LESOTHO FACES UP TO ITS DEVELOPMENT CHALLENGES

UNCLAS SECTION 01 OF 02 MASERU 000214

SIPDIS

AIDAC

E.O. 12958: N/A
TAGS: ECON EINV ETRD LT AGOA
SUBJECT: LESOTHO FACES UP TO ITS DEVELOPMENT CHALLENGES



1. SUMMARY: The Government of Lesotho and the country's
private sector held a three-day World Bank-sponsored Private
Sector Development Forum from April 6-8, 2005 to identify and
map out modalities for eliminating infrastructure, training,
administrative and legal impediments to private sector growth.
As a landlocked country, an imperative aspect of Lesotho's
development was identified as its integration with the economies
of South Africa and other countries of the region. The meeting
also looked at value chain analyses of selected strategic
sectors, and recommended interventions for enhancing the
country's productivity in an increasingly competitive
international trade regime. World Bank studies carried out in
2004 looked into Lesotho's company registration and licensing
procedures; immigration and customs services; incentives for
investors; the financial sector; technical and vocational
education - all of which were found to be cumbersome, antiquated
and not friendly to investors, be they local or foreign. The
country's system of technical and vocational training was found
to be unresponsive to the skills demands of active sectors of
the economy. Recommendations by working groups on each of the
major topics are expected to form part of an Aide Memoire
between the GOL and the World Bank. This will outline specific
project actions that need to be undertaken. END SUMMARY.


2. Setting the tone for a new era of cooperation in reforming
the environment for private sector growth, Prime Minister Mr.
Pakalitha Mosisili cited the ninety days it takes to register a
company in Lesotho, contrasting it to two days in Canada.
(Note. In considering Lesotho's qualification to compete for
funding in 2004, the Millenium Challenge Corporation also
identified this lengthy process as substantially above the
average among MCC countries. End Note.) In addition, the
Prime Minister identified an added barrier as "the high cost and
poor services encountered from the staff during the process of
registering a company" On immigration and customs services, he
singled out an example of an investor who, rather than being
granted an entry visa at the point of entry, was turned away
from the South Africa/ Lesotho border near Maseru to apply for
an entry visa at the offices of the Lesotho High Commission in
Pretoria, five hours away. He called on participants to
consolidate the gains made in the textile sector by retaining
existing investors and diversifying both the country's markets
as well as its export portfolio.

Following are some of the major themes of the Forum.

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TEXTILE INDUSTRY VULNERABLE TO EXTERNAL SHOCKS:
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3. Forum participants identified the garment industry as an
important engine of growth which needed to be consolidated. The
dominance of the sector and its dependence on a single market,
the United States, however rendered the country vulnerable to
external shocks. A consultant of ComMark (a non-profit
organization funded by the UK to assist the garment industry)
observed that the closure of seven factories employing 6,700
workers since January 2005, could not be attributed to the end
of the Multi-Fiber Agreement, but rather to the exchange rate
between the Loti (which is pegged at par with the South African
Rand) and the USD, which has shrunk profit margins in the face
of increasing production costs.


4. Lesotho's inputs for the production of knit apparel are all
sourced from outside the country, which renders the industry
hostage to the inefficiencies in the delivery and sourcing of
inputs. Rail transport from the South African ports of Durban
and Port Elizabeth is slow, and the Maseru Container Terminal
inadequate for increasing traffic. Transport of finished
products to the ports is through trucks which make a shorter
delivery time, although more expensive because of the rising
cost of petrol.


5. Unlike woven fabric production, which is vertically
integrated in the country, the knit fabric sector will be
exposed to fabric sourcing shocks in 2007, when Lesotho's third
country fabric allowance under AGOA expires.


6. Although Lesotho is the biggest exporter of textiles to the
U.S. in volume terms, the value of its products per square meter
has consistently been lower than that of Mauritius, which
concentrates on higher value apparel products like woven
blouses. The decision to move in this direction however cannot
be made in Lesotho, whose industry consists of cut-make-and-trim
production lines whose orders, contracts and input supplies and
sourcing are decided by parent companies in the Far East.

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LABOR COSTS AND PRODUCTIVITY:
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7. The textile industry in Lesotho has not traditionally
invested much in the development of local skills. New recruits
are taught single machine skills over a short period of time.
Cushioned by readily available, low wage employees, Lesotho
managers have concentrated rather on meeting targets and
deadlines at the expence of sharpening productivity.


8. In order to move towards higher value apparel, the industry
would be forced to improve labor skills and productivity.
Although Lesotho's labor costs are competitive, the operator
productivity within the industry remains lower that competitors
in the region, including Mauritius and Kenya. Furthermore, the
in-line defect rate is high, resulting in the need for
additional labor input to make the required corrections during
the finishing stages of production. In cases where
inefficiencies exist on sewing lines, the tendency has been to
allocate more machinists to the problem, which results in the
use of more manpower, adding further to the cost of production.


9. Another evidence of lack of skills is the high concentration
of expatriate supervisors and line managers who are paid higher
salaries than local employees . This contributes to high
overhead costs and animosity among Basotho who feel they have a
right to hold these positions in industries located in their
country although substantial experience and training will be
required to achieve such levels.

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LEGAL FRAMEWORK:
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10. The legal framework around registering and licensing of
businesses was found to be lengthy, cumbersome and unnecessarily
costly for the private sector. Equally time consuming are
procedures for obtaining residence permits for expatriate staff
of foreign companies operating in Lesotho. Resolutions at the
conference called on the government to speedily enact reform
bills to the Companies Act of 1967 to comply with
internationally acceptable norms. A similar recommendation was
made regarding the Aliens Control Act of 1966, which governs the
country's immigration and passport services.


11. The GOL was commended for its responsiveness to concerns
raised by foreign investors. These included the provision of
infrastructure and recent interventions to speed up the process
of Value Added Tax refunds by the Lesotho Revenue Authority.
Identifying the local private sector as equally important in
entrenching economic gains made to date, the conference advised
the government to extend its incentive package to the local
investors as well.


12. COMMENT:

The forum was a good opportunity for the GOL to commit to
improving service delivery to the private sector, be it foreign
or local. The reluctance, or slowness of the government to
enact legislation around issues of land reform women's rights,
company registration, to name but a few, does not augur well for
the immediate future. Action on several legislative fronts has
been further slowed by preparations for the April 30 first local
elections and follow-up integration of newly-elected officials.
Nevertheless, these stated commitments will have to be followed
up with quick action, because pending donor assistance for the
country, including access to Millennium Challenge Account funds
depends on implementation of reforms as well as other factors.
The conference further created an opportunity for increased
coordination between donors, who have displayed a strong
commitment to provide Lesotho with technical and financial
support to implement actions that promote private sector growth.
END COMMENT.









PERRY