Docum'ent of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 9085

PROJECT COMPLETION REPORT

LESOTHO

SECOND IDA CREDIT TO THELESOTHO NATIONAL DEVELOPMENT CORPOPATION

(CREDIT 985-LSO)

OCTOBER 22, 1990

Industry and Energy DivisionSouthern Africa DepartmentAfrica Regional Office

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

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CURRENCY EQUIVALENTS

Currency Unit = Maloti (M) (singular is loti)US$1.00 M2.65 (May 1990)Ml.00 US$0.3771

ABBREVIATIONS

ADB - African Development BankBEDCO - Basotho Enterprises Development CorporationCBL - Central Bank of LesothoCDC - Commonwealth Development CorporationCMA - Common Monetary AreaDEG - Deutsche Entwicklungs GesellschaftEIB - European Investment BankGDP - Gross Domestic ProductGOL - Government of LesothoIDA - International Development AssociationIFC - International Finance CorporationLBFC - Lesotho Building Finance CorporationLNDC - Lesotho National Development CorporationPCR - Project Completion ReportPFP - Policy Framework PaperRMA - Rand Monetary AreaRSA - Republic of South AfricaSACU - South African Customs UnionSAF - Structural Adjustment FacilitySME - Small and Medium-scale EnterpriseSSE - Small-scale Enterprise

FISCAL YEAR OF BORROWER AND OF LNDC

April 1 to March 31

FOR OMCIAL USE ONLYTHE WORLD SANK

Washington. D.C. 20433U.S.A.

Oie of ODiwcem.et"wwuOpratuww Evvak alm

October 22, 1990

MEMORANDU TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Lesotho - SecondIDA Credit to the Lesotho National DevelopmentCorDoration (Credit 985-LSO)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on Lesotho - Second IDA Credit to the Lesotho NationalDevelopment Corporation (Credit 985-LSO)n prepared by the Africa RegionalOffice. No audit of this project has been made by the Operations EvaluationDepartment at this time.

Attachment

This document has a restr*ted distribution and may be used by recipients only in the perfionrnceor their official duties. Its contents may not otherwise be disclsed without World Dank authoriation.

FOR OFFICIAL USE ONLY

PROJECT COMPLETION REPORT

LESOTHO

SECOND IDA CREDIT TO THE LESOTHO NATIONAL DEVELOPMENT CORPORATION(CREDIT 985-LSO)

TABLE OF CONTENTS

Page No.

PREFACE ........... ................................. iEVALUATION SUMMARY ......................................

PART Is PROJECT REVIEW FROM THE BANK'S PERSPECTIVE ........... 1

A. Project Identity . ....................................... 1B. Project Background ............................... ...... 1C. Project Objectives and Design ................ ........... 2

a) Objectives and Components ................... . .. ... 2b) Project Concept and Design ............. # ............ 3

D. Project Implementation ....... ........................... 3a) LNDC Financial Performance so . .................. .... 3b) Organizational and Institutional Performance ........ 6c) Project Implementation Performance ................. . 8d) Audits and Reports * ............................... 9

E. Results and Principal Issues Affecting Results .......... 9a) LNDC's Impact on the Sector ................ . ....... 9b) Impact of the Credit Line Component ................. 9c) Staff Development and Training Grant Components ..*.. 10

P. Bank Performance and Lessons Learned .................... 11C. Sustainability .......................................... 13H. Bank Relationship with Borrower .................... . . .... 13I. Concluding Remarks .... ................... #of ............ 14

PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ...... 15

I* INTRODUCTION . .......................................... 15The Corporation .. .............................. .... 15Capital and Sources of Finance .. # ................ t 16The LNDC Board of Directors .................. * .... 17LNDC Project Financing Guidelines ................... 17Macro Economic Setting over Credit Line Period ..s.... 18Trends in Economic Performance During Periodof Credit LSO ................ ..... .... .. .... 21

The Industrial Sector ., .... . ............... . 21The Financial Sector ....... *..O . ........... 25Review of IDA's Assistance to LNDC ............. * .... 28

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed withouit World Bank authorization.

TABLE OF CONTENTS (cont'd.)

Pato llo.

II. PROJECT IDENTIFICATION. PREPARATION AND APPRAISAL ..... 30

III. INPLEMENTATION UTILISATION OF BANK CREDIT ............. 32General Overview ................................ 32Performance of Subprojects ................... O 34Implementation Schedule . ................... 45

IV. OPERATING PERFORMANCE OVER THE PROJECT PERIOD ......... 47

V. FINANCIAL PERFORMANCE ... .............................. 49

VI. INSTITUTIONAL PERFORMANCE AND DEVELOPMENT ............. 54

VII. BANK PERFORMANCE ...................... .......... *. .0. 56

VIII. CONCLUSIONS ......... ***** ****................*........ s ...*.. 57

PART III: STATISTICAL INFORMATION ................. e........6... 59

1. Related Bank Credits ................................ 592. Project Timetable ......... ........ s ............ ..... . 593. Credit Disbursements ............... 0.........*....... 594. Status of Covenants . .................................. 605. Use of Bank Resources ........ ..................... 62

AUNEXES

1: LNDC's New Organization Chart (1987) .................. 632: Basic Data on the Project Lending Terms ..... .......... 643: Actual Financial Performance and Status as

Compared with Appraisal Projections:I. Income Statement . .............. O......... 65II. Balance Sheet ....... .. ...................... 66III. Operations ....................... ** ....... 68

4: List of Subprojects Financed Under Credit 985-LSOand List of LNDC Staff Trained ....... ............. 70

5: Summary of Subprojects Financed Under the Credit ...... 736: LNDC's Statement of Policies ....................... ... 83

PROJECT COMPLETION REPORT

LESOTHO

SECOND IDA CREDIT TO THE LESOTHO NATIONAL DEVELOPMENT CORPORATION(CREDIT 985-LSO)

PREFACE

This is the Project Completion Report (PCR) for the Second IDACredit to the Lesotho National Development Corporation, for which Credit985-LSO in the amount of US$4.0 million was approved on February 26, 1980.The loan was closed on June 30, 1987, three years behind schedule. US$0.54million remained undisbursed at the Closing Date and was cancelled.

The PCR was jointly prepared by the Industry and Energy Division ofthe Southern Africa Department (Parts I and III), and the Borrower (Part II).

Preparation of this PCR was started during the Bank's final super-vision mission of the project in July 1988, and is based inter alia, on thestaff appraisal report; the loan, guarantee and project agreements; super-vision reports; correspondence between the Bank and the borrower; andinternal bank memoranda.

The draft PCR was sent to the Borrower for comments, but none werereceived.

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PROJECT COMPLETION REPORT

LESOTII

SECOND IDA CREDIT TO THE LESOTHO RATIONAL DEVELOPHNT CORPORATION(CREDIT 985-LSO)

EVALUATION SUIIARY

Background (PCR paras. 1-3)

Credit 985-LSO was the second IDA project to LNDC, which is theGovernment's chief industrial development institution. As such LNDC was seenas the principal actor in Lesotho's industrial development. Its assistanceto the sector was conceived in terms the carrying out of investment promotionactivities including the development of factory shells, the provision of termlending on concessional terms, and equity investments of priority projects.

Objectives (PCR paras.4-6)

Against this background, the project had two principal objectives:a) to assist LNDC in further strengthening itself as an institution withleadership -apability in industrial, tourism and commercial development inLesotho; and b) to expand the industrial sector (with an explicit employmentgeneration goal) through the availability of f4nancial resources for lendingand investment. The project sought to achieve these objectives with threecomponents: a) a US$3.7 million line of credit to LUDC to cover part of itsresource needs for investments in medium and large scale enterprises; b) aUS$150,000 staff training component to finance training of LNDC staff inproject evaluation, project management, accountancy end financial management;and c) US$150,000 in training funds to finance part of the training costs ofskilled and semi-skilled technicians and workers employed by new enterprisesestablishing in Lesotho.

Other objectives related to LNDC's corporate strategy as follows:a) to aggressively promote Lesotho as an investment area. Specific areas tobe pushed were to be food processing, textiles and clothing, leather andfootwear, engineering and building materials; b) to continue efforts toimprove the performance of the portfolio of subsidiary end associated com-panies, including divestiture of selected companies; a) to diversify thecorporation's sources of long-term resources by seeking additional share-holders and new lenders; and d) intensive staff development.

Implementation Exmerience

Section IV of the PCR discusses the principal differences betweenLNDC's actual and projected financial and institutional performance. Despiteinitial poor financial performance and slow growth of operations, by theClosing Date in 1987 (extended from 1984), LNDC had ewperienced three yearsof profitabilitv and its asset base had grown from M9.0 million at the startof the project to over M43.0 million before project closing. Although pros-pects are for continued and increasing profitability, the low rate of return

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on LNDC's asset base--around 5--is in part indicative of the Corporation'sstill vulnerable financial position (PCR paras. 9-12). Institutionally, LNDChas also shown significant improvements. All aspects of LNDC's supervisionand investment promotion activities had improved, and a conscientious programof staff training, successfully supported under the project, continues. Themost notable remaining weakness is in the area of project prioritization,selection and appraisal (PCR paras. 13-20). The train_ng grant scheme wasjudged by investors as well as Bank supervision missions to have been welladministered and to have been a successful experiment in reducing skills gapsthrough encouraging on-the-job-training (PCR para. 28).

LNDC has been successful in its role to promote investment in thesector. From 1980 to 1986, it assisted the establishment and/or expansion of35 firms, which are still operating, representing 28S of the manufacturingenterprises in Lesotho. In 1986, these firms accounted for approximately 612of total manufacturing GDP and employment. A principal weakness affectingLNDC's sustainability and commercial accountability is its continued heavyreliance on Government sources of funds which account for over 70S of itsnon-equity resource base and 901 of its equity. As noted during projectsupervision, in a financial environment characterized by jurplus liquidity inthe banking system, the potential for LNDC to mobilize domestic resources andutilize them for its operations could be achieved with the design ofappropriate financial instruments (PCR para. 23).

Issues

While the project provided a minor share of LNDC's overallresources, IDA's principal contribution to LNDC's development was the inten-sive technical assistance during supervision which supported institutionalobjectives. The principal issues affecting the project were

a) slow demand for the credit line (PCR paras. 24-27). By theoriginal project Closing Date in June 1984, only 261 of thecredit was disbursed. The project Closing Date was postponedthree times and project implementation lasted for 6.5 yearsinstead of the 3.5 years expected at appraisal. In the end theproject documents were amended to permit 60Z (US$2.2 million) ofthe credit to be used for factory shell construction because ofa lack of demand for credit for other investment purposes.While the reported reasons for this was the recession in theearly 80's and regional instability which reduced investor con-fidence, other factors whose impact were not fully appreciatedat appraisal were:

- that the foreign exchange available under the credit wasnot in demand; it was not a constraint to investment.Capital goods and services needed for LNDC financedprojects originate from the rand monetary area requiringonly local currency. When imports from outside the areaare necessary, the rand is freely convertible through theReserve Bank where importers have virtually unlimitedaccess to foreign exchange; and

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- Lesotho competes for investors with the South Africanhomelands which, in addition to a myriad of other cashincentives, offer investors interest concessions of 15-80%of a market interest rate for loans up to about US$3.0million equivalent. Further, the fixed 11% interest rateoffered on IDA's credit line plus a 1% foreign exchangeguarantee fee vas sometimes above the prevailing marketrates.

b) legal issues which constrained LNDC's resource mobilization andinvestment promotion efforts. The LNDC Act, which establishesLNDC and defines its corporate objectives, discourages privateequity participation in LNDC investments by prohibitingdistribution of dividends. Thus, efforts during the project toattract equity from international investment corporations(intended to strengthen LNDC's commercial accountability anddiversify its resource base), were unsuccessful. An additionalissue is the. effect of the Land Act which constrains foreigninvestors from owning land in Lesotho. Through its control onserviced industrial land, LNDC thereby has a de facto monopolyon deciding whether and under what conditions foreigners caninvest in the country. Investors observe that this leverageresults in slow licensing approval as LUDC negotiates terms forits own potential participation. In the case of naturalresource based investments LNDC demands a controlling 51% equityshare. At issue is whether LNDC's efforts to mobilize foreigncapital might be better served if foreign investors did not seeLUDC as a potential roadblock/obligatory partner. Also specialzoning permitting foreign land ownership in restricted areasmight encourage the use of foreign capital for factory spaceinvestments, thereby freeing Government/LNDC resources for otherdirectly productive uses.

Sustainability (PCR paras. 38 and 39)

Long-run sustainability of LNDC's operations was addressed duringproject supervision by analysis of the potential for an LNDC bond issue as ameans to wean the institution from dependence on external and govermaentsources of funding. The necessity to mobilize its own resources was high-lighted as donor interest in LNDC waned somewhat with the on-set of construc-tion of the high profile Lesotho Highlands Water Project. The principalconcern regarding proceeding with resource mobilization efforts was, first,LNDC's interest in continuing to provide loans at highly subsidized interestrates which could not be achieved if its resources were raised on marketterms. A second factor was the potentially high cost of these funds giventhe extremely attractive tax exempt yields offered on Government TreasuryBills, the competitive instrument with any potential LNDC bond issue. Thecrowding out effect of Treasury Bill pricing would subsequently be corrected,and the issue of LNDC resource mobilization would be taken up in the thirdIDA supported industrial sector project, however, with an emphasis on mobili-zation of equity resources.

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The sustainability of LNDC's operations is generally affected by itsrole as an investment promotion agent and its perceived need to compete forforeign investment dollars by providing subsidized factory shells end loans.LNDC's shopping center and brewery investments, strong cash generator., werefacilitated by the Government and were intended to cross-subsidize the lou.-making activities related to investment promotion. Nonethelese, the follw-on project would address these issues by developing with the Government asustainable investment promotion effort consistent with LNDC'a and the coun-try's financial resournes. The long-run viability of LNDC's lending opera-tions would also be taken up as conditionality in the follow-on project.

Lessons Learned

The principal lessons learned are:

- the need to integrate LNDC's lending activities into an overallfinancial development strateav (PCR paras. 29-31). Specifically,attention should be paid in forthcoming lending operations to:a) developing instruments, such as an LNDC bond issue, wherebydomestic savings could be used to finance LNDC's operationsab) achieving consistency between LNDC's interest policies andthose prevailing in the financial system; c) mobilizing local andforeign private equity sources in an effort to privatize LNDC'soperations. Such an effort, in addition to providing equity forexpansion of operations, would also provide the Corporaision withthe commercial accountability and discipline necessary to ensureits development as a strong institution; and d) reviewing LNDC'scomparative advantage as a lender vis-a-vis that of the bankingsystem.

- the need for further sector knowledge and strateay formulatio(PCR paras. 32-34). Little detailed sector work seems to havebeen undertaken prior to appraisal and during most of the projectimplementation period. Thus the Bank was not in a very strongposition to estimate investment demand or to make policy recom-mendations for accelerating industrial growth. Further study isrecommended and should be appropriately focused on the financialsector, development of an investment promotion strategy andincentives policies which take account of Lesotho's comparativeadvantages, employment generation objectives and developmentobjectives to develop industries with crit.cal forward and back-ward linkages. In the absence of such a strategy, investmentpromotion efforts would lack focus and desirable objectives maygo unmet.

- the aunarent success of the trainint grant scheme (PCR paras. 35and 36) highlighted the value of inplant training and workexperience to develop specific skills. However, if potentialinvestors are to see Lesotho's growing labor force as a readilyavailable asset, increased attention must be paid to manpowerplanning and more fully utilizing Lesotho's training and voca-tional education system.

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- SSE development and BEDCO (PCR para. 37). The Basotho Enter-prises Development Corporation (BEDCO) did not receive supportunder the project. Indeed, for the time being, BEDCO's seriousweaknesses makes it an inadequate lending vehicle for SHE's.However, the development of micro and small and medium scaleenterprises is important in a country like Lesotho, given thesmall market and the tendency for these enterprises to have rela-tively high employment per dollar of capital invested. Futureoperations should make BEDCO the subject of a thorough appraisalwith recommendations for its reorganization and strengthening.Tn the meantime, the SME sector should not be ignored but ratheralternative financing and technical assistance mechanismsexplored in the context of the financial and education system.Further, sector strategy, policy initiatives, and incentiveschemes should take SSE development explicitly into account.

Concluding Remarks (PCR para. 41)

The Government sees IDA's involve4ent with LNDC as positive anduseful. Indeed, in the course of the past two projects, LNDC has made sub-stantial and increasing progress both financially and institutionally. Futureoperations in the sector would focus on defining strategies for industrialand financial development (including strategies for SSE development) and onclarifying LNDC's investment promotion role and its r"ile within the financialsector.

PROJECT COMPLETION REPORT

LESOTJQ

SECOND IDA CREDIT TO THE LESOTHO NATIONAL DEVELOPMENT CORPORATION(CREDIT 985-LSO)

PART I: J'ROJECT REVIEW FROM THE BANK'S PERSPECTIVE

A. Proiect Identity

Project Name: Second IDA Credit for the LesothoNational Development Bank

Credit No: 985-LSOCredit Amounts US$4.0 millionTotal Project Costat Appraisal: US$8.6 millionEstimated Project Cost:, US$7,400,000RVP Unit: AF6 -- Industry and Energy Operations

DivisionCountry: LesothoSector: IndustrySubsector: Development Finance Company

B. Proiect Backrrou"d

1. The Lesotho National Development Corporation (LNDC) is a Governmentcorporation set up in 1967 to promote and finance modern non-agriculturalprojects in Lesotho. In its early years, the Corporation enjoyed goodmanagemdnt which guidid the establishment of good internal operational proce-dures and policies. However, in 1973 when its first Managing Directordeparted, a period of uncertain management offset much of the progress whichhad been made in the early years. Good staff could not be recruited andretained; the organizational structure became ineffective and internal proce-dures deteriorated; there was inadequate follow-up on the investments whichhad been made, leading to a rapid deterioration in th;3ir performance; and thevery few new project investments were not adequately appraised--a fact whichlater contributed to LNDC's need for bad loan write-offs and divestiture ofpoorly performing investments.

2. IDA established contact with LNDC in 1973, provided technical assis-tance and advice to assist it to overcome its organizational difficulties,but did not appraise LNDC for financial assistance until 1976. The Govern.-ment requested assistance for both LNDC and its subsidia.y, the Basotho

1/ Actual project costs are estimated due to incomplete information onsubprojects provided by LNDC.

Enterprises Development Corporation (BEDCO). The first credit (US$2.2 mil-lion to LNDC and US$0.3 million to BEDCO) aimed at both institution buildingof the two corporations and at providing financial support to Lesotho'sindustrialization and employment generation efforts. By appraisal in 1976,the deterioration which began in 1973 had reached a peak and the institutionbuilding efforts under that project focussed on improving all aspects of thecompany's operations. The PCR2 for the fi!st operation indicatesachievements including strengthening and improving control of subsidiaries,significant improvements in financial control, recruitment and training ofBasotho staff and localization of some managerial positions, implementationof a quite successful divestiture program and introduction of an activeinvestment promotion program. Numerous weaknesses remained, however, in theareas of procedures (appraisal and supervision, especially of the loan port-folio, and management information systems), staffing (continued heavyreliance on expatriate staff), portfolio quality and financial performance,which remained consistently poor with losses in all years. The PCR notedprogress in BEDCO which succeeded in establishing fairly sound systems andprocedures and improving supervision and financial controls and launching aprogram for training client entrepreneurs. On the other hand, it was notedthat BEDCO's portfolio, including the thirty-one projects financed under theIDA credit, was of poor quality and the Corporation's overall financial per-formance was much poorer than anticipated.

3. In April/May 1979, an appraisal mission visited Lesotho to appraisea second IDF project. The mission reviewed the progress of both LNDC andBEDCO, their prospects, and resource requirements. Despite BEDCO's continuedinstitutional weaknesses, it found that BEDCO's existing resources andexpected new commitments from other donors would be sufficient to meet itsprojected needs through 1982. The second project, therefore, dealt only withLNDC for which an IDA Credit of US$4.0 million to the Government of Lesothowas to be passed on to LNDC. Of this, US$3.7 million was for financin&LNDC's normal operations and $0.3 million would be used for training LNDCstaff and workers in new enterprises establishing in Lesotho.

C. Project Objectives and DesiRn

a) Objectives and Components

4. The project had two principal objectives: 1) to assist LNDC infurtner strengthening itself as an institution with leadership capability inindustrial, tourism and commercial development in Lesotho; and 2) to expandthe industrial sector (with an explicit employment generation goal) throughthe availability of financial resources for lending and investment. Theproject sought to achieve these objectives with three components: a) aUS$3.7 million line of credit to LNDC to cover part of its resource needs forinvestments in medium and large scale enterprises; b) a US$150,000 trainir,gfunds component to finance training in project evaluation, project manage-ment, accountancy and financial management of LNDC's Basotho staff; and

2/ Lesotho National Development Corporation (LNDC) and Basotho EnterprisesDevelopment Corporation (BEDCO) Project Completion Report (Credit 702-LSO)dated March 14, 1984, Report No. 4987.

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e) US$150,000 in training funde to finance part of the training costs ofskilled and semi-skilled technicians and workers employed by new enterprisesestabliehing in Lesotho.

5. Other project objectives related to LNDC's corporate strategy asfollows: a) to aggressively promote Lesotho as an investment area. Duringthis period Europe and America were to be the major focus, and specificactivities to be pushed were to be food processing, textiles and clothing,leather and footwear, engineering and building materials; b) to continueefforts to improve the performance of the portfolio of subsidiary and associ-ated companies, including divestiture of selected companies; c) to diversifythe corporation's sources of long-term resources by seeking additional share-holders and new lenders; and d) intensive staff development.

b) Proiect Concevt and Desian

6. The project concept was conditioned by the early precedents of BankGroup interventions in the financial and industrial sectors which was focusedon industrial lending through Development Finance Companies. LNDC was to betho chief mechanism to promote industrial development: a) by providing termcredit and thereby fill a void in the financial sector; and b) by moreadequately serving new industrial enterprise development which was felt to bethvtrted by an overly conservative, collateral oriented banking sector.LUDC's institutional and financial development were supported as a separateadministrative mechanism to encourage investment apart from considerations ofgeneral financial and industrial sector environment and policies. The indus-trial and financial sector environment in which LNDC was to operate was notstudied prior to or during appraisal. Some of the peculiaities of thatenvironment, which were not fully appreciated at the time, influenced projectimplementation.

D. Proiect ImDlementation

a) LNDC Financial Performance

7. Tables in Annex 3 compare projected with actual income, balancesheet and operations during the project period, FY1980 through FY1984.

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Operations and Portfolio Structure

Balance Sheet(in '000 Maloti)

Proiectio s Actual1980 1984 1981 1984

Assets

Net Current Assets 50 50 532 (158)Loans 2881 8779 443 1519Equity 1791 4271 3308 6141Factory Buildings 5630 12185 8949 11586Provisions (1493) (2020) (317) (2452)Other 185 175 77 NATotal Assets 9044 23440 12836 16636

Liabilities and Eauity

Long-term Liabilities 2650 12147 2989 6089Share Capital 4800 8400 4000 4000Capital Reserves 1416 1416 3445 2733Grants 140 140 2713 6266Accumulated Funds 38 1337 (317) (2452)Total Liabs. and Equity 9044 23440 12836 16636

8. The principal differences between projected and actual operationsand portfolio development are as follows:

-- The level and growth of lending was substantially over-estimated at appraisal. This factor principally accountedfor the overestimation of growth in LNDC's balance sheet.

-- the growth of factory shells in LNDC's portfolio was strongas projected at appraisal.

-- government grants as a source of funds for LNDC's operationswas substantially underestimated. Growth in share capitalwas projected to more than double but in fact did not changeduring the FY80-84 period.

-- Long-term loans projected to be a substantial source offunding for LNDC was almost directly substituted by govern-ment grants. Government financial support for the Corpora-tion contributed to LNDC's maintaining strong liquidity andan unusually low debt:equity ratio of .9:1 which is sub-stantially below the 3:1 limit agreed with IDA.

-- levels of commitments and disbursements fell far short ofexpectations.

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9. at project closing in 1987, LNDC'e portfolio amounted to M24.3 mil-lion, approximately the magnitude projected at appraisal for 1984, theexpected year of project closing. Despite slow growth in lending, by theactual end of the project LNDC's portfolio was very much consistent with whatwas envisioned at appraisal. However, since this was three years after theprojected project Closing Date, this appears to be more a coincidence than asa result of the project planning.

Proj. 1984 Actual 1984 Actual 1987

Loans 34Z 8.0% 321Equity 18% 32.01 18%Factory Buildings 48Z 60.0% 50%

ProfitabilitZ

LNDC Prolected vs. Actual Net ProfitsMillions3 -

0 -................

19} t80 199B1 1982 1983 1984 1965 1968 1997 188Year

Ada Not Pof=s) Prooed Not PrtOks)

10. Expenses grew faster than projected, leading to an overestimation ofLNDC's operating profitability. While administrative expenses were expectedto decline by the end of the project to about 5% of average assets withincreased levels of operation, the ratio of administrative expenses withrespect to average assets remained between 6% and 7S until as late as 1986.In addition, performance on LNDC's equity and loan portfolio was quite poorduring the period and provisions, which reached a peak of 53Z of the value ofthe equity and loan portfolios in 1983, exceeded estimated provisions. As aresult of these factors LNDC operated at a loss despite appraisal estimatesof early profitability. In fact LNDC did not turn a profit after provisionsuntil 1985, but has been profitable ever since.

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11. Net profits since 1985 have been as follows:

1985 1986 1987 1988(---'000 maloti---)

Net Profitability 41 1478 1004 2295

This represents a return on average assets of .6%, .3%, and 4.6%, respec-tively in 1986, 1987 and 1988. Since 1984, LNDC's operations and grossincome have grown at a substantially faster pace than earlier, largely due tothe exceptional profitability of the brewery and of the shopping centerinvestments. Despite recent improvements iTn LNDC's profitability it is stillon average less than appraisal projections which indicated that net profitwould represent about a 2% p.a. return on average assets. However, profit-ability is steadily improving.

12. After conclusion of a successful divestiture program, LNDC's port-folio of subsidiary and associated companies is increasingly profitable andin CY1987 accounted for 50% of LNDC's total annual income. Dividends, how-ever, are highly concentrated amongst a few firms, with the breweryaccounting for about 70% of total dividends. Rental income from factoryshell investments accounted for 33% of total annual income and represents thelowest risk aspect of the Corporation's operations in terms of arrears anddefault--about 1.5% of the value of the rental portfolio as compared to 12%of the loan portfolio. Lending operations, on the other hand, have been onlymarginally profitable. With average loan income representing about 11-12% ofthe average loan portfolio in 1985 and 1986, and financial expenses repre-senting about 6% percent of average liabilities, the available spread onlending operations is only about 5 to 6%. Administrative costs are above 6%and after provisions overall lending costs exceed the available spread.Prospects are for lending to remain a marginal aspect of LNDC's operationsunless costs can be reduced or the spread increased by raising the rate ofinterest.

b) Organizational and Institutional Performance

13. During the early years of the project, LNDC experienced rapidchanges in management. However some stability in management is beginning tobe realized. The organization is currently served by a competent ManagingDirector who is anxious to lead substantial development in the sector.Staffing has increased considerably (from a total of 37 professionals to 48),due in part to an average increase in the salary structure of 10% in 1985.The Finance Department however remained understaffed and LNDC's financialmanagement and accounting functions remain weak and the management informa-tion system had just begun to be established near the close of the project.Trainint and localization efforts, directly supported by the training of 13staff under the project, are judged to have been effective. The number ofexpatriate managers and advisers has declined significantly, from 8 at thetime of appraisal to 4 by the close of the credit (only 1 expatriate managerrema4ned in the Finance Department). Even the one expatriate in charge offinance was slated to be replaced as soon as a Basotho staff's ac -untancytraining was completed.

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14. Privatization of ownership was one of the mechanisms by which theobjective to diversify LNDC's sources of long-term resources was to beachieved. To this end Government agreed in principal to reduce its 1002share of ownership in LNDC to permit participation by DEG on the Board with aDM1 million equity contribution. The required amendments of the LNDC Actwere not made during the project. While a shareholder agreement was signedbetween DEG and LNDC, the equity participation remains pending. LNDC remainsopen to further participation by development corporations on its board andinvitations to FMO and IFC were made. The operative clause in the LNDC Actwhich must be amended to make such participation worthwhile to the partici-pating institution is the one requiring that no part of the income, profitsor property of the Corporation may be distributed to shareholders, i.e. nodividends can be paid. The objective of this increased level of privateownership is to introduce a more commercial and business-like management ofLNDC operations as well as to increase the company's equity as a basis forexpanded operations. However, sensitivities which have not been fullyrevealed remain with respect to the privatization issue and have thwartedprogress in this area.

15. In general, LNDC has not yet successfully diversified i a resourcebase to include non-governmental sources of capital. The Government ofLesotho continues to be the principal source of funds for LNDC's operations.In 1988, the Government provided M14.6 million of the total resources ofM20.5 million. Other non-IDA resources included the M5.5 million equivalentfrom the European Investment Bank, and three commercial loans totalling MO.4million from Lesotho Bank, The Commonwealth Development Corporation, EDESAInternational Finance Company and SIFIDA Investment Company.

16. Because it is not empowered to take financial deposits directly fromthe public, LNDC's role in the mobilization of domestic resources fordevelopment purposes is mainly that of a catalyst attracting equity and loanfinancing from local investors and institutions for projects it assists. Inthis respect, its contribution has so far been negligible. To illustrate,equity investments at end CY1987 were about M7.0 million; virtually 100X wasinvested by LNDC itself. The major factor for this performance is the lackof an equity investment tradition among savers in Lesotho. Savings have beenmainly in bank deposits. Related factors have been the lack of an institu-tiona' mechanism to facilitate such investment, combined with LNDC's lack ofa track record of profitability. As LNDC grows more profitable, the possi-bilities of selling off some equity to local investors can be envisaged andactively pursued. With respect to its role in mobilizing foreign investmentresources, its contribution is difficult to estimate. Ideally the LNDCinvestment as a share of total invested resources would be small to indicatesuccessful resource mobilization activity. However, indications are thatLNDC's financial contributions combined with tax incentives may substantiallyreduce the net level of mobilized resources.

17. In the past LNDC's mobilization of resources from the banking sestemhas been in the form of guaranteeing loans from the three commercial banksfor both short-term and long-term financing needs of companies. More, how-ever, needs to be done especially given the continued excess liquidity in thebanking system, and the availability of surplus lendable funds. A mechanismsuch as an LNDC bond issue with a Government guarantee and the backing of the

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Monetary Authority to ensure liquidity was discuss.d at appraisal and studiedduring project supervision. Such a measure would be ideal for financingLNDC's factory building operations which carry less risks and offer highyields and good cellateral.

18. With the objective to ensure LNDC's evolution into a self-sustaininginstitution within Lesotho's financial sector, progress in the area ofresource mobilization as discussed above are expected under the IDA credit tothe industrial sector which is currently under preparation.

19. Policies (detailed in Annex 6) for the most part were required byIDA to be strictly adhered to. An exception was LNDC's decision to invest inthe brewery project which caused it to exceed the maximum investment as aproportion of net worth covenant in its policy statement. This investment,however, has been among LNDC's best in terms of profitability and cash flow.Interest rates range from 11% (EIB line of credit) to 13% (for the first IDAcredit including 1% fee to cover foreign exchange risk), and 12% (for thesecond IDA credit including the fee). These fixed rates at the time ofproject closing were negative in real terms (inflation was estimated at about18-20%) and were sometimes lower and sometimes higher than tho local commer-cial bank overdraft rates--South African rates varied between 12.5 and 25%and rates in Lesotho varied between 11% and 20%.

20. Significant weaknesses in entrepreneur selection and appraisalprocedures throughout implementation caused a) delays in approvals as IDAquestioned appraisal assumptions and b) rejection of certain projects becauseof doubtful economic justification. However, improvements in appraisalprocedures and reports were recorded toward the end of the project. Pre-Investment and Investment Committee reviews improved the process of projectselection. Given the importance of appraisal to ensure performance of LNDC'sportfolio, the following improvements are needed: a) explicit assessment ofthe quality of enterprise management and staff; b) explicit assessment ofrelationships between sponsors, parent company or subsidiary as part of theevaluation of the apparent risks and strengths of the company; andc) explicit discussion of assumptions underlying financial projections.While supervision of loan investments was unsystematic during most of theimplementation period, under new management efforts were made to more sys-tematically follow up on the loan portfolio with more frequent company visitsespecially for loans which suffered from substantial arrears. Supervision ofequity investments had throughout the project period been given priority andwas adequate.

c) Project Imolementation Performance

21. The proceeds of credit 9G5-LSO were used to finance 17 projectsunder project category A (investment projects including loans and buildings),13 under category B (staff training), and 14 worker training grants asindicated in Annex 4. At appraisal, there was no projection as to theexpected sectoral breakdown of use of the credit or of other LNDC invest-ments. About 60% of approved subprojects were in the textile and clothingsubsector, including factory shell construction tenanted by that type ofindustry. The remainder was for wholesale and retail operations.

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d) Audits and Reports

22. Project reporting was consistently tardy. However, the Corporationproduced a quite satisfactory and timely Project Completion Report(attached). Due to the requirement that independently prepared audits bereviewed by the Auditor General prior to being sent to IDA, audits were con-sistently tardy and the format of accounts were, during the first years ofthe project, found to be wanting. This problem, however, cleared up towardthe end of the project when the draft audit was sent directly to IDA, priorto the Auditor General's review.

E. Results and Principal Issues Affecting Results

a) LNDC's Impact on the Sector

23. The impact of the project is ultimately judged by LNDC's impact onindustrial investment and/or employment generation which has been substan-tial. From 1980 through 1986, it disbursed M22.3 million on developmentprojects or an average of 43.2 million per year using primarily donor assis-tance. It assisted the establishment and/or expansion of 35 firms, which arestill operating, representing 282 of the manufacturing enterprises inLesotho. In 1986, these firms accounted for approximately 61% of total manu-facturing GDP and employment. During this period the manufacturing sectorgrew relatively faster than GDP, representing about 13 percent of GDP in 1986compared with 6 percent in 1975. Employment growth, on the other hand wasfar less impressive with an average per annum rate of growth of about 5Z inthe same period. While it is difficult to calculate LNDC's direct contribu-tion to these trends, IDA has commenced assistance to the Government to studythe dynamics of manufacturing sector growth and its apparently capital inten-sive character. This analysis will contribute to the design of an appropri-ate industrial development strategy and policy framework and clarify LNDC'sinvestment promotion role within that framework.

b) Impact of the Credit Line Component

24. The IDA credit contribution to sector performance and LNDC's con-tribution to it must be judged in part by observing that the total (beforecancellations) of IDA I and IDA II credits were US$5.75 million, about 30Z ofLNDC's total 1987 portfolio asset base equivalent to about US$19.0 million.Further disbursements under IDA II were slower than expected. As a resultthe project Closing Date was postponed three times and project implementationlasted for 6.5 years instead of the 3.5 years expected at appraisal. In theend, the project documents were amended to permit about 60% of the credit tobe used to finance the construction of factory shells. The issues which mayhave led to this are examined in more detail below.

25. Foreign Exchange Available uncer the Credit not in Demand. Apartfrom the IDA and EIB credits, all of LNDC's resources are local resources.This small proportion of foreign exchange has, however, not been a constrainton LNDC's operations because most of the capital goods and services neededfor LNDC financed projects originate from the rand monetary area. Where theyhave to be imported from outside the area, the rand as a convertible currencyhas been sufficient to meet those needs also.

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26. Competitiveness of Interest Rate and Other Charges. In accordancewith the first IDA credit LNDC lent at 12% p.a. on all loans, and in additioncharged a required 1% fee on behalf of Government for the latter's assumptionof the foreign exchange risk. Under the second credit, the interest rate wasreduced to 11% plus the additional 1% fee to be competitive with generalinterest rates in the country and in South Africa. Interest rates inLesotho, however, must be compared to subsidized interest rates for termloans in the South African Homelands, an alternative investment site forinvestors who might also be attracted to Lesotho. Interest concessions of15-80% of a market-related interest rate is payable on a quarterly basis as ataxable cash grant to approved industries for a period of ten years andcovers 100% of the value of land and buildings and 50% of other assets forprojects with a total capital investment not exceeding R7 million (aboutUS$3.0 million equivalent). In 1982, this subsidy, in addition to a myriadof other concessions, was introduced in the homelands as part of SouthAfrica's Regional Development Strategy. While data on the level and growthof investment in the homelands per se is not available to the writer of thisreport, it is likely that the broader market, superior infrastructure as wellas more attractive incentives policy offered by the South African governmentwere more successful in attracting new investors than LNDC. Supervisionreports attribute slow disbursements primarily to the recession of 1982 andto the general deterioration of the investment environment caused by regionalinstability. The importance of these temporal factors, however, should notovershadow the structural issues affecting LNDC's investment promotion role.

27. The GOL has become increasingly aware of the difficulty of invest-ment promotion given the competitiveness of the Southern Africa environment.In 1986, an extension of Lesotho's tax holiday program from 6 to 10 years wasproposed. At IDA's advice, this extension has not been implemented until itscost in terms of foregone revenue and its likely impact on investment can beevaluated. With government and IFC collaboration and in the context ofpreparation for a third project to LNDC, IDA is undertaking a review ofLesotho's incentives policies, investment environment and investment promo-tion efforts. The objective of this review will be the design of a cost-effective system which takes account of the Lesotho's natural comparativeadvantages, special access to European markets and investment opportunitiespresented by the Lesotho Highlands Water Project.

c) Staff Development and Trainina Grant Components

28. Staff development and training progressed well under the project andkey management and staff positions are for the most part now occupied byBasotho. With respect to the training grant scheme, no specific employmenttargets were set and during supervision no specific information was gatheredas to the amount of incremental employment actually created with each sub-project. It is therefore difficult at this point to reconstruct the actualcost per job created or the aggregate employment generation as a directresult of the project. The training grant program was judged to have beenwell managed and to have been a useful measure to encourage the hiring andtraining of Basotho staff.

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F. Bank Performance and Lessons Learned

29. Project Concept. Although the particular features of the financialsystem in Lesotho were discussed at appraisal, the project design chosen wasconsistent with Bank traditional lending in the sector and did not fullyreflect available knowledge about the peculiarities of Lesotho's financialsector. In a financial environment characterized by excess bank liquidityand the absence of a foreign exchange constraint, a project designed around aline of credit ignored the high potential for linking LNDC's resource basewith that of the formal financial system. The line of credit approach lentthrough a specialized institution tended to reinforce market segmentationand did not contribute to the development of instruments and modalitieswhereby short-term domestic savings could be used more efficiently for long-term investment in Lesotho. Even today LNDC remains dependent on officialand foreign sources of capital.

30. An additional aspect of the segmentation issue is that the IDA lineof credit carried a fixed rate of interest of 12% which was sometimes belowand sometimes above rates prevailing in the financial system. Moreover, LNDCitself was able to offer other credit lines at lower interest rates.

31. These lessons have been incorporated into Bank thinking bothgenerally and with respect to Lesotho. Preparation for the third credit toLNDC will actively pursue a) the float of an LNDC bond issue to mobilizeresources from the domestic banking system, b) the possibility of privatizingLNDC and its portfolio, and c) achieving consistency between LNDC's interestrate policies and those applicable in the financial sector.

32. Sector Knowledge and Stratefxy. The weak demand for the credit linewas a function of the relatively low level of demand for industrial invest-ment financing in general as well as the availability of alternative sourcesof funds. While the appraisal report mentions shortcomings in the incentiveframework and problems deriving from the Land Act, little detailed sectorwork seems to have been undertaken prior to appraisal and during most of theproject implementation period. Thus the Bank was not in a very strong posi-tion to estimate investment demand or to make policy recommendations foraccelerating industrial growth.

33. Of particular concern is evidence of problems with respect to thedemand-side for inves.tment. Symptomatic of this concern are: a) that LNDCcontinues to be a principal equity investor in the sector and b) the factthat lack of serviced land and the inability of foreign investors to own landhas led to a heavy weighing of factory shell construction in LNDC's port-folio. An additional related problem is that LNDC's access to serviced landcombined with its investment promotion mandate has evolved to the point whereLNDC considers itself to be the arbiter of which investors can establish inLesotho. The leverage implied by its mandated and implicit monopoly has ledto the complaint that LNDC can be a bottleneck to potential investors as theCorporation negotiates its desired level of equity participation in theinterested enterprise. For resource based industries, the demand is 51%(controlling) ownership by LNDC or no investment. Selling controllinginterest can be a serious problem for potential investors.

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34. The lesson learned is that detailed sector knowledge and thedevelopment of a comprehensive strategy for investment promotion is necessaryin order to design appropriate project interventions to achieve industrialdevelopment. In this respect, knowledge is needed of a) financial sectorfunctioning and constraints, b) the impact of the full package of incentivesin the investment environment, and c) demand-side constraints on investment.In the process of defining a strategy for financial sector development andthe mechanisms for encouraging the private sector's role in industrialdevelopment, LNDC's role as a financial institution and in investment promo-tion may change. Questions which will be addressed in the course of sectorwork to prepare for the third LNDC project are: Is LNDC the most efficientmechanism to channel loan resources? To what extent should LNDC be aninvestor in the sector and to what extent should it play a catalyst role inmobilizing private local and foreign resources?

35. The Success of the Trainin2 Grant Scheme. The training grant schemewas intended to counterbalance the bias in favor of capital intensive indus-tries and technologies and the absence of other policies to support incomedistribution and employment goals.

36. Often an objective of special incentives is to compensate for policyor environmental factors which reduce an investing company's expected returnand thereby discourage investment. As a special incentive the training grantscheme was intended in part to compensate for a scarce pool of trained man-power, an inadequate training and vocational education system and the absenceof a manpower planning process which would operate to systematically meetpresent and future manpower needs. The important lessons learned from thesuccess of the training grant component were that:

a) the best training for skilled technical manpower is notnecessarily at multi-purpose, institutional training facili-ties. Rather intensive in-plant training and work experiencewithin an enterprise making a similar range of products to theone to be established in Lesotho (e.g. in a parent company ofthe investor or subsidiary) was found to be an effectivealternative. In fact, enough flexibility was shown under theproject to permit payment for travel and subsistence for parentcompany staff to come to Lesotho to do local training; and

b) if potential investors are to see Lesotho's growing labor forceas a readily available asset, even a successfully administeredincentive is not a permanent substitute for systematic manpowerplanning and an adequate training and vocational educationsystem. Lesotho now has a good, though underutilized, trainingand vocational education program which should be considered inthe context of future industrial projects.

37. SSE Develolment and BEDCO. The development of micro and small andmedium scale enterprises is important in a country like Lesotho, given thesmall market and the tendency for these enterprises to have relatively highemployment per dollar of capital invested. It is not clear that theappraisal mission's decision not to continue assistance to BEDCO should havealso ignored the need to address the capital or other needs of the micro and

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SME sector which, given BEDCO's weaknesses, were going unattended. In thecontext of Bank assistance to the sector, BEDCO should be subject of athorough appraisal with recommendations for its reorganization andstrengthening. In the meantime, the SME sector should not be ignored butrather alternative financing and technical assistance mechanisms explored inthe context of the financial and education system. Further, sector strategy,policy initiatives and incentive schemes should take SSE developmentexplicitly into account.

a. Sustainability

38. Long-run sustainability of LNDC's operations was addressed duringproject supervision by analysis of the potential for an LNDC bond issue as ameans to wean the institution from dependence on external and governmentsources of funding. The necessity to mobilize its own resources was high-lighted as donor interest in LNDC waned somewhat with the on-set of construc-tion of the high profile Lesotho Highlands Water Project. The principalconcern regarding proceeding with resource mobilization efforts was, first,LNDC's interest in continuing to provide loans at highly subsidized interestrates which could not be achieved if its resources were raised on marketterms. A second factor was the potentially high cost of these funds giventhe extremely attractive tax exempt yields offered on Government TreasuryBills, the competitive instrument with any potential LNDC bond issue. Thecrowding out effect of Treasury Bill pricing would subsequently be corrected,and the issue of LNDC resource mobilization would be taken up in the thirdIDA supported industrial sector project, however, with an emphasis on mobili-zation of equity resources.

39. The sustainability of LNDC's operations is generally affected by itsrole as an investment promotion agent and its perceived need to compete forforeign investment dollars by providing subsidized factory shells and loans.LNDC's shopping center and brewery investments, strong cash generators, werefacilitated by the Government and were intended to cross-subsidize the loss-making activities related to investment promotion. Nonetheless, the follow-on project would address these issues by developing with the Government asustainable investment promotion effort consistent with LNDC's and the coun-try's financial resources. The long-run viability of LNDC's lending opera-tions would also be taken up as conditionality in the follow-on project.

H. Bank Relationshi, with Borrower

40. Bank project activity in Lesotho has become increasingly oriented toaddressing key sectoral constraints and implementing key reforms. Lessonslearned during the course of implementation of the two LNDC projects havecontributed to Bank and Government collaboration on studies on the incentivesframework, the financial sector and SSE development, in preparation for theBank's third project to the sector. Specific reforms supported by the PFP andSAP frameworks are: a) the introduction of new financial instruments to helpLNDC mobilize domestic resources and diversify its own operational resources;b) reorientation of the incentives framework to more directly promote manu-facturing, import substituting assembly-type operations, and exports to

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lessen reliance on migrant romittances; end c) reinforeuont of LJC'o andBEDCO's supporting role in the sector, lncluding estabUlebnt of an Invest-ment Promotion Unit.

I. Conwludi4R RSMark-

.41. Efforts at institutional strengthening progressed well under theproject, but LNDC remains a fledgling organization both financially and *a adevelopment institution. Further, its role within the financlal sector andthe industrial sector remains unclear in terms of its future efforts andobjectives. Future operations will benefit from sector work aend strategywork which will contribute to a fuller knowledge of financl3l and industrialsector dynamics, to a clearer definition of *trate-y and policy goals to beachieved, and to a sharp definition of LNDC's corporate objectives within thebroader context of sector strategy and policy.

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PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE

PROJECT LSO 985

1. IUTRODcTIoU

1.1 The Corporation.

Lesotho National Development Corporation (LNDC) is a paraetatal

organisation established by the Government of Lesotho (GOL) in 1967.

The aims and objectives of the Corporation as detailed in the LNDC Act

of 1967, are primarily to promote the development of industry and

commerce in Lesotho. The Corporation interprets its role as that of a

catalyst in the stimulation of investment in beth manufacturing and

commerce by both foreign and indigeneous entrepreneurs. The

corporation's customers are high net worth investors to whom it offers a

broad range of back-stopping services and financial assistance including

the provision of serviced industrial sites, factory buildings and. long-

term loans and guarantees. In this regard, the LNDC acts as a

Development Finance Institution. The Corporation also participates in

equity in those projects considered of strategic importance to the.

national economy.

The Corporation falls under the auspicies of the Ministry of Trade and

Industry, which is responsible for providing overall policy direction on

all-aspects of industrial development. In August 1988, LNDC employed 98

people sad was organised into three Directorates Viz: planning

Programing and Operations, Finance and Audit, Administrative and

Technical Support Services. The Organization structure in result of a

recent reorganization.

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Capital & Sourcea of Fiusae

Until 1985, the GOL was the sole shareholder of the H4 million

issued share capital of the Corporation. In 1986, negotiations werw

concluded with DEG for their subscription of 1 million shares of one

Maloti each. During the same year the LNDC Board further authorised the

conversion of MS million of capital reserves to share capital to be

issued to GOL. Consequently the issued capital was increased from

M4million to M10million. This issued Share Capital was subscribed as

follows:- 49million ordinary shares for Lesotho Government and for DEG

MI million reedemable preference with an option of convertion to

ordinary at Par.

To improve the corporations equity base and facilita'.e further cash

injections, the LNDC Board of Directors in Juae 1938, approved an

increase of the Corporation's authbrised share capital. from H1O million

to M20 million shares of one maloti each. The addit..ntal share capital

will comprise nine million ordinAry shares to be issww.A to the Lesotho

Government through. capitalisation of reserves and oLe million six

percent cumulative redeemable preference shares subscribed for cash to

DEG. The new shareholding structure is therefore GOL HI8 million and

DEG H2 million. An additional M2million of DEG funds that will be made

available will be subscribed to LNDC in the form of income notes that

may be converted to equity capital in future.

In addition to receiving iovernnent subvention, the Corporation enjoys

financial support from multilateral and bilateral donor agencies. The

following have participated in providing financial assistance to the

Corporation : ADD, EIB, IDA and ODA. The Corporation has now wiped off

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all its losses and is now able to generate profits t&at are available

for development purposes.

The LNDC board of Directors.

The Board.of Directors of the LNDC comprises the Minister of Trade and

Industry as Chairman. seven members including the Minister of Finance

and the Minister of Planning and Economic Analysis, representatives of

the Commonwealth Development Corporation (CDC) and DEG, a member of the

executive of the Lesotho Chamber of Commerce and Industry and three ex

officio advisers who are Principal Secretary of the Ministries of

Trade and Industry . Planning and Finance. The Board of Directors is

the governing body of the Corporation with the responsibility for

setting policy for LNDC and ensuring that Management effectively

implements such policy.

UIDC Project FinP:D8 Guidelines

The Corporation provides short, medium and long term subcommerclal loans

to projects at rates appreciably below the market rates. In extending

such assistance, LNDC is generally guided by the following broad

principles:

- loans (and guarantees) should be covered by acceptable securities

- interest rates charged should earn a reasonable return to

cover the Corporation's cost of borrowing and administration

- total financial contribution (loans, equity and guarantees)

by LNDC should normally not exceed 60% of the total project cost.

- Total loan exposure of LNDC in any one project not to exceed 20% of

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the net worth of the corporation

grace period based on the project's normal capacity

built-up but does not normally exceed 2 years.

Borrower must have reasonable equity base

The borrower to provide regular financial accounts

LNDC must have a seat in the companies Board of Directors.

In assessing proposals for LNDC's participation and financial assistance,

the Corporation takes into account the project's inherent financial

viability, its contribution to the macroeconomy and the promoter's

credit worthiness.

The Corporation conducts a detailed appraisal of projects prior to

entering into any commitments for assistance in order to establish

conclusively that it meets the broad criteria outlined above.

Macro Eco_mic Settin over Credt Lin _eriod

Struct re of the Fconmo.

Lesotho is an enclave within the Republic of South Africa (RSA). The

economy is sparsely endowed with natural resources. Its principal

resource is upstream water which will begin to be exploited under the

Lesotho Highlands Water Project (LHWP). Agriculture is an important

sector within Lesotho's economy contributing to income and employment

for at least 60-70% of all households in the country and accounting for

about one fifth of GDP and nearly 60% of merchanise exports. However,

the potential for the development of this sector is constrained by a

number of factors notably: (i) the limited availability of arable land,

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(it) low fstrmig productivity associated with poor quality of land and

more attractive employment opportunities especially in neighboring RSA,

which offer substantially higher incomes than those obtainable from

domestic fatring, (iII) a system of land tenure that encourages

overgrazing and ineffeclent use of arable land. (v) extensive soil

erosion and Cv) uncertain climatic conditions. Lesotho's industrial

base is at an emerging stage and its potential is limited by the small

domestic mrket, dependence on Imported raw materials, and inadequatecy

of entrepreneurial skills and financial resources.

Lesotho's geographical position has led to the evolution of close economic

and institutional links with South Africa. Lesotho is a member of the

South Aftlerin Custom Union (SACU). It is also a member of the Common

"Ienetary Area (CXA) and its currency the loti is pegged at par to the

South African rod.

The exchange system of Lesotho is free of restrictions on payments and

transfers for current international transactions. These arrangements

and interlinkaes, bowever. limit the macroeconomic policies,

particularly with respect to monetary and fiscal policies. Lesotho also

has larg to p.rt requiremnts for both consumption and capital formation.

and a reLatively low level of exports relative to GDP. In general key

fiasacial lndictors such as interest rates and minimum prices of

agricultral products are adjusted in response to related price

developments in South Africa.

Lasotalos fisal structure is weak. More than balf the Government's

reven cas from SACU receipts, which represent a source over which

lAsotbo baa cotrol and which are received with a two-year lag. The

domstic vem hae is naow ad eaKibits large cyclical swings,

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reflecting migrant workers' remittances, which are very volatile and

subject to economic and political developments in South Africa.

The external sector is characterized by reliance on migrant workers'

remittances, while merchandise exports have remained insignificant and

imports substantial. With the rapid growth in debt (especially

nonconcessional) in the early 1980s, the external debt burden has more

than doubled a situation aggravated by collapse of the Rand currency.

Thus, efforts to ensure balance of payments viability in the long run

focus on the expansion and diversification of the productive base in

order to expand merchandise exports.

Lesotho is currently embarking on its largest undertaking to date

through development of its surplus water resources for export to South

Africa through the Lesotho Highlands Water project (LHWP) that is

estimated to cost about US$2.0 billion (at 1985 prices). Among other

objectives. it is principally geared to provide water supply to the RSA

and generate electricity for domestic use. This project will involve

harnessing the fast-flowing waters of the Orange Rive system and

transferring about one half of their flow to South Africa through an

elaborate system of tunnels. The principal benefit to Lesotho would be

in the form of water royalties, that will accrue annually and the

present value of which is approximately US$0.75 billion. Based on the

current population of 1.7m people, the realisation of this revenue will

considerably enhance the per capita incomes and significantly contribute

to the domestic funding of development programmes. In addition' the

project is expected to have spin-offs for Lesotho in the form of

hydroelectric power generation and irrigation, and in activities such as

services, secondary industry, fishing, and tourism.

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Trem in Eco.iic Perforomce During Period of Credit ISO

The Lesotho economy performed relatively well during the last decade

whlen GDP and GNP grew at an annual average rate of over 7% and 8%

respectively. This was largely due to increases in investments, migrant

labor remittances, diamond export earnings, external assistance and SACU

revenue. The economy experienced no major fiscal or external imbalances

then. During the 1980's however, performance has been poor. Between

1980 and 1986, real GDP grew at an annual average rate of 2%, implying a

drop in per capita GDP. The low growth rate for the 1980's was largely

due to the severe drought which had its greatest adverse economic

effects in 1983/84 and the closure of the Letseng la Terai diamond mine.

Preliminary estimates for 1987 indicate an improved performance of 4.7%

growth by the domestic economy. In general, the economic situation has

deteriorated in recent years. Economic activity has slowed, the current

account has grown substantially and the situation reflects the long term

s:tuctural weaknesses facing the economy. Consequently, the Fourth

Five Year Development Plan covering the period 1986/87 - 1990/91 calls

for medium term macroeconomic policies aimed to restore and sustain

domestic economic growth. The quantitative medium term targets are to

generate an average annual growth rate of 4% in real GDP during the Plan

period.

The Industri Sector

The primary sector of the Lesotho economy is Agriculture. As it moves

away from Agricultural base, Lesotho is pursuing a dynamic programme of

industrialisation through private enterprise. The Government realises

that industry must eventually supply the key to generate wealth, sad to

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this end actively invites foreign investors to participate with local

entrepreneurs in the realisation of the country's industrialisation

programme. Despite general poor overall performance in the 1980's, 9%

growth in industry has been the fastest of all sectors of the economy.

Since Lesotho has very few natural resources, raw materials available

are insufficient to provide for the requirements of industry.

Industries therefore depend heavily on imported raw materials. Although

Lesotho is sparsely endowed with natural resources, the country has a

latent surplus of water resources which represent a major development

challenge for the country through the massive Lesotho Highlands Water

Project (LHMP). From the industrial point of view, the biggest

challenge is to establish satellite investments to supply the project

with material inputs.

All in all industrial development in Lesotho is geared towards the

establishment of export-oriented manufacturing enterprises. In

principle any export-oriented project found suitable for Lesotho will be

encouraged, provided it satisfies the established criteria related to

employment creation, foreign exchange benefits and the importance of

transfer of technology and know-how.

The ownership structure of medium to large scale enterprises indicates

that the companies are predominantly foreign owned. The foreign owned

companies are almost solely production units or subsidiary companies

with parent companies elsewhere. These companies were attracted to

Lesotho largely because of the benefits accruing from the incentive

package offered by the Lesotho government.

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The growth of the industrial sector has however been erratic, and its

share of GDP has continued to be modest. The earliest policies

concentrated on import substitution projects. However, from 1977

conscious attempts were made to attract labour intensive export oriented

projects (eg. clothing and footwear). A constant priority has been the

development of food and beverage and agro-industrial projects e.g. The

Fruit and Vegetable Cannery, Lesotho Brewing Company, Lesotho Milling

and Lesotho Flour Mills, and the processing of Lesotho's largest export

wool and mohair that has hitherto been exported in raw state.

It is estimated (June 1987) that 7,991 people are employed in the medium

scale manufacturing sector. The majority are employed in the labour

intensive clothing and footwear sector which has been growing rapidly.

The food and beverage sector accounts for 28X of the total employment.

Progress in the development of industrial infrastructure has been

satisfactory but needs to be excellerated due to current demand. For

medium and large scale activities there are currently three industrial

estates, Maseru, Maputsoe and Thetsane. There are plans to develop a

new 23.3 hectares estate at Ha Nyenye near Haputsoe and extend the

Maseru and Thetsane estate. The small scale manufacturing sector has

estates at Sebaboleng (Maseru), Mohale's Hoek and Leribe under the

auspices of BEDCO.

In order to facilitate the industrial development of Lesotho literally

from first base at independence the Government established the Lesotho

National Development Corporation (LNDC) as a statutory body in 1967.

Concurrently the wider framework for industrial growth was established,

this included the industrial licencing Act and the Pioneer Industries

- 24 -

Encouragement Act. At the beginning, LNDC interpreted its role as being

a holding company by directly promoting projects and appointing

managers. This approach has now changed with the Corporation acting

more as a Development Finance Institution which aims at promoting

Lesotho as a desirable location for manufacturing investment and to

provide serviced sites, factory buildings and concessionary loan

financing, and in some selective case the purchase of equity. The

corporation has begun to privatise part of its equity portfolio as a

move to allow the private sector to play a leading role in the whole

process.

The development of indigeneous entrepreneurs was encouraged by the

establisment of the Basotho Enterprise Development Corporation (BEDCO)

in 1975 as a subsidiary of LNDC until 1980 when it became a separate

parastatal. BEDCO compliments the role payed by LNDC in supporting

small scale Basotho owned enterprises by providing them with loans

infrastructure, and technical and business services.

The two parastatals represent the major implementing arms of the

Government industrial policy. LNDC focuses on projects requiring an

investment of M250,000 and more, while BEDCO on those below that figure.

In its effort to promote Investment into Lesotho, the Government of

Lesotho offers a package of incentives which include the following :-

- industrial sites for rental

- purpose built factories for rental

- cost effective labour

- Tax holiday

- 25 -

free movement of capital

free access to the EEC and Southern African Customs

Union (SACU) markets. as well as concessionary access to USA,

Scandinavia. PTA, etc.

worldwide international recognition.

The LVDC is structured to operate as a "one-stop service" such that

most of the needs for an investor could be dealt with by the

various professional divisions of the Corporation. The Corporation

acts as link with all government departments such as labor,

customs, licencing board to procure approvals necessary for

commencement of business. This reduces substantially the lead time

between indication to invest and actual procurement of the

necessary approvals to commence business.

The Financil Sector

In December 1974, Botswana, Lesotho, Swaziland and the RSA entered into

a tripartite agreement establishing the Rand Monetary Area (RMA) which

was replaced by the Common Monetary Area (CMA) Agreement in 1986 after

Botswana bad withdrawn. The CMA agreement relates to monetary

caoperation and common exchange control policies or arrangements to be

implemented by the participating countries. The main aspects covered in

the agreement are:

(i) issue of currencies

(ii) movement of funds within the Area

(iii)access to South African money and capital markets

(iv) foreign exchange arrangements.

- 26 -

During the first thirteen years of independence. Lesotho used the South

African currency - the rand as the sole legal tender. Later in 1979 a

bilateral agreement was signed between Lesotho and the RSA providing for

the launching of Lesotho's new currency - the Loti which is backed 100%

by the rand and is freely convertible at par into rand in Lesotho.

Lesotho today operates a fairly sophisticated and well developed banking

and insurance sector which is closely involved in the expansion of

business within and outside Lesotho. Banking system in Lesotho comprise

the Central Bank of Lesotho (CBL). three commercial banks, four major

development finance institutions, and cooperative credit unions.

The Central Bank of Lesotho was established in 1982 to replace the

previous Lesotho Monetary Authority. It performs functions relating to

the supervision of commercial banks and specified financial

institutions. As per Section 39 of the Central Bank of Lesotho Act

1978, the Bank serves as Commissioner of Financial Institutions in terms

of the Financial Institutions Act 1973, and also as Commissioner of

Building Financing Institutions in terms of the Building Finance

Institutions Act 1976. In this capacity, the Bank exercises supervision

over the financial institutions in the country. The primary purpose of

supervision is to promote a sound efficient banking system in the

country.

In recognition of the status and responsibility of the Central Bank

of Lesotho as the monetary authority of the country, the CMA has allowed

the Bank increased flexibility and discretion in the management of its

foreign exchange reserves and dealings.

- 27 -

Under the RMA agreement the CBL was also required to keep all its

foreign exchange reserves in rand currency except some limited amounts

to meet its day to day operations outside the Area. The new agreement

however, allows the bank to hold currencies other than the rand to the

extent of 35 percent of the total of its gold and foreign exchange

reserves. The agreement also provides for increases in this ratio

when needed, subject to prior consultation with the South African

Reserve Bank.

The commercial banks have an extensive network of branches and agencies

throughout the country bringing modern banking services to the rural

comuurities.

According to the Central Bank's reports on monetary developments money

supply (M2) defined as currency in circulation , demand, call, savings

and fixed deposits plus deferred pay fund has been growing continuously

since 1980 through 1983 after which the growth rate diminished

progressively. Between 1983 and 1987, the growth rate has declined from

17% in 1983 to 9.1% in 1987. Domestic credit has been growing, rapidly

recently. It grew from M125.5m in 1984 to 'M285.1m in 1987. Credit to

the private sector followed a downward trend from M13.4m to M7.6m over

the same period.

An increasing proportion of domestic credit went to Government to

finance the rising budget deficit. This proportion has increased from

42% in 1984 to 61% in 1987. A notable feature in 1987 was a significant

increase in credit to the enterprise sector (21.2%) which was

achieved after stagnation in the two previous years.

- 28 -

The consolidated balance sheet of the commercial banks highlights a high

degree of liquidity until 1984, after which it began to decline.

Although the level of liquidity has somewhat declined, the commercial

banks still have large amounts of unused funds which still reflects a

continued difficulty to access these funds because of the conservative

banking practises. However net foreign assets of the banking system

have been growing steadily at an annual average rate of 1% between 1984

and 1987.

Interest rates in Lesotho continue to be influenced by developments in

the South African money markets and therefore follow those of South

Africa. Rates in Lesotho are however generally lower than those of

South Africa.

The period under review has been characterized by an unprecedented

decline in the value of the domestic currency in relation to major

international currencies. While this situation has provided

opportunities for the export led industrial growth. it has also

resulted in a devastating back-lash as most of the iaputs in

manufacturing industry are imported due to the paucity of the natural

resource base of Lesotho.

Review of IDA's assistance to L7DC

The IDA's involvement with LNDC started in 1973. Between 1973 and 1976

IDA provided technical assistance and advise on policies and procedures

to the corporation . In 1976, the Government of Lesotho requested IDA

to provide financial assistance to LNDC and BEDCO a then newly

- 29 -

established susbidiary of LNDC which became a separate parastatal in

1980. The first credit (702-LSO) provided a US$2.5 millinn to assist

the two crganisations in their industrialisation ef:orts. The loan was

advanced to Lesotho Government and on lent to LNDC and BEDCO at 8.5%

and 7% respectively. LNDC utilised this line of credit for fourteen

projects and BEDCO thirty one. Both LNDC and BEDCO were to onlend the

proceeds of the credit for a minimum of 121.

Credit 702-LSO had two objectives :

(i) to facilitate the development of non agricultural enterprises in Lesotho

through the provision of foreign exchange resource for extending term

financing to small, medium and large scale projects in Lesotho, thereby

creating employment opportunities locally for the expanding labor force

(ii) to further the development of LNDC and BEDCO as effective development

instit.tions and financial intermediaries.

The project was fully disbursed by December 1982, about one and half

years behind schedule. Credit 702 was followed by credit 985-LSO based

on an appraisal report no: 2670-LSO dated 22nd October 1979 which

recommended a credit line of US$4 million, $3.7m of which would finance

investment projects. and $O.3million to finance staff and workers

training. This amount was onlend to LNDC under a subsidiary loan

agreement with the GOL. Credit 985-LSO closed on June 30, 1987 even

though the original closing date was June 30th 1984. As at 31st December

1987, the account reflected an uncommitted balance of USS37,768.8.

The purpose of the project was to assist Lesotho Government through LNDC

to finance productive investment projects that would contribute to the

-30-

economic development of the country, and to finance training of LNDC's

Basotho employees as well as skilled and semi-skilled Basotho

technicians and workers of new enterprises establishing in Lesotho.

II PROJECT IDENTIFICATION, PREPARAIO NAD APPRAIUSL

In May 1979, an IDA mission visited Lesotho to appraise a second

IDA project (credit 985 currently under review in this project

completion report). The mission reviewed the progress made by LNDC. and

BEDCO under the first credit facility 702-LS0. their future prospects,

and resource requirements. Since the appraisal and identification was

carried out by the Bank. the role of the LNDC was to facilitate the

necessary information for the appraisal. The mission found that BEDCO's

resources then. and expected new comitments, would be sufficient to

meet its projected needs through 1982, and that there would therefore be

no need for any further IDA assistance to the Corporation then. The

circumstances that gave rise to the need for the project can directly

be derived from the objectives of the project as outlined in the

appraisal report.

The appraisal report recomended an IDA credit of US$4.0 million to

the Government of Lesotho to be passed on to LKDC. US$3.7 of this would

be used to finance investment projects and $0.3 for financing staff and

workers training. Accordig to the mission report the recommended

project was aimed at "assisting LNDC in further strengthening itself as

an institution". The mission felt that while considerable progress had

been made in this area under the first line of credit - (702 LSO) "there

was need for further improvements to bring LNDC up to the level of a

- 31 -

dynamic Basotho run institution providing leadership in industrial,

tourism and commercial development in Lesotho, and able on its own

financial strengths to mobilise the needed financial resourses from

within and outside Lesotho for such development".

At the time of appraisal, LNDC was on lending at 12X p.a on all loans.

In addition. a 1% rate was charged on behalf of the Government for

bearing the foreign exchange risks, thus making the effective rate on

sub-loans 13X p.a. In view of the then declining levels of interest

rates within the RMA, LNDC's rates were considered by the mission among

the highest and could prove to be uncompetitive to long term lending

rates for investors and hence a constraint that could deter investors

from borrowing. In view of these and other factors, IDA recommended a

minimum on-lending rate of 11% on all loans under the proposed line of

credit. The foreign exchange charge of 1% would however be maintained

thus bringing the cost of borrowing to 12X p.a. In addition, the

mission noted the financial environment in which LNDC operated which

dictated flexible interest rate policies and hence the need for a

periodic review of the recommended lending rate during the tenure of the

credit line. Particular emphasis was made on the problem that credit

worthiness of the loan portfolio could create.

Given the past record of LNDC's management instability and its heavy

dependence on expatriate staff, during the appraisal period, the mission

was satisfied with management by the able leadership of the first

Mosotho Managing Director recruited in 1977. The mission was also

content with the management system and organisational structure which

streamlined the previously complex structures and was considered

-32 -

appropriate and functioning efficiently. The mission however noted that

constant fluctuations in key staff could in the long run constitute a

high risk for LNDC's competence.

III. INPLESEXTATIO UrIoISrTIO OF amK CREDIT

General Ovwrview

Development Credit No : 0985- 0 LSO

Borrower : Kingdom of Lesotho

Credit Agreement Date 11th July, 1988

Closing Date 30th June 1984 After extensions

Original Credit Amount : US$4.million After extensions

Interest rate (onlending to : 6X per annumLNDC)

Commitment Deadline 30th June, 1987

Disbursement Dealine : 31st December 1987

Uncomitted balance : USS 537,678.8

Undisbursed Balance 1001 disbursed.

Foreign Exchange Risk fee 1X

Service Charge Rate : 3/4%

Total Number of Approvals : 44

Investment Projects : 17

Staff Training 13

Workers Training 14

The credit had three components: investments in loans and buildings,

LNDC staff and industrial workers training. At the request of the LNDC

Management IDA approved funding for construction of advance factory

shells. The Bank appreciated the fact that whereas investors are free

- 33 -

to erect their own factory buildings most investors who come to Lesotho

do not invest in real estate and they invariably require LNDC to finance

buildings. This is largely because of the very stiff competion offered

by neigbouring states, particularly RSA and Swaziland, in providing

industrial buildings for rent as one of the major incentives for

attracting investors.

After the bank allowed this flexibility to finance advance factory

shells, commitment levels on the line of credit progressed much faster.

This was an indication that the Corporation was at last providing'

the right service to its customers as circumstances in the regional

competition for investment had changed.

The stiff competition in providing industrial building required that

such buildings should be readily available on demand. At this time most

footloose industries locating from RSA were not desperate for financial

assistance, but sought such readily available buildings to immediately

move into.

No funds had been allocated for the purpose of financing studies under

the line of credit. Table one gives a summary of projects financed from

the credit under review.

- 34 -

Table 1

SUMMARY OF PROJECTS FINANCED FROM CREDIT 985-LSO

IDAAPPROVAL NO: PROJECT ACTIVITY FINANCING (USS) STATUS

Al Lesotho Clothing Clothing 87181 in operationA2 Freightpak Storage and 37491 out of

warehouseA3 Gallant Clothing 214715 in operationA5 Metro Wholesale 307794 in operationA6 Metro Wholesale 296977 in operationA7 Focus Clothing 48005 in operationA8 Cashbuild Building material 158128 in operationA9 Mustang Clothing 357082 in operationA10 Steelquip Iron and steel 164187 out of "All Lesotho Clothing Clothing 272747 in operationA14 Factory shells Buildings 630898 fully occupiedA15 Thaba Tseka h'holesale 152159 in operationA16 Factory shell building 291.901 occupiedB3 Lesotho Knitwear Clothing 45630 out ofB4 LKM socks 19877 out of n

B5 Tsitoe clothing 1391 out ofStaff LNDC Complete except

B1-15 Training Staff training 141724 (2ST-Bl-15)3WT-CI-1 Lesotho Clothing Clothing 15709 in operation

2 Gallant Clothing 10347 in operation3 Gattis Ice Cream Ice-cream, drinks 6539 in operation4 Royal Crown Jewellery 18044 in operation5 Pal Crown Leather products 9024 in operation8 Lesotho Knitwear Clothing 59587 out of9 Papillon Rugs 7773 out of

10 Focus Clothing 10793 in operation12 Peacock Clothing 9349 out of "14 Shoecomp Shoes 24844 in operations15 Natural Shoes Shoes 2749 in operation

16 Glennit Textiles Clothing 8899 out of "17 Golden Textiles Clothing 11895 out of "18 Tsitoe Clothing 1391 out of n

Performanee of Sub Projects

As indicated earlier, the proceeds of credit 885-LSO were used to

finance 17 projects under category A, investment projects including

loans and buildings, 13 under category B - staff training and 14 under

workers training.

- 35 -

For all projects approved, there are no undisbursed balances.

Eighteen of the projects are in the clothing footwear and leather

sector, one in the services, three in the trading and the balance

in other sectors including engineering and h.andicrafts. The

factory buildings are all occupied. The current rental on all new2

standard factory units in the various estates is H4.80/m/ month,

subject to an annual escalation of 7.5%.

The following section hig8lights performance and status of projects

financed under the line of credit.

APPROVAL -0.

A-1 LESOTBO C1O UG - Loan : $87,181

- Training : $34,647

A very successful clothing manufacturing company established in 1981

with continual growth trend. Financial performance summarized as

follows:

1985 1986 1987

Sales 2 930 506 2 464 513 9 554 804

Gross Profit: 1 132 296 2 821 402 3 584 624

Net Profit : 450 652 542 891 390 242

The drop in net profit in 1987 was due to an increase in freight and

bank charges. On account of the sanctions imposed on South Africa,

direct freight from South Africa to the USA is no longer possible. The

company markets it product entirely in the US and this increased its

- 36 -

freight costs considerably. As far as bank charges are concerned the

local bank has increased clearance costs on foreign cheques. The

increase in these two items of cost total some M500,000. The company

currently employs 570 people. Training for the 160 workers was

successfully completed. Further expansions have recently i)een approved

by LNDC.

2. GALLANT CLOTHUrG Loan $ 214,715

Training : $ 10.347

One of the first clothing companies to establish in Lesotho

characterized by stable manAgement and labour force. The company was

established in 1977. Gallant's financial performance is summarized

below

1985 1986 1987 Dec 1987

Sales 4 370 916 3 744 440 4 868 461 4 027 630

Gross Profit 1 988 871 1 486 387 1 869 441 1 803 600

Net Profit

(Loss) 296 874 (8 193) 5 813 353 189

1986 and 1987 were particularly bad years for the clothing industry in

South Africa, where the company sells most of its products. This was

particularly in the middle to up market segments. The company has now

stabilised in profitability and has started a joint venture subsidiary

company in Lesotho with a reputable international company to diversify

its product range. The 160 trainees successfully completed the

training.

- 37 -

3. METRO LES0T5 Building: S 307,797

Building: S 296,997

Metro is a very successful retail operations owned 50% by LND LIH and Metro

Group South Africa. Up until June 1987 the Metro Lesotho Group included

groceries. hardware. and clothing wholesaling.

Financial performance of Metro Lesotho over the past three years. is

summarised below

(MALOTI)

1985 1986 1987

Sales : 46 774 501 59 516 815 63 621 582

Gross Profit : 4 587 464 5 472 689 5 122 546

Net Profit : 924 909 1 070 992 2 598 537

4. FOCUS ClOETI Loan: S48.00S

Focus waS established in 1984 to manufacture chi1dren's clothing. The

company has been operating satisfactorily as indicated by the financial

summary performance.

(IAWXI)

(35 moths) 198

19" 1986

Sales : 996 617 1 591 727

Gross Profit 47 701 669 736

Net Profit

(Loss) : (280 068) 324 994

- 38 -

The company now has its cost of production under control and is on the

road to successful operation. The training programme was partially

implemented as no claims were received before the December deadline.

5. NITANG SHOeS Loan: $357,082

A very successful shoe manufacturing company as evidenced by two

successive expansions in 1985 and 1988. The 1988 expansion is

currently under way. The company employs 900 people and produces 6 000

pairs of shoes a day.

The financial performance is shown below

(14 months to Dec)

1985 1986 1987

Sales 3 213 026 8 142 762 10 863 788

Gross Profit : 605 617 2 304 352 4 425 378

Net Profit : 242 441 879 808 2 431 614

6. TERA-TSEU UNDMDLAI Building : S152,159

A recent wholesale operations established late in 1987 in the mountains

at Thaba-Tseka to provide facilities to the trading community, and the

community as a whole.

It is still too early to comment meaningfully on its fivancial

performance. However, it is under the experienced and coripetent

manAgement of the loag-established Fraser Group. The wholesale emprloys

35 people.

7. luOMo DhMErtA Loan : $45,630

This company was established in 1984 to knit jerseys for export. From

- 39 -

inception the company experienced considerable management problems which

in turn caused financial difficulties. These problems seemed difficult

to overcome and by 1988 when the finances of the company were not

improving, the promoters were forced by its major creditor, - Barclays

Bank threatened liquidation and the company promoter paid the

obligation. Thereafter the promoters decided to suspend operations in

July while they mobilize funds and negotiate a joint venture

arrangement. The company is mobilizing to resume operations in January

1989. The company's financial performance is summarised below:

(MALOTI)

(16 months) (9 months to

Sales 200 475 1986 Dec 1987)

Gross Profit

(Loss) (86 500) (47 659) ( 38 929)

Net Loss (184 279) (205 150) (135 884)

Lesotho knitwear trained 230 workers. It however could not meet the

December deadline for its final claims of the second year of training.

8. CAILD Building : $ 158,125

Prior to May 1986, Cashbuild was part of Metro Lesotho. It was then

decided that Cashbuild be separated from Metro. The project supplies

building materials for the local market. Below is a summary of the

company's financial performance.

-40 -

(Eoti)

(2 months)

1986 1987

Sales : 1 569 716 10 199 699

Gross Profit 70 698 481 853

Net Profit : 44 186 259 716

9. SgOECOMP IED5sTRI3 Training: $24,844

Shoecomp Industries was incorporated in 1985. Shoecomp manufactures

high quality fashionable ladies and men's shoes and shoe components like

heels, insoles, outer soles as well as handbags to match some of the

shoes.

The company has sustained losses of M434 607 and M169 965 in 1986 and

1987 respectively. The situation is slightly improving as the company

has now allocated about M100 000 for promoting of its products through

South Africa in Portuguese newspapers, Research has been conducted in

Europe and Nordic countries as well. At the moment the company employs

87 workers. 70 of whom benefitted from the training grant and an

additional 40 trained at the company's expense.

10. GATMI'S ICE CREA Training $6.539

The company started operating in 1982 with a capital investment of H867

000 all of which was raised by the promoters. The investment was

increased to H960 000. The company's performance is profitable. It

employs 203 local workers.

- 41 -

11. NATURUL SHOE COKPhAT Training $2,749

The company was established in 1985. The company produces footwear for

the lower market sector. The company's produce is mainly for export to

the Republic of South Africa. The company's performance is quite

profitable. The company has been able to settle the LNDC's 6 year loan.

in the third year of the loan's operation. It employs 68 inside

employees and 140 outside employees. Training approved for the 51

workers was completed.

LIQUIDATE AND CLOSED CO1PANIES FINJNCED UNDE CREDIT 985-LSO

STEELUIrP Loan : $208,737

This was an engineering company that manufactured agricultural

implements such as cultivators and scot carts. The company was

successful but experienced management problems that eventually

translated into very difficult financial and labour relations problems.

This company closed down in April 1988. The company affairs are under

investigation by a liquidator.

F311I PARK I NUT3&TIONAL Building : $37,497

Freight Park was a freight company that was established in Lesotho. The

company could not compete successfully with a new company that moved

into Lesotho under Manica Freight International. Freight Park was

eventually taken over by Manica Freight. The IDA credit had financed a

building for Freight Park and this is being used by Manica Freight.

- 42 -

TSITOL CLOTHING Training : $1,391

Tsitoe Clothing was established to manufacture of embroidery clothing

for children. The company experienced production and marketing

difficulties mainly due to inadequate support from the promoting company

that is based in Cape Town in South Africa, The problem of this company

culminated in its liquidation in 1987. At the time of liquidation about

40% of the total training grant had been disbursed.

APEX KNITTING I LKK (PTm) LTD Loan : $19,877

This company was established to manufacture men's socks. The company

had very serious technical problems. The production technician was

recruited from the United Kingdom since this skill is very scarce in

Southern Africa in the sock making industry. Because of serious

management problems the production technician left the company. The

promoter could not get a replacement quickly and as a result production

broke down. The manager and promoter of the project abandoned it and

LKDC took it over to liquidate it. The liquidation process was

implemented in 1987.

PEACC GAIMETS Traububg $9,349

This company was established 1984 to manufacture school uniforms.

Shortly after implementation it developed technical, marketing, and

general management problems. As these problems perpetuated, the capital

base became eroded. It become clear in 1986187 that it was not

possible to save the company, hence shareholders decided to put it under

voluntary liquidation. Following the liquidation, the trained workers

were redeployed in other garment making companies.

-43 -

GLENNIT TELTIL (PTm) LTD Training $8.898

Glennit Textiles was established to manufacture mens underwear and to

produce knitted fabrics. The company experienced very difficult

financing problem from very early stage. This resulted in an

unmanageable cash-flow problem when the promoters could not support it

adequately. The IDA contribution to this project was a training grant

finance. This project was liquidated in 1986. Only M19,930 was

disbursed out of the M225,309 approved for training.

PAPILLON (PT!) LTD Training : $6,317

Papillon started operation in 1985 to manufacture bathroom sets and

rugs. The company was selling its produets to South Africa. It

voluntarily closed down its operations *,. July 1987 and paid all

outstanding debts.

GOLDEN TFXIMS Training $ 11,895

Golden Textiles started operations in January 1986 to manufacture

children's and ladies' knitted sweaters. The company closed its

operations in June 1988 because the size of its production was too

small and could not process orders. It was also difficult for the

company to compete with RSA manufacturers who enjoy certain

concessions which are not available in Lesotho. At the time of closure,

Golden Textiles had employed 64 workers, training approved under the

credit was still ongoing although the company was not able to meet the

December deadline.

- 44 -

FACTORY SHEKS PROGAMnR FINANC USD LSO 965 $ 922,799

Six Factory Shells of 1 OOOm each were financed under credit LSO 985.

They are all tenanted as follows:-

a) LESO1D TEXII

This is a company that manufactures men's casual and under wear for

export to bnth South Africa and the EEC countries. The company

today employs 130 people and is operating well.

b) POLTEX (PTm) LTD

Poltex stated operations in November1986 to manufacture denim

Jeans for export to USA. The company is doing very well. The

current level of employment is 500. It occupies two factory shells.

c) TMEADR TECTUIJ (Pn) TD

Tenleader started operations in November 1986 to manufacture t-

shirts for export to USA and Europe. The company currently employs

90 workers. The company is in process of consolidating operations.

d) NrIoJA TZCIn

Norija Textiles is a project that manufactures T-Shirts, Golf

Shirts, dresses. It currently employs 157 people. It was

established in Lesotho by Kluk Textiles Industries in February 1988

to service both the local and export markets. The company started

very well and made a sales turnover of over H200 000 for the first

three months of operations ended 30th April 1988. It is now projected

that Morija Textiles will employ 171 people by the end of this year

as against the initial 128 people projected to be employed within two

years from the date of comeoceeat of the cop cy' s operations.

- 45 -

e) IUK TEXWIES

This is a project that will provide Fabric dying and finishing

facilities at a cost of M3.5 million. The project promoters have

already signed a lease for occupation of an IDA financed factory

shell. The project will commence production around January 1989.

The reason for the delay is that additional factory space has to be

provided to accommodate the project. Construction of an additional2

250m and a boiler house will be ready by December 1988.

luplentation Schedule

According to the agreement, the original closing date for subproject

submissions under credit 985 was June 30th 1982. At the time of expiry

only fourteen projects had been approved net of cancellations totalling

V-S$ 281,000. At this time the rate of commitment as well as drawdown

of the line of credit was slow because most projects submitted were

not acceptable to the Bank and indeed it took some time to substitute

new projects and get them through the required procedures to the point

where they can be committed. Secondly, and most importantly, 1982 was

the worst year in LNDC's operations as a result of the global economic

recession. This led to a drop in the corporation's pipeline projects.

Consequently, Government requested the bank to extend the closing date

of the credit facility by 12 months to June, 1983 and the request was

approved.

By June 1983, the line had not yet been fully committed and LNDC

requested for extension of the commitment date from June 1983 to December

- 46 -

1984 and the closing date for disbursement to be further extended from

June 1984 to June 1986.

By December 1984, it became necessary to seek another extension of the

closing dates for both commitments and disbursements from December 1984

to December 1985 and from June to December 1986 respectively. This

extension was deemed necessary to enable LNDC fully utilise the 2nd line

of credit. The principal reason for the relatively low utilisation of

the credit facility at that time was the withdrawal of a large sum in

respect of application for funding two projects Lintex and Papillon as

the promoters decided to implement them on a much small scale. LNDC

also experienced a bad year of investment promotion and as such, many

targets could not be met.

Consequently, by November 1985, an uncommitted balance of US$2.486m

existed. Towards the end of 1985, a number of projects were approved,

and experience indicated that the funds could be disbursed over 12-15

months. LNDC therefore requested a nine months extension of the

disbursement deadline to June 1987, to enable it to disburse

US$1,866.000 on sub projects that had been committed by then. The

principal reason for this large undisbursed amount was the five

subprojects approved w.thin the three months of the closing date. The

six months allowed for disbursement was thus very short. Other causes

of delays for disbursements had been protracted negotiations with

promoters and longer training periods than anticipated leading to a

slower draw-down of funds.

The increase in the LNDC's level of activity after the recession of the

early eighty's resulted in many projects being processed in the last

-47 -

months before the commitment deadline of December 1985. Consequently,

the Bank granted a generous extension of the cowmitment date to June

1986 and a final disbursement date of December 1987.

From 1986, LNDC experienced an upsurge in demand from new investors

seeking both factory space and loan finance, in conjuction with requests

from established projects seeking additional factory space to expand

operations. In 1987, the LNDC was facing a programme of capital

investment totalling !50million while by 1988, the investment programme

stands at over M100 million. In particular, this upsurge in demand made

it necessary for the LNDC to provide new investors and expansions with

factory buildings and therefore expand the construction of factory

shells.

In addition to the phenomenal increase in the pipeline, the active

investment promotion campaign is expected to result in additional

projects expected to be implemented in the next two years.

IV. OPERATING PRFORMANCE OVER TE PRJECT PERIOD

The Corporation's operations over the 8 year credit period 1980 1988

is evaluated by the approval levels for either new or expansion

projects. It had been projected that projects approval in 1980

would total M4.950 million. However, the actual level of approvals of

over that period. It had been projected that projects approval in 1980

would total M4.950 million. However, the actual level of approvals of

M12.6 million was well beyond the projected level. In 1981 the upward

trend was maintained when project target was M4.4 million and actual

approvals were 1412.83 million. In 1982 actual approvals were M7,678

- 48 -

million again a positive variance above target of M4.7 million. This

was considerably less than the previous year due to the 1982 recession

which adversely affected all forms of economic activity. The following

year 1983 approval performance showed a marked increase of about M6.5

million over the previous year and M8.9 million above target.

1984 experienced a lower approval record of M9.6 million than the

previous year but was beyond the M6.0 million target at the time of

appraisal. It is clear from the foregoing comparison that LNDC's

performance in terms of actual project approvals was well above the

project targets over the period 1980-1984. There was however a very high

mortality rate on approved projects and some are now out of operation

or never took off for various reasons, a situation that reflects that

there were weaknesses at the time in the quality of projects promoted

for approval. This weakness in the pipeline resulted in a number of

projects approved but could not be successfully implemented. Investment

promotion concetrated more on the number than the quality of projects.

The LNDC has entered a new phase that is charaterized by an

unprecedented burgeoning of investment activity. The present pipeline

is a substantial improvement on the project identification of the past

years. This development is motivated principally by three driving

forces viz; the impact of activity generated by the Lesotho Highlands

Water project, the changing international opportunities in the export

trade, and the improved investment incentive package offered by LNDC to

project promoters. The increase in the pipeline projects, and therefore

the potential for a large investment program, has very profound

implications on the LNDC absorptive capacity. The Corporation screening

- 49 -

procedures in both appraisal of promoters and the projects themselves,

need to be commensurate with the level of activity envisaged. To this

end, a major re-organization of the Corporation has been put in place to

streamline control and follow-up procedures. The Corporation has been

implementing a vigorous training program for its professional staff to

enhance their capability in project appraisal which is now fully computerised.

The period 1985 to 1987 experienced an unprecedented further upward

trend in the level of approvals. In 1985 projects with an estimated

total cost of M19.5 million were approved compared to a lower amount of

M114.0 million achieved the following year 1986. In 1987 the highest

record of approvals was achieved when twenty four projects involving a

total capital investment of M106 million were approved. Xost notable

among these approvals are five new projects, the wool and mohair

processing, sandstone, ceramic wall & tile, and edible oil projects

which utilise the local raw material base, thus representing a departure

from the traditional pattern of approving projects with great *reliance

on imported raw materials. At present. five of the new project

approvals are already in operation. A major departure from the past

trend is that the increase in approvals is happening simultenously with

substantial increase in quality of approved projects. This is a basis

for a lasting impact on the macro-economic development of Lesotho.

V FCL

The project set financial performance targets for the Corporation over

the period 1980-84 as reflected in table 2 below.

- 50 -

Table 2

Projected Income Statements

(M'OOOs)

Year ending March 31 1980 1981 1982 1983 1984

INCOME

Dividens 217 243 262 303 359

Interest on Loans 290 416 555 708 895

Guarantee Interest 23 31 35 36 37

Rental 447 612 825 1,057 1,335

other 28 30 34 35 37

GROSS INCOME 1.005 1.332 1.711 2,139 2,663

EXPENSES

Wages and Salaries 215 247 284 327 376

Expenses for Promotion 80 92 106 122 140

Administrative Expenses 401 462 531 610 702

Depreciation 13 13 13 13 13

Interest Payable 166 285 427 552 696

Armotization of Goodwill 2 2 2 2 2

TOTAL EXPENSES 877 1.101 1,363 1,626 1,929

Profit (loss) before

Provisions 128 231 348 518 734

Provisions 94 130 123 129 145

Net Profit (loss) 34 101 225 384 589

Table 3 below shows selected actual financial performance indicators by

the Corporation over the period 1980-1987. The Table reflects ttat

TABLE 3

LJDC FINANCIAL FZRFOENACzs- 1980 - 1986

1968 1987 1986 1985 1984 1983 1982 1l81

Operating Profit 2229 1196 1478 41 (113) 92 (652) 466

Other Ordinary Income 28 63 292 1 245 396 (53) 170

Operatiag Profit 2.257 1259 1770 42 132 488 (599) 636

Occreaselincrease on prc.visionsAgainst Attributable net 38 (250) (162) 365 267 (1999) (293) 326Losses of subsidiaries

0SailmbL intcresL in uasobi.iaLed 3 (5) 101 (2'J) 196 (1I)1) (226) (318)companies .

Profit tor Year 2.295 1004 1709 378 595 (1612) (1118) (8)

Aecumulated Profit/Loss at 1.653 649 (2074) (2452) (3047) (1435) (110) (1302)beggining of Yeair

Profit Year Adjustmett ------ 1014 ------ -------- 1014 (1302)

ProfitAecumulated Profit (Loss) 3.984 1653 649 (2074) (2452) (3047) (2428) (1510)at enid of *car

1982 loas adjusted by transfer of reserveshence lqss of 1434 carried forward

- 52 -

LNDC's performance the period 1980-84 has been below expectations at the

time credit 985 was being appraised. The corporation operated at a loss

increasing from M1.3 million to M2.074 million through the four years.

as against the projected profit from M1.0 million to M2.6 million in

this period.

The Corporation performance improved in later years and this improved

performance was maintained through 1987. The table shows that 1988 was

the most successful year when the Corporation recorded profits of M2.295

million.

Status of Compliance with Covenats to Credit 985 - LSO

Covenant Status

Prior to any proposed amendment In compliance

to the LNDC Act, Government shall

inform IDA of the amendment so proposed

and enable IDA to exchange news with

amendment.

Loans to investment enterprises In compliance

would be made at an interest rate of not

less than 1lX p.a., with an additional 1%

p.a., fee paid to help cover foreiga exchange

rate risk.

Rental charges for factory buildings will be

not less than 5l per annum of the cost of

said building subject to price escalation

provisions.

- 53 -

LNDC shall furnish IDA with quarterly reports Efforts being

on its operations, financial condition and made to comply

resource position.

Within six months following the lst withdrawal In compliance

from Credit 985-LSO, LNDC shall prepare a report

for IDA regarding the execution and operation

of investment projects, parts B&C of the project.

and LNDC and IDA's performance project.

LNDC shall exchange news with IDA on any In compliance

proposal to modify its Statement of Policy

and shall not amend such statement except

in agreement with IDA.

LNDC shall furnish to IDA no more than Audited financial

four months after the end of its fiscal accounts up to 1987188

year the audited financial statements sent to the Bank once

and auditors report they have been cleared

by the Auditor General.

LNDC will maintain a debt : In compliance

equity ratio of no more tha 3:1 Current debt : equity

ratio is 0.9 : 1

LNDC shall take such steps Largely in compliance

satisfactory to IDA to protect M2.3 million remain

itself against foreign exchange risk on LNDC'a balance sheet

as due from Government.

- 54 -

VI. INST'TUrJNMAL UIAM AND DlKWBlI

Host internal institutional problems were identified during

implementation of the first credit line and by the time of appraisal

of credit LSO 985. the IDA noted that these problems were largely

resolved. At appraisal. all key staffing positions had then been filled

and where expatriates were still needed suitable long term plans for

localization were in place. The organisational structure had undergone

successive streamlining and was more functionally oriented. Operation

procedures especially project appraisal had improved as well as

accounting and financial control.

The Corporation's quality portfolio of subsidiary companies had

substantially improved thus relieving it of the financial and

administrative burdens of running them. Finally. a comprehensive

investment promotion strategy was being pursued.

During the project period these institutitional reforms have been pursued

more intesely. Expatriate personnel has been phased out and reduced to

only three, two of whom will soon be leaving the Corporation. A new

organisational structure that further streamlines and harmonises the

functional responsibilities of the Corporation to improve efficiency in

delivery is in place. In line with the new organisational structure there

has been a concomitant recruitment to ma the key management positions.

A comaputerised system has been introduced and is very effective in

enhancing LNDC appraisal capacity. Overall Performance of the equity

portfolio Is becoming increasingly satisfactory. The current portfolio

cousists of seven Associate and seven subsidiary companies, and LNDC

eauda4tra to Intmotfy msnitoring their operations.

- 55 -

The Quality of present management has definitely improved compared with

the situation in 1980:-

Management is now by consultation through managerial committees

that exchange ideas & formulate policies. There is more uniformity

& team work within the Corporation. In addition to Hanpower.

Executive and Investment Committees the Corporation added a very

crucial Committee i.e. the Management Committee which has the

power to approve expenditure within the jurisdictions of Managing

Director. The management Committee has delegated powers to

the Managing Director and the Financial Controller to approve capital

expenditure of up to M30,000.

the Corporation's policy of loqalizing at management level has

ensured better stability and continuity.

The area of manpower development has received increasing attention.

With the accelerated increase of new industries and expansion

programme emphasis has been placed on short programmes (6 weeks-3

months) for staff development and less emphasis on long term

programmes. Several tailor-made in-house programmes particularly

in project identification, appraisal & monitoring have been

organized successfully. We presently have advantage of several

high standard training institutions within the region.

Since last appraisal the number of Corporation staff has more than

doubled. The staff complement has grown from 38 in 1979 to 98 at

present 57 of whom are proffessional staff. Obstacles have been

rather high staff turnover of professional and well trained staff

- 56 -

due to highly competitive salaries and benefits particularly those

of the LHDA and the interest is developing private consultancies;

The major Contribution of expatriates has been in staff training in

management skills & technical skills.

VII aSNK PUPONIANCU

At appraisal, the Bank recognised the critical role that Lesotho's

industrial sector has to play as the potential engine for future growth

of the economy. The Bank on the other hand noted the constraints t:hat

hamper industrial development. The objectives and justifications of the

project were mainly to enhance LNDC's capabilities as the most important

economic institution in promoting industrialisation in Lesotho. Need

was therefore rightfully felt to extent financial support to LNDC

through the project 985-LSO to attract more investments into Lesotho.

increase formal and productive sector employment opportunities and

improve the industrial manpower skills. The project was therefore well

conceived and in line with the main probiems and priorities of the

industrial sector.

Its conditions were largely in accordance with those of the 1st credit

and these were considered appropriate.

The scheduling of the project was appropriate at appraisal. However,

series of external factors mainly the recession of 1982, the collapse of

the local currency in the international markets, dictated slower

commitment and disbursement rates. The Bank was however flexible and

- 57 -

approved requests for extension. A major flexibility that enhanced

increased committment was the banks approval for the factory shell

programme which provided the investor with the basic motivation to

excellarate investment decisions.

During the period of the project the Bank carried out regular

supervisory missions characterised by constructive dialogue between the

Bank and LNDC. After expiry of the line of credit, the last mission

noted tremendous improvements in most issued of concern raised by

previous missions. A very warm relationship continued to be maintained

between LNDC staff and the Bank representative. The spirit was

constructive critisms as documented in all reports by the supervisory

missions.

VIII Conclusions

LNDC's performance in achieving the objectives of the second line of

credit represent an improvement over performance of the first credit

acility. During the first four years of the second credit line, the

Corporation's performance was admittedly poor in terms of commitments,

disbursements and project approvals however. this trend was dramatically

reversed when economic fortunes turned around, and when IDA conceided to

new approvals to the utilizations of the credit line. As already

indicated this poor performance should not be judged in isolation of

economic and other exogenous factors that collectively affected the

Corporation's ability to efficiently implement the project. During this

time LNDC was also going through a period of some institutional

difficulties. Among others were:

- 58 -

the urgantsat±onal structure at the time though generully satisfactory

stil.; suffered from certain weakneases. and iieedect furt.her streamlining.

Lhe Cotporatiomns sLatting position was relatively weak at key positions

and there was a heavy reliance on expartriates and nted for intensive

local sLaff trainins.

a large and unprofitable equity portfoli': imposed heavy administrative

burden in the light of staff shortage and quality.

there was nc) corporate strategy to base LNDC's operaLiolns and finally

manasgmenL instability.

As can he noted from the subsequent supervisory mission reports.

considerable progress was lade in these and other :areas ove' the 2nd

htalf of the project period starting from 1985. Consequently, the

Corporation was placed on a better footing as evidenced by increased

level oL activityion the credit line.

To the extent that one of the main objectives of the prnje:t was to

enhance LNDC's planing and resource mobilUsation and implementt projects

of econooi*c benefit this objective hasi largely been achieved. Over the

project period. LUDC succeeded to mobilize resources frou other donor

agencies like the European Investment Bank (EIB), 2nd global line.

Overseas Development Administrative (ODA). Rowever. with thte increase

level of activity as the regional economy picks up from the early 1980's

recession, LUDC is Inttseltying efforts to mobilixe resoureCs to finance

the investment progrem e that has been growing at unprecedented levels

since 191S36. Pfftrts are also beir-- ',t to negotiate with the local

banking system to avail the surplus liquidity in the commercial banking

sector for productive tnvestmeAt projects.

- 59 -

PART III: STATISTICAL INFORMATION

1. Related Bank Credits

Credit Title Puroose Year of Approval Status

IDA Credit for DFC 1976 Completedthe LesothoNational Develop-ment Corporation(a.702-LSO)

2. Proiect Timetable

Item Date Planned Actual Date

Identification February 1979 February 1979

Appraisal Mission April 1979 April 17, 1979

Negotiations November 1979 November 26, 1979

Board Approval February 26, 1980 February 26, 1980

Credit Effectiveness October 9, 1980 November 7, 1980

Completion of Commitments June 30, 1982 June 30, 1986

Closing June 30, 1984 June 30, 1987

3. Credit Disbursements

Cumulated Estimated and Actual Disbursements(US$ '000)

IBRD Fiscal Year 1981 1982 1983 1984 1985 1986 1987

(i) Appraisal Estimate 1.04 2.48 3.63 &.00 4.00 4.00 4.00

(ii) Actual 0.00 0.28 0.42 1.02 1.14 1.90 3.46

(iii) (ii) as X of (i) 0Z 111 121 262 281 47Z 862

Date of Final Disbursement January 12, 1988

Total Disbursed 3.46Amount Cancelled .54Amount Outstanding at June 30, 1988 3.46

- 60 -

4. Status of Covenants

- Project Agreement

Covenant Status of Comgliance

a) LNDC shall carry out the LNDC proposed involvement in atProject and conduct its operations least two projects, where itsand affairs with due diligence and Investment (equity and total)efficiency and in conformity with exceeded maximum permissibleappropriate economic and limits as per its Statement ofinvestment standards and Policy. These were the brewerypractices, with qualified and and shopping center investments.experienced management and personneland in accordance with the LNDC Actand its Statement of Policy (ProjectAgreement Section 2.01).

b) LNDC undertakes to charge an In compliance.interest rate of not less than 112for subloans made out of the proceedsof the credit and a rental rate of notless than 152 of the cost of building.when financed out of the proceeds ofthe credit (Project Agreement Section2.03 (c) (i) and (c)).

c) LNDC shall exchange views with In compliance.the Association on any proposal tomodify its Statement of Policy, andshall not amend its Policy, exceptin agreement with the Association(Project Agreement Section 2.08).

d) LNDC shall have its accounts LNDC ha. consistently submittedand financial statements for each audited a 'nts although somefiscal year audited by independent have been delayed.auditors acceptable to theAssociation in accordance with soundauditing principles consistentlyapplied and furnish the Audit Reportto the Association, as soon asavailable but, in any case, not laterthan four months after the end ofeach such year (Project AgreementSection 3.02).

e) LNDC shall maintain a In compliance.debt/equity ratio which does notexceed 311 (Project AgreementSection 3.04).

- 61 -

f) LNDC shall take steps In compliance.satisfactory to the Association, toprotect itself against loss fromforeign exchange fluctuations(Project Agreement Section 3.06).

- Loan Agreement

a) As a special condition of In compliance.credit effectiveness, the Governmentof Lesotho would enter into a subsidiaryloan agreement to onlend the creditcomponent to LNDC at six percent interestper annum; the Government would pass thefunds for the training components of theproject on to LNDC as grants.

b) The foreign exchange risk of Some foreign exchange lossthe credit component would be provision remained on LNDC'sborne by the Government, which books as a result of itswould charge LNDC a fee of one participation in thepercent per annum for this project.service; this fee would be passed onby LNDC to its sub-borrowers.

c) The Association would assist In compliance.LNDC in identifying training programssuitable for LNDC staff, and wouldapprove all training proposals financedunder the staff training component ofthe project.

d) LNDC staff being sent abroad In compliance to date.for training would agree to serve LNDCfor five years after completing thetraining program.

a) The first five grants for In compliance.training Basotho workers in newenterprises would be subjected toprior approval by IDA.

- 62 -

5. Use of BDnk Resouvc-s

A. fta.I.Ui

State of Pro10ct Cg le Staff -weks

Through Appraisal 21.6Appraisal through Board Approval 2.7Supervision 80.7 jlProject Completion Report 12.6

l/ Includes mission as vell me other staff *upervision inputs.

5. 11alm

Stage of Month/ Number of Days e lati Types of ProjectProiect Cycle YM. zaraP - IJaJin siold hsol * Scaotus bl Problems c/

Throuth Amnraisal

Appraisal 4179 3 14 5s./rVlsop. h/A slowcoumitment/disbursement ofthe 1st credit.

Appraisal throughBoard Approval

Board Approvalthrough Effectiveness -

Supervision 8/80 2.0 2.0 Op/rA 2/(1) Financial9181 2.0 1.5 Op 21(1) Financial8/82 2.0 2.0 Op 2(11) Financial4183 1.0 1.5 Op SI() Management,

Finaneial11/83 1.0 1.5 Op 2/11) Management,

Financial12184 2.0 2.0 Op 2/(1) Financial11/8S 2.0 1.5 Op 2 Financial5/86 2.0 1.5 Op 2 Admin.Expenses

Slow Disburse-ments

3/87 2.0 1.5 OP 2 FinancialPerformanceSlow Disburse-ments

5/88 1.0 1.0 OP 2 Arrears, lackof corporatestrategypoor appraisals

a/ Fin. - Financial AnalystEc. - EconomistOp. - Operations Offlcer

_l 1 - Problem fre or minor problems2 - Moderate problems3 - Major problems(1) - Improving trend(2) - Stationry trend(3) - Deterioratin tren

c/ - Financial problms affecting project were related toelm disb*rsemuts, hih levels of arrears,financial losses In erly pars, Liiin adinitrative expeass.

- Management problem lncluded wea nagemet leaierebip ad lbc of a clear corporate strategy.

LESOTHOLESOTHO NATIONAL DEV,'LOPM-ENT CORPRORATION (LNDC)

PCR for Credit 985-LSO LND'C's New Oraanis-ation Chart (1987)

b oardi of Dinet |

Dirctor, Todhnl | C t Dro Puang| iCrO Director Finnnes

Administrative etr rni2 IPae dtOw-r

D*iv ion i''a-Dia

Wutr Oiractor Dwuts Dior '> Di z~~~~~~~~~~totr | Deputy O;spOc on:Dty DiroctorOrnstinPannite l'_ r_ tian I_t tin_bn Plr

_ iiniatntien _ ad "_ btriao _ i~~~~~~~~mitori li_ 1rm,= _ baitri FncII nrollor

Sbi i air Sundvii `-lliB 't Sbiiie uiv*

_A-iSeton t ia{_ialBF Stn_ti*n = Xa ituta|_10it aNYI P ortoli o riFa cl tioa- I. St- ra7l

_ Perl l ~~~~~~~~~~~~~~~~~~~-iTr SFiarstll |-8ion d mtira et rTs ocn |2C i ieming S _tionw.~~~~~~~~~~~~~~~~~~~~~~~~~r-- -I

i lXetion |e | - Fuadi1t Uaiet(~~~~ Sa Lf t

- 64- Annex 2

SECOND IDA CREDIT FOR THE LESOTHO NATIONAL DEVELOPMENT CORPORATIONBASIC DATA

1. Yr. of Establishment: 1967

2. Onl*nding Termn:

A. Government onlonding to LNDC -- 6eB. Onlonding rate for LNDC to Sub-borrowers -- 11XC. Fee for Foreign Exchange Risk Coverage -- 1XD. Free Limit -- 8150,000E. Aggregate Free Limit -- 81.0 millionF. Other Limits -- 31.6 million (40X) of credit can be used for equlty

Investments and factory buildings0. Maximum Loan per Project -- 8600,000

8. Ownership:At Appraisal At FY66 At FY86 (end) FY68 (end)

Authorized Capital 10.0 10.0 10.0 10.0Issued and Fully Paid 4.0 4.0 10.0 10.0

At 3/81/80 At 8/81/86Share Capital: 4,000.0 4,000.0 10,000.0 10,000.0

of which DEC (6X 1,000.0 1,000.0cumulative non-votingpreferred shares)

Government grante 2,684.0 9,826.0 6,756.0 7,859.0Capital Reserves 1,768.0 14,976.0 14,298.0 18,076.0Accum. Profit (losses) 1,812.0 649.0 1,658.0 8,948.0

Total Equity 7,186.0 29,468.0 81,646.0 89,838.0

-65 Annex 3Page 1 of 5

ACTUAL FINANCIAL PERFORMANCE AND STATUS AS COMPARED WITHArrPKAiSAL rKUJEICI INS

I. INCOME STATEMENT('000 Maloti)

PROJECTIONS

1980 1981 1982 1983 1984

Gross Income 1005 1332 1711 2139 2663Total Expense 877 1101 1363 1626 1929Profit (Loss) beforeProvisions 128 231 348 513 734

Provisions 94 130 123 129 145Net Profit (Loss) 34 101 225 384 589

*ACTUAL

Gross Income 910 1484 1688 2206 2222Total Expenses 624 848 2287 2114 2090Profit (Loss) before

Provisions 286 636 (599) 92 132

Provisions 391 644 519 2100 463Net Profit (Loss) (105) (8) (1118) (2008) (331)

DIIFKEENCES PROJECTED - ACTUAL

Gross Income 95 (152) 23 (67) 441Total Expenses 253 253 (924) (488) (161)Profit Loss Before

Provisions (158) (405) 949 421 602

Provisions (297) (514) (396) (1971) (318)Net Profit (Loss) 139 109 1343 2392 920

- 66 -Annex 3Page 2 of 5

II. BALANCE SHEET('000 Maloti)

PROJECTIONS

Assets 1980 1981 1982 1983 1984

Net Current Assets 50 50 50 50 50Loans 2881 4169 5468 7003 8779Equity 1791 2812 3530 3948 4271Factory Buildings 5630 7072 8477 10163 12185Provisions (1493) (1623) (1746) (1875) (2020)Other 185 183 181 179 175

Total Assets 9044 12663 15960 19468 23440

Liabilities & quity

Long Ternm Liabilities 2650 4968 7140 9264 12147

Equity

Share Capital 4800 6000 6900 7900 8400Capital Reserves 1416 1416 1416 1416 1416Grants 140 140 140 140 140Accumulated Funds 38 139 364 748 1337Total Shareholders

Funds 6394 7695 8820 10203 11293

Total Liabilities& Equity 9044 12663 15960 19468 23440

- 67 -flnnex 3Page 3 of 5

1960 1982 1982 1983 1984

AssetsNet Current Assets 532 119 (402) (158)Loans 443 676 1315 1519Equity 3308 5209 4479 6141Factory Buildings 8949 9338 9704 11586Provisions (317) ;' 5S) (3047) '2452)Other 77 1435Total Assets 12836 15342 12049 16636

Liabilities & Kouty

Long Term Liabilities 2989 4036 4929 6089

Equity

Share Capital 4000 4000 4000 4000Capital Reserves 3445 4041 1131 2733Grants 2713 4700 5033 6266Accumulated Funds (317) (1435) (3047) (2452)

Total Shareholders Funds 9641 11306 7120 10547

Total Liabilities & Equity 12836 15342 12049 16636

AssetsNet Current Assets (462) (69) 452 208Loans 3726 4792 5688 7260Equity - (496) (1679) (531) (1870)Factory Buildings (1l875) (861) 459 599

Total Assets 1/ (173) 618 7419 6804

Long-Term Liabilities 1979 3104 4335 6058

EquityShare Capital 2000 2900 3900 4400Capital Reserves (2029) (2625) 282 (1317)Grants (2573) (4560) (4893) (6126)

Total Shareholders Funds (2146) (2486) 3083 746

Total Liabilities & Equity 11 (173) Ole 7419 6804

i/ Columns do not add to totals due to omission of provisions and accumulatedfunds in this table.

- 68 -Annex 3Page 4 of 5

III. OPERATIONS('000 Malati)

PROJECTIONS

APprovals 1980 1981 1982 1983 1984

Loans 1400 1680 2016 2419 2903Equity 1450 1000 700 480 528Factory &Infrastructure 1100 1320 1584 1901 2281

Guarantees 1000 400 400 400 400

4950 4400 4700 5200 6112

Coumndtments

Loans 980 1596 1915 2248 2758Equity 1015 1135 790 546 514Factory Bldgs/Sites 770 1254 1505 1806 2167Guarantees 700 580 400 400 400

3465 4565 4610 5000 5839

Disbursements

Loans 1070 1482 1600 1984 2385Equity 812 1111 859 595 520Factory Buildings 758 1442 1405 1686 2022

2640 4035 3864 4265 4927

ACTUAL

Approvals

Loans 1500 600 800 3810 1700Equity 2800 600 300 640 0Factory &

Infrastructure 6100 1900 4400 3103 1300Guarantees 3100 500 100 80

13500 3600 5600 7553 3080

Commitments

Loans - 826 1275Equity 200 51 -Factory Bldgs/Sites -500 1231 1459Guarantees 300 - -

1000 2108 2734

Disbursements

Loans - 2017 903Equity 2400 85 -Factory Bldgs 1100 284 2138

3500 2386 3041

- 69 -Annex 3Page 5 of 5

DIFFERENCES (Projected - Actual)

Approvals

Loans (100) 1080 1216 (1391) 1203Equity (1350) 400 400 (160) 528Factory Shells/Infrastructure (5000) (580) (2816) (1202) 981

Guarantees (2100) (100) 300 400 320(8550) 800 (900) (2353) 3032

Conmitments

Loans 1915 1422 1483Equity 590 495 514Factory Bldg/Sites 1005 575 768Guarantees 100 400 400

3610 2892 3105

Disbursements

Loans 1600 (33) 1482Equity (1541) 510 500Factory Bldge. 305 1402 (116)Total 364 1879 1866

LESOTHOLESOTHO NATIONAL DEVELOPMENT CORPORATION (LNDC)List of Subproiects Financed Under Credit 985-LSO

(US$'000s)

TotalSubproject Date Amount Amount AmountNumber Approved Approved Cancelled Disbursed

1. Lesotho Clothing A-1 2/10/81 107.8 20.7 87.12. Freightpak International A-2 5115/81 76.5 39 37.53. Gallant Clothing A-3 10127181 231.7 17 214.74. Paktex (Pty) Limited (cancelled) A-4 5/27182 785.5 785.5 _5. Metro Mafeteng Building A-5 219183 415 107.2 307.86. Metro Butha-Buthe A-6 2/9183 415 118 2977. Focus Clothing A-7 11/27184 191.4 143.4 488. Metro Cashbuild A-8 11128/84 171.4 13.3 158.19. Mustang Shoes A-9 8/22185 368 10.9 357.110. Steelquip A-10 12110185 372.9 208.7 164.211. Lesotho Clothing Industries A-11 118/86 280.9 291.712. Golden Textiles (cancelled) A-12 1/23/86 170.9 170.9 -13. Glennit Textiles (cancelled) A-13 2)4186 500 S00 -14. Four Factory Shells A-14 5/14/87 640 9.1 630.915. Thaba-Tseka Wholesale A-15 6124/87 164.2 12 152.216. Two Factory Shells A-16 7/22/87 320.3 164.5 155.817. Seventh Factory Shell A-17 10/23/87 185.3 49.2 136.1

18. Maputsoe Bakery (cancelled) B-1 8/8/83 82.8 82.8 _19. Peacock Garment (cancelled) B-2 7120/84 50.9 50.9 _20. Lesotho Knitwear B-3 1/11/85 45.6 _ 45.621. Apex Knitting - B-4 2/22/85 100.4 80.5 19.922. Tsitoe Clothing B-5 2/5/86 59.1 0.4 58.7

4S

71 - Annex 4Page 2 of 3

LIST OF LNDC STAFF MEMBERS ENROLLED IN TRAINING ABROAD

NAME PROGRAM DURATION DATE OF RETURN

RAMASHAMOLE M.L M.Sc. in Banking 87/88 Sept. 1988& Finance forDevelopment

NTSTNYI P. B.Sc. in Estate 86/89 June 199CManagement

MATELA M. M.Sc. in Human 87,/88 Sept. 1983ResourceDevelopment

STAFF ON BLOCK RELEASE AT THE CENTRE FOR ACCOUNTING STUDIES

NAME QUALIFICATION SOUGHT YEAR OF PROGRAM

LEBITSA Chartered Accountanit Final Year

'MEFANE M. Registered Accountant 1st Year

CHONDOMA T. Registered Accountant 2nd Year

MOILOA M. Registered Accountant end Year

MO:HAsCHAU'E T. Registered Accountant .nd Year

CHAKA M. P.egistered A_countant 1st Year

Mus.syam'-iri P. Reg.stered Ac_ountant 1Xt Yer

- 72 -Annex 4Page 3 of 3

PROPOSED STAFF TRAINING PROGRAM FOR 1988/89

NAME TRAINING PROGRAM SOURCE OF FUND DURATION

MA.AiHOAL:BE -. Developmernt Communi BANFESS Ia8$-9OIMRSI' cation Course

IALEKE M. (MRFQ) MBA 1?E

I

-73- Annex 5

Summary of Subprojects Financed lnder the Credit Page 1 of 10

Lesotho Clothing Indu^tries. Subloan A-1 for USS 107,874. This company

was incorporated in 1980 as a subsidiary of Phoenix Clothing Company of

RSA. Initially the company was to produce men's and women's shorts, and in

later years, jeans for export to the EEC and the United States. The IDA

credit was intended for the financing of the foreign exchange component of

a building to be constructed by LNDC and leased to Lesotho Clothing.

The company has been operating profitably, though net profits dropped in

1987. This drop is attributable to an increase in freight and bank

charges. Due to the economic sanctions imposed on the RSA (in 1986?),

direct shipment via the RSA to the United States is no longer an option.

Because the company markets its product primarily to the USA, its freight

costs jumped considerably. Bank Lharges have increased because the local

bank has increased clearance costs on foreign checks. The subproject has

created 325 jobs, and the company currently employs 570 people. Training

for 160 workers was successfully completed. The company intends to expand

further, and this has been approved by LNDC.

Freiahtpak International. Subloan A-2 for USS 76,574. Freightpak was

established in Maseru, Lesotho on August 1, 1978 to urndertake the following

activities: international shipping, road transport services, local

furniture removals, warehousing and export packing of industrial,

ccomercial and household goods, end distribution. In 1980 IBRD approved

under Cr. 702L?9 US$ 83,950 to finance the foreign exchange component of a

building to be constructed by LNDC and leased to Freightpak. However, due

to the company s expansion program additional funds were requested and

subsequently apprGved under Cr. 985LS0. The company was operating

profitably until a new company, Manica Freiaht International, moved into

Annex 5Page 2 of 10

- 74 -

Lesotho, and eventually took over Freightpak. The building which was

initiaily leased to Freightpak is now occupied by Manica Freight

International.

Gallant Clothing Manufacturers. Subloan A-3 for US$ 231,700. Gallant

Clothing Lesotho (GCL) was incorporated in 1977 as a subsidiary of the RSA

based clothing manufacturer, Gallant Durban. The IDA credit was intended

for the financing of the foreign exchange component of a factory to be

leased from LNDC. GCL was to produce outerwear for ladies, girls, and

infants. The company started operations in Maputsoe in 1978, and its main

strategy was oriented towards the EEC markets while the parent company

(Gallant Durban) was to continue to focus on the RSA market. However, due

to inadequate quality and non-competitive costs, GCL's export sales

plummeted. This decline in export sales resulted in BCL becoming a

manufacturing site for the RSA market only. Between 1983 and 1985 GCL's

sales increased by over 20% p.a. but declined by 14% in 1986. Margins have

declined steadily since 1982, and in 1986 GCL suffered an operating loss.

This deterioration in sales was attributed to the declining demand in the

RSA and consequent price cutting to maintain ma-ket share. By the end of

1987 GCL posted net profits again, and has started a joint venture

subsidiary company in Lesotho with a reputable international company to

diversify its product range. Under the training component of the IDA

credit 160 trainees successfully completed their training, and 305 Jobs

-'r created. The company is now in arrears in its building rental

payments.

Annex 5Page 3 of 10

- 75 -

Paktex (Pty) Ltd. Subloan A-4 for US$ 785,515. This company was

incorporated in the RSA on November 17, 1981 to manufacture plastic cloth

and bags. The IDA credit was intended for the construction of a factory

building by LNDC and leased to Paktex. The amount of the credit, however,

exceeded the US$ 600,000 limit -- the maximum financial commitment by LNDC

from the credit per subproject as agreed with IDA under Cr. 985LSO. The

side letter in which the above limit is set, does however provide that LNDC

could, with sufficient Justification and IDA approval, utilise more than

US$ 600,000 from the credit for a single subproject. This additional

amount was subsequently approved by IDA, but was later canceled by LNDC due

to its inability to put together a complete financial package suitable to

all the investors.

Metro Mafetena and Butha-Buthe. Subloans A-S and A-6 for a combined

US$ 830,000. This IDA credit was extended for the construction of

wholesale warehouse buildings in Mafeteng and Butha-Buthe for Metro Lesotho

Ltd. This comoany is a very successful retail operation owned 50X by a

subsidiary of LNDC, Lesotho Investment Holdings (LIH), and 50X by Metro

Group South Africa. Metro Lesotho was incorporated in 1974 and began as a

wholesaler distributor of consumer goods in Lesotho. Up until June of 1987

the Metro Lesotho Group included groceries, hardware and clothing

wholesaling. The rubloans have no arrears in rents due to LNDC. Metro

Lesotho has been operating profitably with net profits increasing steadily

between 1985 and 1987.

Annex 5Page 4 of 10

- 76 -

Focus Clothing Manufacturers Ltd. Subloan A-7 for US$ 191,400. Focus was

incorporated in Lesotho in February of 1984 as a subsidiary of the South

African company, Twin Clothing Manufacturers of Durban. The IDA credit was

sought to finance part of the foreign exchange costs fc- the establishment

of Focus in Maputsoe. The company was to produce children clothes (95%)

and ladies' fashion skirts (5/.). During the initial years, Focus was to

sell 30X. of its production locally, and 707. in the RSA through Twin's

distribution centre in Durban. Eventually, the RSA sales are to be

ubstituted by exports to the EEC. This subproject created 150 jobs. The

company is currently operating satisfactorily.

Metro Cashbuild Maseru. Subloan A-8 for US$ 171.376. This IDA credit was

approved for the financing of the foreign exchange component of a warehouse

to be constructed by LNDC and leased to Metro Cashbuild Maseru, a building

materials wholesale operations to be established in Maseru as a branch of

Metro Lesotho. The latter was originally established as'a joint venture

owned 50. by LNDC (this share was subsequently transferred to LNDC's

subsidiary the Lesotho Investment Holdings -- LIH), and 50% by Metro Cash

and Carry of Johannesburg. The subproject creatod 46 jobs, and is

operating profitably.

Mustang Shoes Limited. Subloan A-9 for USs 368.000. Mustang (Pty) Limited

was formed by Walwijk B.V of Holland and Jaguard Shoes of RSA, previous

owners of Lesotho Shoes Limited (LSL) which was liquidated at the end of

Annex 577 Page 5 of 10

1984. Mustang took over the assets and liabilities of LSL and resumed the

production of moccasins and uppers for athletic footwear and produced a new

line of children's and ladies shoes. Approximately 75% of the moccasins

and shoes uppers produced was to be sold in the RSA and the rest in

Lesotho. This subproject created 500 jobs, and is operating profitably.

The company intends to expand further.

Steelquip (Pty) Ltd. Subloan A-10 for US$ 372,925. Steelquip Ltd. was

established in June 1984 by Rovic Holdings, a diversified manufacturer of

agricultural implements. The IDA subloan was intended to finance 80% of

the building expansion and improvements as well as to finance machinery and

imported raw materials, in order to introduce an additional production line

of cultivators. Steelquip initially planned to produce about 750 units per

year, representing an 8% market share and a level of production well above

steelquip's breakeven point. At appraisal the subproject was estimated to

have created 125 jobs. Unfortunately, due to a draught the RSA farming

sector suffered major problems, which led to low equipment purchases by RSA

farmers as well as their inability to meet financial obligations.

Operations have now ceased, and the company has been placed under

liquidation.

Lesotho Clothing Industries Ltd. Subloan A-11 for US$ 280,899. Lesotho

Clothing-Industries (Pty) Ltd. (LCI) was established in Maputsoe, Lesotho

in 1981 by a group of South African investors. LCI manufactures a wide

Annex 5Page 6 of 10

- 78 -

range of casual and sportswear under the "Instinct" label. Approximately

507 of its production is sold in the RSA and the rest exported to the USA

and Western Europe. The IDA credit was to finance the expansion of LCI;

specifically, to finance part of the cost of constructing a new factory

building, additional machinery and equipment and stocks of imported raw

materials. LCI is a very successful company, and also has a good track

record in its relations with LNDC.

Golden Textiles (Ptv) Ltd. Subloan A-12 for US$ 170,895. This subproject

called for the establishment of a factory to manufacture knitted jerseys

and pajamas. Sponsors of this endeavour, the Auo family, own 5 companies

in the Transkei and Ciskei "homelands" of the RSA, producing knitwear,

cutlery, shoes and plastic products. The establishment of the Lesotho

factory would enable Transkei Knitting (the existing knitwear firm and

parent company to Golden Textiles) to augment its production to meet

demand, which currently outstrips Transkei Knitting's production

capability. Eighty-seven jobs were created against the 350 new jobs

estimated at appraisal. The company started operations in January of 1986,

but closed in June 1988 because of its inability to process orders.

Furthermore, the company had difficulty in competing with RSA manufacturers

who enjoy concessions not available in Lesotho. At the time it closed,

Golden Textiles has employed 64 people.

Annex 579 Page 7 of 10

6lennit Textiles. Subloan A-13 for US$ 500,000. This subproject was

intended to assist in the establishment of a new integrated fabric and

garment manufacturing plant in Lesotho to manufacture knitted fabrics and

sports clothes. The sponsors, Thread Textiles, are experienced South

African garment manufacturers, with several other textile plants in the RSA

and Ciskei. Glennit initially planned to export 20/. of its production to

the USA and the Federal Republic of Germany, with the rest intended for the

RSA. Due to financing problems at the early stages of the company's

existence, Glennit suffered cash flow problems which became unmanageable

when the promoters were unable to support it adequately. The company is

currently under liquidation, and very little chance exists for any

substantial recovery from the liquidator. LNDC has started legal

proceedings against the sponsors.

Thaba Tseka Wholesale. Subloan A-IS for US$ 164,209. This subproject

called for the establishment of a wholesale opiration at Thaba-Tseka,

located in the eastern mountain region of Lesotho. LNDC built the building

for lease to Maluti Marketing, the wholesale operators. haluti Marketing

is a 50/50 joint venture between LNDC and Frazers Group, a large RSA

retailing and wholesale operation.

Factory Shells. Subloans A-14, A-16 and A-17 for a combined total of US$

1,145,600. This endeavour involved the construction of seven advance

factory shells of 1,000 square metres each at Thetsane, Lesotho by LNDC.

Annex 5

- 80 Page 8 of 10

The shells form an important component of the incentive package promoted by

LNDC to attract direct foreign investment with the objective of encouraging

employment creation in the formal sector. These factory shells are

currently leased to 5 textile companies.

Maputsoe Bakery. Subloan B-i for US$ 82,761. Maputsoe Bakery was

established in 1980 by the proprietor of Border Bakery in Ficksburg, RSA,

with LNDC providing leased premises financed under Credit 702-LSO. The

bakery, which opened in early 1981 produced bread loaves and confectionary.

In 1953, IDA approved US$ 82,761 from Credit 985-LSO to expand the bakery's

production. These funds were never disbursed, and upon request by LNDC the

subloan was cancelled in 1985.

Peacock Garment Manufacturina. Subloan B-2 for US$ 50,880. Peacock

Garment Manufacturing was eistablished in 1984 to manufacture school

uniforms, knitwear for school children and women's dresses. All were

intended for the domestic market. The project has eight sponsors, of whom

two are expatriates who control 40/. of the shares of the company. Shortly

after it started operations, the company developed technical, marketing and

general management problems. Towards the end of 1986 it became apparent to

the shareholders that the company could no longer be saved. The company

was put intr a voluntary liquidation. LNDC expects little or no recovery.

Annex 5- 81 - Page 9 of 10

Lesotho Knitwear. Subloan B-3 for US$ 45,630. Lesotho Knitwear was

established in 1984 to manufacture 100/. wool sweaters for export to North

America. Early on the company experienced considerable management problems

which affected the company's financial performance. These management

difficulties persisted until 1988 when Lesotho Knitwear's major creditor,

Barclays Bank, threatened liquidation of the company. In July of 1988 the

company s promoter, Paul Lee Enterprises, suspended operations temporarily

to mobilise funds and to negotiate a joint venture arrangement. The

company is now breaking even but has substantial cummulative losses.

Apex Knitting. Subloan B-4 for US$ 100,440. Apex Knitting was established

by three Zimbabwe nationals to manufacture men's socks. It started

production in January of 1983 in Francistown, Botswana with the aim of

marketing its socks approximately 50% in Zimbabwe and 50% in South. Africa.

In January 1985 Zimbabwe imposed import restrictions which virtually sealed

off the Zimbabwean market. For this reason Apex Knitting decided to move

its operations to Lesotho and focus entirely on the South African market.

Unfortunately, the company experienced production problems as well. The

promoters recruited a production technician from Great Britain, who, due to

management problems left the company. A replacement was not recruited

early enough, and production broke down. The manager and the promoters

abandoned the company, and LNDC liquidated it in 1987.

Annex 5Page 10 of 10

- 82 -

Tsitoe Clothing. Subloan 8-5 for US$ 59,100. Tsitoe Clothing was

established to manufacture an embroidered clothing line for children. The

promoter was the RSA based company Cape Embroidery (Pty) Ltd. The IDA

credit was to finance machinery and 80% of the cost of improvements to an

existing factory shell. But, due to inadequate support from the promoting

company, Tsitoe Clothing suffered production and marketing problems. The

company has been placed under liquidation. Difficulties are expected in

disposing of specialised equipment.

- 83 -

Annex 6Page 1 of 4

LNDC's STATE1NT OF POLICIES

1.2 LNDC STATEMENT OF POLICY

1.2.1 The Board of Directors have the responsibility for setting policyand ensuring that Management will effectively implement such policy.The p'urpose of this statement is to set forth procedures and matterswhi.ch will clarify the Corporation's powers and responsibilities.

1.2.2 The Board of Directors shall meet as frequently as necessary toconduct the business of the Corporation; it shall meet at leastonce each quarter.

1.2.3 LNDC's Management shall be responsible forpreparing and submittingto the Board an annual program of action, which include a budget.Such a program and budget should be supported by financial projectionson a period of at least three years. The program and budget shouldbe submitted to the Board at least three weeks prior to the Boardmeeting at which it will be examined. Such a program shall, interalia, show the resources available to the Corporation, a projectby project review of activities and proposed investment and/or loansby the Corporation, the resource gap, if any, and proposals regardingways and means to close such a gap. Included in the annual programproposal will be any proposed major changes in the structure or areasof responsibility of the senior staff and/or sections of the organiza-tions. The Board shall be informed on a regular basis of proposedchanges, modifications and additions to the annual program.

1.2.4 To further ensure that the LNDC program is consistent with Governmentpolicy, the annual program will be forwarded to, and discussed withthe Ministries of Finance, Trade and Industry and the Ministry ofPlanning, Employment and EconomLc Affairs at the time lt is forwardedto the Board. All written comments received will be presented to theBoard before diseussions of the annual program.

1.2.5 To ensure full discussion of all matters brought before the Board,Government members of the Board may, provided there is no Boardobjection, each be accompanied by an advisor(s) who will be permittedto particlpate in the Board dlscusslons. The Board has the right,however, to close the meetlng to non-Board members at such times asthe Board considers necessary.

1.2.6 The Corporatlon shall, under normal circumstances not manage orattempt to manage the affairs of any of its subsidiarles or invest-ments. However, it will noiinate7Directors and ensure that competentmanagers are employed and performance is carefully monitored. Inprojects encountering severe difflculties in which the Corporationhas made an investment, the Corporation will take such action as itconsiders necessary to protect its investment.

1.2.7 The Corporation shall compile and transmit to the Board each quarterthe financial and operating record of those enterprises in which ithas major outstanding commitments in the way of loan, equity, guaran-tee, and any other assistance of a financial nature. Such submissionsshall include an analysis of the accounts by the Corporatlon's staff.

1.2.8 The Board in considering the program of the Corporation will ensurethat the resources and activities of the Corporation are allocatedin such a manner that the interest of the national business communityare adequately consldered.

Annex 6-84- Page 2 of 4

1.2.9 Before a loan, equity investment, guarantee, or building is under-taken by Corporation, management shall circulate to the Board memberstwo weeks prior to a meeting, an appraisal document on the projectincluding a projected profit and loss account, balance sheet, and acash flow statement for at least five years, and an evaluation ofmanagement, marketing arrangements, and the project's financial andeconomic viability. However, the Managing Director of LNDC mayindividually approve LNDC's financial commitments (viz. loans, equity,guarantee and building) as follows:

1.2.9.1 for individual projects having already been approved inprinciple or included in a capital budget, up to M50,000.00

1.2.9.2 for individual projects not having received approval inprinciple, up to M25,000.00.

The Managing Director shall report to the Board such commitments atthe next Board meeting; in no case should total commitments undercategory (1.2.9.1) exceed M100,000.00 prior to Board approval.

1.2.10 In entering into a commitment, the Corporation will be generallyguided by the following principles in addition to those providedby law:

1.2.10.1 All loans should be reasonably secured and the Corporationshall charge interest rates, and fees which are compatiblewith the prevailing market rates and/or which enable itto earn a reasonable return on its operations.

1.2.10.2 All loans shall be by formal written agreement stipulatingrate of interest (plus any additional charges) grace andrepayment period, security and other relevant details.

1.2.10.3 The Corporation shall not normally invest more than 10%of its net worth in the share capital of any one project.Should it be found necessary to exced this limit, aspecial submission will be made to the Board and a specialresolution shall be passed allowing the Corporation toexceed this limit.

1.2.10.4 Total aggregate investments in share capital should notexceed the net worth ofthe Corporation.

1.2.10.5 The total financial commitment (viz. equity, loan andguarantee) by the Corporation in any single project shouldnormally not exceed 20% of the Corporation's net worth.

1.2.10.6 The Corporation's total financial commitment (viz. equity,loan, guarantee and building) to any single project shouldnot normally exceed 60% of the project's total capital cost,including permanent working capital.

1.2.10.7 The Corporation shall not normally take a controllinginterest in the voting stock of projects it invests in,unless it is unable to interest other investors to takea controlling interest in the projects it is promoting(excluding property development for future lease or

-85- Annex 6

Page 3 of 4

management by other parties, aid-funded projects forwhich it is the executing agency). However, in accord-ance with Government policy, LNDC will take the initiativewhere private investors are not available for projectswhich are financially and economically viable and in thenational interest.

1.2.11 In assessing proposals for financial assistance, the Corporationwill take into account primarily the prospects of success of theproc--t, the ability and integrity of the applicant and socio-economicben. ..s of the project. Enterprises assisted should be financiallyand technically viable and have competent management.

1.2.12 The Corporation will assist credit-worthy enterprises contributingto the development of Lesotho including:

1.2.12.1 Manufacturing and Processing Industries.

1.2.12.2 Construction and Building Materials Industries.

1.2.12.3 Tourism Industries.

1.2.12.4 Commercial Enterprises.

1.2.12.5 Agro-Industries.

1.2.12.6 Mining Enterprises.

It will not normally lend for:

1.2.12.7 Working capital - (except for permanent working capital).

1.2.12.8 Projects where alternative finance is available.

1.2.12.9 Refinancing.

1.2.13 The rental charges for building and industrial sites shall enablethe Corporation to earn a resonable return on its investment. Suchrental charges shall usually be based to yield 15% per annum ofactual construction cost and shall have an escalation clause ofat least 5% per annum.

1.2.14 In the case of a joint venture in which LNDC is a minority share-holder, the Corporation should arrange for the auditors of theenterprise's accounts tc be appointed by the Corporation.

1.2.15 The Corporation shall not normally incur exchange risks withrespect to those of its borrowings that are repayable in foreigncurrencies.

1.2.16 The Corporation's financial policy will aim at maintaning the valueof its own capital, managing its funds in such a manner that theCorporation is, at all times, able to honour its obligations on

-86- Annex 6Page 4 of 4

time and to achieve a profit margin that enables it to cover itsoperating costs and build up adequate reserves.

1.2.17 The Corporation will develop and maintain a solid and well balancedorganization and a management team capable of generating business,appraising requests submitted to it, assisting enterprises in theformulation of their projects, supervising their execution and over-seeing the Corporation investments. It will give special attentionto the training of its professional staff with special emphasis onthe development of a good core of local professional personnel.Professional and other staff shall be recruited solelv on the basisof their qualifications and experience.

1,2.18 Each enterprise receiving financial assistance from the Corporationshall have an accounting system which meets the requirements ofsound management. The Corporation shall, as necessary, exerciseits right to check the activities and inspect the accounts andbooks of enterprises assisted. Each enterprise shall be requiredto submit annual budgets and quarterly financial accounts to theCorporation.

1.2.19 The Corporation and itS subsidiaries' accounts shall be kept inaccordance with generally accepted international accounting princi-ples. The Corporation and its subsidiaries shall ensure that theservices of independent accounting firms of-repute are engaged toaudit their annual accounts.

1.2.20 The Corporation will ensure that enterprises to which it providesassistance will be capitalized with an adequate level of equity funds.

1.2.21 The Corporation shall over time, seek to revolve its funds byselling off its equity portfolios where prices which give it areasc.able return on its investments are obtainable. Such salesshall be made to as wide a range of Basotho shareholders as isfeasible. Where the Corporation's interest is sold to foreignbusinessmen, the Corporation shall ensure that the industry andjobs created are not only protected but expanded and that thenew owners will operate within Government policy and heed thenation's aspirations.