AFRICAN DEVELOPMENT FUND

LESOTHO

ECONOMIC DIVERSIFICATION SUPPORT PROJECT (EDSP)

APPRAISAL REPORT

OSGE DEPARTMENT

December 2016

Pu

bli

c D

iscl

osu

re A

uth

ori

zed

Pu

bli

c D

iscl

osu

re A

uth

ori

zed

TABLE OF CONTENTS

Currency Equivalent i i i

Fiscal Year………………………………………………………………………..i

Weights and Measurement……………………………………………………….i

Acronyms and Abbreviations……………………………………………………ii

Grant Information……………………………………………………………….iii

Project Summary………………………………………………………………..iv

Results-based Logical Framework………………………………………………v

Project Timeframe…..………………………………………………………….vii

I - STRATEGIC THRUST & RATIONALE…………………………………1 1.1 Project Linkages with Country Strategy and Objectives.................................1

1.2 Rationale for Bank’s Involvement………………………………… ………2

1.3 Donors Coordination…………………………………………………………4

II – PROJECT DESCRIPTION…………………………………………….…5

2.1. Project Components…………………………………………………………5

2.2 Technical Solution Retained and Other Alternatives Explored……………...7

2.3 Project Type……………………………………………………………….…8

2.4 Project Cost and Financing Arrangements…………………………………..8

2.5 Project’s Target Area and Population………………………………………10

2.6 Participatory Process for Project Identification, Design and

Implementation…………………………………………………………………10

2.7 Bank Group Experience, Lessons Reflected in Project Design…………….11

2.8 Key Performance Indicators………………………………………………..12

III – PROJECT FEASIBILITY……………………………………………...12

3.1 Economic and Financial Performance……………………………………...12

3.2 Environmental and Social Impacts…………………………………………12

IV – IMPLEMENTATION…………………………………………………..13

4.1 Implementation Arrangements…………………………………………….13

4.2 Financial Management, Disbursement and Audit…………………………13

4.3 Procurement Arrangements………………………………………………..14

4.4 Monitoring and Evaluation………………………………………………..15

4.5 Governance…………………………………………………….………….15

4.6 Sustainability……………………………………………………………...16

4.7 Risk Management…………………………………………………………16

4.8 Knowledge Building………………………………………………………16

V – LEGAL INSTRUMENTS AND AUTHORITY……………………….17

5.1 Legal Instrument………………………………………………………….17

5.2. Conditions Associated with Bank’s Intervention………………………..17

5.3. Undertakings……………………………………………………………..17

5.4 Compliance with Bank Policies…………………………………………..17

VI – RECOMMENDATION………………………………………………..17

LIST OF TABLES

Table 1 Project Timeframe

Table 2 Project Description

Table 3 Project Alternatives Considered and Reasons for Rejection

Table 4(a) Project Cost Estimates by Component and Subcomponent

Table 4(b) Sources of Financing

Table 4(c) Project Cost by Category of Expenditure by Component and Subcomponent

Table 4(d) Expenditure Schedule by Year

Table 5 Lessons Learned from Previous and Ongoing Operations

Table 6 Implementation Schedule

Table 7 Risk and Mitigation Measures

Boxes and Charts

Box 1 NSDP Six Strategic Goals

Box 2 Conditions Precedent to First Disbursement

Chart 1 Lesotho export as percent of GDP

Chart 2 Lesotho’s export destination

Chart 3 Source of Credit to SMMEs

Chart 4 Enhancing economic diversification

Appendices

Appendix I: Lesotho Selected Macroeconomic Indicators

Appendix II: Progress Towards Achieving the MDGs

Appendix III: Donor Mapping

Appendix IV: Bank Group Portfolio Status

Appendix V: Doing business indicators

Appendix VI: Analytical Work and Underpinnings

Appendix VII: Map of Zimbabwe

i

Currency Equivalents As of 22 September 2016

1 UA = USD 1.394

Fiscal Year

1stApril – 31stMarch

Weights and Measurements

1 metric tonne = 2204 pounds (lbs)

1 kilogramme (kg) = 2.200 lbs

1 metre (m) = 3.28 feet (ft)

1 millimetre (mm) = 0.03937 inch (“)

1 kilometre (km) = 0.62 mile

ii

Acronyms and Abbreviations

ADB African Development Bank

ADF African Development Fund

AGOA

BDS

BEDCO

African Growth and Opportunity Act

Business Development Service

Basotho Enterprises Development Cooperation

CBL Central Bank of Lesotho

CPIA Country Policy and Institutional Assessment

CPAF Common Performance Assessment Framework

CSP

DP

Country Strategy Paper

Development Partners

DPCF Development Partners Consultative Forum

DTF

EDSP

Distance to Frontier

Economic Diversification Support Project

EU European Union Delegation

FDI Foreign Direct Investment

GoL Government of Lesotho

GDP Gross Domestic Products

ILO International Labour Organisation

IMF International Monetary Fund

ISP

LNDC

LTDC

LTS

Institutional Support Project

Lesotho National Development Cooperation

Lesotho Tourism Development Cooperation

Long Term Strategy

MDA Ministries, Departments and Agencies

MDP Ministry of Development Planning

MFDP Ministry of Finance and Development Planning

MF Ministry of Finance

MSBCM

MTEC

MTI

M&E

Ministry of Small Business Development, Cooperatives and Marketing

Ministry of Tourism, Environment and Culture

Ministry of Trade and Industry

Monitoring and Evaluation

SMMEs

MTEF

Small, Medium, and Micro Enterprises

Medium Term Expenditure Framework

NSDP National Strategic Development Plan

OPEV Operations Evaluation Unit

OSGE Governance, Economic and Financial Management Department

PCG Partial Risk Guarantee

PCR Project Completion Report

PCN Project Concept Note

PD Presidential Directive

PFM Public Financial Management

PIU Project Implementation Unit

PMU Project Management Unit

PRSP Poverty Reduction Strategy Paper

PSCEDP

SACU

Private Sector Competitiveness and Economic Diversification Project

Southern African Customs Union

SARC Southern Africa Resource Centre

SBD Standard Bidding Document

SME Small Micro Enterprises

UA Units of Account

USD United States Dollars

UNDP

WB

United Nations Development Program

World Bank

iii

Grant Information

Client’s information

RECIPIENT: The Kingdom of Lesotho

EXECUTING AGENCY: Ministry of Trade and Industry

Financing plan

Source Amount (UA) Instrument

ADF 2.22 Million Grant

ADF Loan 5.00 Million Loan

GoL Contribution 0.78 Million

TOTAL COST 8.00 Million

ADF’s key financing information

ADF Loan: UA 5 million ADF Grant: UA 2.22 million

Currency Units of Account (UA) Units of Account (UA)

Commitment fee 0.5% N/A

Service charge 0.75% N/A

Interest rate 1% N/A

Tenor 30 years including 5 year grace

period

N/A

Timeframe - Main Milestones (expected)

Concept Note approval

July 2016

Appraisal September 2016

Project approval December 2016

Effectiveness March 2017

Mid-term Review December 2018

Completion December 2020

iv

Project Summary Paragraph Topics covered

Project

Overview

Project name: Lesotho Economic Diversification Support Project (EDSP)

Geographic scope: Entire country

Implementation timeframe: 2017-2020

Total Project cost: UA 8.00 million

Expected Outcomes and Outputs: The expected outcomes are: (i) improved environment for trade and investment and

(ii) strengthened capacity and improved environment in key identified sectors. These will be achieved through the

following output level results: (a) enhanced entrepreneurial skills for SMMEs, (b) improved access to finance, (c)

economic diversification program implemented, (d) strengthened capacity in industrial policy planning,

implementation and monitoring, (e) improved capacity for standards and certification of products, and (f) improved

public-private dialogue in selected sectors and strengthened partnership with the private sector.

Project direct beneficiaries: The main beneficiaries are SMMEs and the youth who will be supported in business start-

ups and those who wish to expand their business operations. The direct project beneficiaries include the Ministry of

Trade and Industry; Ministry of Small Business Development, Cooperatives and Marketing; Ministry of Finance;

Ministry of Development Planning, Ministry of Tourism, Environment and Culture; Lesotho National Development

Corporation, Basotho Enterprises Development Cooperation; and Lesotho Tourism Development Cooperation.

Overall, the private sector will benefit from the improved business environment that is expected to materialize from

the dialogue process and the public-private partnerships that will emerge.

Needs

Assessment

Lesotho achieved solid economic growth over the past several years, but growth has been less inclusive and dependent

only on the manufacturing and export of textiles and garments. Real GDP growth averaged about 4½ percent a year

from 2010 to 2014. The manufacturing sector, although concentrated mainly on textiles and garments, was until

recently a source of employment, and the main source of growth. Despite good progress, the manufacturing sector’s

contribution to GDP declined from about 20% in 2006 to less than 8% in 2014 due to stagnation in the textile and

apparel sectors after the global economic crisis, and increased competition from low-cost Asian producers. Since then,

public investment has taken over as the main driver of growth. However, increasing dependence on the Southern Africa

Customs Union (SACU) receipts, reliance on miners’ remittances and textile exports to the United States continues to

make the country vulnerable to external setbacks. Further, high unemployment and poverty, particularly in the rural

areas remains a challenge.

To support the revamping of Lesotho’s economy, the Project will first build public sector capacity in policy planning,

implementation and results monitoring leading to sustained reforms. Progress with the investment climate reforms

needs to be pursued and complemented through promoting strategic partnership and dialogue between the public and

private sectors. Furthermore, reforms that have helped to attract FDI (textile and garment) should be complemented

through targeted technical assistance and support to enhance entrepreneurship and strengthening backward and forward

linkages. Second, the private sector is expected to be the engine of growth while the Government is focusing on

maintaining peace and security, ensuring rule of law, providing basic infrastructure and promoting human

development. In this regard, there has to be a mechanism by which the public and private sectors engage on policy

design and implementation issues. The Lesotho Doing Business Report and Private Sector Diagnostics Studies

concluded that the private sector is confronted with several challenges including: (i) poor infrastructure (electricity,

roads, and transport); (ii) lack of access to finance; (iii) administrative barriers; (iv) lack of entrepreneurial and

technical skills; and (v) lack of access to markets. In tackling these challenges, complementary initiatives and projects

are being implemented by the Government and development partners. The proposed Project will complement ongoing

initiatives by focusing on selected sectors critical for economic diversification, and promoting enterprise development

through supporting SMMEs to develop entrepreneurial skills, create linkages with large scale firms through mentorship

programs, improve their access to the services of financial institutions and enhance their access to markets.

Bank’s

Added Value

The proposed operation will complement and enhance the effectiveness of the Bank’s ongoing projects by focusing on

the private sector development pillar. The ongoing Projects are focused on infrastructure (power and water), and public

finance management reform which also contribute towards creating a conducive environment to attract private sector

investment in the country (e.g. reducing the constraints of electricity shortages). There are also synergies with the

ongoing donor- funded programs, in particular the Private Sector Competitiveness and Economic Diversification

Project (PSCEDP) financed by the World Bank. Furthermore, the Bank has a considerable experience and expertise in

private sector development, gained from designing and implementing similar initiatives in member countries.

Knowledge

Management

The Project will contribute to knowledge building particularly in the areas of policy analysis, design, implementation

and monitoring. On the private sector side, the project builds entrepreneurial and business management skills, exposes

SMMEs to new frontiers both in terms of competitiveness, innovation and exploring other sectors that have good

potential for development. The Bank will capture and disseminate knowledge and experience through sharing the

findings of supervision missions, progress reports, and the Project Completion Report. Lessons learned and experience

gained will be available to inform future policy operations.

v

Result-based Logical Framework

Country and project name: Lesotho- Economic Diversification Support Project (EDSP) Purpose of the project: To support private sector development through improving partnership, entrepreneurship and skills development, access to finance and market, and

investment promotion in the selected sectors critical for economic diversification.

RESULTS CHAIN PERFORMANCE INDICATORS

MOV RISKS AND

MITIGATION Indicator (including CSI) Baseline Target

IMP

AC

T

Inclusive growth through private sector

development

Sustained GDP growth rate (%) 3.4 (2014/15) 5.0 (2021) HDI; NSDP; IMF, Bureau

of Statistics;

Finscope Study

Risk # 1: Political instability may affect

pace of project

implementation. Mitigation: GoL is

involved in dialogue

processes and reform implementation with

support from SADC.

Risk #2: Global

economic recession

impact on SACU revenues and FDI-

slowdown of GDP

growth. Mitigation: The

project will focus

equally both on

exporting SMMEs and those supplying the

domestic market.

Furthermore, the linkages between large

enterprises and SMMEs

will to an extent reduce dependence on foreign

suppliers.

Risk #3: Insufficient

commitment and

capacity to implement reforms. Mitigation:

The project will

implement capacity building support as early

as possible in the project

implementation period. The PMU has many

years of project

implementation and has already earned the

confidence and trust of

the government authorities. Currently

on-going projects (WB, EU, etc.) supporting

capacity building will

also enhance public sector capacity for

project implementation.

Risk #4: Start-up delay:

Mitigation: Use of an

existing PMU staffed by professionals with many

years of project

implementation experience and a well-

developed rapport with

counterparts’ will help to mitigate the risk

Size of SMMEs in the Informal

Sector (%)

80 (2016) 50 (2021)

Share of tourism and leather sector contribution to GDP (% increase)

5.5% (travel & tourism, 2014 ); ˂

0.5 % (leather &

footwear, 2016)

1.5 % annual growth in GDP (2020)

OU

TC

OM

ES

Outcome : Improved

environment for

economic diversification, and

enterprise development

Number of jobs created

0 (2016) 1,200 new jobs (approx.. 50% for

women) by 2020

World Travel

& Tourism

Council, Finscope

Study, IMF

and GoL

Economic

Reports

% of SMMEs that access BDS

services

20 (2016) 40 (2020)

Number of new SMMEs created

0 (2016) 50 new SMEs created , at least 50%

by women entrepreneurs(2020)

OU

TP

UT

S

Component 1: Enhancing Economic Diversification

Output 1.1 : Policy

environment and

capacity for economic diversification

strengthened

Tourism and Market development No Tourism

Masterplan &

marketing plan

Tourism Masterplan and marketing

developed & approved (2018)

Progress

report

National Tourism Council establishment

No NTC and Export (2016)

NTC established and staffed (2018)

Guidelines for policy formulation,

implementation, M&E

No guidelines

(2016)

Detailed guidelines for policy

formulation, implementation, M&E

produced (2019)

Output 1.2 : Product

development and market diversification

initiatives supported

Prefeasibility studies/Feasibility

studies in selected sectors

0 (2016) 5 prefeasibility and 5 feasibility

study reports (2019)

Investment compendium production

and staff training on investment

promotion

No compendium, 0

staff trained (2016)

Compendium produced (2018); 10

LNDC staff trained, 50% being

women

Tailor-made training in tourism,

hospitality, leather/footwear value

chains

0 (2016) 4 cohort training sessions per year,

50% of trainees being women

Output 1.3: Improved

product quality and

standards

National standardisation strategy Standards Act in

place

National Standardisation strategy

adopted (2018)

LSI capacity 0 (2016) 8 officers receive specialized training; ICT and testing equipment

procured (2018)

Component 2: Promoting Enterprise Development

Output 2.1: :

Business incubation

and growth

Business incubation strategy &

program

No strategy and

program (2016)

Incubation strategy developed and

(2018)

Progress

report

Supervision

report

PCR

Number of SMME owners trained in entrepreneurship skills

0 (2016) 100 SMME owners trained (50% women) by 2019

Innovative business plan competition

0 (2016) Business plan competition introduced; 10 businesses identified

and incubated/trained, 60% of which

are women owned (2019)

Output 2.2:

Expanding Business

Development Service

for enterprises development

Institutional review of Business

Development Service providers

0 (2016) BDS Institutional Review Report

(2017)

BEDCO capacity 0 (2016) All (100%) of BEDCO technical staff trained (50% women) by 2019

Toolkits and training packages for enterprise development

0 (2016) Training toolkits developed; 10 BDS providers trained, 50% being

women and youth (2019)

Output 2.3: Partnership

for entrepreneurship and micro-finance.

Partnership program for

entrepreneurship

0 (2016) Partnership program for

entrepreneurship designed & entrepreneurship training curricula

rolled-out across training institutions (2019)

vi

Apprenticeship program 0 (2016) Apprenticeship program designed & 50 young entrepreneurs get on-job

training, 50% of whom are females

(2019)

Microfinance program No program and grant scheme in

place (2016)

Microfinance program designed and implemented (2018)

Operational framework for the

competitive grant scheme

Grant scheme in

place (2016)

Operational framework for the

competitive grant scheme reviewed (2017)

Component 3: Project Management

Output 3.1: Project

management capacity strengthened

Number of project implementation

reports /reviews prepare

0 (2016) annual progress reports, and 4 audit

reports submitted

AC

TIV

ITIE

S

COMPONENTS INPUTS

Economic diversification – technical assistance for tourism masterplan development; product and market

diversification, industrial policy planning and monitoring; public private dialogue, investment forum

Promoting enterprise development – technical assistance, access to finance, quality standards and certification, and

capacity building of SME support institutions

Project management: Hiring PMU staff including enterprise development specialist, procurement officer and finance officer, and M&E activities

Total of UA 7.22 million

(comprising of UA 2.22 million grant and UA 5 million loan)

Government: UA 0.78 million

Implementation support and supervision

vii

Table 1: Project Time Frame/Implementation Schedule

Lesotho: Economic Diversification Support Project

Activities/Years

2017 2018 2019 2020 Action by

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Q3

Q4 Q1 Q2 Q3 Q4

Project Processing and Management

Grant approval

AfDB

Signing Protocol of Grant Agreement

AfDB & GoL

Project Effectiveness and Launching

AfDB & GoL

Supervision and Monitoring

AfDB

Mid-term Review

AfDB

Project Completion Report

AfDB & GoL

Component 1: Enhancing Economic Diversification

A. Procurement

GoL

B. Training GoL

C. Technical Assistance GoL

Component 2: Promoting Enterprise Development GoL

A. Procurement GoL

B. Training GoL

C. Technical Assistance GoL

Component 4: Project Management Support GoL

1

REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE ADB GROUP

TO THE BOARD OF DIRECTORS ON A PROPOSED ADF LOAN AND GRANT TO

LESOTHO FOR THE ECONOMIC DIVERSIFICATION SUPPORT PROJECT

Management submits the following Report and Recommendation on a proposed ADF Loan of

UA 5.0 million and ADF Grant of UA 2.22 million to the Kingdom of Lesotho to finance the

Economic Diversification Support Project (EDSP).

I. STRATEGIC THRUST AND RATIONALE

1.1 Project Linkages with Country Strategy and Objectives

1.1.1 The proposed operation is aligned with the country’s development strategy.

Lesotho’s Vision 2020 identifies the following seven pillars of development: economic growth,

management of the environment, technology,

democracy, unity, peace, education and training.

The elements of Vision 2020 are further articulated

into actionable priorities in the National Strategic

Development Plan (NSDP, 2012/13–16/17).

Moreover, the NSDP has identified, manufacturing,

tourism, agriculture, mining and improving the

investment climate as the main growth drivers

necessary to sustain economic growth and

employment creation. The 2015 industrial policy

aims to build on the existing industrial base for

sustainable job creation through, among others,

strengthening the industrial development support

institutions, promoting Basotho Entrepreneurship

as well as diversifying into a range of manufacturing products while increasing value addition.

1.1.2 The proposed operation is also consistent with key sector policy and strategies.

These includes: the Lesotho Industrial Policy (2015-2017); National Investment Policy (2015);

Financial Sector Development Strategy (2013); Quality and Standards Policy (2014); Small,

Micro and Medium Enterprise Policy (2016); and Tourism Policy (2000). The policy papers

provide a framework on which to base private sector development interventions by

development partners including the Bank. The policies identify the main challenges, constraints

and opportunities for private sector development identifying critical priorities in the short to

medium term (Technical Annex). The proposed Project will directly address challenges and

priorities set out in the Government policy and strategies with the aim of promoting and

expanding the private sector’s participation in the economy.

1.1.3 The Project fits firmly with the objectives of the Lesotho Country Strategy Paper

(CSP), and Bank’s strategic and operational priorities. The CSP is aligned with the

Government’s development agenda and focuses on two pillars: (i) infrastructure development;

and (ii) institutional capacity building. According to the CSP, the priority objective of the

institutional capacity building pillar is to enhance the efficiency and effectiveness of the public

sector as well improving business environment for private sector development. The operation

is also aligned to the Bank Group’s Ten Year Strategy (2013-2022), and the High Five

Priority Areas (High-5s)in particular Improving the Quality of Life for African People, and

sectoral strategies such as the private sector development strategy (2012-2017), Financial

Sector Development Strategy (2014-19), Governance Strategic Action Plan (GAP II, 2014-

2018) and the Strategy for Jobs for Youth in Africa (JfYA, 2016-2025), by supporting and

fostering entrepreneurship, SMMEs development and enabling environment for private sector

development. The Project provides needed support to institutions responsible for economic

diversification and enterprises development through business development services.

Box 1: NSDP six strategic goals

- pursue inclusive economic growth and

create 50,000 private sector jobs over 5years

- develop key infrastructure;

- enhance the skills base, technology adoption

and foundation for innovation;

- Improve health, combat HIV and AIDS and

reduce vulnerability;

- Reverse environmental degradation and

adapt to climate change; and

- Promote peace, democratic governance and

build effective institutions

Source: NSDP 2012/13 – 2016/17

2

1.1.4 Complementary and synergy with the ongoing operations: The proposed operation

will complement and enhance the effectiveness of the Bank’s ongoing projects by focusing on

the private sector development pillar. The ongoing Projects are focused on infrastructure

(power and water), and public finance management reform which also contribute towards

creating a conducive environment to attract private sector investment in the country (e.g.

reducing the constraints of electricity shortages). There are also synergies with the ongoing

donors funded programs, in particular the PSCEDP financed by the World Bank, and the FAPA

Technical Assistance which is being prepared simultaneously with this operation.

1.2 Rationale for Bank’s Involvement

1.2.1 Economic Diversification remains a challenge in Lesotho. The country’s economic

growth has been predominantly export led but with excessive reliance on the export of a small

range of textile products, largely to the US market through the African Growth and Opportunity

Act (AGOA). The manufacturing sector helped Lesotho achieve considerable economic growth

averaging about 4.5% for the last two

decades (1994-2014). The main driver

of this growth was manufacturing of

textile garments which account for

more than 85% of total exports earning

(see chart 1)1. Further, export earnings

from the textile garments fell from

about USD 400 million to about USD

300 million in ten years due to the

global economic crisis beginning 2008

and the subsequent stiff competition

from other apparel exporting countries.

To this end, the country’s economy is at

risk from further falling exports.

Textiles and garments contribute about

80% of export earnings, and 90% of the

exports going to the US and EU market.

This status quo puts the country’s

economy exposed to external shocks.

Furthermore, the contribution of textile

garments exports has declined from about 20% of GDP in 2004 to less than 8% in 2013, due

to stagnation in the textile and apparel sector after the global economic crisis, and increased

competition from low-cost Asian producers. Since then, public investment has taken over as

the main economic driver financed by the transfers from Southern Africa Customs Union.

1.2.2 However, Lesotho’s economic exposure to external risks, including the unpredictability

of SACU revenues, excessive dependence on textile and adverse weather conditions, underline

the need to promote private sector development and diversification into other sectors.

Recognizing the challenges Lesotho’s economy is facing, the GoL identified priority sectors

where Lesotho needs to exploit better its comparative advantage and potential for growth.

These include tourism, leather and footwear, agro-processing, mining, and water sectors. The

proposed operation will support the implementation of government strategies for economic

diversification in the selected sectors and create jobs for the youth and women.

1Ministry of Trade and Industry Annual Report (2015)

3

1.2.3 Enterprise development is a key Government of Lesotho undertaking under the

Economic diversification agenda. The SMME Policy of 2011 which is adopted in 2016

provides the framework for the

development of the sector.

There are a number of studies

unbundling the conditions of

SMMEs in Lesotho, the most

recent being a 2016 Finscope

study report (funded by

UNDP). It is an assessment of

the landscape of the SMMEs

and the challenges they face in

terms of access to finance and business development services, the two most binding constraints.

The report notes that there are approximately 76,000 SMMEs with 80% operating in the

informal sector. The majority (about 80%) operate as individual survivalist businesses while

the stake of the youth is minimum as 80% of the business owners are above the age of 30. The

sector has a high representation of women (59%). Chart 3 above shows that 22.2% of SMMEs

are excluded from access to finance and only 24% have access to formal banks.

1.2.4 The current Business Development Service (BDS) market in Lesotho is weak. The

Finscope study confirms the appraisal mission findings that weak institutional leadership and

fragmented and unfocussed BDS provision both in the public and private sectors are the central

problem areas. Lack of collaboration among stakeholders; uncoordinated and duplication of

efforts; absence of information/database on the available institutions that provide services;

inability of SMME’s to pay for BDS services; and lack of training packages suitable for

different entrepreneurs at different stages of their businesses development are the typical

features of the BDS landscape in Lesotho. It was also recognized that both BEDCO and SMME

Support Network which have been operating in the market, have capacity deficiencies to

develop the market.

1.2.5 Access to finance remains as a major constraints for SMME development. The

Finscope study noted that SMMEs having access to credit from banks and non-bank regulated

sources are only about 29%. As shown in the figure above, about 53% are excluded while about

37% depend on non-bank sources and family and friends. This can, to a great extent, be

attributed to lack of BDS to enable them to interact with banks intelligently and with proper

business plans. There are two Partial Credit Guarantee Schemes, one operated by the Lesotho

National Development Corporation (LNDC) and the other by the Ministry of Finance for a

50% and 70% cover respectively to ease the challenges of access to finance. The uptake is

limited as most SMMES are unable to meet the requirements which includes business owners’

contribution of 30%. The micro-finance industry is very small comprising of credit only

institutions, cooperatives and money lenders. The Association of Micro Finance providers has

25 members only 5 of whom are registered while 20 money lenders are yet to be registered by

the CBL due to weak institutional capacity to comply with the registration requirements.

1.2.6 The Project will contribute towards consolidating reform efforts and addressing

the remaining gaps in Lesotho. Lesotho has implemented important reforms, notably in

streamlining the process for starting a business but it still lags behind many of its comparators

in the region. For example, the 2016 Doing Business Report shows a decline in Lesotho’s rank

in ease of doing business to 114 from 110 in 2015 (change in rank -4). There were declines in

virtually all aspects but “starting a business” declined to 112th from 107th in 2016 and “Getting

Credit” declined to 152 from 150 in 2015.Progress with the investment climate reforms needs

to be pursued and complemented through promoting strategic partnership and dialogue

between the public and private sectors. Furthermore, reforms that have helped to attract FDI

26,30%

24%7%

22,20%

20,50%

Chart 3: Source of Credit for SMMEs (FinScope 2016)

Family Served Banked (formal) Non-bank (formal)

Informal Excluded

4

(textile and garment) should be complemented through targeted technical assistance and

support to enhance entrepreneurship and strengthening backward and forward linkages. The

Lesotho Doing Business Report and Private Sector Diagnostics Studies concluded that the

private sector is confronted with several challenges including: (i) poor infrastructure

(electricity, roads, and transport); (ii) lack of access to finance; (iii) administrative barriers; (iv)

lack of entrepreneurial and technical skills; and (v) lack of access to markets (Technical Annex

A). In tackling these challenges, complementary initiatives and projects are being implemented

by the Government and development partners. The proposed Project will complement ongoing

initiatives by focusing on selected sectors critical for economic diversification, fostering

strategic partnership, and promoting enterprise development through supporting SMMEs.

Figure 3 below depicts how the project’s components relate and contribute to the ultimate

objective of diversifying Lesotho’s economy.

Enterprise Development Support

1.3 Donors Coordination

1.3.1 There is strong commitment by development partners to coordinate their support to the

private sector development agenda in Lesotho. Donor Coordination across sectors is assured

through the Development Partners Consultative Forum (DPCF), which provides the platform

for dialogue between donors and the GoL. The main development partners supporting private

sector development agenda include: the World Bank, UNDP, the European Union, and the ILO

(Appendix III). The primary focus of donor support has been improving the investment climate

and business enabling environment, capacity building and partnerships, entrepreneurship

development including skill training for SMME, access to finance and related initiatives with

the aim of fostering employment generation by the private sector. The GoL has established a

Enhancing Economic Diversification

Quality and Standards

Certification in Place

Product and Market

Diversified

Enabling Environment

Created

BDS Market Strengthened

Lesotho's Economy Diversified

5

Project Steering Committee to provide strategic guidance, and to ensure assuring country

ownership, coordination and complementarities.

II. Project Description

2.1 Project Objectives and Components: The overall development objective is to

contribute to inclusive growth through enhanced economic diversification and strengthened

enterprise development. The specific objective of the Project is to support private sector

development through improving partnership, entrepreneurship and skills development, and

investment promotion in the selected sectors critical for economic diversification.

2.1.1 The Project has three mutually reinforcing components: (i) enhancing economic

diversification; (ii) promoting enterprise development; and (iii) project management support.

By focusing its support, the Bank will ensure that adequate resources can be given to ensuring

sustainability of actions, through innovative approaches to enterprise development and capacity

for economic diversification. Reflecting the lessons of past support, more emphasis will be

given to strengthening national capacity and ensuring national ownership of the project.

Beneficiary institutions also clearly requested that future technical assistance ensure adequate

skills transfer. Finally to ensure coordination and monitoring of the EDSP, the Bank will

collaborate with the World Bank to ensure that that the Project Management Unit is adequately

resourced. The major activities are summarized in Table 2.

Component 1: Enhancing Economic Diversification

2.1.2 This component has three sub components: (a) Strengthening policy environment and

capacity for diversification; (b) Support for product development and market diversification in

tourism, and leather and footwear; and (c) Improve product quality and standards.

2.1.3 Sub component 1.1: Strengthening policy environment and capacity for economic

diversification: The objective is to build capacity within the Ministries of Trade and Industry,

and Tourism, Environment and Culture to develop and effectively support the implementation

of the strategy for economic diversification with emphasis on tourism, leather and textile

sectors. Key activities under this sub-component are: (a) technical assistance to review and

update the tourism policy, tourism masterplan and implementation roadmap; (b) support for

the establishment of a National Tourism Council, which will bring together government,

regulators, and private sector operators to strengthen the sector, implement the masterplan and

help increase the international competitiveness of Lesotho tourism; (c) support to the creation

of export consortia to facilitate marketing and group purchase schemes; and (d) capacity

building to Ministry of Trade and Industry to promote business linkages and to develop

competencies in industrial policy planning, research and data management systems, monitoring

and evaluation.

2.1.4 Sub component 1.2: Support for product development and market diversification: The

objective is to catalyze growth in the tourism, leather and footwear sub-sectors by providing

technical assistance for product and market development to attract local and foreign

entrepreneurs to invest in the selected sectors. Key activities under this sub-component are:

(a) the development of tourism products, marketing strategy and the instruments to empower

the tourism sector; (b) technical assistance for product development and marketing in the

leather and footwear industry; (c) feasibility studies of potential projects in the priority sectors

to attract private investment; (d) transaction advisory service and capacity building for public-

private partnership in the tourism training centers and facilities (e.g. Lerotholi Polytechnic

Institute); and (e) institutional review of and capacity building support to LTDC to effectively

deliver its mandate and the tourism masterplan.

2.1.5 Sub component 1.3: Improve product quality and standards: The objective is to

promote product quality and use of standards through improved quality control process and

6

certification in the priority sectors. Key activities under this sub-component are: (a) develop

a national standardization strategy; and (b) human resource training on quality and standards

including sensitization of business enterprises on product certification and quality standards to

enable their products become competitive in the domestic and export markets.

Component 2: Promoting enterprise development

2.1.6 This component has three sub components: (a) Business incubation and growth; (b)

Expanding Business Development Service for enterprises development; and (c) Partnership for

entrepreneurship and micro-finance.

2.1.7 Sub component 2.1: Business incubation and growth: The objective is to support the

development of Basotho business start-ups and growth of existing small businesses, in

particular those owned by the youth and women, through provision of various business

development services to contribute towards the economic diversification agenda through

acceleration of viable enterprises.Key activities under this sub-component are: (a) technical

assistance to assess the entrepreneurial ecosystem (constraints and opportunities) in Lesotho,

and to design a business incubation program and its implementation roadmap including twining

arrangements with regional centres of excellence; (b) introduce a Business Plan Competition

program aimed at supporting innovative ideas and entrepreneurs through entrepreneurship and

technical skill training, mentoring, handholding, and other business development services; and

(c) differentiated business incubation and mentorship services to SMMEs in the leather,

footwear, textile and garment sectors.

2.1.8 Sub component 2.2: Expanding business development service for enterprise

development: The objective is to develop and expand the market for business development

services (BDS) in Lesotho by diversifying the range of products and developing a sustainable

and coordinated approach to delivery of services including an increased role for the private

sector. Key activities under this sub-component are: (a) provision of technical assistance to

assess the current BDS market to determine its ecosystem including key players, challenges

and opportunities; (b) institutional review of selected BDS providers (including BEDCO); (c)

build the capacity of BEDCO to strengthen their role as facilitator and champion in the

development of the BDS market; (d) support to the design of appropriate toolkits and training

packages; and (e) build capacity of BDS providers using the new training packages.

2.1.9 Sub component 2.3: Partnership for entrepreneurship and micro-finance: The

objective is to foster entrepreneurship culture through collaboration between Government,

Training Institutions, and Private Sector as well as to improve access to finance by supporting

Government initiatives in the areas of competitive grant scheme and micro-finance schemes.

Key activities include: (a) technical assistance to prepare and rollout an entrepreneurship

training curricula across educational institutions (universities) and training centers/colleges; (b)

design and introduce apprenticeship program that would encourage private sector to support

youth to get on-the-job training by drawing international experience and good practice; and (c)

technical assistance to design and support implementation of microfinance program in

partnership with PostBank and CBL, and (d) improve the operational framework for the

competitive grant scheme of the Ministry of Small Business and Cooperatives.

7

Component 3: Project Management Support

2.1.10 The objective is to strengthen project implementation, coordination and monitoring and

evaluation capacity. Under this component, the project will co-finance the operating costs of

the PMU, staff salaries, training of staff and the costs of annual audits of project accounts.

Table 2: Project Description

Component Activities

Component 1:

Promote Economic

Diversifications

Develop tourism policy, tourism masterplan and implementation roadmap;

Support the establishment of a National Tourism Council;

Provide CB to Ministry of Trade and Industry for business linkages industrial policy

planning, monitoring and evaluation.

Develop tourism products, and a promotion strategy;

Support product development and marketing in the leather and footwear industry;

Conduct feasibility studies for potential investment projects;

Provide transaction advisory service and PPP in tourism;

Capacity building for the establishment and operationalization of LSI;

Develop a national standardization strategy; and

Provide training on quality standards and certification to business enterprises.

Component 2: Support

to Enterprise

Development

Support assessment of the status of the current BDS market, including private

providers, key players, challenges and opportunities;

Support business incubation & startups through competitive grant scheme

Build the capacity of BEDCO as facilitator and champion in the development of the

BDS market;

Design appropriate toolkits and training packages for BDS;

Build capacity of BDS providers using the new training packages;

Design and roll out curricula across educational (universities) and training

institutions for entrepreneurship development;

Introduce apprenticeship for the graduates through a partnership program with

universities, industry and government;; and

Support the introduction of a microfinance program, and improve the operational

framework for MSBDC’s competitive grant scheme.

Component 3: Project

Management This will finance project core staff salaries (enterprise development specialist,

procurement officer, and finance officer), monitoring and evaluation, training, audit,

and operational expenses.

2.2 Technical Solution Retained and Other Alternatives Explored

2.2.1 During project identification, preparation and appraisal, a number of options were

explored regarding the areas of intervention, the scope of the activities, and implementation

arrangements. As regards the implementation modalities, it was determined that using the

existing PMU for the World Bank Private Sector Competitiveness and Economic

Diversification Project (PSCEDP) ensures coordination, complementarities and avoid project

implementation start-up delays. Based on experience and lessons learned, as well as the other

development partners’ activities, it was agreed that, in order to build on gains from the World

Bank’s on-going project and previous Bank interventions, the proposed operation will be

guided by: (a) selectivity and complementarity – to consolidate and complement the on-going

activities in private sector competitiveness and economic diversification efforts; focusing on

support to SMMEs to gain more traction in the areas of job creation for the youth and women;

(b) supporting the effort to streamline access to finance and building entrepreneurial capacity

and skills; (c) supporting the establishment and capacity building effort of public institutions

for policy implementation and monitoring as well as specific service oriented institutions for

standards and quality certification; (d) supporting the institutionalization of public-private

dialogue for the tourism sector and (e) enhancing the partnership between public and private

8

training institutions to upgrade the level of entrepreneurship skills in Lesotho.A summary of

the technical consideration and project design options is presented in Table 3 below.

Table 3: Project Alternatives Considered and Reasons for Rejection

Alternative Brief Description Reason for Rejection

Establishing a

parallel

implementation

arrangement/unit

(PIU) solely for

the project

Instead of setting up a parallel PIU,

the PAR proposes using the existing

Project Management Unit that

coordinates and monitors the

implementation of the on-going

World Bank PSCEDP.

The proposed arrangement will increases synergy

and achieve value for money as it allows

effectively utilising existing staff and enhancing

structures, reducing transaction costs.

Furthermore, complementarities rather than

duplications will be optimized in addition to

significant project implementation cost savings.

Supporting

sectors where the

WB PSCEDP has

on-going

interventions (the

horticulture

development)

The on-going WB PSCEDP

focusses on improving the

investment and business climate and

diversification of the agribusiness

and horticulture sector. It has piloted

some fruit farms and gathered

knowledge on the sector. The

proposed project will focus on

tourism, leather and footwear

To avoid duplication and ensure focussed

intervention to optimize impact. Furthermore, the

WB PSCED project is likely to be extended

through additional financing which will enable it

to further on-going interventions and take them to

fruition/roll out to larger private sector

participants.

ISP that include

support to several

institutions

Proposals for a capacity building of

a number of institutions responsible

for SMMEs and industrial

development were submitted.

However, the operation has selected

critical interventions that would

support the SMME directly and

ensure sustainability through

engaging the private sector.

The recent OPEV evaluation and lessons from

previous operation suggest that the need to avoid

the risk of spreading projects too thinly across

many beneficiary institutions, particularly where

the overall funding envelope is limited. The

proposed operation is focused and provide targeted

capacity building support to Parliament and OAG.

2.3. Project type

2.3.1 The proposed operation is a private sector development support project designed

to complement and build on the on-going Private Sector Competitiveness and Economic

Diversification projects (PSCEDP), and other partners’ interventions. The project also

supplements the GoL’s interventions - the effort to improve access to finance through the

provision of Partial Credit Guarantee Scheme and the provision of industry sheds and working

space for SMMEs. The project aims to ease the access to finance and economic diversification

challenges through support to SMMEs in the selected, comparatively better potential sectors

like leather and footwear, textiles, food processing, tourism, etc. The Bank will thus play a

critical role in strengthening the private sector to effectively paly a meaningful role in the effort

to expand Lesotho’s economy and create more jobs at the same time alleviate the growing

income inequality.

2.4 Project Cost and Financing Arrangements

2.4.1 The estimated total cost of the project is UA 8.00 million (including 10% GoL’s

contribution). A price contingency of 4%, and a physical contingency of 3%, have been

factored in the project cost. Tables (4a) and (4b) present the estimated project cost by

component and sources of finance, whereas Tables (4c) and (4d) present the estimated project

costs by Category of Expenditure. Details of the Project cost by component and expenditure

category are also presented in Technical Annex B2. The Bank will finance UA 7.22 million

out of which UA 5.0 million will be loan and UA 2.22 million grant. The GoL’s contribution

is expected to be UA 0.78million.

9

Table 4(a): Project cost estimates by component

LSL million inc. Contingency UA million including Contingency

Local Foreign Total Local Foreign Total

%

Foreign

% of

Total

Component 1:Enhancing Economic Diversification

1.1 Strengthening policy

environment and capacity for

economic diversification

8.98 13.91 22.89 0.44 0.69 1.13 61% 14%

1.2 Support for product development

and market diversification

17.78 27.79 45.57 0.88 1.37 2.25 61% 28%

1.3 Product quality and standards 2.98 5.26 8.24 0.15 0.26 0.41 64% 5%

Sub Total 29.75 46.95 76.70 1.47 2.33 3.78 61% 47%

Component 2:Promoting enterprise development

2.1 Business incubation and growth 7.19 18.24 25.42 0.35 0.90 1.25 72% 16%

2.2 Expanding business development

service for enterprise development

6.03 15.05 21.08 0.30 0.74 1.04 71% 13%

2.3 Partnership for entrepreneurship

and micro-finance

2.94 14.57 17.51 0.14 0.72 0.86 83% 11%

Sub Total 16.15 47.86 64.01 0.80 2.36 3.16 75% 40%

Component 3: Project management

3.1 Support to the PMU 19.85 1.37 21.21 0.99 0.08 1.06 8% 13%

Sub Total 19.85 1.37 21.21 0.98 0.08 1.06 8% 13%

Grand Total 65.75 96.18 161.92 3.24 4.76 8.00 59% 100%

Table 4(b): Sources of financing

(LSL Million) inc. Contingency (UAC Million) inc. Contingency

Source of

Finance Local Foreign Total Percent Local Foreign Total

% of

Total

ADF Loan 5.18 96.18 101.36 62% 0.28 4.72 5.00 62%

ADF Grant 44.99 - 44.99 28% 2.22 - 2.22 28%

GoL Contribution 15.56 - 15.56 10% 0.78 - 0.78 10%

Total 65.735 96.18 161.91 100% 3.28 4.72 8.00 100%

Table 4(c): Project cost by category of expenditure

(LSL Million) (UAC Million)

Category of Expenditure Local Foreign Total Local Foreign Total

%

Foreign

% of

Total

A. Goods 4.19 7.63 11.82 0.20 0.39 0.59 66% 7%

B. Services 39.55 82.25 121.80 1.94 4.06 6.00 68% 75%

C. Operating Cost 3.21 - 3.21 0.15 - 0.15 0% 2%

Baseline Cost 46.95 89.88 136.83 2.29 4.45 6.74 66% 84%

GoL Contribution 14.50 - 14.50 0.73 - 0.73 0% 9%

Physical & Price

Contingencies (7%) 4.30 6.29 10.59 0.21 0.31 0.52 60% 7%

Grand Total 65.75 96.17 161.92 3.24 4.76 8.00 60% 100%

10

Table 4(d): Project Expenditure Schedule

(LSL Million) (UAC Million)

2017 2018 2019 2020 Total 2017 2018 2019 2020 Total

Component 1:Enhancing Economic Diversification

1.1 Strengthening

policy environment and

capacity for economic

diversification

2.29

9.16

9.16

2.29

22.89

0.11

0.45

0.45

0.11

1.13

1.2 Support for product

development and

market diversification

4.56

18.23

18.23

4.56

45.57

0.22

0.90

0.90

0.22

2.25

1.3 Improve product

quality and standards

0.82

3.30

3.30

0.82

8.24

0.04

0.16

0.16

0.04

0.41

Sub Total 7.67 30.68 30.68 7.67 68.46 0.38 1.51 1.51 0.38 3.78

Component 2:Promoting enterprise development

2.1 Business incubation

and growth

2.542

10.17

10.17

2.54

25.42

0.13

0.50

0.50

0.11

1.25

2.2 Expanding business

development service for

enterprise development

2.11

8.43

8.43

2.11

21.08

0.10

0.42

0.43

0.10

1.04

2.3 Partnership for

entrepreneurship and

micro-finance

1.75

7.00

7.00

1.75

17.51

0.09

0.35

0.35

0.09

0.86

Sub Total 6.40 25.60 25.60 6.40 46.50 0.32 1.26 1.26 0.32 3.16

Component 3: Project management

3.1 Support to the PMU 2.12 8.48 8.48 2.12 21.20 0.10 0.42 0.42 0.12 1.06

Sub Total 2.12 8.48 8.48 2.12 21.20 0.10 0.42 0.42 0.12 1.06

Grand Total 16.19 64.76 64.76 16.19 136.16 0.79 3.20 3.20 0.81 8.00

Note: Exchange Rates 1UA= 1.394347 USD; 1 UA = 20.26666 LSL and *All figures includes contingencies

2.5. Project’s Target Area and Population

2.5.1 The direct project beneficiaries are: Small, Medium and Micro Enterprises (SMMEs) in

the selected sectors like textiles and garments, leather/footwear, and tourism. The benefits

accrue to them through improved BDS capacity, better entrepreneurial skills training, better

access to markets and improved private sector development policy/regulatory framework.

Public sector organizations such as the Lesotho Tourism Development Corporation; the

Lesotho National Development Corporation; the Basotho Enterprises Development

Corporation; the Ministry of Trade and Industry; the Ministry of Small Business Development,

Cooperatives and Marketing; the Ministry of Tourism, Environment and Culture will benefit

from the planned capacity building support..

2.6 Participatory Process for Project Identification, Design and Implementation

2.6.1 The project preparation process has benefited from a multi-stakeholder consultation

with government departments, business community and development partners in Lesotho. For

example, consultations were held with various Government departments including the Ministry

of Trade and Industry; Ministry of Small Business Development, Cooperatives and Marketing;

Ministry of Finance; Ministry of Development Planning, Ministry of Tourism, Environment

and Culture; Lesotho National Development Corporation, Basotho Enterprises Development

Cooperation; Lesotho Tourism Development Cooperation; and Central Bank of Lesotho. The

project preparation also included discussions with the private sector representatives such as the

Lesotho Chamber of Commerce and Industry, and the Lesotho Hospitality Industry

Association, the Lesotho Post Bank and donor representatives including the World Bank, UN,

EU, ILO, and US Embassy. Issues raised that informed the design of the ISP, include the need

for: improved strategic partnership and dialogue between government and private sector;

support to skill and entrepreneurship development; reforms to improve access to finance and

11

market; and support to implement economic diversification activities in key sectors of the

economy; and ensuring skills and know-how transfer of consultants and sustainability of

support. The consultations with the stakeholders will continue during project implementation

through the project steering committee with representatives from business community and

supervision missions.

2.7 Bank Group Experience and Lessons Reflected in Project Design

2.7.1 The Bank’s current portfolio in Lesotho is comprised of 4 operations amounting to UA

27.8 million (Annex II), and consist of 4 sectors: water and sanitation (32.5%), social sector

(31%), communications (27.1%) and multi-sector (9.4%). The portfolio performance was rated

“satisfactory” with an overall portfolio rating of 3 (on a scale from 1 to 4). Observations

gathered and lessons learnt from analytical work, ongoing and completed operations, for

example, of the last World Bank operation focused on improving the business environment –

business licensing and registration, etc. have been incorporated in the project design. These

translated into: (1) building on the good relationship and trust already accumulated with the

counterparts through the implementation of the WB’s PSCEDP and focusing on

complementarities while avoiding duplications, (2) taking into serious consideration the desires

of the relevant bodies in the GoL in the selection and prioritization of the project components

in order to ensure ownership and full cooperation during implementation, (3) building

institutional capacity for policy analysis, implementation and monitoring at the critical

counterparts, and (4) closely engaging the counterparts throughout the project design process

to secure full buy in.

2.7.2 The design of this operation is guided by findings from various analytical and

diagnostic reports, as well as consultations during the Project preparation and appraisal

missions (Appendix V).The proposed operation draws on lessons from the ongoing projects,

country portfolio performance review (2015) as well as the underpinning analytical works. The

main lessons are: avoidance of start-up delays; addressing implementation capacity constraints;

alignment with the national priorities and reinforce ownership; spreading too thinly across a

sector; and enhanced dialogue and regular supervision and monitoring of portfolio. Lessons

learned from ongoing and previous operations are summarized in Table 5 below.

Table 5: Lessons learned from the previous and ongoing Bank interventions Key Lessons Learned Actions Taken to integrate lessons learnt

(a) Avoidance of start-up delays by simplifying the

conditions precedent to first disbursement; and

developing ToRs.

The project will be implemented by an existing PMU

which has experience with the World Bank operations.

Draft ToRs are prepared as part of the appraisal mission.

(b) Need to address implementation capacity

constraints by reinforcing the financial

management and procurement team of the PMU

The PMU’s capacity has been assessed during appraisal

and appropriate recommendations has been taken on

board in the project design.

(c) Strengthen country ownership and leadership by

ensuring alignment with the strategic plan and

capacity building requirements

The project is fully aligned with country development

objectives. See paragraph 9.1.2.

(d) Avoid spreading of activities too thinly across a

many provinces and a large number of institutions

by ensuring the intervention targets a few

institutions

The project has three components and supports activities

under two Ministries and coordination takes place under

clearly identified departments in the respective

ministries.

e) Enhanced dialogue and regular follow up by

SARC to address portfolio issues timely with a

view to achieving the desired results.

As part of project monitoring arrangement, SARC will

continue to play an active role in the capacity

development, country dialogue and project monitoring

and evaluation.

12

2.8 Project’s Performance Indicators

The key performance indicators identified, and the expected outcomes at Project Completion,

are set out in the Result-based Logical Framework (Section VII). A summary of the expected

results or outputs is summarised below:

Key performance indicators

Component 1: Enhancing Economic Diversification Component 2: Promoting Enterprise Development

SMMEs (50% women owned)

Tourism Master Plan approved (2018)

Number of PPP projects supported and promoted

25 public sector staff trained (at least 50% women)

• 100 SMME owners (50% women) (2019),

• 50 SMMEs (50% women owned) (2019),

• 3 SMMEs linked with large enterprises (2019)

• 25 SMMEs (50% owned by women) (2019)

Source: ESDP Result Measurement Framework.

III. PROJECT FEASIBILITY

3.1 Economic and Financial Performance

3.1.1 While it is difficult to carry out credible and rigorous cost-benefit and financial

analyses for institutional support project, the economic and financial benefits, and

ramifications, accruing from the Project will be much higher than the UA 7.22 million.

Whereas the costs are quantifiable (section 2.4), the benefits are both direct and indirect,

ultimately delivered from improved capacity in policy implementation and monitoring in the

public sector and SMMEs gaining basic business, entrepreneurial and technical skills as well

as financial literacy. The economic justification of the proposed project is its contribution to

better policy implementation and monitoring capacity of the relevant public offices and the

upgrading of entrepreneurial and technical business skills and organizing the BDS market to

make it more responsive to the needs of SMMEs. Overall, the benefits of the project will be

derived from (a) enhanced capacity and effectiveness public bodies in policy implementation

and monitoring; (b)better skilled and financed SMMEs sector; (c) Expanding business

development service for enterprise development; (d) the number of new SMMEs developed

which they also generate jobs for the youth; and (e) enhanced partnership and participation of

the private sector through public-private partnerships for enterprises development through

apprenticeship program.

3.2 Environmental and Social Impacts

3.2.1 Environment and Climate Change: The proposed Project is environmentally classified

as Category 3 by ORQR. The Project will not have a negative impact on the environment as its

activities are limited to entrepreneurship training, technical assistance, and studies. The

activities envisaged under the project, focusing on human and institutional capacity building,

will not have negative impact on the climate.

3.2.2 Social: The Project is intended to contribute to economic growth through improved

capacity of key government ministries responsible for private sector development and economic

growth in general. The Project aims to contribute to building the capacity of selected

government corporations to enhance their capacity in policy analysis and review as well as

providing government financed support to the private sector in general and SMMEs in

particular. The social and poverty-reducing impact will be directly reflected in the number of

jobs created, the number of business start-ups and their sustainable growth.

3.2.3 Impact on Gender: A preliminary assessment on gender shows that the project will

contribute to gender equality (Technical Annex B.6). Lesotho is the highest ranked African

13

country with regards gender equality2. The country’s strong gender policy has resulted in high

enrolment rates for both genders. Lesotho remains a low-gender gap country and is ranked

38 out of 142 countries in the overall Gender Gap Index for 2014. Women are highly present

in the economy, dominating the formal SMME, informal sector and garment manufacturing,

59% of SMME owners are women. Meanwhile their incomes are generally lower than men, and

they remain economically disadvantaged by unequal access to property and finance. To this

end, the project will improve gender outcomes in the area of developing skill and

entrepreneurship, and increasing opportunities for women entrepreneurs who are engaged in

small, medium and micro business. All project support will endeavor to mainstream gender

balance to ensure that men and women benefit from the project support. In addition, the project

will also respond to the national strategy by strengthening its response to promote gender

mainstreaming in the project activities and also to build the capacity of women entrepreneurs

through skill and entrepreneurship development and advisory services.

3.2.4. Involuntary Resettlement: The Project will not result in any population displacement.

IV. IMPLEMENTATION

4.1 Implementation Arrangements

4.1.1 The project will be implemented over a period of four years between January 2017 and

December 2020. The Ministry of Trade and Industry is the lead executing agency in

collaboration with the MSBCM, and MTEC. The existing implementation arrangements for

the on-going World Bank Financed – Private Sector Competitiveness and Economic

Diversification Project will be used to manage the proposed operation. A Project Steering

Committee (PSC) is already in place to provide strategic oversight and policy guidance, as well

as monitor implementation progress. The PSC will consist of members representing the

agencies responsible for the project implementation i.e. the Principal Secretaries from the MTI,

MSBCM, MTEC, MF, MDP, Deputy Governor of the Central Bank, the Master of the High

Court (MHC), the Office of the Parliamentary Counsel (OPC), the CEOs from LNDC, BEDCO

and LTDC. The committee shall meet every quarter to review implementation progress of the

project and help to resolve technical and implementation problems affecting project progress.

The meetings will be chaired by the Principal Secretary of MTI. The committee shall also

provide feedback on progress and challenges to the private sector on a regular basis.

4.1.2 The Project Management Unit will be headed by a qualified Project Manager who will

oversee day-to-day operations of the project. The Project Manager will also coordinate

procurement, financial management and Monitoring and Evaluation (M&E) aspects of the

project including coordination of implementing agencies; donors and other programs/projects.

The services of financial management, Procurement and M&E will be provided by qualified

staff. In addition, the project will finance the recruitment of additional staff including an

Enterprises Development Manager, a Procurement Specialist, and Project Accountant to

strengthen the PMU capacity for fiduciary management, monitoring and evaluation, project

oversight, and coordination. The Project Manager will report to the Project Steering Committee

chaired by the Principal Secretary, MTI.

4.2 Financial Management and Audit Arrangements

4.2.1 The overall FM for the project will be managed within the existing Project Management

Unit (PMU) in MTI under the overall responsibility of the Financial Manager as the head of

the finance unit. The team is currently implementing a World-Bank funded project, and reviews

from the existing systems revealed they are adequate to handle Bank resources as required. The

Unit is staffed with a team of qualified professionals (including a Project Coordinator, Finance

Manager, Project Accountant, Procurement Manager and other experts). There is a functional

2 2012 Global Gender Gap Report

14

computerized accounting system (TOM2PRO) for use by the finance team; and the control

environment seem adequate. Audit reports are generally being submitted on time for the

ongoing project without any significant control weaknesses highlighted by the external

auditors. In this regard, the Bank will make use of the existing FM systems within the EA to

handle the FM aspects of the project. The assessment however revealed the need to strengthen

the PIU with additional hands by competitively recruiting one project accountant to handle

project FM under the overall functional supervision of the Finance Manager. The overall

conclusion of the assessment is that MTI’s capacity to handle the FM aspects of the project,

satisfies the Bank’s minimum requirements as laid out in the Bank’s FM guidelines, and the

implementation of agreed FM actions would further strengthen the existing system. The overall

FM risk for the project is assessed as Moderate. The results of the assessment and the agreed

FM, disbursement and auditing arrangements for the project are contained as part of the

technical annex (annex B4).

4.2.2 Disbursement and Audit: The project would make use of the Bank’s various

disbursement methods including Direct Payment, and Special Account (SA) methods in

accordance with Bank rules and procedures as laid out in the Disbursement Handbook as

applicable. The Bank will issue a Disbursement Letter of which the content will be discussed

and agreed with Government of Lesotho (GoL) during negotiations. In accordance with the

Bank’s financial reporting and audit requirements, the project will be required to prepare and

submit to the Bank Interim Quarterly Financial Progress report (IQFPR) not later than forty-

five (45) days after the end of each calendar quarter. Annual financial statement prepared by

the project and audited by the Office of the Auditor General (OAG) as per their mandate or by

a private audit firm with the involvement of OAG, including the auditor’s opinion and

management letter will be submitted to the Bank not later than six (6) months after the end of

each fiscal year throughout project implementation.

4.3 Procurement Arrangements

4.3.1 Procurement of goods (including non-consultancy services), works and the acquisition

of consulting services, financed by the Bank for the project, will be carried out in accordance

with the “Procurement Policy and Methodology for Bank Group Funded Operations” (BPM),

dated October 2015 and following the provisions stated in the Financing Agreement.

Specifically, Procurement would be carried out as follows:

Bank Procurement Policy and Methodology (BPM): Bank Standard Procurement

Methods and Procedures (PMPs), using the relevant Bank Standard Solicitation

Documents (SSDs). Contracts on this project to be procured under the BPM will mainly

constitute consultancy services which will involve Technical Assistance and capacity

support to the implementing institutions. These consultancy services will be acquired as

using the Quality and Cost Based Selection (QCBS) Method and Selection Based on

Consultant’s qualification (CQS) method as appropriate. In some selected cases the

Selection Method for Recruitment of Individual consultants will apply. In the case of

contracts for goods whose contract values are very low, the National Competitive Bidding

and Shopping method under BPM will apply as appropriate.

Borrower Procurement System (BPS): Specific Procurement Methods and Procedures

under BPS comprising the National Procurement Procedures. No contracts will be

procured using the BPS. However, the operational costs will follow the internal

administrative and financial procedures of the PMU.

4.3.2 Procurement Risks and Capacity Assessment (PRCA): the assessment of

procurement risks at the Country, Sector, and Project levels and of procurement capacity at the

Executing Agency (EA), were undertaken for the project and the findings have informed the

decisions on the procurement regimes being used for specific transactions or groups of similar

15

transactions under the project. The appropriate risks mitigation measures have been included

in the PRCA action plan attached in Annex B5.

4.4 Monitoringand Evaluation: The monitoring and evaluation system will be based on

the result measurement framework. The M&E specialist within the PMU will be responsible

for managing and reporting on results in collaboration with stakeholders and implementing

agencies. The periodic performance assessment and result reporting will be carried out by the

PMU. Quarterly and annual project implementation reports will also be prepared and submitted

to the Bank. The Bank will carry out a monitoring and supervision mission at least twice a year,

in coordination with other development partners in Lesotho. A project completion report will

be prepared to evaluate progress against outputs and outcomes and draw lessons for possible

follow-up operation. Table 6 presents the project implementation and monitoring schedule.

Table 6: Project Implementation Schedule Task / Milestone Responsible Party Time Frame

Project Approval AfDB December 31,2016

Grant Effectiveness AfDB/GoL March 2017

Project Launching AfDB/GoL April 2017

Procurement of goods and services GoL April 2017 to December 2019

Technical assistance and training GoL January 2018 – June 20119

Annual Audit Report GoL June 2018, 2019, and 2020 and

Supervision Mission AfDB/GoL June/December 2017, 2018& 2019

Mid-term Review AfDB/GoL June 2018

Project Completion Report AfDB/GoL December 2020

4.5 Governance: Strengthening the capacity of key government institutions in policy

designs, implementation and monitoring, ensuring that private sector participation in the

economy is enhanced sufficiently through the removal of key constraints such as access to

finance and markets, particularly for SMMEs are the core objectives of this project. Creating

an effective platform for dialogue and knowledge and information sharing both between and

among public and private sector players is also one of the mechanisms for effective governance

of the development process. Focus on gender equality through attempts to maximize women’s

participation in the expected positive outcomes, and monitoring the process to ensure that this

is effectively happening is also designed into the project implementation process. The project

will address the risks emanating from both internal and external sources through focussing on

key beneficiaries like exporting SMMEs, engaging an existing PMU that has already

established proven methods and strong relations, trust and credibility with the counterpart

government institutions that are part of the implementation arrangement. The capacity and

modes operandi of the PMU has been reviewed in terms of the units it has for financial

management, procurement, audits and monitoring and evaluation. Furthermore, the working

modalities with be clearly articulated with the PMU focussing on the particularities of this

project and the distinct ways the project team wishes to manage the process through

supervisions missions and the period reporting of the process as well as results monitoring from

an early stage of the implementation process. An independent audit of project financial reports

and procurement reviews will be undertaken every year.

4.6 Sustainability: The proposed operation responds to demand-led interventions in the

areas of SMME focused interventions to mitigate access to finance and diversification of

Lesotho’s industrial sector. The project is informed by various development plans and

strategies of the GoL as well as outcomes of consultations with key private and public players

that identified key challenges and constraints in Lesotho’s economy in particular in relation to

sustained private sector participation in the effort to diversify the country’s economy and

minimize dependence on SACU contributions, create jobs for the youth and reduce inequality.

Significant attention has been given to sustainability in the project design, through optimizing

16

complementarities both with GoL and development partners’ interventions’ to develop selected

sectors that have both comparative and competitive advantages. The various technical

assistance activities are aimed at improving implementation and monitoring capacity at the

targeted institutions.The project will enhance partnership with local training institutions and

other providers of business development services to ensure sustainability.

4.7 Risk Management

Table 7: Risks and Mitigation Measures

Risk Level Mitigation

Political instability may affect

pace of project implementation.

Moderate GoL is involved in dialogue processes for the implementation

of constitutional and security sector reforms with support from

SADC. This provides prospects for stability of a coalition

government as the country prepares for next democratic

elections in 2020

Global economic recession

impact on SACU revenues and

FDI- slowdown of GDP growth

Moderate The project will focus equally both on exporting SMMEs and

those supplying the domestic market. Furthermore, the

linkages between large and SMMEs will to an extent reduce

dependence on foreign suppliers.

Insufficient commitment and

capacity to implement reforms

Moderate The project will implement capacity building support as early

as possible in the project implementation period. The PMU has

many years of project implementation and has already earned

the confidence and trust of the government authorities.

Currently on-going projects (WB, EU, etc.) supporting

capacity building will also enhance public sector capacity for

project implementation.

Delay in project start-up and

procurements

Moderate Use of an existing PMU staffed by professionals with many

years of project management experience and the ToRs that are

developed will help to reduce the risk in start-up delay

4.8 Knowledge Building

4.8.1 The Proposed project will build knowledge and develop skills in specific areas related

to policy implementation, monitoring and reviews to enhance the whole policy cycle. Through

the institutionalized process of public-private discussions, it enables knowledge and experience

sharing to enhance continuous improvement in the quality and responsiveness of policies and

strategies. The monitoring and evaluation capacity of key public institutions the project seeks

to strengthen will add empirical knowledge thus taking the potential for growth on a continuous

improvement path. The implementation of the proposed project will focus on alleviating

binding constraints for SMMEs in accessing finance and markets, gain competitiveness and

diversify the country’s manufacturing sector at the same time creating more jobs for the youth.

This will be achieved in a number of ways: First, the support to SMMEs helps to develop

entrepreneurial capacity, improve access to finance and markets. Second, to make this

sustainable, the project supports the enhancement of capacity at the institutional level to ensure

that there is effective public sector capacity to provide specific and sector focussed facilitation.

Third, the project also supports the development of strategic partnerships through a sustained

public-private dialogues process.

17

V. – LEGAL INSTRUMENTS AND AUTHORITY

5.1 Legal Instrument

The legal instruments for the project will be the Loan Agreement, and Protocol of Grant

Agreement between the Kingdom of Lesotho and the African Development Fund for a Loan of

UA 5.0 million and Grant of UA 2.22 million respectively.

5.2 Conditions Associated with Bank’s Intervention

5.2.1 Conditions Precedent to Entry into Force:

The entry into force of the Loan Agreement shall be subject to the fulfilment by the

Borrower of the provisions of Section 12.01 of the General Conditions Applicable to

Loan Agreements and Guarantee Agreements of the Bank.

The Protocol of Agreement shall enter into force on the date of its signature by the

Kingdom of Lesotho and the African Development Fund.

5.2.2 Conditions Precedent to First Disbursement:

The first disbursement of the loan shall be conditional upon the entry into force of the

Loan Agreement.

The first disbursement of the grant shall be conditional upon the entry into force of

the Grant Agreement, and the evidence of having opened a foreign currency

denominated special account for the deposit of the proceeds of the Grant in Central

Bank of Lesotho.

5.3 Undertakings

i) The Recipient shall maintain the existence and functioning of the Project Steering

Committee

ii) The Recipient shall submit, within 45 days of the end of each calendar quarter, quarterly

progress reports in a format acceptable to the Bank, indicating the implementation status

of the physical and financial activities.

iii) The Recipient shall submit, within 6 months of the end of each fiscal year, annual

audited project financial statements audited by the Office of the Auditor General in

accordance with Bank-approved terms of reference.

5.4 Compliance with Bank Policies

The project complies with all applicable Bank policies.

VI. RECOMMENDATION

6.1 Management recommends that the Board of Directors approve the proposed Loan of

UA 5.0 million and a Grant of UA 2.22 million to the Kingdom of Lesotho for the purposes,

and subject to the conditions, stipulated in this report.

I

Appendix I

II

Appendix II: Progress Towards Achieving the MDGs

III

Appendix III: Similar Projects Financed by other Development Partners

DONOR PROJECT TITLE AMOUNT INTERVENTION AREAS

World Bank Support to Private Sector

Competitiveness and

Economic Diversification

Project

USD 14

million

Investment climate reform

Horticulture

Linkages between SME and large enterprises

SME skill training

UNDP Financial Inclusion

Review on enterprise

development capability

Finscop study

SMME policy review

SME capability assessment

EC Support to enterprise

development

Support to Trade Facilitation

- Capacity building support and technical assistance

ILO Business development

training

SME skill training

APPENDIX IV: BANK GROUP PORTFOLIO STATUS

Sectors/Operations Approval

Date

Final Date of

Disbursement Funding

Million

UA

Disbur

sement

Rate

Age Implementation

Progress (IP)

Development

Objective

(DO)

COMMUNICATION SECTOR

1

eGovernment

Infrastructure 7.5 7%

2.9 Satisfactory Satisfactory ADF Loan 10/21/2013 8/31/2018 Loan 2.7 2.0%

ADF Grant 10/21/2013 8/31/2018 Grant 4.8 10.0%

MULTI-SECTOR

2

Institutional Support

Project 2.6 27%

3.0 Satisfactory 2.0

ADF Grant 10/14/2013 6/30/2017 Grant 2.6 27%

SOCIAL SECTOR

3

Educ. Qual.

Enhancement Project

(EDC III)

8.6 77.0%

9.5 2.2 2.0

ADF Loan 4/4/2007 3/30/2016 Loan 1.6 64.0%

ADF Grant 4/4/2007 3/30/2016 Grant 7.0 80%

WATER SUPPLY & SANITATION SECTOR

4

Lesotho Lowlands

Rural Water & Sanit.

Project

9.1 4.9%

3.0 Satisfactory Unsatisfactory

ADF Loan 10/3/2013 9/30/2018 Loan 6.5 0.0%

RWSSI 10/3/2013 9/30/2018 Grant 2.6 17.2%

TOTAL 27.8 30% 4.6 Satisfactory Satisfactory

Total Loan

10.8 10.0%

Total Grant 17.0 65.9%

IV

APPENDIX V: Doing Business in 2015 and 2016 (Rank)

Topics DB 2016

Rank

DB 2015

Rank

Change in

Rank

Overall 100 112 12

Starting a Business 117 110 7

Dealing with Construction Permits 171 171 -

Getting Electricity 150 149 1

Registering Property 108 106 2

Getting Credit 82 152 70

Protecting Minority Investors 106 101 5

Paying Taxes 91 90 1

Trading across Borders 39 39 -

Enforcing Contracts 94 92 2

Resolving Insolvency 121 119 2

Source: Doing Business Report, World Bank

V

APPENDIX VI: Analytical Work and Underpinnings

Component Analytical Work Institution

Strategic

Framework

National Strategic Development Plan (2013-

2017)

GoL

Financial Sector Development Strategy Central Bank of

Lesotho

Industry Development Policy GoL

Micro, Small, and Medium Enterprise Policy;

and Tourism Policy

GoL

Investment Policy GoL

Tourism Policy GoL

Quality and Standards Policy GoL

National Gender Development Action Plan GoL

Implementation of the SADC Industrialisation

Strategy and Roadmap

SADC

Sector

Analytical

Reports

Doing business report World Bank

Others Private Sector Competitiveness and Economic

Diversification Project

World Bank

VI

APPENDX VII: GENERAL MAP OF LESOTHO