that analyzed policies to increase economic diversification through FDI and improved backward linkages to the local domestic economy. In addition, the project design is also closely coordinated with the ongoing Financial Sector Development Strategy (FSDS). 21. The project will comprise two mutually- reinforcing components: (i) Improving the business environment; and (ii) Increasing economic diversification. In addition, the third component of the project will support project implementation.
Project Components
COMPONENT 1: Improving the Business Environment (IDA Allocation: US$ 3.16 million; Government: US$ 0.40 million)
22. The objective of this component is to support policy measures intended to facilitate business entry and greater access to finance. The two sub-components are (i) Business regulation, licensing and construction permit reform; and (ii) Improving access to finance. Sub-component 1A: Business Regulation, industrial licensing and construction permit reform (IDA Allocation: US$ 2.08 million)
23. The objective of this sub-component is to reduce the time and cost for registering a business and obtaining construction permits. The rules and procedures for establishing a business in Lesotho are lengthy, cumbersome and costly for the private sector. Under the PSCEDP, the GoL embarked on a series of reforms to improve the company start-up system. The reform was prolonged over time, but its eventual success upon completion is evident by the introduction of the new 2012 Companies Act, and the creation of the One-Stop Business Facilitation Center (OBFC), which brought under one roof different government departments and agencies in charge of business start-up and operations. The reform resulted in a more simplified and streamlined company registration system in Lesotho. These improvements led to a decrease in the number of days required to register a business from 28 days to 7 days reflected in an increase in Lesotho’s Doing Business ranking by 65 positions in the starting a business indicator, also making Lesotho one of the top Doing Business reformers for 2013. 24. The afore-mentioned reforms however only affected companies and do not cover sole proprietors and partnerships. These reforms when extended to all businesses will increase the
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degree of formalization in the economy. Supported by a revised legal framework, the OBFC system can go beyond company registration and start registering sole proprietors and partnerships. This sub-component will also support a streamlined licensing service, modernizing the outdated trade and industrial licensing system for all types of enterprises, thus leading to both a reduction of red tape, and increasing inclusion and formalization. In addition, the introduction of streamlined risk-based environmental and health inspection procedures will further improve the process of registering business start-up operation, and remove the unnecessary regulatory burden for the private sector, resulting in saving time and costs and potentially increasing the numbers of compliant businesses.
25. Business Regulation and Industrial Licensing Reform: The new project will support the drafting and implementation of the Business Registration Bill which aims to cover all businesses, including sole proprietors and partnerships. This will enable the benefits of the OBFC system to go beyond company registration and register sole proprietors and partnerships, and also increase formalization of businesses. The objective would be to replace the outdated Trading Enterprise Act (1993) with the Business Registration Bill, which will develop a legal framework that supports a modern trade licensing regime. The Project will also support the drafting of the accompanying Business Registration regulations to facilitate the implementation of the Bill, such that these supporting regulations are compatible with the current OBFC system and in line with international best practice.
26. Inspired by the success of the company registration under the OBFC, the GoL has undertaken steps to modernize its industrial licensing regime. The GoL recognizes that the current licensing system of Lesotho is cumbersome, unpredictable and non-transparent; involving multiple agencies resulting in high compliance costs for the private sector. In order to tackle these shortcomings, GoL was supported by the PSCEDP to draft the 2013 Industrial Licensing Bill which is to replace the outdated 1969 Industrial Licensing Act. The new project will support GoL to implement this new Industrial Licensing Bill. In addition, the Project and MTICM will work closely with the OBFC to ensure that there is close coordination between the legal amendments and regulations being proposed and the intended OBFC enhancements being supported by New Zealand AID and being undertaken by the New Zealand’s Company Registration Office.
27. The introduction of a streamlined risk-based environmental and health inspection procedure during the business registration and licensing processes can further improve the process of business start-up and operation, and remove unnecessary regulatory burden for the private sector, resulting in cost and time savings and increasing numbers of compliant businesses. Currently under the Environment Act (2008) all businesses are subject to Environmental and Health inspections prior to registering a business or applying for a license, regardless of the potential levels of environmental or public safety risk they pose. This practice imposes high compliance costs and regulatory burden on SMEs and at the same time imposes a high transaction cost for the Ministry of Tourism, Environment and Culture (MTEC) which has only 2 inspectors who conduct these inspections. The project will support the introduction of a risk-based inspection regime by introducing guidelines that support the principle of risk-based inspections to supplement the existing Environment and Health inspections and help streamline the system.
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28. In order to operationalize both the new trade and industrial licensing regimes, the project will also support the creation of an electronic portal for licenses, which will put on-line a database of all laws, regulations, rules, tariffs and steps for all types of trade and industrial licenses, and types of business activity (business codes), similar to the e-licensing portals in Kenya and Nepal. The e-licensing portal will then be linked to or incorporated within the OBFC, thus bringing the business registration and licensing in one place, and providing a complete administrative service to all entrepreneurs.
29. Expected Results: The successful completion of these activities will lead to the creation of an inclusive state of the art comprehensive business registration and licensing system in Lesotho which will cover all forms of businesses, thus bridging the gap between formal and informal enterprises, increasing the tax base, boosting formal employment and allowing newly formalized entities to take advantage of the benefits of the formal economy. In addition, the comprehensive business registration system will lay the foundation for a modern licensing system, which will enhance regulatory compliance, quality of service delivery, transparency and predictability for both the public and the private sector. 30. Construction Permit Reform: With the country ranked 140 out of 185 economies globally in the Doing Business Report, one of the worst performing Doing Business indicators for Lesotho is the process of obtaining construction permits. The enforcement of construction permits creates opportunities for widespread discretion and corruption the world over12. The lessons from the past indicate that there are three main positive outcomes of construction regulation reform. These include: (i) turning unrecognized assets into productive capital; (ii) helping create a level playing field for businesses and (iii) contributing to enforcing increased safety and improved resource management (World Bank, 2013). A negative outcome associated with inefficient and corrupt construction-permit and inspection systems is the loss of opportunity for existing and would be entrepreneurs of a level playing field.
31. While in Lesotho, there are only 11 steps, which is below the average of 15 steps for Sub-Saharan Africa and the 14 steps for OECD countries, it takes an average of 330 days to obtain a construction permit in Lesotho. There are basically two major steps - one is to obtain the Environmental Impact Study, the second is to apply for the permit at the Maseru City Council (MCC). However, all procedures are manual, paper-based, and require physical movement of documents and plans between approving agencies resulting in the large number of days required. Of the 330 days, the MCC accounts for 3 procedures that account for 106 days and the majority of the cost, while the connection with Telecom Lesotho for a fixed line accounts for 180 days13. The delay in the establishment of the fixed line is a factor of both limited capacity within the Lesotho Telecom and the fact that Lesotho Telecom does not have access to a potential client’s credit worthiness due to the lack of an existing credit bureau in the country.
32. The project will help streamline the construction permit system within the MCC, by automating the document workflow, digitizing the back-office functions of MCC and digitizing the archive wherever possible in order to create automated, predictable and transparent systems,
12 Good Practices for Construction Regulation and Enforcement Reform, Investment Climate Group, January 2013. 13 The establishment of a fixed line connection is a requirement of the Doing Business indicator.
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thus reducing time, cost and regulatory burden for the private sector, and at the same time reducing the transaction costs for the MCC. The project will thus focus on reducing the number of days taken for the 3 procedures MCC is responsible for and that currently take 106 days.
33. Expected Results: The establishment of an automated system for construction permits within the MCC is expected to improve the quality of the service delivery, increase transparency, reduce opportunities for rent-seeking, and reduce time, cost and the regulatory burden for the private sector. 34. The activities under this sub-component to be financed will include TA to support the drafting of regulations, design of the e-licensing portal and the automated workflow in MCC, capacity building and training for MTICM and MCC and the purchase of hardware and software for the e-licensing portal and the automation in the MCC. Sub-component 1B: Improving Access to Finance (IDA Allocation: US$ 1.08 million; Government: US$ 0.40 million)
35. The NSDP identifies increasing financial inclusion and access to credit as a high priority and one of the main financial sector challenges. Addressing these challenges requires a focus on both the supply of credit, and the factors which affect the demand for credit. The Second PSCEDP will aim to promote financial inclusion through this sub-component. The objective of this sub-component is to improve the access to finance in Lesotho, by providing a stable and predictable loan market and credit worthiness system (credit information bureau), providing a diversified set of the financial services (financial leasing and movable collateral) and extend these new services to the unbanked population. The initiatives under this component would also directly benefit the main stakeholders under component 2 namely domestic SMEs, artisans and smallholder farmers. This component has been closely coordinated with the ongoing FSDS that aims to provide the overarching framework for policy actions required in the financial sector, which will have a donor-funded high level FSDS Secretariat housed in the CBL.
36. Establishment of a Movable Collateral Registry: The problem of access to finance for SMEs in Lesotho depends to a large extent on factors outside the credit market, underlining demand side constraints. Insufficient suitable collateral is cited as amongst the top constraints to accessing credit. Credit is more readily available to businesses that have immovable property (land and buildings) to be used as collateral than those having movable assets as banks heavily prefer immovable property such as land or buildings to secure a loan. Around the world, movable assets, not land or buildings, often account for most of the capital stock of private firms and an especially large share of the assets for micro, small and medium-size enterprises.
37. There is a request from the Central Bank of Lesotho for support to kick start the leasing industry in Lesotho. The legal framework will need to be conducive to encourage the banks and the Non- Bank Financial Institutions (NBFIs) to start offering financial leasing services to the private sector. The outdated Hire Purchase Act should be replaced by a modern secured transactions or personal property law that will allow all forms of movable and personal property to be used as collateral. The secured transactions law should include financial leases as part of the type of security interests that need to be registered and the law will need to be harmonized with the leasing regulations. This will allow SMEs to offer a bundle of assets comprising stock,
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receivables, and equipment which generally comprise the bulk of the assets of these micro businesses. A law that allows them to be effectively collateralized can unlock credit flows and improve access to credit14. 38. The Project will support the move towards the use of movable and intangible assets as collateral and the establishment of a modern movable collateral registry. The substance of this reform will address issues relating to the creation, registration and enforcement of security interests over moveable collateral. This would be a national movable property securities registry, with priority given to security interests in the order in which they are registered. The proposed registry will aim at including information on financial leasing.
39. Establishment of a Credit Information Bureau: Credit bureaus play an important role in financial stability by helping control over-indebtedness and are critical to the expansion of credit for both individuals and small businesses. A credit bureau collects information from and shares information with financing institutions to enable them to make more informed lending decisions, thereby lowering their default rates and improving the quality of lenders’ loan portfolio. Credit Bureaus world over have expanded their coverage to include non-banking financial and credit-granting institutions, and utility companies. Lack of information on overall consumer indebtedness is an area of concern from the perspective of financial stability as borrowers may accumulate large debts through small facilities from credit providers and related liabilities could remain hidden from lenders and lead to flawed creditworthiness assessment. It is, therefore, important to pool information from all credit-granting institutions including credit financing institutions which provide direct consumer financing to individuals. 40. The enacted 2012 Credit Reporting Act (CRA) provides for the regulation of credit reporting and facilitates the regulations of credit information by credit providers, credit bureau operators and authorities, thus supporting the establishment of a Credit Information Bureau (CIB).15 With the 2012 CRA now in place, the next step is the finalization of the CRA implementing regulations, which will complete the legal foundation for establishment of a credit information bureau. The implementation of the CRA and the establishment of a credit information bureau will help bring all the significant credit providers into the reporting system. Under the ongoing Millennium Challenge Account (MCA) Project, the CBL had drafted a Terms of Reference for a consultancy project to assist with the establishment of a CIB. The MCA project was closed on September 30, 2013 and the CBL requested that this be supported under the proposed Second PSCEDP.
41. A key challenge is to secure a registered credit bureau, given the limited size of the market in Lesotho. The most likely source of potential operators is South Africa where there are currently 13 registered credit bureaus that will be invited to apply for registration in Lesotho16. The Act does make provision for credit information to be processed outside of the country if necessary, so a CIB operating in South Africa would be able to use existing systems. A legal presence in the country and a registration with the CBL however will be required for the CIB.
14 Lesotho FSDS Draft, 2013 15 The Lesotho Review, an overview of the Kingdom of Lesotho Economy, 2013 16 Lesotho FSDS, 2013
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42. The Project will support the finalization of the CRA implementation regulations and the actual establishment of the CIB. The project will assist the CBL in establishing agreed reporting formats and systems for electronic submission of data from data (credit) providers to the CIB, and from the CIB to the CBL.
43. Insolvency Reform: The availability and cost of credit are positively correlated with the strength of creditor rights’ protection. The protection of creditor rights includes an effective debt enforcement regime for individual creditors to recover their debt, and a robust and efficient insolvency regime, which regulates collective creditor recovery.17 The project will provide technical assistance to help modernize the Insolvency Proclamation and ensure coherency with the liquidation provisions. The project will support the review and modernization of the insolvency legislation that deals with both companies’ liquidation and a modernized, personal bankruptcy regime for individuals and unincorporated businesses. This will allow a more coherent, streamlined insolvency framework in line with best practices. Other jurisdictions in the region that have or are in the process of implementing a unified insolvency law include Kenya, Uganda, Mauritius and Malawi. 44. The activities to be financed under this sub-component will include TA to support the leasing framework, insolvency framework and the secured transactions law. In addition it will provide TA to design the moveable collateral registry and the CIB as well as capacity building and training for CBL staff and finance the purchase of hardware and accompanying software envisaged under this component. 45. Expected Results: The establishment of a credit bureau will cover the entire population and provide creditors with information for assessing credit worthiness of borrowers, thus ensuring stability and predictability in the market. The introduction of a movable collateral registry would allow borrowers to use movables to secure loans, thus removing the burden from banks to require only immovable security, and thereby increasing financial access to the unbanked population. Further, this registry will aim at including information on financial leasing. The TA provided to modernize the bankruptcy regime would support increasing creditor confidence to increase their confidence in loan recovery. Together these reforms would help modernize the financial services market, by providing new forms of asset-financing to lenders and borrowers. COMPONENT 2: Supporting Economic Diversification (IDA Allocation: US$ 7.45 million; Government: US$ 1.50 million)
46. The objective of this component is to support policy measures intended to strengthen the competitiveness of new growth sectors with the aim of decreasing Lesotho’s reliance on textile exports as the main engine of growth. The activities under this component will assist the Government of Lesotho to: (i) attract foreign investments into a diversified set of sectors; (ii) facilitate linkages to the local economy; (iii) increase the competitiveness of the tourism sector; (iv) facilitate the production of tree crops and develop a competitive horticulture value chain that
17 World Bank Principles on Creditor Rights
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can be a source of growth and employment creation; and (v) support domestic SMEs by providing access to business development services to improve their productivity and increasing their access to new markets. Sub-component 2A: Supporting investment promotion and increasing linkages to the local economy (IDA Allocation: US$ 1.78 million)
47. This sub-component of the project will aim to provide the GoL with support towards achieving sustainable diversification of the country’s export manufacturing program as well as providing support to strengthen the local SME capacity. This diversification needs to be achieved such that there is horizontal diversification combined with increased localization – where local participation in the manufacturing sector increases in terms of providing technical and managerial skills and supplying export-oriented firms.
48. Supporting investment promotion in diversified sectors: There are currently 41 companies in the textile and apparel cluster employing over 40,000 people. The success of Lesotho’s offshore manufacturing sector is however limited by a number of crucial factors. These include, the country’s track record in attracting and retaining manufacturing FDI due primarily to the preferential trade agreements that give Lesotho-registered and –operating manufacturers duty- and quota-free access to a number of significant consumer markets; Lesotho’s manufacturing exports being concentrated in a few products within the garment value chain; and the existing industrial structure having led to very limited localization and few opportunities for vertical integration.
49. Given the overall pressures it faces, Lesotho needs to urgently take decisive action. LNDC is committed to continuing its support to its existing “customers” while increasing its promotion of non-textile activities focused on other markets. But LNDC’s business model represents a limiting factor in its capacity to service new and potential investment. Its approach to the provision of factory shells is essentially a “constrained supply model”, where it cannot provide shells in the right locations, at the right time to the right demand because of its insufficient financial resources. Scarce resources are thus not being allocated efficiently.
50. The project will focus on delivering a mixture of strategic and operational outcomes in an integrated, sequential way. There is evidence to show that the existing factory sites do not provide the desirable infrastructure and services to foreign investors due primarily to the very low rents that are paid for these sites. Commercialization of these factory shells provisioning would provide an opportunity for the achievement of several goals, inter alia: i) diminution of the financial burden on Government and LNDC; ii) introduction of industrial real estate prices that are closer to market prices, and encouragement of the development of domestic real estate private sector; iii) user-specified design; and, iv) improved quality of maintenance. 51. The project would support a pilot commercialization of factory shells where there is currently proven pent-up demand, delayed delivery, and land that could be rapidly and cost-effectively developed. There seems to be a prima facie case for the pilot project to take place at Maputsoe’s Nyenye project, currently planned by LNDC (with land secured, and design and costing studies conducted), pending financing.
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52. Specifically, the project will support the technical evaluation of options for the commercialization of a site which can meet unmet demand for factory sites from new investors. The TA provided will support designing a PPP deal that would attract private developers to construct and manage the factory site on a commercial and sustainable basis. In depth analytical work will be conducted to inform this analysis (detailed in Annex 2). Technical assistance will also be provided to promote the commercialization of the industrial estate with potential domestic and regional developers/operators/lessors and providing management support to LNDC in order to conduct the commercialization process. 53. Increasing linkages to the domestic economy: While FDI offers macro benefits to countries in terms of increased foreign exchange, tax revenue, and employment, it is the micro-level, dynamic benefits that can have the biggest long term impact. These come through technology and knowledge spillovers that allow local producers to build up capabilities, resulting in productivity gains. At the moment there are virtually no Basotho companies supplying anything to foreign investors, with the exception of very basic services like security, cleaning, and transport. The few products that are sourced locally are almost always provided by other foreign investors. All major inputs are sourced either from East Asia or South Africa. The recent NSDP focuses on creating opportunities for employment which is critical to Lesotho’s development. Most manufacturing employment has been due to FDI in the textiles and apparel sector, suggesting the need to focus on prioritizing opportunities in the domestic economy and building linkages between foreign and local firms.
54. The project will provide technical assistance on implementing targeted programs that would facilitate linkages between these foreign investors and domestic SMEs. Support measures would help facilitate improved information flows and targeted instruments to help increase business opportunities between the two groups while simultaneously also improving capacity of the local SMEs. The project will:
i. Support tie-ups with external investment promotion agencies and the Basotho Diaspora for business development.
ii. Help develop programs that would develop local firms as input suppliers. iii. Support building partnerships with local and regional private sector, through the
mapping of existing service provider capacity and gaps. iv. Support LNDC to establish the right incentives for both FDI and SMEs. v. Provide a full time technical advisor to LNDC to help formulate strategies and
implement the strategic plans that are developed during the course of the project.
55. Activities to be supported under this sub-component will include TA and capacity building for investment promotion and supporting linkages as well as developing systems for management information systems. 56. Expected Results: The technical assistance provided will help pilot a commercial industrial estate that would provide better services and potentially attract higher value added services to the economy. The support provided to LNDC will help build its capacity to implement the diversification strategy and facilitate the missing linkages between the foreign owned firms and the local economy. Programs developed under this sub-component will aim at
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improving the capacity of local SMEs and potentially build a pipeline of domestic service providers —opening new markets for SMEs and potentially creating new and improved jobs. Sub-component 2B: Supporting the Tourism Sector (IDA Allocation: US$ 1.30 million; Government: US$ 0.30 million)
57. Tourism is identified in Lesotho’s Vision 2020 and NSDP as a sector with strong potential to contribute to pro-poor growth and job creation. The Government of Lesotho’s tourism strategy rests on three pillars: i) economic development and employment opportunities; ii) promotion; and iii) institutional strengthening. 58. There is significant potential to develop existing tourism opportunities, but the assets are not currently capitalized to their full potential. The lack of development limits potential job creation and poverty reduction. The tourism industry is highly reliant on South African travellers who account for more than 90 percent of arrivals. GoL’s tourism strategy seeks to triple the number of tourists to over 900,000 visits by 2020. To reach this goal, the tourism strategy suggests a clearly differentiated positioning to distinguish Lesotho as a tourist destination.
59. With targeted tourism product development, improvement and diversification; Lesotho’s tourism sector can increase its opportunity to benefit job generation, firm creation and increased foreign exchange. The PSCEDP to date has supported activities targeted to address fundamental tourism sector constraints. This has contributed to building a solid foundation for further strengthening the tourism value chain to achieve competitiveness. Increasing the competitiveness in the tourism sector mandates efforts that (i) better quantify and track sector performance, (ii) improve standards, (iii) strengthen the country’s unique offerings, and (iv) support an enabling institutional framework. This component will support the tourism value chain development through the following targeted activities.
60. Improving tourism statistics: Timely and correct sector performance statistics inform both policy and private sector decision making. The Lesotho Tourism Development Corporation (LTDC) Research and Development department cooperates with other government departments (in particular Bureau of Statistics (BoS) and Immigration) to capture key data, such as visitor arrivals, and undertake visitor surveys. 61. However, the processing and dissemination of data is not as effective as it could be. Information is required by a large number of stakeholders within the tourism sector, including governmental departments, Lesotho private sector, and external investors to assist with the planning, marketing, monitoring, and regulation of the industry. Consequently, more efficient systems need to be in place to process data on a timely basis, and make it accessible to all stakeholders. This can be addressed through the development of an online tourism statistics database. The database will enable the input, processing and reporting of the following tourism statistics:
Inbound Arrivals (from Immigration) Accommodation (from the accommodation survey) Inbound visitors (from the visitor survey)
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Inventory (a directory of tourism businesses, such as accommodation, tour operators, etc.)
62. In addition to this, the development of the first experimental Tourism Satellite Account (TSA) has highlighted a deficiency in the measurement and understanding of employment in the tourism sector. Little is known about the number of jobs created by the sector, what skills are being utilized, and what skills are needed. A comprehensive survey of employment in the tourism sector is therefore required. The upgrading and improving of statistical collection systems will enable enhanced monitoring and evaluation of the sector. 63. There is increasing focus on domestic tourism, however little is known about the domestic tourism market. BOS is currently undertaking a Domestic Tourism Expenditure Survey to collect expenditure data for the TSA, and this is anticipated to be on-going. However, a more market-oriented survey is required. A household survey covering between 2,000 and 3,000 households will provide useful information and analysis on domestic tourism to the Government of Lesotho as well as private sector tourism operators. Through this support, capacity will be built to repeat the survey on a regular basis to best inform the sector and government policy. 64. Nation-wide implementation of star grading of accommodation establishments: Lesotho has the potential to be considered a desirable component in any southern Africa multi-destination itinerary. However, this requires a standard of accommodation to meet different levels of demand. A complete accommodation star grading system in Lesotho will be responsible for the assessment, certification and monitoring of lodging establishments throughout the country. This system is being developed in close collaboration with all stakeholders including the members of the Lesotho Hotel and Hospitality Association (LHHA), the Tour Operators Association of Lesotho (TOAL) and others directly involved in promoting quality tourism products and services across the country. It follows Southern African Development Community (SADC) and Regional Tourism Organization of Sothern Africa (RETOSA) grading guidelines used throughout Southern Africa. Building on the pilot roll-out of the program in Lesotho through the PSCEDP, continued support will enable national coverage. The star-grading program will foster improved quality in the accommodation sector that is a requisite to increasing the country’s competitiveness. Accordingly, this project aims to support Lesotho to achieve full compliance with SADC/RETOSA accommodation grading. 65. The implementation of the Star Grading System would include training of assessors and district officers in the accommodation grading system and the establishment of a new grading criterion including universal access and energy saving guidelines in alignment with SADC/RETOSA. The sub-component will also support awareness workshops and capacity building training for accommodation operators advancing through the grading process.
66. Improving Lesotho’s handicrafts sector competitiveness: By building upon existing models of development, leveraging linkages with other components and developing a marketplace for women artisans in particular, a stronger and more diverse handicrafts sector could emerge. The development of a competitive handicrafts industry is a vital component in a strong tourism value chain. Capacity building in business skills; diversified and enhanced product development; expanded domestic and export market distribution; and market outlet development will result in improved livelihoods for marginalized populations especially women.
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67. Capacity building and business development support for handicrafts enterprises and SMEs. The project will work with local stakeholders to identify a comprehensive training program for the handicrafts sector. The program will develop a market based artisan enterprise training curriculum that is business oriented, meets the needs of the artisans and includes long term capacity building and mentorship. Product development processes and business skills development will be key elements of the program. The curriculum will be developed by an artisan sector expert and training will incorporate long term capacity building and mentorship. By leveraging existing efforts in the sector, the project will pilot the curriculum with selected artisan enterprises. Once artisans have improved product development processes, product diversity, and business skills to a competitive standard, the project will facilitate market interventions including showcasing products at retail and wholesale exhibitions. This will be facilitated through the Lesotho Enterprise Assistance Program (LEAP) which is described under component 2D. Market support will occur on a pilot basis preparing artisans to progress to financially viable non-subsidized participation in future markets. Through the training and market interventions, artisans should be able to sustainably increase revenues and improve incomes. 68. Development of a combined central handicrafts marketplace, artisan resource center and tourism information center. With the destruction of the Basotho Shield Tourism Information Center and Artisan Market in 2011, artisan sales and revenue from tourist markets have significantly decreased. In order to spur tourist and domestic demand and provide a sustainable retail market outlet, the project will develop a centrally located handcraft marketplace in Maseru. The marketplace will be financially sustainable and include a tourism information hub, attracting the tourist market. An initial 12 sites were reviewed as potential sites in the first half of 2013. Three sites made a final list with the former Basotho Shield site preferred as the location for the future tourism information.
69. The tourism information center will offer market based services in order to meet the needs of tourists and generate income to cover operational costs. Finally, the combined development will also include an artisan resource center that will provide information on the market and available support. Through mutual goals and shared responsibility, these three initiatives will collectively support artisan enterprise penetration into tourist and export markets. This will result in increased revenue for artisans and product diversity within the tourism industry, enabling growth in both sectors. 70. The proposed Handicraft Marketplace will also benefit substantially from additional visitation traffic from those travelers coming to the tourist information center. Therefore the dual interests can be fulfilled through a PPP arrangement between a potential private sector operator, the Lesotho tourism authorities who are entrusted to provide tourism information and the Lesotho Co-operative Handicrafts (LCH) and other Associations who are mainly interested in the promotion of their crafts in different regions of Lesotho. The goal of the PPP is to design a financially sustainable model for the center. The project will support technical advisory services to develop the specifics of an operational PPP model based on global best practices.
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71. Within the MTEC and the MTICM, there are currently a number of occasional artisan support services. However, many of these programs are not appropriate or easily accessible to artisans. To address this, the project will provide a handicraft technical expert to support MTEC to build sector-specific capacity and increase coordination among sector stakeholders. The expert will work across MTEC and MTICM to develop knowledge of artisan needs within the public sector and build appropriate, accessible services to be offered through existing organizations. 72. The activities being financed by IDA resources under this sub-component include TA to develop the tourism database, design and implementation of the surveys, the artisan training curriculum, the TA to support the feasibility analysis and architectural plans for the Tourism Information Center. In addition, IDA funds will also be used for goods and works for the construction of the tourism information center. GoL funds will be utilized to fund the star grading for the accommodation establishments and the handicrafts advisor to be appointed within MTEC.
73. Expected Results: The improvements of the tourism statistics systems is expected to improve the quality and timeliness of tourism sector data collection and dissemination to inform future policy making in the sector. The successful establishment of the national accommodation grading system in Lesotho aims to bridge the gap between lodging enterprises in Lesotho and neighboring states, and increase competitiveness. In addition, the comprehensive accommodation grading system will lay the foundation for improved quality and promotion of lodging according to standards, which will enhance the sector’s viability. Further, improved business and product development skills for artisans will enable increased market access to tourist, domestic and export markets; and increased sales and revenues for artisan enterprises. These specific improvements will lead to increased competitiveness and the revitalization of the handicrafts sector.
Sub-component 2C: Expanding Commercial Horticulture (IDA Allocation: US$ 3.90 million; Government: US$ 0.45 million)
74. Lesotho is currently a net importer of fruit and there are significant prospects for a scale up of the PSCEDP activities. The microclimate growing conditions enables ideal production conditions of high value horticulture and an early season harvest compared with neighbouring South Africa. Competitive wages and proximity to potential markets ensures a premium on crop prices. The Second PSCEDP will specifically focus on the scale up of fruit orchard production in Lesotho to help tap into high value niche markets. The support for horticulture is crucial as farmers have been unable to shift to higher value crops due to associated risks and lack of development of market linkages.18
75. The pilot farms under the PSCEDP, were created to demonstrate the potential for commercial fruit farming in Lesotho, test various varieties of fruit under Lesotho growing conditions and work in conjunction with the Government to ensure that policies and regulations are in place to support sector development. The pilot farms have realized a number of successes,
18 World Bank: Lesotho - Sharing Growth by Reducing Inequality and Vulnerability: Choices for Change. A Poverty, Gender and Social Assessment (2010).
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including Lesotho’s first fruit exports and production of the first Grade 1 apples in the country. Also, lessons learned from the horticultural pilot farm project are being applied to a national rollout of larger commercial farms using block farming, starting with a village association in Mahobong (Village Rollout) in March 2013. 76. Applying lessons learnt from Phase 1 of the Horticulture Component in the PSCEDP, the primary development objectives of Phase 2 under the Second PSCEDP are as follows:
i. Transform strategic areas in Lesotho into major producers and exporters of early variety tree crops by demonstrating that commercial deciduous fruit production is competitive and sustainable.
ii. Improve livelihoods of rural farmers through the production, export and processing of high value tree crops.
iii. Facilitate the shift from reliance on maize as the main source of income to a more diversified cropping structure.
iv. Develop a competitive value chain for tree crops including: v. Sales of fresh produce in local and export markets; vi. Juicing, canning and drying facilities for products of Grade 3 and lower quality;
and vii. Food processing industry based on derivatives from tree crops.
77. The project will help support the expansion of upstream activities, including seedling nursery development, expansion of commercial production of deciduous fruits (35 hectares), and strengthening the capacity of local on-farm technical support services; and downstream activities beginning in 2016 when the project anticipates increasing volume of marketable crop entering the market from existing and new farms. Of the marketable products, Grade 1 products will be targeted for export markets, Grade 2 products for domestic markets, and Grade 3 and lower for local value added processing. In this regard, downstream activities will focus on the development of local supply and value chains for deciduous fruit, farm certification (GLOBAL G.A.P) which will enable Basotho farmers the opportunity to export Grade 1 products to any market in the world and expand marketing options for local products both within and outside Lesotho. 78. During project preparation, extensive consultations took place with officials from MAFS, and MFLR, and the Smallholder Agricultural Development Project (SADP) PMU to ensure there were synergies explored. The training programs under SADP and other existing projects as well as the extension services of MAFS and MFLR will be tapped into in this component to avoid duplication of resources. The site/s for this component will be identified during project implementation.
79. The project seeks to improve quality, volume and delivery capability of Basotho farmers by transitioning away from traditional smallholder farming into group or block farming methods similar to those employed in Mahobong. The move from supporting small-scale growers producing fruit on 1-2 hectares (under PSCEDP) to technical support for larger farmer’s associations incorporated as companies allows the project to satisfy purchaser’s interest in reliable production chains that can supply volume and quality. The land contributed by each farmer towards the association plot must be adjacent. The participating farmers must commit to
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five-year participation in the program to be eligible. The aim is to identify a suitable group of farmers by the end of 2013 in order to plant trees in 2014. 80. The condition for participating farmers is that there are clear long-term leases of land (whether through traditional or formal arrangements). The farmers will either establish the partnership as a formal company or in a producers association with clear benefit sharing arrangements and conditions. The associations will use tree varieties that have shown to perform well in Lesotho under PSCEDP. In the medium term, other small-scale farmers or investors may establish additional orchards as the barriers for production are expected to decrease with better market linkages through the existing production. This will require development of a local tree nursery to supply existing, and expected future farmer association and private investors. The development of a nursery farm is essential as the desired fruit tree varieties are imported and often not available.
81. As with Phase 1 of the PSCEDP, the PMU will report to and be guided by the Ministry of Trade and Industry. The Ministry of Trade and Industry will also be supported by the Ministry of Agriculture and Food Security and the Ministry of Forestry which will help provide guidance to the project on matters related to technical on-farm activities. Within the PMU, a horticulture manager will be employed to oversee the day-to-day operations of Phase 2 activities.19 82. Professional Farm Management: A critical lesson from Phase 1 of the horticulture project was that to achieve commercial success, production and marketing activities require professional management, both with respect to on-farm management and marketing of products. In this regard, it is anticipated that the management of commercial production will be subcontracted to a professional management company with on-farm technical and marketing experience, and have access to an established market network, particularly in export markets. 83. Local Commercial Banks: The project has been in discussions with several local commercial banks regarding their participation in the project where banks have expressed their interest in providing a range of financial services. In this regard, a business plan for both the pilot farms and the village association has already been prepared which provides a financial and economic analysis to help move forward discussions with local commercial banks. Participation of LNDC as a provider of credit guarantee is expected to have a positive impact on encouraging the participation of local commercial banks in financing new market entrants in the development of the deciduous fruit sector in Lesotho. Further, interventions under the access to finance component will help these farmers access commercial loans in Lesotho. 84. Downstream Activities: As marketable fruit becomes increasingly available following the 2016 growing season, the project is expected to be expanded further to include value added production. As noted earlier, Grade 1 products will be exported, and Grade 2 products will be sold in the local market where nearly all fruits consumed in Lesotho are currently imported from South Africa. What remain are Grade 3 and lower products which can be absorbed by the market
19 It is anticipated that the horticulture manager will be an expert with substantial hands-on experience managing orchards and nurseries. The horticulture manager is expected to send a large bulk of his/her time in the field providing hands-on technical support to project beneficiaries.
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through value addition. Particularly, during the early phase of the project, the volume of Grade 3 and lower products are expected to be relatively high due to the current lack of experience in post-harvest handling and weak supply chain management practices. In this regard, strengthening the existing supply and value chain in partnership with LNDC which currently operates a juicing and canning facility, as well as attracting investors into the value added sector is expected to play an important role in improving the income generating potential of participating farmers. 85. Value Added Processing: It is not anticipated that the project will allocate project funds towards goods and works to provide direct support toward downstream activity. Specifically, the focus of the horticulture component will shift more towards supply chain management, investment promotion and knowledge-based support to facilitate the development of a competitive private sector. For example, LNDC has several warehouse facilities (with access to electricity and water) throughout the country which are currently idle and available to be converted into small pack houses where primary processing, handling and sorting activities can take place.20 In this regard, if farming operations are established during the upstream activities or if additional private investments in commercial fruit production are located in relative proximity to existing LNDC warehouse facilities, the need for project or outside financing to develop pack houses may not be required as the project can utilize existing LNDC facilities to conduct some of the basic post-harvest handling activities in existing LNDC warehouse facilities. 86. The activities to be financed under this sub-component include TA to support the local nursery network and TA to run pilot farm training demonstration centers; TA and training for improved farm management for commercial orchard plots; and goods, works and operating costs associated with the commercial orchard plots. In addition, the project will fund goods, works and operating costs to run the local nursery network and to run pilot farm training demonstration centers and any other envisaged expenses for downstream activities. 87. Expected results. Through the project interventions, Lesotho should be able to reduce its reliance on maize production and improve the livelihoods among poor farmers. Lesotho should be able to produce export quality deciduous fruit marketed through South African brokers and other export agents and reduce the extent of imported fruits from South Africa. Further, the participating farms will be GLOBAL G.A.P certified, enabling them to export to South Africa and international markets. The network of local commercial deciduous fruit tree nurseries operating throughout Lesotho will be able to meet the seedling needs of a growing deciduous fruit sector in Lesotho. Investments in and production of local value added products using Grade 3 and lower grade products from project farms and other newly established fruit farms will help develop the value chain.
20 Once marketable fruit is available, it is anticipated that a 30 hectare orchard would produce sufficient volume of fruit to justify investment in a pack house. However, by utilizing LNDC’s mothballed warehouse facility is expected to create opportunities to engage in post-harvest handling and packing activities even before trees reach their maturity.
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Sub-component 2D: Lesotho Enterprise Assistance Program (LEAP) (IDA Allocation: US$ 0 .47 million; Government: US$ 0.75 million)
88. The LEAP matching grant scheme was designed to help strengthen business capacity of the private firms, mostly Basotho-owned MSMEs, as well as their representative organizations through provision of financial and technical assistance to buy business development services with the aim of increasing their competitiveness. The Program was designed to provide local MSMEs with know-how and services to increase their efficiency, productivity and access to new markets. 89. Under LEAP, there has been direct assistance provided to individual firms through mentoring services provided by the LEAP Unit and the provision of cost-sharing grants to firms, for the use of specialized business development services. Further, cost-sharing grant assistance have also been provided to representative business and professional associations and chambers, to build their capacity to better serve their members. 90. The unit is headed by the LEAP Program Manager who is assisted by two LEAP officers. The cost-sharing grants will come out of a dedicated LEAP Grant Fund of US$750,000. Given the overwhelming demand for LEAP and the benefits that SMEs have experienced using LEAP funds, GoL was keen to continue the program with its own funds. Under the Second PSCEDP, it is currently envisaged that this fund is being completely funded by GoL while IDA funds will only be used to fund the LEAP Management Unit which will maintain its independence from any government entity. Given that the existing framework is already in place as developed under the original PSCEDP, there is a possibility that the LEAP grants could be funded by IDA funds if the need arises. Component 3: Project Implementation Support (IDA Allocation: US$ 2.04 million)
91. This component will support the costs of the Project Management Unit. The implementation arrangements used under the PSCEDP will be used in the new proposed Second PSCEDP.
92. This component will support the project implementation costs (implementation arrangements are discussed in detail in Annex 3) including:
i. Consultants to staff the Project Management Unit (PMU): Project Manager, Procurement Manager, Financial Manager, Horticulture Manager, Disbursement and Accounts Assistant and Project Team Assistants and Support Staff .
ii. PMU operating costs; iii. Monitoring and Evaluation system: data collection, compilation and analysis; and iv. Safeguards management including training, Environment and Social Management
Plans (ESMP) and monitoring of implementation of safeguards instruments.
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A. Project Financing
Lending Instrument
93. The lending instrument is an Investment Project Financing (IPF). An IPF is selected as it is a flexible instrument that allows for the financing of different activities (consultants, equipment and works). Investment Project Financing supports projects with defined development objectives, activities, and results, and disburses the proceeds of Bank financing against specific eligible expenditures. Under IDA rules for Lesotho, the project will be financed as a 100 percent Credit.
Project Cost and Financing
94. The total project cost is US$15.0 million, including a PPA of US$900,000, of which IDA financing is US$13.10 million allocated as follows:
Table 3: Project Cost Allocation
Project Components
IDA Financing
US$ million
Counterpart Financing
US$ million
Total Financing
US$ million
1. Component 1: Improving the Business Environment 3.16 0.40 3.56 1A. Business Regulation, licensing and construction permit reform 2.08 0.00 2.08
1B. Improving Access to Finance 1.08 0.40 1.48
2. Component 2: Supporting Economic Diversification 7.45 1.50 8.95 2A. Supporting investment promotion and increasing linkages to the local economy 1.78 0.00 1.78
2B. Supporting the Tourism Sector 1.30 0.30 1.60
2C. Expanding commercial Horticulture 3.90 0.45 4.35
2D. Lesotho Enterprise Assistance Program 0.47 0.75 1.22
3. Project Implementation 2.04 0.00 2.04
Unallocated Costs 0.46 0.00 0.46
Total Project Costs 13.10 1.90 15.00
B. Lessons Learned and Reflected in the Project Design
95. Complementarities in Interventions. One issue that had arisen in previous PSD interventions is the need to make project components more complementary to each other so that the impact of the project can be enhanced and efficiencies realized. The access to finance component will directly benefit the main beneficiaries under component 2 (smallholder farmers, handicrafts artisans and SMEs).
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96. Building Capacity for Reforms: The project design reflects the fact that for policy reforms to have a real impact, they need to be properly implemented and the private sector needs to be informed of any changes. Thus, the project has clearly earmarked resources to be utilized for capacity building of the implementing agencies to effectively undertake these reforms as well as effectively discuss these reforms with private sector stakeholders and then disseminate them widely so that they are utilized by the targeted beneficiaries.
97. Professional Farm Management for the Horticulture Component: A critical lesson from the previous project was that to achieve commercial success, production and marketing activities require professional management, both with respect to on-farm management and marketing of products. In this regard, it is anticipated that the management of commercial production will be subcontracted to a professional management company with on-farm technical and marketing experience, and have access to an established market network, particularly in export markets.
98. Matching Grants Scheme: Lessons from previous World Bank matching grant schemes in Africa21 have highlighted the importance of identifying market failures and targeting of assistance to those specific market issues (examples include markets for technical training, technology, entrepreneurship, and export know-how) and specific target group (such as firm size, sub-sector and ownership status). International best practice with respect to such schemes has evolved. In recent schemes, two complementary interventions are involved. Firstly, generalist consulting assistance is provided directly, limited to the planning of a plan for business growth, and then providing hand-holding, or mentoring, to support its implementation. Secondly, within such a plan for business growth, all specialized services required are supported on the basis of cost-sharing, or “matching,” grants.22 Best practice indicates the following key features should be incorporated: The subsidy must be on the basis that the beneficiary firm pays a proportion of total costs. This ensures real commitment from beneficiary firms, and also prepares them for eventual “graduation,” where they are prepared to pay full market rates for BDS services. Both the grants and the direct supply of business growth mentoring (or hand-holding) are delivered by an independent unit, staffed by individuals recruited under term contract, bringing to the task direct experience in business consulting. This unit is deliberately placed outside the public service, to be seen as independent, and commercial in its approach.
99. Greater Access to a Range of Key Services to MSMEs. A principal conclusion of reviews of MSME interventions, including from Implementation Completion and Results Reports of International Development Association (IDA) projects, is the diminished results that accrue where MSMEs are unable to access the full range of services they require. The evidence is very strong that active intervention does not work unless the basic environment for the private sector is in place. In light of this, the current project strives to increase access to all the key services required by MSMEs and tackle business constraints.
100. Building strong public-private dialogue and buy-in: The importance of building an effective private-public dialogue is a key area in the Africa Region’s PSD strategy as experience
21 Phillips, David. (2006). “Workshop on Export Assistance Instruments for Small and Medium Enterprise in East Africa. January 16-17.” Tanzania 22 These schemes are now referred to as “business growth schemes,” or the like, rather than just “matching grant schemes.”
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has demonstrated the difficulties in implementing reforms without ownership by the public and private sector. To ensure that there is buy-in to the project by the Government and private sector, the project team has carried out extensive consultations during project preparation. To continue this partnership, the project provides for a significant role for the private sector during implementation. Also, the team coordinated with other development partners during project preparation to minimize the possibility of overlapping or duplication, and to benefit from synergies where possible. The team will continue these close relationships during project implementation.
101. Procurement: Under the previous project, fiduciary staff were outsourced to the LNDC and later hired under the project. In the new project, fiduciary staff will be directly hired by the project. In addition, the project will provide capacity building to GoL fiduciary staff in the main implementing agencies. In so doing, the capacity of implementing agencies to execute their own activities will be improved.
IV. IMPLEMENTATION
A. Institutional and Implementation Arrangements
102. Reflecting the multi-sector nature of the project, implementation arrangements are intended to offer a balance between the effective overall supervision and monitoring of the activities at the project level, as well as reinforcing the management and institutional responsibilities of individual sub-components. The institutional and implementation arrangements of the project have been fine-tuned during the implementation of the PSCEDP and aim at mainstreaming the operational responsibility to the public institutions/agencies that are in charge of implementing the policy agenda and outsourcing specialized knowledge and management expertise from the private sector where possible.
103. Project Steering Committee (PSC): The PSC will consist of members representing the agencies responsible for the project implementation i.e. the Principal Secretaries from the MTICM, MTEC, MAFS, MFLR, MoF, MDP, Deputy Governor of the Central Bank, Town Clerk of the MCC, the Parliamentary Counsel, Master of High Court and the CEOs from LNDC and LTDC. The committee shall meet every month to review implementation progress in the first year and later can meet every quarter to monitor the implementation progress of the project and help to resolve technical and implementation problems affecting project progress. The meetings will be chaired by the Principal Secretary of MTICM.
104. Project Management Unit (PMU): The day-to-day operations of the project will be overseen by a Project Management Unit that will be headed by a qualified Project Manager. In addition, the PMU will include a Financial Manager and a Procurement Manager who will oversee the Financial Management and Procurement issues respectively. In addition a Horticulture Manager will oversee the day-to-day activities in the horticulture component. The PMU will provide for overall fiduciary management, monitoring and evaluation, project oversight, and coordination. The role and functions of the PMU have been detailed in the Project Implementation Manual (PIM). The Project Manager will be responsible for: (i) overall day-to-day management of the project, including coordination of procurement, financial management and M&E; (ii) coordination with all the implementing agencies responsible for the
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implementation of the various sub-components; and (iii) coordination with other donors and relevant programs/projects. The Project Manager will report to the Project Steering Committee chaired by the Principal Secretary, MTICM. The project will cover the operating costs of the PMU, necessary equipment purchase, training of staff and the costs of annual audits of project accounts.
105. A Project Preparation Advance (PPA) of US$900,000 is in place to support the Interim Project Management Unit and to provide preliminary technical assistance for the preparation of various preparatory studies and other required design activities. The PMU for the PSCEDP has been hired for six months to implement the activities under the PPA since GoL wanted to ensure a seamless transition between the two projects and given that the PMU had performed its duties with efficiency. These contracts will be renewed under the new project subject to satisfactory performance. The position of the full-time Procurement Manager has been advertised and the selection is underway and will be appointed prior to commencement of major procurements and consultant selections. During the implementation of the PPA an acting Procurement Manager has been appointed who has been conducting these responsibilities. This interim arrangement is deemed adequate considering the low value and non- complex nature of the procurements and consultant selections currently underway.
B. Results Monitoring and Evaluation
106. The monitoring and evaluation (M&E) system will be based on the Results Framework and monitoring arrangements described in Annex 1. An M&E specialist within the PMU will be responsible for establishing and managing the M&E system including data collection, compilation and reporting from various stakeholders and implementing agencies and preparation of M&E reports for the Project. The M&E Specialist will coordinate closely with the Horticulture Manager for the M&E reporting on the horticulture component.
C. Sustainability
107. Lesotho has emphasized its commitment to growth and sustainable development, as documented in the NSDP for 2012-2017. This Project is fully anchored within the strategy laid out in the NSDP, especially with a view to strengthen the role of the private sector as an engine for growth. The Project aims to support programs that will have a long-term impact on private sector development in the economy, strengthening the domestic SMEs with greater access to markets and credit and to new growth sectors such as horticulture and tourism. Further, the impact of support provided to the implementing agencies is expected to continue well beyond the life of the Project.
108. The investments supported under component one will continue to reap benefits beyond the life of the project. The changes envisaged under this component will reduce the regulatory burden on entrepreneurs and will provide greater financial services to the unbanked population of the economy. Investments made under component two will also have far reaching benefits beyond the life of the project by supporting a strategy that helps diversify FDI into non textile sectors and strengthens linkages to the local economy as well as supporting the strengthening of value chains in the tourism and horticulture sectors as potential new growth sectors for the economy. The implementation arrangements under this Project will support capacity building
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within key Government agencies that are under operation and will continue operating after the Project closes. These include MTICM, CBL, MCC, MFLR, MAFS, MTEC and LNDC.
V. KEY RISKS AND MITIGATION MEASURES
A. Risk Ratings Summary Table
Risk Category Rating
Project Stakeholder Risks
- Stakeholder Risk Moderate
Implementing Agency (IA) Risks
- Capacity Moderate
- Governance Moderate
Project Risks
- Design Moderate
- Social and Environmental Low
- Program and Donor Low
- Delivery Monitoring and Sustainability
Moderate
Other (Optional)
Overall Implementation Risk Moderate
B. Overall Risk Rating Explanation
109. The overall implementation risk is moderate for the Project due to the perceived stakeholder risks that involve multiple stakeholders and implementing agencies. However, the Project will benefit from the significant efforts under the first PSCEDP to build capacity in the various implementing agencies by providing training and exposing staff to international good practices in their respective fields with the view to strengthen internal capacities of these implementing agencies.
VI. APPRAISAL SUMMARY
A. Economic and Financial Analysis
110. The Project includes investments to improve business environment and access to finance, support investment promotion in non-traditional sectors, and provide targeted support to the horticulture and tourism sectors with a view to diversify the economy and create jobs. The economic analysis of this Project is built as a financial analysis with the estimated difference in cash flows to beneficiaries (tourism businesses, smallholder farmers, and MSMEs, including new jobs created) accounted for as cash flows to the Project. The costs and benefits that are expected to accrue from all sub-components of Component 2 have been estimated and the Net Present
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Value (NPV) and the Economic Rate of Return (ERR) for the investments in these components were calculated. Sub-component 2A includes TA provided to support a PPP deal. The costs and benefits of this sub-component are estimated for two scenarios: with and without achievement of a PPP deal. Details on these calculations are provided in Annex 7. The economic analysis of Component 1: Improving the Business Environment presents a special challenge due to the indirect relationship between the business environment reforms supported under the Project and the stream of benefits that these are expected to trigger. In light of this, a literature review has been provided on the positive effects of business environment reform on business creation, SME development and growth.
111. Overall Project NPV is estimated at US$31.4 million at a 10 percent discount rate (with costs and benefits based on only component 2), with a 27 percent ERR when no PPP deal is achieved. The Project NPV is estimated at US$37.3 million at a 10 percent discount rate with a 18 percent ERR when a PPP deal is achieved. The data and the assumptions are based on field research, as well as former literature that estimated the impact of similar programs on SMEs growth and productivity rates, and changes in wages. 10 and 12 percent discount rates are used for different scenarios, in line with World Bank guidelines. Further details on these are provided in Annex 7.
Supporting investment promotion in non- traditional sectors and increasing linkages to the domestic economy
112. The Project will provide the GoL with support for increased horizontal diversification outside of the textile sector through TA to improve infrastructure and other service provisions for existing factory sites as well as supporting linkages to the local economy. This support includes options for commercialization of these factory shells including the design of a PPP deal. As a result of the technical assistance, factory shells will incur higher servicing costs but with a view to be able to achieve higher rents from investors. If a PPP is achieved, both servicing costs and rents will be considerably higher than other commercialization options. This impact has been estimated as part of the economic analyses with these two possibilities under a number of different scenarios.
113. Without the achievement of a PPP, the ERR of this sub-component is expected to be 26 percent, and the NPV is expected to be about US$22.5 million with a discount rate of 10 percent. With a PPP, the ERR of this sub-component is expected to be 17 percent, and the NPV is expected to be US$24.7 million with a discount rate of 10 percent. The lower ERR for the PPP scenario reflects the higher risk associated with it, along with the higher expected returns shown by the larger NPV estimate.
Supporting the tourism sector
114. The Project will support an enabling institutional framework for the tourism sector, support the implementation of the star grading for accommodation establishments and improve the productivity of the handicrafts sector. As a result of this technical assistance, tourism-related businesses will be able to improve their efficiency and productivity and as such increase their profits. Improvements in the institutional framework and quality of offerings will also increase the number of tourist arrivals. Additionally, TA provided specifically to the handicraft sector will
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increase tourist spending in this area. This impact has been estimated as part of the economic analyses with a number of different scenarios.
115. The ERR of this sub-component is expected to be 17 percent, and the NPV is expected to be about US$214,655 with a discount rate of 10 percent.
Expanding commercial horticulture
116. Under the previous PSCEDP, pilot horticulture farms were created to support commercial fruit farming in Lesotho. This Project includes support for expansion of this pilot program including support for products targeted for export (Grade 1), domestic consumption (Grade 2), and value added processing (Grade 3). Increased commercial fruit farming will allow smallholder farmers to capture higher prices and thus increase revenues and income. Impact of this investment has been estimated with a range of scenarios.
117. The ERR of this sub-component is expected to be 31 percent, and the NPV is expected to be about US$3.8 million with a discount rate of 10 percent.
LEAP Matching Grants Program
118. The Project will support financing for business development services through the use of cost-sharing grants with a view to improve the capacity of MSMEs and associations. As a result, individual enterprises will be able to improve the efficiency of their businesses and as such increase their profits. Associations will be able to increase their membership and thus their membership income. The impact on individual businesses of different sizes and associations has been estimated as part of the economic analyses with a number of different scenarios.
119. The number of beneficiaries for the Matching Grant Program is estimated at 200 micro-, small-, medium-, and large-enterprises and 20 associations. The ERR of this sub-component is expected to be 30 percent, and the NPV is expected to be about US$1.1 million with a discount rate of 10 percent.
120. The conclusion of the analysis is that activities under Component 1 are expected to result in improvements in the business environment notably in business regulations, licensing, and construction permit procedures and improving access to finance. These improvements in the business environment are expected to contribute to investment and growth, a relationship established in previous empirical studies (listed in Annex 7).
B. Technical
121. Business Regulation, industrial licensing and construction permit reform. The design of the technical and financial support under this component draws from extensive diagnostic work conducted during PCSED Project and the work undertaken by the Doing Business Reform Unit, combined with inputs from both public and private sector stakeholders. The reforms supported to streamline the construction permit issuance will further benefit from in-depth diagnostics that will be conducted during project implementation and will leverage on relevant lessons from reforms undertaken in the sector globally.
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122. Increasing access to finance. The design of this component draws from diagnostic work conducted by external consultant teams under the PSCEDP as well as the ongoing FSDS team along with extensive discussions with commercial banks, CBL and government representatives. The interventions under this sub component will greatly benefit MSMEs that are looking at servicing foreign firms, smallholder farmers under the horticulture component as well as artisans under the tourism sub-component.
123. Supporting investment promotion and increasing linkages to the local economy. This component benefits from significant diagnostic work undertaken by the Bank to look at the level of backward and forward linkages in the economy and the urgent need to diversify FDI away from the textile sector. These findings were further corroborated during the significant consultations that were undertaken with the private sector, LNDC, BEDCO and government agencies.
124. Supporting the tourism sector and expanding commercial horticulture. These sub- components benefit from the work undertaken under the PSCEDP and aim at scaling up the successes as well as taking into account the lessons learnt during the project implementation. In order to design these sub-components, significant consultations were held with MTEC, LTDC, artisans, TOAL and LHAA for the tourism sub-component and MTICM, LNDC, MFLR, MAFS and commercial banks.
C. Financial Management
125. The financial management systems under the PSCEDP and the PPA for the proposed Second PSCEDP are functioning as intended and will need to continue to have a full time financial management staff to sustain the current momentum. As per the current arrangements, the fiduciary aspects of the project will be handled by the Finance Manager. 126. The project will continue to disburse based on statement of expenditures but it is proposed that a commercial local account be opened to effect payments. This will minimize the delays in processing payments at the Central Bank and also minimize dipping into funds from Government contribution. 127. The project will use the existing computerized accounting system (FINPRO/TOMPRO) to record and report on the activities. The project will report on the use of funds on a quarterly basis by submitting Interim Financial Reports (IFRs). The IFRs will be submitted to the Bank 45 days after the end of the calendar quarter. These reports will include a statement of sources and uses of funds, designated account activity statement and statements of eligible expenditure under contracts subject to and not subject to prior review. 128. The project financial statements will be audited by the office of the Auditor General in accordance with international standards on auditing promulgated by the IFAC and audit reports will be submitted to IDA within 6 months after the financial year-end, on 30 September each year. 129. The overall conclusion of the financial management assessment is that the project’s financial management arrangements have an overall “Moderate” risk rating.
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D. Procurement
130. All procurement to be financed under the proposed project will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated January 2011, and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011, and the provisions stipulated in the Legal Agreement. For International Competitive Bidding (ICB) and National Competitive Bidding (NCB), all procurement of goods, works and non-consultant services will be done using the Bank’s Standard Bidding Documents. All consultant selection undertaken for firms will be done using the Bank’s Standard Requests for Proposals. The project will carry out implementation in accordance with the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD and IDA and Grants” dated October 15, 2006 and revised January 2011 (the Anti-Corruption Guidelines). 131. An assessment has also been made of the existing PMU. The key issues identified regarding procurement for project implementation are: (a) the need for the PMU to complete the selection of a full time Procurement Manager that is currently underway to replace the acting Procurement Manager who has been managing the low value and non- complex procurements and consultant selections done so far, for which the interim arrangement has been deemed adequate; (b) limited capacity for new PMU staff to assure adherence to World Bank Procurement and Consultant Selection Guidelines. In addition, the project will also support building the procurement capacity of key Government agencies through short term in-country training programs. 132. Proposed corrective measures to mitigate the overall risks include: (a) The PMU to hire a qualified and experienced Procurement Manager prior to project effectiveness; (b) training of new PMU staff and procurement staff from key Government agencies on World Bank Procurement and Consultant Selection Methods and Procedures (c) selected contracts to be subject to prior review. A Procurement Manual has already been developed under the previous project and has been updated by the PMU for the Second PSCEDP. An acceptable Procurement Plan covering the first 18 months of the project has been prepared.
E. Social (including Safeguards)
133. The project incorporates consultation into specific sub-components which address local stakeholder interests in strengthening private sector activities. During the April 2013 craft sector stakeholder workshop, a consensus emerged to develop the sector beyond current philanthropic projects and seek public-private partnerships. The training program for the handicrafts sector will be designed in consultation with local stakeholders. The program will develop a market based artisan enterprise training curriculum that is business oriented, meets the needs of the artisans and includes long term capacity building and mentorship. Addressing artisan training needs will also benefit the women’s collectives who have strong involvement in handicraft production. A survey will be conducted during implementation to facilitate targeting of domestic tourism. Similarly, the current participating farmers in the horticulture industry were consulted during the preparation of the Second PSCEDP as well as an Environmental and Social Management Framework (ESMF) preparation.
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134. On social safeguards, the project has been rated category B- partial Assessment for Environmental Assessment (EA) and an ESMF for the horticulture component has been drafted with public consultation and disclosed in-country and at the Bank’s Infoshop prior to appraisal on August 06, 2013. Since the site for horticulture component will be selected during project implementation the ESMF lays out the framework for a uniform approach for addressing potential negative impacts and incorporates the lessons learnt from the existing pilot sites and the village roll-out under the PSCEDP. The site for the tourism handicrafts center has been identified and an ESMP has been prepared; consulted upon and disclosed both in-country and at the InfoShop prior to appraisal on August 06, 2013. The tourism information center will be built on an identified site for which the land has already been acquired and does not have any encroachers or squatters. Other components of the project do not require land acquisition, and there are no squatters or encroachers thus not triggering OP4.12.
F. Environment (including Safeguards)
135. Under component 2B the project will support the tourism sector which has a strong potential to contribute to pro-poor growth and job-creation. This is in line with the GoL’s Vision 2020 and Poverty Reduction Strategy. This sub-component will contribute towards targeted tourism product development, improvement and diversification. 136. For this sub-component, identified potential negative impacts would arise from the development of a combined central handicraft marketplace, artisan resource center and tourism information center. The preferred site is located in the urban area in Maseru where the previous Basotho Shield Tourism Information Center and Artisan Market was located, and will, as a result, have minimal impact on the natural environment since existing infrastructure will minimize construction development needs. Identified activities trigger Operational Policy 4.01 due to potential minor to moderate impacts that would arise from, among others, construction noise, air pollution due to dust and emissions from heavy vehicles, accumulation of solid and liquid wastes, and disruption of traffic. An ESMP has been prepared for the construction of the tourism center. The ESMP provides operational guidelines in accordance with World Bank operational policies. It establishes procedures, methodologies and responsibilities within the project for addressing identified environmental and social issues. 137. Under sub-component 2C the project will support the expansion of commercial horticulture. The sub-component will seek to address the limitations imposed by Lesotho’s heavy reliance on rain-fed, subsistence production of maize, sorghum and wheat, which has already been exacerbated by land degradation and climate change. This sub-component will scale up the pilot PSCEDP activities, making maximum benefit of micro-climate growing conditions which enable ideal production conditions of high value horticulture and early season harvest. The scale up of fruit orchard production will help to tap into high value niche markets. 138. Activities under this sub-component trigger two World Bank Operational Policies, namely, OP 4.01 and OP 4.09. The policies are triggered due to anticipated moderate impacts from horticulture activities which may include excessive use of water, tilling of land, and minor to moderate use of pesticides. An ESMF has been prepared since the new sites for the scale up will only be identified during project implementation. The ESMF which includes an Integrated
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Pest Management Plan provides a uniform approach to the management of potential adverse impacts at the sites. 139. The project has been rated as category B – partial assessment for environmental assessment. Both the ESMP for the tourism sub-component and the ESMF for the horticulture sub-component have been disclosed both in-country and the Bank’s InfoShop on August 06, 2013.
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Annex 1: Results Framework and Monitoring
LESOTHO: SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT
Project Development Objective (PDO):
The Project Development Objective (PDO) is to contribute to the development of selected non-textile sectors resulting in increased private sector investment, firm growth and job creation.
PDO Level Results
Indicators* Cor
e Unit of Measure
Baseline
Cumulative Target Values**
Frequency Data Source/
Methodology
Responsibility for Data
Collection
Description (indicator definition, etc.)
YR 1 YR 2 YR3 YR 4 YR5
Indicator One:
Number of direct project beneficiaries
Number 0 30,000 75,000 Annual OBFC, CBL, LNDC, Project
M&E.
PMU M&E Specialist
This is an indicator for components 1 and 2. This will include all the enterprises that benefit from streamlined business regulations, SMEs (manager and firm employees) that are able to access loans with movable collateral, individuals that are covered under the credit bureau, artisans, hotel establishments benefiting from the tourism sub-component and the small holder farmers benefiting under commercial horticulture, and LEAP beneficiaries.
While official targets are only twice during the project implementation, this indicator will be monitored annually, to track progress.
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Of which female Percentage 0 15% 30%
Indicator Two:
Increase in jobs created in selected non-textile sectors
Percentage 6058 15% 40% Annual OBFC, LNDC, MTEC, Surveys conducted for
the horticulture sub-component
PMU M&E Specialist
This is an indicator for component 2. Jobs will be defined as full-time, part time and seasonal workers. This will include jobs created in new foreign and domestic non-textile firms attracted in the industrial estates, jobs created under the horticulture and tourism sub-components
While official targets are only twice during the project implementation, this indicator will be monitored annually, to track progress.
Indicator Three:
Increase in domestic enterprises created/registered in non-textile sectors
Percentage 11382 15% 30% Annual OBFC PMU M&E Specialist.
This is an indicator for components 1.and 2.
While official targets are only twice during the project implementation, this indicator will be monitored annually, to track progress.
INTERMEDIATE RESULTS
PDO Level Results C
ore
Unit of Baseline Cumulative Target Values** Frequency Data Source/ Responsibili
ty for Data Description (indicator
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Indicators* Measure YR 1 YR 2 YR 3 YR 4 YR 5
Methodology Collection definition etc.)
Intermediate Result (Component One): Improving Business Environment
Intermediate Result indicator One: Decrease in the number of days required to obtain a construction permit from the Maseru City Council.
Number
106 80 65 Annual Doing Business Report, MCC, Project M&E
PMU M&E Specialist
This indicator does not include acquiring a fixed line which is included in the process of receiving a construction permit in the Doing Business indicator methodology.
While official targets are only twice during the project implementation, this indicator will be monitored annually, to track progress.
Intermediate Result indicator Two: Credit Bureau established and operational.
Yes/ No
No Yes Project End CBL, Project M&E
PMU M&E Specialist
Intermediate Result (Component Two): Supporting Economic Diversification
Intermediate Result indicator Three: Increase in non-textile investments in the industrial estates.
Maloti 418.5mn 5% 10% 20% 35% 40% Annual LNDC PMU M&E Specialist
This indicator measures the new foreign as well as domestic investments that come into the industrial estate in the non-textile sectors.
Intermediate Result indicator Four: Coverage of registered lodging
None 0
Fully Functional
Project End LTDC, LHAA, Project M&E
PMU M&E Specialist
This indicator measures the fact that registered lodging operations will be adhering to the Star Grading System of accommodations that will
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PDO Level Results
Indicators* Cor
e Unit of Measure
Baseline
Cumulative Target Values**
Frequency Data Source/
Methodology
Responsibility for Data Collection
Description (indicator definition etc.)
YR 1 YR 2 YR 3 YR 4 YR 5
operations under the star grading system
Covering 50% of all registered lodging operations
be rolled out during the project implementation.
While an end of year indicator, it will be tracked annually, to track progress
Intermediate Result indicator Five: Tourism information center established and operational
Yes/No No
Yes Post Yr3 of
Project Implementation
MTEC, PMU PMU M&E Specialist
Intermediate Result indicator Six: Increased incomes of participating farmers.
Percentage TBD via baseline survey after site selection
0% 0% 10%23 25% 30% Annual Field reporting
and data collection system
PMU (Horticulture Manager) w/Farm Management Company
This indicator is measured in real terms and not nominal terms. Will be controlled for inflation.
Intermediate Result indicator Seven: Share of firms supported by LEAP that increased sales by greater than 10% after a year of
Percentage -- 10% 15%
15% 25% 30% Annual LEAP Unit PMU M&E
Specialist This indicator will track the performance of the firms being supported from the date of support. The target values for subsequent years are cumulative.
23 Only from the Likhothola Fruit Farmer’s Association. Trees from other plots will not have matured sufficiently to produce marketable crops.
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PDO Level Results
Indicators* Cor
e Unit of Measure
Baseline
Cumulative Target Values**
Frequency Data Source/
Methodology
Responsibility for Data Collection
Description (indicator definition etc.)
YR 1 YR 2 YR 3 YR 4 YR 5
support.
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Annex 2: Detailed Project Description
LESOTHO: SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT
1. The proposed new project aims to build on reforms initiated under the PSCEDP as well as reforms in new areas to support government priorities that would lead to greater private sector development. This will be achieved through improved business environment, greater access to finance, supporting investment promotion activities in new sectors and enhancing linkages to domestic SMEs and improved economic diversification in the economy through targeted support to new growth sectors such as horticulture and tourism. The project design has been informed by the recent World Bank (2012) technical assistance note that analyzed policies to increase economic diversification through FDI and improved backward linkages to the local domestic economy. In addition, the project design is also closely coordinated with the ongoing Financial Sector Development Strategy (FSDS). 2. The project will comprise two mutually- reinforcing components: (i) Improving the business environment; and (ii) Increasing economic diversification. In addition the third component of the project will support project implementation.
Project Components
COMPONENT 1: Improving the Business Environment (IDA Allocation: US$ 3.16 million; Government: US$ 0.40 million)
3. The objective of this component is to support policy measures intended to facilitate business entry and greater access to finance. The two sub-components are (i) Business regulation, licensing and construction permit reform; and (ii) Improving access to finance. Sub-component 1A: Business Regulation, industrial licensing and construction permit reform (IDA Allocation: US$ 2.08 million)
4. The objective of this sub-component is to reduce the time and cost for registering a business and obtaining construction permits. The rules and procedures for establishing a business in Lesotho are lengthy, cumbersome and costly for the private sector. Under the PSCEDP, the GoL embarked on a series of reforms to improve the company start-up system. The reform was prolonged over time, but its eventual success upon completion is evident by the introduction of the new 2012 Companies Act, and the creation of the One-Stop Business Facilitation Center (OBFC), which brought under one roof different agencies in charge of business start-up and operation. The reform resulted in a more simplified and streamlined company registration system in Lesotho. These improvements led to a decrease in the number of days required to register a business from 28 days to 7 days reflected in an increase in Lesotho’s Doing Business ranking by 65 positions in the starting a business indicator, also making Lesotho one of the top Doing Business reformers for 2013.
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5. The afore-mentioned reforms however only affected companies and do not cover sole proprietors and partnerships. These reforms when extended to all businesses will increase the degree of formalization in the economy. Supported by a revised legal framework, the OBFC system can go beyond company registration and start registering sole proprietors and partnerships. This sub-component will also support a streamlined licensing service modernizing the outdated trade and industrial licensing system for all types of enterprises, thus leading to both a reduction of red tape, and increasing inclusion and formalization. In addition, the introduction of streamlined risk-based environmental and health inspection procedures will further improve the process of registering business start-up operation, and remove the unnecessary regulatory burden for the private sector, resulting in saving time and costs and potentially increasing the numbers of compliant businesses.
6. Business Regulation and Industrial Licensing Reform: The new project will support the drafting and implementation of the Business Registration Bill which aims to cover all businesses, including sole proprietors and partnerships. This will enable the benefits of the OBFC system to go beyond company registration and register sole proprietors and partnerships, and also increase formalization of businesses. The objective would be to replace the outdated Trader’s Enterprise Act (1993) with the Business Registration Bill, which will develop a legal framework that supports a modern trade licensing regime. The Project will also support the drafting of the accompanying regulations required to implement the Bill, such that these supporting regulations are compatible with the current OBFC system and in line with international best practice.
7. Inspired by the success of the company registration under the OBFC, the GoL has undertaken steps to modernize its industrial licensing regime. The GoL recognizes that the current licensing system of Lesotho is cumbersome, unpredictable and non-transparent; involving multiple agencies resulting in high compliance costs for the private sector. In order to tackle these shortcomings, GoL was supported by the PSCEDP to draft the 2013 Industrial Licensing Bill which is to replace the outdated 1969 Industrial Licensing Act. The new project will support GoL to implement this new Industrial Licensing Bill. In addition, the Project and MTICM will work closely with the OBFC to ensure that there is close coordination between the legal amendments and regulations being proposed and the intended OBFC enhancements being supported by New Zealand AID and being undertaken by the New Zealand’s Company Registration Office.
8. The introduction of a streamlined risk-based environmental and health inspection procedure during the business registration and licensing processes can further improve the process of business start-up and operation, and remove unnecessary regulatory burden for the private sector, resulting in cost and time savings and increasing numbers of compliant businesses. Currently under the Environment Act (2008) all businesses are subject to Environmental and Health inspections prior to registering a business or applying for a license, regardless of the potential levels of environmental or public safety risk they pose. This practice imposes high compliance costs and regulatory burden on SMEs and at the same time imposes a high transaction cost for the Ministry of Tourism, Environment and Culture (MTEC) which has only 2 inspectors who conduct these inspections. The project will support the introduction of a risk-based inspection regime by introducing guidelines that support the principle of risk-based
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inspections to supplement the existing Environment and Health inspections and help streamline the system. 9. In order to operationalize both the new trade and industrial licensing regimes, the project will also support the creation of an electronic portal for licenses, which will put on-line a database of all laws, regulations, rules, tariffs and steps for all types of trade and industrial licenses, and types of business activity (business codes), similar to the e-licensing portals in Kenya and Nepal. The e-licensing portal will then be linked to or incorporated within the OBFC, thus bringing the business registration and licensing in one place, and providing a complete administrative service to all entrepreneurs.
10. The following activities will be financed under this sub-component:
i. Technical assistance to support the drafting of the Business Registration Bill and accompanying regulations to operationalize the new Business Registration Act;
ii. Technical assistance to support the drafting of the regulations to implement the Industrial Licensing Bill;
iii. Technical assistance to support the introduction of a risk-based environmental and health inspection regime for business registration and industrial licenses;
iv. Training programs for staff of MTICM, MTEC and Parliamentary Counsel to support the new Business Registration, Industrial Licensing and risk-based environmental and health inspection regimes;
v. Design of an online E-Licensing portal; vi. Creation of an E-Licensing Portal including purchase of computer equipment and
associated software to accompany the online E-licensing portal; vii. Operation and maintenance of installed IT systems; and
viii. Costs of publishing and printing laws and regulations.
11. Expected Results: The successful completion of these activities will lead to the creation of an inclusive state of the art comprehensive business registration and licensing system in Lesotho which will cover all forms of businesses, thus bridging the gap between formal and informal enterprises, increasing the tax base, boosting formal employment and allowing newly formalized entities to take advantage of the benefits of the formal economy. In addition, the comprehensive business registration system will lay the foundation for a modern licensing system, which will enhance regulatory compliance, quality of service delivery, transparency and predictability for both the public and the private sector. 12. Construction Permit Reform: With the country ranked 140 out of 185 economies globally in the Doing Business Report, one of the worst performing Doing Business indicators for Lesotho is the process of obtaining construction permits. The enforcement of construction permits creates opportunities for widespread discretion and corruption the world over24. The lessons from the past indicate that there are three main positive outcomes of construction regulation reform. These include: (i) turning unrecognized assets into productive capital; (ii) helping create a level playing field for businesses and (iii) contributing to enforcing increased
24 Good Practices for Construction Regulation and Enforcement Reform, Investment Climate Group, January 2013.
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safety and improved resource management (World Bank, 2013). A negative outcome associated with inefficient and corrupt construction-permit and inspection systems is the loss of opportunity for existing and would be entrepreneurs of a level playing field. 13. While in Lesotho, there are only 11 steps, which is below the average of 15 steps for Sub-Saharan Africa and the 14 steps for OECD countries, it takes an average of 330 days to obtain a construction permit in Lesotho. There are basically two major steps - one is to obtain the Environmental Impact Study, the second is to apply for the permit at the Maseru City Council (MCC). However, all procedures are manual, paper-based, and require physical movement of documents and plans between approving agencies resulting in the large number of days required. Of the 330 days, the MCC accounts for 3 procedures that account for 106 days and the majority of the cost, while the connection with Telecom Lesotho for a fixed line accounts for 180 days25. The delay in the establishment of the fixed line is a factor of both limited capacity within Lesotho Telecom and the fact that Lesotho Telecom does not have access to a potential client’s credit worthiness due to the lack of an existing credit bureau in the country.
14. The project will help streamline the construction permit system within the MCC, by automating the document workflow, digitizing the back-office functions of MCC and digitizing the archive wherever possible in order to create automated, predictable and transparent systems, thus reducing time, cost and regulatory burden for the private sector, and at the same time reducing the transaction costs for the MCC. The project will thus focus on reducing the number of days taken for the 3 procedures MCC is responsible for and that currently take 106 days.
15. The following activities will be financed under this sub-component:
i. Detailed process mapping of the construction permits system; ii. Design of automated document workflow and introducing file tracking numbers;
iii. Purchase of hardware and software for automated workflow; iv. Design and creation of a publicly accessible transactional website with all
information on procedures, steps, and fees on construction permit process in Lesotho with the option for online submission of documents, plans and drawings;
v. Automate the back-office functions of the MCC; vi. Digitize the construction permits archives wherever possible; and
vii. Training of MCC staff and other regulatory authorities on the new system.
16. Expected Results: The establishment of automated system for construction permit within the MCC is expected to improve the quality of the service delivery, increase transparency, reduce opportunities for rent-seeking, and reduce time, cost and the regulatory burden for the private sector. Sub-component 1B: Improving Access to Finance (IDA Allocation: US$ 1.08 million; Government: US$ 0.40 million)
25 The establishment of a fixed line connection is a requirement of the Doing Business indicator.
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17. Financial services in Lesotho consist of four commercial banks which include three subsidiaries of South African banks and the government owned Lesotho Post Bank, six insurance companies, two asset management companies, moneylenders, and financial cooperatives. While the sector contributes around 6 percent to the GDP, its assets make up 84 percent of the GDP.26 According to the 2011 FinScope Survey, around 62 percent of the population is unbanked (i.e. do not use commercial banks’ products and services). While there are four different banks, collectively they have just 42 branches, and only two banks have countrywide outreach. Among the main obstacles to credit extension is the absence of a credit bureau together with the lack of a collateral registry and a financial leasing system. 18. The NSDP identifies increasing financial inclusion and access to credit as a high priority and one of the main financial sector challenges. Addressing these challenges requires a focus on both the supply of credit, and the factors which affect the demand for credit. The Second PSCEDP will aim to promote financial inclusion through this sub-component. The objective of this sub-component is to improve the access to finance in Lesotho, by providing a stable and predictable loan market and credit worthiness system (credit information bureau), providing a diversified set of the financial services (financial leasing and movable collateral) and extend these new services to the unbanked population. The initiatives under this component would also directly benefit the main stakeholders under component 2 namely domestic SMEs, artisans and smallholder farmers. This component has been closely coordinated with the ongoing FSDS that aims to provide the overarching framework for policy actions required in the financial sector, which will have a donor-funded high level FSDS Secretariat housed in the CBL.
19. Establishment of a Movable Collateral Registry: The problem of access to finance for SMEs in Lesotho depends to a large extent on factors outside the credit market, underlining demand side constraints. Insufficient suitable collateral is cited as amongst the top constraints to accessing credit. Credit is more readily available to businesses that have immovable property (land and buildings) to be used as collateral than those having movable assets as banks heavily prefer immovable property such as land or buildings to secure a loan. Around the world, movable assets, not land or buildings, often account for most of the capital stock of private firms and an especially large share of the assets for micro, small and medium-size enterprises. 20. There is a request from the Central Bank of Lesotho for support to kick start the leasing industry in Lesotho. The legal framework will need to be conducive to encourage the banks and the Non- Bank Financial Institutions (NBFIs) to start offering financial leasing services to the private sector. The outdated Hire Purchase Act should be replaced by a modern secured transactions or personal property law that will allow all forms of movable and personal property to be used as collateral. The secured transactions law should include financial leases as part of the type of security interests that need to be registered and the law will need to be harmonized with the leasing regulations. This will allow SMEs to offer a bundle of assets comprising stock, receivables, and equipment which generally comprise the bulk of the assets of these micro businesses. A law that allows them to be effectively collateralized can unlock credit flows and improve access to credit27.
26 The Lesotho Review, an overview of the Kingdom of Lesotho Economy, 2013 27 Lesotho FSDS Draft, 2013
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21. The Project will support the move towards the use of movable and intangible assets as collateral and the establishment of a modern movable collateral registry. The substance of this reform will address issues relating to the creation, registration and enforcement of security interests over moveable collateral. This would be a national movable property securities registry, with priority given to security interests in the order in which they are registered. The proposed registry will aim at including information on financial leasing 22. Establishment of a Credit Information Bureau: Credit bureaus play an important role in financial stability by helping control over-indebtedness and are critical to the expansion of credit for both individuals and small businesses. A credit bureau collects information from and shares information with financing institutions to enable them to make more informed lending decisions, thereby lowering their default rates and improving the quality of lenders’ loan portfolio. Credit Bureaus world over have expanded their coverage to include non-banking financial and credit-granting institutions, and utility companies. Lack of information on overall consumer indebtedness is an area of concern from the perspective of financial stability as borrowers may accumulate large debts through small facilities from credit providers and related liabilities could remain hidden from lenders and lead to flawed creditworthiness assessment. It is, therefore, important to pool information from all credit-granting institutions including credit financing institutions which provide direct consumer financing to individuals. 23. The enacted 2012 Credit Reporting Act (CRA) provides for the regulation of credit reporting and facilitates the regulations of credit information by credit providers, credit bureau operators and authorities, thus supporting the establishment of a Credit Information Bureau (CIB).28 With the 2012 CRA now in place, the next step is the finalization of the CRA implementing regulations, which will complete the legal foundation for establishment of a credit information bureau. The implementation of the CRA and the establishment of a credit information bureau will help bring all the significant credit providers into the reporting system. Under the ongoing Millennium Challenge Account (MCA) Project, the CBL had drafted a Terms of Reference for a consultancy project to assist with the establishment of a CIB. The MCA project closed on September 30, 2013 and the CBL requested that this be supported under the proposed Second PSCEDP.
24. A key challenge is to secure a registered credit bureau, given the limited size of the market in Lesotho. The most likely source of potential operators is South Africa where there are currently 13 registered credit bureaus that will be invited to apply for registration in Lesotho29. The Act does make provision for credit information to be processed outside of the country if necessary, so a CIB operating in South Africa would be able to use existing systems. A legal presence in the country and a registration with the CBL however will be required for the CIB.
25. The Project will support the finalization of the CRA implementation regulations and the actual establishment of the CIB. The project will assist the CBL in establishing agreed reporting
28 The Lesotho Review, an overview of the Kingdom of Lesotho Economy, 2013 29 Lesotho FSDS, 2013
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formats and systems for electronic submission of data from data (credit) providers to the CIB, and from the CIB to the CBL. 26. Insolvency Reform: The availability and cost of credit are positively correlated with the strength of creditor rights’ protection. The protection of creditor rights includes an effective debt enforcement regime for individual creditors to recover their debt, and a robust and efficient insolvency regime, which regulates collective creditor recovery.30 The project will provide technical assistance to help modernize the Insolvency Proclamation and ensure coherency with the liquidation provisions. The project will support the review and modernization of the insolvency legislation that deals with both companies’ liquidation and a modernized, personal bankruptcy regime for individuals and unincorporated businesses. This will allow a more coherent, streamlined insolvency framework in line with best practices. Other jurisdictions in the region that have or are in the process of implementing a unified insolvency law include Kenya, Uganda, Mauritius and Malawi. 27. The following activities will be financed under this sub-component:
i. Review of the hire purchase act to move towards secured lending transactions law; ii. Design of the movables collateral registry;
iii. Purchase of hardware and accompanying software for the collateral registry; iv. TA to CBL to support the financial leasing regime; v. TA to support the drafting and finalization of the CRA implementation regulations;
vi. TA to establish reporting formats and systems for electronic submission of data; vii. Capacity building to the Supervision Department on the licensing and oversight of the
CIB; viii. Operation and maintenance of installed IT systems;
ix. Review of Insolvency Laws and Regulation and subsequent drafting; x. Stakeholder discussions and training on new systems, laws and regulations ; and
xi. Information dissemination and communication campaigns.
28. Expected Results: The establishment of a credit bureau will cover the entire population and provide creditors with information for assessing credit worthiness of borrowers, thus ensuring stability and predictability in the market. The introduction of a movable collateral registry would allow borrowers to use movables to secure loans, thus removing the burden from banks to require only immovable security, and thereby increasing financial access to the unbanked population. Further, this registry will aim at including information on financial leasing. The TA provided to modernize the bankruptcy regime would support increasing creditor confidence to increase their confidence in loan recovery. Together these reforms would help modernize the financial services market, by providing new forms of asset-financing to lenders and borrowers. COMPONENT 2: Supporting Economic Diversification (IDA Allocation: US$ 7.45 million; Government: US$ 1.50 million)
30 World Bank Principles on Creditor Rights
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29. The objective of this component is to support policy measures intended to strengthen the competitiveness of new growth sectors with the aim of decreasing Lesotho’s reliance on textile exports as the main engine of growth. The activities under this component will assist the Government of Lesotho to: (i) attract foreign investments into a diversified set of sectors; (ii) facilitate linkages to the local economy; (iii) increase the competitiveness of the tourism sector; (iv) facilitate the production of tree crops and develop a competitive horticulture value chain that can be a source of growth and employment creation; and (v) support domestic SMEs by providing access to business development services to improve their productivity and increasing their access to new markets. Sub-component 2A: Supporting investment promotion and increasing linkages to the local economy (IDA Allocation: US$ 1.78 million)
30. This sub-component of the project will aim to provide the GoL with support towards achieving sustainable diversification of the country’s export manufacturing program as well as providing support to strengthen the local SME capacity. This diversification needs to be achieved such that there is horizontal diversification combined with increased localization – where local participation in the manufacturing sector increases in terms of providing technical and managerial skills and supplying export-oriented firms.
31. Supporting investment promotion in diversified sectors: There are currently 41 companies in the textile and apparel cluster employing over 40,000 persons. Exports to the US market alone amounted to $242 million between January and October 2012. These levels vary according to prevailing international economic conditions, but have remained relatively stable since the termination of the Multi-Fiber Agreement in 2005. Investments in the sector – all foreign-owned – have been aided by the availability of a series of investment incentives, which have included: i) a 0 percent corporate tax on manufacturing profits for exports outside of the SACU; ii) a 10 percent corporate tax on manufacturing profits for exports to SACU; iii) no withholding tax on dividends paid by manufacturing firms to local and foreign shareholders; iv) easy repatriation of profits for manufacturers; and, v) facilitated Value Added Tax payment and claims procedures.
32. In addition to these incentives, an important attribute of Lesotho’s attractiveness has been the access to industrial facilities through the LNDC’s extensive factory shells program. The factory shell program is widely considered a key contributor to maintaining the country’s attractiveness, notably because it provides highly subsidized space to adequate standards. Lease rates are presently set at M7-10/m2/month, or about $12/m2/year. This is about one half of regional and one quarter of international rates.
33. The success of Lesotho’s offshore manufacturing sector is however limited by a number of crucial factors. The first resides in the fact that the country’s track record in attracting and retaining manufacturing FDI is primarily the expression of preferential trade agreements that give Lesotho-registered and –operating manufacturers’ duty- and quota-free access to a number of significant consumer markets. It is notable that Lesotho’s export manufacturing has been primarily destined to the American market under AGOA. Exports to the US market expanded rapidly between 2000 and 2005, from under $150 million to over $450 million, to decline progressively since. The country has not been successful in supplying its other potential markets.
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34. The second limitation is directly related to the first: Lesotho’s manufacturing exports have been concentrated in a few products within the garment value chain, mainly in the finished apparel segment, and in that segment within a few weaved and knitted products. That dependency has at times reached over 90 percent of total manufacturing exports. Similarly, the third limitation of the country’s success is a direct product of this high market-product specialization: the vast majority of investors originate from Taiwan, China, who invested in Lesotho in order to access preferential markets.
35. Consequently, and this is a fourth limitation, this industrial structure has led to very limited localization and few opportunities for vertical integration. As noted above, most of the apparel investors in Lesotho are order takers who receive their production inputs from Asia through the AGOA’s third country fabric derogation. They have little need for local partners and local production inputs, and limit their investment in workforce training and development. As a result, very few Basotho entrepreneurs have been involved in the sector. Productivity is considered to be lower in Lesotho than in most of its competitors, which partly undermines its labor cost advantage.
36. The main factor preventing a drastic decline in the sector has been the recent growth of investment and exports targeted to the South African market. This has occurred through the relocation of South African manufacturing activities into Lesotho, mainly to take advantage of cheaper labor. Between 2006 and 2010 apparel exports to South Africa from Lesotho increased 20 fold to US$46m. Textile exports to South Africa now represent close to 14 percent of Lesotho’s total textile exports (Figure A2.1). 37. Notwithstanding these positive developments for Lesotho’s apparel exports to South Africa, Lesotho’s export apparel industry remains vulnerable in the context of increased competitive pressures, most notably from China, Bangladesh, Cambodia and Vietnam, in both the U.S. and the South African markets. As investments from China and Taiwan, China continue to depend on AGOA, uncertainty over its future (its phase out scheduled for September 2015) also threaten the sector. These exogenous factors, combined with ongoing challenges of infrastructure and productivity, which hinder competitiveness, raise serious questions about the sustainability of Lesotho’s export-oriented apparel industry.
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Figure A2.1: Development of apparel exports worldwide and South Africa 2000 to 2010
Source: USITC; South African Revenue Service.
38. Given the overall pressures it faces Lesotho needs to urgently take decisive action. LNDC is committed to continuing its support to its existing “customers” while increasing its promotion of non-textile activities focused on other markets. South Africa is now a priority for its investment promotion efforts, as is the supply of new factory shells in areas of the country where South African investors prefer to locate – such as Maputsoe. But LNDC’s business model represents a limiting factor in its capacity to service new and potential investment. Firstly, the Corporation devotes a significant part of its financial and organizational resources to maintaining current levels of investment and employment in the “legacy” sector represented by the mainly textile-apparel operators from Taiwan, China. Secondly, its approach to the provision of factory shells is essentially a “constrained supply model”, where it cannot provide shells in the right locations, at the right time to the right demand because of its insufficient financial resources. Scarce resources are thus not being allocated efficiently.
39. The project will focus on delivering a mixture of strategic and operational outcomes in an integrated, sequential way. There is evidence to show that the existing factory sites do not provide the desirable infrastructure and services to foreign investors due primarily to the very low rents that are paid for these sites. LNDC’s current strategy is to significantly increase its factory shells portfolio in all its key locations. Commercialization of these factory shells provisioning would provide an opportunity for the achievement of several goals, inter alia: i) diminution of the financial burden on Government and LNDC; ii) introduction of industrial real estate prices that are closer to market prices, and encouragement of the development of domestic real estate private sector; iii) user-specified design; and, iv) improved quality of maintenance. 40. There are likely several options for the commercialization of factory sites, including: i) fully private development, ownership and operation of the industrial estate; and, ii) private construction and leasing of individual factory shells on LNDC serviced industrial land. The project would support a pilot commercialization of factory shells where there is currently proven
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Total exports‐ US$m (LHS) Share of exports to South Africa (RHS)
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pent-up demand, delayed delivery, and land that could be rapidly and cost-effectively developed. Preference should be given to commercialization in growth sectors rather than in legacy activities, provided conditions exist for a sustainable outcome. There seems to be a prima facie case for the pilot project to take place at Maputsoe’s Nyenye project, currently planned by LNDC (with land secured, and design and costing studies conducted), pending financing.
41. Specifically, the project will support the technical evaluation of options for the commercialization of a site which can meet unmet demand for factory sites from new investors. The TA provided will support designing a PPP deal that would attract private developers to construct and manage the factory site on a commercial and sustainable basis. In depth analytical work will be conducted to inform this analysis. These will include:
42. Legal and Regulatory Assessment: A thorough review of the current legal and regulatory framework in Lesotho to identify any constraints to private investment. This includes tax and customs regime, the ease of doing business in the country, the preferential treatment given due to AGOA etc. A careful assessment of the Land Act and its implications with regards to sub-leases and contract enforcement for domestic and foreign investors will be conducted.
43. Site Analysis: An analysis to identify the existing gaps in the service provision within the industrial estates, upstream and downstream linkages with existing and potential investors, movement up the value-chain and expansion into new products, and other options for the future. This would require some of the following diagnostics:
i. Spatial Analytics: To identify existing manufacturing capabilities from a spatial perspective; in particular explore agglomeration benefits and spillovers from the industrial zones.
ii. Sectoral Analytics: To identify dynamic sectors using product space tools with regards to assessing opportunities for export diversification and moving up the value-chain.
iii. Services Diagnostics: Study linkages between trade, FDI and service sectors (logistics, retail, financial, business development etc.) to assess the importance of services within the local and global supply chain and areas for possible intervention.
44. The above analysis will include a thorough review of the existing sites, including access to existing utility connections and infrastructure. These include analyses of the (a) availability of serviced industrial sites, or lack thereof to get a sense of what service and quality of facilities is offered vs. what they pay vs. what they would be willing to pay; (b) existing aftercare provision in factory shells; and (c) access and quality of infrastructure, both hard (electricity, water and transport) and soft (legal and regulatory). The review will also provide valuable inputs into designing an effective PPP deal for the service provision of the identified pilot site. 45. An in-depth feasibility analysis and an implementation plan for the selected site that would be based on:
Financial modeling of potential commercialization options, with identification of most effective financing, development and operating model.
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Identification and correction of legal, regulatory and institutional hurdles to commercialization.
46. Technical assistance will also be provided to promote the commercialization of the industrial estate with potential domestic and regional developers/operators/lessors and providing management support to LNDC in order to conduct the commercialization process. 47. Increasing linkages to the domestic economy: While FDI offers macro benefits to countries in terms of increased foreign exchange, tax revenue, and employment, it is the micro-level, dynamic benefits that can have the biggest long term impact. These come through technology and knowledge spillovers that allow local producers to build up capabilities, resulting in productivity gains. In the case of Lesotho, where FDI is focused on export markets and there are few if any local firms involved directly in the export production, the first channel for spillovers – competition and demonstration – is of relatively minor importance. Instead, what matters is the transfer of knowledge and technology through: 1) the labor market; and, most importantly, 2) through supply chain linkages (World Bank 2012)31. 48. Knowledge and skills provided by FDI to their workforce, both through formal training and on-the-job experience, may be carried over to local firms and to other workers through labor mobility – i.e. when the worker leaves the company to work elsewhere or set up their own firm. While some aspects of the knowledge they have gained may be firm specific, much of it may be transferrable, contributing to increasing the productivity of local firms and workers. The biggest opportunities for spillovers from FDI probably occur through vertical (inter-industry) supply chain linkages. These include both forward linkages, when the goods and services provided by FDI are used as inputs in local industries, and backward linkages, which occur when local firms become input or service suppliers of FDI.
49. The latter are most important, as they offer a platform by which FDI has a direct interest in active support to upgrade local suppliers through transfer of knowledge and technology. For example, local input and service suppliers of FDI may learn to meet international standards and technological efficiency that increases their overall productivity. FDI affiliates might help local producers to upgrade their technological capabilities – directly through sharing production techniques and product design and assisting with technology acquisition, or indirectly through the expectation of high standards and feedback on suppliers’ output (Paus and Gallagher, 2008)32. And of course, supply linkages offer more than just spillovers, but also directly benefit the local economy through employment creation and the growth of local firms. 50. Lesotho’s experience with spillovers in the apparel sector has been a serious disappointment. Nearly 30 years after the first foreign-owned apparel firms opened in Lesotho, no local firm has emerged as an exporter and no substantive links have been developed with local SMEs. Linkages can take place, through: 1) subcontracting; and 2) input supplies (goods
31 Economic Diversification and the Role of FDI Policies (P128116), Policy Note, October 2012, The World Bank. 32 Paus, E. A. and K.P. Gallagher, 200. “Missing Links: Foreign Investment and Industrial Development in Costa Rica and Mexico,” Studies of Comparative International Development, 43: 53-80.
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and services). In many countries, local firms break into the exporting market by starting as subcontractors to the large manufacturers.
51. Subcontracting is a common strategy for managing production cycles in the apparel sector worldwide. It is the type of relationship that is central to the geographical “clusters” of apparel firms that characterize the sector. At the moment, however, there is very little subcontracting in Lesotho, and what does exist takes place among existing foreign investors. 52. Supply links: The nature of the global apparel sector is such that many input supplies, most importantly fabric, can be sourced from global markets. For FDI in Lesotho, input sourcing is generally organized at the head offices, either in Taiwan, China or in South Africa, where inputs are largely sourced from Asian-based firms. Transnational producers from Taiwan, China often own textile mills in other countries that are used for their apparel manufacturing plants. They also tend to source inputs on a global scale for their globally dispersed manufacturing plants to get better prices and secure conformity. Most South African manufacturers are not directly involved in textile or other input production, but still source the majority of textile inputs from Asia with the rest coming from South Africa and very little from other SSA countries.
53. Outside of core inputs, local sourcing is more common, but even here most of it is controlled by foreign investors rather than local firms. Where local firms do participate in the apparel supply chain is in basic services. Of the eight transport firms that were named in the surveys of apparel FDI (World Bank, 2012), six were locally owned and only two foreign (South African). This highlights an improvement in the quality of services provided by the local transport firms since; in 2006 the World Bank FIAS study cited that apparel manufacturers preferred to use South African truck companies because they have experienced problems with the breakdown of Lesotho trucks. This changed scenario highlights the fact that these local firms are now able to effectively compete with their South African counterparts in the trucking industry. Local agents are also used for customs services and freight forwarding. Not surprisingly, security services used at all facilities are local firms. But interestingly, even basic services like catering are being supplied in only limited cases. Services like recycling are in demand by many investors but are largely missing in the local market.
54. The project will provide technical assistance on implementing targeted programs that would facilitate linkages between these foreign investors and domestic SMEs. Support measures would help facilitate improved information flows and targeted instruments to help increase business opportunities between the two groups while simultaneously also improving capacity of the local SMEs. The project will:
i. Support tie-ups with external investment promotion agencies and the Basotho Diaspora for business development. External tie ups with other FDI development organizations including those in South Africa as well as the Basotho Diaspora and working closely with the Business Council of Lesotho could help improve efforts to increase investments, both foreign and domestic.
ii. Help develop programs that would support local firms become input suppliers for less complex trims (i.e. labels, thread or even buttons), hangers, packaging material (i.e. paper boxes, plastic bags), machine parts (i.e. needles, motors, fen belts) and finishing functions such as embroidery, printing, laundry and dyeing would be crucial to establish local linkages.
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iii. Support building partnerships with local and regional private sector, through the mapping of existing service provider capacity and gaps. As a first step support LNDC together with BEDCO to compile and disseminate a comprehensive list of FDI supply requirements to the existing local SMEs. This would help facilitate improved information flows between large and small businesses. In addition the database should also track the services that are in demand and are not being supplied at the moment- e.g. recycling waste materials. Manufacturers are either incinerating this waste themselves or paying companies to remove and destroy it. This waste has a value and a market. It is therefore an immediate employment generation opportunity created by a simple extension of the existing investments.
iv. Support LNDC to establish the right incentives for both FDI and SMEs. With the right incentives – e.g. tax incentives for investing in skills training or in supporting upgrading of SMEs – FDI can play a critical role in supporting the development of local SMEs.
v. Provide a full time technical advisor to LNDC to help formulate strategies and implement the strategy plans that are developed during the course of the project.
55. The following activities will be financed under this sub-component:
i. Legal and Regulatory Assessment to identify constraints to private investment in factory shell provisioning;
ii. Site Analysis to identify the existing gaps in the service provision within the industrial estates;
iii. An in-depth feasibility analysis and an implementation plan for the selected site that would be based on financial modeling of potential commercialization options, identification of legal, regulatory and institutional hurdles and management support to LNDC’s management to formulate a PPP transaction ;
iv. Technical assistance support on designing and implementing targeted programs that would facilitate linkages between these foreign investors and domestic SMEs;
v. Full time technical advisor to LNDC; vi. Capacity Building TA for LNDC and facilitating exchanges with successful
Investment Promotion Agencies; vii. Systems installation – both hardware and software to implement Management
information systems for this component.
56. Expected Results: The technical assistance provided will help pilot a commercial industrial estate that would provide better services and potentially attract higher value added services to the economy. The support provided to LNDC will help build its capacity to implement the diversification strategy and facilitate the missing linkages between the foreign owned firms and the local economy. Programs developed under this sub-component will aim at improving the capacity of local SMEs and potentially build a pipeline of domestic service providers —opening new markets for SMEs and potentially creating new and improved jobs.
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Sub-component 2B: Supporting the Tourism Sector (IDA Allocation: US$ 1.30 million; Government: US$ 0.30 million)
57. Tourism is identified in Lesotho’s Vision 2020 and Poverty Reduction Strategy as a sector with strong potential to contribute to pro-poor growth and job creation. The Government of Lesotho’s tourism strategy rests on three pillars: i) economic development and employment opportunities; ii) promotion; and iii) institutional strengthening. 58. There is significant potential to develop existing tourism opportunities, but the assets are not currently capitalized to their full potential. The lack of development limits potential job creation and poverty reduction. The tourism industry is highly reliant on South African travellers who account for more than 90 percent of arrivals. GoL’s tourism strategy seeks to triple the number of tourists to over 900,000 visits by 2020. To reach this goal, the tourism strategy suggests a clearly differentiated positioning to distinguish Lesotho as a tourist destination. 59. With targeted tourism product development, improvement and diversification; Lesotho’s tourism sector can increase its opportunity to benefit job generation, firm creation and increased foreign exchange. The PSCEDP to date has supported activities targeted to address fundamental tourism sector constraints. This has contributed to building a solid foundation for further strengthening the tourism value chain to achieve competitiveness. Increasing the competitiveness in the tourism sector mandates efforts that (i) better quantify and track sector performance, (ii) improve standards, (iii) strengthen the country’s unique offerings, and (iv) support an enabling institutional framework. This component will support tourism value chain development through the following targeted activities.
60. Improving tourism statistics: Timely and correct sector performance statistics inform both policy and private sector decision making. The LTDC Research and Development department cooperates with other government departments (in particular Bureau of Statistics (BoS) and Immigration) to capture key data, such as visitor arrivals, and undertake visitor surveys. During the term of the PSCEDP, support for tourism research and statistics collection achieved the following:
Review of the system of tourism statistics
Design and implementation of a Domestic Tourism Expenditure Survey
Redesign of Inbound Visitor Survey
Experimental Tourism Satellite Account (2011)
61. Despite this progress, the processing and dissemination of data is not as effective as it could be. Information is required by a large number of stakeholders within the tourism sector, including governmental departments, Lesotho private sector, and external investors to assist with the planning, marketing, monitoring, and regulation of the industry. Consequently, more efficient systems need to be in place to process data on a timely basis, and make it accessible to all
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stakeholders. This can be addressed through the development of an online tourism statistics database. The database will enable the input, processing and reporting of the following tourism statistics:
Inbound Arrivals (from Immigration) Accommodation (from the accommodation survey) Inbound visitors (from the visitor survey) Inventory (a directory of tourism businesses, such as accommodation, tour operators,
etc.)
62. In addition to this, the development of the first experimental Tourism Satellite Account (TSA) has highlighted a deficiency in the measurement and understanding of employment in the tourism sector. Little is known about the number of jobs created by the sector, what skills are being utilized, and what skills are needed. However, a more market-oriented survey is required to answer questions such as:
Destinations to where domestic tourists are travelling to? How long are their trips? What are the biggest barriers to taking trips? Where are they staying?
63. A household survey covering between 2,000 and 3,000 households will provide useful information and analysis on domestic tourism to the Government of Lesotho as well as private sector tourism operators. Through this support, capacity will be built to repeat the survey on a regular basis to best inform the sector and inform government policy. 64. Nation-wide implementation of star grading of accommodation establishments: Lesotho has the potential to be considered a desirable component in any southern Africa multi-destination itinerary. However, this requires a standard of accommodation to meet different levels of demand. A complete accommodation star grading system in Lesotho will be responsible for the assessment, certification and monitoring of lodging establishments throughout the country. This system is being developed in close collaboration with all stakeholders including the members of the Lesotho Hotel and Hospitality Association (LHHA), the Tour Operators Association of Lesotho (TOAL) and others directly involved in promoting quality tourism products and services across the country. It follows Southern African Development Community (SADC) and Regional Tourism Organization of Sothern Africa (RETOSA) grading guidelines used throughout Southern Africa. Building on the pilot roll-out of the program in Lesotho through the PSCEDP, continued support will enable national coverage. The star-grading program will foster improved quality in the accommodation sector that is a requisite to increasing the country’s competitiveness. Accordingly, this project aims to support Lesotho to achieve full compliance with SADC/RETOSA accommodation grading. 65. The implementation of the Star Grading System would include training of assessors and district officers in the accommodation grading system and the establishment of a new grading criteria including universal access, energy saving guidelines in alignment with SADC/RETOSA.
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The sub-component will also support awareness workshops and capacity building training for accommodation operators advancing through the grading process.
66. Improving Lesotho’s handicrafts sector competitiveness: By building upon existing models of development, leveraging linkages with other components and developing a marketplace for women artisans in particular, a stronger and more diverse handicrafts sector could emerge. The development of a competitive handicrafts industry is a vital component in a strong tourism value chain. Capacity building in business skills; diversified and enhanced product development; expanded domestic and export market distribution; and market outlet development will result in improved livelihoods for marginalized populations especially women.
67. Capacity building and business development support for handicrafts enterprises and SMEs. The project will work with local stakeholders to identify a comprehensive training program for the handicrafts sector. The program will develop a market based artisan enterprise training curriculum that is business oriented, meets the needs of the artisans and includes long term capacity building and mentorship. Product development processes and business skills development will be key elements of the program. The curriculum will be developed by an artisan sector expert and training will incorporate long term capacity building and mentorship. By leveraging existing efforts in the sector, the project will pilot the curriculum with selected artisan enterprises. Once artisans have improved product development processes, product diversity, and business skills to a competitive standard, the project will facilitate market interventions including showcasing products at retail and wholesale exhibitions. This will be facilitated through the Lesotho Enterprise Assistance Program (LEAP) which is described under component 2D. Market support will occur on a pilot basis preparing artisans to progress to financially viable non-subsidized participation in future markets. Through the training and market interventions, artisans should be able to sustainably increase revenues and improve incomes. 68. Development of a combined central handicrafts marketplace, artisan resource center and tourism information center. With the destruction of the Basotho Shield Tourism Information Center and Artisan Market in 2011, artisan sales and revenue from tourist markets have significantly decreased. In order to spur tourist and domestic demand and provide a sustainable retail market outlet, the project will develop a centrally located handicrafts marketplace in Maseru. The marketplace will be financially sustainable and include a tourism information hub, attracting the tourist market. The tourism information center will offer market based services in order to meet the needs of tourists and generate income to cover operational costs. Finally, the combined development will also include an artisan resource center that will provide information on the market and available support. Through mutual goals and shared responsibility, these three initiatives will collectively support artisan enterprise penetration into tourist and export markets. This will result in increased revenue for artisans and product diversity within the tourism industry, enabling growth in both sectors. 69. The vision for the new information centre is to integrate modern technology, respond to tourism service demands (e.g. tours, reservations) and invite working artisans and vendors back to the site. The information centre would form part of an integrated strategy to boost tourism in Lesotho. An initial 12 sites were reviewed as potential sites in the first half of 2013. Three sites
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made a final list with the former Basotho Shield site preferred as the location for the future tourism information. There are several reasons for this selection:
The location is ideal: traffic from South Africa is routed by the site; The location is highly visible given the adjacent building: the Basotho Hat
(Mokorotlo) building where the LCH is located; The lease holder for the site, the LCH has developed a preliminary design that can
accommodate the strategy and vision; The existing infrastructure will minimize development needs and cost; Given that the site will be redeveloped, the environmental impacts are limited; The site capacity is sufficient for the visitor capacity expected: parking can be
accommodated on the site and on adjacent side streets; The site provides a strong focal point for the city centre and easy access to other
attractions; There are strong cost-benefit opportunities in terms of arts and craft workshop,
product development and sale; LCH has already shown interest in partnership with MTEC to develop the site.
70. The LCH supports artisan’s sale and production, and is thus an ideal partner as their vision seeks to combine an arts and craft marketplace and artisan resource centre as an integral part of the development. Such development will not only support artisans who were displaced following the fire, but also create new opportunities in the arts and craft sector. There was a strong consensus during a craft sector stakeholder workshop in April 2013 to develop the sector beyond current philanthropic projects and seek public-private partnerships.33 Experience shows that Tourist Information Centers are typically more successful when they are multi-functional and associated with an attraction or a “hook” that can appeal to a greater number of visitors. This level of attraction is critical to developing a successful tourist information center that can successfully distribute travel information about Lesotho to as many travelers as possible. 71. The proposed Handicraft Marketplace will also benefit substantially from additional visitation traffic from those travelers coming to the tourist information center. Therefore the dual interests can be fulfilled through a PPP arrangement with a potential private operator, the Lesotho tourism authorities who are entrusted to provide tourism information and the LCH and other Associations who are mainly interested in the promotion of their crafts in different regions of Lesotho.
72. The proposed private–public partnership (PPP) creates a unique opportunity to both respond to the needs of the craft community as well as achieve the objectives of the ministry. The goal of the PPP is to design a financially sustainable model for the center. The project will support technical advisory services to develop the specifics of an operational PPP model based on global best practices. The PPP model shall include, among other things, responsibilities of various stakeholders, cooperative agreement between the two parties and an action plan to achieve the objectives of both parties.
33 McComb: Lesotho Handcraft Section. Information Dissemination Event and Recommendations.
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73. An Environmental and Social Management Plan (ESMP) that provides the operational guidelines in accordance with World Bank operational policies for the support to the development of the Tourism Information Centre, has been prepared and disclosed in country and in the World Bank Infoshop. The ESMP establishes procedures, methodologies and responsibilities within the project to address associated environmental and social issues. While different institutions and individuals within the project are assigned responsibilities, the Project Management Unit (PMU) has the overall responsibility for the implementation of the actions required under this plan. 74. Within the MTEC and the MTICM, there are currently a number of occasional artisan support services. However, many of these programs are not appropriate or easily accessible to artisans. To address this, the project will provide a Handicraft Technical Expert to support MTEC to build sector-specific capacity and increase coordination among sector stakeholders. The expert will work across MTEC and MTICM to develop knowledge of artisan needs within the public sector and build appropriate, accessible services to be offered through existing organizations.
75. The following activities will be financed under this sub-component:
i. Development of an online tourism statistics database; ii. Design and implementation of the tourism Sector Employment Survey;
iii. Design and implementation of the household survey for domestic tourism; iv. Star Grading Assessment of accommodation; v. Capacity Building workshops and information dissemination;
vi. Feasibility Analysis for a PPP for the tourism information center; vii. Development of a market based artisan enterprise training curriculum;
viii. Development of architectural plans for the handicrafts marketplace and Tourism Information Center;
ix. Construction costs to fund GoL portion of the PPP for the Tourism Information Center; and
x. Handicrafts technical advisor for MTEC. 76. Expected Results: The improvements of the tourism statistics systems is expected to improve the quality and timeliness of tourism sector data collection and dissemination to inform future policy making in the sector. The successful establishment of the national accommodation grading system in Lesotho aims to bridge the gap between lodging enterprises in Lesotho and neighboring states, and increase competitiveness. In addition, the comprehensive accommodation grading system will lay the foundation for improved quality and promotion of lodging according to standards, which will enhance the sector’s viability. Further, improved business and product development skills for artisans will enable increased market access to tourist, domestic and export markets; and increased sales and revenues for artisan enterprises. These specific improvements will lead to increased competitiveness and the revitalization of the handicrafts sector.
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Sub-component 2C: Expanding Commercial Horticulture (IDA Allocation: US$ 3.90 million; Government: US$ 0.45 million)
77. Lesotho relies heavily on rain-fed, subsistence production of maize, sorghum and wheat with few improved inputs. Various sources suggest that 75-80 percent of the total population makes their livelihood from agriculture. Half of all employed men (age 15-49) and 21 percent of women depend on agriculture for their livelihoods34. Farming is particularly dominant in the rural areas where most of the population resides – 65 percent of men in rural areas and 76 percent in the highlands rely on agriculture.35 Land degradation and climate change – particularly persistent drought, flooding, and early frost have exacerbated already low productivity in recent years. 78. Lesotho is currently a net importer of fruit and there are significant prospects for a scale up of the PSCEDP activities. The microclimate growing conditions enables ideal production conditions of high value horticulture and an early season harvest compared with neighbouring South Africa. Competitive wages and proximity to potential markets ensures a premium on crop prices. The Second PSCEDP specifically focuses on the scale up of fruit orchard production in Lesotho to help tap into high value niche markets. The support for horticulture is crucial as farmers have been unable to shift to higher value crops due to associated risks and lack of development of market linkages.36
79. The pilot farms under the PSCEDP, were created to demonstrate the potential for commercial fruit farming in Lesotho, test various varieties of fruit under Lesotho growing conditions and work in conjunction with the Government to ensure that policies and regulations are in place to support sector development. The pilot farms have realized a number of successes, including Lesotho’s first fruit exports and production of the first Grade 1 apples in the country. Also, lessons learned from the horticultural pilot farm project are being applied to a national rollout of larger commercial farms using block farming, starting with a village association in Mahobong (Village Rollout) in March 2013. 80. Applying lessons learnt from Phase 1 of the Horticulture Component in the PSCEDP, the primary development objectives of Phase 2 under the Second PSCEDP are as follows:
i. Transform strategic areas in Lesotho into major producers and exporters of early variety tree crops by demonstrating that commercial deciduous fruit production is competitive and sustainable.
ii. Improve livelihoods of rural farmers through the production, export and processing of high value tree crops.
iii. Facilitate the shift from reliance on maize as the main source of income to a more diversified cropping structure.
iv. Develop a competitive value chain for tree crops including: 34GoL , MDG Status Report, 2013 35 LDHS 2009. 36 World Bank: Lesotho ‐ Sharing Growth by Reducing Inequality and Vulnerability: Choices for Change. A Poverty, Gender and Social Assessment (2010).
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Sales of fresh produce in local and export markets; Juicing, canning and drying facilities for products of Grade 3 and lower quality; and Food processing industry based on derivatives from tree crops.
81. The project will help support the expansion of upstream activities, including seedling nursery development, expansion of commercial production of deciduous fruits (35 hectares), and strengthen capacity of local on-farm technical support services; and downstream activities beginning in 2016 when the project anticipates increasing volume of marketable crop entering the market from existing and new farms. Of the marketable products, Grade 1 products will be targeted for export markets, Grade 2 products for domestic markets, and Grade 3 and lower for local value added processing. In this regard, downstream activities will focus on the development of local supply and value chains for deciduous fruit, farm certification (GLOBAL G.A.P) which will enable Basotho farmers the opportunity to export Grade 1 products to any market in the world and expand marketing options for local products both within and outside Lesotho. 82. During project preparation, extensive consultations took place with officials from MAFS, and MFLR, and the Smallholder Agricultural Development Project (SADP) PMU to ensure there were synergies explored. The training programs under SADP and other existing projects as well as the extension services of MAFS and MFLR will be tapped into in this component to avoid duplication of resources. The site/s for this component will be identified during project implementation. 83. The project seeks to improve quality, volume and delivery capability of Basotho farmers by transitioning away from traditional smallholder farming into group or block farming methods similar to those employed in Mahobong. The move from supporting small-scale growers producing fruit on 1-2 hectares (under PSCEDP) to technical support for larger farmer’s associations allows the project to satisfy purchaser’s interest in reliable production chains that can supply volume and quality. The land contributed by each farmer towards the association plot must be adjacent. The participating farmers must commit to five-year participation in the program to be eligible. The aim is to identify a suitable group of farmers by the end of 2013 in order to plant trees in 2014. 84. The condition for participating farmers is that there are clear long-term leases of land (whether through traditional or formal arrangements). The farmers will either establish the partnership as a formal company or in a producers association with clear benefit sharing arrangements and conditions. The associations will use tree varieties that have shown to perform well in Lesotho under PSCEDP. In the medium term, other small-scale farmers or investors may establish additional orchards as the barriers for production are expected to decrease with better market linkages through the existing production. This will require development of a local tree nursery to supply existing, and expected future farmer association and private investors. The development of a nursery farm is essential as the desired fruit tree varieties are imported and often not available.
85. The Project will provide funding to enable transition from cereal production to fruit orchards, which will likely include subsidies to compensate for the investment costs and income lost due to transition. Calculated based on prior production, the livelihood stipend will be provided on a monthly basis to participating farmers. Participating farmers will provide the
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labour inputs needed and are expected to pay the workers through the proceeds of the project funds. The social and labour standards practiced in the project areas are expected to spill into the rest of the country.
86. As with Phase 1 of the PSCEDP, the PMU will report to and be guided by the Ministry of Trade and Industry. The Ministry of Trade and Industry will also be supported by the Ministry of Agriculture and Food Security and the Ministry of Forestry which will help provide guidance to the project on matters related to technical on-farm activities (Figure A2.2). 87. Within the PMU, a Horticulture Manager will be employed to oversee the day-to-day operations of Phase 2 activities.37 The primary responsibilities of the Horticulture Manager will be as follows:
Provide technical and management support for the establishment and running of the pilot farm training and demonstration center (Center);38
In collaboration with extension service offices from relevant government agencies in the target areas, develop, coordinate and deliver practical horticultural training activities through the Center;
Oversee the establishment and operations, as well as provide technical and organizational support for the local nursery network;39 and
Act as the PMU’s liaison officer regarding activities managed by the professional farm management company.
37 It is anticipated that the horticulture manager will be an expert with substantial hands-on experience managing orchards and nurseries. The horticulture manager is expected to send a large bulk of his/her time in the field providing hands-on technical support to project beneficiaries. 38 Per the project design of Phase 1, the pilot farmers will serve as a training and demonstration center for new market entrances, as well as to promote the production of deciduous fruit in Lesotho. In addition, the pilot farmers are expected to serve as mentors to new market entrants. The Center will also be used by extension service officers to conduct hands-on training and awareness raising activities. 39 Given the lack of experience in supply chain management and weak infrastructure support services in Lesotho, rather than centralizing the production of seedling where nation-wide distribution channels would need to be developed, the project will focus on the development of a local nursery network where qualified farmers with nursery development and management experience will be linked together to propagate select varieties of deciduous fruit seedlings. In this regard the HM is expected to place an important role in ensure the use of clean seeds and seedlings as the primary rootstock to develop marketable seedlings.
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Figure A2.2: Organizational Structure for the Horticulture Sub-Component
88. Professional Farm Management: A critical lesson from Phase 1 of the horticulture project was that to achieve commercial success, production and marketing activities require professional management, both with respect to on-farm management and marketing of products. In this regard, it is anticipated that the management of commercial production will be subcontracted to a professional management company with on-farm technical and marketing experience, and have access to an established market network, particularly in export markets. It is anticipated that the PFM will have the following responsibilities:
Overall administration of commercial production activities; Organize farmers into farmers’ association and eventually transfer them into corporate
entities; Establishment of a network of nurseries and commercial orchards; Provide on-farm technical and management support; Training and capacity building of participating farmers; Provide training and ensure that participating farms are GLOBAL G.A.P certified; Conduct all marketing activities to ensure that marketable crops are sold at competitive
prices that maximize the income earning potential of participating farmers;
Horticulture Component: Phase 2 Upstream Activities January 2014 Onwards
Ministry of Trade & Industry
Ministry of Agriculture & Food Security
World Bank
Project Management Unit (PMU)
Horticulture
Manager
International Advisor
Local Nursery Network
Pilot Farm Training/ Demonstration Center
Village Associations
Extension Services
Horticulture and tree crops
Farmer organizations
Commercial Bank
Downstream Activity 2016 Onwards
On-going activities
Proposed activities
Professional Farm Management
(Performance- based outsource)
Ministry of Forestry
LNDC
Commercial Investors Individual Investors Extension Services
Local Nursery Network
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Provide all necessary post-harvest handling support to minimize on and off-farm losses and waste; and
Provide capacity building and training to extension service officers from all relevant government agencies in target areas.
89. International Advisor: The PMU will also be supported by an International Advisor whose responsibility will be to help ensure that the overall project is meeting its objectives, as well as to provide technical and management guidance on key strategic issues that help ensure the success and sustainability of the project. 90. Local Commercial Banks: The project has been in discussions with several local commercial banks regarding their participation in the project where banks have expressed their interest in providing a range of financial services. In this regard, a business plan for both the pilot farms and the village association has already been prepared which provides a financial and economic analysis to help move forward discussions with local commercial banks. Participation of LNDC as a provider of credit guarantee is expected to have a positive impact on encouraging the participation of local commercial banks in financing new market entrants in the development of the deciduous fruit sector in Lesotho. Further, interventions under the access to finance component will help these farmers’ access commercial loans in Lesotho. 91. Downstream Activities: As marketable fruit becomes increasingly available following the 2016 growing season, the project is expected to be expanded further to include value added production. As noted earlier, Grade 1 products will be exported, and Grade 2 products will be sold in the local market where nearly all fruits consumed in Lesotho are currently imported from South Africa. What remain are Grade 3 and lower products which can be absorbed by the market through value addition. Particularly during the early phase of the project, the volume of Grade 3 and lower products are expected to be relatively high due to the current lack of experience in post-harvest handling and weak supply chain management practices. In this regard, strengthening the existing supply and value chain in partnership with LNDC which currently operates a juicing and canning facility, as well as attracting investors into the value added sector is expected to play an important role in improving the income generating potential of participating farmers. 92. Value Added Processing: It is not anticipated that the project will allocate project funds towards goods and works to provide direct support toward downstream activity. Specifically, the focus of the horticulture component will shift more towards supply chain management, investment promotion and knowledge-based support to facilitate the development of a competitive private sector. For example, LNDC has several warehouse facilities (with access to electricity and water) throughout the country which are currently idle and available to be converted into small pack houses where primary processing, handling and sorting activities can take place.40 In this regard, if farming operations are established during the upstream activities or if additional private investments in commercial fruit production are located in relative
40 Once marketable fruit is available, it is anticipated that a 30 hectare orchard would produce sufficient volume of fruit to justify investment in a pack house. However, by utilizing LNDC’s mothballed warehouse facility is expected to create opportunities to engage in post-harvest handling and packing activities even before trees reach their maturity.
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proximity to existing LNDC warehouse facilities, the need for project or outside financing to develop pack houses may not be required as the project can utilize existing LNDC facilities to conduct some of the basic post-harvest handling activities in existing LNDC warehouse facilities. 93. It is expected that following the third year of crop planting, farmers engaged in deciduous fruit production are expected to enjoy a per hectare revenue of approximately US$8,458 from the sales of deciduous fruit to export and local markets as well as sales to local factories producing value added products41. By the fifth year of the project, per hectare revenue is expected to rise to approximately US$30,496. When compared to the current per hectare revenue of $220 from maize production, the rise in household income is expected to be substantial. 94. An Environmental and Social Management Framework (ESMF) is required under the World Bank Operational Policy 4.01 on environmental assessment for this sub-component. The ESMF sets out the basic principles to screen subproject activities and processes to avoid, minimize or mitigate potentially adverse environmental or social impacts. The ESMF was prepared in accordance with applicable World Bank safeguard policies and Lesotho environmental legislation and in consultation with key stakeholder. The Project also triggers the operational Policy 4.09 on pest management. While the total land under the project is not substantial (only 30-35 hectares) and the risk of pesticides is minor to moderate due to the small amounts of pesticides being used, the ESMF incorporates an integrated pest management plan. The ESMF has been disclosed both in-country and in the World Bank infoshop prior to appraisal. The ESMF specifically provides:
An overview of relevant socio-economic issues and biophysical setting of activities; Review of potential socio-economic and environmental impacts; Applicable legal framework for Lesotho and the World Bank; Screening tool to assess prospective sub-projects, review, approve and implement future
sub-projects; ESMF tasks and responsibilities; Budget estimates for ESMF activities.
95. The following activities will be supported under this sub-component:
i. Goods and Works procured for the establishment of Pilot Farm training and Demonstration Centers and Local Nursery Network;
ii. Technical Assistance provided to Pilot Farm training and Demonstration Centers and Local Nursery Network;
iii. Site Identification and Soil Analysis for the commercial Orchard plot; iv. Technical assistance for Farm Management of the Commercial Orchard Plot; v. Training Provided for pest management, Global Gap, Improved farm management
techniques; vi. Land Preparation for Commercial Orchard Plot;
41 GDS Economic Model Forecasts, 2013
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vii. Goods Procured for Commercial Orchard Plot; viii. Technical assistance and goods and works for downstream activities of value added
processing.
96. All activities except (i) will be financed using IDA resources. Item (i) goods, works and operating costs for the establishment of pilot farm training and demonstration centers and local nursery network will be financed using GoL funds. 97. Expected results. Through the project interventions, Lesotho should be able to reduce its reliance on maize production and improve the livelihoods among poor farmers. Lesotho should be able to produce export quality deciduous fruit marketed through South African brokers and other export agents and reduce the extent of imported fruits from South Africa. Further, the participating farms will be GLOBAL G.A.P certified, enabling them to export to South Africa and international markets. The network of local commercial deciduous fruit tree nurseries operating throughout Lesotho will be able to meet the seedling needs of a growing deciduous fruit sector in Lesotho. Investments in and production of local value added products using Grade 3 and lower grade products from project farms and other newly established fruit farms will help develop the value chain.
Sub-component 2D: Lesotho Enterprise Assistance Program (LEAP) (IDA Allocation: US$ 0.47 million; Government: US$ 0.75 million)
98. The LEAP matching grant scheme was designed to help strengthen business capacity of the private firms, mostly Basotho-owned MSMEs, as well as their representative organizations through provision of financial and technical assistance to buy business development services with the aim of increasing their competitiveness. The Program was designed to provide local MSMEs with know-how and services to increase their efficiency, productivity and access to new markets. 99. Under LEAP, there has been direct assistance provided to individual firms through mentoring services provided by the LEAP Unit and the provision of cost-sharing grants to firms (80-20), for the use of specialized business development services. Further, cost-sharing grant assistance have also been provided to representative business and professional associations and chambers, to build their capacity to better serve their members. 140. The cost-sharing grants will come out of a dedicated LEAP Grant Fund of US$750,000. Given the overwhelming demand for LEAP and the benefits that SMEs have experienced using LEAP funds, GoL was keen to continue the program with its own funds. Under the Second PSCEDP, this fund is envisaged to be completely funded by GoL while IDA funds will only be used to fund the LEAP Management Unit which will maintain its independence from any government entity. Given that the existing framework is already in place as developed under the original PSCEDP, there is a possibility that the LEAP grants could be funded by IDA funds if the need arises.
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100. Criteria: For an individual firm to receive Scheme assistance, the key requirement is that the applicant firm must have written down a simple business plan, showing that management understands the firm’s current situation, and plans a significant set of measures, that are likely to lead to strong sales growth. Once this growth plan is set down, then, in principle, any usage made of outside advisory services, that can reasonably be expected to contribute to the planned growth, can be supported by a grant. As for the mentoring, the aim is to assist the firm to carry out all the measures in its plan, using its own resources where appropriate, and using grant-assisted outside resources where this makes more sense. 101. Applications from firms for grant support are reviewed by the LEAP Unit, to verify that they are in full compliance with the detailed terms of the LEAP Manual. The LEAP unit provides free hand holding and mentoring services to these firms. Once approved by the LEAP manager, the application is sent on for approval by the Project Manager. Since the terms of the LEAP Manual, particularly concerning eligibility criteria, are clear and specific, it is expected that there would be very few outright rejections of applications. It is more likely that applicants could be requested to supply more information, or to include more preparatory activities. The supported firms are closely monitored to track their employment, sales and export growth over the years. 102. Given the financial constraints many of these SMEs face, it was agreed that once the business plan and the associated activities of the grant were approved by the LEAP unit, the 80 percent of the share from LEAP would be paid directly to the service providers rather than having the SME first incur the entire costs and then be reimbursed upon completion of activities. 103. Implementation & Management of LEAP: The unit is headed by the LEAP Program Manager who is assisted by two LEAP officers. This unit would deliberately not be linked to any of the existing public agencies providing or channeling services to private firms. World Bank experience with such schemes highlights the importance of operational independence. The LEAP Unit must be able to withstand the inevitable attempts that will arise, to influence its decisions on specific grant applications. The LEAP Unit would therefore continue to be fully independent operational unit but accountable to the PMU Manager. The PMU shall be responsible for administrative functions related to fiduciary aspects. 104. LEAP Manual: The LEAP Manual has been developed and agreed between the World Bank and the Government. Systems are in place to ensure compliance with the terms of this manual, but with the minimum possible paperwork and complexity. Component 3: Project Implementation Support (IDA Allocation: US$ 2.04 million)
105. This component will support the costs of the Project Management Unit. The implementation arrangements used under the PSCEDP will be used in the new proposed Second PSCEDP.
106. This component will support the project implementation costs (implementation arrangements are discussed in detail in Annex 3) including:
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i. Consultants to staff the Project Management Unit (PMU): Project Manager, Procurement Specialist, Financial Management Specialist, Horticulture Manager, Disbursement and Accounts Assistant and Project Team Assistants and Support Staff .
ii. PMU operating costs; iii. Monitoring and evaluation system: data collection, compilation and analysis and iv. Safeguards management including training, Environment and Social Management
Plans (ESMP) and monitoring of implementation of safeguards instruments.
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Annex 3: Implementation Arrangements
LESOTHO: SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT
Project Institutional and Implementation Arrangements
1. Reflecting the multi-sector nature of the project, implementation arrangements are intended to offer a balance between the effective overall supervision and monitoring of the activities at the project level, as well as reinforcing the management and institutional responsibilities of individual sub-components. The institutional and implementation arrangements of the project have been fine-tuned during the implementation of the PSCEDP and aim at mainstreaming the operational responsibility to the public institutions/agencies that are in charge of implementing the policy agenda and outsourcing specialized knowledge and management expertise from the private sector where possible.
2. Project Steering Committee (PSC): The PSC will consist of members representing the agencies responsible for the project implementation i.e. the principal secretaries from the MTICM, MTEC, MAFS, MFLR, MoF, MDP, Deputy Governor of the Central Bank, Town Clerk of the MCC, the Parliamentary Counsel, Master of High Court and the CEOs from LNDC and LTDC. The committee shall meet every month to review implementation progress in the first year and later can meet every quarter to monitor the implementation progress of the project and help to resolve technical and implementation problems affecting project progress. The meetings will be chaired by the Principal Secretary of MTICM.
3. Project Management Unit (PMU): The day-to-day operations of the project will be overseen by a Project Management Unit that will be headed by a qualified Project Manager. In addition, the PMU will include a Financial Manager and a Procurement Manager who will oversee the Financial Management and Procurement issues respectively. The PMU will provide for overall fiduciary management, monitoring and evaluation, project oversight, and coordination. The role and functions of the PMU have been detailed in the Project Implementation Manual (PIM). The Project Manager will be responsible for: (i) overall day-to-day management of the project, including coordination of procurement, financial management and M&E; (ii) coordination with all the implementing agencies responsible for the implementation of the various sub-components; and (iii) coordination with other donors and relevant programs/projects. The Project Manager will report to the Project Steering Committee chaired by the Principal Secretary, MTICM. The project will cover the operating costs of the PMU, necessary equipment purchase, training of staff and the costs of annual audits of project accounts.
4. A Project Preparation Advance (PPA) of US$900,000 is in place to support the Interim Project Management Unit and to provide preliminary technical assistance for the preparation of various preparatory studies and other required design activities. The PMU for the PSCEDP has been hired for six months to implement the activities under the PPA since GoL wanted to ensure
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a seamless transition between the two projects and given that the PMU had performed its duties with efficiency. The renewal of these contracts will be subject to performance. The position of the full-time Procurement Manager has been advertised and the selection is underway and will be appointed prior to the commencement of major procurements and consultant selections. During the implementation of the PPA an acting Procurement Manager has been appointed who has been conducting these responsibilities. This interim arrangement is deemed adequate considering the low value and non- complex nature of the procurements and consultant selections currently underway.
5. Focal Points for Implementing Agencies: To ensure that there is smooth implementation of the various sub-components of the project; focal points for each of the implementing agencies will be appointed who will communicate regularly with the Project Manager on implementation progress. These will include:
i. Designated officer(s) from MTICM for industrial licensing and business reporting sub-component;
ii. Designated officer from Maseru City Council for the construction permits sub-component;
iii. Designated officer from the Central Bank and the FSDS Secretariat for the collateral registry, implementation of leasing framework and Credit information Bureau;
iv. Designated officer from LNDC for the investment promotion and linkages component;
v. Horticulture Manager for the horticulture component; with focal points from MFLR and MAFS;
vi. Designated officer from MTEC for the tourism component; vii. Designated officer from the Ministry of Law;
viii. LEAP Program Manager for the LEAP sub-component. Financial Management, Disbursements and Procurement Financial Management
6. The Bank’s financial management team updated the financial management arrangements of the PMU under MTICM which will be the implementing entity of the project. The objective of the update was to determine whether the financial management arrangements are still capable of: (a) correctly and completely recording all transactions and balances relating to the project; (b) facilitating the preparation of regular, accurate, reliable and timely financial statements; (c) safeguard the project’s entity assets; and (d) are subjected to auditing arrangements acceptable to the Bank. The assessment complied with the Financial Management Manual for World Bank-Financed Investment Operations that became effective on March 1, 2010 and AFTFM Financial Management Assessment and Risk Rating Principles.
7. The financial management systems are functioning as intended and will continue to require a full time financial management to sustain the current momentum. The project will continue to disburse based on statement of expenditures but it is proposed that a commercial local account be
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opened to effect payments. This will minimize the delays in processing payments at the Central Bank and also minimize dipping into funds from Government contribution.
8. The conclusion of the assessment is that the financial management arrangements meet the Bank’s minimum requirements under OP/BP10.00. The overall residual risk rating is Moderate so the project will have two field supervision missions per annum.
Country issues
9. According to draft Public Expenditure and Financial Accountability report of 2012, major steps have been taken since 2009 to improve public financial management (PFM). These steps include: (i) introduction of the new Integrated Financial Management Information System (IFMIS) in 2009 to serve as the basis for more effective monitoring and control over government revenue and expenditure. The system has improved transparency and discipline, but its functionality is constrained by capacity gaps due to loss of trained personnel to other institutions and the fact that it was introduced without any piloting in parallel with the maintenance of the former system, and has encountered numerous difficulties in the performance of both the hard- and software elements; (ii) enactment of the 2011 Public Financial Management and Accountability Act (PFMA) to clarify responsibilities and to provide the foundation for better financial control and reporting, and also for better and more pro-active monitoring and control over public enterprises. Practical steps are still awaited to give effect to the requirements of PFMA for the timely production of financial statements (including financial statements built by each Ministry) and for much-improved monitoring and supervision of State-owned enterprises.
10. For the project, the implication at this time is that full utilization of the GoL PFM system is not yet possible. Elements that will be relied upon are the following: Independent audit by the Office of the Auditor General.
Risk assessment and mitigation
11. The table below summarizes the results of the risk assessment and the mitigation measures.
Table A3.1: Financial Management Risk Assessment and Mitigation
Description of Risk Risk Mitigation Measures incorporated in Project Implementation
Condition of Effectiveness (Yes/No)
Residual Risk/ (Risk) rating
INHERENT RISKS
Country Level
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Description of Risk Risk Mitigation Measures incorporated in Project Implementation
Condition of Effectiveness (Yes/No)
Residual Risk/ (Risk) rating
There are still notable challenges in the PFM reforms, namely, the rollout of the IFMIS and implementation of the enacted PFMA.
The Government has acknowledged these challenges and action plans have been identified with the support of the donors to work on these challenges.
No S
Entity Level
Should new different personnel be recruited, they will possess limited experience in the financial management aspects of bank-funded projects.
The project is committed to recruit best suitable qualified personnel, (consideration technical expertise and experience in bank funded projects) to handle FM aspects for the project.
No M
Overall Inherent Risk Residual Risk: M
CONTROL RISK
Budgeting
The budgeting process may not be comprehensive and realistic to provide an adequate basis for performance monitoring
The budgeting process will be based on approved procurement plans which will be updated regularly to monitor closely.
No M
Accounting and financial reporting
If new staff is hired, they may not be familiar with the accounting system and the Bank’s reporting requirements.
The recruitment requirements will include knowledge of the already existing accounting system and Bank’s financial management disbursements guidelines.
No M
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Description of Risk Risk Mitigation Measures incorporated in Project Implementation
Condition of Effectiveness (Yes/No)
Residual Risk/ (Risk) rating
Internal control
No risk identified
The project has updated the existing PIM and FM Operations Manual which seem to be effective as evidenced by the quality of previously submitted audit reports.
No
Funds flow
There is no identified risk.
Funds will flow into the designated account and the disbursements will be based on SOE.
No
Auditing
No identified risk
The project has been submitting acceptable audit reports on time.
No
Overall Control Risk M
Overall Risk M
H – High S – Substantial M – Moderate L – Low
12. Strengths: Existing financial management arrangements processes are adequate. The recently closed PSCEDP received unqualified audit opinions with immaterial findings in the management letter.
13. Weakness: There is no identifiable weakness, unless the project changes the entire current personnel in which case the institutional memory will be eroded.
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14. Budgeting arrangements: The PMU will prepare an annual budget for the project based on approved annual work plans, and will be responsible for producing variance analysis reports comparing planned to actual expenditures on monthly and quarterly basis. The periodic variance analysis will enable the timely identification of deviations from the budget. These reports will be part of the IFRs that will be submitted to the Bank on a quarterly basis. The Financial Manager will coordinate the budgeting process in conjunction with the Project Manager.
15. Accounting arrangements: The project will use the current existing computerized accounting software called FINPRO/TOMPRO for project financial management and the production of accounts. The accounting package is capable of transaction processing, production of project annual financial statements, IFRs, and other reports as required for the effective management and monitoring of the project. The project is using the cash basis of accounting as prescribed under the Cash Basis Standard issued by the International Public Sector Accounting Standards Board. The accounting procedures are spelt out in the Project Implementation Manual.
Internal auditing, internal controls and staffing arrangements
16. Internal Auditing: Due to the low capacity of Internal Audit in the Kingdom of Lesotho to service the donor funded projects; the project will rely on the external audit and supervision missions to enhance the internal control environment.
17. Internal Control Systems: The PMU has updated the Project Implementation Manual from the recently closed PSCEDP to accommodate new activities under the second PSCEDP. The project envisages using the current staffing arrangement to service the second phase.
18. Staffing Arrangements: The PMU will provide for overall fiduciary management, monitoring and evaluation, project oversight, and coordination. The Finance Manager will coordinate all financial management aspects of the project.
Financial reporting arrangements
19. The PMU will prepare quarterly un-audited IFRs for the project in form and content satisfactory to the Bank, which will be submitted to the Bank within 45 days after the end of the quarter to which they relate. The project will use the current formats of the IFRs.
20. The IFRs submitted to the Bank will contain the following statements:
Statement of Sources and Uses of Funds;
Statement of Uses of Funds by Project Activity/Component;
Designated Account (DA) Activity Statement;
Bank Statements for both the Designated and Project Account;
Summary Statement of DA Expenditures for Contracts subject to Prior Review; and
Summary Statement of DA Expenditures not subject to Prior Review.
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21. The annual financial statements will be prepared using International Public Sector Accounting Standards. These statements shall be submitted to the Bank within 6 months after the end of the accounting year.
22. The accounts/financial statements will comprise of:
A Statement of Sources and Uses of Funds/Cash Receipts and Payments, which recognizes all cash receipts, cash payments and cash balances controlled by the entity; and separately identifies payments by third parties on behalf of the entity.
The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Statement of Cash Receipts and Payments being cross referenced to any related information in the notes; and
A Management Assertion that Bank funds have been expended in accordance with the intended purposes as specified in the relevant World Bank legal agreement.
Auditing arrangements
23. The project financial statements will be audited by the Office of the Auditor General in accordance with International Standards on Auditing, and the audit report together with the management letter and management responses will be submitted to the Bank within six months after the financial year-end.
24. The external auditor will be required to express a single opinion on the project financial statements. In addition, a detailed management letter containing the auditor’s assessment of the internal controls, accounting system and compliance with financial covenants in the financing agreement, suggestions for improvement, and management’s response to the auditor’s management letter will be prepared and submitted to management for follow-up actions.
Audit Report Due Date
Annual audited financial statements and management letter
Within six months after the end of the financial year i.e. 30 September
Implementation Support Plan
25. Based on the outcome of the FM risk assessment, the following implementation support plan is proposed. The objective of the implementation support plan is to ensure the project maintains a satisfactory financial management system throughout the project’s life.
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FM Activity Frequency
Desk reviews Interim financial reports review Quarterly Audit report review of the program Annually Review of other relevant information Continuous as they become available
On site visits Review of overall operation of the FM system Annual
Monitoring of actions taken on issues highlighted in audit reports, management letters, and other reports
As needed
Conclusion of the assessment
26. The conclusion of the assessment is that the financial management arrangements are acceptable to the Bank. The overall residual risk rating is Moderate hence the project will have on-field supervision missions twice a year.
Disbursements Funds flow and disbursement arrangements
27. Banking arrangements: The PMU will use the Designated Accounts denominated in United States Dollars at the Central Bank to receive the funds from IDA. A project account denominated in Maloti will be opened and used to make local payments. This local account will be reimbursed with funds from the US dollar account, although a minimum balance needs to be maintained in the Designated Account.
28. Funds flow arrangements: Upon effectiveness of the financing agreement and submission of a withdrawal application, the Bank will disburse an initial amount not to exceed US$500,000 based on the expected annual expenditure and the frequency of submitting withdrawal applications. Subsequent disbursements will be made on the basis of withdrawal applications and Statements of Expenditures.
29. The project will also have the option of using: (i) the Direct Payment disbursement method, involving direct payments from the loan account on behalf of the Government and to the suppliers of goods and services that have a value above a set threshold; and (ii) the Reimbursement disbursement method, whereby the Government makes payments for eligible expenditures and submits withdrawal application for reimbursement.
30. The disbursement details have been spelt out in the project’s Disbursement Letter.
Procurement
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31. The key issues identified regarding procurement for project implementation are: (a) the need for the PMU to complete the selection of a full time Procurement Manager that is currently underway to replace the acting Procurement Manager who has been managing the low value and non- complex procurements and consultant selections done so far, for which interim arrangement has been deemed adequate; (b) limited capacity for new PMU staff to assure adherence to World Bank Procurement and Consultant Selection Guidelines. In addition the project will also build the procurement capacity of key Government agencies through short term in-country training programs.
32. Proposed corrective measures to mitigate the overall risks include: (a) The PMU to hire a qualified and experienced Procurement Manager; (b) training of new PMU staff and procurement staff from key Government agencies on World Bank Procurement and Consultant Selection Methods and Procedures (c) selected contracts to be subject to prior review. A Procurement Manual has already been developed under the previous project and has been updated by the PMU. An acceptable Procurement Plan covering the first 18 months of the project has been prepared.
33. The Risk Assessment is rated as MODERATE.
34. Risk mitigation action plan. The following actions are suggested to mitigate the procurement risk and facilitate the implementation of the project.
Table A3.2: Procurement Management Action Plan to Mitigate Procurement Risk
Risk Mitigation/Action Responsibility
Procurement Manager not in place leading to inability to manage major procurements and consultant selections
The PMU to complete the selection of a qualified and experienced Procurement Manager before the commencement of major procurements and consultant selections.
PMU
Limited capacity for new PMU staff to assure adherence to World Bank Procurement and Consultant Selection Guidelines
a) In country training of new PMU staff on World Bank Procurement and Consultant Selection Methods and Procedures.
b) Selected contracts to be subject to prior review
Bank /PMU
35. All procurement to be financed under the proposed project will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated January 2011, and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011, and the provisions stipulated in the Legal Agreement. For International Competitive Bidding (ICB) and National Competitive Bidding (NCB), all
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procurement of goods, works and non-consultant services will be done using the Bank’s Standard Bidding Documents (SBD). All consultant selection undertaken for firms will be done using the Bank’s Standard Requests for Proposals. The project will carry out implementation in accordance with the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD and IDA and Grants” dated October 15, 2006 and revised January 2011 (the Anti-Corruption Guidelines).
36. A Country Procurement Assessment Report (CPAR) for Lesotho was conducted in 2008. Public Procurement in Lesotho is regulated by the 2008 Public Procurement Regulations (PPR). The CPAR noted the considerable progress made in adopting a modern legislation to regulate public procurement. The CPAR also noted areas requiring improvement including (a) allowing for the use of different procurement procedures for projects financed by development partners; (b) harmonizing the conflict between the 2008 PPR, the 1967 Stores Regulations and the 2007 Local Government Act; (c) reviewing the provision for domestic preference so that it related to the content of the goods being provided and not to the nationality of the provider; and, (d) developing a procurement manual and accompanying bidding documents.
37. The 2008 CPAR further highlighted limited capacity of the regulator, the Procurement Policy Advisory Division (PPAD) under the MOF, of the Procurement Units at central level and of District Procurement Units at district level. Lack of specific training and experience in public procurement and weak contract management capacity were noted. The private sector reported to perceive public procurement as having limited competition, inadequate information and lengthy payment arrangements and viewed public procurement practices as detrimental to its interest and prone to corruption. Robust procurement oversight systems are still being developed with the 2008 PPR providing for a dispute resolution process managed by an Appeals Panel appointed by the PPAD which may limit its independence.
38. The Government of the Kingdom of Lesotho has started implementing some of the CPAR recommendations: the redrafting of the 2008 PPR; the finalization of the Procurement Manual and the standard bidding documents; a review of the current Center for International Policy Studies program to consider the introduction of a public procurement module; the recent introduction of the Procurement Tribunal under the PFMA bill to handle procurement disputes; the implementation of the IFMIS. Other matters still remain to be addressed.
39. National Competitive Bidding shall follow the Government of the Lesotho procurement procedures provided that the following provisions apply (a) Use of the Banks SBD; (b) Registration/classification of bidders by PPAD, Ministry of Public Works and Transport or any other body shall not be used as a condition of bidding; (c) Preferences will not be granted based on citizen degree of ownership and local content; (d) Bracketing to provide for the rejection of bids which are in excess of 15 percent of the cost estimate will not be used; (e) Award of contract must be made to the lowest evaluated tender; and (f) Award of contracts shall be publicly disclosed in the media for wide circulation.
Procurement of Works
40. The project will finance some minor works. The project does not envisage procurement for works under ICB procedures. Minor works to be procured under this project are estimated in
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aggregate at not more than US$ 600,000. The procurement of such minor works falls within the NCB threshold. The procurement of works will be done using the World Bank’s SBDs for all procurement under ICB and NCB as appropriate. Direct Contracting may be used when competition is not advantageous with the World Bank’s prior review and approval. Pre-qualification of contractors is not envisaged under this project as only minor works are expected to be carried out.
Procurement of Goods
41. Goods to be procured under this project are estimated in aggregate at not more than US$ 4 million. The procurement of goods will be done using the World Bank’s SBDs for all procurement under ICB and NCB as appropriate. UN Agencies and direct contracting may also be considered with the World Bank’s prior review and approval.
Procurement of Services (other than consultants’ services)
42. Services (other than consultants’ services) to be procured under the project estimated in aggregate at not more than US$ 600,000 will include printing, services for contracts for installation and technical support of telecommunication and computerized systems among others. The project will use the World Bank’s SBDs for both ICB and NCB as appropriate.
Commercial Practices
43. Procurement of training and consultant services under the LEAP Grants Program involving the use of a financial intermediary for on lending to beneficiaries may where appropriate follow well-established private sector procurement methods or commercial practices that shall be acceptable to the Bank. These commercial practices will be explained in detail in the LEAP Manual to be reviewed and approved by the Bank and should include adequate mitigation and control measures against fraud and corruption. Consideration will also be given whenever practical to the use of competitive methods as outlined in the Banks Procurement and Consultant Selection guidelines. The management of the Grants will be based on detailed procedures stated in the LEAP Manual acceptable to the Bank.
Selection of Consultants
44. Consultants’ services required for firms and individuals by the overall project are estimated in aggregate at not more than US$ 10 million to cover consultancies for: (a) Technical Assistance support to the project; (b) technical reviews and evaluations; (c) various studies; (d) training module development; (e) legal reviews; and (g) project management services among others.
45. Training. This category would cover all costs related to the carrying out of study tours, training courses and workshops, i.e., hiring of venues and related expenses, stationery, and resources required to deliver the workshops as well as costs associated with financing the participation of community organization in short-courses, seminars and conferences including associated per diem and travel costs. Training projects would be part of the Annual Work Plan and Budget and will be included in the procurement plan. Prior review of training plans,
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including proposed budget, agenda, participants, location of training, and other relevant details, will be required only on annual basis.
46. Operating Costs. Incremental operating costs include expenditures for maintaining equipment and vehicles, fuel, office supplies, utilities, consumables, allowable travel per diems and, allowable travel and accommodation expenses, workshop venues and materials. These will be procured using the Borrower's administrative procedures, acceptable to the World Bank.
47. Procurement Manual. The procurement procedures and SBDs to be used for World Bank-funded procurement are presented in the Procurement Manual in line with the guidelines of the World Bank. The Procurement Manual includes the component descriptions, institutional arrangements, regulatory framework for procurement, approval systems, activities to be financed, procurement and selection methods, thresholds, prior review and post reviews arrangements and provisions, filing and data management and the procurement plan for the first 18 months for all project components. The Procurement Manual will be updated from time to time by the PMU.
48. Assessment of the agency’s capacity to implement procurement. An assessment has been made of the existing PMU. As of August 2013, an acting Procurement Manager was in place. The PMU is in the process of recruiting a full time Procurement Manager. The Project Manager and the Administrative Assistant have experience in Bank procurement and have supported the project for the last 2 years.
49. As per the Public Procurement Regulations of Lesotho (2007), procurement has been decentralized to procuring entities, and all procurement decisions will therefore be made at PMU/PSC level. Delays in obtaining procurement clearances are therefore not envisaged.
50. Procurement Supervision. Given the country context and the project risk indicated above, an annual Post Procurement Review will be conducted in addition to the semi-annual supervision missions by the World Bank. The annual Post Procurement Review will be carried out either by the World Bank or World Bank-appointed consultants. The frequency of procurement supervision missions will be once every six months and special procurement supervision for post procurement reviews will be carried out at least once every twelve months.
51. To enhance the transparency of the procurement process, the Recipient shall publish the award of Contracts procured under ICB procedures or selected under QCBS method, generally within two weeks of receiving the World Bank no-objection to the recommendation of award of Contract, in accordance with the Procurement and Consultant’s Guidelines. Additional procedures, as elaborated in the procurement manual, will govern the disclosure under other procurement and selection methods.
52. Procurement Plan. The Borrower has developed a draft Procurement Plan for project implementation. The Procurement Plan will be updated annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
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Goods and Works and Non-consulting Services
53. Prior Review Threshold. Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement.
Prior Review Threshold: Good, works and non-consulting services
Procurement Method Prior Review Threshold (US$)
Comments
Works
1. ICB >$3,000,000 All
2. NCB >$100,000 - <$3,000,000 As per procurement plan
3.. Shopping (Small contracts) <$100,000 As per procurement plan
4. Direct Contracting N/A All
Goods and Non consulting Services (excluding Consultants Services)
1. ICB >$500,000 All
2. NCB >$50,000 - <$500,000 As per procurement plan
3. Shopping <$50,000 As per procurement plan
4. Direct Contracting N/A All
Procurement Packages Subject to Bank Prior and Post Review with Selection Methods and Time
1 2 3 4 5 6 7
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Ref No.
Contract
(Description)
Estimated
Cost
(US$)
Procurement
Method
Review
by Bank
(Prior/ Post)
Expected
Bid-Opening
Date
Comments
WORKS
Construction of Tourism Information Center
480,000 NCB Prior TBA
Land Preparation for Commercial Orchard Plot
49,000 Shopping Post TBA
GOODS
Trees Seedlings 50,000 Shopping Post TBA
Fencing Equipment 2,000 Shopping Post TBA
Purchase of computer equipment and software for online E-Licensing portal
500,000 ICB Prior TBA
Purchase of hardware and software for creation of automated workflow
200,000 NCB Prior TBA
Goods for Commercial Orchard Plot
2,100,000 ICB Prior TBA
NON CONSULTING SERVICES
Installation of both hardware and software to implement Management information systems
200,000 NCB Prior TBA
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Printing and publishing laws and regulations
30,000 Shopping Post TBA
Digitization of construction permits archives
150,000 NCB Prior TBA
Operation and maintenance of installed IT systems
200,000 NCB Prior TBA
Selection of Consultants
54. Prior Review Threshold. Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants.
Prior Review Threshold: Consultants
Selection Method Prior Review Threshold
Comments
1. QCBS and QBS >, =$100,000 All
2. FBS, QBS, LCS and CQS <$100,000 As per procurement plan
3. Single Source (Firms) N/A All
4. Individual Consultants >, =$50,000 All
5. Individual Consultants <$50,000 As per procurement plan
6. Single Source (Individual Consultants) N/A All
QCBS = Quality- and Cost-Based Selection (Section II of the Consultants’ Guidelines)
LCS = Least Cost Selection (Para 3.6, of the Guidelines)
CQS = Selection based on Consultants’ Qualifications (Para 3.7 of the Guidelines)
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FBS= Fixed Budget Selection (Para 3.5 of the Guidelines)
QBS = Quality Based Selection (Para 3.2 of the Guidelines)
55. Short list comprising entirely of national consultants. Short list of consultants for services, estimated to cost less than US$ 100,000 equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. All Terms of Reference irrespective of the value of the consultancy assignment are subject to prior review.
Consultancy Assignments with Selection Methods and Time Schedule
1 2 3 4 5 6 7
Ref. No.
Description of Assignment
Estimated
Cost
(US$)
Selection
Method
Review
by Bank
Prior/
Post
Expected
Proposals Submission Date
Comments
Review of critical laws and process mapping for Construction Permits 75,000 IC
Prior
TBA
Review of Industrial Licensing Bill and accompanying Regulations 50,000 IC
Prior
TBA
Feasibility Analysis for Collateral and Leasing Registry 100,000 CQS
Prior
TBA
Assessment Study for Credit Information Bureau Framework 100,000 CQS
Prior
TBA
Demand Analysis for New Industrial Site 100,000 CQS
Prior
TBA
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1 2 3 4 5 6 7
Ref. No.
Description of Assignment
Estimated
Cost
(US$)
Selection
Method
Review
by Bank
Prior/
Post
Expected
Proposals Submission Date
Comments
Feasibility Analysis for PPP for Tourism Center 100,000 CQS
Prior
TBA
Site Identification 50,000 IC Prior TBA
Soil Analysis 3,000 IC Post TBA
Farm Manager for demonstration Farms 18,000 IC Post
TBA
International Technical Advisor 20,000 SSS Prior TBA
LEAP Manager 24,600 SSS Prior TBA
LEAP Officer 8,700 SSS Prior TBA
LEAP Officer 8,700 SSS Prior TBA
Project Manager 39,000 SSS Prior TBA
Procurement Manager 22,500 IC Prior TBA
Financial Manager 19,200 IC Prior TBA
Administrative Officer 14,100 SSS Prior TBA
Disbursement and Accounts
9,000 SSS
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1 2 3 4 5 6 7
Ref. No.
Description of Assignment
Estimated
Cost
(US$)
Selection
Method
Review
by Bank
Prior/
Post
Expected
Proposals Submission Date
Comments
Assistant Prior TBA
Horticulture Manager 18,000 IC Post TBA
PMU Assistant 10,800 SSS Prior TBA
Driver 4,800 SSS Prior TBA
Support Staff 1,500 SSS Prior TBA
Drafting of Business Registrations Bill and Regulations
150,000 IC
Prior TBA
Design of an online E-Licensing portal
75,000 IC
Prior TBA
Introduction of a risk-based environmental and health inspection regime
150,000 IC
Prior TBA
Operation and maintenance of installed IT systems
100,000 CQS
Prior TBA
Design of automated document workflow and file tracking numbers 100,000 CQS
Prior TBA
Design and creation of transactional website for online submissions 150,000 QCBS
Prior TBA
86
1 2 3 4 5 6 7
Ref. No.
Description of Assignment
Estimated
Cost
(US$)
Selection
Method
Review
by Bank
Prior/
Post
Expected
Proposals Submission Date
Comments
Automation of back office functions of the MCC 200,000 QCBS
Prior TBA
Review of the hire purchase act to move towards secured lending transactions law 80,000 IC
Prior TBA
TA to CBL to support the financial leasing regime 150,000 QCBS
Prior TBA
TA to support the drafting and finalization of the CRA implementation regulations 150,000 IC
Prior TBA
Operation and maintenance of installed IT systems 100,000 CQS
Prior TBA
Review of Insolvency Laws and Regulation and subsequent drafting
50,000 IC
Prior
TBA
Information dissemination and communication campaign
100,000 CQS
Prior
TBA
Legal and Regulatory Assessment to identify constraints to private investment in factory shell provisioning
75,000 IC
Prior
TBA
An in-depth feasibility analysis and an implementation plan for
500,000 QCBS
87
1 2 3 4 5 6 7
Ref. No.
Description of Assignment
Estimated
Cost
(US$)
Selection
Method
Review
by Bank
Prior/
Post
Expected
Proposals Submission Date
Comments
the selected site that would be based on financial modeling of potential commercialization options, identification of legal, regulatory and institutional hurdles and management support to LNDC’s management to formulate a PPP transaction
Prior
TBA
Technical assistance support on designing and implementing targeted programs that would facilitate linkages between these foreign investors and domestic SMEs 350,000 QCBS
Prior TBA
Full time technical advisor to LNDC 350,000 IC
Prior TBA
Development of an online tourism statistics database 150,000 QCBS
Prior TBA
Design and implementation of the tourism Sector Employment Survey 150,000 QCBS
Prior TBA
Design and implementation of the household survey for domestic tourism 100,000 CQS
Post TBA
Development of a market based artisan enterprise training curriculum 100,000 CQS
Prior TBA
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1 2 3 4 5 6 7
Ref. No.
Description of Assignment
Estimated
Cost
(US$)
Selection
Method
Review
by Bank
Prior/
Post
Expected
Proposals Submission Date
Comments
Development of architectural plans for the handicrafts marketplace and Tourism Information Center 100,000 CQS
Prior TBA
Technical assistance for Farm Management of the Commercial Orchard Plot 1,000,000 QCBS
Prior TBA
Implementing Agency Capacity Building Activities with Time Schedule
Ref No.
Expected outcome /
Activity Description
Estimated Cost (US$)
Estimated Duration
Start Date Comments
1 Training programs to support the new Business Registration, Industrial Licensing and risk-based environmental and health inspection regimes
50,000
TBA
TBA
2 Training of MCC Staff and other regulatory authorities
50,000 TBA
TBA
3 Stakeholder discussions and training on new systems, laws and regulations
100,000
TBA TBA
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Ref No.
Expected outcome /
Activity Description
Estimated Cost (US$)
Estimated Duration
Start Date Comments
4 Capacity Building to the Supervision Department on the licensing and oversight of the CIB
150,00 TBA
TBA
5 Capacity Building for LNDC including exchanges with successful Investment Promotion Agencies
200,000
TBA TBA
6 Capacity Building workshops and information dissemination for tourism sub-component
100,000
TBA TBA
7 Training Provided for pest management, Global Gap, Improved farm management techniques
150,000
TBA TBA
Environmental and Social (including safeguards)
56. Given the project has low to moderate environmental and social impacts in areas where there are no sensitive natural habitats or forest areas, the Project has been classified as a Category B project according to the World Bank safeguard policy on Environmental Assessment (OP/BP 4.01). Since the location of the sub-projects to be financed under the horticulture component is not yet known, the client has prepared an Environmental and Social Management Framework (ESMF) that also includes a section on Integrated Pest Management Plan. In addition, an Environmental and Social Management Plan (ESMP), has been prepared for the intended construction of the tourism information center under the tourism sub-component. These documents have been disclosed in-country and in the Bank’s Infoshop prior to appraisal. Since the tourism information center will be built on an identified site for which land has already been acquired and does not have any encroachers or squatters, OP4.12 is not triggered. Other components of the project do not require land acquisition and there are no squatters or encroachers.
57. The following safeguard policies are triggered or have been considered:
(a) Environmental Assessment (OP/BP 4.01) and its related General Environmental, Health and Safety Guidelines – The policy is triggered due to anticipated moderate impacts from activities to be undertaken under the horticulture sub-component and the proposed tourism handicraft center. Activities may include excessive use of water, tilling of land and minor to moderate use of pesticides for the
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horticulture sub-component and rehabilitation or construction of buildings for the tourism handicraft center. The project has been rated category B- partial Assessment for Environmental Assessment (EA) and the upstream work for an ESMF for the horticulture component has been completed with public consultation and disclosure in-country and at the Bank’s Infoshop as well. Since the site for horticulture component will be selected during project implementation the ESMF lays out the framework and incorporate the lessons learnt from the existing pilot sites and the village roll-out and ensure that there are no outstanding land issues. The site for the tourism handicrafts center has been identified and a draft ESMP has been prepared, consulted upon and disclosed in-country and at the Bank’s Infoshop prior to appraisal.
(b) Pest Management (OP/BP 4.09). While the total land under the project is not substantial (only 30-35 hectares) and the risk of pesticides is minor to moderate due to the small amounts of pesticides being used, the ESMF incorporates a section on integrated pest management plan (IPMP).
Monitoring & Evaluation
58. The monitoring and evaluation (M&E) system will be based on the Results Framework and monitoring arrangements described in Annex 1. An M&E specialist within the PCU will be responsible for establishing and managing the M&E system including data collection, compilation and reporting from various stakeholders and implementing agencies and preparation of M&E reports for the Project. The M&E Specialist will coordinate closely with the Horticulture Manager for the M&E reporting on the horticulture component.
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Annex 4: Operational Risk Assessment Framework (ORAF)
LESOTHO: SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT (P144933)
.
.
Project Stakeholder Risks
Stakeholder Risk Rating Moderate
Risk Description: Risk Management:
GoL is the main stakeholder for the Second PSCED project. The project is in line with the National Strategic Development Plan which underscores the importance of a dynamic private sector for long term sustainable growth and development. Moderate risks are expected in the implementation of this Project, due to the varied number of implementing agencies that it involves.
This project has the advantage of having learnt valuable lessons from the implementation of the PSCED Project. There have also been extensive efforts under the PSCED Project to build capacity in the various implementing agencies by providing training and exposing staff to international good practices in their respective fields with the view to strengthen internal capacities of these implementing agencies. Further, the Project Steering Committee which comprised of all the focal points from the various implementing agencies met regularly to discuss the progress of the PSCED Project serving as an important coordinating platform amongst various stakeholders for the Project. The PSC will continue to meet during the implementation of the Second PSCED Project and will include designated officers from the new implementing agencies included in the new Project.
Resp: Status: Stage: Recurrent: Due Date: Frequency:
Both Not Yet Due Implementation
Implementing Agency (IA) Risks (including Fiduciary Risks)
Capacity Rating Moderate
Risk Description: Risk Management:
There are potential risks associated with the implementation capacity, given the scaling up many of the activities involved.
In addition to the capacity building interventions that the project will support, the design of the project takes into account the use of private sector management and expertise to manage the pilot commercial factory sites and the horticulture farm management in order to ensure efficiency and timely delivery of services.
Resp: Status: Stage: Recurrent: Due Date: Frequency:
Client Not Yet Due Implementation
Governance Rating Moderate
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Risk Description: Risk Management:
Risks associated with the multiple implementation agencies involved in the project.
The Project design would build on the implementation arrangements in place under the PSCED Project to include proper governance structures to ensure transparency and accountability in decision making and project implementation.
Resp: Status: Stage: Recurrent: Due Date: Frequency:
Both In Progress Both
Project Risks
Design Rating Moderate
Risk Description: Risk Management:
(a) Crop damage from adverse weather conditions including hail, wind and drought. (b) Slow implementation of legislative and legal reforms under component 1
a) The Project design will ensure that all project orchards operate under netting and irrigation; farmers are regularly trained on maintenance and operation of netting and irrigation systems and there is crop insurance for all participating orchards. (b) Based on lessons learnt under the PSCED Project, there will be legal capacity building conducted within MTICM as well as the Parliamentary Counsel to ensure that delays due to capacity constraints are minimized.
Resp: Status: Stage: Recurrent: Due Date: Frequency:
Both Not Yet Due Implementation
Social and Environmental Rating Low
Risk Description: Risk Management:
There are no perceived major social or environmental effects associated under the project activities.
The Government as part of project preparation has prepared an ESMF for the horticulture component since the exact site for the expansion will be selected during project implementation. Further, there are is one potential site selected for the venue of the proposed tourism information center for which an ESMP has been prepared. Both these documents have been completed with public consultation and have been disclosed in-country and at the Bank’s Infoshop on August 6, 2013 prior to appraisal.
Resp: Status: Stage: Recurrent: Due Date: Frequency:
Both In Progress Both
Program and Donor Rating Low
Risk Description: Risk Management:
N/A Extensive consultations have been conducted with all the donors to avoid any
93
duplication of efforts.
Resp: Status: Stage: Recurrent: Due Date: Frequency:
Bank In Progress Both
Delivery Monitoring and Sustainability Rating Moderate
Risk Description: Risk Management:
Some components may only achieve results towards the end of the project life.
The project M&E framework will be designed to capture key interventions and efforts will be made at the outset to collect data on a regular basis to ensure close monitoring of the indicators.
Resp: Status: Stage: Recurrent: Due Date: Frequency:
Both In Progress Both
Other (Optional) Rating
Risk Description: Risk Management:
Resp: Status: Stage: Recurrent: Due Date: Frequency:
Overall Risk
Overall Implementation Risk: Rating Moderate
Risk Description:
Project implementation may face moderate institutional, capacity and design risks which will be mitigated with key interventions especially building on the institutional framework in place under the PSCED Project.
Annex 5: Implementation Support Plan
LESOTHO: SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT
Strategy and Approach for Implementation Support 1. The strategy for Implementation Support has been developed consistently with the nature of the project and its risk profile. It will aim at making implementation support to the client more flexible and efficient, and will focus on implementation of the risk mitigation measures defined in the ORAF.
a. Technical inputs. The technical team will provide regular inputs to the PMU on technical issues. In particular, it will review Terms of References and draft reports from consultants and provide technical and quality control oversight.
b. Procurement and financial management inputs. Close supervision on procurement and financial management will be deployed. Procurement supervision will include prior reviews of procurement activities, as well as post reviews. In addition, the procurement progress against the detailed procurement plan will be closely monitored. On Financial Management, the project will be supervised on a risk-based approach. Supervision will focus on the status of the financial management system to verify whether the system continues to operate well and provide support where needed. It will comprise inter alia, the review of audit reports and IFRs, advice to task team on all FM issues, review of annual audited financial statements and management letters.
c. Environmental and Social Safeguards inputs. The Bank team will supervise the implementation of the recommendations emerging from the ESMP for the tourism sub-component and the ESMF for the horticulture sub-component and provide regular guidance to the PMU to address any issues.
Implementation Support Plan 2. The Bank Procurement and Financial Management Specialist are based in Pretoria to ensure timely, efficient and effective implementation support to the client. Formal supervision and field visits will be carried out semi-annually. Detailed inputs from the Bank team are outlined below:
a. Technical inputs: The technical supervision of the project requires expertise on business environment and access to finance will be provided by the World Bank’s Financial and Private Sector Development Unit for East and Southern Africa (AFTFE) in close collaboration with the IFC’s Access to Finance team and the Joint IFC-WB Investment Climate Advisory Services team. Expertise on
95
investment promotion, tourism and horticulture will be provided by AFTFE, AFTP1 and external sector specialists.
b. The FM implementation support plan will be risk based, and will include: review of the project’s financial management system, including but not limited to, accounting, reporting and internal controls.
Time Focus Skills Needed Resource Estimate Partner Role
First twelve months
Identification of any potential problems early in the life of the project
Financial Management
4 weeks NA
12-48 months Review the continuing adequacy of the financial management arrangements
Financial Management
8 weeks NA
Other
c. Fiduciary requirements and inputs. Both the procurement specialist and the financial management specialist are based in Pretoria, which allows for timely support. There will be at least two on-site supervision visits per year during the implementation and a review of transactions will be performed on that occasion. Procurement supervision will be carried out on a timely basis as required by the client.
Time Focus Skills Needed Resource Estimate Partner Role
First twelve months
Identification of any potential problems early in the life of the project
Procurement Training
4 weeks NA
12-48 months Review the continuing adequacy of the procurement management arrangements
Procurement Management
8 weeks NA
d. Safeguards inputs. Inputs from an environmental specialist and a social specialist will be required to ensure that the recommendations of the ESMP for the tourism component and the ESMF for the horticulture component are being
96
implemented. Social and environmental safeguards specialists will join the implementation support missions.
3. The main focus of implementation support is summarized below.
Time Focus Resource Estimate
First 12 months Procurement review and training
TTL 4 SWs Procurement specialist 4 SWs
FM training and supervision FM specialist 2 SWs
Environmental issues Environmental specialist 2 SWs
Social issues related training and supervision
Social specialist 2 SWs
Technical supervision (on site and off site)
Technical specialists 7 SWs TTL 8 SWs
Team leadership TTL 8 SWs
12-48 months
Procurement review TTL 4 SWs Procurement specialist 3 SWs
FM supervision FM specialist 2 SWs
Environmental issues Environmental specialist 2 SWs
Social issues supervision Social specialist 2 SWs
Technical supervision (on site and off site)
Technical specialists 7 SWs TTL 8 SWs
Team leadership TTL 8 SWs
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4. Staff skills mix required is summarized below.
Skills Needed Number of Staff
Weeks Number of
Trips Comments
Task Team Leader/s 12 SWs annually
2 Based in Washington DC
Financial management specialist
2 SWs annually
2 Based in the region
Procurement specialist 4 SWs annually
2 Based in the region
Social specialist 2 SWs annually
2 Based in Washington DC
Environment specialist 2 SWs annually
2 Based in the region
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Annex 6: Detailed Project Costs
LESOTHO: SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT
Project Components IDA Financing
US$ million Counterpart Financing
US$ million Total Financing
US$ million
1. Component 1: Improving the Business Environment 3.16 0.40 3.56 1A. Business Regulation, licensing and construction permit reform 2.08 0.00 2.08
1B. Improving Access to Finance 1.08 0.40 1.48
2. Component 2: Supporting Economic Diversification 7.45 1.50 8.95 2A. Supporting investment promotion and increasing linkages to the local economy 1.78 0.00 1.78
2B. Supporting the Tourism Sector 1.30 0.30 1.60
2C. Expanding commercial Horticulture 3.90 0.45 4.35
2D. Lesotho Enterprise Assistance Program 0.47 0.75 1.22
3. Project Implementation 2.04 0.00 2.04
Unallocated Costs 0.46 0.00 0.46
Total Project Costs 13.10 1.90 15.00
Project Costs by Category
US $ Million
Percentage of Expenditures to be
Financed (Inclusive of Taxes)
Goods, works, consulting services, non- consulting services, training and workshops and operating costs 12.2 100%
Refund of Preparation Advance 0.9 100%
Total IDA Financing 13.1
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Annex 7: Detailed Economic and Financial Analyses
LESOTHO: SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT
1. This Project aims to contribute to the development of non-textile sectors resulting in increased private sector investment, firm growth and job creation. This will be achieved by (i) improving business environment; (ii) increasing access to finance; (iii) supporting investment promotion in new sectors with increased backward linkages to the local economy and (iv) targeted support to new growth sectors such as horticulture and tourism. The project will comprise two mutually- reinforcing components: (i) improving the business environment; and (ii) increasing economic diversification. In addition, the third component of the project will support project implementation. 2. The economic analysis for Component 1: Improving the Business Environment presents a special challenge due to the indirect relationship between the business environment reforms supported under the Project and the stream of benefits that these are expected to trigger. For components related to investment climate and access to finance reforms, the complexity in quantifying economic benefits is multiplied. In the absence of commonly accepted methodologies for the economic analysis of business environment reform, these types of projects are based on cost effectiveness and more general analytical work on the positive effects of business environment and access to finance on private sector growth and entrepreneurship. 3. The economic analysis of this Project is built as a financial analysis with the estimated difference in cash flows to beneficiaries (tourism businesses, smallholders, and MSMEs, including new jobs created) accounted for as cash flows to the Project. The following includes economic analysis of all sub-components of Component 2: Supporting Economic Diversification (IDA allocation of US$7.45 million and GoL contribution of US$1.50 million). Under sub-component 2A, the Project will provide TA for better commercialization of existing factory sites through improved infrastructure and services and potential PPP design and increase linkages to the domestic economy. In sub-component 2B, the tourism programs commissioned under the Project will improve quality and efficiency standards and support an enabling institutional framework in addition to strengthening unique offerings for tourism as well as improve productivity of the handicrafts sector. The Project will also support expansion of the pilot horticulture program from the PSCEDP (sub-component 2C). Under the LEAP Program, the Project will support implementation of the government financed program to provide business development services to MSMEs and associations. An attempt has been made to quantify the costs and benefits that are expected to accrue from these investments, and the Net Present Value (NPV) and the Economic Rate of Return (ERR) for these sub-components have been calculated. These valuations are constructed through scenario based analyses with sensitivity testing. A qualitative analysis has been included for component 1, based on the literature discussing the impact of business environment and access to finance reform on competitiveness and firm entry.
100
4. The total investment under Components 2 is estimated to result in an NPV of US$31.4 million at the discount rate of ten42 percent, and an ERR of 27 percent with the base case scenario (without the PPP deal). With the PPP deal, the ERR is estimated at 18 percent and the NPV at US$37.3 million with a ten percent discount rate. Different assumptions and detailed data from multiple sources are used for the analysis of specific components. Correspondingly, all sub-components include their own sensitivity analyses, which follow.
Supporting Investment Promotion and Increasing Linkages to the Domestic Economy
5. The Project will provide the GoL with support for increased horizontal diversification outside of the textile sector through TA to improve infrastructure and other service provisions for existing factory sites. This support includes options for commercialization of these factory shells including design of a PPP deal. The Project is investing a total of US$1.78 million in this sub-component, disbursed between 2014 and 2019. 6. As a result of the technical assistance provided under the Project, factory shells will incur higher costs to provide better infrastructure and services, with a view to be able to achieve higher rents from investors. If a PPP is achieved, both servicing costs and rents will be considerably higher than other commercialization options. 7. In the economic analysis of this sub-component the ERR is expected to be 26 percent without the PPP and 17 percent with the PPP. The NPV is expected to be about US$22.5 million and US$24.7 million, respectively, with a discount rate of 10 percent.
Table A7.1: Economic analysis of Investment Promotion Component
Without PPP
NPV (10% Discount rate)
$22,530,981
NPV (12% Discount rate)
$17,058,252
ERR 26%
With PPP
NPV (10% Discount $24,724,805
42 Discount rate: The Bank traditionally has not calculated a discount rate but has used 10-12 percent as a notional figure for evaluating Bank–financed projects. This notional figure is not necessarily the opportunity cost of capital in borrower countries, but is more properly viewed as a rationing device for World Bank funds.
101
rate)
NPV (12% Discount rate)
$14,943,596
ERR 17%
8. The sensitivity results of this component and the underlying assumptions are summarized below.
Investment Promotion Analysis Assumptions
9. Assumptions:
(a) The technical data on leasing charges, total leasing area, and cost of service provisions are based on data gathered during the identification and pre-appraisal
Without Project
Leasing charge per square meter (per year) $22.80
Growth in leasing charge per year 3%
Cost of current service provisions (% of rent) 95%
Cost of current service provisions (per sq meter) $21.66
Growth in service costs per year 3%
With Project TA, no PPP
Additional cost per sq meter for improved services (ex construction),
% of previous costs 30%
Additional cost per sq meter for improved services (ex construction) $6.50
Additional leasing charge % in 2017 10%
Year additional leasing charge occurs 2016
Year up until additional leasing charges occur 2020
Total construction costs (2015‐2020) 2,500,000
Construction costs (per year, 2015‐2020) 500,000
Portion of rent charges that contribute to SME linkages as revenue 2%
Jobs created per dollar increase in revenue 0.0001
Average salary (US$ annual) 500
With Project TA, PPP
Additional cost per sq meter for improved services (ex construction)
over just Project TA, % of previous costs 50%
Additional cost per sq meter for improved services (ex construction)
over just Project TA $10.83
Additional leasing charge % in 2017 (over just Project TA) 10%
Year additional leasing charge occurs 2016
Year up until additional leasing charges occur 2020
Total construction costs (2015‐2020) 5,000,000
Construction costs (per year, 2015‐2020) 1,000,000
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missions through discussions with Lesotho based experts and engineering reports. These numbers were adjusted to arrive at more conservative estimates for the Component ERR.
(b) Construction costs for improving infrastructure and service delivery have been estimated based on discussions with Lesotho based experts, LNDC and engineering reports. Variation in ERR and NPV due to changes in these assumptions have been tested with a number of sensitivity scenarios.
(c) In the base case scenario without the PPP, additional costs for improved service provisions are estimated at 30% of previous costs (US$0.54 per square meter per month), with leasing charges increasing by 10percent per year over the construction period for better infrastructure provisions. With the PPP, additional costs for improved service delivery are estimated at 50% of previous costs (US$0.90 per square meter per month) with leasing rents increasing by 20percent (10percent over the scenario without the PPP). Variation in ERR and NPV due to changes in these assumptions have been tested with a number of sensitivity scenarios. This increase in industrial rents is likely given that Lesotho currently charges considerably less than neighboring countries. Monthly industrial rents average US$1-2 in comparison with US$4-6 for South Africa and US$6 for Uganda.43
(d) Both base case scenarios (with and without the PPP) include an estimate for the spillover effects associated with the Increasing linkages to the local economy activities under this sub-component. The base case estimates that an amount that is equivalent to 2percent of what companies pay to rent in the industrial estates will spillover as income to local SMEs. A job creation rate of 1 per $10,000 increase in revenue is also assumed, at an average salary of $500 per year. These assumptions have been validated by Lesotho based experts and have been tested for robustness in the sensitivity analysis that follows.
10. The sensitivity analysis shows that the Investment Promotion sub-component ERR with an 8percent increase in leasing charges (without PPP) will only result in a 15 percent ERR. In contrast, a 12percent percent increase in leasing charges will increase the sub-component ERR to 35 percent with everything else held constant. The results of the sensitivity analysis include:
43Strategic Review of LNDC and BEDCO, September 28, 2010.
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Sensitivity Analysis with Different Scenarios Without PPP 1. Reduction in additional leasing charges from 10% to 8% Reduces ERR to 15%
2. Increase in additional leasing charges from 10% to 12% Increases ERR to 35%
3. Increase in additional servicing costs from 30% of previous costs to 40% of previous costs Reduces ERR to 12%
4. Reduction in additional servicing costs from 30% of previous costs to 20% of previous costs Increases ERR to 46%
5. Increase in construction costs from $500,000 per year (2016-2020) to $700,000 Reduces ERR to 25%
6. Reduction in construction costs from $500,000 per year (2016-2020) to $300,000 Increases ERR to 27%
7. Reduction in spillover through linkages program from 2% to 0.5% Reduces ERR to 22%
8. Increase in spillover through linkages program from 2% to 3% Increases ERR to 28%
Sensitivity Analysis with Different Scenarios With PPP 9. Reduction in additional leasing charges from 10% to 8% Reduces ERR to 11%
10. Increase in additional leasing charges from 10% to 12% Increases ERR to 22%
11. Increase in additional servicing costs from 50% of previous costs to 60% of previous costs Reduces ERR to 12%
12. Reduction in additional servicing costs from 50% of previous costs to 40% of previous costs Increases ERR to 22%
13. Increase in construction costs from $1,000,000 per year (2016-2020) to $2,000,000 Reduces ERR to 15%
14. Reduction in construction costs from $1,000,000 per year (2016-2020) to $750,000 Maintains ERR at 17%
15. Reduction in spillover through linkages program from 2% to 0.5% Reduces ERR to 15%
16. Increase in spillover through linkages program from 2% to 3% Increases ERR to 18%
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11. The major impact of this component comes from increase in leasing rents for investors in the factory shells due to better infrastructure and services provided. The change in these affects the economic analysis and the returns of the Project.
Supporting the Tourism Sector
12. The Project will support financing to improve quality and efficiency standards, support an enabling institutional framework, and strengthen Lesotho’s unique offerings for tourism. As a result of technical assistance, tourism-related businesses will be able improve their efficiency and as such increase their profits. Improvements in the institutional framework and quality of offerings will also increase the number of tourist arrivals. Additionally, TA provided specifically to the handicraft sector will increase tourist spending in this area. The Project is investing a total of US$1.30 million along with GoL funds of US$300,000 in this sub-component, disbursed over the five years of the Project.
13. Tourism development initiatives implemented under the Project will benefit establishments operating in the tourism sector. The Project will help increase transparency and improve quality and efficiency standards for tourism businesses, leading to increased tourist arrivals and reduction in operating costs for businesses as a percentage of revenue. The combination of these outcomes will increase first-time and repeat visitation rates; and will strengthen the value chain, contributing to job generation and firm creation. For the handicraft sector, TA provided to businesses will increase tourist spending specifically in this area. As such, the channels through which this component will impact the tourism industry are estimated as: i) reduction in costs as a percentage of revenues for non-handicraft tourism related businesses; ii) increase in the number of tourist arrivals; and iii) increase in spending in the handicraft sector both domestically and potentially increase handicraft exports from Lesotho.
14. In the economic analysis of this component the ERR is expected to be 17 percent. The NPV is expected to be about US$215 thousand, with a discount rate of 10 percent.
Table A7.2: Economic analysis of Tourism Component NPV (10% Discount
rate) $214,655
NPV (12% Discount rate)
$131,581
ERR 17%
105
15. The sensitivity results of this component and the underlying assumptions are summed below.
Tourism Analysis Assumptions
Tourism growth rates (2014‐2018)
Tourism growth rate without Project 3.0%
Tourism growth rate additionality with Project 0.2%
Tourism growth rate post Project 3%
Length of average stay (days) 2.0
Average spending per day per tourist (USD) $50
Growth rate in tourist spending per year (non‐handicraft) 1.0%
Costs borne by Basotho businesses for tourism
Percentage of revenue that is cost (without Project) 90.0%
Percentage of revenue that is cost (with Project) 89.9%
Arrivals (2013) 448,797
Direct tourism jobs 42,303
Estimated number of tourists (2011) 423,034
Jobs / tourist 0.10
Average salary (skilled) $1,731
Percentage of tourism jobs (skilled) 45%
Average salary (unskilled) $1,622
Percentage of tourism jobs (unskilled) 55%
Growth in salary 1%
Exchange rate (Maloti / Dollar) 10
Handicraft sector
Percentage of tourism spending 1.70%
Average spending per day per tourist (USD) $0.85
Total handicraft spending 2011 (USD) $1,170,000
Growth rate in spending per year without Project (%) 1%
Growth rate additionality due to Project (until 2020) 1%
Growth rate post Project 1%
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16. Assumptions:
(a) The technical data on number of arrivals, annual growth rates, per day expenditures, costs, and average length of stay are taken from data provided by Lesotho National Tourism statistics. These numbers were adjusted to arrive at more conservative estimates for the sub-component ERR.
(b) The number of tourist arrivals is estimated at 450 thousand in 2013 based on the actual number of 411 thousand in 2010, grown at 3 percent per year to 2013. Annual growth rates between 2006 and 2010 have been fairly scattered, but South African tourism arrivals show a growth rate of 6 percent. This percentage is adjusted downwards to 3.0 percent between 2014-2018 in the base case scenario. As a result of the Project, the growth rate is estimated to be 3.3 percent for these years. After 2018, the growth rate is estimated to reduce to 3.0 percent.
(c) Lesotho Annual Arrival Statistics data indicates that as of 2011, the average tourist spends 5-13 days in Lesotho and spends $60/day. These estimates are reduced to 2 days and $50/day to arrive at a conservative estimate for the additional tourists brought in due to the Project.
(d) Improvements in transparency and efficiency are expected to benefit tourism-related businesses in the form of improvements in value added due to the reduction in costs as a percentage of revenues. The analysis assumes that costs will be 90 percent of revenues for tourism-related businesses which reduces to 89.9 percent due to the TA supported by the Project. The economic analysis assumes a job creation rate specified for each business based on an increase in revenue. These assumptions are based on revenue to labor ratios for tourism businesses that have been adjusted downwards.
17. The sensitivity analysis shows that the Tourism sub-component ERR with 0.1 percent additional arrivals growth will only result in a 6 percent ERR. In contrast, a 0.3 percent increase in arrivals will increase the component ERR to 31 percent with everything else held constant. The results of the sensitivity analysis include:
Sensitivity Analysis with Different Scenarios 1. Reduction in additional arrivals growth to 0.1% Reduces ERR to 6%
2. Increase in additional arrivals growth to 0.3% Increases ERR to 31%
3. Increase in the percentage of revenues that is cost with the Project from the assumed 89.9% to 89.95% (relative to 90% without the Project) Reduces ERR to 12%
4. Reduction in the percentage of revenues that is cost with the Project from the assumed 89.8% to 89.5% (relative to 90% without the Project) Increases ERR to 57%
107
18. The major impact of this sub-component comes from increase in value added for tourism related business due to the increased transparency and capacity development in addition to the increased number of tourist arrivals as a result of the Project and the wages paid for the jobs created. The change in these affects the economic analysis and the returns of the Project.
Expanding Commercial Horticulture
19. Under the previous PSCEDP, pilot horticulture farms were created to support commercial fruit farming in Lesotho. The Project includes support for expansion of this pilot program including support for products targeted for export (Grade 1), domestic consumption (Grade 2), and value added processing (Grade 3). The major impact of this sub-component comes from smallholders being able to capture higher prices for commercial fruit in the export and domestic markets and thus increase revenues and income. The Project is investing a total of US$ 3.90 million along with GoL funds of US$ 450,000 in this sub-component, disbursed over the five years of the Project.
20. The ERR of this sub-component is expected to be 31 percent, and the NPV is expected to be about US$3.8 million with a discount rate of 10 percent.
Table A7.3: Economic analysis of Horticulture Component NPV (10% Discount
rate) $3,789,505
NPV (12% Discount rate)
$2,966,720
ERR 31%
21. The sensitivity results of this component and the underlying assumptions are summed below.
Horticulture Analysis Assumptions
% of area
Apples 55%
Peaches 25%
Cherries 20%
Total 100%
Grade 1 35%Grade 2 45%Grade 3 20%
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22. Assumptions:
(a) The technical data on yield rates, handling losses, packout percentages, and quality grade differentiation are based on data gathered during the identification and pre-appraisal missions through discussions with Lesotho based experts, in addition to the data from the pilot phase of the program under the PSCEDP.
(b) Data gathered from the pilot phase of the program under the PSCEDP has also been used to estimate average price for each of the three commercial fruits (apples, peaches, and cherries) along with the 6 percent growth rate used in this analysis. This has been supplemented by data from South Africa based experts on the final price of sale for these products.
23. The sensitivity analysis shows that the Horticulture sub-component ERR with handling losses of 20 percent, rather than the assumed 10 percent will only result in a 28 percent
Price Discount According to Grade
Grade 2 20%
Grade 3 40%
Handling loss 10.0%
Price increase per year (@ inflation) 6%
Packout percent 85.0%
Exchange rate (Rand/Dollar) 8.5
Estimated Grower's Selling Price Projections in Rands/ton (2013 - 2023)
2014 2015
Apples 4,508 4,778
Peaches 7,024 7,445
Cherries 64,500 68,370 Annual price increase 6%
Estimated Yield Rate (Tons/Ha)
Years (Tons/Ha)
2014 2015 2016 2017 2018 2019 2020 2021
Apples 0 0 15 24 40 55 65 70Peaches 0 0 14 23 40 52 60 65Cherries 0 0 2 4 10 15 17 17
Total Area 35
109
ERR. In contrast, a 5 percent handling loss44 will result in the component ERR to 33 percent with everything else held constant. The results of the sensitivity analysis include:
LEAP Program
24. The Project will support continued implementation of the LEAP matching grants scheme which provides financing for business development services. As a result, individual enterprises will be able improve the efficiency of their business and as such increase their profits. The impact on individual businesses of different sizes has been estimated as part of the economic analyses. The Project is investing a total of US$470 thousand to manage implementation of this component along with GoL financing of US$750,000 disbursed over the five years of the Project.
25. The particular channels through which profit increase can be seen are discussed in the following example. The BDS provided through the matching grant program will cover a range of areas including marketing, bookkeeping, and customer care. As a result of this support, the individual business is able to increase its sales, resulting in revenue additionality due to the Project that translates into an increase in value added which is observed for a specified number of years (3-4) following the particular intervention under this Component. Revenue additionality resulting from the Project is specified for different types of beneficiaries, including micro, small, medium, and large enterprises, and associations.
26. In the economic analysis of this component the ERR is expected to be 30 percent. The NPV is expected to be about US$1.1 million, with a discount rate of 10 percent.
Table A7.4: Economic analysis of Matching Grants Component NPV (10% Discount
rate) $1,127,598
44 Handling loss is the term for the amount of product that cannot be sold due to quality degradation in the postharvest crop production process (cooling, cleaning, sorting, and packing).
Sensitivity Analysis with Different Scenarios 1. Increase in handling losses to 20% Reduces ERR to 28%
2. Reduction in handling losses to 5% Increases ERR to 33%
3. Reduction in the assumed price growth rate of 6% to 3% Reduces ERR to 25%
4. Increase in the assumed price growth rate of 6% to 8% Increases ERR to 35%
110
NPV (12% Discount rate)
$879,930
ERR 30%
27. The sensitivity results of this component and the underlying assumptions are summed below.
Matching Grant Assumptions
Total number of business beneficiaries 200
Total number of association beneficiaries 20
Percentage of beneficiaries
Percentage micro and small 40%
Percentage medium 55%
Percentage large 5%
Micro and Small enterprises
Average number of employees 10
Average revenue $5,000
Percentage costs 80%
Average value added $1,000
Annual growth (without Project) 1%
Annual growth increase due to Project 4%
Number of years growth increases due to Project 4
Percentage formal 0%
Tax rate 0%
Average salary $200
Annual growth in wages 2%
Jobs created per $ increase in revenue 0.0001
111
Medium enterprises
Average number of employees 50
Average revenue $50,000
Percentage costs 80%
Average value added $10,000
Annual growth (without Project) 2%
Annual growth increase due to Project (Years 2‐5) 4%
Number of years growth increases due to Project 4
Percentage formal 100%
Tax rate 30%
Average salary (skilled) $800
Average salary (unskilled) $300
Annual growth in wages (skilled) 2%
Annual growth in wages (unskilled) 2%
Jobs created per $ increase in revenue (skilled) 0.0001
Jobs created per $ increase in revenue (unskilled) 0.0005
Large Enterprises
Average number of employees 100
Average revenue $100,000
Percentage costs 80%
Average value added $20,000
Annual growth (without Project) 2%
Annual growth increase due to Project (Years 2‐5) 4%
Number of years growth increases due to Project 4
Percentage formal 100%
Tax rate 30%
Average salary (skilled) $1,500
Average salary (unskilled) $500
Annual growth in wages (skilled) 2%
Annual growth in wages (unskilled) 2%
Jobs created per $ increase in revenue (skilled) 0.0001
Jobs created per $ increase in revenue (unskilled) 0.0005
112
28. Assumptions:
(a) The technical data on revenues, costs, annual growth rates, and average wage are taken from data gathered during the identification and pre-appraisal missions through discussions with Lesotho based experts validated by available data and comparisons with nearby countries with similar enterprise demographics. In many cases, these numbers were adjusted to arrive at more conservative estimates for the sub-component ERR.
(b) The number of beneficiaries is estimated at 200 including micro-, small-, medium, and large-enterprises, and 20 associations. This estimate is based on results from previous years of LEAP implementation under the PSCEDP and the program’s capacity.
(c) The main impacts of the Project are expected in the form of improvements in value added for individual businesses due to the growth in revenues and/or reduction in costs as a result of the business development services provided. The economic analysis assumes a job creation rate specified for each business based on an increase in revenue. These assumptions are based on revenue to labor ratios data from neighboring countries that have been adjusted downwards and validated by local experts.
(d) A large body of work that is exploring the impact of “support services” on SMEs sales, workers’ wages, and technology adoption rates found results suggesting that positive improvements can be achieved. Sarder, et al. (1997) study “The Importance of Support Services to Small Enterprises in Bangladesh” find 5-16 percent increase in employment, sales and productivity. Similarly, Tan & Lopez-Acevedo (2005) look at the impact of SME programs in Mexico using panel firm data and find that 9-14 percent improvement in training and 9 percent improvement in technology absorption have been achieved. Various SME programs – Business Advisory Services, Technology Development, Credit, Supplier Development (1992 – 2000) in Chile presented similar results. Lopez-Acevedo & Tan (2010), “Impact Evaluation of SME Programs in Latin America and Caribbean” found 8 percent increase in wages and 9 percent increase in productivity as a result of these programs. We base our assumptions on the lower end of the achieved impact in similar programs in other developing country settings. In line with the results described above we assume a 4 percent growth in
Associations
Average number of members 75
Average income $30,000
Annual income growth (without Project) 3%
Annual income growth additionality with Project 4%
Number of years growth increases due to Project 4
113
sales and a 2 percent growth in wages for the support provided to SMEs between years 2-5 after Project effectiveness.
29. The sensitivity analysis shows that the Matching Grant ERR with 3 percent sales growth and 1 percent growth in wages will only result in a 17 percent ERR. In contrast, a 5 percent increase in sales and 3 percent wage increase will increase the component ERR to 42 percent with everything else held constant. The results of the sensitivity analysis include:
30. The major impact of this component comes from increase in value added for each MSME impacted by the Project and the wages paid for the jobs created. The change in these affects the economic analysis and the returns of the Project.
Component 1: Improving the Business Environment
31. This component will support (a) Business Regulation, licensing and construction permit reform, (b) Improving access to finance.
32. The relationship between the characteristics of the business regulatory environment and the performance of firms has been well documented (Djankov et. a1 2002, Botero et. al 2004, Acemoglu and Johnson 2005, Mastruzzi 2006, and Kaufmann et. a1 2006).
33. A recent study finds that barriers to starting a business are negatively and significantly correlated with business density and entry rate. Fewer procedures are associated with a greater number of registered firms and higher entry rates (Klapper, 2006). A similar relationship can also be found with the cost of starting a business. It is estimated that for every 10 percent decrease in entry costs, density and the entry rate increase by about 1 percent (Klapper, 2006). Simpler entry encourages the creation of new companies. Easier start-up is also correlated with higher productivity among existing firms. A study which analyzes data in 157 countries, finds that a reduction in entry costs raises output per worker by an estimated 29 percent (Barseghyan, L “Entry Costs and Cross-Country Differences in Productivity and Output.” Journal of Economic Growth 13 (2008)). These targeted interventions are a key portion of the business environment reforms supported under the Project.
Sensitivity Analysis with Different Scenarios 1. Reduction in sales growth to 3 percent and wages to 1 percent Reduces ERR to 17%
1. Increase in sales growth to 5 percent and wages to 3 percent Increases ERR to 42%
2. 9% increase in sales due to the Project Increases ERR to 87%
3. Increase in number of beneficiaries to 250 businesses Increases ERR to 37%
114
34. The 2008 World Bank Group Entrepreneurship Survey (WBGES 2008) includes new data on the impact of modernization of business registries on business creation. It gathers extensive data on the functioning and structure of business registries in 71 countries from the registrar of companies, as well as complementing data on the number of total and newly registered businesses in over 100 countries. This new empirical evidence suggests that greater ease in starting a business and better governance are associated with increased entrepreneurial activity. After controlling for economic development (GDP per capita), higher entrepreneurial activity is significantly associated with cheaper, more efficient business registration procedures (as measured by the Doing Business 2009 “Starting a Business” indicators) and better governance (as measured by Kaufmann and others, 2008). The figure below highlights these findings.
Figure A7.1: Relationship between a Better Business Environment and Entry Density Rates
35. The relationship between access to finance reform and the performance of firms is also well supported in the literature. Greater business opportunities and better access to finance are generally related to a more robust private sector (Demirguc-Kunt and Klapper, 2012)45. Additionally, at the individual and micro-enterprise level, the probability of making an investment tends to increase with greater access to credit and collateral. The number of financial instruments available to both lenders and borrowers also contributes to a higher probability of personal and business investment (Besley, 1995). This benefit is particularly large for relatively unbanked populations, where improvements in access to finance and financial development have larger poverty impacts (Burgess and Pande, 2005). As such, access to finance reforms and improvements such as those proposed under the Project are likely to benefit Basotho individuals and businesses, particularly within the current unbanked population.
45 Demirguc-Kunt, Asli and Klapper, Leora, 2012. "Financial inclusion in Africa : An Overview," Policy Research Working
Paper Series 6088, The World Bank.
115
36. The data below (Figure A7.2) also show a positive and significant relationship between economic and financial development and entrepreneurship. The log of GDP per capita and domestic credit to the private sector (as a percentage of GDP) are both positively and significantly correlated with entry rates (see below) and business density. This suggests that greater business opportunities and better access to finance are related to a more robust private sector (Klapper et al. 2008), lending further credence to the credit bureau and moveable collateral registry investments supported by the Project to improve access to finance. Additionally, moveable collateral registries are widely considered a “gender positive” reform which has a particular impact on women who are less likely to own fixed collateral such as land, but often have access to jewelry or other items of high monetary value.46
Figure A7.2: Entry rates and GDP per capita and Private Credit to GDP, by country, Average 2003-2005
46 Based on interviews with program leads at the World Bank and Millennium Challenge Corporation.
116
Annex 8: Team Composition
LESOTHO: SECOND PRIVATE SECTOR COMPETITIVENESS AND ECONOMIC DIVERSIFICATION PROJECT
Name Title Unit Smita Kuriakose Economist (Task Team Leader) AFTFE Dobromir Christow Operations Officer AFTFE Francesco Strobbe Financial Economist AFTFE Antonia Preciosa Menezes Private Sector Development Specialist CICBR Thomas Farole Senior Economist AFTP1 Hannah Messerli Senior Private Sector Development Specialist AFTFE Puja Guha Consultant AFTFE Paula F. Lytle Senior Social Development Specialist AFTCS Lungiswa Thandiwe Gxaba Senior Environment Consultant AFTA2 Tandile Gugu Zizile Msiwa Financial Management Specialist AFTME Chitambala John Sikazwe Procurement Specialist AFTPE Anthony Molle Senior Counsel LEGSO Jose C. Janeiro Senior Finance Officer CTRLA Christiaan Nieuwoudt Finance Officer CTRLA Yeshareg Dagne Program Assistant AFTFE Tanangachi Ngwira Senior Country Program Assistant AFTFE
117
Annex 9: Country at a Glance
Malut i
Mtns.
ThabanaThabanaNtlenyanaNtlenyana3,482 m)3,482 m)
MakhekaMakheka(3,461 m)(3,461 m)
SeqoqoSeqoqo(3,394 m)(3,394 m)
Thaba-Thaba-PhafanePhafane
(3,250m)(3,250m)
ThabaThabaPutsoaPutsoa
(3,095 m)(3,095 m)
MachacheMachache(2,885 m)(2,885 m)
T H A B A - T S E K AT H A B A - T S E K A
Q A C H A’ S N E KQ A C H A’ S N E K
Q U T H I N GQ U T H I N G
M O H A L E ’ SM O H A L E ’ SH O E KH O E K
M A F E T E N GM A F E T E N G
M A S E R UM A S E R U
L E R I B EL E R I B E
B E R E AB E R E A
B U T H A -B U T H A -B U T H EB U T H E
M O K H O T L O N GM O K H O T L O N G
MatsiengMatsieng
RomaRoma
MapotengMapoteng
PekaPeka
MaputsoeMaputsoe
PitsengPitseng
MantsonyaneMantsonyane
SemonkongSemonkong
TsoloaneTsoloane
MekalingMekaling MountMountMoorosiMoorosi
SekakeSekake
SehlabathebeSehlabathebe
MashaiMashai
MokoengMokoeng
LibonoLibono
SinxondoSinxondo
RankoRanko
MazenwoodMazenwood
MafetengMafeteng
Mohale’s HoekMohale’s Hoek
QuthingQuthing
Thaba-TsekaThaba-Tseka
MokhotlongMokhotlong
Butha-ButheButha-Buthe
LeribeLeribe
TeyateyanengTeyateyaneng
Qacha’sQacha’sNekNek
MASERUMASERU
T H A B A - T S E K A
Q A C H A’ S N E K
Q U T H I N G
M O H A L E ’ SH O E K
M A F E T E N G
M A S E R U
L E R I B E
B E R E A
B U T H A -B U T H E
M O K H O T L O N G
Matsieng
Roma
Mapoteng
Peka
Maputsoe
Pitseng
Mantsonyane
Semonkong
Tsoloane
Mekaling MountMoorosi
Sekake
Sehlabathebe
Mashai
Mokoeng
Libono
Sinxondo
Ranko
Mazenwood
Mafeteng
Mohale’s Hoek
Quthing
Thaba-Tseka
Mokhotlong
Butha-Buthe
Leribe
Teyateyaneng
Qacha’sNek
MASERU
SOUTH AFRICA
SOUTH AFRICA
Ora
nge
Orange
Caledon
Moh
okar
e
To Fouriesburg
To Senekal
To Clocolan
To Ladybrand
To Himeville
To Matatiele
To Matatiele
To Sterkspruit
To Zastron
To Zastron
To Dewetsdorp
Malut i
Mtns.
Drakensberg M
tns.
ThabanaNtlenyana3,482 m)
Makheka(3,461 m)
Njesuthi(3,446 m)
Mont-aux-Sources(3,282 m)
Seqoqo(3,394 m)
Thaba-Phafane
(3,250m)
ThabaPutsoa
(3,095 m)
Machache(2,885 m)
27°E 28°E 29°E
27°E 28°E 29°E
30°S
29°S
30°S
29°S
LESOTHO
0 40302010
0 10 20 30 Miles
50 Kilometers
IBRD 33434
SEPTEMBER 2004
LESOTHO
SELECTED CITIES AND TOWNS
DISTRICT CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
DISTRICT BOUNDARIES
INTERNATIONAL BOUNDARIES
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.
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