View
220
Download
2
Category
Preview:
Citation preview
AFRICAN DEVELOPMENT FUND
LESOTHO
ECONOMIC DIVERSIFICATION SUPPORT PROJECT (EDSP)
APPRAISAL REPORT
OSGE DEPARTMENT
December 2016
Pu
bli
c D
iscl
osu
re A
uth
ori
zed
Pu
bli
c D
iscl
osu
re A
uth
ori
zed
TABLE OF CONTENTS
Currency Equivalent i i i
Fiscal Year………………………………………………………………………..i
Weights and Measurement……………………………………………………….i
Acronyms and Abbreviations……………………………………………………ii
Grant Information……………………………………………………………….iii
Project Summary………………………………………………………………..iv
Results-based Logical Framework………………………………………………v
Project Timeframe…..………………………………………………………….vii
I - STRATEGIC THRUST & RATIONALE…………………………………1 1.1 Project Linkages with Country Strategy and Objectives.................................1
1.2 Rationale for Bank’s Involvement………………………………… ………2
1.3 Donors Coordination…………………………………………………………4
II – PROJECT DESCRIPTION…………………………………………….…5
2.1. Project Components…………………………………………………………5
2.2 Technical Solution Retained and Other Alternatives Explored……………...7
2.3 Project Type……………………………………………………………….…8
2.4 Project Cost and Financing Arrangements…………………………………..8
2.5 Project’s Target Area and Population………………………………………10
2.6 Participatory Process for Project Identification, Design and
Implementation…………………………………………………………………10
2.7 Bank Group Experience, Lessons Reflected in Project Design…………….11
2.8 Key Performance Indicators………………………………………………..12
III – PROJECT FEASIBILITY……………………………………………...12
3.1 Economic and Financial Performance……………………………………...12
3.2 Environmental and Social Impacts…………………………………………12
IV – IMPLEMENTATION…………………………………………………..13
4.1 Implementation Arrangements…………………………………………….13
4.2 Financial Management, Disbursement and Audit…………………………13
4.3 Procurement Arrangements………………………………………………..14
4.4 Monitoring and Evaluation………………………………………………..15
4.5 Governance…………………………………………………….………….15
4.6 Sustainability……………………………………………………………...16
4.7 Risk Management…………………………………………………………16
4.8 Knowledge Building………………………………………………………16
V – LEGAL INSTRUMENTS AND AUTHORITY……………………….17
5.1 Legal Instrument………………………………………………………….17
5.2. Conditions Associated with Bank’s Intervention………………………..17
5.3. Undertakings……………………………………………………………..17
5.4 Compliance with Bank Policies…………………………………………..17
VI – RECOMMENDATION………………………………………………..17
LIST OF TABLES
Table 1 Project Timeframe
Table 2 Project Description
Table 3 Project Alternatives Considered and Reasons for Rejection
Table 4(a) Project Cost Estimates by Component and Subcomponent
Table 4(b) Sources of Financing
Table 4(c) Project Cost by Category of Expenditure by Component and Subcomponent
Table 4(d) Expenditure Schedule by Year
Table 5 Lessons Learned from Previous and Ongoing Operations
Table 6 Implementation Schedule
Table 7 Risk and Mitigation Measures
Boxes and Charts
Box 1 NSDP Six Strategic Goals
Box 2 Conditions Precedent to First Disbursement
Chart 1 Lesotho export as percent of GDP
Chart 2 Lesotho’s export destination
Chart 3 Source of Credit to SMMEs
Chart 4 Enhancing economic diversification
Appendices
Appendix I: Lesotho Selected Macroeconomic Indicators
Appendix II: Progress Towards Achieving the MDGs
Appendix III: Donor Mapping
Appendix IV: Bank Group Portfolio Status
Appendix V: Doing business indicators
Appendix VI: Analytical Work and Underpinnings
Appendix VII: Map of Zimbabwe
i
Currency Equivalents As of 22 September 2016
1 UA = USD 1.394
Fiscal Year
1stApril – 31stMarch
Weights and Measurements
1 metric tonne = 2204 pounds (lbs)
1 kilogramme (kg) = 2.200 lbs
1 metre (m) = 3.28 feet (ft)
1 millimetre (mm) = 0.03937 inch (“)
1 kilometre (km) = 0.62 mile
ii
Acronyms and Abbreviations
ADB African Development Bank
ADF African Development Fund
AGOA
BDS
BEDCO
African Growth and Opportunity Act
Business Development Service
Basotho Enterprises Development Cooperation
CBL Central Bank of Lesotho
CPIA Country Policy and Institutional Assessment
CPAF Common Performance Assessment Framework
CSP
DP
Country Strategy Paper
Development Partners
DPCF Development Partners Consultative Forum
DTF
EDSP
Distance to Frontier
Economic Diversification Support Project
EU European Union Delegation
FDI Foreign Direct Investment
GoL Government of Lesotho
GDP Gross Domestic Products
ILO International Labour Organisation
IMF International Monetary Fund
ISP
LNDC
LTDC
LTS
Institutional Support Project
Lesotho National Development Cooperation
Lesotho Tourism Development Cooperation
Long Term Strategy
MDA Ministries, Departments and Agencies
MDP Ministry of Development Planning
MFDP Ministry of Finance and Development Planning
MF Ministry of Finance
MSBCM
MTEC
MTI
M&E
Ministry of Small Business Development, Cooperatives and Marketing
Ministry of Tourism, Environment and Culture
Ministry of Trade and Industry
Monitoring and Evaluation
SMMEs
MTEF
Small, Medium, and Micro Enterprises
Medium Term Expenditure Framework
NSDP National Strategic Development Plan
OPEV Operations Evaluation Unit
OSGE Governance, Economic and Financial Management Department
PCG Partial Risk Guarantee
PCR Project Completion Report
PCN Project Concept Note
PD Presidential Directive
PFM Public Financial Management
PIU Project Implementation Unit
PMU Project Management Unit
PRSP Poverty Reduction Strategy Paper
PSCEDP
SACU
Private Sector Competitiveness and Economic Diversification Project
Southern African Customs Union
SARC Southern Africa Resource Centre
SBD Standard Bidding Document
SME Small Micro Enterprises
UA Units of Account
USD United States Dollars
UNDP
WB
United Nations Development Program
World Bank
iii
Grant Information
Client’s information
RECIPIENT: The Kingdom of Lesotho
EXECUTING AGENCY: Ministry of Trade and Industry
Financing plan
Source Amount (UA) Instrument
ADF 2.22 Million Grant
ADF Loan 5.00 Million Loan
GoL Contribution 0.78 Million
TOTAL COST 8.00 Million
ADF’s key financing information
ADF Loan: UA 5 million ADF Grant: UA 2.22 million
Currency Units of Account (UA) Units of Account (UA)
Commitment fee 0.5% N/A
Service charge 0.75% N/A
Interest rate 1% N/A
Tenor 30 years including 5 year grace
period
N/A
Timeframe - Main Milestones (expected)
Concept Note approval
July 2016
Appraisal September 2016
Project approval December 2016
Effectiveness March 2017
Mid-term Review December 2018
Completion December 2020
iv
Project Summary Paragraph Topics covered
Project
Overview
Project name: Lesotho Economic Diversification Support Project (EDSP)
Geographic scope: Entire country
Implementation timeframe: 2017-2020
Total Project cost: UA 8.00 million
Expected Outcomes and Outputs: The expected outcomes are: (i) improved environment for trade and investment and
(ii) strengthened capacity and improved environment in key identified sectors. These will be achieved through the
following output level results: (a) enhanced entrepreneurial skills for SMMEs, (b) improved access to finance, (c)
economic diversification program implemented, (d) strengthened capacity in industrial policy planning,
implementation and monitoring, (e) improved capacity for standards and certification of products, and (f) improved
public-private dialogue in selected sectors and strengthened partnership with the private sector.
Project direct beneficiaries: The main beneficiaries are SMMEs and the youth who will be supported in business start-
ups and those who wish to expand their business operations. The direct project beneficiaries include the Ministry of
Trade and Industry; Ministry of Small Business Development, Cooperatives and Marketing; Ministry of Finance;
Ministry of Development Planning, Ministry of Tourism, Environment and Culture; Lesotho National Development
Corporation, Basotho Enterprises Development Cooperation; and Lesotho Tourism Development Cooperation.
Overall, the private sector will benefit from the improved business environment that is expected to materialize from
the dialogue process and the public-private partnerships that will emerge.
Needs
Assessment
Lesotho achieved solid economic growth over the past several years, but growth has been less inclusive and dependent
only on the manufacturing and export of textiles and garments. Real GDP growth averaged about 4½ percent a year
from 2010 to 2014. The manufacturing sector, although concentrated mainly on textiles and garments, was until
recently a source of employment, and the main source of growth. Despite good progress, the manufacturing sector’s
contribution to GDP declined from about 20% in 2006 to less than 8% in 2014 due to stagnation in the textile and
apparel sectors after the global economic crisis, and increased competition from low-cost Asian producers. Since then,
public investment has taken over as the main driver of growth. However, increasing dependence on the Southern Africa
Customs Union (SACU) receipts, reliance on miners’ remittances and textile exports to the United States continues to
make the country vulnerable to external setbacks. Further, high unemployment and poverty, particularly in the rural
areas remains a challenge.
To support the revamping of Lesotho’s economy, the Project will first build public sector capacity in policy planning,
implementation and results monitoring leading to sustained reforms. Progress with the investment climate reforms
needs to be pursued and complemented through promoting strategic partnership and dialogue between the public and
private sectors. Furthermore, reforms that have helped to attract FDI (textile and garment) should be complemented
through targeted technical assistance and support to enhance entrepreneurship and strengthening backward and forward
linkages. Second, the private sector is expected to be the engine of growth while the Government is focusing on
maintaining peace and security, ensuring rule of law, providing basic infrastructure and promoting human
development. In this regard, there has to be a mechanism by which the public and private sectors engage on policy
design and implementation issues. The Lesotho Doing Business Report and Private Sector Diagnostics Studies
concluded that the private sector is confronted with several challenges including: (i) poor infrastructure (electricity,
roads, and transport); (ii) lack of access to finance; (iii) administrative barriers; (iv) lack of entrepreneurial and
technical skills; and (v) lack of access to markets. In tackling these challenges, complementary initiatives and projects
are being implemented by the Government and development partners. The proposed Project will complement ongoing
initiatives by focusing on selected sectors critical for economic diversification, and promoting enterprise development
through supporting SMMEs to develop entrepreneurial skills, create linkages with large scale firms through mentorship
programs, improve their access to the services of financial institutions and enhance their access to markets.
Bank’s
Added Value
The proposed operation will complement and enhance the effectiveness of the Bank’s ongoing projects by focusing on
the private sector development pillar. The ongoing Projects are focused on infrastructure (power and water), and public
finance management reform which also contribute towards creating a conducive environment to attract private sector
investment in the country (e.g. reducing the constraints of electricity shortages). There are also synergies with the
ongoing donor- funded programs, in particular the Private Sector Competitiveness and Economic Diversification
Project (PSCEDP) financed by the World Bank. Furthermore, the Bank has a considerable experience and expertise in
private sector development, gained from designing and implementing similar initiatives in member countries.
Knowledge
Management
The Project will contribute to knowledge building particularly in the areas of policy analysis, design, implementation
and monitoring. On the private sector side, the project builds entrepreneurial and business management skills, exposes
SMMEs to new frontiers both in terms of competitiveness, innovation and exploring other sectors that have good
potential for development. The Bank will capture and disseminate knowledge and experience through sharing the
findings of supervision missions, progress reports, and the Project Completion Report. Lessons learned and experience
gained will be available to inform future policy operations.
v
Result-based Logical Framework
Country and project name: Lesotho- Economic Diversification Support Project (EDSP) Purpose of the project: To support private sector development through improving partnership, entrepreneurship and skills development, access to finance and market, and
investment promotion in the selected sectors critical for economic diversification.
RESULTS CHAIN PERFORMANCE INDICATORS
MOV RISKS AND
MITIGATION Indicator (including CSI) Baseline Target
IMP
AC
T
Inclusive growth through private sector
development
Sustained GDP growth rate (%) 3.4 (2014/15) 5.0 (2021) HDI; NSDP; IMF, Bureau
of Statistics;
Finscope Study
Risk # 1: Political instability may affect
pace of project
implementation. Mitigation: GoL is
involved in dialogue
processes and reform implementation with
support from SADC.
Risk #2: Global
economic recession
impact on SACU revenues and FDI-
slowdown of GDP
growth. Mitigation: The
project will focus
equally both on
exporting SMMEs and those supplying the
domestic market.
Furthermore, the linkages between large
enterprises and SMMEs
will to an extent reduce dependence on foreign
suppliers.
Risk #3: Insufficient
commitment and
capacity to implement reforms. Mitigation:
The project will
implement capacity building support as early
as possible in the project
implementation period. The PMU has many
years of project
implementation and has already earned the
confidence and trust of
the government authorities. Currently
on-going projects (WB, EU, etc.) supporting
capacity building will
also enhance public sector capacity for
project implementation.
Risk #4: Start-up delay:
Mitigation: Use of an
existing PMU staffed by professionals with many
years of project
implementation experience and a well-
developed rapport with
counterparts’ will help to mitigate the risk
Size of SMMEs in the Informal
Sector (%)
80 (2016) 50 (2021)
Share of tourism and leather sector contribution to GDP (% increase)
5.5% (travel & tourism, 2014 ); ˂
0.5 % (leather &
footwear, 2016)
1.5 % annual growth in GDP (2020)
OU
TC
OM
ES
Outcome : Improved
environment for
economic diversification, and
enterprise development
Number of jobs created
0 (2016) 1,200 new jobs (approx.. 50% for
women) by 2020
World Travel
& Tourism
Council, Finscope
Study, IMF
and GoL
Economic
Reports
% of SMMEs that access BDS
services
20 (2016) 40 (2020)
Number of new SMMEs created
0 (2016) 50 new SMEs created , at least 50%
by women entrepreneurs(2020)
OU
TP
UT
S
Component 1: Enhancing Economic Diversification
Output 1.1 : Policy
environment and
capacity for economic diversification
strengthened
Tourism and Market development No Tourism
Masterplan &
marketing plan
Tourism Masterplan and marketing
developed & approved (2018)
Progress
report
National Tourism Council establishment
No NTC and Export (2016)
NTC established and staffed (2018)
Guidelines for policy formulation,
implementation, M&E
No guidelines
(2016)
Detailed guidelines for policy
formulation, implementation, M&E
produced (2019)
Output 1.2 : Product
development and market diversification
initiatives supported
Prefeasibility studies/Feasibility
studies in selected sectors
0 (2016) 5 prefeasibility and 5 feasibility
study reports (2019)
Investment compendium production
and staff training on investment
promotion
No compendium, 0
staff trained (2016)
Compendium produced (2018); 10
LNDC staff trained, 50% being
women
Tailor-made training in tourism,
hospitality, leather/footwear value
chains
0 (2016) 4 cohort training sessions per year,
50% of trainees being women
Output 1.3: Improved
product quality and
standards
National standardisation strategy Standards Act in
place
National Standardisation strategy
adopted (2018)
LSI capacity 0 (2016) 8 officers receive specialized training; ICT and testing equipment
procured (2018)
Component 2: Promoting Enterprise Development
Output 2.1: :
Business incubation
and growth
Business incubation strategy &
program
No strategy and
program (2016)
Incubation strategy developed and
(2018)
Progress
report
Supervision
report
PCR
Number of SMME owners trained in entrepreneurship skills
0 (2016) 100 SMME owners trained (50% women) by 2019
Innovative business plan competition
0 (2016) Business plan competition introduced; 10 businesses identified
and incubated/trained, 60% of which
are women owned (2019)
Output 2.2:
Expanding Business
Development Service
for enterprises development
Institutional review of Business
Development Service providers
0 (2016) BDS Institutional Review Report
(2017)
BEDCO capacity 0 (2016) All (100%) of BEDCO technical staff trained (50% women) by 2019
Toolkits and training packages for enterprise development
0 (2016) Training toolkits developed; 10 BDS providers trained, 50% being
women and youth (2019)
Output 2.3: Partnership
for entrepreneurship and micro-finance.
Partnership program for
entrepreneurship
0 (2016) Partnership program for
entrepreneurship designed & entrepreneurship training curricula
rolled-out across training institutions (2019)
vi
Apprenticeship program 0 (2016) Apprenticeship program designed & 50 young entrepreneurs get on-job
training, 50% of whom are females
(2019)
Microfinance program No program and grant scheme in
place (2016)
Microfinance program designed and implemented (2018)
Operational framework for the
competitive grant scheme
Grant scheme in
place (2016)
Operational framework for the
competitive grant scheme reviewed (2017)
Component 3: Project Management
Output 3.1: Project
management capacity strengthened
Number of project implementation
reports /reviews prepare
0 (2016) annual progress reports, and 4 audit
reports submitted
AC
TIV
ITIE
S
COMPONENTS INPUTS
Economic diversification – technical assistance for tourism masterplan development; product and market
diversification, industrial policy planning and monitoring; public private dialogue, investment forum
Promoting enterprise development – technical assistance, access to finance, quality standards and certification, and
capacity building of SME support institutions
Project management: Hiring PMU staff including enterprise development specialist, procurement officer and finance officer, and M&E activities
Total of UA 7.22 million
(comprising of UA 2.22 million grant and UA 5 million loan)
Government: UA 0.78 million
Implementation support and supervision
vii
Table 1: Project Time Frame/Implementation Schedule
Lesotho: Economic Diversification Support Project
Activities/Years
2017 2018 2019 2020 Action by
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Q3
Q4 Q1 Q2 Q3 Q4
Project Processing and Management
Grant approval
AfDB
Signing Protocol of Grant Agreement
AfDB & GoL
Project Effectiveness and Launching
AfDB & GoL
Supervision and Monitoring
AfDB
Mid-term Review
AfDB
Project Completion Report
AfDB & GoL
Component 1: Enhancing Economic Diversification
A. Procurement
GoL
B. Training GoL
C. Technical Assistance GoL
Component 2: Promoting Enterprise Development GoL
A. Procurement GoL
B. Training GoL
C. Technical Assistance GoL
Component 4: Project Management Support GoL
1
REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE ADB GROUP
TO THE BOARD OF DIRECTORS ON A PROPOSED ADF LOAN AND GRANT TO
LESOTHO FOR THE ECONOMIC DIVERSIFICATION SUPPORT PROJECT
Management submits the following Report and Recommendation on a proposed ADF Loan of
UA 5.0 million and ADF Grant of UA 2.22 million to the Kingdom of Lesotho to finance the
Economic Diversification Support Project (EDSP).
I. STRATEGIC THRUST AND RATIONALE
1.1 Project Linkages with Country Strategy and Objectives
1.1.1 The proposed operation is aligned with the country’s development strategy.
Lesotho’s Vision 2020 identifies the following seven pillars of development: economic growth,
management of the environment, technology,
democracy, unity, peace, education and training.
The elements of Vision 2020 are further articulated
into actionable priorities in the National Strategic
Development Plan (NSDP, 2012/13–16/17).
Moreover, the NSDP has identified, manufacturing,
tourism, agriculture, mining and improving the
investment climate as the main growth drivers
necessary to sustain economic growth and
employment creation. The 2015 industrial policy
aims to build on the existing industrial base for
sustainable job creation through, among others,
strengthening the industrial development support
institutions, promoting Basotho Entrepreneurship
as well as diversifying into a range of manufacturing products while increasing value addition.
1.1.2 The proposed operation is also consistent with key sector policy and strategies.
These includes: the Lesotho Industrial Policy (2015-2017); National Investment Policy (2015);
Financial Sector Development Strategy (2013); Quality and Standards Policy (2014); Small,
Micro and Medium Enterprise Policy (2016); and Tourism Policy (2000). The policy papers
provide a framework on which to base private sector development interventions by
development partners including the Bank. The policies identify the main challenges, constraints
and opportunities for private sector development identifying critical priorities in the short to
medium term (Technical Annex). The proposed Project will directly address challenges and
priorities set out in the Government policy and strategies with the aim of promoting and
expanding the private sector’s participation in the economy.
1.1.3 The Project fits firmly with the objectives of the Lesotho Country Strategy Paper
(CSP), and Bank’s strategic and operational priorities. The CSP is aligned with the
Government’s development agenda and focuses on two pillars: (i) infrastructure development;
and (ii) institutional capacity building. According to the CSP, the priority objective of the
institutional capacity building pillar is to enhance the efficiency and effectiveness of the public
sector as well improving business environment for private sector development. The operation
is also aligned to the Bank Group’s Ten Year Strategy (2013-2022), and the High Five
Priority Areas (High-5s)in particular Improving the Quality of Life for African People, and
sectoral strategies such as the private sector development strategy (2012-2017), Financial
Sector Development Strategy (2014-19), Governance Strategic Action Plan (GAP II, 2014-
2018) and the Strategy for Jobs for Youth in Africa (JfYA, 2016-2025), by supporting and
fostering entrepreneurship, SMMEs development and enabling environment for private sector
development. The Project provides needed support to institutions responsible for economic
diversification and enterprises development through business development services.
Box 1: NSDP six strategic goals
- pursue inclusive economic growth and
create 50,000 private sector jobs over 5years
- develop key infrastructure;
- enhance the skills base, technology adoption
and foundation for innovation;
- Improve health, combat HIV and AIDS and
reduce vulnerability;
- Reverse environmental degradation and
adapt to climate change; and
- Promote peace, democratic governance and
build effective institutions
Source: NSDP 2012/13 – 2016/17
2
1.1.4 Complementary and synergy with the ongoing operations: The proposed operation
will complement and enhance the effectiveness of the Bank’s ongoing projects by focusing on
the private sector development pillar. The ongoing Projects are focused on infrastructure
(power and water), and public finance management reform which also contribute towards
creating a conducive environment to attract private sector investment in the country (e.g.
reducing the constraints of electricity shortages). There are also synergies with the ongoing
donors funded programs, in particular the PSCEDP financed by the World Bank, and the FAPA
Technical Assistance which is being prepared simultaneously with this operation.
1.2 Rationale for Bank’s Involvement
1.2.1 Economic Diversification remains a challenge in Lesotho. The country’s economic
growth has been predominantly export led but with excessive reliance on the export of a small
range of textile products, largely to the US market through the African Growth and Opportunity
Act (AGOA). The manufacturing sector helped Lesotho achieve considerable economic growth
averaging about 4.5% for the last two
decades (1994-2014). The main driver
of this growth was manufacturing of
textile garments which account for
more than 85% of total exports earning
(see chart 1)1. Further, export earnings
from the textile garments fell from
about USD 400 million to about USD
300 million in ten years due to the
global economic crisis beginning 2008
and the subsequent stiff competition
from other apparel exporting countries.
To this end, the country’s economy is at
risk from further falling exports.
Textiles and garments contribute about
80% of export earnings, and 90% of the
exports going to the US and EU market.
This status quo puts the country’s
economy exposed to external shocks.
Furthermore, the contribution of textile
garments exports has declined from about 20% of GDP in 2004 to less than 8% in 2013, due
to stagnation in the textile and apparel sector after the global economic crisis, and increased
competition from low-cost Asian producers. Since then, public investment has taken over as
the main economic driver financed by the transfers from Southern Africa Customs Union.
1.2.2 However, Lesotho’s economic exposure to external risks, including the unpredictability
of SACU revenues, excessive dependence on textile and adverse weather conditions, underline
the need to promote private sector development and diversification into other sectors.
Recognizing the challenges Lesotho’s economy is facing, the GoL identified priority sectors
where Lesotho needs to exploit better its comparative advantage and potential for growth.
These include tourism, leather and footwear, agro-processing, mining, and water sectors. The
proposed operation will support the implementation of government strategies for economic
diversification in the selected sectors and create jobs for the youth and women.
1Ministry of Trade and Industry Annual Report (2015)
3
1.2.3 Enterprise development is a key Government of Lesotho undertaking under the
Economic diversification agenda. The SMME Policy of 2011 which is adopted in 2016
provides the framework for the
development of the sector.
There are a number of studies
unbundling the conditions of
SMMEs in Lesotho, the most
recent being a 2016 Finscope
study report (funded by
UNDP). It is an assessment of
the landscape of the SMMEs
and the challenges they face in
terms of access to finance and business development services, the two most binding constraints.
The report notes that there are approximately 76,000 SMMEs with 80% operating in the
informal sector. The majority (about 80%) operate as individual survivalist businesses while
the stake of the youth is minimum as 80% of the business owners are above the age of 30. The
sector has a high representation of women (59%). Chart 3 above shows that 22.2% of SMMEs
are excluded from access to finance and only 24% have access to formal banks.
1.2.4 The current Business Development Service (BDS) market in Lesotho is weak. The
Finscope study confirms the appraisal mission findings that weak institutional leadership and
fragmented and unfocussed BDS provision both in the public and private sectors are the central
problem areas. Lack of collaboration among stakeholders; uncoordinated and duplication of
efforts; absence of information/database on the available institutions that provide services;
inability of SMME’s to pay for BDS services; and lack of training packages suitable for
different entrepreneurs at different stages of their businesses development are the typical
features of the BDS landscape in Lesotho. It was also recognized that both BEDCO and SMME
Support Network which have been operating in the market, have capacity deficiencies to
develop the market.
1.2.5 Access to finance remains as a major constraints for SMME development. The
Finscope study noted that SMMEs having access to credit from banks and non-bank regulated
sources are only about 29%. As shown in the figure above, about 53% are excluded while about
37% depend on non-bank sources and family and friends. This can, to a great extent, be
attributed to lack of BDS to enable them to interact with banks intelligently and with proper
business plans. There are two Partial Credit Guarantee Schemes, one operated by the Lesotho
National Development Corporation (LNDC) and the other by the Ministry of Finance for a
50% and 70% cover respectively to ease the challenges of access to finance. The uptake is
limited as most SMMES are unable to meet the requirements which includes business owners’
contribution of 30%. The micro-finance industry is very small comprising of credit only
institutions, cooperatives and money lenders. The Association of Micro Finance providers has
25 members only 5 of whom are registered while 20 money lenders are yet to be registered by
the CBL due to weak institutional capacity to comply with the registration requirements.
1.2.6 The Project will contribute towards consolidating reform efforts and addressing
the remaining gaps in Lesotho. Lesotho has implemented important reforms, notably in
streamlining the process for starting a business but it still lags behind many of its comparators
in the region. For example, the 2016 Doing Business Report shows a decline in Lesotho’s rank
in ease of doing business to 114 from 110 in 2015 (change in rank -4). There were declines in
virtually all aspects but “starting a business” declined to 112th from 107th in 2016 and “Getting
Credit” declined to 152 from 150 in 2015.Progress with the investment climate reforms needs
to be pursued and complemented through promoting strategic partnership and dialogue
between the public and private sectors. Furthermore, reforms that have helped to attract FDI
26,30%
24%7%
22,20%
20,50%
Chart 3: Source of Credit for SMMEs (FinScope 2016)
Family Served Banked (formal) Non-bank (formal)
Informal Excluded
4
(textile and garment) should be complemented through targeted technical assistance and
support to enhance entrepreneurship and strengthening backward and forward linkages. The
Lesotho Doing Business Report and Private Sector Diagnostics Studies concluded that the
private sector is confronted with several challenges including: (i) poor infrastructure
(electricity, roads, and transport); (ii) lack of access to finance; (iii) administrative barriers; (iv)
lack of entrepreneurial and technical skills; and (v) lack of access to markets (Technical Annex
A). In tackling these challenges, complementary initiatives and projects are being implemented
by the Government and development partners. The proposed Project will complement ongoing
initiatives by focusing on selected sectors critical for economic diversification, fostering
strategic partnership, and promoting enterprise development through supporting SMMEs.
Figure 3 below depicts how the project’s components relate and contribute to the ultimate
objective of diversifying Lesotho’s economy.
Enterprise Development Support
1.3 Donors Coordination
1.3.1 There is strong commitment by development partners to coordinate their support to the
private sector development agenda in Lesotho. Donor Coordination across sectors is assured
through the Development Partners Consultative Forum (DPCF), which provides the platform
for dialogue between donors and the GoL. The main development partners supporting private
sector development agenda include: the World Bank, UNDP, the European Union, and the ILO
(Appendix III). The primary focus of donor support has been improving the investment climate
and business enabling environment, capacity building and partnerships, entrepreneurship
development including skill training for SMME, access to finance and related initiatives with
the aim of fostering employment generation by the private sector. The GoL has established a
Enhancing Economic Diversification
Quality and Standards
Certification in Place
Product and Market
Diversified
Enabling Environment
Created
BDS Market Strengthened
Lesotho's Economy Diversified
5
Project Steering Committee to provide strategic guidance, and to ensure assuring country
ownership, coordination and complementarities.
II. Project Description
2.1 Project Objectives and Components: The overall development objective is to
contribute to inclusive growth through enhanced economic diversification and strengthened
enterprise development. The specific objective of the Project is to support private sector
development through improving partnership, entrepreneurship and skills development, and
investment promotion in the selected sectors critical for economic diversification.
2.1.1 The Project has three mutually reinforcing components: (i) enhancing economic
diversification; (ii) promoting enterprise development; and (iii) project management support.
By focusing its support, the Bank will ensure that adequate resources can be given to ensuring
sustainability of actions, through innovative approaches to enterprise development and capacity
for economic diversification. Reflecting the lessons of past support, more emphasis will be
given to strengthening national capacity and ensuring national ownership of the project.
Beneficiary institutions also clearly requested that future technical assistance ensure adequate
skills transfer. Finally to ensure coordination and monitoring of the EDSP, the Bank will
collaborate with the World Bank to ensure that that the Project Management Unit is adequately
resourced. The major activities are summarized in Table 2.
Component 1: Enhancing Economic Diversification
2.1.2 This component has three sub components: (a) Strengthening policy environment and
capacity for diversification; (b) Support for product development and market diversification in
tourism, and leather and footwear; and (c) Improve product quality and standards.
2.1.3 Sub component 1.1: Strengthening policy environment and capacity for economic
diversification: The objective is to build capacity within the Ministries of Trade and Industry,
and Tourism, Environment and Culture to develop and effectively support the implementation
of the strategy for economic diversification with emphasis on tourism, leather and textile
sectors. Key activities under this sub-component are: (a) technical assistance to review and
update the tourism policy, tourism masterplan and implementation roadmap; (b) support for
the establishment of a National Tourism Council, which will bring together government,
regulators, and private sector operators to strengthen the sector, implement the masterplan and
help increase the international competitiveness of Lesotho tourism; (c) support to the creation
of export consortia to facilitate marketing and group purchase schemes; and (d) capacity
building to Ministry of Trade and Industry to promote business linkages and to develop
competencies in industrial policy planning, research and data management systems, monitoring
and evaluation.
2.1.4 Sub component 1.2: Support for product development and market diversification: The
objective is to catalyze growth in the tourism, leather and footwear sub-sectors by providing
technical assistance for product and market development to attract local and foreign
entrepreneurs to invest in the selected sectors. Key activities under this sub-component are:
(a) the development of tourism products, marketing strategy and the instruments to empower
the tourism sector; (b) technical assistance for product development and marketing in the
leather and footwear industry; (c) feasibility studies of potential projects in the priority sectors
to attract private investment; (d) transaction advisory service and capacity building for public-
private partnership in the tourism training centers and facilities (e.g. Lerotholi Polytechnic
Institute); and (e) institutional review of and capacity building support to LTDC to effectively
deliver its mandate and the tourism masterplan.
2.1.5 Sub component 1.3: Improve product quality and standards: The objective is to
promote product quality and use of standards through improved quality control process and
6
certification in the priority sectors. Key activities under this sub-component are: (a) develop
a national standardization strategy; and (b) human resource training on quality and standards
including sensitization of business enterprises on product certification and quality standards to
enable their products become competitive in the domestic and export markets.
Component 2: Promoting enterprise development
2.1.6 This component has three sub components: (a) Business incubation and growth; (b)
Expanding Business Development Service for enterprises development; and (c) Partnership for
entrepreneurship and micro-finance.
2.1.7 Sub component 2.1: Business incubation and growth: The objective is to support the
development of Basotho business start-ups and growth of existing small businesses, in
particular those owned by the youth and women, through provision of various business
development services to contribute towards the economic diversification agenda through
acceleration of viable enterprises.Key activities under this sub-component are: (a) technical
assistance to assess the entrepreneurial ecosystem (constraints and opportunities) in Lesotho,
and to design a business incubation program and its implementation roadmap including twining
arrangements with regional centres of excellence; (b) introduce a Business Plan Competition
program aimed at supporting innovative ideas and entrepreneurs through entrepreneurship and
technical skill training, mentoring, handholding, and other business development services; and
(c) differentiated business incubation and mentorship services to SMMEs in the leather,
footwear, textile and garment sectors.
2.1.8 Sub component 2.2: Expanding business development service for enterprise
development: The objective is to develop and expand the market for business development
services (BDS) in Lesotho by diversifying the range of products and developing a sustainable
and coordinated approach to delivery of services including an increased role for the private
sector. Key activities under this sub-component are: (a) provision of technical assistance to
assess the current BDS market to determine its ecosystem including key players, challenges
and opportunities; (b) institutional review of selected BDS providers (including BEDCO); (c)
build the capacity of BEDCO to strengthen their role as facilitator and champion in the
development of the BDS market; (d) support to the design of appropriate toolkits and training
packages; and (e) build capacity of BDS providers using the new training packages.
2.1.9 Sub component 2.3: Partnership for entrepreneurship and micro-finance: The
objective is to foster entrepreneurship culture through collaboration between Government,
Training Institutions, and Private Sector as well as to improve access to finance by supporting
Government initiatives in the areas of competitive grant scheme and micro-finance schemes.
Key activities include: (a) technical assistance to prepare and rollout an entrepreneurship
training curricula across educational institutions (universities) and training centers/colleges; (b)
design and introduce apprenticeship program that would encourage private sector to support
youth to get on-the-job training by drawing international experience and good practice; and (c)
technical assistance to design and support implementation of microfinance program in
partnership with PostBank and CBL, and (d) improve the operational framework for the
competitive grant scheme of the Ministry of Small Business and Cooperatives.
7
Component 3: Project Management Support
2.1.10 The objective is to strengthen project implementation, coordination and monitoring and
evaluation capacity. Under this component, the project will co-finance the operating costs of
the PMU, staff salaries, training of staff and the costs of annual audits of project accounts.
Table 2: Project Description
Component Activities
Component 1:
Promote Economic
Diversifications
Develop tourism policy, tourism masterplan and implementation roadmap;
Support the establishment of a National Tourism Council;
Provide CB to Ministry of Trade and Industry for business linkages industrial policy
planning, monitoring and evaluation.
Develop tourism products, and a promotion strategy;
Support product development and marketing in the leather and footwear industry;
Conduct feasibility studies for potential investment projects;
Provide transaction advisory service and PPP in tourism;
Capacity building for the establishment and operationalization of LSI;
Develop a national standardization strategy; and
Provide training on quality standards and certification to business enterprises.
Component 2: Support
to Enterprise
Development
Support assessment of the status of the current BDS market, including private
providers, key players, challenges and opportunities;
Support business incubation & startups through competitive grant scheme
Build the capacity of BEDCO as facilitator and champion in the development of the
BDS market;
Design appropriate toolkits and training packages for BDS;
Build capacity of BDS providers using the new training packages;
Design and roll out curricula across educational (universities) and training
institutions for entrepreneurship development;
Introduce apprenticeship for the graduates through a partnership program with
universities, industry and government;; and
Support the introduction of a microfinance program, and improve the operational
framework for MSBDC’s competitive grant scheme.
Component 3: Project
Management This will finance project core staff salaries (enterprise development specialist,
procurement officer, and finance officer), monitoring and evaluation, training, audit,
and operational expenses.
2.2 Technical Solution Retained and Other Alternatives Explored
2.2.1 During project identification, preparation and appraisal, a number of options were
explored regarding the areas of intervention, the scope of the activities, and implementation
arrangements. As regards the implementation modalities, it was determined that using the
existing PMU for the World Bank Private Sector Competitiveness and Economic
Diversification Project (PSCEDP) ensures coordination, complementarities and avoid project
implementation start-up delays. Based on experience and lessons learned, as well as the other
development partners’ activities, it was agreed that, in order to build on gains from the World
Bank’s on-going project and previous Bank interventions, the proposed operation will be
guided by: (a) selectivity and complementarity – to consolidate and complement the on-going
activities in private sector competitiveness and economic diversification efforts; focusing on
support to SMMEs to gain more traction in the areas of job creation for the youth and women;
(b) supporting the effort to streamline access to finance and building entrepreneurial capacity
and skills; (c) supporting the establishment and capacity building effort of public institutions
for policy implementation and monitoring as well as specific service oriented institutions for
standards and quality certification; (d) supporting the institutionalization of public-private
dialogue for the tourism sector and (e) enhancing the partnership between public and private
8
training institutions to upgrade the level of entrepreneurship skills in Lesotho.A summary of
the technical consideration and project design options is presented in Table 3 below.
Table 3: Project Alternatives Considered and Reasons for Rejection
Alternative Brief Description Reason for Rejection
Establishing a
parallel
implementation
arrangement/unit
(PIU) solely for
the project
Instead of setting up a parallel PIU,
the PAR proposes using the existing
Project Management Unit that
coordinates and monitors the
implementation of the on-going
World Bank PSCEDP.
The proposed arrangement will increases synergy
and achieve value for money as it allows
effectively utilising existing staff and enhancing
structures, reducing transaction costs.
Furthermore, complementarities rather than
duplications will be optimized in addition to
significant project implementation cost savings.
Supporting
sectors where the
WB PSCEDP has
on-going
interventions (the
horticulture
development)
The on-going WB PSCEDP
focusses on improving the
investment and business climate and
diversification of the agribusiness
and horticulture sector. It has piloted
some fruit farms and gathered
knowledge on the sector. The
proposed project will focus on
tourism, leather and footwear
To avoid duplication and ensure focussed
intervention to optimize impact. Furthermore, the
WB PSCED project is likely to be extended
through additional financing which will enable it
to further on-going interventions and take them to
fruition/roll out to larger private sector
participants.
ISP that include
support to several
institutions
Proposals for a capacity building of
a number of institutions responsible
for SMMEs and industrial
development were submitted.
However, the operation has selected
critical interventions that would
support the SMME directly and
ensure sustainability through
engaging the private sector.
The recent OPEV evaluation and lessons from
previous operation suggest that the need to avoid
the risk of spreading projects too thinly across
many beneficiary institutions, particularly where
the overall funding envelope is limited. The
proposed operation is focused and provide targeted
capacity building support to Parliament and OAG.
2.3. Project type
2.3.1 The proposed operation is a private sector development support project designed
to complement and build on the on-going Private Sector Competitiveness and Economic
Diversification projects (PSCEDP), and other partners’ interventions. The project also
supplements the GoL’s interventions - the effort to improve access to finance through the
provision of Partial Credit Guarantee Scheme and the provision of industry sheds and working
space for SMMEs. The project aims to ease the access to finance and economic diversification
challenges through support to SMMEs in the selected, comparatively better potential sectors
like leather and footwear, textiles, food processing, tourism, etc. The Bank will thus play a
critical role in strengthening the private sector to effectively paly a meaningful role in the effort
to expand Lesotho’s economy and create more jobs at the same time alleviate the growing
income inequality.
2.4 Project Cost and Financing Arrangements
2.4.1 The estimated total cost of the project is UA 8.00 million (including 10% GoL’s
contribution). A price contingency of 4%, and a physical contingency of 3%, have been
factored in the project cost. Tables (4a) and (4b) present the estimated project cost by
component and sources of finance, whereas Tables (4c) and (4d) present the estimated project
costs by Category of Expenditure. Details of the Project cost by component and expenditure
category are also presented in Technical Annex B2. The Bank will finance UA 7.22 million
out of which UA 5.0 million will be loan and UA 2.22 million grant. The GoL’s contribution
is expected to be UA 0.78million.
9
Table 4(a): Project cost estimates by component
LSL million inc. Contingency UA million including Contingency
Local Foreign Total Local Foreign Total
%
Foreign
% of
Total
Component 1:Enhancing Economic Diversification
1.1 Strengthening policy
environment and capacity for
economic diversification
8.98 13.91 22.89 0.44 0.69 1.13 61% 14%
1.2 Support for product development
and market diversification
17.78 27.79 45.57 0.88 1.37 2.25 61% 28%
1.3 Product quality and standards 2.98 5.26 8.24 0.15 0.26 0.41 64% 5%
Sub Total 29.75 46.95 76.70 1.47 2.33 3.78 61% 47%
Component 2:Promoting enterprise development
2.1 Business incubation and growth 7.19 18.24 25.42 0.35 0.90 1.25 72% 16%
2.2 Expanding business development
service for enterprise development
6.03 15.05 21.08 0.30 0.74 1.04 71% 13%
2.3 Partnership for entrepreneurship
and micro-finance
2.94 14.57 17.51 0.14 0.72 0.86 83% 11%
Sub Total 16.15 47.86 64.01 0.80 2.36 3.16 75% 40%
Component 3: Project management
3.1 Support to the PMU 19.85 1.37 21.21 0.99 0.08 1.06 8% 13%
Sub Total 19.85 1.37 21.21 0.98 0.08 1.06 8% 13%
Grand Total 65.75 96.18 161.92 3.24 4.76 8.00 59% 100%
Table 4(b): Sources of financing
(LSL Million) inc. Contingency (UAC Million) inc. Contingency
Source of
Finance Local Foreign Total Percent Local Foreign Total
% of
Total
ADF Loan 5.18 96.18 101.36 62% 0.28 4.72 5.00 62%
ADF Grant 44.99 - 44.99 28% 2.22 - 2.22 28%
GoL Contribution 15.56 - 15.56 10% 0.78 - 0.78 10%
Total 65.735 96.18 161.91 100% 3.28 4.72 8.00 100%
Table 4(c): Project cost by category of expenditure
(LSL Million) (UAC Million)
Category of Expenditure Local Foreign Total Local Foreign Total
%
Foreign
% of
Total
A. Goods 4.19 7.63 11.82 0.20 0.39 0.59 66% 7%
B. Services 39.55 82.25 121.80 1.94 4.06 6.00 68% 75%
C. Operating Cost 3.21 - 3.21 0.15 - 0.15 0% 2%
Baseline Cost 46.95 89.88 136.83 2.29 4.45 6.74 66% 84%
GoL Contribution 14.50 - 14.50 0.73 - 0.73 0% 9%
Physical & Price
Contingencies (7%) 4.30 6.29 10.59 0.21 0.31 0.52 60% 7%
Grand Total 65.75 96.17 161.92 3.24 4.76 8.00 60% 100%
10
Table 4(d): Project Expenditure Schedule
(LSL Million) (UAC Million)
2017 2018 2019 2020 Total 2017 2018 2019 2020 Total
Component 1:Enhancing Economic Diversification
1.1 Strengthening
policy environment and
capacity for economic
diversification
2.29
9.16
9.16
2.29
22.89
0.11
0.45
0.45
0.11
1.13
1.2 Support for product
development and
market diversification
4.56
18.23
18.23
4.56
45.57
0.22
0.90
0.90
0.22
2.25
1.3 Improve product
quality and standards
0.82
3.30
3.30
0.82
8.24
0.04
0.16
0.16
0.04
0.41
Sub Total 7.67 30.68 30.68 7.67 68.46 0.38 1.51 1.51 0.38 3.78
Component 2:Promoting enterprise development
2.1 Business incubation
and growth
2.542
10.17
10.17
2.54
25.42
0.13
0.50
0.50
0.11
1.25
2.2 Expanding business
development service for
enterprise development
2.11
8.43
8.43
2.11
21.08
0.10
0.42
0.43
0.10
1.04
2.3 Partnership for
entrepreneurship and
micro-finance
1.75
7.00
7.00
1.75
17.51
0.09
0.35
0.35
0.09
0.86
Sub Total 6.40 25.60 25.60 6.40 46.50 0.32 1.26 1.26 0.32 3.16
Component 3: Project management
3.1 Support to the PMU 2.12 8.48 8.48 2.12 21.20 0.10 0.42 0.42 0.12 1.06
Sub Total 2.12 8.48 8.48 2.12 21.20 0.10 0.42 0.42 0.12 1.06
Grand Total 16.19 64.76 64.76 16.19 136.16 0.79 3.20 3.20 0.81 8.00
Note: Exchange Rates 1UA= 1.394347 USD; 1 UA = 20.26666 LSL and *All figures includes contingencies
2.5. Project’s Target Area and Population
2.5.1 The direct project beneficiaries are: Small, Medium and Micro Enterprises (SMMEs) in
the selected sectors like textiles and garments, leather/footwear, and tourism. The benefits
accrue to them through improved BDS capacity, better entrepreneurial skills training, better
access to markets and improved private sector development policy/regulatory framework.
Public sector organizations such as the Lesotho Tourism Development Corporation; the
Lesotho National Development Corporation; the Basotho Enterprises Development
Corporation; the Ministry of Trade and Industry; the Ministry of Small Business Development,
Cooperatives and Marketing; the Ministry of Tourism, Environment and Culture will benefit
from the planned capacity building support..
2.6 Participatory Process for Project Identification, Design and Implementation
2.6.1 The project preparation process has benefited from a multi-stakeholder consultation
with government departments, business community and development partners in Lesotho. For
example, consultations were held with various Government departments including the Ministry
of Trade and Industry; Ministry of Small Business Development, Cooperatives and Marketing;
Ministry of Finance; Ministry of Development Planning, Ministry of Tourism, Environment
and Culture; Lesotho National Development Corporation, Basotho Enterprises Development
Cooperation; Lesotho Tourism Development Cooperation; and Central Bank of Lesotho. The
project preparation also included discussions with the private sector representatives such as the
Lesotho Chamber of Commerce and Industry, and the Lesotho Hospitality Industry
Association, the Lesotho Post Bank and donor representatives including the World Bank, UN,
EU, ILO, and US Embassy. Issues raised that informed the design of the ISP, include the need
for: improved strategic partnership and dialogue between government and private sector;
support to skill and entrepreneurship development; reforms to improve access to finance and
11
market; and support to implement economic diversification activities in key sectors of the
economy; and ensuring skills and know-how transfer of consultants and sustainability of
support. The consultations with the stakeholders will continue during project implementation
through the project steering committee with representatives from business community and
supervision missions.
2.7 Bank Group Experience and Lessons Reflected in Project Design
2.7.1 The Bank’s current portfolio in Lesotho is comprised of 4 operations amounting to UA
27.8 million (Annex II), and consist of 4 sectors: water and sanitation (32.5%), social sector
(31%), communications (27.1%) and multi-sector (9.4%). The portfolio performance was rated
“satisfactory” with an overall portfolio rating of 3 (on a scale from 1 to 4). Observations
gathered and lessons learnt from analytical work, ongoing and completed operations, for
example, of the last World Bank operation focused on improving the business environment –
business licensing and registration, etc. have been incorporated in the project design. These
translated into: (1) building on the good relationship and trust already accumulated with the
counterparts through the implementation of the WB’s PSCEDP and focusing on
complementarities while avoiding duplications, (2) taking into serious consideration the desires
of the relevant bodies in the GoL in the selection and prioritization of the project components
in order to ensure ownership and full cooperation during implementation, (3) building
institutional capacity for policy analysis, implementation and monitoring at the critical
counterparts, and (4) closely engaging the counterparts throughout the project design process
to secure full buy in.
2.7.2 The design of this operation is guided by findings from various analytical and
diagnostic reports, as well as consultations during the Project preparation and appraisal
missions (Appendix V).The proposed operation draws on lessons from the ongoing projects,
country portfolio performance review (2015) as well as the underpinning analytical works. The
main lessons are: avoidance of start-up delays; addressing implementation capacity constraints;
alignment with the national priorities and reinforce ownership; spreading too thinly across a
sector; and enhanced dialogue and regular supervision and monitoring of portfolio. Lessons
learned from ongoing and previous operations are summarized in Table 5 below.
Table 5: Lessons learned from the previous and ongoing Bank interventions Key Lessons Learned Actions Taken to integrate lessons learnt
(a) Avoidance of start-up delays by simplifying the
conditions precedent to first disbursement; and
developing ToRs.
The project will be implemented by an existing PMU
which has experience with the World Bank operations.
Draft ToRs are prepared as part of the appraisal mission.
(b) Need to address implementation capacity
constraints by reinforcing the financial
management and procurement team of the PMU
The PMU’s capacity has been assessed during appraisal
and appropriate recommendations has been taken on
board in the project design.
(c) Strengthen country ownership and leadership by
ensuring alignment with the strategic plan and
capacity building requirements
The project is fully aligned with country development
objectives. See paragraph 9.1.2.
(d) Avoid spreading of activities too thinly across a
many provinces and a large number of institutions
by ensuring the intervention targets a few
institutions
The project has three components and supports activities
under two Ministries and coordination takes place under
clearly identified departments in the respective
ministries.
e) Enhanced dialogue and regular follow up by
SARC to address portfolio issues timely with a
view to achieving the desired results.
As part of project monitoring arrangement, SARC will
continue to play an active role in the capacity
development, country dialogue and project monitoring
and evaluation.
12
2.8 Project’s Performance Indicators
The key performance indicators identified, and the expected outcomes at Project Completion,
are set out in the Result-based Logical Framework (Section VII). A summary of the expected
results or outputs is summarised below:
Key performance indicators
Component 1: Enhancing Economic Diversification Component 2: Promoting Enterprise Development
SMMEs (50% women owned)
Tourism Master Plan approved (2018)
Number of PPP projects supported and promoted
25 public sector staff trained (at least 50% women)
• 100 SMME owners (50% women) (2019),
• 50 SMMEs (50% women owned) (2019),
• 3 SMMEs linked with large enterprises (2019)
• 25 SMMEs (50% owned by women) (2019)
Source: ESDP Result Measurement Framework.
III. PROJECT FEASIBILITY
3.1 Economic and Financial Performance
3.1.1 While it is difficult to carry out credible and rigorous cost-benefit and financial
analyses for institutional support project, the economic and financial benefits, and
ramifications, accruing from the Project will be much higher than the UA 7.22 million.
Whereas the costs are quantifiable (section 2.4), the benefits are both direct and indirect,
ultimately delivered from improved capacity in policy implementation and monitoring in the
public sector and SMMEs gaining basic business, entrepreneurial and technical skills as well
as financial literacy. The economic justification of the proposed project is its contribution to
better policy implementation and monitoring capacity of the relevant public offices and the
upgrading of entrepreneurial and technical business skills and organizing the BDS market to
make it more responsive to the needs of SMMEs. Overall, the benefits of the project will be
derived from (a) enhanced capacity and effectiveness public bodies in policy implementation
and monitoring; (b)better skilled and financed SMMEs sector; (c) Expanding business
development service for enterprise development; (d) the number of new SMMEs developed
which they also generate jobs for the youth; and (e) enhanced partnership and participation of
the private sector through public-private partnerships for enterprises development through
apprenticeship program.
3.2 Environmental and Social Impacts
3.2.1 Environment and Climate Change: The proposed Project is environmentally classified
as Category 3 by ORQR. The Project will not have a negative impact on the environment as its
activities are limited to entrepreneurship training, technical assistance, and studies. The
activities envisaged under the project, focusing on human and institutional capacity building,
will not have negative impact on the climate.
3.2.2 Social: The Project is intended to contribute to economic growth through improved
capacity of key government ministries responsible for private sector development and economic
growth in general. The Project aims to contribute to building the capacity of selected
government corporations to enhance their capacity in policy analysis and review as well as
providing government financed support to the private sector in general and SMMEs in
particular. The social and poverty-reducing impact will be directly reflected in the number of
jobs created, the number of business start-ups and their sustainable growth.
3.2.3 Impact on Gender: A preliminary assessment on gender shows that the project will
contribute to gender equality (Technical Annex B.6). Lesotho is the highest ranked African
13
country with regards gender equality2. The country’s strong gender policy has resulted in high
enrolment rates for both genders. Lesotho remains a low-gender gap country and is ranked
38 out of 142 countries in the overall Gender Gap Index for 2014. Women are highly present
in the economy, dominating the formal SMME, informal sector and garment manufacturing,
59% of SMME owners are women. Meanwhile their incomes are generally lower than men, and
they remain economically disadvantaged by unequal access to property and finance. To this
end, the project will improve gender outcomes in the area of developing skill and
entrepreneurship, and increasing opportunities for women entrepreneurs who are engaged in
small, medium and micro business. All project support will endeavor to mainstream gender
balance to ensure that men and women benefit from the project support. In addition, the project
will also respond to the national strategy by strengthening its response to promote gender
mainstreaming in the project activities and also to build the capacity of women entrepreneurs
through skill and entrepreneurship development and advisory services.
3.2.4. Involuntary Resettlement: The Project will not result in any population displacement.
IV. IMPLEMENTATION
4.1 Implementation Arrangements
4.1.1 The project will be implemented over a period of four years between January 2017 and
December 2020. The Ministry of Trade and Industry is the lead executing agency in
collaboration with the MSBCM, and MTEC. The existing implementation arrangements for
the on-going World Bank Financed – Private Sector Competitiveness and Economic
Diversification Project will be used to manage the proposed operation. A Project Steering
Committee (PSC) is already in place to provide strategic oversight and policy guidance, as well
as monitor implementation progress. The PSC will consist of members representing the
agencies responsible for the project implementation i.e. the Principal Secretaries from the MTI,
MSBCM, MTEC, MF, MDP, Deputy Governor of the Central Bank, the Master of the High
Court (MHC), the Office of the Parliamentary Counsel (OPC), the CEOs from LNDC, BEDCO
and LTDC. The committee shall meet every quarter to review implementation progress of the
project and help to resolve technical and implementation problems affecting project progress.
The meetings will be chaired by the Principal Secretary of MTI. The committee shall also
provide feedback on progress and challenges to the private sector on a regular basis.
4.1.2 The Project Management Unit will be headed by a qualified Project Manager who will
oversee day-to-day operations of the project. The Project Manager will also coordinate
procurement, financial management and Monitoring and Evaluation (M&E) aspects of the
project including coordination of implementing agencies; donors and other programs/projects.
The services of financial management, Procurement and M&E will be provided by qualified
staff. In addition, the project will finance the recruitment of additional staff including an
Enterprises Development Manager, a Procurement Specialist, and Project Accountant to
strengthen the PMU capacity for fiduciary management, monitoring and evaluation, project
oversight, and coordination. The Project Manager will report to the Project Steering Committee
chaired by the Principal Secretary, MTI.
4.2 Financial Management and Audit Arrangements
4.2.1 The overall FM for the project will be managed within the existing Project Management
Unit (PMU) in MTI under the overall responsibility of the Financial Manager as the head of
the finance unit. The team is currently implementing a World-Bank funded project, and reviews
from the existing systems revealed they are adequate to handle Bank resources as required. The
Unit is staffed with a team of qualified professionals (including a Project Coordinator, Finance
Manager, Project Accountant, Procurement Manager and other experts). There is a functional
2 2012 Global Gender Gap Report
14
computerized accounting system (TOM2PRO) for use by the finance team; and the control
environment seem adequate. Audit reports are generally being submitted on time for the
ongoing project without any significant control weaknesses highlighted by the external
auditors. In this regard, the Bank will make use of the existing FM systems within the EA to
handle the FM aspects of the project. The assessment however revealed the need to strengthen
the PIU with additional hands by competitively recruiting one project accountant to handle
project FM under the overall functional supervision of the Finance Manager. The overall
conclusion of the assessment is that MTI’s capacity to handle the FM aspects of the project,
satisfies the Bank’s minimum requirements as laid out in the Bank’s FM guidelines, and the
implementation of agreed FM actions would further strengthen the existing system. The overall
FM risk for the project is assessed as Moderate. The results of the assessment and the agreed
FM, disbursement and auditing arrangements for the project are contained as part of the
technical annex (annex B4).
4.2.2 Disbursement and Audit: The project would make use of the Bank’s various
disbursement methods including Direct Payment, and Special Account (SA) methods in
accordance with Bank rules and procedures as laid out in the Disbursement Handbook as
applicable. The Bank will issue a Disbursement Letter of which the content will be discussed
and agreed with Government of Lesotho (GoL) during negotiations. In accordance with the
Bank’s financial reporting and audit requirements, the project will be required to prepare and
submit to the Bank Interim Quarterly Financial Progress report (IQFPR) not later than forty-
five (45) days after the end of each calendar quarter. Annual financial statement prepared by
the project and audited by the Office of the Auditor General (OAG) as per their mandate or by
a private audit firm with the involvement of OAG, including the auditor’s opinion and
management letter will be submitted to the Bank not later than six (6) months after the end of
each fiscal year throughout project implementation.
4.3 Procurement Arrangements
4.3.1 Procurement of goods (including non-consultancy services), works and the acquisition
of consulting services, financed by the Bank for the project, will be carried out in accordance
with the “Procurement Policy and Methodology for Bank Group Funded Operations” (BPM),
dated October 2015 and following the provisions stated in the Financing Agreement.
Specifically, Procurement would be carried out as follows:
Bank Procurement Policy and Methodology (BPM): Bank Standard Procurement
Methods and Procedures (PMPs), using the relevant Bank Standard Solicitation
Documents (SSDs). Contracts on this project to be procured under the BPM will mainly
constitute consultancy services which will involve Technical Assistance and capacity
support to the implementing institutions. These consultancy services will be acquired as
using the Quality and Cost Based Selection (QCBS) Method and Selection Based on
Consultant’s qualification (CQS) method as appropriate. In some selected cases the
Selection Method for Recruitment of Individual consultants will apply. In the case of
contracts for goods whose contract values are very low, the National Competitive Bidding
and Shopping method under BPM will apply as appropriate.
Borrower Procurement System (BPS): Specific Procurement Methods and Procedures
under BPS comprising the National Procurement Procedures. No contracts will be
procured using the BPS. However, the operational costs will follow the internal
administrative and financial procedures of the PMU.
4.3.2 Procurement Risks and Capacity Assessment (PRCA): the assessment of
procurement risks at the Country, Sector, and Project levels and of procurement capacity at the
Executing Agency (EA), were undertaken for the project and the findings have informed the
decisions on the procurement regimes being used for specific transactions or groups of similar
15
transactions under the project. The appropriate risks mitigation measures have been included
in the PRCA action plan attached in Annex B5.
4.4 Monitoringand Evaluation: The monitoring and evaluation system will be based on
the result measurement framework. The M&E specialist within the PMU will be responsible
for managing and reporting on results in collaboration with stakeholders and implementing
agencies. The periodic performance assessment and result reporting will be carried out by the
PMU. Quarterly and annual project implementation reports will also be prepared and submitted
to the Bank. The Bank will carry out a monitoring and supervision mission at least twice a year,
in coordination with other development partners in Lesotho. A project completion report will
be prepared to evaluate progress against outputs and outcomes and draw lessons for possible
follow-up operation. Table 6 presents the project implementation and monitoring schedule.
Table 6: Project Implementation Schedule Task / Milestone Responsible Party Time Frame
Project Approval AfDB December 31,2016
Grant Effectiveness AfDB/GoL March 2017
Project Launching AfDB/GoL April 2017
Procurement of goods and services GoL April 2017 to December 2019
Technical assistance and training GoL January 2018 – June 20119
Annual Audit Report GoL June 2018, 2019, and 2020 and
Supervision Mission AfDB/GoL June/December 2017, 2018& 2019
Mid-term Review AfDB/GoL June 2018
Project Completion Report AfDB/GoL December 2020
4.5 Governance: Strengthening the capacity of key government institutions in policy
designs, implementation and monitoring, ensuring that private sector participation in the
economy is enhanced sufficiently through the removal of key constraints such as access to
finance and markets, particularly for SMMEs are the core objectives of this project. Creating
an effective platform for dialogue and knowledge and information sharing both between and
among public and private sector players is also one of the mechanisms for effective governance
of the development process. Focus on gender equality through attempts to maximize women’s
participation in the expected positive outcomes, and monitoring the process to ensure that this
is effectively happening is also designed into the project implementation process. The project
will address the risks emanating from both internal and external sources through focussing on
key beneficiaries like exporting SMMEs, engaging an existing PMU that has already
established proven methods and strong relations, trust and credibility with the counterpart
government institutions that are part of the implementation arrangement. The capacity and
modes operandi of the PMU has been reviewed in terms of the units it has for financial
management, procurement, audits and monitoring and evaluation. Furthermore, the working
modalities with be clearly articulated with the PMU focussing on the particularities of this
project and the distinct ways the project team wishes to manage the process through
supervisions missions and the period reporting of the process as well as results monitoring from
an early stage of the implementation process. An independent audit of project financial reports
and procurement reviews will be undertaken every year.
4.6 Sustainability: The proposed operation responds to demand-led interventions in the
areas of SMME focused interventions to mitigate access to finance and diversification of
Lesotho’s industrial sector. The project is informed by various development plans and
strategies of the GoL as well as outcomes of consultations with key private and public players
that identified key challenges and constraints in Lesotho’s economy in particular in relation to
sustained private sector participation in the effort to diversify the country’s economy and
minimize dependence on SACU contributions, create jobs for the youth and reduce inequality.
Significant attention has been given to sustainability in the project design, through optimizing
16
complementarities both with GoL and development partners’ interventions’ to develop selected
sectors that have both comparative and competitive advantages. The various technical
assistance activities are aimed at improving implementation and monitoring capacity at the
targeted institutions.The project will enhance partnership with local training institutions and
other providers of business development services to ensure sustainability.
4.7 Risk Management
Table 7: Risks and Mitigation Measures
Risk Level Mitigation
Political instability may affect
pace of project implementation.
Moderate GoL is involved in dialogue processes for the implementation
of constitutional and security sector reforms with support from
SADC. This provides prospects for stability of a coalition
government as the country prepares for next democratic
elections in 2020
Global economic recession
impact on SACU revenues and
FDI- slowdown of GDP growth
Moderate The project will focus equally both on exporting SMMEs and
those supplying the domestic market. Furthermore, the
linkages between large and SMMEs will to an extent reduce
dependence on foreign suppliers.
Insufficient commitment and
capacity to implement reforms
Moderate The project will implement capacity building support as early
as possible in the project implementation period. The PMU has
many years of project implementation and has already earned
the confidence and trust of the government authorities.
Currently on-going projects (WB, EU, etc.) supporting
capacity building will also enhance public sector capacity for
project implementation.
Delay in project start-up and
procurements
Moderate Use of an existing PMU staffed by professionals with many
years of project management experience and the ToRs that are
developed will help to reduce the risk in start-up delay
4.8 Knowledge Building
4.8.1 The Proposed project will build knowledge and develop skills in specific areas related
to policy implementation, monitoring and reviews to enhance the whole policy cycle. Through
the institutionalized process of public-private discussions, it enables knowledge and experience
sharing to enhance continuous improvement in the quality and responsiveness of policies and
strategies. The monitoring and evaluation capacity of key public institutions the project seeks
to strengthen will add empirical knowledge thus taking the potential for growth on a continuous
improvement path. The implementation of the proposed project will focus on alleviating
binding constraints for SMMEs in accessing finance and markets, gain competitiveness and
diversify the country’s manufacturing sector at the same time creating more jobs for the youth.
This will be achieved in a number of ways: First, the support to SMMEs helps to develop
entrepreneurial capacity, improve access to finance and markets. Second, to make this
sustainable, the project supports the enhancement of capacity at the institutional level to ensure
that there is effective public sector capacity to provide specific and sector focussed facilitation.
Third, the project also supports the development of strategic partnerships through a sustained
public-private dialogues process.
17
V. – LEGAL INSTRUMENTS AND AUTHORITY
5.1 Legal Instrument
The legal instruments for the project will be the Loan Agreement, and Protocol of Grant
Agreement between the Kingdom of Lesotho and the African Development Fund for a Loan of
UA 5.0 million and Grant of UA 2.22 million respectively.
5.2 Conditions Associated with Bank’s Intervention
5.2.1 Conditions Precedent to Entry into Force:
The entry into force of the Loan Agreement shall be subject to the fulfilment by the
Borrower of the provisions of Section 12.01 of the General Conditions Applicable to
Loan Agreements and Guarantee Agreements of the Bank.
The Protocol of Agreement shall enter into force on the date of its signature by the
Kingdom of Lesotho and the African Development Fund.
5.2.2 Conditions Precedent to First Disbursement:
The first disbursement of the loan shall be conditional upon the entry into force of the
Loan Agreement.
The first disbursement of the grant shall be conditional upon the entry into force of
the Grant Agreement, and the evidence of having opened a foreign currency
denominated special account for the deposit of the proceeds of the Grant in Central
Bank of Lesotho.
5.3 Undertakings
i) The Recipient shall maintain the existence and functioning of the Project Steering
Committee
ii) The Recipient shall submit, within 45 days of the end of each calendar quarter, quarterly
progress reports in a format acceptable to the Bank, indicating the implementation status
of the physical and financial activities.
iii) The Recipient shall submit, within 6 months of the end of each fiscal year, annual
audited project financial statements audited by the Office of the Auditor General in
accordance with Bank-approved terms of reference.
5.4 Compliance with Bank Policies
The project complies with all applicable Bank policies.
VI. RECOMMENDATION
6.1 Management recommends that the Board of Directors approve the proposed Loan of
UA 5.0 million and a Grant of UA 2.22 million to the Kingdom of Lesotho for the purposes,
and subject to the conditions, stipulated in this report.
I
Appendix I
II
Appendix II: Progress Towards Achieving the MDGs
III
Appendix III: Similar Projects Financed by other Development Partners
DONOR PROJECT TITLE AMOUNT INTERVENTION AREAS
World Bank Support to Private Sector
Competitiveness and
Economic Diversification
Project
USD 14
million
Investment climate reform
Horticulture
Linkages between SME and large enterprises
SME skill training
UNDP Financial Inclusion
Review on enterprise
development capability
Finscop study
SMME policy review
SME capability assessment
EC Support to enterprise
development
Support to Trade Facilitation
- Capacity building support and technical assistance
ILO Business development
training
SME skill training
APPENDIX IV: BANK GROUP PORTFOLIO STATUS
Sectors/Operations Approval
Date
Final Date of
Disbursement Funding
Million
UA
Disbur
sement
Rate
Age Implementation
Progress (IP)
Development
Objective
(DO)
COMMUNICATION SECTOR
1
eGovernment
Infrastructure 7.5 7%
2.9 Satisfactory Satisfactory ADF Loan 10/21/2013 8/31/2018 Loan 2.7 2.0%
ADF Grant 10/21/2013 8/31/2018 Grant 4.8 10.0%
MULTI-SECTOR
2
Institutional Support
Project 2.6 27%
3.0 Satisfactory 2.0
ADF Grant 10/14/2013 6/30/2017 Grant 2.6 27%
SOCIAL SECTOR
3
Educ. Qual.
Enhancement Project
(EDC III)
8.6 77.0%
9.5 2.2 2.0
ADF Loan 4/4/2007 3/30/2016 Loan 1.6 64.0%
ADF Grant 4/4/2007 3/30/2016 Grant 7.0 80%
WATER SUPPLY & SANITATION SECTOR
4
Lesotho Lowlands
Rural Water & Sanit.
Project
9.1 4.9%
3.0 Satisfactory Unsatisfactory
ADF Loan 10/3/2013 9/30/2018 Loan 6.5 0.0%
RWSSI 10/3/2013 9/30/2018 Grant 2.6 17.2%
TOTAL 27.8 30% 4.6 Satisfactory Satisfactory
Total Loan
10.8 10.0%
Total Grant 17.0 65.9%
IV
APPENDIX V: Doing Business in 2015 and 2016 (Rank)
Topics DB 2016
Rank
DB 2015
Rank
Change in
Rank
Overall 100 112 12
Starting a Business 117 110 7
Dealing with Construction Permits 171 171 -
Getting Electricity 150 149 1
Registering Property 108 106 2
Getting Credit 82 152 70
Protecting Minority Investors 106 101 5
Paying Taxes 91 90 1
Trading across Borders 39 39 -
Enforcing Contracts 94 92 2
Resolving Insolvency 121 119 2
Source: Doing Business Report, World Bank
V
APPENDIX VI: Analytical Work and Underpinnings
Component Analytical Work Institution
Strategic
Framework
National Strategic Development Plan (2013-
2017)
GoL
Financial Sector Development Strategy Central Bank of
Lesotho
Industry Development Policy GoL
Micro, Small, and Medium Enterprise Policy;
and Tourism Policy
GoL
Investment Policy GoL
Tourism Policy GoL
Quality and Standards Policy GoL
National Gender Development Action Plan GoL
Implementation of the SADC Industrialisation
Strategy and Roadmap
SADC
Sector
Analytical
Reports
Doing business report World Bank
Others Private Sector Competitiveness and Economic
Diversification Project
World Bank
VI
APPENDX VII: GENERAL MAP OF LESOTHO
Recommended