Document of

The World Bank

FOR OMCIAL USE ONLY

Rqur NN. 8990-LSO

STAFF APPRAISAL REPORT

LESOTHO

IMUSTRIAL AND AGROInDUSTRIES DEVELOPMENT PROJECT

NOVEKER 5, 1990

Iudustry and Energy Operations DivisionSouthern Africa Department

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CURRENCY EQUIVALENTS

Currency Unit - Maloti (M) (singular is loti)US$1.00 - M2.67 (March 1990)M1.00 - US$0.3771

ABBREVIATIONS

ADB - African Development BankBAPS - Business Advisory and Promotion ServiceBEDCO - Basotho Enterprises Development CorporationCBL - Central Bank of LesothoCMA - Common Monetary AreaDPD - Development Finance DivisionhIAS - Foreign Investment Advisory ServicesGOL - Government of LesothoTCOR - Increment.al Capital Output RatioD1F - International Monetary FundLADB - Lesotho Agricultural Development BankLBFC - Lesotho Building Finance CorporationLEC - Lesotho Electric CorporationLHDA - Lesotho Highlands Water AdministrationLHWP - Lesotho Highlands Water ProjectLIH - Lesotho Investment HoldingsLIPC - Lesotho Investment Promotion CenterLNDC - Lesotho National Development CorporationLNIC - Lesotho National Insurance CompanyLTC - Lesotho Telecomunnications CorporationMLAR - Minimum Local Asset RequirementMOA - Ministry of AgricultureMOE - Ministry of EducationMTI - Ministry of Trade and IndustryODA - Overseas Development AdministrationOJT - On-the-Job TrainingRSA - Republic of South AfricaSACU - Southern Africa Customs UnionSME - Small and Medium-scale EnterprisesUNIDO - United Nations Industrial Development OrganizationVTE - Vocational and Training Education

FISCAL YEAR

April 1 - March 31

FOR OmCIAL USE ONLY

LESOTHO

INDUSTRIAL AND AGROINDUSTRIES DEVELOPMENT PROJECT

Table of Contents

Page

Credit and Project Suummary .. ................ ........... . i-iii

I. Background .... ........................................ ....... 1-14

A. Salient Economic Features. .. . . . . . . . . . ........ . 1

B. Industrial Sector Ferformance and Issues ................. . 1C. The Agroindustrial Subsector ............................ 4D. Small-Scale Enterprises and the Role of Women ..... * 5E. Industrial Manpower and Skills Development ..... ... 6F. Financial Sector Performance and Issues ................ O.. 7G. The Policy Environment for Industrial Investment .......... 10H. Government and Bank Strategy ........ .................... 12

II. Project Related Institutions ................................. 15-27

A. Introduction ..... . .......... 15B. Institutions Participating in the Line of Credit .......... 15C. Institutions Participating in the Equity Funding,

Investment Promotion and IndustrialInfrastructure Components .......................... 17

D. Institutions Participating Only in the InstitutionalStrengthening Component ... ........ ........ ... ..... 25

III. The Project ....... ........ .............. .. ..... 28-41

A. Project Origin and Rationale for Bank Involvement ......... 28B. Project Obj ectiv esiand Design ......... 28C. Project Description ....... ..... ............. 29D. Policy Reforms .... ........................................ 33E. Cost Estimates ................................... ........ . 36F. Financing Arrangements ............ . ...................... 36G. Environmental Impact ................................. 37H. Procurement . ............. . ................. .... 38I. Disbursement ..... .... ..... ... ........... 40J. Accounts and Audit ....... ............. .................. . 41

IV. Project Tmplementation and Management ......................... 42-49

A. Line of Credit Component .. .... ............. ...... 42B. Equity Funding and Venture Capital Component . .. 44C. Agroindustries Component .... .. .... .. 46D- Industrial Infrastructure Component ... 46E. Institutional Strengthening Component ..... ... 46F. Overall Project Management, Monitoring, Evaluation .. 48G. IDA Supervision .................................. .. .... . 48

This document has a restricted distribution and may be used by recipients only in the performance Iof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

V. Project Benefits and Risks .................................... 50-52

A. Beneficiaries and Expected Benefits ........... 0* .......... 50B. Risks . .................................................... 51

VI. Agreements Reached at Negotiations and Recommendation ......... 53-56

ANNEXESs

Annex I - The Industrial Sector: Key Indicators

Table 1.1 The Structure of Economic Activity, 1967-1988Table 1.2 Ownership of Firms with Pioneer Industry StuatusTable 1.3 Th'. Structure of Merchandise ExportsTable 1.4 The Composition of Larger Firms in Manufacturing, 1986Table 1.5 Lesotho, Survey of Small-Scale Industries, 1989Table 1.6 Locations and Distributions of Small-Scale Industries, 1989

Annex II - The Agroindustrial Subsector Performance and Issues

Annex III - Financial Sector

Table 3.1 Composition of the Financial SectorTable 3.2 Comparative Performance of Lesotho BankTable 3.3 Comparative Performance Lesotho Bank and other BanksTable 3.4 Monetary SurveyTable 3.5 Selected Ratios of the Commercial BanksTable 3.6 Distribution of Commercial Bank Deposits by TypeTable 3.7 Commercial Bank's Loans and Advances to Business

Enterprises and Statutory Bodies (end of period)

Annex IV - Lesotho National Development Corporation

Annex V - Lesotho Bank

Annex VI - Lesotho Agricultural Development Bank

Annex VII - Basotho Enterprises Development Corporation

Annex VIII - Detailed Cost Tables

Annex IX - Terms of Reference - Technical Assistance

Annex X - Policy Reforms

Annex XI - Supervision Plan

LESOTHO

INDUSTRIAL AND AGRO-INDUSTRIES DEVELOPMENT PROJECT

CREDIT AND PROJECT SUMMARY

Borrowers The Government of Lesotho

Beneficiaries: Central Bank of Lesotho (CBL); Ministry of Trade and Industry(MTI); Lesotho National Development Corporation (LNDC);Lesotho Agricultural Development Bank (LADB); BasothoEnterprises Development Corporation (BEDCO); Ministry ofEducation (MOE); Ministry of Agriculture (MOA) and selectedagroindustrial parastatals; and the participating bankinginstitutions (PBIs).

Amount: SDR 15.1 million (US$21.0 million)

Terms: Standard IDA Terms, with 40 years maturity

OnlendintTermst Line of Credit. Government will pass US$4.7 million

equivalent of the IDA credit to the CBL at the onlending rateto PBIs minus a one percent administration fee. The CBL wouldonlend this amount in local currency at the prevailing averagecost of term deposits ia the banking system. The PBIs wouldonlend the funds in local currency at a variable rate based onmarket interest rates vith maturities ranging from a minimumof two to a maximum of twelve years, inclusive of graceperiods of up to three years. The PBIs would bear full creditrisk and would repay the CBL according to the same maturitiesof the individual subloans to final beneficiaries.

Equity Line. The GOL would provide US$1.9 million of the IDAcredit to LNDC which would manage the equity operation for afive percent fee through a mutual fund arrangement. TheGovernment would bear the foreign exchange risk and the IDAcommitment fee. Dividends and capital gains realized would bepassed back to the mutual fund.

Industrial Infrastructure. The GOL will provide US$2.5million to LNDC at an interest rate of 8.8Z (current IBRD rateplus 1OZ) for a period of twenty years including a graceperiod of three years. LNDC shall bear the foreign exchangerisk.

Agroindustries Component. The GOL would provide US$4.6million of the IDA credit to four agroindustrial parastatalsto finance management contracts and staff training. The fundswould be onlent at 8.8Z (current IBRD rate plus 1O) for aperiod of twenty years including a grace period of threeyears. Government would bear the foreign exchange risk.

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ProjectObiectives: The principal project objective is to encourage foreign and

indigenous investment in the industrial and agroindustriessectors. In particular, the project would (a) support policychanges to improve the environment for private investment; (b)help investors to take advantage of opportunities created bythe Lesotho Highlands Water Project; (c) support subcontractlinkages between the formal industrial sector and Small- andMedium-Scale Enterprises (SMEs); and (d) in the medium-termdiversify investment into higher value added and agriculture-based industries.

Pro3ectDescriptions The project broadly addresses constraints to investment

through interventions in the financial sector, investmentpromotion, agroindustrial development and strengthening of keyindustrial and financial institutions. Project components are(a) term credit and an equity fund designed to increase accessto financial services currently not available in Lesotho; (b)support for the commercial operation of key agroindustrialparastatals through management contracts and training; (c)support for timely provision of infrastructure for industrialestates; and Cd) institutional strengthening and training to(i) strengthen investment promotion, (ii) build the projectappraisal and management capacity of financial institutions,(iii) improve the institutional performance of LNDC, LADB andBEDCO, (iv) train entrepreneurs and labor in management andtechnical skills necessary to improve the quality andcompetitiveness of Lesotho-made products, and (v) carry outstudies to identify reforms and services needed to improveLesotho's investment environment.

Benefits: The project aims to encourage investment in labor-intensivemanufacturing. Promotion efforts would focus on diversifyingthe subsectoral composition of industry and encouraging highervalue added activities and industries based on agriculture.Project components are expected to generate about 3,500 newjobs over five years. The strong export-orientation of newfirms, given Lesotho's preferential market access, is expectedto improve balance of payments performance. Theagroindustries component would provide for the efficientoperation of key parastatals, reduce their drain on thegovernment deficit, improve the potential for privateagroindustrial development, and expand markets for high valuecrops. The institution building component would strengthenkey financial and industrial development institutions. Policyreforms, which remove distortions, disincentives andregulatory bottlenecks, are expected to reduce costs anduncertainty and thereby encourage private investment and theprovision of a fuller range of financial services.

Risk: Political uncertainty in South Africa (RSA) and the potentialremoval of sanctions against the RSA could jeopardize theproject's overall investment promotion objective. The risksurrounding the lifting of sanctions is mitigated by Lesotho'spreferential access to markets and low labor costs which still

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gives it an advantage over the RSA for export orientedinvestors. From Lesotho there is easy access both to thelarge and growing RSA market through the SACU arrangements andto external markets where preferential (tariff-exempt) accessis available to Lesotho through the Lome Convention andGeneral System of Preferences arrangements. While theprospect of political change in RSA has so far positivelyaffected investor attitudes towards the region, if the processis prolonged and internal unrest grows, investor attitudes maychange. On the other hand, changes in South Africa's economicdevelopment policies away from heavy subsidies for investorsin the 'homelands' should enable Lesotho to compete forforeign investment on more even terms. The erodingcompetitiveness of Basotho labor in the region with respect towages and skills jeopardizes a principal comparativeadvantage. This risk is mitigated by the project manpower andskills training prog.-am and by policy reforms related to thesetting of wage rates. The principal risk to the developmentof financial markets is that the government deficit will againcrowd cut financing to the private sector. This is mitigatedby the successful expenditure control program beingImplemented by the PFr/lSAP program.

Project Cost Summary Local Foreign +Total---- USS (millions) -----

Investment Credit 2.4 4.7 7.1Equity Financing 0.6 1.9 2.5Foreign Investment Promotion 0.7 0.6 1.3Indigenous Investment Promotion 0.3 0.2 0.5Skills Training and Trade Testing 0.1 0.4 0.5Agro-Industrial Development 0.0 4.6 4.6Technical Assistance and Training 0.0 4.1 4.1Beneficiary Assessments and Studies 0.0 0.2 0.2Industrial Infrastructure .5 2.5 3.0

Total Base Costs 4.6 19.2 23.8Contingencies 0.2 1.3 1.5Total Project Costs 4.8 20.5 25.3

Financing Plans

IDA 0.5 20.5 21.0Project Sponsors 1.4 0.0 1.4LNDC 1.1 0.0 1.1PBIs 1.5 0.0 1.5Government 0.3 0.0 0.3Total 4.8 20.5 25.3

Estimated Disbursements (US$ million)

FY91 FY92 FY93 FY94 FY95 FY96

Annual 1.5 1.5 4.0 4.0 5.0 5.0Cumulative 1.5 3.0 7.0 11.0 16.0 21.0

I. BACKGROUND

A. Salient Economic Features

1.01 Surrounded by the Republic of South Africa (RSA) and with anextremely limited natural resource base, Lesotho's economic development isnecessarily highly dependent on the RSA. About half of Lesotho's malelabor force works in the South African mines; their remitted incomesaccount for about 45X of Lesotho's GDP and 70? of its external accountreceipts. Similarly nearly half of the Government of Lesotho (GOL)revenues come from the South African Customs Union (SACU) in the form ofrebated customs duties on Lesotho's foreign goods imports. Receipts onexports cover only a tiny proportion of expenditures on imports. Ninety-five percent of imports come from the RSA, and 80S of exports are soldthere.

1.02 Lesotho's economy faces a problematic but potentially promisingmedium-term future. On the negative side is the deep vulnerability fromLesotho's dependency on the RSA, where the post-apartheid economic andpolitical future is uncertain. There is also the formidable difficultyassociated with 352 unemployment, labor force growth of 20,000 persons ayear, and stagnant employment opportunities for migrant workers in SouthAfrica. On the positive side, a comprehensive structural reform programhas made substantial progress in reducing the government deficit and itsreliance on domestic bank financing; also, there are favorable trendsinvolving foreign direct investment as a means of industrial developmentand employment generation. Above all, the Lesotho Highlands Water Project(LHWP) will provide a long-term opportunity for Lesotho to broaden andstrengthen its economic base. The project's direct benefits to the economywill come from construction and service contracts, water royalties, andincreased customs revenue to the Government. Potentially large indirectbenefits could accrue to the industrial sector from spinoff opportunitiesresulting from generally increased demand in the economy. A principalobjective will be to capture these benefits for Lesotho's long-run economicdevelopment. Given the heavy foreign and RSA domination of the Lesothoeconomy, with few linkages to indigenous suppliers, the proposed projectinvestments would focus on development of indigenous enterprises and theirpotential to benefit from LHWP opportunities and contracts with foreignindustrial enterprises.

B. Industrial Sector Performance and Issues

Performance

1.03 During the past 25 years, Lesotho has managed to build a smallbut significant industrial sector. From less than 1S of GDP in the mid-1960s, the sector now accounts for about 11? of GDP (Annex I, Table 1.1).Over a 20-year period, the sector has grown an average of 18S per annum,which is exceptional by the standards of contemporary Africa. Three

principal characteristics are apparent in Lesotho's industrial developments(a) an enclave-like formal sector that is dominated by fore..gn firms; (b) ahighly distorted agro-industrial sector, dominated by state-ownedenterprises; and (c) an indigenous enterprise sector where financing andpromotional needs have not been effectively addressed by policy and otherinterventions.

1.04 A surge in foreign investment in the late 1970s and into the1980C was primarily motivated by trade-related reasons, especiallyintensified worldwide economic sanctions against the RSA. Also, to avoidMulti-Fibre Agreement quotas, certain Asian producers relocated part oftheir production to such countries as Lesotho and Mauritius. Lesotho'sembryonic electronics sector also owes its existence largely to this quotaavoidance and to trade sanctions against the RSA. It is easier, and legal,for RSA firms to import critical electronics components if the importingfirms are based in Lesotho rather than in the RSA itself. Thus, half thefirms in the sector in 1986 either were wholly owned by foreigners or werejoint ventures with foreign partners. RSA-owned firms avoiding sanctionshave been particularly important, representing half of all foreign-ownedfirms in the sector. This trend appears to be continuing. By 1986, thewholly foreign-owned and joint venture companies accounted for 77Z of thejobs in the formal industrial sector (Annex I, Table 1.2).

1.05 These firms have made industrial exports the most buoyantelement of Lesotho's total exports. In 1987, manufactured products hadgrown to nearly 60Z percent of total export value, compared with only 25Xin 1981 (Annex I, Table 1.3). Indeed, Lesotho's trade regime is reasonablyoutward oriented. SACU tariffs and surcharges are rela:ively low, andduties are refunded on raw materials embodied in export products.

1.06 Lesotho's attractiveness as an investment location is due to itspreferential market access as follows:

First, Lesotho, being a member of SACU, enjoys unrestricted access tothe RSA market of 30 million people;

Second, Lesotho-made products enjoy duty-free access to the EuropeanEconomic Community (EEC) of 300 million people 11 because Lesothois a signatory of the Lome Convention; and

Third, the Generalized System of Preferences (GSP) provides Lesothowith special advantages, particularly in the U.S. and Japanesemarkets and, to a lesser extent, in the larger Commonwealthcountries.

1! That is, provided that the products exported have been subject to enoughtransformation in Lesotho. For many products this is achieved if the tariffheading of the finished product is different from that of the product beforetransformation. However, the rules are more stringent for sensitive productssuch as textiles and footwear.

Comparable arrangements under the NordiclSADCC accord and the PreferentialTrade Area in Southern and Eastern Africa, which Lesotho joined in 1984,provide similar benefits.

1.07 Although the RSA is the most important export market for Lesotho-- and is the most important single source of new foreign investment --from 1984 to 1988 South Africa's share of Lesotho's exporcs declined from93.62 to 792. Interestingly, as Lesotho's exports have grown drax.stLcally(threefold since 1984) so has the relative importance of the EEC and U.S.markets. The share of exports to the U.S. has grown from less than 1? to12.7Z, and exports to the EEC have increased from H1.9 million to M9.7million in that period.

1.08 A final characteristic of the industrial sector is the clearimprovement in the efficiency of capital use. From the mid-1970s to theearly 19809 the incremental capital - output ratio (ICOR) declined from 8to about 3, comparable to the East Asian ICORs during their period oflabor-intensive industrialization. Statistical evidence indicates no cleartendency for labor productivity to rise. This would signify that theindustrial sector plays its role in employment creation (i.e. 2,000 jobs inthe early 1970s rising to about 10,000 by the end of the 1980s) partly byfailing to use available labor-saving technology. Also, structuralchanges, including the increased importance of garment manufacturing, implygreater labor intensity. Throughout the period 1969 to 1988, employmentrose more rapidly than output.

Issues

1.09 Despite this strong economic performance, there are issues.First, a close interdependent network among firms has not emerged inLesotho. Rather, a variety of simple linear sourcing relatlonships exists,mainly back to the RSA and outwards to the RSA and international markets.The large and active subsector of very small Basotho enterprises is notwell integrated with medium and larger enterprises. As a result, theforeign sector has not contributed significantly to the process oftechnology transfer and the building of the indigenous sector throughsubcontract linkages (paras. 1.17 to 1.20).

1.10 While agroindustrial development has high priority in terms ofproviding an outlet for agricultural production (agriculture employs themajority of the population), extreme distortions in that subsector haveretarded private investment. If agroindustrial development is to fulfillits potential in terms of incomelemployment generation and linkages betweenLesotho's indigenous resource base and the dynamic industrial sector,removing these distortions will be essential (paras. 1.14 to 1.16).

1.11 Second, the subsectoral composition of the sector is narrow andheavily concentrated on subsectors with low domestic value added and fewlinkages with the domestic market (textileslgarments) and on state-ownedenterprises (food and beverages). Over half the firms in 1986 were in thethree areas of food and beverages, textiles and garments, and footwear(Annex I, Table 1.4). Textiles and garments has, with 33? of all firms,the largest presence in the sector. However, average employment and value

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added were relatively small, accounting respectively, for 282 and 20? oftotal industrial employment and value added. The food and beveragessubsector dominates in terms of output and employment. With only about 12Zof total firms in the sector, this subsector accounted for 282 ofemployment and 54? of value-added, a result partly explained by the highdegree of protection for the agro-industrial subsector.

1.12 Third, industrial development is motivated more by transitoryinternational economic and political circumstances (sanctions) than by thepolicies of the Lesotho government itself. Lesotho's industrial incentivespolicy has consisted mainly of subsidized loans, provision of factoryshells, and a tax holiday system, instead of provision of carefullytargeted services and infrastructure. Regulations that increase investorcosts of doing business have been compensated for by tax expenditures(through the tax holiday) that are excessively costly in terms of foregonerevenue. In addition, subsidized lending policies have seriously affectedthe performance and viability of key non-bank financial institutions.Resources would be more cost-effectively directed toward improving servicesand infrastructure to attract export-oriented firms from abroad.

1.13 While a low-cost, highly educated labor force is one ofLesotho's comparative advantages that attracts foreign investment, the GOLhas no clear manpower development strategy to increase the supply ofskilled labor as the basis for more diversified and sophisticatedindustrial investment. These issues are explored in more detail below(paras. 1.21 to 1.25).

C. The Agroindustrial Subsector(Annex II provides a detailed discussion)

1.14 Agroindustries dominate the industrial sector in terms ofemployment and value added. Within the subsector, publicly-ownedinvestments, concentrated in a few sizeable parastatals, contribute about63? of total agroindustrial GDP. The financial performance of the majorparastatals generally has been poor. Most have persistent financial lossesthat have eroded equity and required the massive infusion of governmentbudgetary resources. Government budget transfers to agroindustrialparastatals increased from M6.0 million in 1983184 to almost M27 million in1987188, a nearly five-fold increase (see Annex for discussion of the majoragro-industrial parastatals).

1.15 The principal reasons for this poor performance ares

a) Poor management and organization. The management teams arecivil servants or bureaucrats without appropriate training andexperience in business or commercial management (the exceptionsbeing the feed mill and the brewery, with contract managementand management by a private joint venture partner,respectively). Parent ministries, in most cases the Ministry ofAgriculture, dictate policy, which is often in conflict withcommercial objectives; the ministries also control resources and

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employment. In many cases plants are built with substantialexcess capacity, which further limits viable operations; and

b) Inappropriate policy environment. GOL uses some of theparastatals as instruments for achieving specific policyobjectives. For example, the marketing policy for meat and meatproducts attempts to establish a close linkage between thenational abattoir and implementation of a range destockingpolicy. However, the abattoir is obligated to purchase allcattle irrespective of quality, thereby encouragingovzrstocking, overgrazing and the socially acceptable buteconomically inefficient custom of holding livestock as assets.

1.16 A more pervasive conflict is GOL's policy of using theparastatals as instruments of social and income distribution, both at theconsumer and producer levels. Annex II, Table 2.4 summarizes thesubstantial subsidies accorded by the parastatals, which include up to a1002 subsidy of producer eatablishment costs for specified vegetables, a742 subsidy on agricultural machinery rental charges, a 712 subsidy onslaughter charges at the abattoir, and substantial price subsidies toconsumers of milk and poultry. The impact of these subsidies is farree-ting. They affect the parastatals' financial results and introducedistortions that discourage or make the private sector's participation incompetition with the parastatals impossible. As a result, privateagroindustrial investment has declined substantially. By 1988 itscontribution to agroindustrial GDP had fallen to 372 from about 542 fouryears earlier.

D. Small-Scale Enterprises and the Role of Women

1.17 Overwhelmingly, Basotho-owned industrial enterprises belong tothe small scale, or even microenterprise, sector. Low levels ofentrepreneurship, scarcity of personal financial resources, and lack ofindustrial tradition and experience have limited business development tothose who have failed to find other employment, i.e. women and men unableto make a living from agriculture or unable to obtain employment in theSouth African mines. The SME sector employs about 4,000, which combinedwith the formal sector, brings total industrial employment to about 14,000.

1.18 A recent survey of the sector (Annex I, Table 1.5) indicatesthat over 602 of SMEs are run by wmen engaged principally in knitting,sewing, leather work and handicraft production. Another 152-202 ofindustrial SMEs are engaged in woodworking, and the remainder in metalwork,brick, and concrete block production, and in maintenance and repair work.Significantly, there is little evidence of small-scale food processing,usually a subsector in which SMEs predominate but which in Lesotho isdominated by state-owned companies.

1.19 With estimates that 50X of the adult male labor force (150,000men) are migrant workers in South Africa, mostly in the mines, this leaveswomen with increased economic and social responsibilities as principalincome providers and heads of household. Most women work in the low-

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productivity rural subsistence farming sector. Women in the urban areasengage in small business activities (street-vending, working in cafes,making handicrafts, or dressmaking, hair dressing, and other cottageindustries), most of which require little start-up capital and offersporadic and uncertain profit.

1.20 In addition, women-owned businesses suffer from discriminatorylaws (which require husbands to sign for bank loans), as well as otherproblems common to smali businesses, including: (a) ignorance of how toapproach governmental authorities for vital business information; (b)ignorance of potentially viable projects to undertake in terms of anindividual's skills and financial base; (c) lack of technological know-howand market opportunities; (d) lack of information on how to start andoperate a business successfully (i.e. managerial and financial skills); and(e) lack of knowledge about sources and procedures to procure financialresources. 2/

B. Industrial Manpower and Skills Develooment

1.21 For the future, Lesotho's competitiveness as a supplier ofrelatively inexpensive labor, one of its principal assets, must be givengreater consideration. Table 1.1 compares Lesotho's minimum wages withthose in other SACU countries. Skilled and semi-skilled workers, wagerates (and hence industrial wage costs) are relatively high, mainly due toabsolute shortages of trained workers in relation to industrial demand.This, in turn, suggests the need for rapidly expanding the country's supplyof skilled manpower over the medium term. Vocational and technicaltraining programs have been slow to develop, however. As af 1986, onlyabout 1,800 students were being trained in pre-service industrial-commercial courses, far short of requirements.

1.22 To address this problem the GOL has recently begun steps toimprove the quality and relevance of pre-service vocational training, interalia, by: (a) standardizing curricula and examinations in some key trades;(b) involving industry representatives in shaping course content; and (c)increasing the practical content of the courses through emphasizingsystematic industrial connections (e.g., apprenticeships) for students.Industry's own strategy for meeting its demand for skilled workers has beento provide on-the-job training (OJT), e.g., through pairing new hires with

21 Various organizations are in the process of formation in an effort tooffer financial and advisory services to women: the Lesotho branch of Women'sWorld Banking (WWB), Women in Business (UIB), and the National Council ofWomen (NCW). Their goals include (a) organization of research, workshops,seminars, lectures and training programs for women; and (b) professional womenadvising other women and helping them gain contacts with funding agencies,banks, etc. NCW, an NGO, provides a two-year vocational and entrepreneurialskills development program. WWB, once formally established, would providebanking services to women with financial resources initially supplemented bythe United States-based WWB Headquarters.

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experienced skilled workers, training workers in parent plants abroad, orbringing in trainers to develop skills in-plant.

Table 1.1: Minimum Wages in Southern Africa Region

(Rand per month)

Lesotho 189Swaziland 192-200Botswana 198RSA

Kwazulu 196Qwa Qwa 280Ciskei 264

1.23 In-service skills development has been supported by LNDC, which,with assistance from IDA, ODA and ADB, introduced a training grants schemefor new and expanding firms. The scheme covers 75Z of the costs of in-service skills training, including subsistence. travel, tuition and wagecosts during training periods. Eighty percent of beneficiary companieshave been export oriented. The grants scheme is thus dual-purpose,increasing the supply of skilled workers in Lesotho vhile being anincentive to investment through subsidizing wage costs.

1.24 In general, OJT or in-service training (as opposed to formalpre-service programs) is cost-effective for rapidly increasing the supplyof skilled workers -- there is little risk of irrelevance of the trainingtopics and content, and firms are likely to be more cost-conscious thantraining institutions tend to be.

1.25 The main drawbacks are that training standards are uneven acrossfirms and that training is often too narroi. in scope to allow forflexibility among trainees to adapt to changing technologies and industrialskills requirements. A program of systematic skills testing is needed toensure the adequacy of skills learned on the job, and would be aninducement to prospective investors by certifying specific manpower skills.

F. Financial Sector Performance and Issues 31

1.26 The following paragraphs highlight key financial sector issuesto be addressed by the proposed project. Key financial indicators areprovided in Annex III of this report, and appraisals of key financiaiinstitutions are provided in Annexes IV, V, VI and VII.

3t For a detailed discussion of the financial sector see a grey cover report -Lesotho Financial Sector Review (Report No. 8021-LSO, April 16, 1990).

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1.27 Background. Lesotho's financial system consists of a CentralBank (since 1982), three commercial banks, 41 two specialized banks, anda rural credit system of 73 rural credit unions. The specialized deposit-taking institutions are the Lesotho Agricultural Development Bank (LADB)and the Lesotho Building Finance Corporation (LBFC). In addition, thereare two development finance companies, the Lesotho National DevelopmentCorporation (LNDC) and the Basotho Enterprises Development Corporation(BEDCO), which are funded by the Government and by foreign loans andgrants. The LNDC concentrates on larger enterprise development; BEDCOdeals with the smaller end of the market. LNDC, BEDCO and LADB wereestablished to promote industrial and agro-industrial investment byproviding low-interest rate financing and highly subsidized services, andby making direct investments. The Lesotho National Insurance Company (LNIC)represents the insurance industry. The Central Bank adequately supervisesthe banking institutions, which are largely self-regulating. A principalweakness is on-site surveillance, a gap being filled by a recentlyappointed IMF advisor, however.

1.28 Lesotho's financial structure is in many ways an extension ofthe South African financial system. Membership in the Common Monetary Area(CMA), which allows free flow of financial resources across borders,constrains Lesotho's implementation of a monetary policy independent ofSouth Africa. The financial sector is not well developed, partlyreflecting Lesotho's access to a full range of sophisticated financialservices in the RSA. Most financial activity in Lesotho is short-termoverdraft lending by the commercial banks to their traditional clients onthe basis of strict collateral requirements. Despite the proximity of theJohannesburg stock exchange, Basotho entrepreneurs, especially in the smalland medium-scale range, effectively have no access to equity markets. Theprincipal void in Lesotho's markets is the lack of loan and equity financefor indigenous borrowers who have viable projects but no traditionalcollateral or bank track records.

1.29 Financial policy has focused on the channeling of resources intothe Lesotho economy. For example, the 1981 Minimum Local Asset Requirementmandates a minimum of 85? percent local use for domestically generatedresources as a mechanism to limit banks' investment of these resources inthe RSA. The Miners Deferred Pay Fund was established from the GOL policyrequirement that 60? of migrant miners' pay be directly remitted to Lesothoby the RSA mining companies.

1.30 The effect of these policy parameters is mixed. First, thecommercial banks are financially sound and market oriented as a result ofhaving been relatively free from Government interference. Key interestrates (prime lending and the short-term treasury bill rate), althoughadministratively set by the Central Bank, closely track South Africanmarket rates, thus staying in line with the true cost of capital.Exceptions are the savings deposit rate (a short term deposit instrument)which is set above the market rate and above term deposit rates as a means

4/ The commercial banks include the Government-owned Lesotho Bank as well aslocal branches of Standard Chartered Bank and Barclays Bank.

of protecting small savers against the market power of the banks. Also,long-term government bond rates are set below market-determined yields paidon equivalent South African bond instruments. These non-market basedpolicies combined with the absence of demonstrated profitable long-terminvestment oppcrtunities, such as investment (term) lending, havecontributed to banks' lack of incentive to mobilize term resources.Generally deposit interest rates are substantially below those in SouthAfrica reflecting bank liquidity and banks' claim that there is a dearth ofbankable projects in Lesotho for which to mobilize additional resources.

1.31 Second, while the Minimum Local Asset Requirement has beeneffective in keeping resources in Lesotho, the policy's chief objective: toencourage local investment, has been unsuccessful. Banks' domestic creditto the private sector fell substantially to 32S of the total after thispolicy became effective. This is largely due to the crowding out effect ofthe Government deficit and the extremely attractive 30Z-plus yields (taxinclusive) on Government paper, which have far exceeded the 202 primelending rate. 51 Thus, the principal effect of the MLAR has been toprovide domestic financing for the Government's budget deficit.Expenditure control under the IMF program has reduced the deficit from 1O0in 1988/89 to 6.12 of GDP in 1989/90. The deficit is expected to fall to3.12 of GDP during the current FY90191, making the Government a net repayerto the banking system and increasing the supply of lendable resources forprivate investment.

1.32 Banks have remained conservative partly because more aggressivelending practices have not been necessary to maintain highprofitability. 6/ The challenge now is to encourage banks to expandcredit to the private sector.

1.33 Although banks have liquidity, they have few term resources tosupport investment lending and do not aggressively practice maturitytransformation. While the current small volume of term project lending isbased on renewing short-term loans, business planning requires availabilityof more predictable financial instruments. Expanded availability of termlending instruments, in turn, requires that banks mobilize term depositresources.

1.34 Third, the performance of the parastatal Lesotho NationalDevelopment Corporation (LNDC), Lesotho Agricultural Development Bank(LADB), and Basotho Enterprises Development Corporation (BEDCO) has beenweak as a result of their being used as instruments of development policy.

51 During 1989, for example, T-Bills were earning 20.122 and given their taxfree status, an alternative asset would have had to earn a taxable 36.61 togive it an equivalent rate of return. This compares to a prime rate onlending of only 201. Thus the government had created a strong disincentive toprovide loans to the private sector.

6/ While switching en masse from lending to riskless T-Bill instruments,banking sector returns on average assets increased dramatically from 3.52 to5.4S between 1988 and 1989.

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The issues affecting these non-bank financial institutions and projectinstitutional strengthening efforts are explored in Chapter II on ProjectRelated Institutions.

G. The Policy Environment for Industrial Investment

Background

1.35 Paras. 1.14 to 1.16 on the agroindustrial sector and paras. 1.30to 1.34 on the financial sector indicated distortions which impedeeconomic efficiency, private investment, and the development of newfinancial instruments to support investment. In addition, the recentdiagnostic review of Lesotho's investment environment 7/ revealedaspects of the regulatory and institutional framework that reduce thecountry's attractiveness to private investors by imposing high costs anduncertainty. The principal issues are as follows:

Industrial Sector Policies

1.36 To date the GOL has relied on a tax holiday as a principalpolicy instrument to promote industrial investment. The tax holiday hasseveral anomalies and weaknesses. First, since trade and market access arethe principal motivations for investors to come to Lesotho, a complete taxholiday bestows a windfall to companies that would have located in Lesothoin any case. The argument that non-tax reasons are the principalmotivation for investing in Lesotho is made more compelling by the factthat investors choose Lesotho over the South African homelands whereinvestment tax concessions as well as other subsidies are far moreattractive. Second, access to the tax holiday is wrapped in anadministratively cumbersome decision-making process by the PioneerIndustries Board, thus introducing uncertainty into the investment process.Third, the tax holiday is perceived as available only to larger foreignenterprises. Finally, the tax holiday introduces a short-term time horizoninto the investment planning process and hence encourages "foot-loose,industry, with no commitment to develop longer-term linkages within thecountry.

1.37 Processing of Work Permits. In most developing countries,foreign investors are motivated to replace expatriate workers and managersquickly with locals because of the exceptionally large salaries andbenefits expatriate staff often require. Lesotho, however, poses anexception given its proximity to South Africa where managerial staff can berecruited at no additional expense. Sensitive to the employment needs ofits people, the GOL carefully controls the number of expatriate workers toensure counterpart training and to generate opportunities for Basothoemployees to move into management positions. The effect of this policy hasbeen to introduce unacceptable delays and uncertainty in the processing ofwork permits.

7/ Diagnostic Review of Lesotho's Investment Environment, May 1989, by theForeign Investment Advisory Services (FIAS).

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1.38 Land Availability. The Land Act, No. 17, 1979, provides thatall land in Lesotho is vested in the Basotho Nation and held by the Stateas the representative of the Nation. The Land Act further provides thatforeigners or majority foreign-owned companies cannot be granted leases bythe state and can only hold sub-leases from a head lessor, a representativeof the State. Presently access to most industrial land is through LNDC ona sub-lease basis. While LNDC has done a commendable job of developingindustrial land, its monopoly over the availability of land for thispurpose has been problematic and a time consuming bottleneck. For example,while LNDC can grant a maximum sub-lease term of 30 years, in practice thelease is on average for less than 10 years, with terms for continuance andrenewal which greatly increase investor's perceived tisk. Banks arereluctant to accept sub-leases held by foreign concerns as collateral forloans due mainly to the terms of the sub-leases imposed by LNDC. While inprincipal indigenous entrepreneurs can receive land grants directly fromthe Ministry of Interior without passing through LNDC, they faceoverwhelming delays and bottlenecks in obtaining land from the LandCommission. Mechanisms to improve the availability, transferability andcollateral quality of land could be achieved in part by opening competitionwith LNDC for the provision and development of industrial land.

1.39 Control of Natural Resource-Based Industry. To protect naturalresources for the benefit of the people of Lesotho and against control byforeigners, the Government has pursued a policy through LNDC of requiring512 equity in 'priority projectsO. Feedback from investors, howeverindicates their deep dislike of sharing equity with a government. Indeed alarge pipeline of "priority projects, has, over the years, gone wanting forsubstantial investment and development in part because of this problem.

1.40 Wage Policy. The Government recently increased the minimum wageby 51Z to restore the purchasing power of wages eroded by inflation and toprovide a 'real' increase in the living standards of Basotho workers.Investors have indicated that this dramatic change may have erodedconfidence, however, since to plan operations, investors must be able tocount on stable policies. Further, there are indications that the recentincrease may have eroded Lesotho's competitive position vis-a-vis othersouthern African countries.

1.41 Industrial Infrastructure in Lesotho is not adequate. Electricconnections and installation of telecommunications are subject to seriousdelays which frustrate investors and delay commencement of theiroperations. Indeed, the provision of basic infrastructure is an essentialelement of an attractive investment environment which is frustrated inLesotho partly by lack of financial resources in the relevant institutions,and partly by disagreements between the Lesotho TelecommunicationsCcrporation (LTC) and the Lesotho Electric Corporation (LEC), on one hand,and LNDC, on the other, regarding cost sharing, construction standards andthe timing of availability of planning information regarding industrialeqtate occupancy.

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H. Government and Bank Strategy 8/

1.42 Although industrial sector growth has been dramatic, weaknessesin the policy environment and institutional structure have contributed to aquality of investment which is not optimal from a longer term developmentperspective. The Government and IDA have jointly developed a strategyfocused on policy reforms and expanded access to financial and investorservices intended to diversify and deepen output and the export base. Inthis strategy a strong emphasis is placed on the development of small andmedium-scale indigenous enterprises. An Industrial Sector Strategy Paperhas been discussed and agreed with the Government as the strategic approachto be taken in the proposed and future projects in the sector. Theprincipal strategy elements to be supported by the proposed project arediscussed below.

Policy Reform Program

1.43 Policy reforms to address distortions, disincentives andregulatory bottlenecks are needed to improve the environment for privateinvestment as the basis for the investment promotion focus of IDAassistance. A principal objective of the policy reform program would be toeliminate the costly tax holiday system and at the same time eliminatecostly regulations which incentives are intended to compensate.Beneficiary Assessments (BAs) and a Joint IDA/GOL Mid-term Review of thestrategy based in part on the BAs would e aluate investor attitudes as thebasis for additional and ongoing reforms.

Promoting Foreign Investment and Linkages

1.44 In the medium-term a focus on foreign investment is necessary,given the low state of development of Lesotho's indigenousentrepreneurship. GOL's challenge will be to attract further foreigninvestment through provision of adequate industrial infrastructure (i.e.serviced factory shells) and active investment promotion efforts.Investment promotion would (a) focus on diversifying the sources andsubsectoral composition of investment, (b) emphasize Lesotho'sattractiveness in terms of labor-intensive production and its preferentialaccess to the growing RSA market and to other export markets, and (c)develop programs which deepen linkages within the economy.

1.45 The recommended investment promotion strategy capitalizes onLesotho's current ability to attract labor intensive export-orientedindustry. Over time, as project interventions lay an appropriategroundwork, investment promotion would emphasize introducing higher valueadded industry, industries linked to the agricultural base of the country,

8/ The Lesotho Ind&strial Sector Strategy Paper is circulating as a separatedocument.

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and export-oriented industries 91. Reforms in the agroindustrialsubsector would lay the groundwork for development of viable agriculturebased industries. Skills training programs would improve the quality andavailability of key skills in the economy as the basis for labor-intensiveproduction.

1.46 To promote development of linkages between indigenousenterprises and foreign firms, it is recommended that a 'patrons' and"mentor program be established which would match foreign companies withlocal firms in an ongoing advisory relationship. The programs are intendedto improve the capacity of indigenous entrepreneurs to play asubcontracting role -- linkages which would contribute to deepening ofLesotho's industrial base. This building of indigenous productioncapacity, transfer of technology and market knowledge would ensureindustrial continuity should external motivations and trade factors, whichdrive foreign investors, change.

Development of Small and Medium-scale Indigenous Enterprises

1.47 Strategy in this area is intended to redress the presently highdependence of the industrial sector on large and mainly foreign-ownedcompanies. The large number of potential new business opportunities openedup by the LHWP provide an excellent opportunity to launch a new BusinessAdvi3ory and Promotion Service (BAPS) to encourage the emergence andexpansion of independent entrepreneurs. There already exist degrees ofcooperation between various institutions in the country which supportindigenous investors. However, there is presently no arrangement whichpools information about the various support services which could be madeavailable to meet the needs of different small businesses. Therefore acentral function of the BAPS would be to provide a "one stop' service tolink these operations and enhance awareness of their different functions.BAPS would also maintain intelligence about the industrial demands comingfrom larger companies including contractors to the LHWP.

Expanded Access to Financial Services

1.48 The Lesotho Financial Sector Report recommended a strategy thatbuilds on existing strengths of Lesotho's financial sector. Principalobjectives are to:

(a) increase access by small and medium-scale enterprises tofinancial services by (i) supporting project- (versuscollateral-) based lending through Lesotho's commercial banksand (ii) supporting LNDC's development of an equitylventurecapital capacity to fill a void in Lesotho's financial system;

91 The advantage to exporting firms of locating in Lesotho will continue evenafter sanctions against the RSA are removed, since preferential market accessis reserved for low-income developing countries, which the RSA is not.Le6otho's access to both the RSA and other markets will become even moreimportant if a post-apartheid regime in South Africa improves the economicopportunities and purchasing power of the huge black South African market.

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(b) improve the incentive structure with emphasis on policies thatencourage more competitive banking practices. It wasrecommended that low-yields offered on long-term treasury bondsbe increased to reflect market rates offered on South Africanbonds and that the tax-exempt treatment on treasury bills beeliminated. These reforms would remove distortions thatdiscourage the mobilization of term resources and moreaggressive lending practices;

(c) eliminate subsidized interest rate policies by financialinstitutions, and use the subsidy elements of concessionalfunding to finance improved services for the establishment ofviable businesses;

(d) ensure sufficient supervision and regulation of the bankingsystem to cope with the greater risks ensuing from moreaggressive lending and the introduction of new financialinstruments; and

(e) reorient the activities of LNDC, LADB and BEDCO intended toimprove their performance consistent with their comparativeadvantage in the financial system.

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II. PROJECT RELATED INSTITUTIONS

A. Introduction

2.01. The project addresses the objective to promote industrialand agroindustrial investment by providing term finance and equity fundingand by strengthening and expanding services in several industrial andfinancial institutions (see Chapter III). The main institutions involvedin the project are discussed below.

2.02 Only institutions appraised as being creditworthy wouldparticipate in the line of credit component (paras. 3.07 and 3.08). Theseinclude Lesotho Bank, Standard and Barclays Banks. The Lesotho NationalDevelopment Corporation (LNDC), Lesotho Agricultural Development Bank(LADB), and Basotho Enterprises Development Corporation (BEDCO), which arenot presently eligible to participate in the line of credit because ofweaknesses in their capacity to manage lending operations, nonetheless playvaluable roles in Lesotho's industrial and financial sectors. Aspects oftheir operations in which they have comparative advantages relative toother institutions will be improved under the project institutionalstrengthening program focused on: (a) reorienting LNDC's activities towardequity venture capital financing and investment promotion; (b)restructuring LADB's weak operation in preparation for its overall role incommercial banking (not just agriculture banking) in the future; and (c)eliminating BEDCO's lending activity and reorienting it toward provision offactory and workshop space and project preparation assistance to SMEs.LNDC and LADB's potential participation in the credit line is strictlyconditioned on their undertaking resource-mobilization and other measuresto put their credit operations on a viable and sustainable basis.

B. Institutions Participating in the Line of Credit

The Central Bank of Lesotho (CEL)

2.03 The Central Bank would manage the project-supported line ofcredit, supervise commercial bank training, and implement financial sectorpolicy reforms. The Central Bank has accepted the financial sectorstrategy discussed in para. 1.48 and detailed in the Lesotho FinancialSector Report, and will play a lead role in its implementation. To thatend, CBL management is committed to removing key distortions in the pricingof treasury bills and long-term bonds, which constrain the mobilization ofterm resources and reduce Banks' incentives to lend to private projectsrather than to the Government.

2.04 The Central Bank organization includes a Board of Directors, andfour key departments: Operations, Supervisory Setvices, Research, andInternal Audits. Within the Operations department a Development FinanceDivision manages the Export Finance and Guarantee Scheme as well as otherpotential donor-operated credits. Its staff consists of a Manager, aCredit Guarantee Officer, a Credit Policy Officer, and an advisor (financed

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by the International Trade Center of UNCTAD). The staff have degrees ineconomics and business administration, and all have strong experience inproject finance, appraisal and general banking. The DFD has successfullyestablished the Export Credit and Guarantee Scheme and educated Banks andexporters on its operation. DFD would undertake a similar informationdissemination and training role under the project. To date it has handledthe review, monitoring of accounting, disbursements and repayments forMUO.O million in export credits.

2.05 CBL has a comprehensive legal mandate with respect to bank andinsurance company supervision on the basis of the Central Bank of LesothoAct and the Financial Institutions Act, 1973. 1/ CBL's SupervisoryServices department receives monthly reports from the commercial banks, theLADB, and the housing finance corporation (LBFC). These data tend to beeconomic rather than prudential, although supplemented by profitabilityinformation. However, no data are collected on portfolio quality, and theprofitability data are not particularly informative. As a result, off-sitesurveillance has previously had difficulty detecting early indications ofdeteriorating performance. Currently, on-site inspection is nonexistent.CBL management recognizes, however, that institutional strengthening inthis important area is important. In 1989, an IMF financed BankSupervision adviser was hired to build up the skills of local staff. Withthis assistance, it is expected that the Department will develop on-siteinspection capability and improve the prudential quality of reportedinformation. The first on-site inspection is expected to take place inlate 1990. CBL is judged to have the capacity to adequately monitor theperformance of financial institutions participating in the project and takeremedial actions as required to maintain their creditworthiness.

2.06 Given the strictly administrative and monitoring role that theDevelopment Finance Division is to play in the project, there is no issueof conflict of interest between the Central Bank's supervisory/regulatoryfunction and its participation in the project.

Participating Banking Institutions

2.07 Lesotho Bank, Standard and Barclays Banks are all highlyprofitable, earning in 1989 returns on average assets of 4.4Z as a group.Lesotho Bank's return was 4.12 and Standard's return was 5.4Z. LesothoBank, 10OZ Government-owned, is the largest commercial bank with totalassets at end 1989 of M432.2 million, representing approximately 60Z oftotal commercial bank assets. Standard and Barclays share the remaining40? of the market and are about equal in the size of their operations. Thebanks are managerially independent, well-staffed, organizationally adequateand operate according to sound commercial principles. Each have carvedmarket niches within Lesotho's financial sector as follows:

1/ These acts stipulate financial ratio ,.d requirements that are to befollowed by financial institutions. These stipulations pose no burdensomereserve or other requirements on the banking system.

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2.08 Lesotho Bank (Annex V) focusses on local business and the secondtier of foreign-owned business. Lesotho Bank has also taken a prominentdevelopment role by serving small savers and enterprises, as well asBasotho households. In addition, the bank has developed a Projects Unit topromote and finance manufacturing projects. Rather than emphasizingcollateralized lending, this unit is more concerned with the underlyingviability of a project af;d in monitoring the project's cash flow to ensurethat debt obligations can be covered. The Projects Unit emphasizeseducating customers in financial matters, as this is perceived as a seriousconstraint to meaningful industrial development in Lesotho. The Unit hascritically appraised over 50 projects and funded 19, totalling M6.5 millionover the 18-month period starting in early 1989. All lending has been atmarket rates. The average loan size is M209,000 (US$78,000) although loansas small as M8,000 (US$3,000) have been granted. A training assessment ofLesotho Bank (financed by the Project Preparation Facility) recommendedshort-and-long-term courses in appraisal, portfolio monitoring and projectsupervision. Training (managed by the bank's Personnel and TrainingDepartment) would be at all staff levels of the bank with the intention ofexpanding project-based lending to the branches. Lesotho Bank's objectiveis to increase access to financial resources by non-traditional bankclients, with indigenous-ovned enterprises being a principal focus.

2.09 Barclays Bank in Lesotho is a full branch of its British parent.Its focus is on large corporate clients. Standard Bank is also a branch ofits London parent. It is the oldest bank in Lesotho and retains itshistorical role as banker to the Government, handling the Governmentpayroll and acting as a clearing bank through the RSA interbank clearinghouse. Perceived as unduly conservative and having heavy collateralrequirements, these banks operate according to standards set by London.Hence, they have not shown interest in the higher-risk lending pursued byLesotho Bank. In addition, the availability of tax exempt governmentsecurities has provided them with a highly remunerative source of income.With the availability of high-yield treasury bills diminishing as a meansof investing liquid resources, the objective of the project line of creditis to support these banks in pursuing a more aggressive lending policy byencouraging project lending activities.

C. Institutions Participating in the Equity Fundina,Investment Promotion and Industrial Infrastructure Components

The Ministry of Trade and Industry (MTI)

2.10 Objectives and Role. MTI is responsible for formulatingindustrial policy and services on the Boards of LNDC and BEDCO (responsiblefor promoting and servicing, respectively, large and small-scaleenterprises). MTI staff is weak in numbers and in professional experience,however, and MTI has largely ceded operational responsibility forindustrial development to LNDC and BEDCO. Under the project, this divisionof responsibility would largely be maintained, except that MTI's role withrespect to policy coordination and information services for SMEs would bestrengthened.

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2.11 MTI's organizational structure consists of two departments (forTrade and Industry) and is headed by a Principal Secretary (P.S.) who isresponsible for day-to-day management. The P.S.'s responsibilitiesinclude: (a) implementation of programs to generate employment throughexport expansion, local trading and commercial activities; (b) enhancementof the skills and capabilities of the Basotho people; (c) er,oringprovision of assistance and services to the trading/business community; and(d) ensuring that the objectives and interests of the sector are wellelaborated and implemented through legislation and policies. Theseresponsibilities and the active leadership role played by the new P.S. incoordinating inter-institutional arrangements call for the Ministry's leadrole in the project.

2.12 In line with policy decisions giving priority to development ofsmall- and medium-scale industries, MTI service delivery to theseenterprises has been strengthened with the creation of a Small IndustriesDivision within the Department of Industry. The Division works directlywith a UNIDO Technical Adviser (contracted to the end of 1990). Staffconsists of three relatively inexperienced professionals being trained bythe UNIDO adviser. The unit has carried out a baseline survey of S1Es andalso has prepared SME projects for submission to the Lesotho Bank. Throughthis project preparation assistance, the unit has become recognized byentrepreneurs as a starting point for service delivery.

2.13 Although MTI's regulatory and licensing requirements are notserious burdens to SMEs, no systematic incentive, training, or serviceprograms support the indigenous enterprise sector, such as support foreignand larger enterprises. Under the proposed project, MTI would becomeresponsible for oversight of the Business Advisory and Promotion Service(discussed below), which would coordinate information about businessopportunities, training, financial, and advisory services for small andmedium-scale enterprises. The analytical support provided by the SmallIndustries Division would be the basis for identifying SME needs to beaddressed by BAPS.

2.14 The Principal Secretary would be responsible for administeringthe Small Business Development Fund (SBDF) -- a technical assistance andtraining fund -- established to support improvement of the skill level ofentrepreneurs and professional staff in SME support institutions.Assistance also would be available to NGOs that provide training andpromotional support for SMEs. It is anticipated that the followinginstitutions would be interested in participating in the fund: Women'sWorld Banking, Women in Business, the Lesotho Chamber of Commerce, thesmall business development unit of the Lesotho Highlands Water Authority,and the Business Training Center of the Ministry of Education.

2.15 Women entrepreneurs would also be promoted under the SBDF.For example, Women's World Banking and Women in Business, both in theprocess of establishing operations, would have access to the fund on thebasis of well-defined proposals to establish information and advisorycenters and workshop and seminar programs for women entrepreneurs.

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2.16 To increase competition in the development of industrial land,the Government has agreed, as part of the policy reform program, to grant atract of land to the MTI. Land would be leased to indigenous investors forup to 60 years, and subleased to foreign investors for 40 years.

Lesotho National Development Corporation (LNDC) (Annex IV)

2.17 Objectives and Role. As the principal institution responsiblefor industrial development, LNDC (formed in 1967) was given wide-rangingpowers in project promotion and financing and for assisting foreigninvestors to set up in Lesotho. LNDC makes equity and loan investments inmedium- to large-scale enterprises, encourages foreign investment (jointventure formation), and provides industrial sites and premises. In recentyears, LNDC has been investing in real estate such as shopping centers,commercial buildings, factory premises for rental; few equity investmentshave been made. Although understandable in terms of maintaining income(the shopping centers and the brewery subsidiary are high earners), thistendency, combined with the emphasis on supporting foreign investment intfootloose" industries, has led to some questioning of the focus of thecorporation's activities.

2.18 LNDC is not empowered to accept deposits and has relied onGovernment grants and concessional loans which have been onlent at highlysubsidized interest rates of 82-13Z. It recently explored the possibilityof raising resources through a bond issue. However, given the high yieldson treasury bills with which bond rates must compete, the cost of raisingfunds in this manner was considered too high to permit profitableoperations. The Government has made a commitment to remove the taxexemptior. on treasury bills, which would effectively permit anappropriately priced LNUC bond issue.

2.19 The Lesotho Financial Sector Review recommended that LNDCreorient focus toward promotion and toward providing industrial space andequity finance. To this end, the Cabinet amended the LNDC Act to permit upto 402 equity holding by the private sector, a step intended to broadenLNDC's resource base, and support the provision of equity finance. Theproposed project will support LNDC in its evolving role.

2.20 Organization, Management and Staff. LNDC comprises a staff ofabout 50, in four departments and an office of internal audit. The SecondIDA Credit to LNDC financed a five-year training plan, including advanceddegree courses in economics and business administration and specializedcourses in project evaluation, project management, financial management andprofessional accounting. LNDC has made significant progress in all aspectsof its operations. Systematic project appraisal is now undertaken for allloan and equity projects and for lease contracts. The quality of theanalysis and information presented is good.

2.21 LNDC has adequate standard formats for share subscription, loan,guarantee and lease agreements. Its procurement procedures requirecompetitive bids on purchases of plant, machinery, buildings, and civilworks. Equity investments are disbursed only after independent auditors

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have certified that all partners have paid in their portions of tlhesubscriptions. LNDC's Operations Manual details its operationalprocedures, which are satisfactory.

2.22 LNDC has made significant improvements during the past two yearsin financial planning and control. A detailed annual budgeting exercisenow enables LNDC to assess the costs of running its programs anddepartments and to project operating revenues and deficits. Long-rangeresource planning is weak, however, with control and profit centeraccountability the principal weaknesses. LNDC's accounts consolidate allactivities and thus make it difficult to identify each activity'sprofitability and cash flow. Strengthening LNDC's institutional structurewill require redefining each of its operations as a financial cost orprofit center.

2.23 Financial Performance. On a consolidated basis, LNDC has becomean increasingly profitable institution, with net profits (after provisions)having grown from MO.378 million in 1985 to M3.5 million by 1989. Its debtto equity ratio is satisfactory at 0.9:1 (1989). However, LNDC has threelines. of business where performance varies: direct lending, real estateoperations, and the equity/investment portfolio. Large parts of LNDC'soperations run at a loss (lending) or inefficiently (real estate).overall, operations are heavily cross-subsidized by the vastly profitableequity portfolio, which the brewery, a protected monopoly, dominates bycontributing 80? of dividends. Indeed, a principal management issue,highlighted by a review of LNDC's financial performance, is the extent towhich the very profitable Brewery investment masks LNDC's institutionalproblems. These include the absence of clear lines of authority andaccountability.

2.24 LNDC has a direct lending portfolio of M10.6 million, whichrepresents 17.5Z of the Corporation's total assets of M60.4 million. Thisportfolio suffered an operating loss of about MO.656 million in FY89.After debt repayment the loss was M1.0 million -- a negative 12.4? returnon assets applied to lending. The principal contribution to this poorperformance was the very low gross financial margin of about 31, comparedwith operating expenses of about 9?. This mismatch between margins andexpenses is due to LNDC's policy of passing funds to subborrowers at highlysubsidized rates. This policy does not even begin to cover costs orprovide a basic return on assets. An additional problem is that 32Z ofLNDC's portfolio is affected by arrears.

2.25 LNDC is uncreditworthy at present to participate in the line ofcredit component because of the poor perfermance of the loan portfolio.LNDC's participation in the project line of credit is conditioned onputting its lending operation on a viable and self sustaining basis. Atappraisal, LNDC management made a commitment to review with other donorsthe obstacles to onlending funds at market rates of interest. Recentlyinterest rates were raised significantly to 16.5?. However, it is unlikelythat this measure alone will be adequate to cover costs, risk, and leavemargin for profit.

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2.26 Real estate operations, with M41 million in applied assets,represent nearly 70t of LNDC's total assets. In VY89, the cash flow onthis portfolio was about M713,000 for a return of 1.72 -- a highly negativereturn in the face of 14Z inflation. Performance on its industrialestatelfactory shell portfolio (which represents 70? of gross revenue onreal estate operations) is affected by LNDC's mandate to attract andpromote foreign investment in competition with other countries in theregion which subsidize factory shell rentals for investment promotionpurposes. Consequently, LNDC's factory rental rates do not adequatelyprovide for the costs of operation plus a reasonable profit. Despite thelow rental rates, weak management of this portfolio has resulted in only85? of rentals due being collected. The timely provision of electricity,telecommunications and other infrastructure has been a constraint to theeffective management of LNDC's industrial estates as part of its overallinvestment promotion efforts. In other respects, factory shell design andconstruction standards are adequate and assisted by an Irish governmentfinanced advisor. Maintenance programming and implementation are alsosound.

2.27 LNDC's investment/equity portfolio, which is the smallest of itsoperations in terms of assets applied, has shown the most positiveperformance, with investments in a mixture of explosive growth companiesand companies with slow growth or failure. The FY89 return on thisportfolio was about 34?; M3.07 million in cash generated by dividendpayments represented 112Z of LNDC's total cash generation of 12.76 million.This good performance positions LNDC to manage the equity mutual fund(venture capital) component unde. the proposed project.

2.28 Investment Promotion. LNDC's early industrial promotion effortsfocused on food and agro-industries, textiles, clothing, wood andfurniture, engineering, electrical and construction and had some success.However, after 1985, the investment climate in Lesotho changed markedlywith the intensification of sanctions against the RSA. During this periodforeign investment significantly rose as investors began coming into thecountry on their own initiative. This new foreign investment was dominatedby low value-added, somewhat footloose, industries such as clothingmanufacture which have nonetheless substantially contributed to jobcreation.

2.29 Despite its success, three principal weaknesses characterizeLNDC's investment promotion. First, active promotion efforts have largelyceased; investment is primarily from RSA investors and textilemanufacturers. Second, for all intents and purposes, LNDC has substitutedactive investment promotion and investor services with "project reviews.This has contributed to the third weakness, which is investordissatisfaction over the conflict of interest between LNDC's role asprovider of investor services and its role as investor itself. Thisconflict of interest developed from LNDC's insistence on majority ownershipof resource-based industry. The recent Diagnostic Review of Lesotho'sinvestment environment recommended that Lesotho provide unbiased servicesto investors regardless of their need or interest in an equity investmentor in an LNDC factory shell.

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2.30 To correct these weaknesses the project would support renewedinvestment promotion to diversify sources and types of investment and todeepen linkages with indigenous investors and the country's agriculture andother natural resources. To that end, the Lesotho Investment PromotionCenter (LIPC) would be established within LNDC, to provide unbiasedservices and information to all investors. The Government would maketracts of land available for private development so that investors wouldhave access to both land and factory shells without having to go throughLNDC's lengthy review procedures. Also, investment promotion literaturewould be amended to indicate that Government or LNDC equity participationin resource-based and strategic industries is available and tailored to theinvestor's needs. Organization of LIPC is discussed below.

Lesotho Investment Promotion Center

2.31 Organization, Management and Staffing. LIPC would beestablished as a semi-autonomous unit within LNDC with a specialsubcommittee on the Board of Directors responsible for its work program,budget approval and supervision. Its organizational structure wouldinclude: Promotion and Services Section, Public Relations, Research, andDonor Relations Section.

2.32 Staffing of the new unit will be from the existing NewIndustries Subdivision and from new recruitment. The Director of theCenter will be the current New Industries Subdivision Director. TheSection Heads of Research, Public and Donor Relations will be from existingstaff. The LNDC staff member responsible for services to investors will bereassigned to the Center. The new recruitment will be for threeprofessionals for the Promotion and Services Section (including a seniorstaff member as Head of the Section) and one junior staff member for thePublic Relations Section.

2.33 The Promotion and Services Section will be responsible forinvestment-generating activities and investor services, by focusing on theRSA, Europe and the Newly Industrialized Countries (NICs) and the U.S. (Itis estimated that the NICe, Europe and the U.S. will generate about 100site visits a year.) In terms of investor services, this unit will provideinvestment counseling, expedite the processing of applications and permits,provide post-investment services, work on linkages between promoted foreignfirms and local suppliers, and foster their participation in the small-scale industries "patron" and "mentor" programs. This unit will have fourprofessionals. The Public Relations section will be responsible for imagebuilding activities and for developing and disseminating promotionalmaterials, an investors' guide and newsletters. It will also host generalpromotion missions from abroad. The unit will have two professionals. TheResearch Section will support both promotion and public relations bymaintaining a data base on the Lesotho market and economy and by preparingpolicy papers on the effects of policy changes on the investmentenvironment. The unit will have one professional. Donor Relations willcoordinate aid from abroad.

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2.34 In the first three years of operation, LIPC will have atechnical assistance agreement with an experienced investment promotionorganization, to be financed by the project. LIPC will receive advisorysupport for the LIPC Director, staff training in investment promotiontechniques and management, and specific assistance to support establishmentof the organization. It is projected that during the five-year projectperiod LIPC will be responsible for the creation of about 3,500 jobs, whichis consistent with industrial job creation in recent years. The principaleffect of the renewed investment promotion effort should be over time todiversify types and sources of investment and to emphasize subsectors withhigher value added and greater linkages with Lesotho's economy.

2.35 Cost Effectiveness and Sustainability. Investment promotion istypically criticized because links between promotion efforts and actualinvestments made are not always apparent. Promoted investments may takethree to five years before they are realized. However, the initial yearsof the promotion effort would be supported by IDA and donor funds to ensurea sustained uninterrupted effort. Eventually, LNDC will need to decidewhether the activities of LIPC are worth further support. To supportLNDC's decision, two methods will be used to evaluate the effectiveness ofthe investment promotion effort under the project:

- First, an annual progress report will be required from LIPC andsent to its Board and to IDA for review; and

* Second, a Beneficiary Assessment will be carried out after thesecond year of the project and at the end of the project toassess investor attitudes about LIPC services and Lesotho'sinvestment environment.

Business Advisory and Promotion Service (BAPS)

2.36 Background. Promotion of indigenous entrepreneurs is currentlyperformed by a multitude of institutions. However, it is argued that allthe services are badly organized, coordinated and delivered to thebeneficiaries and lack sustainability because they are inadequately orintermittently financed by donors. The poor development performance ofindigenous enterprises and the absence of backward linkages and sub-contracting arrangements are evidence of weaknesses in the system. Absenceof linkages comes from lack of knowledge of possibilities, and lack ofassistance for technical, marketing and other improvements. This point hasbecome particularly clear in the context of the LHWP.

2.37 Obiectives and Functions of BAPS. No arrangement currentlypools information about the various support services that could be madeavailable to meet the needs of various small businesses. Therefore, thefirst function of BAPS would be to provide an information service. Inaddition, it would maintain intelligence about the industrial demands fromlarger companies, including contractors to LHDA, and the potentialindustrial and commercial supplies available from Basotho businesses. Tothis end, BAPS will establish information centers in the Lesotho Chamber ofCommerce and in other SME meeting points.

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2.38 The number of exploited opportunities that BAPS might be able toidentify would be increased over time, by the following activitiess

* Promoting awareness of business possibilities for smallbusinesses, through brochures, newspaper advertisements, villageseminars, etc.;

* Maintaining up-to-date information about the nature of theresource requirements of the LHDA and the larger companies anddefining and publicizing sub-sets of those requirements thatmight realistically be met by Basotho enterprises;

* Identifying sources of tecbnical advice to remedy technicalweaknesses in particular companies, including, in the case ofthe larger of the small companies, assistance in theidentification of foreign technical partners;

* Assisting small companies identify consultants to support theirmarketing and their promotion to larger companies;

* Identifying potential sub-contracting consortia in particularsub-sectors along the lines of the Lesotho HighlandsConstruction Consortium established in November 1988;

* Identifying, in collaboration with the Lesotho InvestmentPromotion Center foreign firms that can act as *patrons' tosmall-scale enterprises by providing them information on sub-contracting opportunities and by assisting them in upgradingtheir technological capabilities; and

* Identifying local senior business persons that assist and advisesmall enterprises in a *mentor' program.

2.39 Organizational Arrangements. BAPS would be established withinMTI with a large degree of day-to-day independence from the Ministry.Since the justification for its existence depends strongly on itsmanagement and supervision of existing institutions and the uniqueopportunity offered by the Highlands Water Project, its management andstaffing would have sufficient stature to permit it to work closely withLHDA. BAPS would need regular and detailed information about LHDA and LIPCactivities in order to advise its Basotho clients. The new service wouldbe expected to contribute to the project pipelines of both the LNDC and theLesotho Bank and, with the LIPC, would play an important part in justifyingthe credit and equity line components of the proposed IDA project.

2.40 Staffing. The unit will be staffed by one senior person whowill be the director of BAPS, and two additional staff members, allrecruited by BEDCO and seconded to BAPS. MTI will assign to BAPS its ownstaff members who provide small-scale industry services. The new unit willbe directly under the P.S. and will be governed by the managementcommittee.

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2.41 Because coordinated promotion, advisory and informationalsupport to indigenous enterprises is a new function in Lesotho, aconcentrated package of technical assistance and staff training will beprovided for the full 5 year project period in an effort to ensure thestrong establishment of the program.

2.42 Financing and Budgets. BAPS has no financial base to ensure itslong-term sustainability. Therefore, a fee system would be designed forBAPS-arranged services and training. Client fees would maintain the aspectof client-driven demand to ensure the quality of BAPS operations.Following the project, further Government support for BAPS would bedetermined on the basis of its effectiveness, as evaluated in theBeneficiary Assessments.

D. Institutions Participating Only in the InstitutionalStrengthening Component

Lesotho Agricultural Development Bank (LADB) (Annex VI)

2.43 LADB was established as a wholly government owned bank. It hasgrown into the primary source of agricultural and agroindustrial finance--its rapid growth having been encouraged by international donor agencies whoused the bank as a pipeline for rural credit. Recently LADB has undertakena rapid branch expansion program intended to extend depositor services torural areas. The bank now has nine full service branches, twelve agencies,three offices, with more planned. Until three years ago, the LADB wasfunded chiefly with non-deposit resources. Then deposits increased ten-fold over two years and more than doubled again in 1988. The loanportfolio more than tripled between 1986 and 1989. The down-side to thisexpansion has been the rapid increase in overhead expenses. Further, theexpansion has not been matched by the development of appropriate internalinfrastructure, including adequately trained staff, information and controlsystems. Particularly, strengthening is needed in the areas of creditmanagement, financial control, internal audits and data processing toassist in the installation of a management information system on LADB's newIBM system.

2.44 LADB's recent business record has been poor and its financialperformance is not characteristic of a viable going concern, with theGovernment's equity being rapidly exhausted. LADB has recorded losses forthe past four years. The return on assets in 1988 was -2.5Z, and thereturn on equity was -14.4Z. Equity eroded from 82.62 of total assets in1983 to only 17.5X in 1988. If additional provisions on its loanportfolio, equivalent to more than 21? of the outstanding loans are neededto clean up the portfolio, LADB would become technically insolvent. Theprincipal reasons for this poor performance are:

(a) the high proportion of operating costs to average total assets,a ratio that stood at 14.31? in 1989 (compared to a 3.7? ratioin Lesotho's commercial banking system) and is due to increasedoverheads from expansion in the branch network;

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(b) Staff training costs, which amounted to more than 6Z ofoperating expenses in 1989, as compared to nil in 1988 when theywere financed by donor funds; and

(c) the high administration costs and risks (provision for losses)associated with agricultural lending.

2.45 The project-supported institutional strengthening program forLADB is based on the Financial Sector Review's recommendation that LADBshould suspend !ts expansion activities and undertake correction of itsfinancial and institutional weaknesses. LADB is considered worthy ofsupport for several reasons: first, because it provides valuable financialservices to previously unserved rural areas -- as evident in the explosivegrowth of deposits accompanying its expansion program. Second, the bank'smanagement has shown a commitment to correcting weaknesses. For example,the branch expansion has been halted, and interest rates on lending havebeen raised above prime to 21.52. Third, the regular loan portfolio showsa relatively favorable recovery rate of 85Z. And, finally, the FinancialSector Review identifies LADB as an important source of competition to theestablished banks, and encourages its evolution into a commercial bank.

2.46 The measures already implemented (including the comprehensivestaff training program) lay the groundwork for a substantial improvement inLADB's financial performance, and management projects a profit for fiscalyear 1990/91. However, to achieve sustainable long term viability, LADBneeds to strengthen institutional capacities and to develop internalinfrastructure and controls. Further LADB is unlikely to achieve viabilityas a specialized agricultural bank because of the high transactions costsand risks associated with this sector. The project institutionalstrengthening program for LADB would be focused on developing a StrategicCorporate Plan to put the management and finances of the institution on aviable basis and for broadening the institution's focus to includecommercial banking activities.

Basotho Enterprises Development Corporation (BEDCO) (Annex VII)

2.47 BEDCO was established in 1975 as a parastatal under thesupervision of the Ministry of Trade and Industry (MTI), with the objectiveof establishing and developing Basotho-owned business enterprises. It nowoperates according to the BEDCO Act of 1980 and regards its task asassisting local small-scale entrepreneurs.

2.48 BEDCO has about 86 staff members employed in three principalorganizational groupings: (a) Loans and Projects, (b) Business ExtensionServices, and (c) Operations, which includes administration of estates,common workshops, bulk purchasing and selling, technical services, andinternal administration. In addition there is a financial controller andan internal audit department. All evaluation reports strongly criticizeBEDCO's weak management and very high rate of staff turnover. A recentevaluation indicates that only about 20 of BEDCO's staff have any technicalor professional qualifications or experience.

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2.49 BEDCO's operations and financial performance have been poor inall areas. The institution has failed to reach the targets originally set,in terms of number of enterprises assisted and jobs created. Clients aredissatisfied with the quality of BEDCO's extension ard advisory services.It has experienced a 70X default rate in its loan program; in any case,performance was curtailed by highly subsidized interest rates. While itsindustrial estate operations are an important and unique service, highlysubsidized rental rates and an abysmal collection record have furthercontributed to the institution's poor financial performance. In the pastBEDCO received substantial financial support from the CanadianInternational Development Agency, ODA (U.K.), and the World BanklIDA (thefirst Lesotho industrial credit). However, most donors have withdrawnsupport; since 1987 they have not assisted BEDCO in any significant way.The World Bank/IDA did not include BEDCO as a beneficiary in the SecondLNDC Credit, largely as a result of IDA's dissatisfaction with the handlingof the small credit component (US$ 0.3 million) in the first IDA credit.Annually BEDCO receives Government grants averaging MO.5 million to coveroperating losses. Annex VII shows the performance by each of BEDCO's linesof business.

2.50 Given other institutions' better ability to provide certainservices to SHE clients, BEDCO will not be reorganized or strengthened in awholesale way. Instead, its activities will be streamlined and refocusedon those areas where BEDCO has a comparative advantage vis-a-vis SMEclients. The principal facets of this reorientation, which will besupported by the project institutional strengthening program, are asfollows:

- BEDCO lending operations will cease, and future credits will bechanneled through the Lesotho Bank;

- BEDCO's provision of industrial and workshop space is animportant service to enterprises and a potentially importantfinancial base to sustain BEDCO's operations. To that end thereis a need to strengthen financial management, including thesetting of rental rates at levels to recover costs and areasonable return, strengthening of debt collection and rentalpayment performance, with clearer tenant eligibility criteriaand implementation of a tenant eviction program for non-payingclients, and financial management of construction and managementof new industrial estate space; and

* Project Preparation capacity will be strengthened to assistentrepreneurs prepare viable bankable projects for submission toLesotho Bank and possibly other banks.

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III. THE PROJECT

A. Project Origin and Rationale for Bank Involvement

3.01 The proposed project was identified in 1987 as a follow-on tothe Second Lesotho National Development Corporation Project (Cr. 985-LSO)and the IFAD-financed Agricultural Marketing and Credit Project (Cr. 55/63-LE). Those projects focused on encouraging industrial and agroindustrialdevelopment through the provision of term finance. The proposed projectapproaches industrial development from a broader perspective, i.e.addressing not only financial but also institutional and policy constraintsthat inhibit industrial investment, especially by indigenous small- andmedium-scale investors, and includes the important aspect of investmentpromotion. The multi-part approach, guided by a comprehensive strategy forindustrial development (para. 3.03), is particularly appropriate, given theobjective of capturing benefits from the Lesotho Highlands Water Projectfor long-term economic development. The narrow window of opportunitypresented by construction of the LHWP means that in some cases the idealmarket solutions cannot be immediately implemented and that interimmeasures must be undertaken. However, project design and conditionalitylay the groundwork for market solutions for the medium-term.

3.02 The first preparation mission took place in October/November1988. A Project Completion Report on the Second LNDC Project was completedin April 1989. Both highlighted the dearth of sectoral knowledge and theneed to integrate the activities of LNDC and of other non-bank financialinstitutions into a coherent financial and industrial sector developmentstrategy. As a result, preparation studies have included a financialsector review, a diagnostic review of Lesotho's investment environment, areview of the tax incentive framework, a review of agro-industrialcomparative advantage, and a study on manpower planning and skillsdevelopment.

3.03 Through intensive dialogue on the basis of this body of work,IDA has taken the lead in developing with the Government a comprehensiveprogram of policy reforms, investments and institutional strengthening toincrease industry's role in employment generation and for overall economicdevelopment. An Industrial Sector Strategy Paper has drawn together thesestudies' key findings and recommendations and will guide this and futureproject interventions in the sector. The policy dialogue is well advancedand several key policy reform measures have already been voted into law.As a result IDA is well positioned to support the proposed project.

B. Proiect Obiectives and Design

3.04 The principal project objective is to encourage private foreignand indigenous investment in the industrial and agroindustries sector witha focus on diversifying investment into higher value added industries(particularly agriculture-based industries), deepening linkages between theformal industrial sector and SMEs, and supporting indigenous investors'

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ability to take advantage of opportunities created by construction of theLesotho Highlands Water Project (LHWP). The project also supports animproved enabling environment for this investment with some policy reformsin the industrial, agroindustrial and financlal sectors to removedistortions, disincentives and regulatory bottlenecks which impedeefficiency and private investment.

3.05 The project reflects a multifaceted approach to achieving thisobjective with four principal interventions as follows:

(a) financial interventions through as a line of credit and anequity fund to increase access to loan and equity finance byindigenous enterprises, including SMEs and women-ownedbusinesses, agro-industrial enterprises, and private industrialestate developers;

(b) industrial infrastructure to ensure the timely availability ofelectricity, telecommunications, water, road and otherinfrastructure to LNDC industrial estat*s and factory shells --a critically important service required by foreign investors;

(c) agro-industrial development underpinned by a focused subsectorreform program to encourage private investment in the sector,and improve the efficiency of the large parastatals bysupporting their operation on a commercial basis and theireventual privatization; and

(d) institutional strengthening and training activities to financialead industrial sector institutions intended to improve theircapacity to support and promote industrial development.Promotion activities would aim to deepen linkages betweenforeign and indigenous enterprises and attract investment inhigher value added industries.

C. Proiect Description

3.06 The proposed project would provide funds to finance five maincomponents: (a) a line of credit; (b) an equity fund for venture capitalinvestments; (c) agro-industrial development; (d) industrialinfrastructure; and (e) institutional capacity development.

(a) Line of Credit

3.07 M12.5 million (US$4.7 million) would be provided to encourageproject-based term financing for fixed asset investments, associatedincremental working capital to viable industrial and agro-industrialenterprises and export projects, and for the private development ofindustrial land. The line of credit would be targeted to, though notrestricted to, non-traditional bank clients. Targeting procedures aredealt with in subproject appraisal criteria and in PBI agreements (ChapterIV). The objective is to increase indigenous borrowers' access toinvestment finance by reducing transactions costs and risks associated with

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this type of lending. To that end, bank clients would receive assistancefrom the Business Advisory and Promotion Service (BAPS), which wouldcoordinate information about training and advisory assistance forpreparation of business plans and loan applications and for implementationof projects. Bank staff would be trained ir. project appraisal andportfolio monitoring techniques tc support the greater analytical andsupervisory attention required by term project lending.

3.08 Funds would be channeled through the Central Bank of Lesotho andadministered by its Development Finance Division (DFD), according to theterms of a subsidiary loan agreement. CBL would onland this amount inlocal currency to eligible banking institutions, which include Lesotho Bankand Standard and Barclays Banks on the basis of actual loan approvals andagreed eligibility criteria. Onlending to subborrowers would be in localcurrency at the prevailing market rate of interest. At the time ofappraisal (February 1990), the prime rate stood at 202. LNDC and LADBwould be eligible to participate in the component if they meet disbursementconditions related to putting lending operations on a viable basis and own-resource mobilization. Funds would be onlent from the Government to theCentral Bank at the onlending rate to PBIs minus one percent to cover CBL'scosts of administering the component. Onlending from the Central Bank tothe Participating Banking Institutions (PBIs) would be at a rate initiallyset at the average cost of term deposits. As interest rate distortions arecorrected, which should permit banks to raise their own term resources, theonlending rate to the PBIs would be periodically reviewed and adjusted toensure that it does not represent a disincentive to the PBIs mobilizingtheir own term resources. Funds would be onlent to the PBIs with the samematurities as the individual subloans to final beneficiaries. Subloanterms to beneficiaries would range from a minimum of two to a maximum oftwelve years, inclusive of grace periods of up to three years. The CentralBank may subsequently re-lend repaid amounts to PBIs for similar purposesin line with the objectives of the project, through its rediscountingmechanism for up to 15 years. Chapter IV on Project Implementation andManagement presents detailed disbursement conditions, operating mechanismsand subproject eligibility criteria.

(b) Equity Financing and Venture Capital

3.09 LNDC has already established a Mutual Fund called LesothoInvestment Holdings (LIH). LIH would be reactivated under the project withthe operation of small equity fund of M5.0 million (US$1.9 million). Theobjective of establishing the proposed fund is to fill a gap in Lesotho'sfinancial markets and thereby alleviate a key constraint to the developmentand expansion of viable SMEs. Eligibility criteria (para. 4.14) aredesigned to reach small- and medium-scale enterprises. LNDC has developeda list of potential contract and spin-off opportunities related to theLesotho Highlands Water Project. Opportunities range from constructionmaterials supply through catering and transportation services, and many areideally suited to the indigenous SME sector. In addition, subcontractingopportunities with larger manufacturing companies will be actively fosteredunder the project. Equity financing, and the managerial advice and supportavailable from LNDC, as the mutual fund manager, are expected to facilitatedevelopment of these investment opportunities. In the medium term, sale of

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shares to the public from the mutual fund would be the mechanism fordivestiture of mature investments and for the sale of other LNDCinvestments. As such the mutual fund would ie a first step in theestablishment of a capital market and a liquidity and resource mobilizationmechanism for LNDC. Para. 4.12 explains the mechanism by which LNDC wouldact as an agent of the Government in administering this component. As anagent, it would not bear associated risk or repayment responsibility.

(c) Agroindustrial Development

3.10 The project would support the commercial operation and eventualprivatization of agroindustrial parastatals. The project would finance27.5 manyears of performance based (related in part to profits) managementcontracts and associated training to strengthen the management andperformance of four agro-industrial enterprises after their incorporationas autonomous companies. Assisted companies would be the National Abattoirand Feedlot Complex, the Poultry Hatchery, the Milk Processing Plant andCollection Centers and Lesotho Poultry Cooperative Society. Thesecompanies' production show their potential economic efficiency with low DRCratios and represent important outlets for a majority of farmers'production. The principal issues affecting these companies' operations andproposed remedial technical assistance are discussed in Annex II. Thetotal cost of the management contracts and training program would be M12.2million or US$4.6 million for a two-year period, which compares favorablywith M26.6 million or US$10.6 million the GOL currently transfers to theparastatals annually to cover their operating losses.

3.11 Four management consultant contracts would be executed withprofessionally qualified and experienced consultants. TA would be providedat an average cost of M414,300 or US$165,720 per manyear. After the secondyear, the management contracts would be extended using the firms' ownfunds. Therefore, it is expected that all firms supported by the projectwould eventually be financially able to hire their own contract management.Excluded from the TA program would be the Flour-Maize Mill and Feed MillComplex (FMMFM) and the Brewery, which are currently efficiently managed.FMMFM would also be subject to privatization, and LNDC would be expected tosell a significant minority of shares from the Brewery to the LIH equitymutual fund. Bidding contractors would be judged inter alia on the basisof their definition of a corporate and financial plan for the givenagroindustry.

3.12 Consultants bidding for contracts to manage the agroindustrieswould also include proposals to provide staff and management training. Theperformance of the contract management would be measured by, among otherthings, success in implementing a staff training program. The total costof the training program is estimated at M775,000 or US$290,000. Theproject would provide a total of 27.6 staff years of training at an averagecost of M30,900 or US$12,360 per staff year.

(d) Industrial Infrastructure

3.13 M6.7 million (US$2.5 million) would be provided to financeequipment and civil works for road, electricity, water andtelecommunications infrastructure necessary to service LNDC industrial

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estates. Lending from GOL to LNDC would be at the World Bank rate oflending plus 102 of that rate. LNDC would bear the foreign exchange risk.Approximately M2.6 million would be used for infrastructure upgrading andextension of the Maseru West industrial estate which will service up to27,000 sq. meters of factory space. In addition, the component wouldfinance an expansion of the Thetsane estate which will service up to 45,000sq. meters of factory space. The total cost of infrastructure for thisexpansion would be M4.0 million. Design work is expected to be completedfor commencement of works by March 1991. As part of its decentralizationefforts future LNDC estates are planned at Mafeteng and Ha'Nyenye to befinanced with internally generated resources and donor funding.

3.14 While there are no substantial issues related to the establishedstandards of construction for road, telerepmmunications and waterinfrastructure, there are substantial disagreements between LEC, LNDC andother end users regarding standards and costs of electricity bulk lineconnections. Accepted standards of construction for a country such asLesotho indicate that average cost of bulk line electricity connectionsshould be about $20,000 per kilometer. LEC currently designs substantiallyhigher standards which may be excessive and inconsistent with a least costprovision of this utility accounting for the trade-off between capital andmaintenance costs. A review of existing studies on standards would beundertaken under the project and agreement with IDA reached on appropriatestandards to be applied. Conditions of disbursement for this componentwould be agreement with IDA on (a) a formula for cost sharing for maindistribution lines between the end users and LEC and LTC, respectively; and(b) procurement arrangements and construction standards for utilitynetworks.

'e) Institutional Capacity Development

3.15 A total of 35.5 manyears of advisory and training assistance atan average cost of US$132,000 per manyear would be provided under thiscomponent for a total cost of M12.5 million (US$4.7 million). Thetechnical assistance and training component are discussed below.

3.16 Promotion of industrial investment would involve (a)establishment of the Business Advisory and Promotion Service (BAPS) in theMinistry of Trade and Industry to coordinate policy and information aboutbusiness opportunities and privately provided advisory and trainingservices to indigenous enterprises; (b) establishment of the LesothoInvestment Promotion Center (LIPC) in LNDC to provide one-stop investorservices to foreign and larger enterprises (including the leasing ofindustrial land for private development); (c) a twinning arrangement withan experienced investment promotion authority would provide advisorysupport and training to BAPS and LIPC; (d) two beneficiary assessments togauge investor attitudes about the investment environment and quality ofservices offered by LIPC and BAPS would be carried out during the third andfifth years of project implementation; and (e) studies to be identified inthe Beneficiary Assessments and the Mid-Term Review would provide theanalytical basis for additional policy measures needed to improve theinvestment environment.

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3.17 A manpower and skills development subcomponent would support thepromotion strategy focused on Lesotho's comparative advantage in labor-intensive industry. Skills development would be supported by: (a) a SmallBusiness Development Fund to support improvement of the skill level ofentrepreneurs and of professional staff in SME support institutions.Women-focused organizations such as Women's World Banking, Women-in-Business, and the National Council for Women would be eligible forfinancial support for their training and seminar programs; and (b)strengthening and expanding in-service training and skills-testing programscollaboratively designed by businesses and the vocational and trainingeducation (VTE) system.

3.18 The institutional capacity of financial sector institutionswould be strengthened as follows:

(a) Training in bank management, project appraisal and loanportfolio management for Lesotho Bank, LNDC, LADB, BEDCO, andthe Lesotho Manufacturers Association;

(b) Support for the reorganization and reorientation of BEDCOactivities with a focus on the provision of industrial space andon the provision of project preparation assistance. The projectvould finance two long-term technical advisors in FinancialManagement and Project Preparation for two years each;

*c) LNDC would be provided three technical advisors for one yeareach in management accounting and information systems, propertymanagement, and credit and equity portfolio appraisal andmanagement. Task-oriented advisory assistance would establishthe marketing plan for operating the LIH equity mutual fund,preparation of a prospectus and other documentation for floatinga bond issue and for selling shares of LIH, defining an actionplan for putting lending on a viable basis, and improvingmanagement of industrial estates. These advisors would carryout their assignments during intermittent short-term visits,when they would establish systems and train staff; and

(d) LADB would be provided three long-term technical advisors fortwo years each in the areas of credit and portfolio management,internal audits, and a financial controller. A short-termadvisor would be provided for the 3stablishment of a managementinformation system. Tasks would include development of aStrategic Corporate Plan of Action for the institution's futuredevelopment, carrying out a complete external audit andstrengthening systems and procedures in internal budgeting,portfolio management, internal audits and informationmanagement.

D. Policy Reforms

3.19 During project preparation policy issues identified in Chapter Iwere discussed with the Government. As the basis for the investment

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promotion focus of the project, it was agreed that key distortions andregulatory aspects affecting investor confidence and costs of establishingin Lesotho should be addressed. The Government has shown substantialcommitment to adjusting the policy environment and has already implementedimportant reforms including:

(a) abolishing the tax holiday and the Pioneer Industries Board andreplacement of the current system with a constant 15? tax rate formanufacturing companies. Companies enjoying the tax holiday couldchoose to continue the holiday and move to the currently prevailing37.5? tax at the end of the holiday; or they could begin to pay taxat the low rate for the life of their investment in Lesotho. Thissystem has great potential to expand the revenue base and increasetax collections. It notably reduces administration involved in theinvestment process and, in introducing a stable incentive, it has thepotential to change the character of investment coming into thecountry;

(b) removal of the tax exemption for treasury bills to bring treasurybill pricing in line with returns on alternative investments such aslending. Removal of this distortion :!ould reduce the crowding outeffect of bank financing for the government deficit. It alsoincreases the scope for the issuance of appropriately priced bond orother instruments by institutions such as LNDC in its effort tomobilize its own resources; and

(c) repeal of the policy requiring LNDC majority ownership of resourcebased industry. Future investment promotion literature would beamended to indicate the availability of equity financing from LNDCand the total flexibility about the level of the equity/joint venturecontribution. The policy should improve the possibility for LNDC'spipeline of projects to iind financing as government control of theinvestment would not threaten investors coming to the country.

3.20 The Government has provided assurantces that it would maintainthese policies and that it would implement additional reforms by June 30,1991 as followss 1/

3.21 Land Availability for Private Sector Development. To opencompetition with LNDC for industrial land development, the Governmentwould allocate an adequate sized tract of Lndustrial land for privatesector development. Indigenous developers would be eligible for 60 yearprimary leases as provided by law. Foreign investors would be eligible forstandard subleases up to a 40 year term. Finance for site developmentwould be available from the line of credit component.

3.22 Minimum Wages. For the future, the Government would reviewminimum wage levels and make adjustments in small discrete steps takingaccount of Lesotho's competitive position in the region. The objective of

1/ The Government indicated commitment to these measures by presentation totha appraisal mission of a policy matrix (Annex X).

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this measure is to ensure that Lesotho maintains its attractiveness as alow-cost production site for labor-intensive products consistent with itsneed to generate employment for its rapidly growing labor force.

3.23 Work Permits. The Government would implement the followingchanges in the granting of work permits (a) automatically grant workpermits for the General Manager, the Financial Manager and the ProductionManager for two years; (b) link progress in implementing training programsto subsequent renewals of permits; and (c) provide for one automaticrenewal and subsequent renewals only upon submission of a program oftraining and/or progress in promoting local staff to key positions.

3.24 Industrial Infrastructure. The Government under the leadershipof the Principal Secretary for Ministry and Trade would form an InvestmentPromotion Committee to coordinate and supervise the provision of servicesto industrial estates. Each responsible authority (Lesotho ElectricCorporation, Lesotho Telecommunications Corporation, the Ministry of PublicWorks, and LNDC) would be required to submit plans and cost estimates forproviding existing and planned industrial estates with necessary services.Disagreements over costs, cost sharing, and construction standards would bemediated and agreed between the parties and with IDA.

Agroindustrial Subsector Reforms

3.25 Policy reforms in the industrial sector generally are more inthe nature of fine-tuning to improve the cost-effectiveness of policies andinstitutions. Reforms in the agroindustrial sector are targeted at a broadarray of policies that currently distort economic efficiency and inhibitprivate investment. Privatization is to be implemented after projectassistance has returned the parastatal agroindustries to viability.

3.26 At negotiations the Government agreed to implement the followingmeasures. By October 30, 1991: (a) elimination of existing subsidies,price and import controls, Government grants and budgetary transfers. andimplementation of a policy requiring full cost recovery on operations ofthe agroindustrial parastatals; (b) introduction of measures to putoperations on a commercial basis, including gradewise pricing for inputsand a reject-grade for inferior products offered by farmers; and (c) theparastatals being assisted under the project would be registered under theCompanies Act, with full autonomy and accountable to their respectiveBoards of Directors. By April 1, 1993: negotiations would be finalizedfor private-sector (local and foreign) participation in each registeredcompany with agreement by the Board of each company and the private sectorparticipant.

Financial Sector Reforms

3.27 Consistent with Lesotho's basically sound, market-orientedfinancial sector, correction of a remaining non-market policy would improvethe incentive to mobilize long-term resources. At negotiations, theGovernment provided assurances that by October 31, 1991 it would pay marketyields on long-term treasury bonds.

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E. Cost Estimates

3.28 Total project costs, including contingencies for the non-creditcomponents and taxes and duties, are estimated at M67.5 million (US$25.3million) with 812 in foreign exchange. Annex VIII shows detailed projectcost estimates. Because of the nature of project investments, no physicalcontingencies have been used. Price contingencies are calculated on basecosts (excluding the credit component). 21

3.29 The following table summarizes the estimated costss

Table 8.1: Pro]ect Cost Summary

Project Component Local Foreign Total Local Foreign Total X FE(laloti millions) (US mlillIong)

A. Financial SectorComponent.

-Investment Credit 6.4 12.5 18.9 2.4 4.7 7.1 e8x-Equity Financing 1.6 6.1 6.7 0.6 1.9 2.6 761Subtotal 8.0 17.6 26.6 8.0 6.6 9.6 8eX

B. Investment PromotionComponents-Lesotho InvestmentPromotion Center 1.9 1.8 8.5 0.7 0.6 1.8 46X

-Business Advisory andPromotion Service 0.8 0.6 1.8 0.8 0.2 0.5 40X

C. Skills Tralning andTrade Testing 0.2 1.1 1.8 0.1 0.4 0.5 801

D. Agro-Industries Component4Management Contracts - 11.6 11.5 - 4.8 4.8 1001-Trainins - 0.8 0.8 - 0.8 0.8 100XSubtotal 0.0 12.8 12.8 0.0 4.6 4.6 100X

E. Technical Assistanceand Training 0.0 11.0 11.0 - 4.1 4.1 100l

F. Benoteicary Assesmentand Studies 0.0 0.5 0.5 - 0.2 0.2 1001

a. Industrial Intrastructure 1.8 6.7 8.0 0.6 2.5 8.0 83x

Base Cost 12.2 51.8 68.6 4.6 19.2 23.8 81X

Price Contingencies 0.5 8.5 4.0 0.2 1.8 1.5

Total Project Cost. 12.7 54.8 67.5 4.8 20.6 26.8 81X

F. Financing Arrainnements

3.30 The following table details the proposed financing plan. Allforeign exchange costs and US$0.5 million in local costs would be funded byIDA. There is no project cofinancing. Project sponsors would financeUS$1.4 million or 162 of the total cost of subloans and investments madeunder the investment credit and equity financing components. The PBIswould finance US$1.5 million or 202 of the total cost of subloans made.

2/ The following price contingency rates are used: Local Costs - 1991(15.02); 1992-3 (14.02); 1994-5 (13.02); Foreign Costs - 1991 (4.71);1992-3 (4.6Z); 1994-5 (4.72).

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The Government would finance US$0.3 million of local costs related to theskills training and establishment costs of the BAPS. LNDC would contributeUS$0.6 million to equity investments and to the costs of existing staffwhich would be transferred to the LIPC. LNDC would also contribute US$0.5million to the costs of infrastructure development for its Industrialestates.

Local Foreign Total---- US$ (millions) -----

Financing Plant

IDA 0.5 20.5 21.0Project Sponsors 1.4 0.0 1.4LNDC 1.1 0.0 1.1PBIs 1.5 0.0 1.5Government 0.3 0.0 0.3Total 4.8 20.5 25.3

G. Environmental Impact

3.31 With assistance from the Bank, the GOL has been developing anational environmental action plan, which will identify the country's mainenvironmental problems and call for an inventory of current developmentactivities capable of addressing them. To implement the plan, the GOLintends to establish a National Environmental Council with a secretariat tocoordinate the development of sectoral guidelines for environmentalprotection. The process is underway to develop national and sectoralenvironmental guidelines and review procedures.

3.32 Projects to be financed through the line of credit and equityline, or projects to be promoted by BAPS or LIPC, would be evaluated, asappropriate, by the investment committees or the boards of the responsibleinstitutions to determine whether the investment project entails anypotential environmental impact. For projects that are found to haveenvironmental side-effects, varying levels of environmental assessmentwould be carried out, and the project design would include measures tomitigate problems. Projects where the environmental impact showsunacceptable environmental damage that cannot be mitigated adequately wouldnot be eligible for financing or services under the proposed project.Additional design preparation costs needed to mitigate environmental damagewould be borne by the project sponsor. Once the National EnvironmentalCouncil has become operational, PBls would submit annually their lendingprogram to the Council's Secretariat for review. World Bank support wouldbe provided during project supervision for establishing environmentalreview processes (at the national level) for the lending agd investmentprograms of financial institutions.

3.33 Aspects of the proposed project are expected to contributedirectly to environmental improvement. Of note is the agroindustriespolicy reform package, which includes the introduction of grade-wisepricing and permission for the abattoir to reject unacceptable animals. Itis expected that this will strengthen the concept of the economic value oflivestock, reduce the concept of livestock numbers alone as a measure of

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wealth and status, and lead to a reduction of overgrazing and uneconomicland management.

B. Procurement

3.34 A review of Lesotho procurement practices found that procurementregulations and procedures are compatible with Bank Guidelines. However,slow project implementation is due in part to lack of experience withprocurement activities. This problem will be addressed by hiring a short-term consultant prior to project effectiveness to assist implementingagencies with the preparation of bidding documents and with consultantevaluation and selection. In addition, the project launch, which will takeplace during the first supervision mission (January 1991) will include aworkshop by a bank procurement specialist to train staff in consultantevaluation and procurement procedures which represents the bulk of projectprocurement.

3.35 The project elements, their estimated costs and proposed methodsof procurement are summarized below.

Table 3.2: Summary of Proposed Procurement Arrangements(USS Millions)

Project Element Procurement Method Total

ICB/LCB ILS NAInvestment Creditand Equity -- -- 9.6 9.6

(6.6) (6.6)

Equipment and Vehicles 1.4 0.6 -- 2.0(1.4) (0.6) -- (2.0)

Civil Works -- -- 1.2 1.2__ __ (0.7) (0.7)

Consultancies, Studies,Training -- -- 9.7 9.7

__ __ (9.7) (9.7)

Other (Recurrent Costs, -- -- 2.8 2.8refund, PPF Advance, and (2.0) (2.0)unallocated contingies)

Total 1.4 0.6 23.3 25.3(1.4) (0.6) (19.0) (21.0)

Note: Figures in parentheses are the amounts financed by the IDA Credit

3.36 Under the line of credit and equity financing components (40Z ofproject costs) regular commercial procurement by private enterprises isregarded as efficient and economic. Aggregate amounts under each type ofprocurement are not known a priori for subprojects and investments. PBIs

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would assure themselves that sub-borrowers had canvassed the main sourcesof supply and had chosen appropriately. PBI appraisals would cover theprocurement procedures used, and PB1s would maintain records of theprocurement processes in subproject implementation. The same procedureswould apply to goods procured on the basis of financing from the equityfund component. ICB would not be used for these components sincesubproject size under the project cannot exceed $0.5 million equivalent(para. 4.05).

3.37 For the establishment of LIPC and BAPS there would be aboutUS$0.2 million of office equipment and vehicles. For these items at leastthree quotations would be obtained using the method of International andLocal Shopping (ILS). Records of bids and procurement for these itemswould be kept by LNDC and the project coordinator in MTI for review by IDAmissions. Procurement for the infrastructure development component wouldbe as follows: civil works for electricity, telecommunications, water androads, would be contracted respectively from LEC, LTC, the Department ofWater and the Department of Public Works as a matter of law. Prices forcivil works originate from standard unit construction prices. E-quipmentand materials for infrastructure would also be provided by these agencies.However, they have agreed to utilize International Competitive Bidding(ICB) to the greatest extent possible. Lots would be made as large aspossible to attract the maximum numbers of potential bidders. Packages arenot expected to exceed US$300,000, and it is expected that about US$400,000of equipment and materials for this component would be procured on thebasis of price quotations from at least three suppliers using the method ofILS.

3.38 Procurement of management contractors and consultants would beaccording to Bank Guidelines and Procedures. In all cases, selectioncriteria would be based on the qualifications and experience of the firmand on the quality of the technical proposal. Financing (budgets andprice) would be given secondary consideration in the evaluation process,except for the investment promotion twinning contract arrangement where itwould not be a factor (given the central role played by this component inachieving project objectives). All contract awards for consultants andtraining would require prior IDA review and approval. In all cases, termsof reference have been drawn (Annex IX). The Government has requested Bankassistance in finalizing consultant shortlists. Letters of invitation tosubmit proposals would be sent by December 1, 1990 and consultant selectionwould be completed shortly after credit effectiveness, by March 1991.Component specific arrangements are as follows: Agroindustries Development- Consultants would be procured for four management and training contractsaveraging US$1.2 million each. Details on the estimated cost of eachcontract is contained in Annex VIII. Investment Promotion - Two contractstotalling US$1.7 million would be awarded respectively for the twinningarrangements for BAPS and for LIPC. Procurement of other TechnicalAssistance for institutional strengthening and studies would be managedunder separate contracts by the beneficiary institution and is discussed inpara. 4.18.

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I. Disbursement

3.39 A Project Preparation Facility (PPF) advance of US$150,000 wasapproved by IDA on March 3, 1989. It will be refinanced upon crediteffectiveness.

3.40 The disbursement schedule for the IDA credit is given in AnnexVIII, Table 10 and shows that funds would be disbursed over six years,largely reflecting the disbursement profile for Lesotho. The Central Bankwould serve as disbursement and collection agent for credits grantedthrough the participating banks.

3.41 To expedite disbursements under the project, the Central Bankwould open two Special Accounts: one for the overall project and one forthe proposed line of credit. The accounts would be managed by theDevelopment Finance Division. IDA would make initial deposits of US$1.8million and US$0.8 million equivalent in the general and line of creditaccounts at the Central Bank. These sums represent about four months ofdisbursement requirements. Applications for replenishment of the SpecialAccounts would be accompanied by appropriate supporting documents,including a reconciled bank statement.

3.42 Withdrawal applications would be submitted to IDA by DFD withfull supporting documentation, except for payments against contracts with atotal value of less than US$100,000 for which reimbursement could beclaimed on the basis of statements of expenditure (SOEs). All expendituresmade under the line of credit and the equity line shall be made under SOEs.Documents in support of SOEs would be retained by the Development FinanceDivision of the Central Bank and would be available to IDA for inspectionduring supervision missions.

3.43 Disbursements would be made on the following basis:

(a) Line of Credit: 802 of eligible subloans disbursed by the P8Is;

(b) Equity Line: 100? of equity funds invested by LNDC in qualifyingprojects;

(c) Technical Assistance, Training and Studies: 100? of foreign andlocal expenditures;

td) Infrastructure Development: 1002 of foreign expenditures forgoods and services and 802 of civil works;

(e) Training under Small Business Development Fund: 1002 of totalexpenditures; and

(f) Vehicles, equipment: 100S of foreign expenditures if importeddirectly and 85X of local costs if procured locally.

3.44 The final date for submission of subloan and equity investmentproposals for IDA's approval would be December 31, 1994. The expectedproject completion date would be December 31, 1995. The closing date fordisbursement would be June 30, 1996, in accordance with the expecteddisbursement profile.

41

J. Accounts and Audit

3.45 Participating banks (under the line of credit component), LNDC(under the equity line component), LIPC and BAPS (under the investmentpromotion component), and the entities receiving technical assistance wouldmaintain separate project accounts. The project coordinator and accountantappointed by the Ministry of Trade and Industry would be responsible forcoordinating the presentation of these accounts for IDA supervisionmissions. They would also be responsible for preparing the accounts forinclusion in the annual project progress reports. The capability of theMTI comptroller was evaluated at appraisal and found to be generallyadequate. He will receive training from IDA's Loans Department in Bankdisbursement procedur s and further training in project accounting duringproject implementation.

3.46 The Auditor General is responsible for coordinating the auditsof parastatals and government ministries. Audit work is subcontracted toprivate consulting firms, among which some of the major international firmsare represented. At negotiations. assuranccs were obtained that (a) theaccounts of project entities (to include tle PBIs) would continue to beaudited by the Auditor General whose audit; are acceptable to the Bank:; (b)the audits would cover SOEs as relevant . .d would include specific commentson SOEs and the use of funds from the Special Account; and (c) within ninemonths of the close of each financial year, the audited annual financialstatements, together with the full auditor's report, would be submitted tothe Bank. LNDC, LADB, BEDCO and the companies participating in the agro-industries component would be expected to submit audited accounts to IDA.

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IV. PROJECT IMPLEMENTATION AND MANAGEMENT

A. Line of Credit Component

4.01 Apex Administrative Responsibility. The Development FinanceDivision of the Central Bank would be responsible for (a) administering theproject credit line; and (b) evaluating the adequacy of banks' appraisalstandards and consistency between subprojects submitted for refinancingwith eligibility and selection criteria (para. 4.04). DFD would play anaccounting and administrative role and would not be involved in creditreviews or decision-making. DFD would submit quarterly reports on theoperation of the credit line, identify weaknesses in the quality of sub-project preparation and make recommendations to the commercial banks on howto correct weaknesses. DPD would also handle the establishment andmanagement of the project Special Accounts.

4.02 The DFD would also supervise administration of the projectfinanced bank training component to ensure that all interested andqualified bank staff participate in the various management, appraisal, andportfolio monitoring modules as appropriate to their responsibilities.Lesotho Bank's Personnel and Training Department would actually administerthe training component, including the screening of training proposals andsubmission of disbursement applications to DFD. At negotiations,assurances were provided that by March 30 of each year, this Departmentwould submit to the Association a training plan for training in bankmanagement, project appraisal and supervision.

4.03 Operating Mechanism end Credit Management. Subloans grantedwould normally finance up to 802 of the total project cost for existingenterprise subprojects. 'While in exceptional cases, up to 90Z of totalproject cost could be financed, in no case should the debt coverage ratiobe less than 1.2:1. For new enterprise development projects, where risksare higher and where it is desirable to limit the debt to equity ratio, thedebt coverage ratio should not be less than 1.4:1. Disbursements would bemade against 80 of the loan made by PBI. It is anticipated that as banksgain experience and profitability with project term financing that theywould mobilize increased levels of term resources as a basis for futureproject investment lending.

4.04 Sub-Project Eligibility and Selection Criteria. Although thetarget of the project is non-traditional bank clients, the eligibility oflarger enterprises is not precluded. However, through its promotionalfacilities and training for bank branches, the project will place greateremphasis on expanding access to the banking system for indigenousenterprises. Subsectors eligible for financing would include agribusiness,mining and quarrying, all manufacturing, construction, transport andcommercial services. Given the important role of microenterprises, therewould be no required lower limit to the scale of enterprises eligible forfinancing under the credit.

4.05 Subprojects would normally have to meet the following criteria,although exceptions would be considered on a case-by-case basis:

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(i) Subloans not to exceed US$0.5 million equivalent;

(ii) Positive appraisal of the firm/project technicalviability, market analysis, managerial capacity,and ability to manage significant adversities;

(iii) Incremental cash flow analysis leading to a financialinternal rate of return (FRR) calculation with a rate ofreturn hurdle no less than the interest rate on the loancontract; in addition, a summary cash flow analysis toindicate the firm's viability and ability to service itsdebt; and

(iv) For subloans above US$100,000 equivalent, current andprojected balance sheets and income statements would berequired, along with financial ratio analysis, includingliquidity, debt service coverage, leverage and earningratios.

4.06 Project Preparation. Potential beneficiary firms will undertakeinitial preparation of subprojects. They may seek assistance from theAfrican Project Development Facility of the IFC (headquarters in Nairobi).BEDCO and HTIs Small Industries Division would provide project preparationassistance, and BAPS would provide contacts between consultant advisors andindigenous enterprises for project preparation, business plan developmentand other specialized business advisory assistance.

4.07 Sub-Project Appraisal. PBIs would review the subprojects inaccordance with their own loan analysis procedures. The appraisalevaluation would cover relevant information about the enterprise and theproposed investment, including its technical soundness, financialviability, economic efficiency and managerial capacity. The appraisalreport would also set down loan security requirements. Financial rate ofreturn (FRR) calculations would be required for all subloans, on the basisof cash flow analysis, with balance sheet analysis also required forsubloans above US$100,000 equivalent. As Lesotho's economy is relativelyundistorted with few divergences between economic and market prices, noeconomic rate of return calculation would be required. Project financedtraining of bank staff in project appraisal, portfolio managementtechniques, and general bank and enterprise management would commence soonafter project effectiveness. Because this is the first IDA project inLesotho involving the commercial banks, the first three subprojects fromeach PBI would be subject to prior IDA review and approval. Thereafter,with the exception of subprojects over $300,000 equivalent, which wouldrequire prior IDA approval, IDA would review a sample of subprojects on anex-post basis during supervision missions.

4.08 A condition of effectiveness would be the execution of asubsidiary loan agreement between GOL and the Central Bank and between GOLand LNDC. Conditions of disbursement to the individual PBIs would beexecution of a PBI agreement with the Central Bank. The PBI agreementsinter alia would specify (a) the requirement that the participating bankhas established a projects unit with at least one staff qualified inproject appraisal techniques; (b) the subproject appraisal eligibility andselection criteria detailed in paras. 4.04 and 4.05, (c) debt service

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coverage ratios of not less than 1.2:1 for established firms and not lessthan 1.4:1 for new enterprises; td) the environmental impact assessment ofsubprojects would be undertaken during bank appraisals in accordance withbank guidelines; (e) the availability of staff training in projectappraisal and portfolio management techniques as a contribution to banks'developing project-based lending capability; and (f) BAPS and othergovernment support for monitoring and advisory assistance for subprojectsand loans. Execution of a PBI agreement between the Central Bank and atleast one participating bank would be a condition of effectiveness of theproposed project.

4.09 To support the mobilization of term deposits at Negotiations,the Government provided assurances that by October 31, 1991, it would paymarket rates for long-term bonds.

4.10 Specific conditions of disbursement to LNDC would be: (a)adjustment of interest rates to subborrowers to rates sufficient to covercosts, risk, and leave some margin for profit for all credit linesoperated; (b) implementation of resource mobilization through a bond issueor other instrument, and preparation of documentation by December 31, 1991for this instrument; and (c) submission to IDA of an acceptable action planto increase income and reduce costs and improve collection performance onloan operations to ensure viable operation.

4.11 The condition of disbursement to LADB, would be that it has (a)implemented its technical assistance program; (b) implemented a viable planfor its recapitalization; (c) put in place systems adequate to manage itsloan portfolio; and (d) implemented key aspects of its Strategic CorporatePlan of Action to be developed under the institutional strengtheningcomponent.

B. Equity Funding and Venture Capital Cmponent

4.12 Operating Mechanism. Initially GOL and LNDC would be the onlyshareholders in the LIH mutual fund with purchased investments being thebasis of GOL shareholding. LNDC's shareholding would be from transferringshares of some of its mature companies to the mutual fund. The Governmentwould make the proceeds of the equity component available to the LIH mutualfund without interest charges, and the government would continue to bearboth the foreign exchange risk and the IDA service charge. For a fivepercent fee, LNDC would invest these resources on behalf of the GOL asshares in the enterprise concerned. LNDC would agree to establish (withsupport from the proposed project) within the treasury function of theFinance Department, the professional and administrative capability tomanage an equity/investment fund. On receipt of dividends, LNDC would berequired to pass the funds back to LIH on account to the Government.Capital gains realized would similarly be passed back to LIH, so that fundsfor future investments would be internally generated.

4.13 GOL would have no say in the management and affairs of the firmas a result of its equity investment. This would be provided for by themutual fund arrangement, which is intended to create a screen between theGovernment as the source of funding and the enterprise investment. To helpensure the quality of investments, the first three investments would

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require IDA review and approval. Thereafter, IDA would review a sample ofinvestments on an ex post basis during supervision missions.

4.14 Eligibility and Selection Criteria for Investments. Eligibilitycriteria are based on LNDC Investment Policy Guidelines which areacceptable to IDA and would ensure that the resources of the Equity Fundwill finance participation in financially and economically viableindustrial projects. The viability of the fund is ensured by the followingadditional Capital Limit Guidelines.

(i} LNDC will diversify the portfolio of investments across as broada spectrum of risk levels, economic activities and size ofcompanies. In so doing, the company will adhere to thefollowing capital limit guidelines;

(ii) Single Industry. Not more than 25S of Fund resources shall beinvested in a single industry as defined under the three-digitSITC classification. In cases where economic risk categoriesare imperfectly defined under the three-digit category, withBoard permission, the four-digit category may be applied;

(iii) Single Enterprise. Not more than 102 of the Fund shall beinvested in a single enterprise including affiliated companieswhich the Fund controls directly or indirectly. This level mayfrom time to time be raised to 152 for expansion projects withapproval of LNDC's Board. For investment in new enterprises thelimit shall be 52 for any single enterprise;

Uiv) Start-Up Companies. Not more than 252 of the Fund's capitalshall be invested in enterprises classified as 'start-ups". Acompany shall be graduated from the position of start-ups afterit has met its projected obligations and production and salestargets and other realistic measures in an acceptable fashionfor a period of not less than 24 months;

(v) The Fund will not acquire more than 50X of the voting powers ofa given company unless the enterprise fails to meet itsobligations and thus requires reorganization in the interest ofcreditors and/or shareholders.

4.15 Arrangements for Divestiture. An ultimate objective of theproposed equity financing scheme is to encourage LNDC's disposal to theprivate sector of its own and the Government's shareholdings. Securitieswould be based on the cash flow or growth potential of some of LNDC's ownmature subsidiaries as well as the matured companies that have receivedequity financing under the proposed project. Although sale of securitiesfrom LIH is a medium-term objective, the Bank and LNDC management agreedthat a first step would be for LNDC to explore the successful investmenttrust established in Botswana and attempt to adopt appropriate elements forLesotho. The project financed institutional strengthening component wouldprovide assistance in developing the marketing plan, prospectus, and stafftraining to manage the mutual fund. At appraisal, LNDC's project appraisalcapacity was Judged to be adequate.

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C. Agro-Industries Component

4.16 The GOL has established a Task force consisting of the PrincipalSecretaries from the Ministries of Planning, Trade and Industry, andAgriculture to coordinate policy related to the agroindustrial parastatals.At appraisal, the Task Force made a commitment on behalf of the GOL tocarry out the agroindustrial policy reform package. The Task Force wouldon behalf of the GOL coordinate implementation of the agreed policies andinstitutional reforms in collaboration with the Boards of Directors andmanagement of the individual enterprises involved in the component.Specifically, the Task Force would be responsible for (a) drafting terms ofreference and selection of consultants; and (b) supervising the performanceof management contractors and related training, and ensuring that remedialsteps, as necessary, are taken with respect to performance. The Task Forcewould also ensure that subsidiary agreements are executed as a condition ofdisbursement of the credit proceeds for each individual company. Anadditional condition of disbursement is that policy reform measuresaffecting the performance of that company have been implemented. Thesubsidiary agreements would provide inter alia for (a) implementation ofpolicy reforms affecting the performance of that company; and (b) thecompany operating on a commercial basis with full management autonomy overpricing, costs and expenditure control, and staffing. Component financingfor management contracts and local staff training would be provided over atwo-year period. Detailed phasing and costing for each of the fivemanagement and training contracts are presented in Annex VIII, Tables 8.5,8.6, and 8.7.

D. Industrial Infrastructure Component

4.17 The Investment Promotion Committee (para. 3.24) would coordinateplanning and issue resolution related to construction of infrastructure forLNDC and privately developed industrial estates. A review of existingstudies on construction standards for the electricity network would beundertaken by this Committee with project support. Recommendations onstandards, a cost sharing formula and timetables for procurement andinfrastructure construction would be agreed with IDA. To support thetimely provision of infrastructure to industrial estates, LNDC would beresponsible for submitting planned needs. LEC, LTC and and the Ministry ofWorks would be responsible for equipment and materials procurement and forperforming civil works according to procedures indicated in para. 3.37.They would also be responsible for adopting construction standards and thecost sharing formula agreed with IDA.

E. Institutional Strengthening Component

4.18 The Ministry of Trade and Industry would have overallresponsibility for management of this component. With respect to thetwinning arrangement for the Business Advisory and Promotion Service (BAPS)and the Lesotho Investment Promotion Center (LIPC), technical assistance toBEDCO, and the skills testing advisor, MTI has already reviewed andapproved Terms of Reference and drawn up a short list of qualifiedconsultants. Advisory assistance needed by LNDC and LADB for strengtheninglending, property management, equity and overall operations has been

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identified by the respecti%3 institutions and reviewed with IDA. Theeffectiveness of consultants contracted to provide the assistance would bereviewed during supervision missions.

4.19 As the basis for project support to strengthen LADE and BEDCO,at negotiations, the government provided assurances as follows: LADB (a)by March 1992, the Strategic Corporate Plan of Action would be finalizedand sent to IDA for review; (b) by June 1992, it would be discussed withIDA and agreement would be reached on key steps to be taken to strengthenthe institutions; and (c) measures would be undertaken necessary to putLADB operations on a viable basis including, but not limited to broadeningthe institution's mandate to include commercial banking. BEDCO (a) byOctober 31, 1991 BEDCO would carry out a reorganization consistent with itsnew focus on provision of industrial and workshop facilities and on projectpreparation assistance to SMEs; (b) implement a cost-recovery rentalpolicy; and (c) carefully screen SMEs admitted to the industrial estate toensure their full-time involvement in an industrial enterprise and theviability of their business. Funding for the institutional strengtheningcomponents would be provided as a grant by the Government to the relevantinstitution.

4.20 The Principal Secretary (P.S.) would establish two managementadvisory committees. The BAPS Advisory Committee would be chosen fromrepresentatives from the Ministries of Education, Planning, Employment,BTC, BEDCO, LHDA and the Chamber of Commerce. It would advise the P. S. onthe policies and procedures for BAPS and review its budgets. It would alsoreview proposed allocation of funds from the Small Business DevelopmentFund. The P.S., in collaboration with this committee, would be responsiblefor drawing eligibility criteria for disbursements and arrangements foradministration of the fund. Submission of administration arrangementsacceptable to IDA would be a condition of disbursement of funds from thiscomponent. To ensure prompt decision-making, the P. S. Trade wouldmaintain final approval authority.

4.21 The Land Managment Committee would review and approveapplications for land leases and subleases. The committee would consist ofthe P.S.'s of the Ministries of Planning, Trade and Industry, and Interior(Chairman).

4.22 The Principal Secretary Ministry of Trade in collaboration withthe P.S. Ministry of Planning would be responsible for overseeing twoBeneficiary Assessments which would take place respectively during thethird and fifth years of project implementation. The first assessment ofinvestor attitudes were carried out during project preparation as the basisfor the design of project components and policy instruments to provide amore attractive investment environment. The project financed BeneficiaryAssessments would be completed by March 1993 as the basis for the JointGOLWIDA Project Mid-Term Review and by December 31, 1995 as the basis forthe Project Completion Report. The BAs would survey the attitudes ofindigenous and foreign investors and would (a) evaluate the impact ofpolicy reforms and LIPC and BAPs services on investors' attitudes towardLesotho's investment environment; and (b) identify areas where progress hasbeen made and areas of continued weakness. At negotiations, the Governmentidentified acceptable local institutions with a business orientation whichwould be appropriate to implement the proposed survey.

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4.23 The component would also finance additional studies and/orconsultancies as the analytical basis for additional policy measures neededto improve the environment for private sector investment. Terms ofReference for those studieslconsultancies would be acceptable to IDA.

F. Overall Proiect Management, Monitoring. Evaluation

4.24 The Principal Secretary MTI would be responsible for overallproject coordination. The P. S. Ministry of Trade in collaboration withthe P. S. Ministry of Planning would be responsible for coordination of theMid-Term Review (para. 4.26), for overseeing the Beneficiary Assessments(para. 4.22), and for coordinating policy discussions among relevantministries.

4.25 LNDC, BAPS, the Development Finance Division of the CentralBank, LADB, and BEDCO and the Trade Test officer in the Vocational andTechnical Education Department would prepare progress reports for theirrespective components (summary of operations, use of project funds, andfactors bearing on implementation progress) for submission to IDA not laterthan two months after the end of each year.

4.26 The Joint Bank/Government Mid-Term Review would be held in March1993 to (a) review project progress with respect to institutional andpolicy reforms; (b) review the findings and recommendations of the FirstBeneficiary Assessment; and (c) agree on an action program for implementingadditional policy measures, analytical studies as the basis for futurereforms, and additional institutional strengthening measures. The IDAmission aide-memoire would summarize recommended actions for addressingoutstanding issues. Implementing agencies would be responsible for follow-up to be reviewed by subsequent supervision missions. At negotiations,Government provided assurances that the Mid-Term Review would be undertakenby March 1993, and that actions agreed during the Review would beimplemented in consultation with IDA.

4.27 A Project Completion Report (PCR), content and format to beagreed on with the Bank, would be submitted to IDA within six months afterthe project closing date.

G. IDA Supervision

4.28 The project's multi-faceted approach will require close IDAsupervision with inputs from the divisions responsible for industry,agriculture (agroindustries) and human resources (manpower development).Task-oriented technical assistance financed by the project will beincorporated into supervision missions. To support the Government'scapacity to implement the project, the following steps would be taken.First, procurement of consultants would be assisted by the hiring of ashort-term procurement advisor prior to project effectiveness. Second, theproject launch workshop to take place during the first supervision missionwill inter alia provide intensive training to counterpart staff indisbursement and procurement procedures and in preparation of relateddocuments and project accounts. The Government will be responsible forcoordination of all supervision missions and for organizing the Mid-Term

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Review. A detailed supervision plan is contained in Annex XI. Keyactivities and supervision missions (m) are as follows:

Feb. 1991(m) Project Launch WorkshopMar. 1991 Completion of Consultant selectionOct. 1991(m) Review implementation of policy measuresDec. 1991 LNDC preparation of documentation for resource

mobilization instrument

June 1992(m) Agreement on LADB Strategic Corporate PLan

March 1993(m) Joint IDA/Government Mid-Term ReviewSept. 1993(m) Review Progress - Privatization of key

agroindustries

March 1994tm) Review project implementation progressDec. 1994(m) Review project implementation progress

Dec. 1995(m) Discussion second Beneficiary Assessment

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V. PROJECT BENEFITS AND RISKS

A. Beneficiaries and Expected Benefits

5.01 Lesotho's industrial and financial sectors are essentiallysound. Project interventions are primarily intended to change the policyenvironment and strengthen the capacity of key institutions, and to providefor the expansion of services to support new investment and enterprisedevelopment.

5.02 The Government of Lesotho would benefit from implementation ofan industrial investment promotion strategy that would enhance economicgrowth, improve balance of payment performance, and increase employmentgeneration. Specific project contributions to these benefits are asfollows.

5.03 The investment promotion components, related policy reforms andthe industrial infrastructure component are expected in the medium term todiversify the subsectoral composition and change the *footloose" characterof foreign investment by encouraging activities with higher value added andindustries based on agriculture which employs the majority of thepopulation. The strong export orientation of firms investing in Lesotho,because of its preferential trade access, should improve the country'sbalance of payments performance. The industrial infrastructure componentwould support these objectives by ensuring the timely provision of servicedindustrial estates -- a key investor requirement. Indigenous investors areexpected to benefit from better information, advisory, and trainingservices to support the start-up of new businesses, no matter how small.Promotion and development of subcontracting relationships with largecompanies is expected to contribute to the transfer of knowledge aboutmarkets, management, and production technology. Abolition of the taxholiday should substantially expand the revenue base which is currentlynon-existent for manufacturing firms. Since a 15Z rate of tax hasapproximately the same present value as a 6 year tax holiday followed by a37.5Z rate of tax, it is expected that investors will prefer theadministrative ease of the low flat rate. Enhanced revenue can then beused to finance urgent infrastructure and services to support sustainedinvestment in the sector.

5.04 Components and policy reforms in the agroindustrial sector wouldlay the groundwork for private agroindustrial development. In the short-term this component would provide for the efficient operation of keyparastatals, reduce their drain on the government budget, and expandmarkets for high value crops, the result of a more dynamic and efficientsubsector. This should benefit a large number of agricultural householdswhich comprise the majority of the population.

5.05 The financial sector reforms supported by the project creditline should pave the way for a generally more competitive and aggressivebanking system, increased access by clients which may have good projectsbut no access to financial services, and the deepening of financial markets

_ 51 -

through the introduction of new financial instruments and increasedmobilization of term resources. Introduction of venture capital will filla void in Lesotho's financial market.

5.06 The Government has already shown commendable commitment andaction in undertaking needed reforms which have been supported by theanalytical work provided during project preparation. The policy dialogueand consensus building effort would be maintained during projectsupervision using the Beneficiary Assessment process and the Joint IDAIGOLMid-Term Project Review to improve understanding of investor's perceptionsand needs. This dialogue would be the basis for an on-going process ofimproving the environment for investment.

5.07 The project is expected to result directly through investmentfinancing and indirectly through promotion of new foreign investment in thecreation of some 3,500 new jobs over five years -- about a 1OZ increaseover average incremental annual industrial employment. BAPS is expected toserve directly about 500 indigenous investors during the course of theproject, through contract training programs and information and advisoryservices. Women in Business and Women's World Banking would receivesupport through the Small Business Development Fund managed by MTI.

B. Risks

5.08 Overall Project Risks. In the short to medium term, Lesothomust depend upon foreign investment for market knowledge/access, fortechnology and information transfer, and for employment generation. Thepotential removal of sanctions against the RSA and the consequent impact onLesotho's attractiveness as an investment site, as well as the impact ofgeneral political change in the region on Lesotho's investment promotionefforts, are important risks.

5.09 The risk surrounding the lifting of sanctions is largelymitigated by the fact that Lesotho's preferential access to markets and lowlabor costs still gives it an advantage for export-oriented investors.From Lesotho, investors have easy access to the large and growing SouthAfrican market through the SACU arrangements and to external markets wherepreferential (tariff exempt) access is available to Lesotho through theLome Convention and GSP arrangements.

5.10 The general political uncertainty in the region and itspotential impact on Lesotho's investment promotion efforts is also a matterfor concern. Lesotho's economic prospects as well as the potential torealize project objectives are closely bound with South Africa's future. Sofar the prospects of political change in South Africa has had a positiveeffect on investor attitudes towards the region, but if the process isprolonged and internal unrest grows, investor attitudes may change. On theother hand, changes in South Africa's economic development policies awayfrom heavy subsidies for investors in the "homelands' should enable Lesothoto compete for foreign investment on more even terms.

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5.11 A further risk to Lesotho's investment promotion strategy basedon labor intensive production is the er3ding competitiveness of Basotholabor in the region with respect to wage rates, skills and productivity.This risk is being addressed by the project manpower and skills trainingprogram and by policy reforms related to the setting of wage rates.

5.12 The principal risk to the development of financial markets isthat the Government deficit will again crowd out financing to the privatesector and counteract project efforts to promote less conservative andproject-based term lending. This risk is largely mitigated by (i) thesuccessful expenditure control program being implemented under the PFPprogram and (ii) the increased revenue that will follow from increased SACUreceipts from LHWP-related lmports.

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VI. AGREEMENTS REACHED AT NEGOTIATIONS AND RECONMENDATION

6.01 During negotiations, agreements were reached as follows:

Policy Reform Program and General Project:

(a) The Government would maintain policies already implemented asfollows: (i) replacement of the tax holiday system with a 152 rateof tax as part of the tax code; (ii) repeal of the policy requiring amajority LNDC shareholding in resource-based foreign enterprises; and(iii) removal of the tax exemption on treasury bills. The Governmentwould undertake additional measures as follows by June 30, 1991: (i)allocate industrial land for private sector development; (ii)streamline industrial licensing and the work permitting process forkey management staff and technical experts of foreign companies;(iii) set the minimum wage to take account of Lesotho's competitiveposition vis-a-vis other potential investment sites; and (iv)coordinate the provision of services and infrastructure to industrialestates (paras. 3.19 to 3.24);

In the agroindustrial sector: By October 31, 1991, the Governmentwould a) eliminate existing subsidies, price and import controls,government grants and budgetary transfers; and implement a policyrequiring full cost recovery on operations of the agroindustrialparastatals; b) introduce measures to put operations on a commercialbasis, including gradewise pricing for inputs and a reject-grade forinferior products offered by farmers; and (c) the parastatals beingassisted under the project would be registered under the CompaniesAct, with full autonomy and accountable to their respective boards ofdirectors. By April 1, 1993, ensure private-sector (local andforeign) participation in each registered company on a negotiatedbasis, agreed to by the board of each company and the private sectorparticipant (para. 3.25 to 3.26);

In the Financial Sector the Government would agree to pay marketyields on long-term treasury bonds as a means to increase theavailability of profitable investment opportunities for long-termfunds and thereby encourage the mobilization of term resources(October 31, 1991, para. 3.27);

(b) The Government would agree to coordinate the participation of allagencies and Ministries to participate in a Joint Government/IDA Mid-term Review to be held no later than March 1993. Actions agreedduring the review would be implemented in consultation with IDA(paras. 4.26);

Line of Credit:

(c) The Government would onlend US$4.7 million to the Central Bank ofLesotho (CBL) at the onlending rate to PBIs minus one percent to

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cover CBLs costs of administering the component. CBL may re-lendrepaid amounts to PBIs for up to 15 years (paras. 3.07 and 3.08);

(d) CBL would onlend funds to eligible participating banks at a rateinitially set at the average cost of term deposit funds in thebanking system. The onlending rate to PBIs would be periodicallyreviewed and adjusted to ensure that it does not represent adisincentive to the PBIs mobilizing their own term resources (para.3.08);

(e) Onlending by the participating banks to subborrowers would be inlocal currency at the prevailing market rate of interest. (para.3.08);

(f) Agreements between the CBL and the participating banks would specifyrequirements for the PBIs as follows: (a) establishment of a unitwith at least one staff, qualified in project appraisal techniques;(b) project appraisals to be carried out according to standardappraisal criteria including ti) requirement that subloans not exceedUS$0.5 million equivalent; (ii) debt service coverage ratios of notless than 1.2:1 for established firms and 1.4sl for new enterprises;and (iii) the environmental impact assessment of subprojects would beundertaken during bank appraisals in accordance with Bank guidelines(para. 4.08);

Equity Fund:

Cg) The Government would invest US$1.9 million equivalent in a mutualfund to be managed by LNDC which would make venture capitalinvestments in eligible enterprises (para. 3.09 and 4.12);

(h) LNDC would receive funds without interest charges, and the Governmentwould bear the foreign exchange risk. Dividends and capital gainswould be passed back to the equity mutual fund (para. 3.09 and 4.12);

(i) Investments would be made by LNDC based on its Investment PolicyGuidelines and according to capital limit guidelines to ensurediversification and fund viability. (para. 4.14) and (b) LNDC wouldestablish within the Treasury function of the Finance Department, theprofessional and administrative capability to manage themutual/investment fund (para. 4.12);

Agroindustries Development:

(j) Government would onlend US$4.6 million to finance managementcontracts and management and staff training for the National Abattoirand Feedlot Complex, the Poultry Hatchery, the Milk Processing Plantand Collection Centers and Lesotho Poultry Cooperative Society (para.3.10);

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(k) Agreements with individual enterprises would provide for (a)implementation of the policy reforms affecting the performance ofthat company; (b) the company operating on a commercial basis withfull management autonomy over pricing, cost and expenditure controland staffing (para. 4.16);

(1) The Agroindustries Task Force, consisting of the PrincipalSecretaries of Planning, Trade and Agriculture would havecoordination and management responsibility for the policy reformprogram and project assistance to parastatals under the project(para. 4.16);

Investment Promotion:

(m) LNDC's participation in the investment promotion component to be asfollows: (a) the LIPC would be established as a department level unitwith a separate subcommittee of the Board to be chaired by the P.S.Trade and Industry with strong private sector representation; (b)investor service would be provided on an unbiased basis even forinvestors not needing an LNDC factory shell or equity participation;(c) LIPC would undertake a revision of investment promotionliterature to indicate the various policy changes agreed to beimplemented and the completely flexible policy regarding the level ofequity participation in resource based industries (para. 2.30);

Institutional Strengthening and Training:

(n) By March 1992, the LADB Strategic Corporate Plan of Action would befinalized and sent to IDA for review; and by June 1992, it would bediscussed with IDA and agreement would be reached on key steps to beundertaken necessary to put LADB on a viable basis (para. 4.19);

(q) BEDCO would by October 31, 1991 (i) carry out a reorganizationconsistent with its new focus on provision of industrial estate andworkshop facilities and on project preparation assistance to SME's(ii) implement a cost recovery rental policy and (iii) carefullyscreen SME's admitted to industrial estates to ensure their full-timecommitment to their enterprise and the viability of their business(para. 4.19); and

(r) Lesotho Bank's Training Department would (a) by March 31 of eachproject year prepare and submit to the Association a training planfor training in bank management, project appraisal and supervision;(b) manage training on behalf of the PBIs and other financialinstitutions; and (c) make application to IDA on behalf of thecommercial banks for training (para. 4.02).

6.02 Conditions of Disbursement would be as follows:

(a) For the line of credit component to LADB -- (a) implementation of itstechnical assistance program; (b) implementation of a viable plan for

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its recapitalization; (c) put in place systems adequate to manage itsloan portfolio; and (d) implementation of key aspects identified inits Strategic Corporate Plan (para. 4.11);

(b) For the line of credit component to LNDC: (i) LNDC adjusting itsinterest rate to subborrowers to at least the prime rate of interestfor all credit lines operated or to a level which would allow theCorporation to recover the costs of its lending operations and ensurefuture sustainability of those operations; (ii) preparation ofdocumentation by December 31, 1991 for the floating of a small bondissue or other resource mobilization mechanism agreed with IDA; and(iii) submission to IDA of an acceptable action plan to increaseincome, reduce costs and improve loan collection performance on loanoperations to ensure viable operation (para. 4.10);

(c) For the line of credit component to individual PBI'st execution of aPBI agreement with the Central Bank (para. 4.08);

td) For the agroindustries component to the individual agroindustrialparastatalss (a) prior implementation of policy measures affectingthe performance of that company and (b) the agroindustrial parastatalhaving entered into a subsidiary agreement with the Government (para.4.16); and

(e) Disbursements from the Small Business Development fund would besubject to government arrangements, approved by IDA, foradministration of the fund (para. 4.20).

(f) For infrastructure development component GOL would agree with IDA on(a) a formula for sharing of the costs for main distribution linesbetween end users and Lesotho Electric Corporation (LEC) and LesothoTelecommunications Corporation (LTC) respectively and (b)construction standards and procurement arrangements, to be applied toutility networks (para. 3.14).

6.03 Conditions of Effectiveness would be as follows:

(a) An executed subsidiary loan agreement between the GOL and the CentralBank and between the GOL and LNDC (para. 4.08); and

(b) An executed PBI agreement (participating bank agreement) between theCentral Bank and at least one commercial bank (para. 4.08).

;NNE

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Annex IPage 1 of 6

Table 1.1

Lesotho: The Structure of Economic Activity, 1967-1988(percentages of GDP)

1967188 1980 1984 1988

Primary Sector 36.8 33.9 24.7 22.7of which Agriculture 34.5 26.2 24.5 22.6

Secondary Sector 7.7 16.5 20.7 24.0

of which Manufacturing 3.4 5.2 10.1 11.0Construction 4.0 10.5 9.7 11.8

Tertiary Sector 55.5 49.3 54.6 53.2of which Public Administration,Education and Health 14.6 24.7 20.3 22.1

Source: Lesotho Bureau of Statistics and Central Bank

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Annex IPage 2 of 6

Table 1.2

OwnershiR of Firms with Pioneer Industry Status

March 1989

Ownership Type No. of Enterprises Employment InvestmentM4'000

Basotho only 5 115 1692

LNDC only 1 306 2300

RSA only 9 1468 14760

Foreign butnon-RSA only 10 2200 13017

Joint Venturest-Basotho & RSA 4 207 2573-Basothoand Foreign 4 437 3527-LNDC & RSA 2 64 4350-RSA and Foreign 6 2044 7808

UnidentifiedOwnership 4 923 4757

TOTAL 45 7764 54784

Sources Lesothos Ministry of Trade and Industry

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Annex 1Page 3 of 6

Table 1.3

The Structure of Merchandise Zxiorts

Cv.rcentazes)

1981 1983 1985 1987

Food 10.1 22.9 12.3 20.0Fuels 0.1 0.3 0.1Other PrimaryCommodities 60.9 40.1 51.4 20.0Manufactures 25.6 32.7 34.2 57.8Other 3.3 4.3 1.8 2.1

TOTAL 100.0 100.0 100.0 100.0

Sources Lesotho, Bureau of Statistics.

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Annex IPage 4 of 6

Table 1. 4

The Composition of Larger Firms In Manufacturing. 1986

No. of No. of Employment Value ValueFirms Employees Shares (Z) Added Added

m't000 Shares (2)

Food & Beverages 15 1808 27.5 34572 53.7

Textiles,Garments 41 1R28 27.8 12569 19.5

Leather 7 890 13.5 2522 3.9

Furniture 10 182 2.8 2907 1.4

Printing 4 357 5.4 103 3.3

chemical Products 6 206 3.1 2868 4.5

Non-MetallicMinerals 19 444 6.7 2594 4.4

Fabricated SteelProducts 7 192 2.9 1122 1.7

Other Manufacturing 14 677 10.3 5098 7.9

Total Manufacturing 123 6485 100.0 64357 100.0

Sources Ministry of Trade and Industry, Louis Berger and Baffoe AssociatesSurvey, May 1987 and LDC.

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Annex 1Page5 of 6

Table 1.5

Lesotho, Survey of Small-Scale Industries, 1989

No. of No. ofCategory Establishment Employees

Blocks & Bricks 17 206Carpentry 56 130Elec. Repairs 5 15Handicraft 28 146Knitting 87 174Knitting & Sewing 45 231Leather Works 41 121Sewing 143 291Sheet Metal 38 75Metal & Carpentry 6 40Others 10 46

Total 476 1475

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Annex IPage 6 of 6

LESOTHO

TABLZ 1.6 : LOCATIONS AND DISTSBUSSTONS OF SMALL-SCALE INDUSTRTIS, 1989

Category A a C D E F a L 'I

Blocks X Bricks 3 2 4 3 2 1Carpentry 21 4 2 4 12 8 1 1 3Zlec. Repairs 5 2Handicraft 12 1 7 4 3 1Knitting 44 2 6 9 9 7 6 4Knitting & Sew 10 2 2 2 3 11 2 5 5 3Leather Works 31 1 2 2 2 1 2sewing. 52 3 11 8 18 18 3 9 7 13Sheet Metal 20 1 1 4 3 6 1 1 1Metal & Carpentry 4 1 1Others 3 3 2 1 1

Total "0a 19 30 32 53 51 9 27 20 27

Locations, A-Maseru; Butha-tuthe; C-Leribeg D-Ireag X-Nafeteng; F-Mohale'sHock; G.Quthing& E-Mokhotlong; I-Thaba-Taka; J-Qacha's tik; IC-Others.

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Annex IIPage 1 of 16

LESOTHOII. THt AGROINDUSTRIAL SWUBSCTOR PIRPORNANCE AND ISSUES

2.01. Introduction. Agriculture plays an important, albeit declining,role in Lesotho's economy. The sector's direct contribution to GDP hasdeclined from about 35 percent in 1968 to approximately 23 percent in 1988.Despite this decline, agriculture continues to provide employment andincome to nearly 70 percent of the Basotho population. Agriculturalexports, mainly wool, mohair and canned vegetables (asparagus and greenbeans), account for 65 percent of the total value of exports. On the otherhand, agricultural imports (mainly food grains, processed foodstuff, freshfruits and vegetables, fertilizer and agricultural machinery) account for asizeable part of the country's import bill.

2.02. Growth in agroindustry is contingent upon expansion inagriculture, given their strong interlinkages. Consequently agriculture'sdeclining share in overall economic growth has important implications foragro-industrial development. Prospects for a dramatic increase in thecountry's agricultural production are poor, given that Lesotho is generallya marginal agricultural producer. Its agricultural resource base islimited and has reached its frontier in terms of land resource.Sustainability of the sector is a major challenge to the country'splanners. Increased agricultural production in Lesotho can only come fromincreased productivity, which, in turn, is dependent on technological,institutional and policy changes -- ingredients which so far have beenlacking. Consequently, both production and productivity in the sector havebeen declining, with adverse consequences on the sector's comparativeadvantage. Unless this trend is reversed, Lesotho's agroindustrial growthand competitiveness would be in jeopardy. The Government of Lesotho (GOL),with donor assistance, has been Implementing various programs to avert thisevenituality. Priority has been given to implementing policies and programsinteuded to ensure the sustainability of the land resource as a basis forsustainable agricultural production, income, and employment. Unlessagriculture's decline is effectively arrested and reversed, agroindustrialexpansion based on domestic production, is not likely to be substantial inthe short and medium term.

2.03. Growth of Lesotho's agriculture and agroindustry is also -reatlyinfluenced by linkages with the South African economy under the SouthernAfrican Customs Union (SACU). This arrangement makes Lesotho's economy andagriculture (including agroindustry) extremely open and exposed tocompetition from RSA production. Substantial productivity gains (mainlydue to technological change) have been achieved in RSA's agriculture inrecent years at the same time that Lesotho's agricultural productivity hasdeclined. Thus the comparative advsntage (competitiveness) of Lesotho'sagriculture vis-a-vis the RSA's must have substantially eroded. Lesothoprices have continued to follow closely those of RSA's agriculture, whichhave remained the price leader within SACU. A continued decline inLesotho's agricultural productivity would eventually result in RSA'sagricultural prices ceasing to be profitable to Basotho farmers. Thissituation might have been already reached in the case of maize, wheat,poultry products and beef. These products have DRCs which are more than

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Annex IIPage 2 of 16

unity. Consequently, agroindustrial activities in these subsectors haveremained financially profitable only in the presence of deliberate andspecific protection measures (e.g. import supply management through importlicensing, etc.).

2.04. Structure. Agroindustry in Lesotho is dominated by grainmilling, the brewery, fruit and vegetable canning and beef processing. In1988, the agro-processing represented about 80 percent of totalmanufacturing value added, a substantial portion of formal sectoremployzent, and nearly 10 percent of total GDP. It is estimated thatapproximately 24 percent of paid manufacturing employees work in the foodand beverage industries.

2.05. The subsector has two major components -- the public(parastatal) sector and the private sector. The public sector'scontribution to agroindustrial GDP in 1988 is estimated at 63 percent(Table 2.1). Much of this contribution is concentrated in a few sizeableparastatals as followss Lesotho Brewery Company, which also accounted formost of the growth in the beverage subsector; Basotho Fruit and VegetableCompany (BFVC), which accounts for all fruit and vegetable processing inthe country; National Abattoir and Feedlot Complex (NAFC), which accountsfor most of the covmercial livestock slaughterings in the country; and theFlour-Maize Mill and Feed Mill Complcx (FMMFMC), which is the nation'smiller of wheat and maize flour and the only manufacturer of feeds in thecountry.

2.06. The private sector investment in agroindustry is limited andconsists largely of small-scale enterprises. Only 6 percent of privatesector GDP in 1988 is estimated to have come from agroindustries andmanufacturing. Privately held agroprocessing enterprises have notperformed well. Their contribution to agroindustrial GDP declined from 54percent in 1984 to only 37 percent in 1988 (Table 2.1), in line with thedecline of agriculture's share in GDP. For example, the butcherysubsector's (made up primarily of small enterprises) contribution toagroindustrial GDP declined by almost 40 percent; local brewery'scontribution declined by 25 percent; while the contribution of small scalewool and mohair knitting activities stagnated during 1984-88. Therelatively small contribution by private sector investment toagroindustrial GDP can be traced in large part to the government policywhich defines agro-based industry as *strategic" and mandates governmentcontrol and participation. This also explains the substantial publicsector share and role in the subsector.

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Annex IIPage 3 of 16

Table 2.1

Lesotho Private Sector Share in Agroindustrial GDP

(Current Prices in Million Maloti)

1984 1985 1986 1987 1988

1. Total Agroind. GDP 37 43 56 70 87

2. Private Sector Agro. GDP 20 17 29 25 32

3. 2 as I of 1 54 40 52 36 37

Source: USAID, Manual for Action in Private Sector (MAPS), Lesotho, Nov.1, 1989.

2.07. Performance. Overall agroindustry performance indicators cannotbe estimated for lack of data. For the same reason, performance of theprivately owned agroindustrial enterprises cannot be estimated. Reasonablyreliable data is, however, available to evaluate the performance of severalagroindustrial parastatals. In evaluating parastatal performance it isimportant to note that the stated objectives against which performance isevaluated is often conflicting. For example, while the raison d'etre forthe establishment of most parastatals is to generate economic growth (i.e.social or economic profitability), the GOL has often used the companies asinstruments for achieving social or economic equity (e.g. incomeredistribution through subsidies). Parastatal companies dealing with milk,beef and asparagus processing, for example, have been used to channelsubsidies to target groups (e.g. consumers and producers). Nevertheless,for most parastatals, the primary objective of their establishment has beenmore financial or economic, than social. It is therefore appropriate tosubject these parastatals to traditional financial/economic tests and touse financial profitability as the principal yardstick. The use of thismeasure is equally justified by the fact that financial resources used inthe establishment and operation of these parastatals have extremely highopportunity costs, particularly in the face of fiscal restraints whichLesotho faces.

2.08. Data available on the financial performance of the majoragroindustrial parastatals indicates that they have generally performedpoorly (Table 2.2). With the exception of the Flour-Maize Mill and FeedMill Complex, all the parastatals have operated with financial losses.Total accumulated loases incurred by the nine major parastatals operatingas 'trading accounts' of the Ministry of Agriculture and the BFVC(operating as a subsidiary of LNDC), amounted to at least M7.7 million in1987-1988. This represented about 8 percent of the total public sectoragroindustrial GDP. In fact, over 80 percent of these parastatals have,since their inception, continually operated with looses. This has 1-1 toerosion of assets and resulted in massive infusion of Government budgetaryresources in the form of "capital grants" (to recapitalized or halt the

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Annex IIPage 4 of 16

provide working or maintenance capital). Total government budgetarytransfers to agroindustrial parastatals increased from about 6 million in1983/84 to almost 27 million in 1987/88, an increase of nearly fivefold.

Table 2.2

Lesotho's Financial Results of Parastatals in Agroindustry(Thousand Maloti)

Parastatal Financial Profit (Loss)

1987 1988 Accumulated

1. National Abattoir and Feedlot Complex (2,952.3) (2,760.9) (5,713.2)2. Basotho Fruit and Vegetable Canners (13.5) (54.3) (40.8)3. Lesotho Poultry Cooperative Society n.a. n.a. n.a.4. Flour-Maize Mill and Feed Mill Complex 15,340.0 11,009.0 26,349.05. Poultry Hatchery, Cold Store

and Pullet Rearing n.a. n.a. n.a.6. Milk Processing Plant and Collection

Centers n.a. (19.4) (19.4)7. Agricultural Machinery n.a. (1,963.4) (1,963.4)8. Irrigated Farms and Irrigation

Equipment (TOU) n.a. n.a. n.a.9. Seed and Nursery Production n.a. n.a. n.a.10. Coop Lesotho 200.6 264.3 464.3

Total Losses Alone (2.952.3) (4,798. (7,736.8)

Source: Extracted from Annexes of the FAO Study on Rationalization ofAgricultural Commercialization in Lesotho, Rome, 1989.

2.09. The major beneficiaries of these grants or transfers have beenCoop Lesotho, the Abattoir, BFVC, Agricultural Machinery and the MilkProcessing Plant. As indicated in Table 2.3, capital grants increasedsixfold. However, as indicated in Table 2.12, these massive investmentshave not generated satisfactory financial results in most parastatals.

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Annex IIPage 5 of 16

Table 2.3

Lesotho - Government Transfers to Parastatals in Agroindustry,

1984-1988 (in Current Maloti, Millions)

1983184 1984185 1985/86 1986/87 1987/88

Capital 3.5 2.8 12.3 19.9 21.5Recurrent 2.4 4.1 3.9 4.1 5.1

Total 5.9 6.9 16.2 24.0 26.6_ _

Sourcess Mission Estimates based on:1. FAO study on Rationalization of Agricultural Commerclalization in

Lesotho, Rome, 1989.2. USAID, NAPS. Lesotho, Nov. 1, 1989

2.10. An analysis, using data contained in the FAO study supplementedby field Interviews, finds the following comwon problems among theparastatals -- poor management, inappropriate organization, inappropriatecorporate culture, and over/under capitalization. The best performer ofall, the Flour-MaLze Mill and Feed Mill Complex which operates underexcellent contract management has shown quite strong financial performance,good organization and above average independence from government directiveswhich, in other companies, subverts commercial objectLves. The factorscontributing to Lesotho's mnsatisfactory parastatal performance arediscussed below and summarized on page 13.

(a) Manazement was judged on the basis of the management team'stechnical training, experience, and its ability to makecommercially sound decisions to achieve institutionalobjectives. These attributes were lacking in the majority ofthe management teams The competence of the management team wasfound to be critical in determining the degree of corporateindependence demonstrated in responding to the policy andinstitutional environment existing in Lesotho. With theexception of the Milling Complex, the management teams of allparastatals are 'civil servants* or bureaucrats withoutappropriate training and experience in business or commercialmanagement.

(b) Ornanization of a parastatal refers to the degree of corporateautonomy and accountability in relation to the parent miDnistry(i.e. Ministry of Agriculture for all except the BIVC). Mostparastatals have boards of directors and management teams whichneither have autonomy with respect to parent ministry policydecisions nor do they have command over key resources (e.g.

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Annex IIPage 6 of 16

personnel and finance). Boards' policy decisions as well asmanagement's major operational decisions (e.g. staffappointments and promotion) are subject to approval orauthorization by either the Minister or Permanent Secretary ofthe Ministry of Agriculture. As a result neither the Board northe management team feels accountable for such decisions.Autonomy and accountability are the missing ingredients as theyhave been replaced by ministerial decisions or authorization anddirectives.

(c) Corporate Culture is the definition of corporate objectives, howthese are perceived by parastatal staff, and what is the modusoperandi for achieving these objectives. Most parastatals havesuch ill-defined and conflicting objectives that staff does nothave a clue about their company's basic mandate. On one hand,most parastatals are expected to operate as business orcoumercial entities, on the other hand they are directed to actas social welfare organizations via which the governmentchannels subsidies to target groups. For example, mostparastatals (e.g. BFVC, the Abattoir and Milk Plant) neitheroperate on a commercial (profit) basis nor on cost recoverybasis because they have been directed, as a matter of policy, toprovide subsidized services to their respective customers or tothe farmers which provide inputs for their operations. Themodus operandi of most parastatals is procedure- rather thanresults-oriented and efficiency is not the guiding principle ofoperations.

(d) Over/Under Capitalization refers to the installed or designedcapacity of the processing plant in relation to the supply ofraw materials or throughput. Most plants (e.g. NAPC, BFVC,Agricultural Machinery) have capacities far in excess of theavailable supply of raw material or demand for services. Inthis sense, they are overcapitalized, and low or uneconomiccapacity utilization is the order of the day. Others (e.g. theMilk Plant) have far too small capacities in relation to rawmaterial supply. Another form of overcapitalization common toalmost all agroindustrial parastatals in is over employment oflabor, especially of permanent labor, in relation to the volumeof output and the seauonality of operations (e.g. in the BPVCand NAPC). This results in high overhead costs and raises thebreak-even points of the operations.

(e) An Inappropriate Policy Environment is at the heart of theoperational problems of parastatals. As stated before, GOL usessome of the parastatals as instruments of achieving specificpolicy objectives. For example, existing government marketingpolicy for meat and meat products establishes a close linkagebetween the Abattoir and implementation of range destockingpolicy. Consequently, the abattoir is obligated to purchase allcattle presented for sale by farmers at sales auctionsirrespective of their quality which, in most cases, is extremelypoor.

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Page 7 of 16

Most of the animals sold by traditional farmers are cull coWs,oxen and sheep. In reality, the Government's directive obligingthe abattoir to purchase all cattle offered resulted in inferioroutput quality of the abattoir and indirectly and ironicallyencourages overstocking and overgrazing of the range. Farmerskeep their animals for as long as they wish without fearingrejection of the animal by the market. Similarly, in the nameof this policy, the abattoir has no freedom to import liveanimals from RSA to supplement domestic supply--which in itselfwould improve the quality of the abattoir's output and ensurebetter capacity utilization. As a result, the abattoir hassuffered from gross capacity underutilization and has failed toinduce farmers to sell animals. As a result the farmers regardcattle as assets to hold rather than as commodities to sell.Similarly, government policy to manage imported supplies (viaimport permits) of poultry and dairy products has discouragedthe optimal use of installed processing capacity and hasperpetuated inefficient pricing systems benefitting a few largeproducers. Finally, government policy to use parastatals asinstruments of income redistribution and provision of incentives(via subsidies) to target groups has accounted for the financialstraits of most parastatals. Table 2.4 sunmarizes the varioussubsidies accorded to target groups through the parastatals. Itis evident that these subsidies are substantial. In some cases(e.g. the Abattoir's subsidies to the butcheries) cannot bejustified on either financial, economic or social grounds.

2.11. The impact of the subsidies is far reaching. It affects boththe financial results of the parastatals, but more importantly, theseSubsidies introduce distortions in the subsector which discourage or makethe private sector's participation impossible. For example, the subsidizedlow rates of farm machinery rental charged by TOU have consistently putprivate tractor contractors at a competitive disadvantage and discouragedtheir operation. Similarly, both producer and consumer subsidiesadministered by various parastatals have discouraged private participationin the subsector.

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Annex 1IPage 8 of 16

Table 2.4

Lesotho - Specific Subsidies Channelled Through Parastatels

1990

Parastatal Target Group Type of Subsidy Subsidy Rate(Z)

1. Basotho Fruit and Vegetable Producers of (a) Interest on Establish- 100Canners asparagus and green ment costs

beans (b) Sransport Cost 50(c) Seedling Costs 60

2. National Abattoir and (a) Livestock (a) Price Subsidy 30-45Feedlot Complex producers (b) Customer slaughter

(b) Butcheries fee 71

3. Agricultural Machinery Crop producers Tractor Service Charge 74

4. Milk Processing Plant (a) Dairy Parmers (a) Producer Pricesubsidy 64

(b) Milk Consumers (b) Consumer PriceSubsidy 21

5. Lesotho Poultry Coop. (a) Poultry producers (a) Producer PriceSociety Subsidy 31

(b) Poultry Product (b) Consumer taxconsumers (16)

Sources Mission Estiiates based on data in the PAO Study and Field interviews.

2.12. Removal of the above discussed distortions is a precondition forincreased participation of the private sector in agroindustrial developmentin Lesotho. The proposed project would prouide support to the GOLt (a) toeliminate the policy-induced distortions which have inhibited parastatalperformance and virtually prevented increased participation of the privatesector in Lesotho's agroindustrial development; (b) to restructure andcoamercialize selected existing agroindustrial parastatals to improve theirefficiency and production; and (c) to facllitate the iTplementation of (b)above, the project would provide financing iir technical assistance undermanagement consultant contracts and implementation of staff and managementtraining programs to ensure adequate local capacity for the future.

2.13. Policy Refora 'Packae. In order to Improve efficiency andgrowth in the agroindustrial subsector (i.e. private and public), theproject would prior to negotiations seek written commitment from thegovernment to implement the following policy reforms by the specified

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Annex IIPage 9 of 16

dates, Agreement in principal to these reforms was received from GOLduring project appraisal.

(i) Eliminate existing subsidies administered by the variousparastatals to various target groups by requiring full costrecovery on operations.

(ii) Allow parastatals to introduce gradewise pricing for comoditieswhich are currently not graded.

(iii) Implement changes in the Land Act of 1979 (as agreed under thegovernment's PFP program) to permit long-term land leasingarrangements.

(iv) Rationalize procedures for import-supply management via importlicensing to permit flexibility and responsiveness in the systemfor all products currently under the import licensing system.

(v) Eliminate supply management of domestically produced commoditiescurrently practiced by some parastatals (e.g. the LesothoPoultry Cooperative Society for broilers and eggs).

(vi) parastatals to reject inferior and unprofitable products offeredby farmers for sale (e.g. old and sickly livestock or rejectvegetables and fruits).

(vii) Eliminate existing price controls for certain commodities (e.g.milk and poultry products) and services (e.g. customer slaughterfees and tractor service rates).

(viii) Eliminate government grants or budgetary i _isfers toparastatals as well as government guarantees for conmercialloans.

(ix) Permit private sector participation in ownership of parastatalson at least a 51:49 basis, with the private sector havingcontrolling share participation by September 30, 1993.

2.14. Assurances will be sought during negotiations that theGovernment will have implemented the above policy reforms by June 30, 1991,except item (i) above.

2.15. Implementation of the Institutional and Financial RestructuringProgram. In order to improve he institutional and financial performanceof agroindustrial parastatals, the Government has agreed in principal toimplement the institutional and financial reforms specified below:

(i) Change the legal status of the parastatals from ministerial'trading accounts' to legal corporate bodies, registered underthe Companies Act, with full autonomy and accountable ,- theirrespective boards of directors by June 30, 1991.

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Annex SIPage 10 of 16

(ii) Parastatals registered under the Companies Act will cease tohave ministerial affiliation upon registration or appointment ofcontract management, whichever comes first.

(iii) For each parastatal to be registered under the Companies Act,the Government will prepare a statement of operating policiesand procedures in which the corporate objectives, autonomy,accountability and procedures would be clearly articulated; thisstatement would be annexed to the Memorandum and Articles ofAssociation and it should be completed for each parastatalbefore incorporation (June 30, 1991).

(iv) Por each parastatal registered under the Companies Act, theGovernment will contract the management of the company to aprofessionally competent management consultant initially for twoyears, with possible extension for another one or two years uponsatisfactory rqrformancet the basic mandate of each managementconsultant w, _. be to run the company on a purely commercialbasis. As part of the tendering process, the Government willrequire bidding consultants to prepare a three-year corporateplan with specific performance targets (e.g. turnover, unitcosts and net profit) and projected capitalization required tosupport commercial operations for the subject company; such acorporate plan would become part of the management contract tobe executed. The preparation of a corporate plan satisfactoryto IDA would be a condition of disbursement for each company.Management contracts for all selected parastatals would beexecuted by September 30, 1991.

(v) Procurement of the management consultant services would be inaccordance with IDA Guidelines for Procurement of ConsultancyServices. The signing of a management consultant contract wouldbe a condition of disbursement for the individual parastatal forthe Technical Assistance and Staff Training under theagroindustrial component.

(vi) The Government would ensure that each parastatal has asatisfactory capital structure for the purpose of its basicmandate as recommended under the corporate plan for eachparastatal and as approved by IDA.

(vii) Before September 30, 1993, the Government, as the initial andsole owner of these companies, will allow private sector (localand foreign) participation in each registered company on anegotiable basis agreed by the board of each company and theprivate sector participants.

2.16. The parastatals to be restructured, commercialized andeventually privatized under the proposed project will consist of theNational Abattoir and Feed Complex, Basotho Fruit and Vegetable Canners(Pty) Ltd; Lesotho Poultry Cooperative Society, Flour-Maize Kill and FeedMill Complex, Poultry Hatchery, Cold Store and Pullet Rearing, and MilkProcessing Plant and Collection Centers.

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Annex IIPage 11 of 16

2.17. The Agricultural Machinery, Irrigated Farms and IrrigationEquipment, Seed and Nursery Production and Coop Lesotho are providingservices which are easily privatized. These entities should be liquidatedand left to the private sector.

Institutions Participating in the Agroindustries Component

2.18. Abattoir and Feedlot Complex (NAFC). Government policy formeat and meat products establishes a close linkage between the Abattoirand Implmentation of a range destocking policy. GOL policy also requirespayment of a price subsidy of 30-45? to livestock producers and controlsbutcher fees representing a 712 subsidy of the market fee. The samesubsidized price is paid regardless of the quality of the animal. Thetechnical quality of the abattoir is unsatisfactory in that it was neverconstructed to export standards. Financial and operational systems aretotally inadequate. As a result, the abattoir has suffered from grosscapacity underutilization (50?) and financial losses. Under the projectcontract management would provide a General Manager, a production manager,a financial controller, a feedlot manager and a marketing manager. Theseareas would also be the focus of training activities.

2.19. Basotho Fruit and Vegetable Canners (BFVC). The Productionis dominated by canned asparagus for export to the European Community whereit has captured a market niche. Although organization of asparagusproducers has been good, production beyond the peak season has not beenseriously pursued. As a result, after the asparagus season, capacityutilization at the BFVC is virtually nonexistent, except for a small amountof peach canning. Government policy currently requires BFVC to subsidizeproducer establishment costs, transport costs, and seedling costs, thelatter at 602. Operations would benefit from marketing advice, improvedcosting systems, mechanical labeling, generally more efficient processingsystems, and active efforts to improve capacity utilization throughcontract efforts with farmers. Under the Project, contract managementwould provide a General Manager, Production Manager, Marketing Manager anda Financial Controller. These areas would also be the focus of trainingactivities.

2.20. Poultry Hatchery, Cold Store and Pullet Rearing. The plantis owned and supervised by the Ministry of Agriculture, Department ofLivestock. Hatchery facilities accommodate 6,000 eggs, and chicken rearingcapacity has been about 2,000. Two new modern buildings completelyequipped to house 6,000 broilers was built recently. The facilities appearto be technically adequate and are the proper scale for the market.However, the operation is plagued by inadequate incentives to operateefficiently. For example, incubators have not been operational for two-

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Annex IIPage 12 of 16

and-a-half years that has not been replaced. Lesotho's poultry productionis protected by strict import controls on poultry products, which hasperpetuated inefficient pricing benefiting a few large producers. Thisprotection results in an effective consumer tax of about 162. In addition,poultry producers receive a 312 subsidy. Accounts and financial controlsare extremely inadequate. Under the project, contract man4gement wouldprovide a General Manager, a Financial Controller and a loultzy Specialist.These would also be the focus of training activities.

2.22. Milk Processing Plant and Collection Centers. This has been aCanadian International Development Authority (CIDA) assisted project since1983 when CIDA took over operation of the dairy from the Ministry ofAgriculture. The M2 million plant includes a building, dairy equipment,and delivery equipment, all of which are new or in good condition. Theobjective of the project, to raise plant capacity from 1,000 litres to10,000 litres a day, has been achieved although the plant is not operatingat full capacity. A principal objective of the project was to provideconsumers with a quality product at a fair price to correct the very lowmilk consumption in the country. This social objective has motivatedGovernment intervention into pricing policy to the detriment of soundmanagement of the plant and of the industry in general. Through managementby th.i ;: -ional Dairy Board, milk imports are restricted, limiting capacityutiliz. ion; the dairy is required to pay producer prices, which are set64Z above the market rate; and prices to consumers are set 212 below marketrates in South Africa. These regulation-constrained margins, combined with652 capacity utilization with high fixed costs, make the plant unviable forthe foreseeable future. In addition, with the end of the CIDA projectthere is no local manager to assume responsibility. The proposed projectwould shore up management for an additional two years by providing ageneral manager, a financial controller, a dairy specialist, and relatedtraining to ensure local capacity for the future.

2.23. Poultry Cooperative Society. The society is cooperatively ownedby 50 members at Mekaling and in Mohale's Hoek district. The complexcomprises an egg circle, a chicken slaughter house (capacity of 250birds/day, although not in operation due to lack of broilers), four broilerhouses (capacity of 500 broilerslday), and a handicraft training center.The demand for chickens is high as is the potential viability of theoperation and its returns to farmers. Currently the cooperative is thefocus of the organization, and management is virtually nonexistent. Underthe project, a managing director, financial manager and marketing managerwould be provided.

_peaIx I

LesotIh

Major t.e.c. to A.re-Zndu.t.y

tOnoppritl ISapprwlt OverUnder Xeptprplt Goer. OperatinO ll" y . ~~~porO H__swm orVlsole cprt Coltur Capitallxein, Policy 6v>rote"t Probl_e

*I. NtItoml Abtteir sod Food Subtaoutal accumulated opextingCouvx l xx 1 1.

02. en"tho d Vegetable 2. High proceeing ceds.Co r y) Ltd. x x . Le of utmy.

*8. Lesho Pulty Ce ti 4. 1odaquet eontebi I ity.e4oc$.liAF a x x a. Depeadany on gowt fInncell grant

*4. Flur4 Mt II or Capac F1 pity utadrwutilaetion (low CoepiPxproduction)..6. pouitry Hatc.y, Cold Store 7. Leok ot pricing policy decision

SWd Pul lob nor a a a x s (price control.).6. Milik Proceszig Pl an S. Highly Subsided z ervices to cil at

ColtloeCn a x a x x (lack ofeot rcovwry).7. Agricultural echinary a0. Oex9 ln or toebnical probl_w. VS Irrigted frms and rrigtliee 10. Lack of lty control r ine

Equimen a a a a a price poliey (or market guara teerfo9. lead SWd Nub ry Production a. aa x a a * pro )

10 Coo lenotbo a x x a a 11. Uetictory captal ctre12. C_mbr_o procurement procdue

on bools ef Public T_ndr Ibard adPub lte Stors Reglatiees.

* Thes perLAuttle will be retaructred, c_inralallad and privatized under th proe_d project.

0

0 0o hX

_ g-os 4

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Page 14 of 16

Table 2.5

Lesotho - Techatcal Assistance and Staff Training

for Aarolnduetry Detailed Component Cot ClI'00

Conany PYl PY2 "i Tota I coet

A. Technial Aslataneo:1. NAFC 0.0 1,956.7 1,985.7 38,71.42. am 0.0 1,646.0 1,654.0 ,2900.08. LPCS 0.0 1,267.6 .,267.6 2,616.04. Poultory atchery 0.0 1,267.5 8,257.6 2,515.06. Ml lk Proecalag Plant 0.0 1,257.5 1,267.6 2,616.0

Total Tochnical Aesietance 0.0 7,385.2 7,a58.2 14,706.4

S. Local Staff Training:

1. NAFC 0.0 112.5 112.6 226.02. BfVC 0.0 100.0 100.0 200.08. LPCS 0.0 75.0 75.0 150.04. Poultry Hatchery 0.0 62.6 62.5 125.05. Milk Processing Plant 0.0 02.5 62.5 126.00. MleoeIlaneoe Staff 0.0 76.0 7C.0 150.0

Total Local Staff Traainng 0.0 487.6 407.5 075.0

Total 0.0 7,640.7 7,840.7 1560O1.4

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Annex IIPage 15 of 16

Table 2.6

Lesotho Staff Trainine Prosrm for Asroindustrial Develonmnt Staff

Company Main Training Ara Traintng Yro Unit Cost Total Cost

1. NAFC Buolneas Adminlatrotlon (MD) 0.5 60.0 25.0Production Management(PYM D-ior tsn) 1.0 60.0 60.0Ftnanclrl Management(FC Designate) 1.5 60.0 75.0Feed lot Management(FM Designate) 0.6 50.0 26.0Marketing Management(MM Doeignat.) 1.0 60.0 60.0

Total Coat 4.6 50.0 225.0

2. BFVC Buslnes A4ministration (MD) 0.5 60.0 26.0Production Management(PM Dosignate) 1.0 60.0 60.0Marketing Management(MM Designate) 1.0 60.0 60.0Financial Management(FC Designate) 1.6 60.0 75.0

Total Costa 4.0 S0.0 200.0

8. LPCS Busines Administration (MD) 0.6 50.0 26.0Financial Management(FC Designate) 1.5 60.0 75.0Marketing Managemnt(MM DOelgnate) 1.0 60.0 50.0

Total CoSt 8.0 S0.0 160.0

4. Poultry HatcheryBusines Administration (MD) 0.5 60.0 25.0Financiol anagement(FC Destgnate) 1.0 60.0 50.0Poultry Productlon Management(PS Designl ) 1.0 60.0 50.0

Total Coa 2.6 60.0 126.0

S. Mtilk Proc¢singBusines Administration (MD) 0.6 60.0 25.0Plant Dairy Management(DS Designate) 1.0 60.0 50.0Financial Management(FC Designate) 1.0 50.0 50.0

Total Coat. 2.5 50.0 125.0Miscellaneous Staff Training 15.0 10.0 160.0

Total Staff Training Program Cost 81.6 80.9 975.0

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Annex IIPage 16 of 16

Table 2.7

Lesotho Technical Asistance tor Acroindustritl Develogent

Company Speciallate Needed Total Manyanrt Unit Cost Contract Price11 #000_________

1. NAFC Genera I Manager 2.0 450.0 900.0Production Manager 2.0 387.6 775.0Financial Controller 2.0 420.0 840.0Feedlot IMnager 2.0 887.5 775.0MaIrketing Manager 1.6 387.6 681.3Lump Sum Contract Price 9.6 407.6 8,871.3

2. SFVC General Manager 2.0 460.0 900.0Production Manager 2.0 887.5 775.0Marketing Manager 2.0 887.6 775.0Financiel Control ler 2.0 420.0 640.0Lump Sum Contract Price 8.0 411.8 3,290.0

3. LPCS General Manager 2.0 460.0 900.0Financial Controller 2.0 420.0 84.0Marketing Manager 2.0 387.6 775.0Lump Sum Contract Price 6.0 419.2 2,615.0

4. Poultry HatcheryGenral Manager 2.0 450.0 900.0Financlal Controller 2.0 420.0 840.0Poultry Specialists 2.0 887.5 775.0Lump Sum Contract Price 6.0 419.2 2,516.0

S. Milk ProcesingGenral Ibner 2.0 460.0 900.0Plant Dairy Specialist 2.0 387.5 775.0Financial Controller 2.0 420.0 840.0Lump Sum Contract Price 6.0 419.2 2,516.0

Total Technical Aseletance Proram Coat 86.5 414.8 14,706.8

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Annex IIIPage 1 of 7

Table 3.1

Lesotho: Composition of the Financial Sector(M million)

1987 Z 1988 2

Central Bank 188.2 25S 266.3 26SCommercial Banks 469.8 62Z 627.5 62ZLesotho Bank 301.4 402 400.0 392Standard Chartered 94.8 13? 136.0 132Barclays Bank 73.6 102 91.5 92

LBFC 21.1 32 27.3 32LADB 16.5 22 26.6 32LNDC 40.2 5S 48.2 5SBEDCO+ 5.01 12 5.7 123NIC 12.7 22 14.1 1S

TOTAL* 753.5 1OOS 1015.7 1OOS

Memos GNP 1373 1635

In millions of maloti. Based on end year assets.Current liabil'ties of the three banks were netted out.* 1988 assumes no real growth.* The total includes claims between financial institutions amounting toM129 million in 1987 and 1988.Sources: CBL, L?EDC, BEDCO.

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Annex IIIPage 2 of 7

Table 3.2

Lesotho: Comparative Performance of Bank(M '000)

1985 1986 1987 1988 1989

1. ASSETS OTHER THAN FIXEDLesotho Bank 212.9 254.4 276.2 246.0 403.2Other banks 136.4 152.8 170.5 237.1 265.9Total All banks 349.3 407.2 446.7 583.1 669.1Lesotho 61.0 62.5 61.8 59.3 60.3

2. TOTAL DEPOSITS EXCLUDING DEFERRED PAYLesotho Bank 131.3 161.3 187.8 250.7 276.9Other 125.5 141.2 157.8 219.7 238.6Total All banks 256.8 302.5 345.6 470.4 515.5Lesotho 51.1 53.3 54.3 53.3 53.7

3. TOTAL ASSETSLesotho Bank 235.5 278.8 301.4 373.2 432.2Other banks 140.0 169.1 176.6 243.4 273.5Total All banks 375.5 447.9 478.0 616.6 705.7Lesotho Bank percentag 62.7 62.2 63.1 60.5 61.2

4. TOTAL ADVANCES INCLUDING LOANSLesotho Bank 75.2 86.4 93.2 120.4 135.3Other banks 53.1 73.1 82.6 85.0 106.5Total All banks 128.3 159.5 175.7 2.5.4 241.8Lesotho Bank percentage 58.6 54.2 53.0 58.6 56.0

5. FIXED ASSETSLesotho Bank 22.7 24.4 25.2 27.3 29.0Other banks 3.6 4.5 6.1 6.4 7.6Total All banks 26.3 29.0 31.3 33.7 36.6Lesotho Bank percentage 86.3 84.3 80.4 81.0 79.2

6. BALANCES 1ITH CENTRAL BANK OF LESOTHOAND OTIER ItBAURS INCLUDING CASH ANDSHORT-TERM INVESTMENTSLesotho Bank 134.5 156.5 162.2 211.0 241.3Other banks 75.1 68.5 76.3 130.4 151.9Total All banks 209.6 225.0 238.5 341.4 393.2Lesotho Bank percentage 64.2 69.6 68.0 61.8 X .4

Sources Lesotho Bank, Annual Report.

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Annex IIIPage 3 of 7

Table 3.3

Comparative Performance Lesotho Bank and other Banks

1984 1985 1986 1987 1988* 1989

Return on Average AssetsLesotho Bank 4.61 4.02 2.02 1.52 2.72 4.12Standard and Barclays 4.42 4.52 2.22 1.92 3.5X 5.41All Banks* 4.52 4.22 2.92 1.72 2.92 4.4Z

Note: For 1988 and 1989, Information on Barclays Bank was not available,and is therefore excluded from comparisons in this table.

Table 3.4s Monetary Survey(maloti millions)

1986 1987 1988 1989

Net Foreign Assets 231.5 188.2 191.9 171.4Central Bank 161.4 127.9 130.8 100.2Commercial Banks 70.1 60.3 61.1 71.2

Domestic Credit 187.8 285.1 405.8 460.6Claims on Government 94.5 174.3 245.7 281.0Claims on Pvt Sect. 93.3 110.8 160.1 179.6

Other Items Net 76.0 -86.2 -107.7 -97.6

Money and Quasi Money 343.3 387.1 490.0 534.4Narrow Money 143.4 156.8 219.9 243.7Quasi Money 199.9 230.3 -270.1 290.t

Source: Central Bank of Lesotho.

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Page 4 of 7

Table 3.5: Selected Ratios of the Commercial Banks(percent)

Liquidity Capital Local AssetRatio Ratio Ratio(1) (2) (3)

1982 56.4 3.0 80.31983 66.1 4.0 85.51984 67.5 4.7 80.21985 61.5 3.8 76.81986 63.5 3.7 85.41987 64.0 3.8 98.51988:1 66.0 3.4 86.71988:2 63.2 3.2 83.31988:3 62.4 3.0 89.51988:4 67.6 3.1 93.81989s1 60.6 2.9 92.81989X2 63.7 2.9 88.9

(1) = Liquid Assets/Liabilities to the Public in Lesotho(2) - Capital/Liabilities to the Public in Lesotho(3) - Local Assets/Total Assets

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Annex IIIPage 5 of 7

Table 3.6. Distribution of Cormercial Bank Deposits by Type(M million)

Demand MLners& Call Savings Time DeferredDeposits Deposits Deposits Pay Fund TOTAL

1981 57.48 42.51 12.70 36.23 148.921982 66.96 48.72 15.49 50.35 181.521983 69.92 64.08 17.20 58.37 209.571984 87.73 74.00 16.91 62.61 241.251985 123.31 92.23 23.92 63.91 303.371986 141.18 111.89 24.91 68.33 346.311987 140.38 134.67 37.83 65.28 378.161988sl 169.98 142.66 41.54 73.11 427.291988:2 181.68 150.07 40.55 78.48 450.781988:3 197.38 154.94 40.11 84.94 477.371988t4 193.81 166.71 39.60 71.99 472.111989sl 207.61 175.07 45.20 71.76 499.641989:2 221.74 178.62 45.08 76.99 522.43

(percent)

Demand Miners& Call Savings Time DeferredDeposits Deposits Deposits Pay Fund TOTAL

1981 38.6? 28.5? 8.52 24.32 100.O01982 36.9a 26.82 8.5 27.72 100.0?1983 33.42 30.6? 8.22 27.9? 100.O01984 36.42 30.7? 7.01 26.0? 100.O01985 40.6? 30.4? 7.9Z 21.1? 100.O01986 40.8? 32.32 7.2S 19.72 100.O01987 37.12 35.6? 10.0? 17.3? 100.O01988:1 39.8? 33.42 9.72 17.1? 100.0?1988s2 40.3? 33.3? 9.0? 17.4? 100.O01988:3 41.3? 32.5? 8.4? 17.8? 100.0?1988t4 41.1? 35.32 8.42 15.2? 100.0?1989:1 41.6? 35.0? 9.02 14.42 100.O01989:2 42.4? 34.2? 8.6? 14.7Z 100.O0

-Annex II- 84 - Page 6 of 7

Table 3.7 Co cial Bank's Loans and Avances to uguinessEntezuzisea and Statutory odies tend of Derigd)

(M millions)

June1985 1986 1987 1988 1989

Agriculture 3.53 4.28 4.78 2.36 3.96Mining 0.05 0.06 0.07 0.08 0.70Manufacturing 2.76 3.79 5.06 10.99 11.15Electricity, gas, water 1.69 0.42 0.61 7.58 7.74Construction 6.91 7.37 8.54 22.73 29.37Wholesale & retail trade 31.72 28.57 33.45 33.20 42.75Transport & storage 2.77 4.43 2.23 13.67 16.36NBFI's and real estate 2.25 1.75 2.43 7.48 2.27Community & social 4.38 5.22 4.43 8.40 9.27

TOTAL 56.06 55.89 61.60 106.49 123.57

of whichBusiness Enterprises 44.80 44.82 53.99 82.45 95.95Statutory Bodies 11.26 11.07 7.61 24.05 27.62

(percent of total)

Aqriculture 6.30 7.66 7.76 2.22 3.20Mininq 0.09 0.11 0.11 0.08 0.57Manufacturing 4.92 6.78 8.21 10.32 9.02Electricity, gas, water 3.01 0.75 0.99 7.12 6.26Construction 12.33 13.19 13.86 21.34 23.77Wholesale & retail trade 56.58 51.12 54.30 31.18 34.60Transport & storage 4.94 7.93 3.62 12.84 13.24NBFI's and real estate 4.01 3.13 3.94 7.02 1.84Cozuunity & social 7.81 9.34 7.19 7.89 7.50

TOTAL 100.00 100.00 100.00 100.00 100.00

Source:- Central Bank of Lesotho

;'.

- 85 -

Annex IIITable 3.8 Page 7 of 7

A Com_rtlm of Av.erp tnterest Rates In Loetho end to Seuth Africa

I I LMIdinr Ottl Sorrowin, Rntes

*er I avg Pris, Prlm _ Call Acet. t1 Dy ToralSavins Aect.t 06 Coy Torno Month T*r l I Year TorsQuarter LIES LIS NUA IL OSA N LlS NA I LIS SA I LES NU LES NUA ILlS RSA I

194stl 1 7. 14 21 ITr E1TIrF 1 12. 11.71 1.2 to F to. 1tTT I :2 1 1.8 14 n 12.7 17.0 I 18.4 1S.. 1 0 9 18.4 13 I 12.7 17.0 12.2 17 II :8 1 21.8 14 is1t.2 2 11s.0 is 10 10.4, 16 281 18 22 12.7 1s II :41 21 20 24 11.2 21 11.1 22 10 10.4, 16 20 118.2 20.6 112.7 19 1

191t:1 122.2 22 2a1 1.t 2n 17 22.6, 12 10.4 17.1 22.J 14.6 21.01 1i 20.5 1I :2 21.4 10 221 18 17 14.0 17.6 11 10. s18.$ 17 11.5 s11 11.2 Is II :8 1 21.5 1t 10.5 I 12 15.5 I 12 14.5 .5 *.0 11.5 14.5 a 10.5 18.5 1 10 18 I

:4 I 17.8 15 10.6 9.2 18.5 9.5 18.5 0.8 6.1 5 9.9 18.3 1 10 18.5 I 10.7 14 1I 1960:1 10.4 14 16$ 0 *.2 18.8 I * 1.8 I 7 7.0 I *.0 18 -.J 12.6 5 10.8 18.8I :2 115. 18 14.51 7.6 10.01 7.5 11.85 7 7.4 7.5 St 7.6 11 9.1 1215 :J 151. 10 18.i6 5 .0 10.0 a 9.0 7 75 0.2 9.51 5.7 90. 9.51I :41 15 18 12 4. 0.. 5 *.1 *.5 0 *.7 0.4 5.4 6.01 4.9 9.5t 5.7 9.5t5 10tl 1 12.0 11 12.61 4.8 6Sf 4.6 6.5 0.2 5.7l a *.5 4.7 0.01 6.7 1051 :21 14 11 12.5 4.8 . 0. 4.0 6.05 6 5.71 8 6.0 47 0 5.7 1011 :8 1 1.0 11 12. 4.8 0.01 4.a 90. 0 0 5 0.81 4.7 9.11 5.7 10.8 1

:4 118.9 11 125 5 4.8 9O 4.6 90. I 0 * 0.31 4.7 0.5 5.7 10.51I 16:1 I 14.2 11 145 4.7 115 5.4 11.8 0.2 5.0 5. 11.1 5. 12.8 a 5. 1i1

:2 15.9 14 15 S 5.$ 11.6 7.8 12.6 1 0 *.0 7.4 12.$ 7.6 12.6 0.8 18.5 1:8 I 16.9 1 10i 0.0 1.5 0 .1 14. 10.8 7.& 0.4 14.8 0.7 14.8 9.2 14 1I 4 1 20.8 T 7 106. 15.0 90. 1. l 12.5 6.8 10.1 17.8 10.5 10.0 11 10

1 1096:11 1i 1is 5 I I I S

Motes: lnterest rates ore for LosetW*s (LES) and South Afir ca (NS). * Iterest rates other than prime a;Ndsving. ore the weoihted averae of rates offered by benbk in Lesethe. All rate are sd of quartr.

Source; Control Sank of Losotho.

- 86 -

Anunex IVPage 1 of 3

Table 4.1t LESOTHO - LNDC Statement of Profit and Loss(in M'000)

1989 1988 1987 1986 1985

Operating Profits 3,797 2,229 1,196 1,478 41Extraordinary Income 36 28 63 292 1

Gross Profits 3,833 2,257 1,259 1,770 42(Less) Provisions

(287) 38 (255) (61) 336

Net Profit 3-546 2,295 1.709 378

Cumulative Profitbeginning of the year 3,948 1.653 649 (2,074) (2,452)Preference Dividend (180) - - 1,014 -Cumulative Profit/Loss 7,314 3,948 1,653 649 (2,074)

(end of year)

Table 4.2s LESOTHO - Suma ry of Profit and Loss Operationby Principal Activity

FY 1989

Direct Lending Operations (656,000)Real Estato Operations 1,078,000tnvestamst Portfolio 3,33S,000Total Profit 3,797,000

.-a

- 87 -

Annex IVPage 2 of 3

Table 4.3: LESOTHO - LNDC Analysis of Profit and Loss StatementDirect Lending Operations

FY 1989

Avg. Assets

Interest Income 56S.000 5.3Interest Expenses (216.000) (2.0)

Gross Financial Spread 349.000 3.3

(Less) Provision for Bad Debt ( 60,000) ( 6)

Financial Incoma 289,000 2.7Other Income 58,000 .6

Total Income 347,000 3.3(Less) Operating Expenses (949,000) (8.9)(Less) Depreciation (60,000) (.6)

Net Profit (Loss) from Lending (656.000) (6.2)

Table 4.4s LESOTNO - LNDC Real Estate OperationsFT l989

Rental Income (Ind.Estates) 2,887,000Land Rent 367,000Shopping Center Income 588.000Interest oan Bank Cash 26,000Other Income 58.000Gross Revenues 3,926,000Interest Expenses (487.000)Net Financial Revenues 3.439.000Insurance (300.000)Rents & Rates (161.000)Maintenace (154,000)Depreciation (901,000)

Total Direct Operating Expenses (1,516,000)Indlrect Operating Expenses (959.000)

Income tr= Oserations 1.018.000Other Fees & Revenue 142,000(Less) Proisions (82.000)Net Profits . Real Estate 1.078.000

a ~ ~ ~ ~ ~

- 88 -Annex IV

Page 3 of 3

Table 4.5: LESOTHO - Investment Portfolio OperationsnY 1989

Dividends Received 4,085,000Interest on Bank Cash 299,000

Gross Income, Operations 4,384,000(Less) Operating Expenses (959,000)

Net Operating Income 3,425,000Misc. Income 148,000

Total Income 3,573,000(Less) Cash Pay Out (218,000)

Net Profit 3,35,.000

Table 4.6: LESOTHO - Analysis of Cash Flow Generation by Activity 1

Direct LeIdingOperation Assets Applied Return on

Assets

Operating Loss '56,000(Plus) Depreciation 60,000(Plus) Provision O. 0000Cash Flow From Operations (536,000)(Less) Capital Repayment (487,000)Contribution to LNDC (1,023,000) 10,629,000 (12.4)Cash Flow

Real Estate Operation

Operating Profit 1,078.000(Plus) Depreciation 901,000(Plus) Provisions 62,000Cash flow Ftrom Operation 2.061.000(Less) Capital Repaymt (1,348,000)Contribution to LNDC 713,000 40,853,000 1.7?Cash Flew

Investmet Portfolio

Contribution,to Cash Flow 3,066,000 6.909,000 34.4t

- -# Total*Estimted Total Cashflow Generation 2,756,000 60,391,000 4.62

11 Interest Income and Rental Incomes are based on accruals, actual cashgeneration would be less than shown.

Annex V- 89 - Page 1 ot 6

LESOTHO BANK

Table 5.1:- ReY Indicators, 1984 to 1988(M '000)

1985 1986 1987 1988 1989

Net Profits 8.9 5.0 4.5 9.0\ 16.4Retained Income 2.9 1.0 1.5 4.0/Total Assets 235.5 278.8 301.4 373.2 432.2Non-fixed Assets 212.9 254.4 276.2 346.0 403.2Total Deposits 195.2 229.6 253.0 324.7 353.4Deposits non-MDPF 131.3 161.3 187.8 250.7 276.5Loans 19.8 27.9 26.0 36.4\Advances & Other Account 55.4 58.4 67.2 84.0/ 135.3Equity 32.9 32.0 33.4 37.5 48.4Reserves 24.8 23.8 25.3 29.3 14.2Non-Distributable Reserve 8.2 8.2 8.2 8.2 8.2Operating Expenses 5.9 7.4 8.2 10.2 12.5Fixed Assets 22.7 24.4 25.2 27.3 29.0Short Term Investments 112.0 77.7 64.6 65.9 185.7

Sources Lesotho Bank, Annual Report.

GROWTH IN REY INDICATORS, 1984 to 1988(percent)

1985 1986 1987 1988 1989

Net Profits 1.1 -43.8 -10.0 100.0 82.2Retained Income -39.6 -65.5 50.0 166.7Total Assets 13.3 18.4 8.1 23.8 15.8Non-fixed Assets 14.6 19.S 8.6 25.3 16.5Total Deposits 17.8 17.6 10.2 28.3 8.8Deposits - MDPF 27.1 22.8 16.4 .33.5 -69.5Loans -4.3 40.9 -6.8 40.0Advances & Other Account 23.4 5.4 15.1 25.0 61.1Equity 17.1 -2.7 4.4 12.3 29.1Reserves 24.6 -4.0 6.3 15.8 -51.5Non-Distributable Reserve 0.0 0.0 0.0 0.0 0.0Operating Expenses 28.3 25.4 10.8 24.4 22.5Fixed Assets 3.2 7.5 3.3 8.3 6.2Short Term Investments 30.1 -30.6 -16.9 2.0 181.8

Source: - LeothBank, Annual Repor.

Sources- Ledotho Bank,, Annual Report.

Annex V_ 90 - Page T o To

Table 5.2. Lesotho Bank's Loans and Advances to BusinessEntergrises and Statutory Bodles. 1989

(M thousands)

Business StatutoryEnterprises Bodies TOTAL percent

Agriculture 754 2,260 3,014 3.37Mining 101 - 101 0.01Manufacturing 668 204 872 0.98Electricity, gas, water 626 7,330 7, 9S6 8.90Construction 4,405 - 4,405 4.93Wholesale & retail trade 36,269 - 36,269 40.57Transport & storage 5,557 11,659 17,216 19.26NBFI's and real estate 7,048 160 7,208 8.06Community & social 12,249 108 12,357 13.82

TOTAL 67,677 21,721 89,398 100.00

Sources Lesotho Bank

- 91 - Annex VPageSobT

LESOTHO BANK

Taft 53 D e m Stt_llmt, y dd 31 Dec~

1985 1086 1987 1988 1989

INCOMEinterest Receivable 31,023 24,828 24,151 36,019 58,661Commutlon 1,2568 1,496 1,885 2,064 2,706Other Icome 1,166 1,650 1,748 1,923 2,146Foreln Currency 2.524 0 65 1,719 2.044

Trnsaction GaIns

TOTAL NCOME 35,961 27,874 27,849 41,715 65,547

EXPENDffU_Intere9t Payable 18,818 14,138 13,203 20,017 36,011Oeprecatbn of 352 404 430 523 582

Fxed AsstsForeign Currency 0 389 '0 0 701

Transaction LosseOperatin expenses 5,923 7,445 8,234 10,174 11,809increase h Provision 2,000 500 1,500 2,000 0

for DoubtfW Debts

TOTAL EXPENDITURE 27.C93 22,856 23,307 32,714 49,103

NET NCOME FOR YEAR 8,868 5,018 4,482 9,001 16,444

APPMR0PATK0PProposed ODidnd 4.000 2,000 2,000 3,000Transfer to Geneo 2,000 2,000 1.000 2,000

Reserv

Total Aoplatkon 6.000 4,000 3.000 5,000

RETANE MC= 2.568 1,018 1,482 4,001

Sourc Lesou futc Anva Reports.NOTE1. A provisbn for doubtfu debts ha not yet ben made in the 1980 accountTh Is expocted to,reduce net Income for the year by around M2.0 amUo

ApproprIatIo for dhvkdred, genra reorv and (for th fret tis) ta, have abo notyet been made froc the 1950 accounts to give an actu retained hKome at th end of theyear.

-92 - Annex V

LESOTHO BANK Page4-Y-Table 5.4: Balance Sheet. ye"r ended 31 December

(M '000)

1985 1986 1987 1988 1989

CAPITAL AND RESERVESShare Capital 5,600 5,600 5,600 5,600 15,000Share Application 2,500 2,500 2,500 2,500 0AccountCapital Grant 23 23 23 23 23Non-Distributable 8,191 8,191 8,191 8,191 19,191ReservesRetained Income 14,635 15,653 17,135 21,136 14,237

TOTAL CAPITAL AND 30,949 31,967 33,449 37,450 48,451RESERVES

LIABILITIESDividends 6,000 6,000 4,000 7,000 16,444Current, Deposit 131,304 161,299 187:825 250,739 276,901and Other AccountsDeferred Pay Fund 63,909 .68,331 65,208 73,960 76,545Due to Subsidiaries 1,439 837 857 1,115 0& Assoct Companies

Liabilities on Account 1,947 10,386 10,060 2,968 13,869of Customers forAcceptances, etc.

TOTAL CAPITAL RESERVES 235,548 278,820 301,399 373,232 432,210AND LIABILITIES

Cash and Balances 112,030 77,662 64,556 65,938 185,707with BankersShort-term Funds 20,643 73,763 92,526 136,311 47,489Investments 0 0 10,000 10,000 10,000Advances and Other S5,395 58,490 67,173 84,005 135,293AccountsLoans 19,848 27,939 25,995 36,384Reserve Requirement 1,780 5,047 5,124 8,734 8,139Interest in Subsidiaries/ 699 892 705 1,640

Associated CampmaiesDeferred 5xpenditue 517 239 69 0Fixed Assts 22,689 24,402 25,191 27,252 29,015Liabilities of Customers 1,947 10,386 10,060 2,968 16,566

for Acceptances, etc.

TOTAL ASSETS 235,548 278,820 301,399 373,232 432,209,..

NOTE:- Therz is some mis-classification in the 1989 accounts -between the items of "capital and reserves"p between "cash and

balances vith bankers and "short term funds-; and between"advances and other accounts" and "loans".

Annex V93 - Page-5 or -

LESOTHO BANK

Table S 5: Loans Made by the Prolects Unit of Lesotho Bank(l '000)

Term ofLoan Loan Repayment

Date Project Applied Approved (years)

1. Nov 1988 Dry Cleaners 140.0 140.0 52. Social Centre 246.0 246.03. Social Centre 8.0 8.0 14. Distributors 31.0 25.0 05. Jan 1989 Children Wear 40.0 40.0 36. Electronics 45.0 35.0 07. Land Surveyors 20.0 20.0 38. Mar 1989 Lodge S.0 S0.0 59. Mohair Products S.0 50.0 510. Fridge Repairs 24.0 14.0 011. Jun 1989 Restaurant 120.0 120.0 512. Aug 1989 Brick Manufacturers 3,170.0 3,170.0 *13. Oct 1989 Knitted Goods 40.0 40.0 014. Shopping Complex 1,125 0 1,125.0 1015. Herb Production 100.0 50.0 316. Jan 1990 Sewing & Knitting 10.0 20.0 317. Wool Products 150.0 A1500 518. Leather Products 1,000.0 1,000.0 719. Mar 1990 Leather Products 50.0 50.0 520. Restaurant 163.3 99.0 5

TOTAL 6,582.3 6,452.0

Average 329.1 322.6 3.6Average minus brick project 179.6 172.7 3.8Average minus brick & o/draft 216.2 208.7 4.6

..

- 94 -

Annex VPageof 6

Table S.6s Financial Performance Prolected 1: 1992(II millions)

1989 1990 1991 1992

Net Profit 10.15 12.14 14.13 16.13Retained Income 5.15 6.65 8.13 9.63Total Assets 387.11 422.21 457.32 492.43assets not Fixed 359.59 393.68 427.77 461.86Total Deposits 332.80 364.94 397.08 429.21Deposits ExcludLng IDPF 256.21 284.92 313.64 342.35Loans 36.40 39.78 43.16 46.53Advances & Other Accounts 86.56 94.S4 102.51 110.49Equity 40.60 43.36 46.12 48.87Reserves 33.35 36.45 39.54 42.64Operating Expenses 11.18 12.48 13.77 15.07Fixed Assets 27.52 28.54 29.56 30.57Short Term Investments 81.41 83.21 8S.02 86.82

Sources Lesotho Bank, Annual Report 1988

;-.

Table 6.1

Lesoho Agricultusral DevelgpMent Bank

Finncal bJig ,tU 10M9189(la Thossand Neloti)

PercentIncrease

1*M, ISA! II 198 lA1l1eL

Averae Assets 9,300 14,058 22,568 33,860 264ZAverage Looam to 3.t_ 5,414 5,056 11,013 IS,900 3661Avrtage Investments 4.2" 5,136 4,329 10,313 143ZAverga. VimA Assets "2 1,026 1,457 3,034 2152

Average Met V.rt 6,9s 5,612 4,926 4,129 -402Averase Loa-tem Loom 1,06 2,0J6 3,542 5,519 4092AverAge CIstGftt DeouitS 1,217 3,671 9,64 21,475 1,6652

Prfit and t A_e uOpoerting Inco a 1,459 1,320 2,544 4,216 1892Operating Costs 1,19 1,9t 3,039 4,645 297X

Stoff 6-l i ( 111 ) (1,064 ) (1,532 ) (2,541 ) 2302 qh

siss of StaffAvetage *A&e of Staff 80 109 163 226 1832

Average Aasetsjlloye0 116 129 138 150 20XAverage S&IAuy7161oyee 9,636 9,945 11,239 11,243 172Operating ImcomemAvege aete 1S.6I9 9.39.922 11.272 12.45Xopersting CoatelAvocp Aseta 13.112 13.922 13.452 14.312

,J Average balace shet data refer to tb. arithetic average of two *ucceive eN yar figure.

ki In Heloti per *anum.

Sources Leeotbo Agrlcultural Development *ank N x

96 Annex VIPage 2 of 15

Table 6.2

Geosra2hical Distributgioof LADI's Ntwork in Lesotho

February 1990

DiWtrict Brch2s Agencies *f Offices kI

Ifewu 2 6

Thyataeyneg 2 3 _

Leribe 2 2 1

Thaba Tee 1 I

MohUlo's oo 1 -

quching 1 1

Butha Dutha - - 1

Naf=ec sa - a ~ 1~

Total 9 12 3

Si Age"e provide al banking srvice. dwdg a ertain mberof days pe moat ranging tgn two to (twv days. The staff of anage Usually e.miat of saves eons (is., loM OffIcer,two t*llr. tw drives an two s*eonty parts). The accountsof sw essaci" ace ined with th1se of the brance in theirdientats emepe for ome agency In Trataeemsn uhtc repor to

asemS The ageteg are mnne by the staff of the branches.

I Offtice de mt offer al banking sagyics. They eceive loanapL1ici ad reopwant of loom. tah offic is manned Withtwo offiers, All offleas rorlt to Iabar Iranh.

Sources Leseth Arcasua Dewelopuasm Sank

-97 - Annex VI

Page 3 of 15

Table 6.3

Lesotho Agri4ultural Develougt Bumk

Growth in Staff. 1985-199Q

RNbcr of Staff

End of d4naserIt Seirr, Total

1985 9 3 51 63

1986 14 7 77 98

1987 15 18 87 120

1988 18 20 167 205

1989 18 21 207 246

1990 (C.bmaq) 19 21 217 257

Sourcet Loth. Agricultural D_- Back

- 98 -Annex VI

Page 4 of 15

Table 6.4

LasotLo Agric ltural Develoomne SaBk

B-zakdown of Staff, February 1990

Number of Number ofNumber of University Diplom

Staff __ RDeresj' Loldgr. Holdrs

Managing Director's Office 3 1 1Legal Unit 2 1 1Internal Audit Unit 2 1 1Planning &ad Research Uait 2 IMonitoring and Evsluation Unit 3 -Computer Services Unit 4.1' 1 -Finacial Advisor I 1

Finance Departmnt 15 2 2Loas Oparationo Department 13 1 8Savings Department 29 - 3Personnel and Training Departmont 6 3 1Administration Department _a 2 I 2

Total Read Office. MbSem reanch 132 14 19

Semoakong Branch 15 2 1Teyateyanng St-snb 14 1 2Moletsamn Branch 15 - 2Peka Brench 17 1 IMsputs.O Branch 17 - -Quthbng srnch 23 1 -

HOae Sek stanch 13 - 1Thaba Tee1a Breach _.

Total 257 19 28

.~~~~~J

.1 Iin editist two aw recmtdt ac* being tred ad cowputerprogre_re La gglad.

Sourcme Loesot Agrcltura Developenst Baok

- 99 -

Annex VIPage 5 of 15

Table 6.5

LSogtho Atricultural Dvevloyment Bank

Balance Sheet for the Years 1986-1989As at End De_ember(In Thousand Naloti)

198i 1.211 121 t989

Cash on Hand 88 144 359 694Cash with Banks 564 4,049 4,625 673Debtors .M 6t4 1.690 1.18ICurrent Assets 815 4,867 6,674 2,554

Iav stments 4,914 5,357 3,300 17,326Loas to Customers 2,496 7,616 14,409 17,391FPixed Assets (not) 990 1.061 Lfa 4.214

Total Assets 9,215 18,90t 16,235 41,485

Creditors * 72 297 1,576 1,793Tarut fund Accounts 96 4-536 2105Current Liabilitles 168 4,833- 3,681 1,793

Customer Deposits 1,606 5,935 13,752 29,199Ordinary Savin ( 701 ) (2,14? ) (6,669 ) (18,260specal l 9btnaL C 500 ) ( 970 ) (1,457 ) (1,539Fid Deposits ( 05 ) (1,640 ) (3,919 ) (6,529Call Accounts ( - ) ( 976 ) (1,681 ) (2,845Capital Haug -) ( -) ( 6) ( 6

Long-ten Loam 1,217 2,876 4,207 6,830Sbre Ccapital 500 S0 500 500Resezss L.4AM 4,fl 4.e9 iii

Total Liabilits 9,215 16,901 26,255 41,485

..

.I

oqgLstaAralmslDwl etSa

Table 6.6

Lotho Aricultural DevSlorMept Bank

Amount of Custmer DRgogits, Brokn Down by ?tat of Account and BrancAs of Decmr 31, 1989

(In Thousan Ifloti)

XRLRM Umi 9mka lik &lms o mr thto 1s.s

Orawy SLain 10,36 1,262 1,153 3,504 S0 359 1,109 18,219

Sp.e"ia Sv_ a 11 1II 231 228 52 54 44 1,539

via" Deposits 4,015 251 578 1,062 95 262 265 6,528

Call Accounts 2,327 a 45 127 23 75 241 2,864

Capitol UAser - - 2 -

Total 17$544 1,636 2,007 4,923 674 732 1,659 29,199

I

C

j The difference betwee the ordinay sd special savings accounts is that the letter require * blhe;miisma balance an allo fevr nibec of withdtaw'l pec mth.

Souk ce Lesotho Agricultural Devlopoent $ank

Anrnex VttPaga 7 of 15

Is s g SI "r"

wa i! X. X a'I #; I

j~~ I XIX

]~iJ I

- 102 -Annex VI

Page 8 of 15

Table 6.8

Lesotho Aericulturol Dov_lomaant Bank

Breckdown of toa_s to C¢ustoMes.- by Branch6A of December 31. 1989(In Tha nd 14lotl)

ProvisionsTot Bad

Gross ad Doubtful Unearld OutstandingLtanch Lt- Debts Interest Balance

4"-mu 14,608 2,241 2,146 10,221s.mowou 717 - 30 687Pe" 1,250 - 211 1,039QuthLg 3,494 - 313 3,181I*lstse 204 - 25 1794aputao. 1,867 3712 1,495

-oysosas Gal 12 589

Total 22,741 2,241 3,109 17,391

Souce Leeh ptmutue Dv41m_ Bs

*s

- 103 - Annex VIPage 9 of 15

Table 6.9

Lesotho Agricultural D.vloommt sank

Breakd@w of Orogs Lome to CuStocs bi Two of Lgan ad IranchAs of Docoer 31. 1989

(In Thousand Kalott)

Seomnal Short Madts LOSS All

Yaeogn 1,283 2,641 5,509 5,175 14,608

Semnk.ag 2 430 25 - 717

la (13.) 44 532 685 1,250

QisthLa 142 897 1,071 700 3,494

Noltsaa 61 31 112 - 204

Mapuato los 228 323 1,211 1,867

Toyatang il 22 its 211 . 601

Total 1,653 4,295 6,811 7982 22,741

Sawa" Dined edwaz sInpl. by tbs Lsestho gi.trlDvl,a_s sw3in D

* Ik

- 104 - Annex VTPage 10 of IS

Table 6.10

Lesotho Agricultural Dov. loont s3nk

Braakdvwn of Investmntn(In Thousand Xlotl, as of December 31)

Twoo of Inv stment 1989

Government Bonds '1 3,140 3,140

Fixed Deposits a - 7,124

Call Account At - 6,702

esogvy Requirement (Contral Bank) 110 310

Ordinary Shares

Total 3,300 17,326

l s Leme Ateel v et le.

Smr*** Lo 4 t_

- 105 -Annex VI

Page 11 of 15

Table 6.11

Lesotho Agricultural Develooment Bank

Prof it and Loss Account fgr the Years 1986-1989(In Thousand taloti)

1986 1987 19 1989

lateerst Received 592 538 1,765 3,330lnterest Paid _ 94 2j 776 1.566Interest Margian 498 241 989 1,764

Interest on Iaveetmeuts 534 595 770 2,143Fee Incoae 371 327 693 230Other Incom .S6 157 _92 9

Operating Income 1,459 1,320 2,544 4,216

Operating Costs 1,219 1,957 3,039 4,845Salacies 771 ) (1,064 ) (1,832 ) (2,541 )Repals and Maintnaace ( 32 ) ( 121) ( 240 )( 345)Other Oveheds ( 416 ) C 7S2 )&/( 967 ) (1,959 )kI

M*t OpevstLng taom (LoSS) 240 ( 637) C 495) ( 629)

D9preciationcost ( 90g) ( 7) ( 167)( 350)Loan Loss Provisons L.941 - . -38Other Costs 2,037 72 167 312

Loss for the low 1,797 709 662 941

I I_ eudisg ea ammot of N 110 thousanW, quivaloet tothe 3o icu=rre due to the fire of December 1987.

kI Includitg en moam of N 313 thousand, *quivalent to the*sp easO inCured in staff train4ng prOeJouly finSacedby the IAD project.

Sowrce Lesoth gcltua Development lak

- 106 -Annex VI

Page 12 of 15

Table 6.12

Lesotho Anricultural Development BankComa-ison of 3udgeted with Actual Balance Sheet

As of December 313 1989(In Thousand Maloti)

Budtet Actual

Cash on Hand 250 694Cash with Banks 1,400 673Debtors __0 l.A187Current Assets 2,500 2,554

Investments 12,785 17,326Loas to Customes 27,895 17,391Flxed Ass.:. (net) . 340 .4214

Total Assets 46680 41,485

Creditors 1,605 1,793Trust Funds Account 1.401 -Current Liabilities 3,005 1,793

Customer Deposits 29,280 29,199Long-tema Loam 10,500 6,830Share Capital 500 500Reserves 3.163

Total Lsiibili:is 46,680 41,485

SourcesU Lesetbo velopent leak.

- 107 - Annex VIPage 13 of 15

Table 6.13

Lgsotho Agricultural Develo=m*nt Bank

Co_a:ison of Budtatod with Actual Profit and Loss AccountFor the Year 1989

(In Thousand Maloti)

Budia t Actual

Interest Received 3,340 3,330Interest Paid 1.200 1.566Interost Margi 2,140 1,764

Interest on nvoestments 800 2,14)'Fe Income 250 230Other Income 75 2.Operating Incom 3,265 4,216

operatir g Cost 3,665 4,845Saaies (1,800 ) (2,541Repairs and Mantenanct ( 200) ( 345Other Overheads (1,665 ) (1,959

Otbht Costs 300 312Depreciatio Costs C 300) C 350Loan oss rovisions C -) ( -38

LOs for the T"r 700 941

Sources tshe De n lk

- 108 -Annex VI

Page 14 of 15Table 6.14

Lesotho Agricultural DWvelOuuent BSak

Changes in the Lendint Interest Rates, 1986-1989(Percent Per Annum)

January January November FebruaryTrD of Loan 1986 198j 1988 19j0

Aaricultural Loans

Seasonal 12.02 17.02 21.02Short Term 11.02 19.02 23.02Medium Tern 11.02 18.02 22.52Long Tern 12.02 19.52 24.02

Non-Asricultural Loans

Short Ttna 12.0S 21.02 25.02Medium Tetm 11.02S 21.52 25.5SLong Tern 12.02 . 22.02 26.02

Food *nd S lfweufficiencvIrood DM 12.02 17.02 21.02

Source, Lesot. Agricldtural Development Bank

S.

- 109 - Annex VIPage 15 of 15

Table 6.15

Lesotho Aaricultural Dovelooment Bank

Changes in the Interest Rates Paid on Deposits. 1986-1990(Percent per &anU)

January January January July JanuaryTVPe of Account 1986 1987 1988 1989 1990

Call ccounts

24 hours 7.002 8.002 11.75231 days 7.252 8.752 12.25288 days 7.252 9.002 11.502

Fixed Demosits

6 month* 7.002 9.752 13.00212 montho 8.002 10.002 13.15Z24 months 8.252 10.25Z 13.25236 mnths 8.252 10.25Z 13.25260 months 9.002 10.2s2 13.252

SaSinse

Ocdinary caving 9.002 7.002 9.25S 14.502Special, savin 10.002 7.252 9.252 1S SOSCapital e 10.002 15.50

!I Since June 1988

Soures Lesotho Agtcsluua Deelopomn Saek

a

BASOTNO ENTEIPRISES DEVELOPUMT CPORATION

ALLOCATED WOE STATEMENT (for ysr ended March 81, 190)

Sob.b.olsg TechnicalTerds, a Ceases Socylos Tetrox swenes

Iedusq NobseWa' Merhobop (mW/hslt' Costr Ezt.sloe Leon ACguAto 1/ ""A 2/ (ood) me"liL) (TaaltS.) Service Project. TOTn.W

Ao coloulod to dto / (77,) (6,89) (10,58) MO2M6 (25,512) (100,074) (207,704)id d Os 402,50) (5.40) (8,441) (09.07)

EIq lenst (7,000) (21,000) (26,0 IFrsltor & t Fltre. (,74) (2,748

pie L4us Irtstors no0,927 209,027Iwo latweres EXIS"S5 ( 0,717) (0,6,2) (105,269)plus SWd OebtC be-, "t 10,440 10,440lees Le Fe (16.062) 15,062)loo Pro's for SoObWtfl Debts (70,00 (4,07 4,641) .,)Ise Alloo's ftor Op"pO DOp (,900) (0,900) (1,900 (S,000 80600) (44,600)

Op'g Profit (Law) 82,20 (109,2#4) (115,218) (81,652) 24,744 (2100,950) 8W.679 (009,209)

laow Al los'l for imed Offlo. (75,242) (41,014) (106,067) (01,7M) (21,U64) (142,252) (60,162) (499,005)

Tota) Profit (Lose) (42,022) (150,266) (2s,660) (50,815) 2,600 (09,206) 6,497 (660,212)

plus GowvrnetSubel. 052,000 o

Lo"s Aftor Subsldy (215,412)

I/ Includes Nobel.'. Nuoo ssoretwlol st2/ laduetrll egtro eely0, ame Asoao 2

net on metedsilou eedW for Wloc.tlosezOpotloss opsr_tmts *llocotd $I sy over rolovtmt aro"Need Otlee tllo Wcaed Is propertie to col oer'se calorles a e"pl"e b sefits

O.5. Theo. Is oalilbt discropsoto bet.... thes" flgres and th accountlg flguroe eo the op r Is th, audltedflolsl eotemoest, d to reonding sad eer edjeotet. net r Wily oval loblS for tho roe date.

x

S-

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"AS-§wt "t.o uvwt ttes," a"til me6eeee'"§" lo "t M-e t *W GM. ow ow M _

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uolvt _@no ono 0"p " 0.0 #"o mon e" oew1 cm-on oBeew eo¢"n OWN '"lo oeot WI 001 MIT Wtl W'S In :

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- U't" 9s9e V44se me" Mtss" eVW" sorest' Qast eaee ases0 usin osw' "u'a W" 401 0`1W "I WI 40' P -t 1 3iwomI0

esrew on," so," me,' 'ns,*% "¢$ s m's e'os eo',s 4W* sue usous Uee5 U oS M's O'is U-t Go's Olt MIfLh ¶5854M,%. emit O"I" g"ut "utI obes ease aWe4 oWe enars are. ee. aou's eo O-t 403 W- 403 U'S 405- AM .UW mm." *"t, W,t& ,me'Gs QWIti on, " em es*o" S#t 50t'* Oles OIe. WlS' Col W0 405- o lt felt all M U oUV UorUts seo's oles got,s ost'l osv'- torest soees aro soer eWo wees Goae, eo-t WS, -I1 - "li 0, M AO

ms*mU ese as' o s' om use. os moes aso mos oas aeeo oas aug eros ge Ut 40s *' t * IN -

on, m's oIS M's a's on's erum ' as's eA ao,s as's ears ea,s ass as' W's eoil 401 WI MNWsI tsm'e °'sV whelp e' VA,& t sst leOs oast cmes Ores aore ee oarn eI o e 's all 551 "It 401t 0'S Iw AWarm'4 ms'eu mIS'ez eates ess's CMs'm NOVIss ewar eaoonco am mon," se muml colt 40-1 WI' 0'S 40t 001 MN MD*me

sam ninmm 'tsMIN' e 5 0 ea'ss sue, ea's: 0 o OeA'a mness us'so so,* wo, W.' 00,4 W's W$ AM JISUis. 'WIaLssg,e a 0 0 , sum's'Wlr us's e s -6 eass ast us'us 01 - - W@1' W A 010111iS 1uLse s o a ease 0 m'os e us's.le uss s' - - W11Zt es si mnmtsrto * o o 0 *,t m'es a e e 0 m'eoo us's Go's --- -0' l 55'5 0 0 0 0 mg's uSW$ 0 0 e @ use0 uso's set1 Is - g' go" 4soUt o e e at ^s't us'sn o o o us'¢"eeo eat weo - - - e-t S eo- US Lw mW's 9 e a a m's a' 0 s a a ml cm's so's - g adOWN'e * 5 ss uPsao a a a mum us's 'earn a's - - ass u's 00- me fu5bl

_~~~~~~~~~~~~~~~~~~~~~~~~sm uu:e fsuam-W <) 'inmates O_1a-m8 gam

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mo m .P, m. 5*1 sS.

Va. |"V'£ t" *. VWs M. til l MIT M's M 6 ootw

"4 146'W O'S 3.96' LlS" *4 slop: me'SCt' UwoIW .6tl'as ILtlOW 'loS mass m _Wmms es ser svs

S'S 396' 19tl' tt' 661':i O' OW'IS 0We'Wt 55W'? 111O'?il m's WOW'S 126fl _ M-se oLS:6 Va36 VaSle S*3'W M."W 0Galin 000'SA 0'S w'es 4603 OUDIT6 Sul n 1p%

mlWn to* Ise *IWO9 1066't 980:k 0696 460'uoiW 000'4 0OM'1 O00'GO SWU'3S 460'f Skim `'WIll "l' P

nw M,'U"IV M466Os59 9 M9 M6'O US? s, Nsin,: MINXu Ga,'= Galva tm 3 500,119 1104= -wiL

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Go 65 6,14 VA1'O W6 O ShW'46aI w,&' ow'lLn 010111 00013 000'1K OM-Itsa01 W el Ow'15W ws a 'WA mmS WAIAU

* oss'o ooo's S~~O'S ms aW's us' osmo' IWS4W * or'ar toll 46'W in wnxslldWt4 ttot t *W $Wt "Wst ant tAl 60? 46 46W 46'W 61 uv t O

531US 56 '6tn"VAO ewl Owl SWIM '" a a wn NoW wo; Gola e0's tee'n _ tt R t'soII 24 In mmmw%sw'1n 61 'M ASg'35 SWg'S *66'S LW'S QW0QK OW4L QOG'49 OW4O OW'S MOW' 5VWSW 'WhOlES

00 0 0 0 0

NS'PL OW'S? 46191 356'fl 636'9 536'9W OWoas 00mg, OW' t OW'O ' O t9 W'* OW'S IOW 4'tM *G 46s *05 *5 60 MIlEIISUEI O

61146 0 0 0 618.51 59665"a, OW'W 0 0 0 O,Wlon,"l Am 111in 'WiAL

* 0 0 0 0~~~~~~~~~~~~~~~~~~~~~~o-o mlsG'

16*6 0 0 0 46*0 0~~~~au' mOW'46 0 0 WO S01 O'0I41 4646'W - 5 31113Mw

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WOW 3.NJAP -ASSAPO MANW

re riavz~~~~~~~~~~~~~~~~~~~1

RNbU __L AMe ONVELOF10e E MRJE TABLE 8.3OwAIL c05: IND ff me WIN MTMQ

- -- ----- _- __X;*f-.--- ------ - ------------------------- -------------̂ *---------------¢-*----------------- *6------- --------------.

Wm01 I 2 S 4 5 TOTAL OIr COST a 2 8 5 TOTAL 1 2 8 4 a TOTAL1. DWUTUE ranST

TEnAO MTSUALS La 0.10 0.20 0.20 0.20 o.30 1.00 0o.00o 8.000 8.o0 6,C00 6,00 9.000 80.000 1,125 2.250 2.250 2.260 3S375 11.240NM eF _36 La 0.10 0.20 0.20 G.20 0.80 1.00 20.00 2.000 4.000 4,000 4.00 6,000 20.000 780 1,s00 1,5o L.OO 2.250 7.4"6*35.w La 0.10 0.20 0.10 0.20 0.80 1.00 2.4000 2.8o 5,00 5.000 5.000 7.50o 25.000 e37 La75 1.075 1.675 2.*17 0.374

s8M. D_TU# cow 7.c00 IS.0 15.000 1.000 22.0o 75.000 2,612 ,6624 5.624 0.6 .46 2a.121

U.ffoXM me51£ 6M.0am

0 0 0 0 0 0hfWM 7 AMM N 1.20 L.O 1.00 1.0e 1.00 8.00 25.000 25.400 25.000 25.000 25,000 25000 125.000 0.874 0,274 .874 0.874 0.374 456.69

6OPWOAL. MM=* 25.000 25.66 254000 25.060 25,000 15.0o0 15.0o0 9.S74 0.874 0.874 0.874 0.84 "6.60

o 136a13311 oriP 16* 1 .00 8.00.60 SOLOS 419.0046.10 1,.0F7.00 eo 2.760 .000 920.60 25.10 n7,6 ff.420 .085 0.749 5.57n 9.426 10.371 8.1

ro7AL. 6m PAN 27.760 4.000 47.6* 0,u10 82,60 1.420 10.46 18.13 17.945 W.OO t.74" S.022

TOTAL. a I'l51 0 .6 8.000 62.60 65.140 7.160 26.420 18.221 21747 2a.570 24.424 25,181 111.144of i.bsz 0.CM 25760 47.000 .6 54.10 58.60O 241.420 11.1 2762 10448 20.00 21905 60621of lellt 8.80 S0D 11.000 1.00 11,000 u, .80 5.000 2.062 4.12 4.126 4.124 S.167 20.622

-I comcmLOCAL Pa CMm 22 6.815 7260 7?.0 7.626 2 1.242 S7 2.hs 2.722 2.740 2.8S 11.714F mms - 1t 5 6t o m17 76 2.481 46 192 10 194 294 919TOMWL. P330o6 0 28.61 7.7 7.M 76* 6.410 SM.69 # 66 2.747 2.918 2.,4 S.18 12.688

TOTAL. AOMm OaU# 8.M 06,07 70,60 72N ,6 8.579 ,011 14,106 24,494 26.43 27.8 81.86 125.777

101 19 19 1994 to LOCAL. 5330C007660138M2 15.00 14.ee 14.0 1 l.001. u.FOE= 530 C0#DCOV MM18 4.75 4.00 4.10 4.00 4.0AN&6 MTISW 0.CM. 065*001 7.60014.800 14.000 1860 18.001AM PAM 513U sOWDiM 2.0 4.80 4.M 4.70 4.70

0

00 '-4,

TABLE S. 4

LEW"us_ .VVAPW& as *In-sposom manes 'sD=

IMT I S a 4 a Ws on an 1 9 2 4 8 n!K 1 9 8 * MAL

A. AtS SuvAMi LMaL..I. mum vs in i.e i.e - - a.* am*e" m11a. MA5. us.me 0 .Mt.51 U9.d' gso.a' sn.e' 0 0aWswum. mouvAi vs - .e SAO s.c 1'.m0 0 0 0 171.1', 7.0100 134,' a 0 0 te.m4 U.n. Wl.Omans mav lwarno w i. . . . . ass 5o^ M.M's 0 * sa.eos 1"cm 0 0 0 * 2us.e40vuw.ur imai m $-S e4 en 0.1 o. i.0 sss.m s.M -ses M.M M.su tos.u OMAN s.s. w.s. *.sO as.00 o .s. noo.=$__ .- n.ms ;a en em eo i. o. e .e im .mom 1.1 s .me* 1's MAes,M M.M i.'. s.4u W.42 40.mmaaU m.m as.. man gs.m' simm' ,ss.n twi ae.a me.m* i.e.. i.s, o,s 4.ssA. e m'M m, us,a in . ,.t no.= wdo 1t, UmM to.ow

a.T. mu vs i.e i.e i.e i.eZ i.e u.n i'.i _n's #UA twOM .5M 5150,0 m.IitS .B. 1it... mn00 Itee' 115.5s 554'smute LO i.e - - - - .e MM M.. n 0 0 * S0 8. se 0 0 O * n.

p.. TM Po _mL. . .e. . i.e win Trim 5 0 0 0 ".weanA.S Ua.M 1.666 So."$ ma... MA.' 1s nts.1 , 11 mt s.0s ac.u; m.m an.00 7M.W

"M . M- - in a..a's mm1 'a 344.14 "6" 4.'.11 'a? M' -s..m p-e ._s 902.4 .uS.&s

C. eqIMY iNNSINVK UlmMin VW vs e.a o.s .*.- o.i I.e 1n.m n.m ".n n.m n.m0 Jln.M mWAM U.M u.s' a."? emc I.wc mice.1MaMma as ama ON. W 0.0 .. .*n 0.1 Ci i.* m., ".m u.s' "AM woo N ms.m wOm U.6" n.for u.4" e0a ato"eMs. main W o.11 - - -. *. _.M i.m 0 a * n.m n.e 0 0 0 WA",

anlua USe i. . - e * 5.5 .l.ss 1.._ e' cs.m W."$ n." O O O .

D. APU A604 __0-w 1 1* ,O tUO ° 1 n <

wa ge MD I Mt *1.5 I . . . 1.1 MLe. e.uw M,."o 0 0 0 M In.." o. 0.sUsmU.UA_U W * I ... .* a MA" MAW Sm o * "soe . Inoo %n.M 0 * o sMANf_ooem ConooLu W A I *.F . . *.8 Olow. W.. 0," * o mo.u Mm &m.. * 0 o0 mr. SAVV W 0. 0 A MA m,e. A#s. 0 00 i?.i #.iN * 0 * S "Mo'

qs.e _M 4.4 S * P.O I.Saft .mi 0 0 10.m 1.1 SesA 'S .U5 0 0 0e.4a's

S. mussy sWM.rnin ta'

paga. mu's _ vs i.e a - . ,.' 46.SI m,0o. , * 0 e.".ui ii.m mR.m 0e o * aOs.Xe'

mat 'fM ete W i. a . . . ge m.o4 ai.s M.A.. a0 11.60 do.m 0 0 0 SU,AaNUva muWT MMW 1. ..5. .0 518*" 1 A 5.5' MA" owsce ineem u..m 0 0 0 'smwo'

w t aL 0. es e.U we 4 1n,4 a.1 w,i p.. . eI ". .. .sm . " m..SIn*= Laa m 0 1's. 1n.i' 311.. 11 5 61.5 MAO 0 4.SAW 0*.401 #T.G *.nr

e. "ar lfmls L.a 0.0 0.8 Ce 0.1 o.a i.e MAN me.M Iftm MAPm u.n .cu OeMA n.e's n0.e' ISAs 20.40 0.e's ma..WM VW? OIOW0" C I a .. - - m.n" 41.5w 4110.e. mn" 0a0 M.Mo? sn.w a.e' an.. 0 a m

sues memmem mmm.e'~~~~~~~~~~IDA 1sa,na u2.n 4?.e. 42.811. 444.132 0am's 0.0.s ,.asn m?.we eia m.o~.mkwMOAL 1550M. AMSiA7U 5,04.5e 10,06.us 1.6474 1 .sei.ms 40.m0 12.815.475 a,m.W81 3.aes.m5 GS0.202 40.244 255510 4.68. '2336 k

- 115 -Annex VIlI

Page 5 of 9

Tablo 8.5

Lesotho - Technical AwulLtne and Staff Traitnin

tor Agroindustry Dealledl conont Cot CM'O000)

company PY 1 pY PYs Totm I Costa

A.oecnncal Asaanc-:

1. NAFC 0.0 1,986.7 1,935.? 3,371.42. LPCS 0.0 1,257.5 1,267.5 2,515.0S. Poultry Hatchery 0.0 1,257.5 1,267.5 2.516.04. Milk Procastng PlantO.0 1,257.5 1,257.6 2,515.0

Total Techntcal Assistance 0.0 5,708.2 6,708.2 11,416.4

S. Local Staff Training:

1. NAFC 0.0 112.6 112.5 225.02. LPcS 0.0 76.0 76.0 150.0S. Poultry Hatchery 0.0 62.6 62.5 126.04. Milk Proc_ing PlantO.0 62.6 62.5 126.05. Miscellanous Staff 0.0 76.0 75.0 160.0

Total Lcal Staff Trlainig 0.0 387.5 387.6 775.0

Total 0.0 6,095.7 6,096.7 12,191.4

116 -

Annex VIIIPage6 of 9

Table 8.6

Lesotho Staff Trainitn Proorga for Agrotndustrlal O w_lopm_nt Stoff

Compony main Tratning Area Training Yre Unit Coft Total Cost

1. NAFC Busines Administration (MD) 0.6 60.0 26.0Production Mansgement(PM Designate) 1.0 $0.0 50.0Financial Management(fC Designate) 1.5 50.0 75.0F edlot anaemgoent(FM Dosignoto) 0.0 t0.0 25.0Markettng Managemnt(MM Doe inote) 1.0 60.0 60.0

TotJ I Cotts 4.0 $0.0 225.0

2. LPCS Busines Administration (MD) 0.5 50.0 25.0Financial Managomnt(FC Designate) 1.5 50.0 75.0Marketing Manag_met(MM Designate) 1.0 60.0 60.0

Total CoOe $8O 60.0 160.0

S. Poultry HatchoryBusines Administration (ND) 0.6 50.0 25.0Financial Monagemont(FC DO signte) 1.0 50.0 60.0Poultry ProductIon Mnagemnt(PS Designate) 1.0 60.0 50.0

Total Cost 2.5 t0.0 125.0

4. Milk ProcessingBusines Admintstration (MD) 0.5 60.0 25.0Pl nt DeIry Management(0DS Deal gnat) 1.0 50.0 60.0Financial Management(FC Deignae ) 1.0 50.0 60.0

Total Co 2.5 S0.0 125.0Misellaneou Staff Trainntg 16.0 10.0 150.0

Total Staff Training Program Cose 2?.6 80.9 775.0

- 117 -

Annex VIIIPage 7 of 9

Tabl- 8.7

Lesotho Technical Assistance for Aroaindustrial Doevfovment

Company Specialists Needed Total Manysare Unit Cost Contract Price… ----- U '000------… _

1. NAFC Goneral Manager 2.0 460.0 900.0Production Manager 2.0 a87.5 775.0Financsll Controller 2.0 420.0 940.0Feedlot Manager 2.0 387.5 775.0Marketing Manager 1.5 387.6 5 51.8Lump Sum Contract Price 9.5 407.5 3,871.8

2. LPCS Genral Manager 2.0 460.0 900.0Financial Controller 2.0 420.0 84.0Marketing Manager 2.0 887.5 775.0Lump Sum Contract Price 6.0 419.2 2,515.0

S. Poultry HatcheryGenral manager 2.0 460.0 900.0Financial Controller 2.0 420.0 640.0Poultry Specialists 2.0 387.5 775.0Lump Sum Contract Price 6.0 419.2 2,515.0

4. Milk ProcessingGenoral Manaenr 2.0 460.0 900.0Plant Dairy Specialist 2.0 387.5 775.0Financial Controller 2.0 420.0 840.0Lump Sum Contract Price 6.0 419.2 2,515.0

Total Technical Assistance Program Coat 27.6 414.3 11,416.8

TABLE 8.8

LESOTHO

CALCULATION OF PRICE CONTINGENCIES FOR AGRO-INDUSTRIES COMPONElT

o l _ ot I

p11 Pm2 P PY4 P1 To. P1Y1 PY2 P1 P4 P1 TO"I

Totel se.s Coo 0 S0oe 6,046 0 0 12,101 0 2,2f8 2,238 0 0 4,W1

Pse.l C.et"pa 0 26 33 0 0 6 0 140 10t 0 0 t2

ToeI cos 0 6,87 6,3 0 0 12,75 0 1, 2,3m1 0 0 4,7

1991 10se 1t83 1904 1386 -Le.l Prle Contlngu,y 0.15 0.14 0.14 0.13 0.18 *

.tpolon 1 0.047 0.046 0.040b 0.0471 0.0470

Lao" 0.07 0.145 0.14 0.18 0.18For.lgn 0.02" 0.0465 0.0462 0.04? 0.04755

I0f

'.4

- 119 -

Annex VIIIPage 9 of 9

LESOTHO

INDUSTRIAL AND AGROINDUSTRIES DEVELOPMENT PROJECT

Estimated Disbursement of IDA Credit (US S Millions)

Semester Cumulative

n? 1990191First Semester - -Second Semester 1.5 1.5

FY 1991192First Semester .5 2.0Second Semester 1.0 3.0

FY 1992193First Semester 2.0 5.0Second Semester 2.0 7.0

FY1993/94First Semester 2.0 9.0Second Semester 2.0 11.0

FY1994195First Smester 2.5 13.5Second Semester 2.5 16.0

PY1995196First Semester 2.5 18.5Second Sewester 2.5 21.0

- 120 -

Annex IXPage 1 of 24

LISOTNO

INDUSTRIAL AND AGRO-INDUSTUeS DVMLOMENT PROJECT

DRAFT TRMS OF REPERENCI

Technical Assistance - Credit Controller at theLesotho Agricultural Develogment Bank (LADD)

1. Objectives. To provide adequate control mechanisms within the LesothoAgricultural Development Bank with regard to all aspects of the creditprocess - application, processing and monitoring.

2. Work Program

- review the existing credit control mechanisms with a view toimproving and strengthening thems

- develop appropriate monitoring mechanisms for credit applications toensure that both the applicant and the proposed lending activityconstitute a reasonable risk for the banks

- in line with the above, develop appropriate processing procedures forloan applications;

- develop a proper monitoring system for LADB's loan portfolio. Incases where problems are encountered, to devise appropriate follow upmechanismst

- particular attention should be paid to the control of disbursementsand loan repayments through the branch net work of the bank.Analysis of the amount and aging of arrears, penalty interest ratesand classification of the loan portfolio;

- assist in the development of lending guidelines by the LADS; and

- to train a local counterpart to take over responsibilities in thisarea with-in a two year period. To also train related support staffin the areas of credit control.

The required consultant should have extensive experience in developmentbanks within the developing world, preferably with an emphasis onagricultural lending activities.

This position would be under the Monitoring Unit and responsible to theGeneral Manager.

S. Trainina Program DeveloDmt. At th. onset of the assignment thechosen advisor would be required to draw a training program for the localcounterpart and other related support staff. The training program would

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include a phasing of responsibility transfer, and progress would bereviewed annually by project supervision missions.

4. Tlm4^s. It is expected that the consultant would be able to commencework in Lesotho by early CY91. It is envisaged that the assistance wouldbe required for a two year period with complete localization after thattime.

5. Lojjstic. The LADB would be responsible for assistance withlogistical matters such as the provision of housing. Financialresponsibility would be born by the consultant as part of the cost of thecontract.

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LESOTEO

INDUSTRUAL AND AGRO-INDUSTRIES DEVELOPMHNT PROJECT

DRAFT TEIMS OF RZFEUBREC

Tecbnical Assistance - Financial Controller at theLesotho Agricultural Development Bank (LADB)

1. Obiectives. To develop systems of financial control within theLesotho Agricultural Development Bank (LADB) in order to improve financialcontrol over the bank's expanding net work.

2. Work Program

- to monitor all financial operations of the LADB with a view tostreamlining and strengthening the institution's control of itsfinancial resources;

- to take particular regard to operating expenses at LADB which haveincreased substantially in the recent past;

- develop appropriate financial monitoring mechanisms for the LesothoAgricultural Development Bank;

- particular attention should be paid to the control of disbursementsand loan repayments through the branch net work of the bank;

- advise management of financial mechanisms within the bank and ways inwhich they can be Improved. Keep management fully informed of anyfinancial problems which may arise;

- assist in the development of financial guidelines for LADE;

- to train a local counterpart to take over responsibilities in thisarea with-in a two year period. To also train related support staffin the area of financial controls and

- define measures which would streamline the bank's operations.

The required consultant should have extensive experience in developmentbanks within the developing world, preferably with an emphasis onagricultural lending activities.

3. Traingg Program Development. At the onset of the assignment thechosen advisor would be required to draw a training program for the localcounterpart and other related support staff. The training program wouldinclude a phasing of responsibility transfer, and progress would bereviewed annually by project supervision missions.

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*. !.4fis It is expected that the consultant would be able to commencework $n Lesotho by early CY9l. It is envisaged that the assistance wouldbe requlire for a two year period with complete localization after thattime.

5. Logistics. The LADB would be responsible for assistance withlogistical matters such as the provision of housing. Financialresponsibility would be born by the consultant as part of the cost of thecontra:t.

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LISOTNO

inD STRIAL AND AGRO-INDSTRUS D PVELOIT PROJECT

DRAFT TURNS OPF RFERC

Technical Assistance - Internal Auditor at theLesotho Agricultural Development Bank (LADD)

1. Obiectives. Provide internal control of financial resources within theLADB and train the current incumbent fully in all aspects of internalauditing as it applies to the LADB.

2. Vork Program

- audit, on a monthly basis, the books of the LADB.

- pay particular attention to the auditing of the loan portfolio whichhas not been seriously audited for the past three years. Such anaudit would be an important initial function of the internal auditorso as to determiae whether the LADB is insolvent.

- after full assessment of the loan portfolio provide input intodetermining the adequacy of the provisions for bad and doubtfuldebts.

- provide information to management and the Board of the bank of anyissues of importance.

- work closely with the ezternal auditors, providing information andbackup support to assist with all external auditing functions in thebank.

- advise management of any potential policy area which would improvefinancial control and accountability.

- work closely with the current incumbent and provide training so thatthe position could be fully localized with-in a two year period. Toalso train related support staff in the area of financial control.

- define measures which would streamline the bank's operations.

The required consultant would preferably have experience in developmentbanks within the developing world.

S. Trainn Progrsm Deelonment. At the onset of the assignment thechosen advisor would be required to draw a training program for the localcounterpart and other related support staff. The training program wouldinclude a phasing of responsibility transfer, and progress would bereviewed annually by project supervision missions.

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4. TlMlua. It is expected that the consultant would be able to commencework in Lesotho by early CY9l. It is envisaged that the assistance wouldbe required for a two year period with complete localization after thattime.

5. Logistics. The LADB would be responsible for assistance withlogistical matters such as the provision of housing. Financialresponsibility would be born by the consultant as part of the cost of thecontract.

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LESOTHO

INDUSTRTAL AND AGRO-INDUSTRIES DEVELOPMENT PROJECT

DRAFT TERMS OF REFERENCE

Technical Assistance - Consultant on Data Processing at theLesotho Agricultural Development Bank (LODB)

1. Obiectives. Advise the Lesotho Agricultural Development Bank (LADB)on all aspects of computerization and assist in the implementation andtransfer of existing systems onto a fully computerized basis.

2. Work Program

- advise LADB management on computing alternatives with regard to bothhard ware and soft ware purchases;

- training local staff in the operations of computers and theirparticular applications with-in the LADB;

- provide initial back up support to staff working on thecomputerization of all aspects of the LADB's banking activities;

- advise and improve on management information systems and dataanalysis reporting;

- provide special assistance and training to a locally identifiedcounterpart who would in turn be in a position to provide basic back-up support to the computer personnel in the bank; and

- advise and recommend on all other aspects of computerization in thebank.

The consultant on data processing would primarily assist the officer incharge of the Computer Services Unit in installing the IBM system.

3. Training Progpam Development. At the onset of the assignment thechosen advisor would be required to draw a training program for the localcounterpart and other related support staff. The training program wouldinclude a phasing of responsibility transfer, and progress would bereviewed annually by project supervision missions.

4. Timint. It is expected that the consultant would be able to commencework in Lesotho by early CY91. It is envisaged that the assistance wouldbe required for a six month period with complete localization after thattime.

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5. Loaletics. the LADB would be responsible for assistance withlogistical matters such as the provision of housing. Financialresponsibility would be born by the consultant as part of the cost of thectntract.

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LESOTHO

INDUSTRIL AND AGRO-INDUSTRIES DEVELOPMENT PROJECT

DRAFT TES OF REFERENC

Technical Assistance - Trade Testing Officer vlthin theHinistry of Education

1. Oblectives. The officer would be attached to the Technical andVocational Division (TVD) of the Ministry of Education, but would operatein close collaboration with the Ministry of Trade and Industry, theLesotho National Development Corporation and private industry under theestablished trade panel system. The officer would be responsible fordeveloping, under the trade panel system, additional trade tests forpriority skills areas as part of the industrial training role of theTechnical and Vocational Division.

2. Work Program

The consultant would be responsible to the Director of the Trade andVocational Division within the Ministry of Education for all trade testingmatters including:

- administration and implementation of existing trade tests;

- development and implementation of trade tests in other skill areasnot yet being dealt with;

- development and implementation of up-grading courses for candidateswho fail the trade tests;

- advice to industry on the development of in-service courses so far asthese are related to preparation of personnel for trade tests;

- development, as one of a team, of proposals for a skills trainingcenter in Lesotho;

- development and implementation of training courses for localexaminers; and

The officer would requiret

- extensive experience in the design and implementation of a wide rangeof trade tests;

- qualifications and practical experience in one of the major trades;and

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- experience as a training officer involved withs

- training needs analysis- skills analysis- the design and implementation e.f training programs- the design of training facilities including specification,

procurement and installation of equipment

3. Trainini Program DeveloDment. At the onset of the assignment thechosen advisor would be required to draw a training program for the localcounterpart and other related support staff. The training program wouldinclude a phasing of responsibility transfer, and progress would bereviewed annually by project supervision missions.

4. T!A%ng. It is expected that the consultant would be able to commencework in Lesotho by early CY1991. It is envisaged that the assistance wouldbe required for a three year period with complete localization after thattime.

S. Logistics. The Ministry of Education in collaboration with theMinistry of Trade and Industry would be responsible for assistance withlogistical matters such as the provision of housing. Financialresponsibility would be born by the consultant as part of the cost of thecontract.

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LESOTHOINDUSTRIAL AND AGRO-INDUSTRIES DEVELOPMENT PROJECT

DRAFT TERMS OF REFERENCE

Technical Assistance - Bankint wnd Credit SpecialistLesotho National Development CoryoratiMn_JLNDCI

1. Objectives. To provide advice and a plan of action for improving theoperations of LNDC's lending opetations. To establish control m.chanismswithin the Lesotho National Development Corporation with rexvid to allaspects of the credit process - application, processing and monitoring.

2. Work Program

- review the existing lending operation including expenses, appraisalprocedures, credit control mechanisms with a view to streamlining andimproving operations;

- develop accounting systems and procedures consistent withestablishing the lending operation as a profit and loss centerseparate from the factory shell and investment promotion operationsof the Corporation;

- review monitoring mechanisms for credit applications to ensure thatboth the applicant and the proposed lending activity constitute areasonable risk for the bank;

- review lending guidelines and processing procedures for loanapplications and make modifications and improvements where necessary;and

- review systems established to control disbursements and loanrepayments, procedures for aging of arrears, charging of penaltyinterest rates and classification of the loan portfolio and makemodifications and improvements where necessary;

The required consultant should have extensive experience in developmentbanks within the developing world, preferably with experience in Africa.This consultant would work closely with the financial constrollerpositionwould be under the Monitoring Unit and responsible to the General Manager.

3. TraiUln& Program Development. At the onset of the assignment thechosen advisor would be required to draw a training program for the localcounterpart and other related support staff. The training program wouldinclude a phasing of responsibility transfer, and progress would bereviewed annually by project supervision missions.

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*. !!ln* The proposed consultant would be available during the firstproject year for atleast a four month period to be followed by periodicvisits as necessary to follow-up on the improvement program to beimplemented by LNDC staff.

S. Logistics. The LADB would be responsible for assistance withlogistical matters such as the provision of housing. Financialresponsibility would be born by the consultant as part of the cost of thecontract.

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LESOTHOINDUSTRIAL AND AGRO-INDU5TRIS DEVELOPMENT PROJRCT

DRAFT TERMS OF REFERENCE

Technical Assistance - ProPerty Management SpecialistLesotho National Development Corporation tLNDC)

1. Objective. The objective of the proposed assignment would be toimprove collections, maintenance, evictions, and tenant credit analysis byLNDC of its factory shell portfolio. LNDC's commercial real estateoperations should also be reviewed with a review to improving financialoperations as needed.

2. obrk Program

The consultant would review all procedures related to LNDC's management ofits real estate portfolio to includet

-- rental rates and the extent of cost-recovery for land rental and thecost of the factory shell construction and maintenance;

-- the adequacy of rental rates to recover costs, provide for deliquencyand bad debt and for maintenance reserves;

-- define, if necessary, reasonable alternatives to full cost recoverygiven the competition over rental rates within the southern africa region;

-- determine legal remedies available to LNDC to improve rental recovery;

-- define a program of cost effective property management includingstreamlined credit analysis procedures, more cost effective rentalcollection procedures, monitoring systems, etc.; and

-- implementation with the data processing specialist of managementinformation systems consistent with the new property management systemsproposed.

S. Tl lus. The proposed consultant would be available during the firstproject year for atleast a four month period to be followed by periodicvisits as necessary to follow-up on the improvement program to beimplemented by LNDC staff.

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LESOTHO

INDUSTRIAL AND AGRO-IND0STRIES DEVELOPHINT PROJECT

DRAFT TERMS OF REFERENCE

Technical Assistance - Consultant on Data Processing at theLesotho National Development Corporation (LNDC)

1. Objectives. Advise the Lesotho National Development Corporation(LNDC) on all aspects of computerization and assist in the implementationand transfer of existing systems onto a fully computerized basis.Development of Management Information Systems consistent withaccountability by major profit centers in the areas of Real Estate, EquityInvestments and Lending Operations.

2. Work Program

- advise LDNC management on computing alternatives with regard to bothhard ware and soft ware purchases;

- training local staff in the operations of computers and theirparticular applications within LNDC;

= provide initial back up support to staff working on thecomputerization of all aspects of the LNDC's banking activities;

- advise and improve on management information systems and dataanalysis reporting;

- provide special assistance and training to a locally identifiedcounterpart who would in turn be in a position to provide basic back-up support to the computer personnel in the bank; and

- advise and recommend on all other aspects of computerization in theorganization.

The consultant on data processing would primarily assist the financialcontroller.

S. Trai=nin Program Develoinent. At the onset of the assignment thechosen advisor would be required to draw a training program for the localcounterpart and other related support staff. The training program wouldinclude a phasing of responsibility transfer, and progress would bereviewed annually by project supervision missions.

4. TIM4o . It is expected that the consultant would be able to commencework in Lesotho by early CY91. It is envisaged that the assistance wouldbe required for a six month period with complete localization after thattine.

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Page 15 of 24

S. Lodetitc*. The LNDC would be responsible for assistance withlogistical matters such as the provision of housing. Financialresponsibility would be born by the consultant as part of the cost of thecontract.

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LESOTHOINDUSTRIL AND AGRO-INDUSTRIES DEVELOPMENT PROJECT

DRAFT TERMS OF REFERENCE

Techbical Assistance - Foreisn Investment Promotion

1. Obiectives. The contractor's objectives would be to assist with theestablishment and operation of the Lesotho Investment Promotion Center, anddefinition and implementation of Lesotho's foreign investment promotionstrategy. The principal objectives of the LIPC would be to a) improve theinvestment environment by focussing on the provision of services toinvestors, by improving the timely provision of industrial infrastructureand by correcting key disincentives which raise costs and investorsperceived risk of establishing in Lesotho; b) increase investor outreachefforts targeted on southern africa-origin investors; c) increase imagebuilding and information dissemination efforts particularly in Europe andAsia and to a lesser degree in the USA; and d) establish linkage programsbetween larger firms and indigenous enterprises.

2. Work Protram

Generic activities are as followst

Investors Services: Providing investment counselling services; expeditingthe processing of applications and permits; providing post-investmentservices.

ImaRe Buildin8: Public relations campaigns including solicited stories inthe media; the use of heads of state and top political figure3 to deliverthe investment message to potential investors, etc.; advertising in thegeneral financial media; preparation of promotion (information) materiallike brochures, audio-visual presentations, etc.; conducting generalinvestment missions and general information seminars.

Investment Generations Advertising in sector-specific publications;preparation of sector specific publication, typical investment andoperating cost profiles, etc; sector specific direct mailing and/ortelemarketing; engaging in firm-specific research followed by *sales*presentation; initiating firm- (and executive) specific site missions tothe host country.

Specific activities are as follows:

-- Preparation of new promotional materials and holding of informationdissemination seminars for local investors to share information aboutnew promotion policies, i.e. new services available, the new taxincentives system, the availability of long-term land leases to theprivate sector for industrial development, new policies with respectto the provision of work permits, etc.;

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-- Establishment of contacts with large company managers potentiallyinterested in participating in the 'patrons and 'mentor' programs.These programs would pair an indigenous-owned company with a largercompany which would share advice on how to develop product quality totake advantage of potential subcontract opportunities:

-- Monitoring of those contacts in collaboration with the BusinessAdvisory and Promotion Service to ensure that optimal efforts aremade to establish subcontract linkages;

-- Implementation of improved services and deregulation of theinvestment environment, mainly focussed on existing investors as wellas potential new investorlclients;

-- Preparation for a new Image building campaign in the RSA includingthe hiring of a public relations company in the RSA;

-_ Research to guide firm-specific outreach efforts in textiles, leatherand footwear, electric equipment and components assembly and othersimple, (labor-intensive) manufactures and the promotion of specificprojects in chosen agro-industrial products (e.g. wool and mohair,beef, milk, vegetable canning, oil-seed production and manufacture;

-_ Recruitment of Basotho project officers who will handle promotion andinvestor service efforts; and

-_ Direct outreach efforts in the RSA. Europe, Asia and the USA would beactively undertaken once the service facilities and researchdiscussed above has been firmly established.

3. Trainin. The contractor would be expected to carry out a formaltraining program for the LIPC staff in state of the art investmentpromotion techniques related to investor service, implementation of animage building campaign and investment generation activities. Trainingshould take place during the first project year and in no case later thanDecember 1991. To the extent possible techniques should draw on those usedin other developing countries which have established investment promotionefforts, including study tours where possible.

4. Supervision. Following the long-term advisory contract, thecontractor would be expected to carry out intermittent supervisory visitswith the LIPC to offer advice, additional training and any needed supportthat may be required to ensure the sustainablility of the investmentpromotion effort. Supervision would include monitoring of policy issuesand investor attitudes and implementation of correction or improvementmeasures as needed. During the fourth and fifth project years, supervisionwould take place every six amnths.

S. Specialized Services. To support the outreach effort, the contractorwould be expected to provide market information and other reconnaissanceservices in targetted markets in Asia, the USA and Europe.

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6. Manatement. The contractor would be expected to provide strongoversight management for the contract which includes a long-term advisor,training, supervision, coordination with the Business Advisory andPromotion Service for linkage programs, and the provision of specializedservices. Management would be expected to coordinate all logisticalarrangements related to travel, relocation, and housing arrangements. Thecontract would pay for these costs on an actual invoice basis.

7. Prequalification. This contract and the one for indigenousinvestment promotion through the Business Advisory and Promotion Serviceare central to the objectives of the proposed contract. Biddingcontractors will be prequalified on the following basist

a) ability to fulfill the terms of reference for both the foreign andindigenous investment promotion contracts to ensure consistentmanagement and coordination of linkage programs;

b) the contractor must be an internationally recognized investmentpromotion practitioner organizations and

c) the contractor must have recent experience with investmentpromotion in the developing world with preference for experience inAfrica and knowledge of the special dynamics of the southern africaregion.

8. Evaluation Criteria include: a) the experience in the firm withspecial emphasis on the above prequalification conditions; b) the qualityof the technical proposal and its response to all services required by thework program including training, management, supervision, and specializedservices. Budgets and financing will not be considered.

9. Tg. The contract includes 3 manyears of a long-term investmentpromotion advisor. The position is expected to be filled by early calendaryear 1991. In project years 4 and 5, supervisory assistance is expected ona bi-annual basis with terms of reference to be provided by GOL and theWorld Bank on the basis of issues which come up during project supervisionmissions. Promotion staff training is expected to take place duringproject year 1.

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LESOTHOINDUSTRIAL AND AGRO-INDUSTRIES DEVELOPMENT PROJECT

DRAFT TERMS OF REFERENCE

Technical Assistance - Indigenous Investment Promotion

1. Objectives. The contractors objective would be to assist with theimplementation of an indigenous investment promotion strategy whichincluaes the coordination of advisory services for indigenous investors,coordination of training in business skill: and entrepreneurship, andcoordination of promotional services incl-.ding information and marketingfor investors interested in the subcontr' _t opportunities with the LesothoHighlands Water Project and with larger .oreign companies.

2. Work Program. The contractor would be expected to provide a long-term advisor for five years to assist the Business Advisory and PromotionService to carry out the following activities:

- - actively promote awareness of the business possibilities available tosmall businesses through the use of brochures, newspaperadvertisements, village seminars, etc.;

-- maintain up-to-date information about the nature of the resourcingrequirements of the LHDA and the larger companies and define andpublicize sub-sets of those requirements which might be met byBasotho enterprises;

-- identify sources of technical advice to remedy technical weaknes!sesin particular companies, inclding, in the case of the larger of thesmall companies, assistance in the identification of foreigntechnical partners;

-- assist small companies with their marketing and with their promotionto larger companies. In some cases, this might involve activing asthe agent for small companies in obtaining particular contracts;

-- identifing and promoting sub-contracting consortioa in particularwell-defined sub-sectors along the lines of the Lesotho HighlandsConstruction Consortium established in November 1988;

-- identify, in collaboration with IPC, local foreign andindigenousfirms that can act as "patrons" to small-scale enterprises byprovidng them information on sub-constracting opportunities and byassisting them in upgrading their technological capabilities;

-- identify local senior business persons that assist and advise smallc-nterprises in a umentor* program;

-- support training programs in existing institutions in appropriateareas of business management including marketing and finance;

-- support the advisory function in the Business Training Center;

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-- supervise the establishment and the operation of advisory andfinancial services provided by participating banks including thepreparation of loan applications, assistance with remedial advisorysupport during enterprise development, etc.; and

-- supervise the operation of small-scale industrial estates.

3. Training. The contractor would be expected to carry out a formaltrainiag program for the BAPS staff in state of the art investmentpromotion techniques related to small and medium-scale businesses.Training should take place during the first project year and in no caselater than December 1991. To the extent possible techniques should draw onthose used in other developing countries which have established indigenousinvestment promotion efforts, including study tours where possible.

4. Nmaatement. The contractor would be expected to provide strongoversight management for the contract which includes a long-term advisor.training, supervision, coordination with the Business Advisory andPromotion Service for linkage programs, and the provision of specializedservices. Management would be expected to coordinate all logisticalarrangements related to travel, relocation, and housing arrangements. Thecontract would pay for these costs on an actual invoice basis.

5. Prequalification. This contract and the one for foreign investmentpromotion through the Lesotho Investment Promotion Center are central tothe objectives of the proposed contract. Bidding contractors will beprequalified on the following basis.

a) ability to fulfill the terms of reference for both the foreignand indigenous investment promotion contracts to ensureconsistent management and coordination of linkage programs;

b) the contractor must be an internationally recognized investmentpromotion practitioner organization with experience in thepromotion of small and medium-scale enterprises; and

c) the contractor must have recent experience with investmentpromotion in the developing world with preference for experiencein Africa and knowledge of the special dynamics of the southernafrica region.

6. Evaluation Criteria include: a) the experience in the firm withspecial emphasis on the above prequalification conditions; b) the qualityof the technical proposal and its response to all services required by thework program including training and management. Budgets and financing willnot be considered.

S. Timing. The contract includes 5 manyears of a long-term investmentpromotion advisor. The position is expected to be filled by early calendaryear 1991. Promotion staff training is expected to take place duringproject year 1.

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LESOTNOINDUSTRIAL AND AGRO-INDUSTRIES DEVhLOPMENT PROJECT

DRAFT TEMOS OFEPERE

Management Contracts and training for Agro-Industries Develooment

1. Objective. In order to put the operations of the major agro-industrial parastatals on a commercial basis, to prepare for theirincorporation as autonomous companies, and to prepare for their potentialprivatization, the project would finance management contracts for fiveagroindustrial enterprises. The contractor would also be required toprovide extensive training to counterpart management and technical staff toensure their capacity to take over operations upon completion of theproposed contracts.

Preoualifications for bidding contractors

-- Contractors bidding on contracts for the Basotho Fruit and VegetableCanners (canners of asparagus and green beans with canning potentialfor orchard and other crops), the National Abattoir and FeedlotComplex, Lesotho Poultry Cooperative Society, and the Milk ProcessingPlant would be required to have extensive practical experience in theoperation of similar agro-industries to those on which they proposeto provide management and training services.

3- Contractors proposals would include

a) an analysis of the accounts and the operations of the relevantcompany;

b) discussion of major financial and operational weaknesses; and

c) a proposed plan of action and a timetable for remedying thoseweaknesses and for putting the companies' operations andfinances on a viable and sustainable basis without governmentsubventions.

-- Proposals will be judged on the basis of the soundness and realism ofthe proposed plan of action and on the basis of demonstrated successin similar assignments.

2. Timing. The project would finance management contracts and trainingfor a two year period. If management assistance is required beyond thatperiod, the cost would be born from the revenue of the assisted company onthe basis of a contract which would include a strong incentive component tothe payment schedule.

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LESOTHOINDUSTRIAL AND AGRO-INDUSTRIES DEVELOPMENT PROJECT

DRAFT TERMS OF REFERENCE

Technical Assistance: Basotho Enterprises Development Corporation

Project Preparation Advisor

1. Objective. The objective of the assignment is to provide assistanceand training to the Basotho Enterprises Development Corporation inpreparing loan applications and business plans for Basotho clients makingapplications to the commercial banks for business development loans.

2. Work Program

-- To develop project appraisal guidelines and manuals consistent withthe practices of Lesotho Bank and commercial banks in their projectlending division;

-- .To provide advice and assistance to Basotho entrepreurs in thedevelopment of business feasibility studies, business plans and loanapplications for investment and working capital purposes;

3- To train relevant BEDCO staff and entrepreneurs in business plan andloan application development; and

-- To plan information campaigns for dissemination of informationregarding the availability of the project preparation service;

The assignment will require close interface with Lesotho Bank's projectsdivision and other commercial banks participating in the project regardingtheir needs for quality control of project feasibility studies and businessplans and loan applications.

3. Timin. The proposed assignment would be for a two year period.

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LESOTHOINDUSTRIAL AND AGRO-INDUSTRIES DEVELOPMENT PROJECT

DRAFT TERMS OF REFE tCE

Technical Assistances Basotho Enterprises Develowment Cormoration

Financial Controller

1. Obiectives. To develop systems of financial control within theBasotho Enterprises Development Corporation (BEDCO) in order to improvefinancial control over the organizations loan and industrial estateportfolio.

2. Vork Program

- to rationalize BEDCO's loan portfolio. To take write-offs asappropriate, to initiate legal collection actions, and to implementrestructuring and monitoring programs to ensure repayment in othercases;

- do analysis necessary to implement cost-recovery rental rates onBEDCO's industrial estates;

- develop a plan to control rental payments on BEDCO's industrialestates;

- develop a feasibility study, a financial plan and an implementationplan for the development of additional BEDCO industrial estates forsubmission to Lesotho Bank or other commercial banks for financingunder the project;

- 'to monitor all financial operations of the BEDCO with a view tostreamlining and strengthening the institution's control of itsfinancial resources;

- to take particular regard to operating expenses at BEDCO which haveincreased substantially in the recent past;

- develop appropriate financial monitoring mechanisms;

- advise management of financial mechanisms within the bank and ways inwhich they can be improved. Keep management fully informed of anyfinancial problems which may arise;

- assist in the development of financial guidelines; and

- to train a local counterpart to take over responsibilities in thisarea with-in a two year period. To also train related support staffin the area of financial control.

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The required consultant should have extensive experience ir developmentbanks within the developing world, preferably with an emphasis on small andmedium-scale enterprises.

3. Training Prosram Development. The the onset of the assignment thechosen advisor would be required to draw a training program for the localcounterpart and other related support staff. The training program wouldinclude a phasing of responsibility transfer. and progress would bereviewed annually by project supervision missions.

4. Tjg. It is expected that the consultant would be able to commencework in Lesotho by early CY91. It is envisaged that the assistance wouldbe required for a two year period with complete localization after thattime.

5. Logistics. BEDCO and the Ministry of Trade and Industry would beresponsible for assistance with logistical matters such as the provision ofhousing. Financial responsibility would be born by the consultant as partof the cost of the contract.

POLICY REFORMS

KEY ISSUES AND VIEWS OF CONCERNED MINISTRIES/DEPARTLMtS/INSTI¶UrIONS ON WORLDItANK ATrE I1p101RE OF IlIE PRE-APPRAISAL MISSION (NOVEIER 27 - F.DiR 8, 1989)ON TIIE PRONrSI*i) INDUSTRIAL AND AGRO-INIJSRIES nDEVE.LPME4 PRWfr

iSSi1ES BASIC OBSERVATIONS OF THE FINAL VIEWS OF GOT,WORLD BANK

1. Adoption of tax incentive A low corporate tax rate instead of the The Ministry endorses the merits of thepolicy to replace tax current 37.5% rate would offer incentive corporate tax (of 15 to 20%) rate insteadholiday system to investors; and would correct anomalies of the present 37.9%, without any tax(re: annex It p. 5) and weaknesses in the administration of the holiday at all. Atrahsitional devise for

tax holiday and allowance systemm, which abolishing the tax holiday system could beshould both be abolished. Another evolved.expectation is that the lower rate wouldincrease the revenue base.

2. Streamlining of work permit Taking into consideration the need to maintain The Work Permit Board of the Ministry ofprocessing management control especially in the critical Employment, in which MTI is represented(re annex II p.6) establishment period of a project, an element meets once a week regularly to process uork

of automaticity in processing work permits permit applications. Expatriates submitfor key management personnel is requisite. applications to the Conmissioner ofAlso, similar guarantee for permits of those Industries or tIDC who, after satisfyingemployed under technical management himself about their necessity, would forwardagreements could he considered. to the Work Permit Board, ensuring that the

Board grants the permit on his/theirreccmmendation.

In the case of a renewal, the Comissioneror LNDC most submit a full evaluation ofprogress of the training programme,ascertaining necessity for extension, alongwith the recommendation to the Work PermitBoard.The granting of work permits shall beautowatic in respect of the following positionsor thtir equivalent: (a) General

(b) Production, and

(c) Financial Manager g

ISSIES BASIC ORERVATIONS op 11E FINAL VIEWS OF GOL*nRT,D PANK

3. Land availability for In order to alleviate delays in the It is of prime concern to make the currentprivate sector development availability of factory shells and other land allocation policy more conducive toand establishment of the bottlenecks in land availability to private investors.Industrial Estate Corporation investors, worthy of consideration is the An alternative implementing modality to(re: annex II p.6) opening of industries estates for proposed Industrial Estate Corporation

developemnt by private investors. This will be formu.ated in due course.could cut short the problems created byLNDC's monopoly over land holding. Theproposed Industrial Estate Corporationwould hold in trust for Government allindustrial zone allocations and providestandard sub-leases of at least 40 yearsto investors.

4. Minimum wage policy Given the need to maintain a competitive Maintenance of competitiveness of Lesotho as(re: annex TT p.6) position for Lesotho in relation to other an industrial location in the sub-continent

Southern African countries-or industrial is of definite and key importance to thelocations, and to safeguard investors; promotion of investors and the country'sconfidence in Lesotho authorities, minimum industrial growth. Thus, the entirelevels in the proximity. They must also recomnendation is positively taken.be gradual and be introduced in apredictable manner.

5. GOL policy of 51% share- The 51% equity requirement for LNDC in Majority shareholding in resource-basedholding in natural resource- 'priority projects' could actually be serving projects is a politically sensitive matter.based industries as a disincentive to investors. Hence, large HNoever, due to the practical requirements(re: annex II p.8) pipeline of projects in this bracket has, of large capital investments for their

over years, gone wanting of investment. exploitation, this policy is totallyGovernment could revise this policy as part flexible.of its investment prowtion effort.

o x

BASTC OMSESVATIONS Or hi nr WWIn) BRANK FTNAT. VIEWS OF C00,

6. Derexjilation of the Yearly renewal of manaufacturing and trading Rencr.l of a licence either for a manufacturer o0

industrial licensinrg licences could have undue and burdensome an exporter, is a brief and automatic processprocess administrative implications for investors. with positive revenue implications for the

lekce, proposal that renewal of manufacturing Government. The Ministry is not convincad oflicences be on three-yearly basis, and the asserted inconveniences for the investor.trading licences for exporters be The licensing process must also be seen as aindefinitely valid. vital means for alleviating the present

dearth of structures for statistical collectionin industry, inside the planning framework.

7. Processing of financial Steps to increase the efficiency of processing Central Bank feels that they are quite avare

rand applications 'rand applications could enhance the impact of of this and is always ready to expedite(re: atnex IT p. 8) this facility as an incentive to foreign sanction.

investors.

6. Line of credit for on- Terms funds are to be provided through This line of credit could result in higher

lending to snall and commercial banks to small and medium scale momentum if a concessionary element in the.il,dilm-scealt enterprises at prn.'rniling market rates. On- rates of on-lending to the small and medium-

(re; I'. 3, annex III p.6) lending form GOL to comAerciar banks to be scale enterprises could be considered duringat the savings deposit rate. Initial years the first few years of trials and errors. a'of the scheme to test graduated paymentamortization instruments which vould reduce(and capitalize) interest payments in theearly years of the loan.

9. Equpity funding for To elleviate the heavy debt financing of new TNDC concedes in principle to implementing this

indigenous enterprises enterprise, and to meet Lesotho investors line of credit. But shall prefer option 2 in

(re: page 3, annex IV) halfway in equity availability could establish practice (see Annex rV p.27), due to the copera M5.0 million equity fund to be managed by concern of recent GOL policies of taxing para-LNDC, made up of funds originating from ID statals which may make the matching fundcredit to GOL. UNDC would require to provide composite of Option I difficult to raise.matching capital for each investment. AndGOL capital gaining shoutd be re-investedinto the fund to maintain a revolvingelement in it.

StX

ROMSUl BASIC OREIStVATIoNS OF 'MM "Olb BANK FINAL VIES OF (GX.

10. Establisahont of DAfti0r This unit would provide professional advisory 11he requirement for the strengthening of theAdvisory and Promotion services with focus to appraise indigenous advisoryand promotional service to indigenou:Service (NAPS) entrepreneurs of the vindow of opportunity entrepreneurs is acceptable. But the insti-

(re: p. 4) opened by UUWP, the construction therein; tutional arrangement for fulfilling the

and the sub-constracting possibilities with service vill be further discussed with thelarger enterprises. appraisal mission.In view of the E IDO's present need to re-organize, OAPS could be created separatelyfor the moment.

11. Assistance to LTC and LEC: Nwrld Bank funding is available for setting LEe appreciates the technical support in

Provision of adequate up sufficient infrastructure in both existing pipeline and has already rade dueinfrastructure and planned industrial locations, vith submission of plans and relevant estimates(res annex I p. 1) necessary services. to the mission.

1. formation of a coordinating ooumittee Nonetheless, the Corporation would not(under the new Industrial Estate require the "mmnagement diumnsein ofCorporation; the assistance.

2. subaission of plans and cost estimatesby UrC and LEO; and

3. offer menagemnt and technicalassistance to the infrastructureproviding corporations. - __

12. Establishmnmt of Investment Over-and-above the basic need to install all amL is agreeable to the principle of devalopinPrnxtion Authority els_ ts of long-term pckaged fOreign investment in our prowtion strategies under(re: p.3, annex IV) investment in the prmotion system, lasotho the Investmnt Pro tion Authority and

requires to provide a one-stop servioe effecting a one-stcpa service therein.centre to assist investors. and to engage in got to avoid creating a new institution,effective image-building by applying developed proposes a promotion machinery that isstrategies for prowation of the countrr to divided betwen the Ministry and tNDC inforeign investors, the following order: create an

operational liaison desk In WnI and havein UNC the investment Prmotion Divisionstrengthened. Modalities of operation canbe determined in due course.

oe

01

Sank Snervisico into Key Activities

Aamrozat. Sa ^tes ActivitT Iruected Skills (NSO

JsntIa 1991 SHes ia MisSAi

Prolect Launch WorkshopObjectivess a) ezplain to Industrialists Operations Officer (2)

and goveroat. project objectives and policy Agroindustries (2)

refosms; b) detailed workshops on procurement Investment Pros. (2)

and disbursements; c) review progress: Disbursements (1)

(1) aehieet of credit effectiveness Procurement (1)

(11) hiring long tern consultants (investment Lawyer (1)

promotion, LDS, BSBDCO, Trade Test Spec.,Agroindustries)i (iLL) allocation of Industrialland for private developments (iv) comencementbank trainings (v) discussions with Barclays and a

Standard Sanks regarding participationIn lte of Credit.

June l99t aned vioA Mis"si

a) initial mission of the LADS Consultant LADD

teao to develop Strategic Corporate Plang sank/Credit (Cons-3)

b) financala regulatory consultant to HIS Spec. (Cons-3)

prepare standards and regulatory frmwork for Internal ud. (Cons-3)

LIDC Oquity mutual fund and general capitalmarket development LNDC

C) prepae property managemaent progrm for LUDC Prop. Hngment (Cons-3)

d) prepare action plan to put LDCO's loan Rank/Credit (Cons-3)

program on a viable basis HIS Spec. (Cons-3)

c) development of managemnt information systems. Fin. leg'ltry (Cons-3) *g

* SX~~~~~~~~~~

haproximte Dateg Act iytvl Exected Skills (SW)

OctiNov. 1991 smmervision mission

RawleW Progress:a) Iplementation of policy reforms with focus Operations Officer (2)on agroindustrial reforms, lay groundwork for AgroindustrLes (2)privatiation; Fin. Regltry (Cons-2)b) development of regulatory framework for LNDC Education/Training (1)mutual fund and goneral capital market developmentc) preparations for floating an LUDC bond issueand satisfaction of other conditions of disbursementof line of credit to LNOCd) BEDCO reorganisation and development of rental andteonat policies for Industrial estatese) development of LADB Strategic Corporate Planf) development of expanded trade test program.

June 1992 Suslerisios mission

a) agreement with GOL and LADS on LADB Strategic Operations Officer (2)Corporate Plan of Action Financial Spec. (2)b) preparation for Beneficiary Assessment to becompleted by March 1993.

lovember 1992 Completion of first Beneficiary Assessment (eA) anddelivery to the Government and to IDA for comment

January 1993 Comment from Government and IDA to SA consultantsto be included in final report

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PhN0ta o x

bib

Approimate Dates ActivitY Expected Skills L S

march 1993 useavision lusiom

Joint BankIGovernment Kid-Term Reviewa) review findings of IA with GOL and Operations Officer (2.5)Implemsnting agencies Agroaindustries (2.5)b) review progress in implementing policy reforms Investment Promotion (2)c) review overall project progress and adequacy Disbursoments (1)of Institutional arrangementsd) review project accounting, 80E and disbursements

Nov/Dec 1993 uuergvisoia Mission

a) review project progress and implementation Operations Officer (2)of recommendations from the Kid-Tenm Review Agroindustries (2)b) review progress implementation agroindustrialpolicy reforms, anagement contracts, parastatalperformance, and progress with respect toprivatization Vs

March 1994 mervision mission

a) review project progress Operations Officer (2)b) review outstanding Issues (other Consultants)

December 1994 suneursion Mission

a) review project progress Operations Officer (2)b) review outstanding issues (other Consultants)

December 1995 FInal Supervision mission

a) discussion with GOL of BA Operations Officer (2)b) preparation for writing PCR (other Consultants)c) discussion and initiation ofpreparatory work for future ^ Nproject W 1

MAP SECTION

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