Unlocking the potential of lesotho’s Private Sector: A Focus on Apparel, horticulture, and ICT Unlocking the potential of lesotho’s Private Sector: A Focus on Apparel, horticulture, and ICT © 2018 The International Bank for Reconstruction and Development/The World Bank, 1818 H Street NW, Washington, DC 20433 USA This volume is a product of the World Bank staff. The findings, interpretations and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank Group or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. Images: Front Cover: World Bank Photo Library (John Hogg and Elita Banda), Enhanced Integrated Framework (Simon Hess), and Lesotho Times. Interior: page 3 – World Bank Photo Library (John Hogg), page 11 – World Bank Photo Library (Sarah Farhat), page 20 – World Bank Photo Library (John Hogg), page 36 Shutterstock (Therina Groenewald), page 49 - Shutterstock (Maxim Gaigul). The report was edited by Sandra Gain and designed by Brenda Ryan. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 1 Contents Executive Summary 5 Chapter I. Economic Context and Private Sector Profile 11 1. Economic Context 11 2. Private Sector Profile 15 Chapter II. Textiles and Apparel 20 1. Context 20 2. Challenges to Growth 22 3. Opportunities for Penetrating Different Markets 29 4. The Way Forward 32 Chapter III. Horticulture 36 1. Context 36 2. Challenges to Growth 39 3. Zooming in on Commercial Fruit Cultivation 44 4. Opportunities for Lesotho’s Producers 44 5. The Way Forward 46 Chapter IV. ICT as an Enabler for Private Sector Development 49 1. Context 49 2. Challenges to Greater Digital Adoption 52 3. The Way Forward 58 Annex A. Share of Small Firms in Lesotho Compared with Other Lower-Income Countries 62 Annex B. Distribution of Jobs by District and Urban vs. Rural Locations 63 Annex C. Determinants of Labor Productivity 64 Annex D. Top Ten Apparel Exports to the United States and South Africa, 2016 65 Annex E. Tax Incentives in Lesotho Applicable to the Apparel Industry and Horticulture 66 Annex F. Revenue per Hectare and per Tree for Different Fruit Varieties 67 Annex G. Strategic Segmentation of the Global Food Industry 68 Annex H. Tech Hubs in Africa 69 References 70 2 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Acknowledgements This report was prepared by a team led by Anna Reva (Private Private Sector Specialist), Ellen Olafsen (Senior Private Sector Sector Development Specialist) under the guidance of John Specialist), Meeta Sehgal (Senior Agricultural Specialist), Heinz Gabriel Goddard (Lead Economist) and Douglas Pearce Strubenhoff (Senior Private Sector Specialist), Joshua Wimpey (Manager, GFCAS). The Jobs analysis was prepared by Reyes (Private Sector Development Specialist) and Sashana Whyte Aterido (Economist) and the ICT assessment was written by (Young Professional). The team is grateful to Asli Senkal Tim Kelly (Lead ICT Policy Specialist) and Sara Troiano (Young (Economist) and Barbara Kotschwar (Senior Private Sector Professional). The team would like to thank Janet Entwistle Specialist), peer reviewers, for their comments. (Country Representative) and Paul Noumba Um (Country The team would like to express its gratitude to the Director) for the overall guidance and support to the project. Government of the Kingdom of Lesotho for the cooperation The report has benefitted from contributions and comments and support extended throughout the preparation of this of many World Bank Group colleagues, including Dobromir report. The report benefitted from detailed comments sent Christow (Senior Private Sector Specialist), Klaus Deininger by the Lesotho Communications Authority, Econet, Vodacom, (Lead Economist), Sebastien Dessus (Lead Economist), WIOCC and LEC Communications. The team would also like Ijeoma Emenanjo (Senior Agricultural Specialist), Jakob to thank the staff of the private companies, industrial and Engel (Young Professional), Thomas Farole (Lead Economist), farmer associations, nongovernmental organizations, the Alexandra Fraser (STC), Marek Hanusch (Senior Economist), editor of the African Cotton, Textiles and Apparel Monitor, Ankur Huria (Senior Private Sector Specialist), Erich Kieck Vodacom Foundation, the National University of Lesotho, the (Senior Private Sector Specialist), Uzma Khalil (Senior Financial U.S. Southern Africa Trade and Investment Hub, Delegation Sector Specialist), Smita Kuriakose (Senior Economist), Sanyo of the European Union to the Kingdom of Lesotho, and the Lutalo (Senior Water Supply and Sanitation Specialist), Eric World Trade Organization’s Enhanced Integrated Framework Manes (Senior Economist), Numa De Magalhaes (Senior Program. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 3 Abbreviations and Acronyms AGOA African Growth and Opportunity Act MoE Ministry of Education CBL Central Bank of Lesotho MoF Ministry of Finance EASSy East Africa Submarine Cable System MoSBDCM Ministry of Small Business Development, Cooperatives and Marketing FAO Food and Agriculture Organization MoW Ministry of Water Affairs FDI Foreign direct investment MPWT Ministry of Public Works and Transport FOB Free-on-board MTI Ministry of Trade and Industry GDP Gross domestic product NUL National University of Lesotho GDS Global Development Solutions OAG Office of the Attorney General ICTs Information and communication technologies PCG Partial credit guarantee IFPRI International Food Policy Research Institute PSCEDP Private Sector Competitiveness and Economic Diversification Project IMF International Monetary Fund SACU Southern African Customs Union ISP Internet service provider SADC Southern African Development Community IT Information technology SARS South African Revenue Service LAA Land Administration Authority SDP Supplier development program LCA Lesotho Communications Authority SMEs Small and medium-size enterprises LEC Lesotho Electricity Company SMICs Small and Middle-Income Countries LECC LEC Communications SSA Sub-Saharan Africa LICP Lesotho Investment Climate Project USF Universal Service Fund LNDC Lesotho National Development Corporation VAT Value-added tax LRA Lesotho Revenue Authority VMNOs Virtual mobile network operators MDP Ministry of Development Planning WASCO Water and Sewerage Company MLCA Ministry of Law and Constitutional Affairs WIOCC West Indian Ocean Cable Company MoA Ministry of Agriculture and Food Security MoCST Ministry of Communications, Science and Technology 4 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Executive Summary Background the availability of industrial infrastructure, and strengthen vocational institutions to improve skills availability, among Job creation and private sector growth are at the heart other measures. The government’s upcoming National of Lesotho’s development agenda. Indeed, despite Strategic Development Plan identifies four priority sectors: continuous economic growth during the past decade, over (1) manufacturing (measures include strengthening the a quarter of the population is unemployed and more than competitiveness of the garment industry and attracting half lives below the national poverty line. Lesotho’s growth investment in other industries), (2) commercial agriculture model is driven by public spending, which is dependent on (including livestock, deciduous fruit, and other high-value Southern African Customs Union revenues. Strengthening crops), (3) technology, and (4) tourism and creative industries. the competitiveness of Lesotho’s traditional industries, such This report offers a comprehensive analysis of three of the as apparel, as well as developing new, export-oriented four priority sectors and provides recommendations on sectors has long been a government priority. improving horizontal policies that affect all firms in the economy. Data collection for the report was undertaken This report aims to fill the knowledge gaps on the during November 2017-March 2018. characteristics of the private sector and identify growth opportunities in the key sectors of Lesotho’s economy. Where Are the Jobs in Lesotho? Specifically, the report aims to (1) shed light on the characteristics of the private sector, (2) identify opportunities Employment in Lesotho is concentrated in a few for increasing competitiveness in the apparel and horticulture economic activities and most jobs are in Maseru and industries, and (3) discuss mechanisms for using information Leribe. Nearly all firms are small. The report analyzes and communications technology (ICT) more effectively to the newly released Business Registry data collected by increase productivity and reduce the costs of regulatory the Bureau of Statistics, which covers all sectors except compliance for the private sector. The objective of the report agriculture. Employment is concentrated in apparel and is to inform the World Bank Group’s programs in Lesotho as wholesale and retail trade, which account for 84 percent of well as the government’s reform priorities. all jobs in manufacturing and services. Nearly all firms (97 Sector selection was underpinned by several criteria: percent) are micro or small with fewer than 20 employees. (1) potential to create jobs, (2) government priorities, and (3) Large firms (with more than 100 employees) account for less feasibility to improve sector performance within a relatively than 1 percent of all firms but more than half of employment. short period (within the next five years). Apparel was selected Maseru and Leribe districts account for 46 percent of firms because of its current role in exports and employment as well but nearly 80 percent of employment. This is likely due to the as its loss of market share in its main export destination, the large share of manufacturing employment in the industrial United States, necessitating the need for better understanding zones of these districts. global trends in this industry and developing a strategy for Lesotho has a healthy share of young firms (age five strengthening competitiveness. Agriculture is an important years or younger). In 2015, 48 percent of firms were age five source of livelihoods in Lesotho, where 70 percent of the years or younger, compared with 13 percent in South Africa. population lives in rural areas. Transitioning from subsistence In many economies, new and young firms are the primary cultivation of cereal crops to commercial production of fruits drivers of job creation and economic dynamism, increasing and vegetables can transform the rural economy, improve competition and spurring innovation. The presence of incomes, and generate new jobs. The report discusses many young firms in Lesotho may be indicative of the ease the key constraints to such transformation and identifies of entry. However, given that most young firms are small interventions to unlock the growth of the sector. Lastly, ICT and in commerce, the large presence of new firms may be is an important enabler for private sector competitiveness. indicative of job scarcity in the economy rather than vibrant All three sectors are prioritized in the upcoming National entrepreneurship. Strategic Development Plan. Older firms are larger than younger firms and In 2017, Lesotho elected a new, four-party coalition productivity tends to improve with firm size and age. The government, which prioritized measures to increase same type of firm is likely to be larger if it is older. Findings from investment and create jobs. The budget speech for the multivariate analysis show that firms that survive and grow 2018/19 fiscal year prioritizes actions to increase foreign and tend to be more productive. This is a good sign, indicating domestic investment, expand access to finance for domestic that resources are allocated toward better performing firms. businesses, attract private property developers to increase Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 5 Findings from Sectoral Analysis shortages, particularly for machine repair and management, and introducing a supplier development program. Apparel: An Established Industry at a Crossroads Improving cross-border trade logistics, through closer cooperation with South African Customs and addressing Apparel accounts for most of the jobs and exports in water shortages in Maputsoe, is another important priority. manufacturing. The industry has grown over the past Lastly, the government may consider targeted foreign decade, but its further development is under pressure. direct investment (FDI) attraction from South Africa, raising Lesotho’s garment industry was established in the late 1980s, awareness about opportunities in the South African market and exports have grown rapidly after the introduction of the among exporters, and building stronger relationships with African Growth and Opportunity Act (AGOA), which has given South African buyers to increase exports to the region. Given the country preferential access to the U.S. market. Although the importance of the U.S. market, continuous dialogue with Lesotho is the second largest garment exporter to the United the United States over the post-AGOA trade regime will be States in Africa, exports to this market have been falling over important to avoid the collapse of exports and massive job the past decade, due to the expiration of the Multi Fibre losses after the expiration of the agreement. Arrangement and Lesotho’s struggle to compete with other low-cost producers. However, exports to South Africa have Horticulture: An Emerging Industry with Potential for more than tripled since 2010 and helped mitigate the decline Growth in exports to the United States. Exports to the European Commercial horticulture offers opportunities to Union have been low despite duty-free access to this market. transform the rural economy by increasing incomes The industry shows several vulnerabilities: (1) concentration and creating jobs. Crop farming in Lesotho is based on of production in manufacturing of basic apparel with low subsistence cultivation of cereal crops, which contributes value added; (2) weak localization, with few local exporters, to low incomes and widespread poverty in rural areas. low representation of Basotho in management positions, and Transitioning to commercial cultivation of fruits and lack of local suppliers; and (3) declining competitiveness in vegetables can significantly increase farm incomes. Lesotho’s the U.S. market, which accounts for 60 percent of exports. climate is favorable to production of many vegetables and The U.S. market will likely remain lucrative for Lesotho’s deciduous fruits. Thanks to the country’s high altitude, producers in the short term; however, the regional Lesotho’s fruit can be harvested two to three weeks earlier market may offer greater opportunities in the longer than that in South Africa’s Western Cape province (the main term. Lesotho’s manufacturers exporting to the U.S. market center for fruit production), resulting in price premiums. are in the low-margin, high-volume business and face Lesotho can also build on its proximity to South Africa, which fierce competition from other low-cost producers. Long- is a leading global exporter of fruit and has advanced research term prospects depend on trade preferences, as AGOA is institutions, export infrastructure, and market intelligence. set to expire in 2025. Furthermore, a global trend toward Lesotho’s access to water resources can make it an attractive fast fashion would disadvantage Lesotho and other African investment destination for fruit companies from the water- producers. Indeed, many traditional U.S. retailers have been scarce Western Cape Province if the irrigation infrastructure losing market share to fast fashion brands such as Zara, is developed. H&M, and Forever 21 as well as online platforms such as Commercial horticulture is a new industry in Lesotho Amazon. However, the trend toward fast fashion strengthens and has not yet realized its potential. Over 80 percent Lesotho’s position in the South African and regional market, of fresh fruits and vegetables are imported (based on where it can benefit from proximity to buyers. South Africa’s interviews with supermarkets). Fruits and vegetables in imports of garments from countries in the Southern African Lesotho are grown primarily by smallholders for subsistence Development Community increased significantly over the consumption; skills and productivity are low. About 300 fruit past decade, while imports from China declined. Interviews and vegetable farmers produce mostly for the market (Bureau with South African retailers reveal an increased focus on local of Statistics 2016); but fewer than 10 have regular contracts and regional sourcing to reduce time-to-market. with supermarkets. There are no aggregators or commercial What can be done to increase the competitiveness of packing and processing facilities; all inputs are imported. The Lesotho’s garment industry? It will be important to address most significant challenges faced by the sector are lack of a the shortage of factory shells by involving the private sector functioning land market (only 232 farmers have land titles) in construction and management of industrial estates. This and irrigation, poor productivity of smallholders, and weak is the most important measure to facilitate new investment linkages within the value chain. in the industry. To strengthen the productivity of existing Unlocking the potential of the sector requires significant enterprises and support localization of the industry, the public intervention and private investment. Improving government’s interventions could focus on addressing skills the functioning of the land market and availability of serviced 6 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT land (with access to irrigation and road infrastructure) is Company (LEC), but it has not yet had a noticeable impact on the main priority to encourage foreign and large-scale the market. In addition, relatively high interconnection costs domestic investment in commercial farming. To increase the and government levies increase the prices of communication productivity of smallholders, who constitute the majority services. The development of digital economy is further of farmers in Lesotho, the government may consider constrained by the low penetration of smartphones and grid incentivizing private investment in aggregators, supporting electricity, and low digital literacy among the population, productive alliances between farmer groups and potential slow development of e-government services, low number of buyers, and establishing an SMS-based market information ICT graduates, and a small local IT industry. system, possibly through a partnership with the international Increasing competition among service providers to service provider. Given the capital and skill intensity of fruit improve the quality and affordability of services is farming as well as lack of such experience in Lesotho, targeted the most important measure to enhance Lesotho’s FDI attraction from South Africa could facilitate knowledge participation in the digital economy. One way to increase transfer and support development of the industry. competition in the market is to bring in a private sector ICT as an Enabler for Private Sector Development partner for LEC Communications (LECC) and provide LECC with a full, unified services license. Competition can also ICTs are increasingly important for private sector be strengthened through (1) regulation of wholesale data competitiveness. Digital technologies are facilitating the prices and introduction of a sender-keeps-all arrangement inclusion of new and young firms in the global economy for mobile interconnection (that is, zero fees for mobile (notably through e-commerce and social media platforms) call termination), (2) introduction of a specialized tower and enhancing the efficiency of production. Furthermore, company, and (3) privatization of the government’s stake e-government applications can reduce regulatory in telecommunications companies. Other measures the compliance costs for firms. Global apparel sourcing and government may consider to support the growth of the manufacturing processes are significantly affected by digital economy include (1) strengthening the security of digitization. Big data analysis can help make accurate electronic transactions and development of e-government predictions about batch sizes and replenishment sourcing (through the adoption of laws on cybersecurity and based on real-time data from the demand and supply e-commerce, and ensuring interoperability between digital sides, and if digitization is undertaken in collaboration with ID and the government systems), (2) investing a higher share suppliers (for example, through system integration), it can of the Universal Service Fund’s resources in digital literacy enable automatic ordering (McKinsey & Company 2017a). programs, and (3) exploring the feasibility of partnerships Furthermore, 3D design and automation are improving with the corporate sector to co-fund a specialized incubation the efficiency of apparel manufacturing. Agriculture is also program for the ICT startups. becoming increasingly hi-tech. Technology is used to provide farmers with real-time information on prices, connect them What Are the Main Horizontal with traders, and provide weather forecasts and extension Constraints to Private Sector Growth services. in Lesotho? Lesotho is not yet fully benefitting from global Lesotho’s business climate has improved in recent years. technological advancements. Weak competition in the Lesotho ranks 104th globally in the World Bank’s Doing ICT market, which results in high prices, is at the core of the Business 2018 Report, with a distance to the frontier score of problem. Only 15 percent of formal firms have a website and 60.42 on a 0–100 scale (World Bank 2017b). It ranks eighth on 45 percent use e-mail, which is much lower than the average the Ease of Doing Business in Sub-Saharan Africa (World Bank for Sub-Saharan Africa. Furthermore, only 27 percent of the 2017b). Several positive developments were recorded in population uses the Internet. Although mobile penetration recent years, including the opening of the One-Stop Business is high by regional standards, fixed broadband penetration Facilitation Center and the establishment of the Credit in Lesotho is around 0.2 percent, one of the lowest in Bureau. Furthermore, the process of obtaining construction Southern Africa. According to BDRC Continental, a 2 Mbit/s permits was streamlined, with the introduction of electronic fixed broadband connection in Lesotho in December 2017 systems in August 2017. would have cost more than US$100 per month, which is almost twice that in South Africa. Despite the best efforts However, red tape and weak access to finance remain of the Lesotho Communications Authority, two service obstacles for private sector development. The process providers, Vodacom and Econet, still control most of the of receiving business licenses and permits remains market, and weak competition contributes to high prices. cumbersome, and adoption of the Business Legislation and The government encouraged the emergence of a third Licensing Bill has been delayed. Furthermore, regulatory player, a communication subsidiary of the Lesotho Electricity compliance costs are high. For example, firms need to spend Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 7 29 days just to start a business, 43 days to register property, and lenders, (3) streamlining claim payout criteria and and 114 days to obtain an electricity connection (World Bank final settlement procedure, and (4) ensuring sustainability 2017b). Access to finance is considered a major constraint to by introducing an optimal fee structure. For the LNDC- firm operation by 35 percent of domestic firms (World Bank administered scheme, it is important to (1) streamline the 2016a), and bank credit to the private sector is much lower approval process by moving to electronic systems, and (2) than in comparator economies. introduce monitoring and evaluation to assess the impact of the scheme. Furthermore, it will be useful to conduct Skills mismatches and lack of entrepreneurship training for banks on cashflow-based SME lending and SME programs for growth-oriented businesses limit the risk assessment. competitiveness of Lesotho’s private sector. The interviews carried out with firms as part of the sectoral analysis The government may consider introducing targeted revealed that lack of specialized skills and skills mismatches entrepreneurship and skills development programs are important constraints for the Basotho businesses. For to improve firm capabilities. One way to do this is example, no institution in the country offers training in through introducing a supplier development program sewing machine repair, which is a skill in high demand by aimed at enhancing the capacity of local SMEs to become the apparel industry; local universities do not offer degrees in subcontractors or suppliers for FDI firms. Given the small size horticulture (an industry prioritized by the government); and of the Lesotho economy, such a program could be open to of the approximately 1,800 students enrolled at the National all sectors. It will also be important to partner with the private University of Lesotho, only about 40 major in ICT-related sector to address skills constraints as well as raise awareness fields (although ICT graduates tend to experience lower about the existing tax incentive for training. unemployment rates compared with graduates majoring Pursuing deeper regional integration and continuous in other fields). Furthermore, although several government trade dialogue with the United States over the post- ministries run entrepreneurship support programs, they do AGOA regime will also be important for the growth of not address the needs of growth-oriented businesses. Lesotho’s private sector. Lesotho’s proximity to South Several legislative reforms can increase access to finance Africa provides access to a large consumer market as well for small and medium-size enterprises (SMEs). Lending to as opportunities to build on its neighbor’s advanced logistic SMEs can be facilitated through adoption of the Insolvency capabilities, export infrastructure, and support institutions Bill and the Security in Movable Interest Bill, both of which (business associations, metrology agencies, incubators, and have been drafted. In addition, adoption of the Law on universities) to strengthen local businesses. Lesotho’s lower Financial Cooperatives, which has also been drafted, as well labor costs and more stable labor relations have already as development and enactment of the Law on Financial helped the country attract South African investment in the Consumer Protection can support the development of apparel industry. A targeted investment promotion campaign microfinance institutions and financial cooperatives and can help Lesotho attract more South African FDI into apparel- increase access to finance for small firms. related activities as well as other labor-intensive industries. Given the large dependence on the U.S. market, negotiations The government may also consider reform of partial with the U.S. government on the post-AGOA trade regime credit guarantee (PCG) schemes to improve design, could give confidence to current investors and help avoid differentiate the market segments served by the Lesotho job losses. Furthermore, the Government of Lesotho may National Development Corporation (LNDC) and the Ministry consider organizing an investment promotion campaign of Small Business Development, and reduce turnaround targeting the EU market to build on the recently signed times. The PCG scheme administered by the Ministry of Small Economic Partnership Agreement with the European Union. Business Development would benefit from: (1) defining clear It will also be important to sign international investment and eligibility criteria for borrowers and lenders, (2) determining double taxation agreements to give greater confidence to the appropriate guarantee coverage ratio in a manner that potential investors. credit risk is appropriately shared among the PCG Fund 8 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Summary of Recommendations Sectoral Recommendations Time Agency Apparel Reform provision of industrial infrastructure – key priority to attract new investment in the industry 1. Bring rental prices to the cost recovery level and improve rent collection ST LNDC, MoF 2. Institute a more careful appraisal of potential tenants ST 3. Partner with the private sector to increase availability of factory shells. MT Improve backward linkages and skills - to increase the productivity of existing enterprises 1. Introduce a local supplier development program and attract FDI into inputs ST LNDC, MoE, LRA, MDP, 2. Improve availability of local skills in machine repair and management and raise awareness about a tax MoSBDCM incentive for training. Address other business environment constraints 1. Work with the South African Revenue Service to improve cross-border trade logistics: ST LRA, MTI • Create a designated office in the Lesotho Revenue Authority where traders can register their cases ST • Undertake an apparel time-release study to identify specific constraints faced by garment exporters ST and include apparel exporters in the pilot exercise on the mutual recognition of preferred traders. 2. Improve water availability in the Maputsoe industrial area: ST WASCO, LNDC, • Consider organizing regular tanker water delivery to companies with no alternative sources of water MT MoW, MDP • Construct a bulk water scheme to provide a sustainable solution.* Horticulture Improve the functioning of land markets and access to serviced land – key priority to enable large-scale investment 1. Identify several parcels of land that can be made immediately available to potential investors ST LNDC, LAA, MoA, MDP, 2. Organize land titling, conduct a land assessment, and create an online database of land parcels MT MPWT, suitable for horticultural production MoW 3. Prioritize the areas suitable for horticulture development for investments in irrigation* and road MT infrastructure. Incentivize market linkages and invest in skills - to improve the productivity of smallholders 1. Support productive alliances between farmers and potential buyers and incentivize the establishment ST MoA, LNDC, of aggregators (for example, through FDI attraction, matching grants to leading farmers or farmer MTI, NUL associations) 2. Establish an SMS-based market information and extension services system ST 3. Sponsor the studies of several masters and PhD students at the Universities in Western Cape to MT improve the availability of specialized skills. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 9 Sectoral Recommendations Time Agency ICT as an Enabler for Private Sector Development Focus on increasing competition in the ICT market as the main priority ST LCA, LECC, MoF 1. Bring in a private sector partner for LECC and give LECC a full unified license 2. Introduce a sender-keeps-all arrangement for mobile interconnection 3. Consider privatizing the government’s stake in the communications companies. Other measures to support development of digital economy include: 1. Increase security of electronic transactions and develop e-government services: adopt the laws on ST LCA, MoF, cybersecurity and e-commerce; ensure interoperability between digital ID and the government MoCST, systems; adopt a single, mobile-based e-payments system throughout government. MLCA 2. Support the development of digital skills and entrepreneurship: allocate a greater share of the USF ST MoF, LCA, Fund for digital literacy programs; explore the feasibility of partnership with Vodacom Foundation or MoE, LNDC, another corporate actor to co-fund a specialized incubation program for ICT startups. MoCST, NUL Recommendations on Horizontal Policies Time Agency Reduce red tape and improve access to finance: adopt Business Legislation and Licensing Bill*; the ST MoF, CBL, Insolvency Bill* and the Security in Movable Interest Bill*; the Financial Cooperative Law* and the Financial MoSBDCM, Consumer Protection Law; Reform the design and administration of Partial Credit Guarantee Schemes*. LNDC, OAG, MLCA Pursue deeper regional integration and continuous trade dialogue with the United States over MT MTI, LNDC the post-AGOA regime. *indicates that work on implementation of the reform has already started (e.g. a draft law has been developed) Note: Timeframe for implementation: short term (ST), up to three years; medium term (MT), three to five years. CBL = Central Bank of Lesotho; LAA = Land Administration Authority; LCA = Lesotho Communications Authority; LECC = Lesotho Electricity Company Communications; LNDC = Lesotho National Development Corporation; LRA = Lesotho Revenue Authority; MDP = Ministry of Development Planning; MLCA = Ministry of Law and Constitutional Affairs; MoA = Ministry of Agriculture and Food Security; MoCST = Ministry of Communication, Science and Technology; MoE = Ministry of Education; MoF = Ministry of Finance; MoSBDCM = Ministry of Small Business Development, Cooperatives and Marketing; MPWT = Ministry of Public Works and Transport; MoW = Ministry of Water Affairs, MTI = Ministry of Trade and Industry; NUL = National University of Lesotho; OAG = Office of the Attorney General; USF = Universal Service Fund; WASCO = Water and Sewerage Company. 10 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Chapter I. Economic Context and Private Sector Profile 1. Economic Context The growth model is driven by public spending and a few economic activities. Lesotho’s growth model is vulnerable, Continuous Economic Growth but Slow Progress in Poverty as it is driven by public spending and dependent on a few Reduction economic activities. Mining and quarrying contributed to fast growth in the late 2000s, but also explained the slowdown in Lesotho has experienced strong economic growth over FY09/10 and FY13/14 (IMF 2018a). Manufacturing is heavily the past decade. Since 2007, Lesotho’s economy has grown concentrated in textiles and apparel and thus dependent on by an average annual rate of 4.2 percent, with real per capita just one industry for growth. The public sector’s contribution gross domestic product (GDP) increasing by about 40 percent, to GDP follows the boom and bust cycles of fiscal policies. much faster than the average in Sub-Saharan Africa (figure Furthermore, government spending is highly dependent on 1.1) (IMF 2018b). In the past three years, real growth averaged Southern African Customs Union (SACU) revenues, which 3 percent and was driven by apparel manufacturing, which declined from 25 percent of GDP in 2014/15 to 13.6 percent of benefitted from the rand/dollar depreciation, and more GDP in 2016/17,1 raising concerns about fiscal sustainability. recently by the strong recovery of agriculture after the severe The World Bank’s Systematic Country Diagnostic (2015) droughts of 2015 and 2016 (IMF 2018a). identified the following constraints to broad-based Figure 1.1. Lesotho’s real per capita GDP grew faster growth: (1) high and inefficient public spending, driven by than in SSA SACU revenues, which had a negative impact on private Real per capita GDP growth (2007 = 100) sector competitiveness by raising the relative price of non- tradables to tradables, contributing to a decline in private 160 investment, and (2) weak business environment and poor 150 access to finance. The Systematic Country Diagnostic also 140 identified lack of skills and infrastructure constraints among 130 the factors that inhibit growth (World Bank 2015). 120 110 Lesotho SSA 100 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1 World Bank, Lesotho Overview, http://www.worldbank.org/en/country/ Source: IMF 2018 based on World Development Indicators. lesotho/overview, accessed April 27, 2018. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 11 The narrow growth pattern contributes to limited job Lesotho’s exports to South Africa are more diversified creation and slow progress in reducing poverty and compared with those destined for the EU and U.S. inequality. More than half the population (57 percent) lives markets. Textiles and apparel account for 57 percent of total below the national poverty line, and inequality is among exports to South Africa, followed by machinery and electric the highest in the world. The Gini coefficient is estimated at equipment and miscellaneous items, comprising 15 and 7 0.53 (SCD 2015). The problems of poverty and inequality are percent of the export basket, respectively. The number of partly linked to the country’s inability to generate a sufficient products exported to South Africa is much higher than to number of jobs. Over a quarter of the working-age population the European Union and the United States and has grown is unemployed, and the government plays an important role over time. For example, Lesotho exports 148 products (at the in providing formal employment. HS 6-digit level) worth more than $100,000 to South Africa, 31 products to the United States, and only 10 products to Exports Are Concentrated in Products and Markets the European Union (UNCOMTRADE). It seems that exports to South Africa do not create a learning effect and most Lesotho’s exports have grown slowly over the past exporters are not able to graduate to more demanding decade and remain heavily concentrated in products markets. and markets. The country’s exports of goods and services Over the past decade, Lesotho has developed new (in current U.S. dollars) have grown by 8 percent cumulatively exports to demanding markets in several product over the past 10 years (World Development Indicators); categories; so far, these exports have been small and all however, they remain heavily concentrated. Apparel and of them are related to agribusiness. Specifically, Lesotho diamonds comprised 84 percent of the country’s merchandize realized exports of dried fruit/rosehip (HS 081340) and exports in 2016 (UNCOMTRADE) and water is the third most plants used for pharmaceutical purposes (HS 121190) to the important export (figure 1.2). Lesotho has three main export European Union. Exports of both products to the European partners—the United States accounts for 35 percent of total Union increased from less than $100,000 in 2011 to more exports, the European Union for 25 percent, and South Africa than $800,000 in 2017 (figure 1.3). Furthermore, Lesotho for 32 percent. Lesotho benefits from duty-free access to started exporting plant oil (HS 151590) in 2016. This is likely these markets under the respective trade agreements. As a rosehip oil; all exports are destined to New Zealand and the least developed country, Lesotho can also export its products value of exports doubled from $275,000 in 2016 to $591,000 duty- and quota-free to Canada and receives preferential in 2017. And over the past six years, Lesotho has developed market access in many other countries, including Australia, exports of trout to Japan and South Africa. A recent World New Zealand, the Republic of Korea, China, and India (LNDC Bank report shows that the quality of frozen trout exports to 2016). Lesotho has yet to build on these opportunities. There Japan (as measured by unit values) surpasses that of several is very little export product diversification outside South global suppliers, such as Chile and Norway (Arenas et al. Africa, since apparel comprises 95 percent of exports to the 2018). These positive trends show a potential for Lesotho to United States and diamonds comprise 98 percent of exports compete in niche agribusiness products in highly demanding to the European Union. The high concentration of exports markets. However, these activities will need to be scaled up results in vulnerability to external demand fluctuations. to have a noticeable impact on the economy. Figure 1.2. Exports are highly concentrated Figure 1.3. Lesotho developed two new exports to the Export value (US$ 1,000) EU since 2011 Textiles Diamonds Water Other 1,200 Exports to the EU (US$ 1,000) 1,000 2000 800 1500 600 1000 400 500 200 0 2011 2012 2013 2014 2015 2016 2017 0 FY07/08 FY08/09 FY09/10 FY10/11 FY11/12 FY12/13 FY13/14 FY14/15 FY15/16 FY16/17 FY17/18 HS 81340 HS 121190 Source: IMF 2018 based on country authorities. Source: UNCOMTRADE. 12 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Despite Recent Improvements, the Business Climate outdated. There is no website that contains all the business Remains Challenging laws; most government-to-business transactions are paper based; and many ministries do not have websites. Progress The business climate in Lesotho has improved in recent in adoption of key Doing Business legislative reforms has years. Lesotho ranks 104th globally in the World Bank’s Doing been slow. For example, although the Business Registration Business 2018 Report, with a distance to the frontier score of and Licensing Bill was developed five years ago, it is yet to 60.42 (on a 0–100 scale) (World Bank 2017b). It ranks eighth in be adopted by the Parliament. The law aims to reduce the the Ease of Doing Business in Sub-Saharan Africa (World Bank level of informality and cost of regulatory compliance for 2017b). Several positive developments have been recorded in businesses, by allowing for electronic registration of sole recent years, including the opening of the One-Stop Business proprietors and partnerships, introducing streamlined Facilitation Center and the establishment of the Credit registration procedures for companies via the electronic Bureau, which covers 7.5 percent of the adult population. One-Stop Business Facilitation Center, and providing for a Furthermore, the process of obtaining construction permits risk-based inspection regime. Introduction of other business was streamlined, with the introduction of electronic systems environment reforms was also delayed and, as a result, firms in August 2017. All these reforms were supported by the face a high burden of regulatory compliance. For example, Second World Bank Private Sector Competitiveness and firms need to spend 29 days just to start a business, 43 days Economic Diversification Project. to register property, and 114 days to obtain an electricity However, red tape remains an important obstacle for connection (World Bank 2017b). Figure 1.4 illustrates the private sector. The legal framework governing business Lesotho’s ranking for each of the 10 Doing Business indicators transactions is fragmented, and many regulations are (relative to 190 economies covered by the Doing Business 2018 report). Figure 1.4. Lesotho’s rankings on Doing Business topics 1 28 40 55 77 82 95 Rank 119 109 108 111 109 124 136 152 163 167 190 Starting Dealing Getting Registering Getting Protecting Paying Trading Enforcing Resolving a with Electricity Property Credit Minority Taxes across Contracts Insolvency Business Construction Investors Borders Permits Source: World Bank 2017b. Access to finance is among the major constraints to local banks have historically preferred to invest excess liquidity in businesses. Enterprise Survey data show that 35 percent South Africa, draining savings from the country (IMF 2018a). of domestic firms identify access to finance as a major or The return on equity of Lesotho’s banks is the highest in the severe constraint to firm operation. A recent survey of region, but it is derived largely from liquid assets rather than commercial farmers revealed that only 7 percent have taken long-term loans to productive sectors (IMF 2018a). Bank a loan (of these, 68 percent borrowed from banks) (A2F executives cite the lack of quality investment projects as the Consulting 2018). There are four banks in Lesotho, three of main reason behind low lending to businesses. Low levels of which (Standard Bank, Nedbank, and First National Bank) are lending to the private sector may also be indicative of the branches of South African banks and one (Postbank) is state- risky investment climate with weak contract enforcement, owned. Bank credit to the private sector in Lesotho is much forcing banks to add a significant risk premium, which few lower than the average for Sub-Saharan Africa (figure 1.5), as projects are profitable enough to afford (IMF 2018a). Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 13 Figure 1.5. Bank credit to the private sector is lower in guarantees, prolonged claim payout procedures (for the Lesotho than in comparator countries scheme administered by the Ministry of Small Business Development), lack of marketing and awareness of the Bank credit to the private sector as a percent of GDP program among potential beneficiaries, and significant South Africa overlap between the two schemes. Namibia Non-bank financial institutions are not well developed SMICs in Lesotho. There are 11 microfinance institutions in the Botswana country, with total assets of approximately M 736 million. These are all credit-only microfinance institutions, although SSA at least one has expressed interest in transitioning to a Swaziland deposit-taking institution. Weaknesses in the supervision Lesotho of microfinance institutions, lack of a financial consumer 0 20 40 60 80 protection framework, and, until recently, lack of a tiered regulatory framework for microfinance institutions have Source: IMF 2018a. constrained the entry of new players and greater competition and innovation in financial services. Similarly, lack of an Note: SMIC = small middle-income countries; SSA = Sub-Saharan effective supervisory framework has impeded the growth of Africa. the financial cooperative sector. Access to finance is impeded by lack of legislation that Political instability has been an important constraint in could reduce the risk of lending to small and medium- recent years, although the situation has improved with size enterprises (SMEs). Furthermore, weaknesses in the the formation of the coalition government in 2017. design and implementation of partial credit guarantee (PCG) Among the 15 areas covered by the World Bank’s Enterprise schemes reduce their uptake. The Insolvency Bill and the Survey 2016, firms of all sizes have overwhelmingly cited Security in Movable Interest Bill were prepared but remain political instability as the biggest obstacle to business to be adopted. Although the government has introduced operation (Figure 1.6). Indeed, three governments have PCGs, they have not yet been effective in improving access to changed in Lesotho over the past five years and political credit. PCGs are administered by two agencies, the Lesotho fragility remains a concern for many businesses. In 2016, National Development Corporation (LNDC) and the Ministry Lesotho was at risk of losing preferential access to the U.S. of Small Business Development, Cooperatives and Marketing. market under the African Growth and Opportunity Act The interviewed domestic entrepreneurs viewed PCGs as a (AGOA), due to concerns over the country’s ability to satisfy desirable instrument to get access to credit but felt that the the eligibility criteria on good governance and the rule of law. process of obtaining the guarantees is tedious. The banks still Although Lesotho managed to maintain its market access, require collateral and even if all documents are in order, loans this experience demonstrated the importance of political may be denied. Several problems impede the functioning stability not just for generating new investment, but also for of PCGs, including slow turnaround times in providing the preserving existing business activity. Figure 1.6. Political instability was rated as the biggest obstacle to firm operation in 2016 Political instability Tax rates Informal competitors Access to nance Crime, theft and disorder Access to land Electricity Corruption Tax administration Customs & trade regulations Transport Labor regulations Poorly educated workers Licensing and permits Courts 0 5 10 15 20 25 30 35 40 Percentage of rms Lesotho 2016 Lesotho 2009 Source: World Bank Enterprise Survey 2016. 14 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 2. Private Sector Profile The Business Register data have some limitations. Manufacturing, and specifically apparel companies, were This section uses firm-level data from the recently under-sampled in the Business Register 2015 relative to released Business Register 2015 to analyze private 2012 and other sources of data. Indeed, based on Business sector characteristics in Lesotho. The Business Register Register 2015 data, there were 280 apparel companies in was prepared by the Bureau of Statistics and is a census of the country, which employed 23,640 people. Data from the economically active establishments operating in a physical Manufacturing Survey, which covers a subsample of firms, location; the census includes unregistered firms that satisfy estimate that employment in apparel was 35,060. The data the above-mentioned criteria. It covers all economic activities, collected by LNDC, which monitors mostly foreign export- except agriculture and the public sector, and all districts oriented companies, estimate that permanent employment in the country (box 1.1). In addition, the Manufacturing in apparel firms stood at 37,734 in 2015. The LNDC data show Survey 2015 (a quarterly survey that covers firms with 20 or an increase in apparel employment between 2012 and 2015, more employees) is used for validation of some results. The a trend confirmed in interviews with stakeholders. Although Manufacturing Survey 2015 covers 61 firms in manufacturing. the Business Register data are also available for 2012, they are not used in the analysis, as it would not be worthwhile to examine the trends given the inconsistencies in the data. Box 1.1: Lesotho’s Business Register Data Lesotho’s Bureau of Statistics collected basic information on all establishments operating in 2012 and 2015. The establishments include all sectors of the economy as per International Standard Industrial Classifications Revision 4 except agriculture and the public sector. The Business Register intends to capture data from establishments dealing with economic and social activities that engaged one or more persons in fixed premises in Lesotho. A total of 6,813 establishments were covered in the Business Register 2015. A structured questionnaire served as the main instrument for the survey. Data for the main variables include (i) name of the establishment, (ii) mailing address (postal box, telephone, fax number, and e-mail address), (iii) physical location of the establishment, (iv) date of its first operation, (v) main activity of the establishment, (vi) type of ownership, (vii) value of output (turnover), and (viii) number of persons employed, by gender. Data were collected in 2016 with a reference period of the 2015 calendar year. The Business Register data have some limitations. Small firms were not captured in their totality and weights are not available to estimate the true universe. By Bureau of Statistics estimates, approximately 60 percent of small firms are included. Furthermore, manufacturing, and specifically apparel firms, were under-sampled in 2015 compared with the Business Register 2012 as well as relative to the Manufacturing Survey 2015, which is based on a small sample of 61 firms. The Business Register did not capture as much as 10,000 manufacturing jobs relative to the Manufacturing Survey, which represents about a quarter of the manufacturing jobs identified in the Business Register. The findings of the analysis are summarized as follows: of the firms). This pattern is also observed in many other lower-income countries (annex A). Only 2.2 percent of firms 1. Micro and small firms account for 97 percent of all firms in in the sample were medium (20 to 99 employees), indicating the country; yet over half of employment is in large firms. a “missing middle” problem often observed in developing 2. Economic activity is concentrated in a few industries countries. The small presence of medium-size firms may be with low value added. Wholesale and retail and apparel indicative of a weak formal private sector, where micro and account for 84 percent of employment. small firms are unable to grow. Large firms account for 0.7 3. Productivity tends to improve with firm size (except for percent of all firms, and almost half of all large firms are in very large firms) and age, showing a positive trend of apparel. resource allocation toward better performing firms. Wholesale and retail trade is the main economic activity. 4. A strong effort is needed to improve data quality, which Most firms (89 percent) are in services and 71 percent are would enable a more accurate and nuanced analysis of in retail and wholesale. A high concentration of firms in employment and productivity and provide better insights commerce may be reflective of the low entry barriers in this into policy making. industry in capital and skill requirements and potentially the lack of opportunities in other sectors. Manufacturing firms The private sector in Lesotho is comprised primarily of comprise 11 percent of firms. In geographic distribution, micro and small firms. Firms with fewer than 20 employees almost half of the firms are located in Maseru and Leribe make up 97 percent of all firms in the country (and micro districts (table 1.1). firms with fewer than five employees make up 82 percent Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 15 Table 1.1. Profile of firms Lesotho has a large share of young firms (age five years or younger). By international comparisons, Lesotho has a Firm characteristics Firms (%) healthy share of young firms (figure 1.7). In 2015, 48 percent Size Fewer than 20 employees 97.14 of the firms were age five years or younger, compared 20-99 employees 2.17 with 12.9 in South Africa.2 In many economies, new and 100 or more employees 0.69 young firms are the primary drivers of job creation and Age Less than 6 years old 47.5 economic dynamism, increasing competition and spurring 6-10 years old 24.86 innovation. The presence of many young firms in Lesotho 10 or more years old 27.64 may be indicative of the ease of entry. However, given that most young firms are small and in commerce (95 percent Sector Manufacturing 11.11 of young firms have fewer than 10 employees and over 72 Services 88.89 percent are in retail and wholesale trade), the relatively large Location Maseru 23.84 presence of young firms may be indicative of the lack of Leribe 22.00 formal employment opportunities in the economy rather Berea 12.23 than vibrant entrepreneurship. Mafeteng 12.86 Other 29.07 Source: Bureau of Statistics 2015. Figure 1.7. Lesotho has a relatively high share of young firms Share of rms by young and old (%) 70 60 50 40 30 20 10 0 e an e a e an o o a da sh ay on bw ric rd bi as th ist ist de an gu m Ve Af aF Le so ba jik an la Za Ug ra Le h bo in ra m Ta ng gh ut Pa rk er Zi Ca So Ba Af Bu Si Young < 6 Old (10+) Sources: For Lesotho, Bureau of Statistics 2015; for other countries, Merotto, Weber, and Aterido 2018. Jobs are concentrated in a few economic activities Figure 1.8. Most jobs are in apparel and wholesale and large firms. Two industries—textiles and apparel and retail trade and wholesale and retail—account for 84 percent of all employment (figure 1.8). New industries, such as information Employment share by sector, % technology (IT), play a limited role in the economy. Indeed, 0% 1% Mining there are only 10 IT firms (ISIC code 62) that collectively employ 84 workers. Although large firms represent less 8% Food and Beverages than 1 percent of all firms, they account for 56 percent of employment (figure 1.9). This is mostly due to the significant Textiles and Apparel role of apparel manufacturing in employment; this industry 43% Metals accounts for 75 percent of employment in large firms, with even young firms hiring significant numbers of workers. By 41% Other Manufacturing contrast, most firms in wholesale and retail are micro. Construction Wholesale and Retail 3% 3% 1% Other Services 2 Date for South Africa are for 2014, based on tax records. 16 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Figure 1.9. Large firms account for more than half of Older firms are larger than younger firms (figure 1.10). employment Although Lesotho has a healthy share of young firms, it stands out for a large share of employment by older firms. Employment share by rm size, % This is mostly due to a large share of employment in apparel, where almost half of the firms were established more than 1-9 10 years ago. Multivariate analysis indicates that, other 28% things being equal, the same type of firm is likely to be larger 10-19 if it is older. That older firms account for a larger share of 56% 20-99 employment could indicate that firms are becoming more 7% productive as they grow, a finding that is generally confirmed 100+ 9% by multivariate analysis (annex C). Source: Bureau of Statistics 2015. Figure 1.10. Older firms are larger than younger firms Total number of jobs, by rm size and age 15000 Number of workers 10000 5000 0 1 2-5 6-10 10+ 1 2-5 6-10 10+ Industry Services Firm size 1-9 10-19 20-99 100+ Source: Bureau of Statistics 2015. Most firms in Lesotho do not grow. Lack of panel data grow (figure 1.11). Among firms older than 10 years, 89 restricts the scope of analysis on trends in firm growth. Yet, percent have fewer than 10 employees. Furthermore, firm an examination of firm distribution by size and age provides survival also appears to be low, with many firms exiting after strong indications that most micro and small firms do not the fifth year of operation. Figure 1.11. Most firms do not grow as they age Number of rms by size (number of employees) and age (years) 3000 Total number of rms 2500 age 1 (entry) 2000 age 2-5 1500 age 6-9 1000 500 age 10+ 0 size 1-9 size 10-19 size20-99 size 100+ Firm size Source: Bureau of Statistics 2015. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 17 Most jobs are in Maseru and Leribe, the two most sector is more concentrated than services. The top four apparel populated districts. These locations are also home to firms (of 280) comprise 45 percent of all apparel employment industrial sites, which provide employment in manufacturing and 39 percent of turnover. Given that all large apparel firms to thousands of workers. The share of employment in these are export-oriented, sales concentration does not present a two districts is 79 percent, compared with 46 percent of firms risk from the competition perspective. However, the hiring (annex B). Furthermore, there is little economic activity in and potentially relocation decisions of these firms will have rural areas (annex B). a disproportionate impact on manufacturing employment. In services, there are more players and the largest firms Employment and sales in apparel are more concentrated account for a smaller employment share: 3,191 firms in retail than in services. Table 1.2 presents an analysis of jobs (nonspecialized stores) provide 15 percent of the jobs, and and sales concentration of the top five sectors, with the the top four firms account for only 7 percent of the jobs in the largest employment share in manufacturing and services, sector and 13 percent of the turnover. respectively. As in many other countries, the manufacturing Table 1.2 Employment and sales concentration (top 5 largest employment share sectors) Sector Sector Employment share of 4 top ISIC Code Number Employment Share firms in the sector (% of sectoral Revision 4   of Firms (% of all jobs) employment) Manufacturing 1410 Wearing apparel 280 42 45 4100 Construction 39 2 55 2395 Non-metallic minerals 49 1 36 1520 Footwear 4 1 100 1071 Other food products 36 1 65 Services 4711 Retail non-specialized stores 3,191 15 7 4771 Retail specialized stores 687 8 56 4759 Retail household equipment 147 3 52 8010 Private security activities 9 3 92 5510 Short-term accommodation 107 3 21 Source: Bureau of Statistics 2015. Services firms account for 90 percent of all sales revenue, Figure 1.12. Services firms account for 90% of all while apparel firms’ share in total sales is extremely low revenues (figure 1.12). Apparel firms account for 6 percent of total sales, based on the Business Register data and 9 percent Revenue share by sector of total sales if data from the Manufacturing Survey are 0% 1% 0% 0% used. Even if the records of both survey instruments are 2% Mining incomplete, the apparel industry’s sales are clearly low relative 6% Food and Beverages to employment, indicating the low value added generated Textiles and Apparel 30% by the industry. Metals Other Manufacturing Construction Wholesale and Retail 60% Other Services Source: Bureau of Statistics 2015. 18 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Maseru generates more revenues relative to its Table 1.3. Large firms in all sectors are more productive employment share (figure 1.13). Although Maseru than small firms accounts for 42 percent of jobs, it generates 68 percent of revenues, followed by Leribe with 6 percent of revenues (and Sector Percent by which median 37 percent of jobs). This could be because more productive productivity in large firms firms tend to locate in the capital city. is higher than in small firms Figure 1.13. Maseru accounts for two-thirds of total Apparel 34 revenues Food and Beverages 92 Revenue share by location Other Manufacturing 40 1% 1% Maseru Wholesale and Retail 30 0% 1% Leribe Construction 14 2% Berea Other Services 81 9% Botha-Bothe 6% Mafeteng Source: World Bank staff calculations based on Bureau of Statistics 2015. 6% Mohale’s Hoek Similar to the trends in most developing countries, Quthing foreign firms are more productive than domestic 6% firms. Foreign firms in most developing countries tend to 68% Qacha’s Nek have better management capabilities, access to modern Mokhotlong technology, better access to finance, and established Thaba-Tseka contacts with global suppliers and buyers, which contribute to higher productivity relative to domestic firms. Source: Bureau of Statistics 2015. In Lesotho, productivity tends to improve with firm size 3. Concluding Remarks and age. Productivity—the efficiency with which firms turn inputs into outputs—is a key driver of competitiveness. It is The analysis reveals several vulnerabilities in the typically correlated with job quality, as more productive firms structure of Lesotho’s private sector. The private sector is tend to pay higher salaries. The results of the multivariate mostly inward-oriented, with 71 percent of firms in wholesale regression (annex C) suggest that productivity (measured and retail trade. Most firms are micro and fail to grow. This by sales per worker) generally improves with firm size could be due to a variety of reasons, including deficiencies in and age. Indeed, firms that survive and grow tend to be the business environment, weak firm capabilities and lack of more productive: firms with more than 10 employees are mentors, as well as the small size of the domestic economy. more productive than smaller firms, and the highest labor Productivity in large firms is significantly higher than in productivity is observed in firms with 50–249 workers. This small firms operating in the same sector. This suggests pattern does not hold true for very large firms with more than that developing linkages between small and large firms, 500 workers, which are the least productive. Firms of this size for example through the supplier development program constitute a tiny minority and account for only 0.25 percent of (see more on this in chapter II), can potentially enable all firms. Lack of information on cost structure does not allow technological catch-up of small firms and support overall us to test whether large firms are more cost efficient than productivity growth in the economy. smaller firms. That larger and older firms are more productive indicates that firms learn as they grow. The apparel industry plays a significant role in employment and exports. Furthermore, the top four There are significant differences in within-sector apparel firms account for 45 percent of employment in the productivity between large and small firms. The industry, indicating that the behavior of large firms in hiring or median productivity in large apparel firms (more than 100 relocation decisions could have a significant socioeconomic employees) is 34 percent higher than in small apparel firms. impact. Any external shocks to the industry, such as a change Table 1.3 shows that there are also significant differences in trade preferences, will also have negative impacts on in the productivity of large and small firms in other sectors. employment and exports. This suggests that addressing constraints faced by small firms (such as poor access to credit, markets, and quality Although in general exports are highly concentrated in inputs) and helping them catch up with the production products, there is a higher diversification in exports to practices already implemented by leading firms in the South Africa. This points to the opportunities for greater country can have a significant impact on overall productivity regional integration, which are also highlighted in the sectoral growth. It would not be appropriate to draw conclusions analysis. Furthermore, given that Lesotho’s currency is pegged on productivity differences between sectors, as they have to the South African rand, exports within the customs union different production functions. will be less sensitive to exchange rate volatility. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 19 Chapter II. Textiles and Apparel3 1. Context is mainly generating low-skill, low-wage jobs: unskilled labor makes up 87 percent of labor value added in textile and The textiles and apparel industry accounts for most apparel exports (World Bank 2018). Although the industry formal manufacturing jobs in Lesotho. It employs is credited with the creation of thousands of jobs, there are more than 40,000 people and accounts for 92 percent of concerns over job quality and the low career advancement manufacturing jobs (Bureau of Statistics 2018). The industry of Basotho employees. Nevertheless, the sector remains generates 43 percent of exports. There are about 45 garment important for poverty reduction and estimates show that exporting factories and one vertically integrated textile mill one worker employed in this sector supports five other family that produces denim fabric used primarily by its parent jeans members and the income generated by the industry benefits manufacturing factories located in Maseru.4 The contribution 13 percent of the population (Molapo 2016). of the industry goes well beyond direct employment, with Lesotho has a longer history of apparel manufacturing many formal and informal activities that feed into it—road compared with most other African countries, which gave freight and passenger transport, a small packaging industry, it a competitive advantage when AGOA was introduced. residential accommodation and catering services for The first foreign investors arrived in the late 1980s when many employees, water, telecommunications, and utilities services. Taiwanese and some South African firms moved from South The industry provides an important source of income for Africa to Lesotho to avoid apartheid-era sanctions and take the low-skilled and poor population. For now, the sector advantage of Lesotho’s unused apparel quotas (Lall 2005). By the time Lesotho became a beneficiary of AGOA in 2000, it 3 The analysis in the chapter uses a variety of sources. It relies on (1) had a competitive advantage over other African countries, interviews with 17 apparel manufacturers in Lesotho, two industry associations, forwarding companies, an apparel compliance solution given the existence of prior trading networks importing company, South African retailers, government ministries, and donor inputs from Asia and linked to global lead buyers (Lall 2005). agencies; (2) the structured Linkages Survey administered to 14 apparel The country emerged as the leading African supplier of exporters to shed light on their sourcing strategies; (3) data from the apparel to the United States after AGOA was introduced in World Bank’s Enterprise Survey 2016 (which covered 150 formal firms 2000. The Act provides for duty-free access to the U.S. market of which 28 were apparel firms); and (4) the UNCOMTRADE database and other secondary data. Primary data were collected in November- combined with relaxed rules of origin. In 2016, Lesotho was December 2017. The analysis in this chapter also builds on the work the second largest garment exporter to the United States in done by Kuriakose, Farole, and Staritz (2012). Sub-Saharan Africa after Kenya. 4 Based on LNDC records. 20 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT AGOA has been one of the major drivers behind the benefits from zero duties and generous rules of origin in the growth of Lesotho’s apparel manufacturing, but the European Union under the Everything But Arms agreement; industry is now under pressure to diversify its export however, apparel exports to the European Union have never markets. AGOA initially provided a strong impetus to the exceeded US$4 million and were not persistent, that is, most growth of the garment industry, with exports increasing by products are not exported for more than two or three years in 120 percent in 2000 (Arenas et al. 2018). However, exports to a row (Arenas et al. 2018). On the positive side, several South the United States declined over the past decade in absolute African investors established their operations in the country and relative terms (figure 2.1), due to the expiration of the to take advantage of lower labor costs and duty-free access Multi Fibre Arrangement (on January 1, 2005) and Lesotho’s to South Africa through SACU. Exports to South Africa have struggle to compete with other low-cost producers. Exports tripled since 2010 and helped mitigate the decline in exports to the United States decreased from 94 to 61 percent of total to the United States (UNCOMTRADE). textile and apparel exports between 2005 and 2016. Lesotho Figure 2.1. Textile and apparel exports shifted from the United States to South Africa Global textile and apparel exports 2005-16 (US$ 1,000) 500 000 400 000 300 000 200 000 100 000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 USA South Africa Global EU Source: UNCOMTRADE. Apparel exports are highly concentrated in products Results from computable general equilibrium modeling and markets and dependent on trade preferences. The show that a sudden suspension of AGOA privileges in 2018 United States and South Africa account for 95 percent of the would result in a 1 percent decline in income relative to the industry’s exports. The top 10 products constitute 96 percent baseline in 2020. Exports and output of the textile and apparel of apparel exports to the United States and 65 percent to industry would drop by 16 and 9 percent, respectively, while South Africa (UNCOMTRADE). Simple items, like trousers, average real consumption would decline by 0.5 percent shirts, and t-shirts, continue to dominate apparel exports to (Arenas et al. 2018). both countries. On a positive note, factories based in Lesotho Apparel firms in Lesotho operate in different segments supply multiple brands belonging to various price segments depending on the primary export market. Firms supplying (Levi Strauss, Lee, Wrangler Corporation, Walmart, JC Penny, the U.S. market tend to specialize in basic products with long and Costco for the United States; Woolworths, the Foschini lead times and large batch sizes. Firms supplying the South Group, Truworths, Mr. Price, Pick n Pay, and Pep Group for African market also produce mostly basic items but with South Africa). Lesotho benefits from generous preferences shorter lead times. Some have potential or are already serving in its two major export markets with most favored nation the fast fashion segment of the South African market. While duties reaching 32 percent in the United States and 45 the minimum batch sizes of the firms oriented for the U.S. percent in South Africa (annex D). The European Union has market start from 4,000 units and can reach 100,000 units, lower tariffs for apparel, which may contribute to the lower firms supplying the South African market can take orders as competitiveness of Lesotho’s producers. small as 300 units. These small trial orders are usually used High dependence on the U.S. market makes Lesotho to test the market and subject to sufficient demand are vulnerable to changes in trade preferences and scaled up. There are no firms in Lesotho that specialize in consumer demand fluctuations. Exports to the United manufacturing complex products, such as formal suits, coats, States accounted for 61 percent of total apparel exports in and underwear, or supplying luxury brands, such as Hugo 2016. Although AGOA has been extended until 2025, annual Boss. eligibility reviews create some uncertainty for investors. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 21 Similar to other industries, textile and apparel Although many developing countries that want to producers benefit from several incentives offered by attract efficiency-seeking FDI offer tax incentives, the Government of Lesotho for all manufacturing subsidization of factory rentals is not common. establishments. The incentives include a reduced corporate Furthermore, global investor surveys show that incentives are income tax of 10 percent, subsidized cost of factory shells not the most important factor for investors (figure 2.2) (World provided by LNDC, and tax allowances for training (annex Bank 2017d). Even for efficiency-seeking investors that attach E). These incentives are available to domestic and foreign more importance to incentives than other types of investors companies and across all manufacturing industries. No globally, the availability of incentives ranks only fourth of six studies have been done on whether reduced corporate investment climate characteristics. Overall, only one in five income taxes and factory rent subsidies have induced new investors finds the absence of investment incentives a deal- investment. breaker in deciding to invest (World Bank 2017d). Figure 2.2. Availability of investment incentives ranks only fourth in importance for global investors Importance of investment climate factors Transparency and predictability Efficiency-skg 37 45 16 2 in the conduct of public agencies Non-eff-skg 37 44 14 4 Investment protection guarantees Efficiency-skg 47 37 13 3 provided in the country’s laws Non-eff-skg 42 36 16 5 * Ease of obtaining government approvals to start a Efficiency-skg 41 38 16 4 business and to own all equity in the country Non-eff-skg 30 44 19 5 *** Investment incentives such as tax holidays Efficiency-skg 23 41 28 8 *** Non-eff-skg 18 29 37 13 Having a preferential trade agreement Efficiency-skg Non-eff-skg 17 12 33 46 37 26 14 8 *** Having a bilateral investment treaty Efficiency-skg Non-eff-skg 17 12 34 38 34 31 11 15 ** Critically important Important Somewhat important Not at all important Don’t know Source: World Bank 2017d. Note: Most investment climate factors in this graph have statistically significant differences between investors involved in efficiency-seeking foreign direct investment (FDI) and investors involved in other types of FDI. The differences between the two groups are significant at ***p < 0.1. 2. Challenges to Growth agency; the latter is important for firms supplying socially and environmentally cautious buyers in the United States. The interviewed apparel firms in Lesotho had a 1) Shortage of Factory Shells generally positive view of the future of the industry and over a quarter had plans for expansion. The interviews For the investors who want to expand their businesses, also revealed some business environment constraints. In lack of available factory shells emerged as an impotant particular, for new investors (and those wishing to expand constraint to growth. The wait times reported by the their operations), shortage of factory shells was the main interviewed investors ranged from a few months to over a constraint. For existing firms, lack of specialized skills was year. Shortage of ready–to-occupy industrial estates is also a an important bottleneck to growth, while weak backward constraint to the establishment of new foreign and domestic linkages have limited the benefits of FDI for the local industrial enterprises. Based on interviews with LNDC staff, economy. Furthermore, underdeveloped water infrastructure there were 12 investors on the waitlist (five from South Africa, in Maputsoe, delays in crossing the South African border, one from Taiwan, China, and six domestic) as of April 2018. and lack of access to finance were identified as important LNDC is the main provider of industrial real estate, which business environment constraints (a more detailed analysis is rented at subsidized rates. Current factory space rental of these issues is provided below). In addition, firms reported rates vary between M 7.50 and M 18 per square meter per the following obstacles to doing business in Lesotho: poor month (based on the age and condition of the building) security and lack of dormitories for foreign employees in some and are some of the lowest in Africa. Interestingly, none industrial estates, costly and unreliable Internet services, and of the interviewed manufacturers considered the rental lack of an internationally recognized compliance certification subsidy among the deciding factors for investing in Lesotho. 22 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Industrial rental prices in neighboring South Africa are at their payments (based on interviews with LNDC staff ). LNDC’s least two to three times higher (figure 2.3), with no shortage conflictng priorities of investment promotion and factory of investors and vacancy rates of 1 to 5 percent across the shell management prevent the agency from aggressive provinces. Despite the subsidy, rent collection by LNDC is low debt collection and eviction of tenants with overdue rental and about 40 percent of manufacturers are not current on payments. Figure 2.3. Rental prices for industrial estates in South Africa are two to three times higher than in Lesotho Mean monthly rental rates (ZAR per sqm, excluding VAT) for prime industrial developments Durban, KwaZulu-Natal Pretoria, Gauteng East Rand, Gauteng Cape Peninsula, Western Cape Central Witwatersrand, Gauteng West Rand, Gauteng Nelspruit, Mpumalanga Far East Rand, Gauteng Port Elizabeth, Eastern Cape Bloemfontein, Free State Polokwane, Limpopo George, Western Cape 0 10 20 30 40 50 60 Source: World Bank staff calculations based on Lamprecht 2017, 4. Note: The data reflect the rental rates for 1,000–square meter units in the third quarter of 2017. Lack of financial resources results in poor maintainance. Private investment in industrial infrastructure is The LNDC property management unit has only five constrained by the complexity of the legal framework, employees. This is insufficient for developing and efficiently lack of promotion efforts by the government to attract managing the agency’s large property portfolio, which investors in property development, as well as the LNDC includes commercial and induistrial property. Many industrial subsidy crowding out private investment. The Lesotho buildings have maintainance and repair issues, which have Constitution vests all land in the King in trust for the Basotho not been resolved for months. Due to lack of resources, nation and permits the Parliament to make provisions for priority is given to urgent repair issues as opposed to a routine land allocation. In 2010, the Parliament adopted the Land Act, maintainance program. Some tenants reportedly withold which states that land can be allocated to the Government rental payments because their maintainance requests have of Lesotho, Lesotho citizens over age 18 years, Basotho- not been addressed (LINPICO and KOIOS 2017). owned companies and associtaions, as well as foreign enterprises with at least 20 percent Basotho ownership when Global evidence shows that private zones tend to be the following factors are taken into consideration: (1) the better managed. In general, privately operated zones magnitude and origin of the tangible and intangible assets, tend to offer better facilities and amenities, command (2) employment generation, (3) the strategic nature of the higher prices from tenants, and attract “higher-end” types of enterprise, (4) potential for the transfer of business expertise, activities. In some countries, rental prices in private zones are (5) advancement of business undertakings owned by two to three times higher than in government-run facilities, citizens, and (6) environmental protection.5 Although private yet investors are willing to pay higher rates thanks to superior investment in land and infrastructure is allowed under the amenities and services in such zones (for example business law, it has not been exercised much in practice. This could be support services, day care centers, and so forth) (World explained by the lack of clarity on the procedures a potential Bank 2008). Some countries (for example, the Philippines investor would have to undertake to obtain access to land, and more recently Bangladesh and Kenya) that started lack of targeted promotion efforts by the government, as with government provision and management of industrial well as that LNDC’s factory shell subsidy crowds out potential infrastructure subsequently moved toward models based on investment. public-private partnerships. 5 Lesotho Land Act No. 8 of 2010. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 23 The current model of industrial estate provision is specialized training institutions impedes the career unsustainable and does not serve the country well. advancement of Basotho employees. Findings from the There is concensus in the government that reform is needed. World Bank Linkages Survey show that 38.5 percent of firms LNDC’s current rental levels are below cost recovery and have at least some Basotho in management positions. All unsustainable in an environment characterized by inflatonary firms have some locals represented among floor supervisors, operating and construction costs. Increased fiscal pressures while 46 percent of firms rely exclusively on local staff for also limit the government’s ability to continue subsidizing floor supervisory functions (figure 2.4). Most firms employ factory shells. Furthermore, this model does not serve the locals for their human resources and accounting needs. For country well because old investors are being subsidized at the firms that employ locals and foreigners for the same position, expense of new, potentially more productive entrants, with for example, machine repair mechanic or floor supervisor, negative consequences for economic diversification and job a foreign specialist often has the ultimate responsibility creation. Reform of industrial infrastructure provision has been for quality control. Supervisory positions are occupied by discussed for over a decade, with different models ranging nationals from several countries (including the Philippines; from full commercialization to various forms of public-private China; Taiwan, China; Mauritius; Zimbabwe; Madagascar; and partnerships proposed. The ongoing reorganization of LNDC Zambia). presents an opportunity to reform the provision of factory shells. The most recent budget speech also emphasizes the Figure 2.4. Local staff are most commonly represented among human resources specialists and floor importance of private investment in industrial infrastructure supervisors and identifies the new industrial zone in Botha-Bothe as a site where private property investors should be invited to Percent of rms that employ foreign and local develop the zone. sta for di erent positions HR Specialist 2) Varying Levels of Firm Productivity and Lack of Skills Floor Supervisor There are significant differences in firm productivity, Accountant linked to management capabilities. Rework rates range Mechanic from 1 percent to over 20 percent; changeover time (that is, the time it takes for employees to switch to the production Manager of a new style without errors) ranges from immediate to 0 20 40 60 80 100 five days; and abseinteism ranges from less than 1 percent to 10 percent. Although all firms face skills shortages, Local Only Foreign Only Both NA better managed firms invest more in emloyee training and performance incentives and report higher productivity. Source: World Bank Linkages Survey. Many firms report that the lack of locally available skills Note: NA (nonapplicable) refers to situations where there is no is an important constraint to competitiveness. Enterprise dedicated specialist, for example, for human resources, or the Survey data show that 44.4 percent of foreign apparel firms function is performed from the company’s headquarters. identify skill levels as a major or severe constraint. The skills Several reasons can contribute to the relatively low that are most in demand include managers, supervsiors, career advancement of Basotho employees. First, entrants mechanics, and skilled machine operators who can operate to the industry often have relatively low initial qualifications several machines. Most production workers had no formal (incomplete secondary education, no formal industry- education in sewing machine operation at the time of specific training, and low command of English), which makes joining the factories and received a few weeks of training on it difficult for them to advance to managerial positions. the job. Enterprise Survey data show that about 80 percent Lack of role models is another factor contributing to low of full-time employees receive training in foreign apparel career advancement for Basotho employees. Furthermore, companies, compared with 12 percent of employees in the starting wages for machine operators are not high domestic companies. Although most foreign firms provide enough to attract graduates with tertiary qualifications. The on-the-job training, it tends to be short and task-specific. government-set minimum wages in the apparel industry are The interviewed companies mentioned high employee lower than in services (table 2.1), which might be reflective of turnover, migration of qualified workers to South Africa, and lower productivity. Although all the firms interviewed for this the need to contain costs among reasons for relatively low study reported paying more than the minimum wage (when investment in employee skill building. The Government of bonus payments are added, salaries ranged from 10 to 50 Lesotho offers a tax incentive—training or tertiary education percent above the minimum wage), the starting salaries for costs for Lesotho citizens are allowable at 125 percent for tax machine operators are not high enough to attract graduates purposes—yet, most factory managers are not aware of this with tertiary education. Lastly, lack of specialized training incentive. institutions offering management degrees in fields relevant The share of local staff in management and supervisory for the industry is also an obstacle for the upward mobility of positions has increased over the years, but lack of Basotho employees. 24 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Table 2.1. Minimum wages for employees with more impede effective communication between foreign than 12 months of service with the same employer supervisors and their staff. Where local staff were promoted to supervisory positions within the factory, promotions were Machine operator (clothing, textile and leather M 1456 typically done based on employees’ good performance, as manufacturing) machine operators and were not accompanied by training Wholesale, supermarkets and furniture shops M 2049 in management, communications, and other soft skills. Weak Hotels, motels and lodges M 2049 management capabilities contribute to the low productivity Restaurants, food caterers M 1883 observed at many factories. Domestic worker M 596 HIV/AIDS has a negative impact on the industry and the General minimum wage M 1530 economy at large, contributing to worker absenteeism Source: Lesotho Government Gazette 2017. and lower productivity. Lesotho has one of the highest HIV/AIDS rates in the world. Data from the Enterprise Surveys Multiple educational institutions offer courses related show that approximately a fifth of the textile and apparel to textiles and apparel, yet there is a clear mismatch companies report high worker absenteeism associated with between the skills taught and those required by the HIV/AIDS. The Enterprise Survey data also show that the industry. Universities and vocational schools offer courses in industry is actively engaged in HIV response campaigns: 43 fashion and design; yet, hardly any exporting firms perform percent of the apparel firms have HIV prevention messages design activities in Lesotho. Meanwhile, no institution offers at the workplace, 57 percent distribute free condoms, and training in sewing machine repair, a skill that commands 36 percent provide anonymous HIV testing. Foreign-owned much higher salaries than machine operation and is in high demand by the factories. More than half of the factories companies are significantly more likely to provide HIV employ foreign workers as machine repair mechanics. response at the workplace compared with domestic firms: 78 percent of foreign firms report providing free condoms and Lack of locally available skilled labor increases 50 percent provide anonymous HIV testing, compared with production costs and contributes to low productivity. 20 and 10 percent of domestic firms, respectively, offering The need to bring in expat workers increases firms’ production similar services (Enterprise Survey). Box 2.1 provides more costs. Furthermore, language and cultural barriers sometimes information on HIV prevalence in the industry. Box 2.1. HIV Prevalence in the Apparel Industry Lesotho’s economy is severely impacted by HIV/AIDS. Migrant workers (who dominate employment in the apparel industry) are more vulnerable than nonmigrant workers to HIV infection. Table B2.1.1 shows that female textile and apparel workers have a higher prevalence of HIV than the general female population, although the rate is comparable to that of street vendors and lower than that for domestic workers. However, evidence from the World Bank Gender Study shows that after controlling for socioeconomic characteristics, employment in the industry is not a significant predictor of HIV/AIDS status (World Bank 2017e). Findings from multivariate regressions show that HIV prevalence is positively correlated with the garments workers’ age and urban residence and negatively correlated with economic status (measured by possession of durable goods). By contrast, domestic workers are 17.6 percent more likely to be HIV positive than the average after controlling for socioeconomic characteristics. Table B2.1.1 HIV prevalence among women (Demographic and Health Survey 2009) Category % HIV positive All women 26.7 Labor migrants 36.6 Occupation Apparel workers 40.9 Domestic workers 46.1 Street vendors 38.4 Many women working in the apparel industry have benefited from HIV prevention and treatment services, and it is important to ensure the continuity of these initiatives. The World Bank Gender Study shows that 53 percent of respondents in the apparel industry mentioned the workplace as the main source of condoms, ahead of stores (11 percent) and clinics (24 percent) (World Bank 2017e). Furthermore, 76 percent of apparel workers reported having a clinic at their workplace, compared with 27 percent of domestic workers who had a clinic near their workplace. Several donor-supported programs have provided targeted support to the industry. For example, the Apparel Lesotho Alliance to Fight AIDs and Better Work Lesotho have provided free condoms, HIV testing, and prevention training at the workplace, while these types of services were not available to other vulnerable workers. Both programs are no longer active. It is important to continue supporting HIV prevention and treatment at the factories. The government may consider establishing multistakeholder partnerships involving the private sector, nongovernmental organizations, and the donor community to achieve this objective. Source: World Bank 2017e. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 25 3) Lack of Backward Linkages Figure 2.5. Many apparel firms consider local linkages Backward linkages are important for job creation and a priority strengthening the value chain. Supply chain linkages are % of rms that important for three reasons. First, they strengthen the value chain by reducing the time-to-market and increasing the Encouraged suppliers to flexibility of production. Second, they result in knowledge relocate to Lesotho spillovers and help build local capacity as well as create jobs. Consider local sourcing Third, they can cushion against potential changes in the rules a priority of origin of the international trade agreements. Currently, garments produced in Lesotho have duty-free access to the Have authority to make decisions about United States (under AGOA) and the European Union (under local procuement Everything But Arms), with third-country fabric derogation 0 20 40 60 80 100 (that is, manufacturers in Lesotho can source fabric from anywhere in the world and still qualify for duty-free access). Source: World Bank staff calculations based on the World Bank Trade policies may change in the future with the expiration Linkages Survey. of AGOA in 2025 and the rising trend toward protectionism The availability of local products and specialized services across the world. improved over the past 5–10 years. Nevertheless, many Backward linkages in the textile and apparel sector can important inputs continue to be imported, which increases be fostered in several ways: (1) subcontracting to local lead times and weakens the supply chain. Based on Enterprise firms, (2) developing the local suppliers of goods and services Survey data, 17.2 percent of inputs and supplies purchased (Staritz and Frederick 2016), and (3) attraction of FDI into by foreign apparel companies are of local origin. The analysis select inputs (this is particularly true for goods that require of trade statistics indicates that local sourcing of packaging knowledge and capital intensive production processes, such material has improved in recent years: export of packaging as fabric). As part of this report, the Linkages Survey was material (HS 392390) to the United States almost doubled, administered to 14 apparel exporters to understand their from $238,000 in 2010 to $413,000 in 2016 (UNCOMTRADE). sourcing and localization strategies. The Linkages Survey administered for this report shows that inputs or services commonly sourced locally or available Contrary to the popular belief that foreign firms located in-house include boxes, hangers, transport, security and in Lesotho have no control over the sourcing strategies of financial services, screen printing, and embroidery (figure their parent companies, the majority of the interviewed 2.6). Polybags are available locally, yet few firms report buying executives can influence procurement decisions. About them in Lesotho, as the prices are not competitive. The most 85 percent of managers report having the authority to important input into apparel manufacturing—fabric—is not make decisions about purchasing inputs and services in manufactured in the country (with the exception of denim Lesotho if the supplier meets quality standards and offers fabric produced by Formosa Textiles, primarily for the use of competitve prices. Although such decisions typically require its own jeans manufacturing factories in Lesotho). Zippers, approval from company headquarters, the interviewees felt buttons, and trim are also imported. that their top management would be rather supportive of local procurement, as it reduces time-to-market. Half of the interviewed firms consider local sourcing a priority. Firms with some exports to South Africa were more likely to consider local sourcing to be a priority than firms exporting only to the United States. Furthermore, over a quarter of foreign firms encouraged their input suppliers to relocate to Lesotho (figure 2.5). 26 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Figure 2.6. Most basic and some specialized services are sourced in Lesotho Firms that source inputs and services in Lesotho and those that import them from abroad (% of rms) Embroidery Screen printing Polybags Hangers Boxes Transport IT Security Accounting/Audit 0 10 20 30 40 50 60 70 80 90 100 Local or done in-house Imported or done in HQ Service not needed Source: World Bank staff calculations based on the World Bank Linkages Survey. Lack of local suppliers is the main obstacle to sourcing Swaziland, and would not accept zippers from another brand more products and services in Lesotho. The low price even if they were available locally; and some U.S. buyers competitiveness of local producers compared with imports require the use of branded hangers that are imported from as well as the inability to meet volume requirements (typically China or fabric from nominated suppliers. This points to the because of the small scale of local operations) impede importance of taking buyer requirements into account when greater local sourcing (figure 2.7). Furthermore, some buyers developing a local linkages strategy or attracting FDI into require the use of inputs from specific brands. For example, input supplies for the industry. many buyers require the use of YKK zippers, imported from Figure 2.7. Lack of local suppliers is the main impediment to greater sourcing of inputs in Lesotho Main obstacles to sourcing more products and services in Lesotho (% of rms that selected the answer) No local suppliers exist Prices are not competitive relative to imports Local suppliers are unable to meet volume requirements Local suppliers are unable to meet deadlines Local suppliers are unable to meet quality standards Other 0 5 10 15 20 25 30 35 40 45 Source: World Bank staff calculations based on the World Bank Linkages Survey. Although many apparel exporters would like to source Bank 2017d). The report also finds that local linkages are less more inputs locally, none of the interviewees currently common in manufacturing than in services sectors (World has a corporate program to promote linkages. Such Bank 2017d). programs are also not very common in other parts of the There are very few local entrepreneurs among exporters world. Data from the recent World Bank Global Investment or subcontractors to exporters, and the industry remains Competitiveness Report show that among the foreign firms FDI driven several decades after the establishment of that source locally, 50 percent use internal “talent scouts” to the first operations. There are four export-oriented factories find local suppliers, 31 percent have vocational or training (each employing more than 100 people) with some Basotho programs to upgrade local suppliers, and 11 percent have ownership and one export-ready firm (employing about equipment-financing programs for local suppliers (World 60 people). The latter started with production of traditional Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 27 dresses and gradually diversified into freezer jackets and Evidence from global surveys shows that governments uniforms. Interestingly, local exporters have started in other can play a role in promoting local linkages. Specifically, sectors and moved into apparel because they saw a business investors value information on the availability of local opportunity. There are no examples so far of Basotho suppliers, rated as important or critically important by 68 businesses started by former employees of foreign-owned percent of respondents to the World Bank Global Investment apparel companies. Some expat workers, primarily from Competitiveness Survey (figure 2.8) (World Bank 2017d). China or Taiwan, China, who used to work at the foreign- About 61 percent of the respondents also considered owned apparel factories, have started their own businesses supplier upgrading as important, whether in the form of as subcontractors to FDI enterprises. Lack of Basotho in direct financial incentives for companies to invest in supplier managerial positions at the FDI companies is one reason development or governments’ own initiatives to upgrade behind the lack of local entrepreneurs in the sector. Another suppliers. Furthermore, 42 percent of the respondents reason suggested by the interviewees was the fact that it valued matchmaking events with suppliers. Firms involved may be simpler to make money in other industries, such as in efficiency-seeking FDI were more likely (by about 8 to 12 construction and wholesale and retail. A third reason is lack percentage points) to rate these government programs as of access to finance for domestic producers. important compared with other investors. Figure 2.8. Governments can nurture linkages by sharing information on the availability of suppliers and by facilitating supplier upgrading Importance of factors related to linkages Capacity and skills of local suppliers 24 50 23 3 Information about the availability 21 47 28 4 of local suppliers Proactive government role in 19 42 32 6 upgrading potential suppliers Incentives from government to 20 40 31 9 invest in supplier upgrading Government-organized matchmaking 10 32 42 15 events with potential suppliers Critically important Important Somewhat important Not at all important Don’t know Source: World Bank 2017d. In Lesotho, there are no programs to support local in Lesotho. Enterprise Survey data show that 32 percent linkages; although entrepreneurship support programs of the apparel firms throughout the country experienced exist, they generally do not meet the needs of growth- insufficient water supply for production over the past year. oriented enterprises. Basotho Enterprise Development Water shortages mainly affect the Maputsoe area, where Corporation runs several entrepreneurship programs, industrial estates and population growth have expanded fast but these are targeted primarily to the unemployed over the past decade. This growth was not accompanied by and microenterprises, rather than to more established expansion of water infrastructure. Supply from the Lesotho entrepreneurs who could benefit from mentorship, linkages Water and Sewerage Company’s (WASCO’s) water system with larger enterprises, and access to finance to scale up their is only able to serve about half of the demand in the area. operations. Industries as well as population depend on informal water systems without adequate quality control and reliable supply. 4) Other Business Environment Constraints: Shortage of Water, Delays in Cross-Border Trade, and Weak Although some of the interviewed managers in the Access to Finance Maputsoe area were satisfied with water quantity or were able to fulfill their needs through investment in Water Shortages in Maputsoe boreholes, others reported an acute shortage of water Water shortages in the Maputsoe and Ha Nyenye threatening factory operation. Boreholes are not a industrial areas are an important constraint to sustainable solution and do not address the water needs of sustainability and further growth of the apparel industry large companies. Furthermore, some production sites do not have enough water to justify the construction of boreholes. 28 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT One firm reported buying water that was delivered by Access to Finance for Domestic Firms truck, which is an expensive solution. A manager of another company said they had to ask employees to bring two liters Access to finance is an important impediment to of drinking water from home every day to compensate for development of the sector, particularly for domestic the shortage of water in the factory. Some South African firms that do not have access to multinational financial investors reported they would close the factories if the institutions. Enterprise Survey data show that half of the water shortages are not addressed in the near future. The apparel companies consider access to finance as a major government has recognized the problem and is working with obstacle to firm operation. Access to finance becomes a its development partners to resolve it. Yet, the interviewed particularly important factor for firms that want to move foreign investors were not aware of planned infrastructure from cut-make-trim to free-on-board (FOB) production, Improvements and felt that their concerns are not taken into which allows for higher margins. FOB production requires consideration. larger working capital, as the manufacturer will have to Lack of water constrains investment in value-adding source all inputs and the buyer will only pay after receiving activities. Two companies producing denim garments the garments. Firms complain that banks have little in Maputsoe take them to South Africa for wet finishing, understanding of the apparel industry and perceive it as too as there is not enough water in the area to justify the risky. The reported annual interest rates were 20 percent. construction of water treatment plants. Furthermore, at least one South African company would consider investing The interviewed firms were aware of PCG schemes in textile production in Maputsoe if the water shortages are suported by the government to increase bank lending to addressed. Fabric manufacturing is of great importance for SMEs. However, the firms felt that the program has not been the competitiveness of the apparel industry, as local sourcing effective in increasing access to credit. Firms that tried to will reduce time-to-market and cushion against any changes access the scheme reported having to go through a tedious in trade policy. process of securing government guarantees, followed by an Cross-Border Issues even longer process of obtaining the bank’s approval. One apparel firm that has received a government guarantee About 80 percent of the interviewed apparel companies did not manage to secure credit, as the bank did not have reported problems with crossing the South African confidence that the government would repay the loan in the border among the key constraints to competitiveness. event the firm defaults on its payments. Several types of issues were reported: (1) delays at the border that can last for hours due to long queues and because South African border and customs officials are understaffed 3. Opportunities for (the recent introduction of biometric scanning by the Home Penetrating Different Affairs Department of South Africa has further increased the Markets wait time), (2) random inspections that in some cases can result in delay in crossing the border by about a week, and Global Trends (3) issues with the estimation of value-added tax (VAT) for firms that export to South Africa. Several interviewed firms Three major trends characterize the global fashion reported that the South African Revenue Service (SARS) industry: a move toward fast fashion, increase in frequently questions the value of goods for VAT purposes. online shopping, and emergence of a strong consumer These problems were confirmed in interviews with the base in middle-income markets. In the United States, forwarding companies. They were also raised in March 2017 traditional retailers have been steadily losing market share at a joint meeting of the Lesotho Revenue Authority (LRA), to fast fashion brands such as Zara, Forever 21, and H&M, SARS, and represesentatives of the apparel industry and as well as online platforms such as Amazon, which has forwarding companies. recently launched its own apparel brands. Sales in the fast South Africa applies a risk-based approach to fashion segment increased 20 percent over the past three inspections. Given that apparel is a high-duty good, there years, reflecting consumer demand for speed, inspired by is a much higher likelihood of inspections of garment social media (McKinsey & Company 2017b). As the new consignments compared with other goods. The concern fast fashion entrants are delivering products at ultra-speed of exporters was not that the goods are inspected, but (figure 2.9), many traditional brands are also reducing their that the process is not streamlined and can last for several days if there is disagrement between the inspector and the lead times. Minimum order sizes are falling, which requires exporter, for example, on the number of articles transported. that suppliers increase their flexibility. Digital technologies Given that delivery of apparel goods is time sensitive, delays are revolutionizing the fashion industry and creating new at the border hurt the competitiveness of exporters. opportunities for established players and newcomers, Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 29 including from Africa (box 2.2). Furthermore, increased Figure 2.9. Fast Fashion is Turning into Ultra-Fast connectivity can enhance transparency throughout the Fashion supply chain and help improve environmental and social Average time to shelf (in weeks) compliance, which is an important condition for accessing 15 the U.S. and European markets. Lastly, according to McKinsey 12 & Company (2017), 2018 will be a watershed year for the 10 fashion industry when half of the apparel sales are expected 6 5 to be realized in emerging markets, with 50.4 percent of 5 2 global sales originating outside Europe and the United States 1 (McKinsey & Company 2017b). This creates an opportunity 0 Traditional ASOS Zara Boohoo Misguided for local manufacturers and retailers in developing countries to capture a larger market share closer to home. Source: McKinsey & Company 2017. Box 2.2. Digital Technologies Are Disrupting the Fashion Industry and Offer Opportunities for Newcomers The fashion industry is increasingly moving from an art to a science that is based on in-depth understanding of customer preferences. Companies are using artificial intelligence to understand fast-changing consumer tastes, communicate this information throughout the supply chain, and deliver the right products to consumers with much shorter lead times. They are also increasingly using technology to crowdsource new ideas from across the world and reach out to new consumers. Some industry leaders are using “big data” to experiment with customization at levels that were unthinkable a decade ago. For example, H&M has recently partnered with Google to take advantage of data insights for creating customized dress designs tailored to the lifestyles of consumers. The spread of digital technologies and connectivity are particularly beneficial for new players, allowing them to reach millions of consumers without establishing a strong physical presence. Some African entrepreneurs have taken advantage of online platforms to bring African fashion to established markets. For example, Kisua, founded by a Ghanaian entrepreneur, is an online platform that offers contemporary African fashion, selling limited-run pieces and showcasing the continent’s design talent. Since Kisua launched in 2013, it has opened distribution centers in the United States and Europe, partnered with Yoox (a luxury online retailer), and been worn by international icons like Beyoncé. The company collaborates with designers across the continent and rewards them by paying them a portion from every sale; it sources most of the materials from Africa. Apparel made in Africa can also be found on Amazon as well as on regional e-commerce websites such as Jumia or Konga. Sources: McKinsey & Company 2017b; Forbes 2016. Global apparel manufacturers operate in several distinct proximity to export markets are essential for competitiveness. market segments. A simplified schematic representation of Suppliers are often located in middle-income and sometimes these segments is depicted in figure 2.10. Globally, margins even high-income countries. For example, Zara sources 50 are low for the production of simple products in the high- percent of its products in Spain and despite higher labor costs volume, long lead time segment. Labor costs play a major role is still the leading global fast fashion retailer. The production in competitiveness in this segment, and most suppliers are of complex and luxury garments also offers good margins. It based in developing countries with low wages. By contrast, requires high and specialized skills and is often undertaken in margins in the fast fashion segment tend to be higher, labor middle- or high-income countries. costs play a smaller role, while state of the art logistics and Figure 2.10. Schematic presentation of the strategic segments in the apparel industry Strategic Segments in the Global Apparel Industy Segment 1 Segment 2: Segment 3: Simple Products, Simple Products, Reactive Response Complex Products, Scheduled Scheduled Response (Fast Fashion) Response • Higher lead times: 10- 15 weeks • Low lead times (2-5 weeks) • High lead times: 10-15 weeks • Large batch sizes:10,000-100,000s • Small batch sizes • Large and small batch sizes • Few physical inputs (5-pocket jeans, • Few physical inputs • Many physical inputs men’s briefs, etc.) • Direct relationships with buyers • Few or no intermediaries • Mostly indirect relationships with Example: Zara Example: Hugo Boss Luxury/lifestyle/ buyers technical garments Example: Walmart suppliers Source: Adapted from World Bank 2017a. 30 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Opportunities for Penetrating Different Markets Leading global fast fashion retailers have entered the South African market in recent years, showing that The U.S. market will remain lucrative for Lesotho’s there are significant opportunities in this segment. producers in the short term; however, the regional This increases competitive pressures on local retailers to market may offer greater opportunities in the longer reduce lead times and creates opportunities for local and term. Lesotho’s manufacturers exporting to the U.S. market regional suppliers. South Africa boasts a large clothing retail are in the low-margin, high-volume business. Although market, with close to 2,000 malls, the sixth highest number the United States remains a lucrative market for Lesotho’s in the world.6 Although challenging economic times have manufacturers, the long-term prospects depend on trade moderated consumer spending, the long-term prospects preferences. Furthermore, a move toward fast fashion is for apparel retailers remain positive thanks to continued leading to relocation of some production to countries urbanization and a large share of young population. Several in Central America. McKinsey’s survey of United States– global fast fashion giants have opened stores in South Africa based sourcing executives revealed that almost half of the in recent years—Australia’s Cotton On, British Topshop, respondents planned to increase sourcing from Central Spain’s Zara, the United States’ Forever 21, and Sweden’s H&M. America (McKinsey & Company 2017a). About a third of the The entrance of these global players created strong pressures global respondents to the McKinsey survey also expected on local retailers to shorten lead times. Two South African to make increased use of reshoring, with the United States– retailers—Woolworths and Edcon Group—interviewed for based executives more likely to consider reshoring than their this report have prioritized increased sourcing of products European counterparts (McKinsey & Company 2017a). These in the SADC region (rather than in Asia) to allow for greater developments will put the African manufacturers exporting flexibility and ensure speed to market. to the U.S. market at a disadvantage. By contrast, firms supplying the South African market benefit from proximity South Africa’s imports of garments from the SADC region to clients and offer flexibility and fast turnaround times. They have increased significantly since 2007, while imports have the potential to compete in the fast fashion segment of from China have declined. Apparel imports into South the South African market. Africa nearly doubled over the past decade and were worth more than $1.6 billion in 2016. The share of imports from Increasing exports to South Africa and the broader China declined from 62 percent in 2007 to 51 percent in 2016 Southern African Development Community (SADC) and has also fallen in absolute terms since 2014. By contrast, region can cushion against changes in U.S. trade policy imports from Lesotho and other countries in the region— and presents a good opportunity for diversification Swaziland, Mauritius, and Madagascar—steadily increased in the apparel industry. Export market diversification over the past decade (figure 2.11). Lesotho’s garment exports was considered a priority for about half of the interviewed to South Africa grew from $2 million to $114 million between companies. Executives interested in tapping into new 2007 and 2016, and the country is now South Africa’s second markets tend to be local or South African investors who largest regional supplier after Swaziland. Partnership with want to export to other SACU countries, the United States, South African retailers can also help Lesotho’s manufacturers and the European Union. By contrast, few of the large, well- supply other SADC countries with the presence of South established firms exporting to the United States under AGOA African retailers. The value of Lesotho’s apparel exports to are interested in supplying other markets. This may change SADC countries (other than South Africa) reached $1.4 million with the expiration of AGOA. For example, when Swaziland in 2016; they were entirely nonexistent a decade ago. lost its AGOA status, some companies reoriented their production to the South African market. 6 South African Council for Shopping Centers, https://sacsc.co.za/news/ south-africa-has-the-sixth-largest-number-of-shopping-centres- globally. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 31 Figure 2.11. Apparel imports from the SADC region to South Africa increased over the past decade Top 5 apparel exporters to South Africa (excluding China) 160 000 Export value (US$ 1,000) 140 000 120 000 100 000 80 000 60 000 40 000 20 000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Swaziland Lesotho Mauritius Madagascar India Source: UNCOMTRADE. Interviews with South African retailers reveal in Asia, which also benefit from free market access and opportunities for increasing exports to South Africa have higher productivity. So, although there may be some and other SACU countries. South African retailers are niche opportunities for Lesotho’s manufacturers, it would be prioritizing suppliers that can ensure (1) fast turnaround difficult to gain a significant share in this market. times and ability to change styles quickly, (2) production of garments with higher fashion content, and (3) diversified 4. The Way Forward capabilities—screen printing, embroidery, beading, and fabric sourcing. South African retailers also believe that Apparel accounts for most of the jobs and exports in increasing fabric production in the region is important for manufacturing. The industry has grown over the past their ability to compete with foreign brands. Edcon Group decade, but its further development is under pressure. has invested in partnerships with South African cotton Apparel is Lesotho’s leading export industry, accounting growers by committing to buy 600 tons of cotton annually for most manufacturing jobs and over a third of exports. to increase local availability of inputs (Edcon 2017). There is Trade preferences and government subsidies have played more demand for woven fabric and specialized fabrics like an important role in development of the industry. Although cotton and linen blends than for basic cotton knit fabric. the industry is credited with the creation of thousands of Given the stiff competition and that most EU buyers jobs, it also shows several vulnerabilities: (1) concentration of require relatively small orders with fast turnaround times, production in manufacturing of basic apparel with low value it is unlikely that Lesotho will be able to gain a significant added; (2) weak localization of the industry, with few local share in this market. Lesotho benefits from duty-free access exporters, low representation of Basotho in management to the European Union, but so far exports have been small, positions, and lack of local suppliers; and (3) declining worth $748,000 in 2017 (UNCOMTRADE). The few firms that competitiveness in the U.S. market with uncertain prospects supply EU markets tend to do so indirectly (that is, through post-AGOA. an intermediary buyer located in Asia for brands that sell in the United States and EU countries). Firms cite lack of direct Government interventions to support the growth of the contacts with EU retailers, shorter lead times, smaller order sector could focus on (1) improving the availability of factory sizes, and higher fashion content requirements of EU buyers shells, which is a key priority to facilitate more investment in among the impediments to entering this market. Overall, few the industry; (2) promoting backward linkages and skills to African economies export to the European Union. Mauritius improve the productivity of existing enterprises and reduce and Madagascar’s exports to the European Union reach $273 lead times; and (3) addressing other business environment million and $337 million, respectively (over 30 and 50 percent constraints, such as bottlenecks in cross-border trade and of their total garment exports). Ethiopia supplies several water shortages in Maputsoe. The government may also large European retailers—H&M, Tesco, and Primark—yet its consider pursuing stronger regional integration to improve total EU exports were worth only $36.7 million in 2016. Most competitiveness. Potential measures will include targeted African suppliers to the European Union are concentrated FDI attraction from South Africa and raising awareness in the low-margin, high-volume segment with low value of opportunities in the South African market among all added. They face stiff competition from low-cost producers exporters, and building stronger relationships with South 32 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT African buyers to increase exports to the region. In addition, or joint venture), and (2) fully private development, collaboration within SADC to build linkages between ownership, and operation of factory shells. The construction manufacturers and input suppliers can promote regional of the Ha Belo industrial zone in the District of Botha Bothe sourcing, create new jobs, and reduce time-to-market. Given provides an opportunity to experiment with the private the importance of the U.S. market, continued trade dialogue provision of infrastructure. It will be important to conduct a with the United States over the post-AGOA trade regime will demand study among the investors who are currently on the be important to avoid the collapse of exports and massive waitlist as well as other potential investors to understand (1) job losses after the expiration of the agreement. whether there is sufficient interest among the private sector 1) Reform the Provision of Factory Shells: Key Priority to move to this location, and (2) if the investors would be to Attract New Investment ready to pay for quality infrastructure at rates that are at least at the cost recovery level. Assuming there is sufficient interest Enhancing the availability and quality of industrial from potential tenants, the government can start looking for estates will entail (1) bringing current rental prices to the private developers and discussing a suitable partnership cost recovery level and improving rent collection, and (2) involving the private sector in managing and developing model. The government may also consider running this factory shells. These measures will reduce the financial experiment in a well-established location, for example, close burden on the Government of Lesotho, potentially to Maseru or Maputsoe where investors may potentially encourage development of domestic real estate companies, show larger interest. There will also be a need to introduce and facilitate improvements in the quality of infrastructure regulations governing industrial estate provision and public- thanks to user-specified design and better maintenance. private partnerships, specifying the roles and responsibilities of different parties. As a first step, the government can consider bringing rents to the cost-recovery level and a more aggressive 2) Promote Backward Linkages and Invest in Skills to strategy to improve rent collection. In the short term, Improve Productivity this approach may potentially result in some manufacturers Backward linkages can reduce lead times, cushion leaving Lesotho and associated job losses, yet in the longer against potential changes in rules of origin of the trade term, this will help improve the quality of investors and agreements, and improve Lesotho’s competitiveness, reduce the burden on the public budget. A more careful particularly in the fast fashion segment. They can also appraisal of prospective investors (for example, reviewing support local entrepreneurship and create additional credit history, financial statements, and business plans) can also help improve the quality of new tenants. jobs. Backward linkages can be facilitated by (1) attraction of FDI in selected inputs; (2) support to upgrading There is a need for better understanding the potential Basotho entrepreneurs, for example, through the supplier for private sector involvement in the construction and development program; and (3) investment in skills. operation of industrial estates in Lesotho. Some feasibility studies have been done previously, yet several knowledge Attract FDI in Value-Adding Activities and Inputs gaps remain, particularly on (1) whether investors would be willing to pay the rent, which is at the cost recovery The government may consider a targeted FDI attraction level; and (2) what the breakeven rates are in Lesotho’s campaign to increase domestic value addition and context. For example, a report prepared by BuraHappold facilitate investment in inputs, such as knit fabric Engineering Consulting firm in 2015 concludes that (1) there production. The Government of Lesotho may consider was significant unmet demand for factory space (estimated surveying South African investors who already manufacture at over 200,000 square meters as of 2014), (2) there was garments in the country, to examine the opportunities for a difference in financial performance among different relocation of additional value-adding activities to Lesotho. industrial estates attributable to their ability to collect rent, One of the interviewed South African investors producing (3) a significant improvement in financial performance of jeans in the Maputsoe area would consider relocating fabric industrial estates could be achieved through better rent production to Lesotho where the company already has collection, and (4) breakeven rental rates are high by global apparel manufacturing operations, if water shortages were standards (BuraHappold Engineering 2015). For example, addressed. Similarly, wet finishing for jeans can be done under the scenario of full commercialization, the estimated in Lesotho with improvements in water availability. The breakeven rates (based on LNDC data) were above $30 per government may also consider building on the connections square meter per month. The report does not explain the of the existing investors in their respective countries to bring reasons behind the high rates. in additional FDI in fabric and potentially other supplies. Most There are several options for involving the private sector of the interviewed stakeholders felt that attraction of knit in developing industrial infrastructure. These include (1) fabric manufacturing would be particularly beneficial for the private construction of industrial estates on government/ industry. LNDC owned land (for example, through a form of concession Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 33 Consider Introducing a Supplier Development Program implemented in the Czech Republic. Discussions with local apparel entrepreneurs revealed that they would benefit from Introduction of a supplier development program (SDP) access to experienced mentors (such as current or former is one way to facilitate localization of the industry. The executives of apparel firms with a good track record of program would aim to enhance the capacity of local SMEs to exports) to support them in improving production efficiency, become subcontractors or suppliers to the FDI firms. Many enhancing business skills, and finding potential buyers. Local countries have successfully used SDP programs to build firms can start by subcontracting to large FDI companies linkages between foreign and local enterprises, promote based in Lesotho and gradually develop capabilities for direct knowledge transfer, and improve the competitiveness of exports. An SDP program can also explore the potential of domestic SMEs. Box 2.3 describes common elements of upgrading local SMEs to produce some inputs such as SDP programs and provides an example of such a program garment labels, box tape, and box labels. Box 2.3. Key Elements of Supplier Development Programs Supplier development programs have been used in many countries to enhance the benefits of foreign direct investment for the local economy and develop a qualified local supplier base. These programs are usually run by investment promotion agencies and involve the following elements: (1) identification of the needs of international firms, (2) creation of an online database of potential suppliers, (3) business-to-business matchmaking events, and (4) upgrading of local firms to meet the requirements of international companies. Typically, a pool of the most competent local firms will be identified through a competitive selection process and these firms will be provided with customized technical assistance and possibly matching grants to enhance skills and operational efficiency, improve adherence to product standards, assist with necessary certification, and upgrade equipment. A Czech investment promotion agency implemented a supplier development program in the electronics industry during 2000–02. The program was implemented with the close involvement of multinational corporations and lasted 21 months. The profiles of 200 firms were reviewed in detail, of which 73 were invited to apply and 45 benefited from the project’s assistance. An evaluation undertaken 18 months after the project’s completion showed that 15 firms had gained new contracts (worth $46 million), which they attributed to the program; four companies found new customers abroad; and three companies obtained contracts with a higher value-added content. Only four firms reported no business benefits from the program. The share of components sourced from Czech companies by the multinational corporations participating in the program increased from a rate between 0 and 5 percent at the start of the program to 2.5 to 30 percent by 2004. Source: World Bank Pilot Czech Supplier Development Program. Given the small size of the Lesotho economy and the Strengthen the Skills Base (Focus on Machine Repair and relatively few growth-oriented SMEs, it may be best to Management) develop a general supplier development program, open to all sectors. The government could start with a survey of Measures to improve skill availability could include FDI companies to understand (1) what goods and services updating the curricula, introducing training for machine can be procured locally but are currently imported, and (2) repair and management skills, and raising awareness whether there is interest among large firms to participate of the tax incentive for training. First, the curricula of in the supply chain financing program. Based on the results universities and vocational schools need to be updated, with of the survey, an online database of potential suppliers, the involvement of industry representatives, to make it more subcontractors, and service providers could be established relevant. It will also be important to introduce specialized (it should include IT, accounting, logistics, packaging, and courses in management and marketing with a focus on other general service providers, along with specialized the apparel industry, to build the cadre of workers who can input suppliers and SMEs that could potentially serve as replace expat labor in management positions. The duration subcontractors). A competitive selection process could be of internships should be extended from the current one organized to select local SMEs with the potential to become month to a minimum of three months. It will also be useful suppliers or subcontractors to foreign companies. These to develop vocational training programs in machine repair, SMEs should be provided targeted technical assistance which is a skill in high demand by the industry. Lastly, it will and possibly matching grants or support in obtaining bank be important to raise awareness about the tax incentive financing. The government may also consider introducing that allows firms to deduct 125 percent of costs incurred a pilot supply chain financing program, provided there is on training or tertiary education for Lesotho’s citizens. strong interest and commitment from buyers. Implementation of these measures could help the country to (1) compete in the fast fashion segment, which requires quick turnaround times, as well as (2) develop the capabilities for producing complex garments with higher value added. 34 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 3) Address Other Business Environment Constraints: implementation support for the electronic exchange of Cross-Border Trade and Water Availability in customs data. The LRA should consider working with textile Maputsoe and apparel traders to identify how they can become involved in the mutual recognition arrangement. Work with SARS to Improve Cross-Border Trade Improve Water Availability in Maputsoe Addressing constraints in the cross-border movement of goods will involve establishing a close collaboration Improving water availability in Maputsoe area will between the LRA and SARS Customs. There is a need to require significant improvements in infrastructure. create a channel between traders, LRA, and SARS Customs Addressing the serious water supply issues in the Maputsoe for the immediate escalation of concerns. This will entail area will require (1) significant investments in the provision of the creation of a designated office (or appointing a contact bulk water to augment supply and satisfy increased demand, person at LRA) where traders can register their cases, detailing and (2) rehabilitation and expansion of the distribution the specific information needed for follow-up investigation. network to improve service reliability and access to some The LRA contact person should have access to a designated currently unserved areas. In addition, ensuring sustainable office in SARS Customs. This mechanism will provide traders service delivery to the industry will call for improvements in with the certainty that their specific operational concerns will the performance of the service provider, WASCO. be registered, tracked, and resolved. Customs-to-customs It will be important to work with development partners working groups should be established for specific border to improve water availability in underserved locations, posts where issues have been reported, to examine and including the area around Maputsoe. One way to do resolve the concerns reported by traders. this is through the upcoming World Bank Lowlands Water Undertaking an apparel time-release study could help Development Project, which can support (1) construction shed light on the specific constraints faced by garment of the bulk water scheme with a design capacity of 26,000 exporters. LRA and SARS Customs can consider undertaking cubic meters/day, (2) construction and rehabilitation of water a focused, limited commodity time-release study for apparel, distribution mains and networks, and (3) strengthening the to map the Lesotho and South African regulatory and border institutional capacity of WASCO to improve service delivery. processes and track the movement of relevant consignments. If approved, project implementation will take about one This would provide both governments a baseline and and a half to two years, with improvements in bulk water indication of specific issues that may require attention. The availability by the end of 2020. In the short term, it will be World Bank, under the Trade Facilitation component of the important to communicate to investors that the government Lesotho Investment Climate Project, is providing support to has recognized the problem and has a plan to resolve it. the Lesotho government in implementing the World Trade Repairing the leaking pipes will also improve the situation, Organization Trade Facilitation Agreement, and it is possible even if it cannot solve the problem. WASCO may also to consider support for the proposed action under this consider regular tanker water delivery to companies with no project. alternative sources of water. The ongoing joint work of LRA and SARS Customs on the advance electronic exchange of customs data and the mutual recognition of preferred traders has the potential to streamline cross-border movement of goods. LRA and SARS Customs are cooperating on the development and implementation of several World Customs Organization activities that have the potential to streamline the cross-border movement of goods. These activities include advance electronic exchange of customs data,7 and mutual recognition of preferred traders.8 Both programs have the potential to facilitate the clearance and release of goods. The World Bank, through the Lesotho Investment Climate Project, is in discussion with the Lesotho government on providing 7 This initiative aims to transfer electronic transactional customs data from the export to the import customs to support more informed decisions on the release or detention of goods. 8 This proposed arrangement aims to reward traders who have demonstrated a high level of compliance by providing prescribed benefits. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 35 Chapter III. Horticulture9 1. Context Agriculture accounts for most of the employment in High-value horticulture offers opportunities to rural areas, where over 70 percent of the Basotho live. transform the rural economy and increase incomes. Crop farming is dominated by subsistence production of Lesotho’s climate conditions are favorable for the production cereal crops. Agriculture accounts for less than 10 percent of of many vegetables and deciduous fruit. A crop suitability GDP but over 60 percent of employment. Most of the jobs map identified 5,500 square kilometers (550,000 hectares) of are in subsistence-oriented small family farms characterized micro-climate areas favorable for fruit cultivation and an even by low productivity. Crop farming is based on traditional larger area is deemed to be suitable for vegetable production low-input, low-output rainfed cereal production. The main in Lesotho. High altitude contributes to a lower prevalence crops—maize, sorghum, and wheat—are planted on more of pests. Furthermore, deciduous fruit can be harvested than 85 percent of the cultivated area (World Bank 2017f ). two to three weeks earlier in Lesotho compared with the Yields vary significantly, depending on the amount of Western Cape province in South Africa (the main region for rainfall, but are generally low, contributing to widespread fruit production), resulting in price premiums. Commercial poverty in rural areas. Lesotho does not have a competitive horticulture can also increase incomes and transform advantage in cultivating cereals due to its mountainous Lesotho’s rural economy. For example, it is estimated that terrain, challenging agro-climatic conditions, and poor soils, per hectare revenue for commercial fruit orchards can reach as well as the large economies of scale and high levels of $30,500 after the fifth season; the comparative income for mechanization required for commercial grain cultivation. subsistence production of maize in Lesotho is $220 (Ministry of Trade and Industry 2017a). Furthermore, increased 9 The analysis in this chapter uses a variety of sources. Specifically, it relies production of fruits and vegetables can help improve on data from the smallholder survey covering 120 vegetable and 22 fruit farmers in four districts, completed by Global Development Solutions for nutrition in a country where 15 percent of the population is the World Bank in 2016. The survey interviewed farmers, supermarkets, undernourished10 and traditional diets are based on cereals. the donor community, and government stakeholders. The chapter also builds on the experience of two World Bank projects: (1) the Second Private Sector Competitiveness and Economic Diversification Project (PSCEDP), which successfully piloted commercial fruit cultivation in Lesotho and helped realize Lesotho’s first exports of fresh fruit to South 10 World Bank, https://data.worldbank.org/indicator/SN.ITK.DEFC. Africa, and (2) the Smallholder Agriculture Development Project (SADP), ZS?end=2015&locations=LS&start=2000&view=chart, accessed April which aims to increase the productivity of smallholder farmers. 10, 2018. 36 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Investments in horticulture can help create jobs. Fruit A relatively small share of land is allocated to commercial and vegetable cultivation is more labor intensive than grain horticulture. At the peak of the season, only 611 hectares are cultivation and can increase employment in rural areas: planted to vegetables. Spinach, spaile (a traditional green leaf based on statistics for South Africa, commercial vegetable vegetable), and pumpkin are the most commonly planted and fruit cultivation generates about 1.3 jobs per hectare vegetable crops (table 3.1). Although there are no data on compared with 0.01 jobs per hectare for maize (GDS 2016 the area under orchard cultivation, the total number of trees and HORTGRO 2017). This suggests that more than half a grown by commercial farmers is less than 36,000, which million jobs could potentially be created in Lesotho if fruits suggests that a typical fruit farm is small. Apples, peaches, and vegetables were commercially grown on the entire area and apricots are the most commonly planted trees (figure suitable for horticultural crops. 3.1). Although high-value fruits and vegetables can be Table 3.1: Total area planted to vegetables (hectares), profitably grown in Lesotho, commercial horticulture is by quarter, 2015/2016 agricultural year in its infancy. In Lesotho, fruits and vegetables are produced First Second primarily by smallholders for subsistence consumption. Vegetables Third quarter quarter quarter Most of the horticultural output is owner-consumed or Cabbage 4 1 2 sold in informal domestic markets. A few larger and more Tomato 52 0 0 commercially-oriented farms have emerged in recent years and are supplying supermarkets, hotels, restaurants, and Spinach 208 91 1 public institutions such as schools and hospitals. Yet, most Carrots 34 0 0 producers lack sufficient product quantity to enter forward Spaile 90 0 1 contracts with institutional buyers. Small volumes may also Rape 12 50 2 explain the absence of aggregators, packhouses, commercial Beetroot 46 0 1 processing facilities, and specialized logistics companies. All Pumpkin 72 0 1 inputs are imported. Potatoes 36 0 0 Only several hundred farmers are involved in market- Green peas 0 1 1 oriented horticultural production. The first pilot Onion 1 0 0 commercial horticulture survey identified 198 “commercial” vegetable farmers and 109 fruit farmers (Bureau of Statistics Lettuce 4 0 0 2016). For the purposes of the survey, “commercial vegetable Green pepper 52 0 0 farmers” were those who produced mostly for selling and Total 611 143 9 had irrigation facilities and access to water. Qualifying fruit Source: Bureau of Statistics 2016. farmers were those with 100 or more fruit trees. The results of the survey suggest that while farmers of all age groups Note: The first quarter covers August–October; the second quarter invest in vegetable farming, few of the young Basotho covers November–January; and third quarter covers February, engage in orchard cultivation. Indeed, over 60 percent of fruit March, and April. There were no data for the fourth quarter, which farmers are over age 60 years, compared with 23 percent for coincides with the winter season, when hardly any production takes vegetable farming. place. Figure 3.1. Apples, peaches, and apricots are the most commonly grown fruits Number of trees 18 000 10 074 16 000 14 074 14 000 12 000 10 000 8 000 6 000 4 000 1 971 1 715 2 000 434 304 79 0 Apple Peach Apricot Plum Cherry Pear Quince Source: Bureau of Statistics 2016. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 37 Given the low level of domestic production, Lesotho is Box 3.1. Lack of Data Complicates Analysis of the a net importer of fruits and vegetables. Interviews with Horticulture Industry supermarkets showed that over 80 percent of fruits and Lack of data on horticultural production, yields of major vegetables is imported. Imports of fruits grew by 16 percent crops, and farm revenues complicates analysis of the between 2010 and 2016, while imports of vegetables increased industry and policy efforts to support the sector. Although by 31 percent over the same period (UNCOMTRADE) (figure the statistics on cereal production have been available 3.2). All imported fruits and vegetables come from South for many years and are updated annually, the first pilot Africa. Imports of vegetables are dominated by potatoes and commercial horticulture survey was conducted by the legumes, which constitute over half of total imports. Apples Bureau of Statistics in the 2015/16 agricultural year. The and pears are the most popular imported fruits, accounting survey covers a limited number of variables, including area for 42 percent of imports (UNCOMTRADE). planted to different crops, age and educational attainment Figure 3.2. Lesotho’s fruit and vegetable imports of farmers, and number of farm employees. There are no increased since 2010 data on yields or farm turnover, and production statistics may not be accurate, as farmers do not keep records on Lesotho fruit and vegetable imports harvested produce. Given the novelty of the survey, it is also (US$ 1,00) likely that not all commercial farmers were covered. 20 000 Source: Bureau of Statistics 2016. 15 000 Although commercial horticulture plays a limited 10 000 economic role at the moment, the sector has good 5 000 potential for growth. Indeed, there is high domestic and international demand for fruits and vegetables. Lesotho’s 0 proximity to South Africa offers access to a large market 2010 2011 2012 2013 2014 2015 2016 for early variety fruit. Furthermore, given that South Africa Vegetables Fruit is a leading fruit exporter in Sub-Saharan Africa, there are opportunities for knowledge and technology transfer as Source: UNCOMTRADE. well as partnerships for increased supply to global markets. Lesotho’s exports of horticultural products are negligible. Developing vegetable exports to international markets may Lesotho has hardly exported any vegetables over the past be more challenging, as many countries have year-round decade. In 2016, the export value of vegetables, all of which greenhouse production. However, investments in vegetable were sold in South Africa, was only $24,000 (UNCOMTRADE). production can help reduce imports, which exceeded $16 Dried rosehip (HS 081340, “other dry fruit”) accounts for most million in 2016. of the fruit exports, which were worth more than $1 million The Government of Lesotho has prioritized development in 2016. The value of other exported fruit was only $12,000. of the horticulture industry and mobilized donor Several factors constrain the development of commercial support for the sector. The horticulture industry is among horticulture, including poorly functioning land markets, the priority sectors identified in the forthcoming National lack of irrigation, low technical and business skills of farmers, Strategic Development Plan. The government has partnered and poor access to markets. Furthermore, the analysis of the with the donor community to raise awareness about horticulture industry and its impact on the rural economy to business opportunities in horticulture and provide training date is hampered by lack of data (box 3.1). and grant support to facilitate investments in protected fruit and vegetable cultivation and small-scale irrigation schemes. Data from the recent Horticulture Statistics Report show that about 31 percent of vegetable farmers and 38 percent of fruit farmers have received some external funding (figure 3.3) (Bureau of Statistics 2016). Districts with a larger share of horticultural production tend to receive more funding. Such support has contributed to increased horticultural production and will likely remain essential in further development of the industry. 38 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Figure 3.3. A significant share of farmers in key production areas receive external funding Percentage share of funded farmers by district, 2015/16 agricultural year 46 50 40 29 30 23 21 21 20 15 10 8 10 2 2 5 5 3 5 5 0 k ng ng e k ru a g a e Ne rib ek re in Ho e te tlo as th Be Ts Le a’s e ho ’s M af Qu a- e ch M ok ab al Qa oh M Th M Fruit farmers Vegetable farmers Source: Bureau of Statistics 2016. 2. Challenges to Growth arable land; lack of specialized skills; and weak linkages within the value chain. Furthermore, access to finance is an Commercial horticulture is a new industry in Lesotho. important constraint for commercial farmers; only 7 percent It is characterized by lack of leading commercial farmers, have access to credit (A2F Consulting 2018). Lesotho also has absence of aggregators, and low level of expertise in a challenging climate, which requires investment in climate- commercial farming by producers and extension workers. smart technologies, irrigation infrastructure, hail nets for fruit, The sector faces many challenges, the most significant being and greenhouses for vegetables (box 3.2). lack of a functioning land market; shortages of irrigable, Box 3.2. Challenging Climate Conditions Require Investment in Climate-Smart Technologies Difficult agro-climatic conditions combined with poor natural resource management pose a risk to sustainable agricultural development. Lesotho’s climate is characterized by erratic and unevenly distributed rainfall, frequent drought, hail, and frost risk. Temperatures are highly variable throughout the year and due to high altitude are generally cooler than in other countries at the same latitude. The country has recently recorded cycles of drought and intense rainfall and is considered extremely vulnerable to climate change. Droughts are particularly harmful for orchards, as nonoptimal irrigation in a specific year will affect the yield and quality of fruit during that year, but also in the following year and, depending on the severity, the impact can spread over two seasons (Louw 2017). Heavy storms can limit infiltration and increase runoff and erosion. Challenging climate conditions are aggravated by poor resource management, which has resulted in widespread soil degradation. Climate risk can be managed if proper production techniques are applied, as shown in neighboring South Africa. Despite the impacts of climate variability, crop yields in the Free State Province of South Africa, just across the border from Lesotho’s drier Mafeteng and Mohale’s Hoek districts, exceed the crop yields in Lesotho by 2.5 to 9 times (FAO 2011). The contrast could be attributable to widely differing crop, livestock, and natural resources management, and efficient use of agricultural inputs (FAO 2011). This shows that climate risk can be managed if proper production techniques are applied. Farmers face different constraints, depending on the from donor funding to install greenhouses and hail nets. level of commercialization. Basotho farmers can be Nevertheless, these farmers often struggle due to lack of broadly classified into three groups (figure 3.4). Traditional technical and basic business management skills and lack farmers constitute the majority of farmers and rely on rainfed, of access to markets; their productivity is typically much low-input production systems for subsistence consumption. lower than that in neighboring South Africa. The third group, Climate variability presents the main risk for these farmers commercial farmers, represents a minority of farmers. They run and many of them have observed declining production in their farms as a business, have contracts with supermarkets, recent years due to weather shocks. Modernizing farmers and some have realized small exports to South Africa. The are the most diverse group. These farmers have realized the main constraints these farmers face are lack of serviced land business potential of horticulture farming, increased the and poor access to finance. area planted to fruits and vegetables, and often benefited Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 39 Figure 3.4 The three types of horticulture farmers Typology of Horticulture Farmers Type 1: Type 2: Type 3: Traditional farmers Modernizing farmers Commercial farmers • Subsistence farmers producing mostly • Smallholder market-oriented • Run their farms as a business cereals horticulture farmers • Use modern production techniques • Fruits and vegetables are grown for • A mixture of modern and traditional • Regularly supply supermarkets, hotels, subsistence consumption production techniques is used and restaurants • Most of the Basotho farmers fall in this • Keep some records, although rarely • Maximum farm size 8-10 hectares category detailed enough to be able to apply • A few leading farmers for a loan • Most farmers sell their produce in informal markets, although some supply institutional buyers • Typical farm size 1-8 acres • A small but growing share of the Basotho farmers (most of the 307 fruit and vegetable farmers identified in the Horticulture Statistics Report fall in this category) The development of commercial fruit farming is subject Most Basotho farmers cultivate their family plots and to a different set of constraints than vegetable cultivation. do not have legal titles to their land. Based on Land Only two fruit farms in Lesotho can currently satisfy the Administration Authority data, only 232 farmers have titles quality requirements of supermarkets. The development to their land. Most rural land transactions (buying or renting of commercial fruit farming is more knowledge and capital land) take place informally. In areas with access to communal intensive compared with vegetable cultivation. Furthermore, land, it can be allocated to farmers by community councils, while vegetables can be harvested in the same season they typically in consultation with the chiefs. To obtain a formal were planted, stone fruit comes into full bearing three years land title, a farmer needs to submit a package of documents after planting and as late as six years for apples. This requires a to the Land Administration Authority, including (1) a copy of different cashflow model compared with vegetable farming the identity card, (2) an allocation title granted by the local and access to reliable long-term finance. Furthermore, while government, (3) proof that the land has been surveyed vegetable cultivation is suitable for smallholders, commercial and the boundaries of the plot determined (there are only fruit farming requires economies of scale. In South Africa, five surveyors in Lesotho), and (4) a form from the Ministry commercial fruit cultivation is typically done on farms of of Agriculture certifying that the land is suitable to be used 50 or more hectares. None of the fruit farms in Lesotho is at for agricultural purposes. Land lease titles are granted for 90 this scale. The World Bank has supported the establishment years and are transferable. of three commercial fruit farms with an average size of 13.6 There is no comprehensive national land registry nor a hectares. One of these farms is already bearing fruit and database of agricultural land parcels. Lesotho does not supplying local supermarkets. The second farm that meets have a national land registry that catalogues all the land the requirements of local supermarkets is run by Blessing held by government institutions, state-owned enterprises, Nkhase, who was supported under an earlier World Bank local governments, households, and businesses. Similarly, intervention, and has been operating his farm independently there is no database of agricultural land. So, if a hypothetical since 2013. He has about 10 hectares of land and is supplying businessperson wanted to invest in a large agricultural farm, domestic supermarkets and at times exporting to South he or she would need to physically visit communities to Africa. identify a suitable land plot. The following narrative discusses the key constraints as they A typical Basotho farm is small. This presents a major apply to different categories of farmers. challenge for the establishment of commercial fruit farms, 1) Lack of a Well-Functioning Land Market and which require economies of scale, as well as for growth- Shortage of Irrigable Land Have Particularly oriented vegetable farmers. Over 60 percent of households Negative Impacts on Modernizing and Commercial have land plots of less than 1.5 hectares (table 3.2). This level of Farmers land fragmentation makes it difficult to develop commercial 40 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT orchard farms that require a minimum of 10 hectares to be Smallholder farmers tend to rely on traditional profitable. Access to serviced agricultural land (in locations agricultural practices and invest little in input use. The with access to electricity and irrigation) was also mentioned GDS smallholder survey found significant variability in input among the constraints for growth-oriented vegetable use and production costs among smallholder farmers, farmers. Block farming and incentives for farmers to pull suggesting a limited understanding and uniformity of on- land have proven effective in overcoming scale constraints; farm technical management and husbandry practices. Table however, the legal framework for collective long-term lease 3.3 illustrates the variability in input use among smallholder of land to a foreign or domestic investor is underdeveloped. green pepper farmers. Application of fertilizers and chemicals Although cultivation of many vegetables (tomatoes, peppers, by smallholder farmers is based largely on what is available and leafy greens) is scale neutral and can potentially be and affordable rather than optimized for soil type or based on profitably done on plots of about an acre, fragmentation of a targeted plant management program. No farm surveyed by production makes it difficult to market produce. GDS reported soil testing to identify optimum amendments. Plant protection programs, if available, are based on advice Table 3.2. Most households have farms below 1.5 by extension services, which tends to be general rather than hectares specific to individual farm or crop needs. As a result, producers Percentage distribution of agricultural households by who invested more in fertilizer and pest management did field size not necessarily report higher profits. Hectares Percentage of households Table 3.3. Application of inputs varies significantly 0.01-0.49 21.8 among smallholder farmers 0.50-0.99 23.6 Location Application of inputs by green pepper 1.00-1.49 19.3 farmers 1.50-1.99 12.5 Fertilizer Irrigation Chemicals 2.00 - 2.49 7.8 Botha-Botha 50% 25% 25% 2.50 - 2.99 4.7 Leribe 0 20% 60% 3.00 - 3.49 3.4 Berea 40% 50% 100% 3.50 - 3.99 2.3 Mafeteng 30% 0% 0% 4.00 - 4.49 1 Source: GDS Survey.2016. 4.50 - 4.99 1 Low technical skills and input use result in low 5.00 - 5.49 0.8 productivity and weak price competitiveness. For example, 5.50 - 5.99 0.4 the GDS survey found that prices for green peppers charged 6+ 1.4 by smallholder farmers in Lesotho were nearly twice higher Total 100 than those found in Joburg Market at the time of the survey. This was partly attributable to the low planting density of the Source: Bureau of Statistics, 2009/2010 Agricultural Census. Basotho farms and low-quality plant husbandry practices.11 Fruits and vegetables in Lesotho are grown primarily Similarly, low plant density, suboptimal irrigation, and low under rainfed conditions with no irrigation. Yields of use of inputs contributed to higher prices for tomatoes and commercially produced crops with optimal application spinach realized by smallholders in Lesotho relative to prices of water can be three to four times higher compared with observed in South Africa. Although smallholder fruit farmers the same crops that were not irrigated. Respondents to were selling peaches and apples at competitive prices the Global Development Solutions (GDS) survey reported relative to those observed at the Joburg Market, the quality challenges in obtaining or affording water and pumping of the produce did not match South African standards. and considered drought and suboptimal water supply as Smallholders frequently lack basic financial and business the main contributors to crop loss (GDS 2016). Due to lack of skills. Few of the GDS surveyed smallholders keep records electricity in many rural locations, farmers must rely on diesel on farm operating costs, sales, land size, varieties grown, and pumps, which increases their operating costs. When irrigation other data necessary to evaluate and monitor commercial is used, it frequently relies on borehole technology, which farm operations. Farmers consider it a success if they can risks depleting groundwater. Water usage for agricultural sell their produce but do not always know if the production purposes is unregulated. 11 For example, in a commercial green pepper farm, it is not unusual to 2) Lack of Technical and Business Skills Is a Major find plant density between 10,000 and 12,000 plants per acre. In the Problem for Traditional and Modernizing surveyed farms in Lesotho, plant density ranged from 294 to 667 plants Smallholder Farmers per acre (GDS 2016). Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 41 is profitable (GDS 2016). This finding was confirmed by the supermarkets, produce frequently gets spoiled by the time it Bureau of Statistics team that worked on the Horticulture is delivered. Packaging material imported from South Africa Statistics Survey 2015/16. Many commercially-oriented is available locally, but few farmers can afford to use it; so, the farmers did not know the production area under different supermarkets frequently buy vegetables loose and do the crops (it had to be measured by the team working on the packaging themselves. The most common locally procured survey), the amount of produce they have harvested, or the vegetables are cabbage, beans, and spinach, which are often yields of different crops, and data on farm profitability were grown in the open field. There is a large demand for more largely unavailable. local lettuce, tomatoes, and peppers. The inability of farmers to provide consistent and continuous produce delivery is Farmers lack market intelligence on the varieties that are another important constraint. Overall, there are only two most in demand by buyers or are better adapted to the fruit farms supplying supermarkets. Although the number local climate. Most seed is imported from South Africa and of vegetable suppliers that have realized at least some sales seed selection in Lesotho’s stores is limited. The GDS survey to local supermarkets is larger, most of these are irregular revealed that seed sellers do not provide guidance to farmers deliveries. While about 250 vegetable farmers sold at least on varieties that are better for fresh versus processed use, are once to Pick n Pay in recent years, there is only one vegetable more adapted to weather shocks such as drought or frost farm that provides a continuous supply of fresh produce. resistance, or have other desirable characteristics (such as Shoprite reports working with three or four vegetable farms thicker skins for less damage during transport for tomatoes). that can provide a continuous supply during the growing Similarly, there is little information on market demand for season. particular fruit and vegetable varieties. Smallholder farmers tend to buy imported seeds and seedlings in local stores 3) Low Quality of Extension Services Has a Particularly based on what is available, while more advanced market- Negative Impact on Traditional and Modernizing oriented farmers looking for specific varieties typically buy Farmers seed in South Africa. The outreach and quality of extension services are not Digital technologies have not been used to their full adequate to support the transition from subsistence potential to provide technical assistance and access to commercial horticulture. The GDS smallholder survey to market information for the Basotho farmers. Lack of revealed a significant difference in the availability and quality Internet access in rural areas, high Internet costs, and low of extension services depending on the location and main digital literacy explain farmers’ low use of web applications. crop grown by farmers. For example, 71 percent of tomato Only 9 percent of the Smallholder Agriculture Development farmers in Botha-Bothe, 70 percent in Leribe, and 50 percent Project beneficiaries report using the Internet for information in Berea were visited by extension services. Farmers in the about marketing of agricultural produce (namely, Facebook first two locations received advice once a year, while farmers (8 percent) and WhatsApp (1 percent)), compared with 60 in Berea reported receiving advice three times a year, yet the percent who rely on radio and 25 percent on newspaper tomato farmers in Berea tended to be the most passive, with (World Bank 2017f ). There is no web portal that provides only limited on-farm husbandry activity. Similarly, 71 percent information on prices for agricultural produce. Although of smallholder apple growers across all districts surveyed mobile phone penetration is high in rural areas, SMS-based received technical assistance through the extension services agricultural services are not developed. once or twice annually, but the assistance was rated as “poor” (GDS 2016). Supermarkets show strong interest in buying locally produced fruits and vegetables but do not currently Educational institutions in Lesotho do not offer offer credit or technical assistance. Interviews with degrees in fruit and vegetable growing (pomology the two main supermarkets in Lesotho—Pick n Pay and and olericulture), resulting in lack of expertise among Shoprite—reveal that both chains aim to increase the share extension workers. Other issues include lack of in-service of produce sourced locally. They attend farmers’ conferences training for extension workers, high attrition of qualified and meetings and are interested in partnering with local staff due to low pay and lack of incentives, and poor producers for increased local sourcing. The supermarkets communication between staff in headquarters and districts also raise awareness among suppliers about product quality and even within districts among staff who direct the work standards but do not offer any credit or on-farm technical of extension agents (World Bank 2017c). Furthermore, lack assistance. of transport limits the ability of extension workers to provide on-farm assistance to producers. The main constraint to greater local sourcing is the lack of farmers who can meet the supermarkets’ quality (size, There is little research in Lesotho involving the color, and freshness) and volume requirements. Due to development of fruit and vegetable varieties adapted lack of post-harvest handling and the long distance to the to local agro-climatic conditions. This hurts the entire 42 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT industry, as seed varieties imported from South Africa are not the World Bank through the Private Sector Competitiveness always well-adapted to Lesotho’s high-altitude conditions and Economic Diversification Project. These and a few other and microclimate. Lesotho has only two PhD-level researchers producers supplying supermarkets also perform on-farm and five masters-level specialists with specializations in packaging using materials imported from South Africa. There plant breeding and crop sciences (IFPRI 2016). The overall are no aggregators—private collection centers providing spending on agricultural research and development (R&D) is product sorting, grading, packaging, and processing. The among the lowest in Africa and covers primarily staff salaries. lack of aggregators has two negative impacts: (1) it reduces Critical infrastructure and equipment for applied agricultural value added in horticulture (produce that cannot be sold is R&D (for example, equipment for crop breeding, seed quality, often fed to livestock or processed by households for own and soil and plant analysis) is missing, particularly in the field consumption), and (2) it reduces access to markets for stations. smallholders, particularly those far from urban locations. The government has recently constructed a Market Center in 4) Lack of Linkages within the Value Chain Hurts All Ha Tikoe Industrial Estate to address the problem of market Farmers access by smallholders and develop a local processing All inputs—seeds, fertilizer, pesticides, and equipment— industry. However, unless a private operator is found, the are imported. Given that Lesotho’s farmers buy inputs in facility will not become operational. small quantities, their production costs are higher compared Outgrower schemes and contract farming are not with those of South African farms, which are much larger common in Lesotho due to the lack of aggregators. on average. Fertilizer, plant protection products, and farm However, several farmer associations have emerged equipment are manufactured by large multinational recently and offer useful services to their members. In many companies; however, seedlings could potentially be produced countries, aggregators play an important role in improving in Lesotho. The lack of commercial nurseries in Lesotho has the productivity of smallholders and linking them to global a particularly negative impact on the orchards, as imported value chains through contract farming. Contract farming is tree seedlings experience stress during transportation, which an agreement between a downstream processor or buyer reduces their survival rate. Furthermore, there is a shortage of and farmers, individually or in groups, that guarantees a seedlings for popular tree varieties in South Africa, which can market and/or price for a product of specified quality (World result in a wait-time of over a year. Bank 2013). The contractor frequently provides inputs and There are no aggregators or commercial processing advisory services, and most evaluations indicate positive facilities. Fruit and vegetable production has grown benefits for smallholder participants and sometimes positive over the past five years thanks to increased investment in spillovers for their neighbors (World Bank 2013).. In Lesotho, greenhouses, hail nets, small-scale irrigation, and farmer these arrangements have not taken place due to the lack of training, often supported by donors. However, the increase aggregators. Only one of the interviewed farmers (head of the in production has not yet led to the emergence of value- Alosang Farm) sometimes buys produce from smallholders, if adding services, such as packaging and specialized she receives a large order that cannot be fulfilled based on her logistics. Very few farms have invested in on-farm cold own production capacity. On a positive note, several farmer storage facilities, namely Alosang farm, which specializes in associations and cooperatives have emerged in recent years vegetable production, and the three orchards supported by and offer valuable services to their members (box 3.3). Box 3.3. Potato Lesotho Association Offers Multiple Services to Its Members Potato Lesotho Association commenced its operations in 2015 and has more than 100 members with chapters in each of the 10 districts in the country. The association offers several services to its members. It has recently partnered with Wesgrow, one of the largest potato seed producers in South Africa, for bulk procurement of quality seed. The association is currently trying to procure machinery and equipment to facilitate mechanized crop production and enhance the productivity of its members. Potato Lesotho Association also offers training sessions to its members in collaboration with the Ministry of Agriculture. The training sessions are organized once a month before the start of the growing season and cover topics related to production (for example, land preparation and harvesting) as well as financial management. Furthermore, a Wesgrow agronomist from South Africa was invited to provide training on technical aspects of potato cultivation. The association is also trying to increase market access for its members. For example, sales agreements were reached with Letseng Mine, Afriski resort, and other institutional buyers. In October 2017, the association rented a cold room from the Department of Civil Aviation at the Moshoeshoe International Airport, to increase the shelf life of potatoes. Potato Lesotho Association is currently doing fundraising for the establishment of the packhouse and processing facility (estimated at approximately M 1.7 million). It is also trying to improve access to finance for its members through an internal savings and lending fund as well as by reaching out to banks to negotiate loans for its members. Source: Interview with Potato Lesotho Association members. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 43 3. Zooming in on Commercial The farmers supported by the World Bank project reported improvement in livelihoods associated with Fruit Cultivation the intervention. Not all the farmers were cultivating their land prior to the establishment of the fruit companies Development of commercial fruit farming in Lesotho (some were old, sick, or employed elsewhere). The farmers faces more challenges than vegetable cultivation. who were growing maize experienced low harvests due Commercial fruit farming requires economies of scale, is to poor productivity and a series of droughts and other more knowledge and capital intensive, and has a longer weather shocks. Having a stable and predictable income, payback period compared with vegetable cultivation. associated with project participation, was appreciated by Although hundreds of Basotho farmers are growing fruit, the beneficiaries. As the trees mature and sales grow, the only two farms (one of which is supported by the World Bank revenue of participating farmers will increase further. The and the other is a former beneficiary of a World Bank project) main benefit to the communities is increased employment— are currently able to satisfy the quality standards of Pick n Pay each farm employs about 10 permanent employees and and Shoprite, the two major supermarket chains in Lesotho. some temporary workers during the cultivation season. Unlocking the potential of the fruit industry requires The employees were provided extensive training in tree public intervention and the first steps in this direction husbandry by South African consultants. have been taken. Smallholder farmers do not have the The project has realized several successes and had a resources and skills to establish competitive fruit farms. The positive demonstration effect. Farmers in participating Government of Lesotho has made the first steps to unlock communities acquired skills in modern tree husbandry. The the opportunities in the industry. Through a partnership with harvested fruit is of high quality and domestic supermarkets the World Bank, commercial fruit farming was piloted during are interested in sourcing more of it in Lesotho. Given the 2007–13. It has shown that commercial fruit cultivation small volumes of production and large domestic demand, is feasible in Lesotho’s climate conditions, that is, at high most of the fruit is currently sold to local supermarkets rather altitude. Basotho farmers produced quality fruit and realized than exported. Cleaning, grading, and packaging are done at the first exports of grade 1 apples to South Africa. Production a small on-farm packhouse. Many tree varieties were tested has been subsequently scaled up. Box 3.4 describes the in Lesotho’s climate conditions, with Early Grande peaches approach the project used to overcome scale and skill commanding the best prices. Data on the profitability of constraints. different fruit cultivars (annex F) can inform future planting Box 3.4. Block Farming and Incentives Can Be Used to decisions. The project also had a positive demonstration Overcome the Lack of Experience with Commercial effect, with farmers in the adjacent communities showing Fruit Cultivation interest in participating in similar schemes. A World Bank project used block farming and incentives Establishing partnerships with South African investors to establish three farms with a combined cultivated area is one way to advance the development of the pilot of 41.5 hectares. The project relied on block farming to farms after the end of the project as well as to promote overcome scale constraints: about 9-10 farmers pulled commercial fruit cultivation in Lesotho more broadly. land to create each of the farms, which were registered Given the capital intensity of fruit farming and the lack of as shareholding companies. The project supported the experience in operating commercial orchards in Lesotho, farmers in obtaining titles to their land. Each farmer’s share attracting FDI could play a strong role in promoting in the company is proportional to the land he or she has development of the industry. contributed. The companies are governed by the board of directors. To overcome skill constraints, a professional manager with experience in the horticulture industry in 4. Opportunities for Lesotho’s South Africa was hired to operate each of the farms. The Producers farms adopted modern environmental practices and received GLOBAL GAP certification, which enabled them Global Trends to export to international markets. Given the novelty of the approach, the project provides an incentive to participating The global food market is characterized by increased farmers. During the first three years after establishment of demand for fruit and vegetables, higher values for fresh the farms (until the trees start bearing fruit), the farmers versus processed fruit, growth in South-South trade, receive livelihood support from the project, which is and the increased power of supermarkets. There is rising equivalent to the amount of maize they could grow on demand for fruits and vegetables in global markets thanks to their land plots in a good agricultural year. After the third population growth, urbanization, and increased popularity of year, the farmers obtain proceeds from the sales of fruit. healthy diets. Although the highest value food markets are still in Western Europe and North America, the demand is 44 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT growing faster in emerging markets and South-South trade Opportunities is increasing. There is also a trend toward consolidation of grocery retail outlets. Supermarkets are expanding fast in Lesotho can build on its proximity to South Africa, developing countries at the expense of wet markets, while its global competitiveness in selected horticultural in developed countries there is growing concentration of products, and the expanding presence of South African supermarket chains, which increases buyers’ bargaining supermarkets in the region, to develop its own industry. power. These trends increase the importance of adhering South Africa boasts a growing domestic market for fruits and to standards and often change the economies of scale vegetables. Its domestic private consumption expenditure needed to join the list of retailers’ suppliers. Furthermore, on fruits and vegetables has more than doubled over the globally fresh and perishable products have higher value past decade and the outlook is positive (Department of than processed food and allow for a higher margin for the Agriculture 2017). South Africa is also among the leading producer (see annex G for more information). For example, in global exporters of fruit. Furthermore, its supermarkets are the United States, the cost of fresh blackberries is 70 percent leading the expansion of modern retail across Sub-Saharan higher than the price of frozen blackberries. In South Africa, Africa (box 3.5). It also has world class technical expertise, the income of 90 percent of the pome fruit industry and 73 established relationships with international buyers, and percent of the stone fruit industry is generated from fresh market intelligence on which Lesotho can build. sales (HORTGRO 2017). Box 3.5. South Africa Leads Sub-Saharan Africa’s Fruit Exports and Food Retail Expansion South Africa is among the leading global exporters of fruit. South African exports of fruit have nearly doubled since 2007 and reached almost $3 billion in 2016. Exports of apples, pears, and stone fruit, which are suitable for cultivation in Lesotho’s climate, increased by 75 percent over the same time frame and constituted about $669 million in 2016. South Africa is the third largest exporter of citrus fruit in the world (UNCOMTRADE). It ranks 13th and 9th, respectively, in international competitiveness rankings for apples and pears (HORTGRO 2017). The country exports fruit to a variety of destinations, including Western Europe, Asia, the Middle East, and Sub-Saharan Africa. South African supermarkets have increased their market share domestically at the expense of traditional grocery outlets and are leading the expansion of modern retail across Sub-Saharan Africa. The share of produce traded at the traditional wholesale markets in South Africa has declined steadily over the past 15 years (Louw 2017). Furthermore, South African supermarkets are leading the expansion of modern retailing across Sub-Saharan Africa. For example, Shoprite and Pick n Pay have stores in 15 and eight African countries, respectively. They often supply their stores across the continent via the distribution centers in South Africa, which creates opportunities for smaller players, like Lesotho, to partner with South African chains for joint exports to the region and across the globe. However, selling to supermarkets often requires adherence to standards and larger, predictable volumes compared with informal trade. Lesotho can partner with South Africa’s research, As a first step, Lesotho should aim to attract South Africa’s marketing, and food safety institutions to develop local investors into its fruit industry. Lesotho’s access to water capacity in commercial horticulture. A range of support resources can make it an attractive investment destination. agencies and advanced logistics underpin South Africa’s Most of South Africa’s fruit production is concentrated success in the horticulture industry. Potential partnerships in the Western Cape province, which has suffered from with the horticulture research institutions in the Western Cape recurrent droughts over the past decade. Although Lesotho (such as Stellenbosch University) can support knowledge has experienced erratic rain patterns as well, it has access transfer and joint research on the varieties that are best to sufficient water resources for agricultural use, industrial adapted to Lesotho’s climate. The South African Perishable production, and water exports to the neighboring countries, Product Control and Export Board has been instrumental in and water availability is projected to be resilient to most maintaining South Africa’s reputation as a high-quality fruit climate change scenarios (World Bank 2016b). The main issue exporter by testing produce to ensure quality control and is water management, which can be improved through the adherence to standards. Once Lesotho reaches a sufficient ongoing construction of dams and development of irrigation scale of production, a partnership with the South African infrastructure. There is also evidence that South African Perishable Product Control and Export Board could help fruit companies want to expand and diversify production ensure compliance with international food safety standards. destinations; for example, they have recently invested in South Africa also boasts a vibrant consulting industry that Namibian grape farms to increase export volumes. can support Basotho farmers on the technical aspects of farm As fruit production volumes increase, Lesotho could operations as well as share market intelligence. capture a share of the South African market for early Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 45 variety fruit. Lesotho’s fruit is available a few weeks earlier revenue. This is especially true for fruit with a short shelf life, compared with the Western Cape (South Africa’s center for such as apricots, plums, and cherries, and is less pronounced the fruit industry) and can command price premiums. Figure for apples, which can be preserved for 5-11 months 3.5 illustrates that early and late fruit sales generate higher (depending on variety) in modern cold storage facilities. Figure 3.5a. Local Market Sales of Apricots in South Africa, 2015/16 VOLUME R/TON 800 R 35 000 700 R 30 000 600 R 25 000 R/TON 500 R 20 000 TONS 400 R 15 000 300 R 10 000 200 100 R 5000 0 R0 OCT NOV DEC JAN FEB Figure 3.5b Local Market Sales of Plums in South Africa, 2015/16 VOLUME R/TON 6 000 R 45 000 R 40 000 5 000 R 35 000 4 000 R 30 000 R/TON R 25 000 TONS 3 000 R 20 000 2 000 R 15 000 R 10 000 1 000 E 5 000 0 R0 OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEPT Source: HORTGRO 2017, based on data from the Department of Agriculture, Forestry and Fisheries. Productivity-enhancing interventions can also help donor-supported initiatives have shown that commercial increase the production of vegetables in Lesotho. vegetable and fruit farming offers a viable alternative to Vegetable farming will likely be aimed primarily at import cereal cultivation. Yet, the horticulture industry remains in substitution. Global demand for fresh vegetables is different the startup stage due to skill constraints, poorly functioning from that for fruit, as greenhouse cultivation is possible year- land markets, lack of linkages within the supply chain, and round in many countries. This may explain why, despite its weak access to finance. There are few large, well-managed favorable climate, South Africa is not a prominent player horticulture farms that can serve as role models and mentors on the global vegetable market, with $199 million worth of for smallholders. exports in 2016 (UNCOMTRADE). South Africa’s vegetable Building a competitive horticulture industry in Lesotho exports are comprised primarily of products with a long shelf will require (1) incentivizing the establishment of new, large life, such as potatoes, onions, and legumes, which are mostly commercial farms, and (2) upgrading existing smallholders. destined for regional markets in Sub-Saharan Africa. Land titling and improving access to serviced land are the key measures for encouraging foreign and large-scale 5. The Way Forward domestic investment in commercial farming. Incentivizing private investment in aggregators and supporting The government can play an important role in unleashing productive alliances are the most important measures to the potential of the horticulture industry and improving support smallholders. It will also be necessary to strengthen access to markets. Commercial horticulture could have the availability of specialized skills to provide better technical a transformative impact on Lesotho’s rural economy. Pilot support to smallholders and develop crop varieties that are adapted to Lesotho’s high-altitude conditions. 46 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT The Government of Lesotho may also consider improve access to finance. In the short term, it will be undertaking targeted foreign investor attraction, important to identify several parcels of land that can be particularly for fruit farming, which is relatively capital made immediately available to investors. In the medium and knowledge intensive. The government could reach term, it will be necessary to promote land titling, conduct a out to farmer associations and fruit companies in South land assessment, and create a database of land parcels that Africa as well as participate in specialized trade shows. Once are suitable for horticultural production. LNDC could then an inventory of available land is established, the identified take a proactive approach in marketing agricultural land to land parcels can be marketed on government websites and domestic and foreign investors. in promotional publications. Promotional materials could Aerial photography and satellite imagery can be used also emphasize Lesotho’s labor cost advantages, low tax rate to provide land titles to farmers in a relatively fast and for agricultural activities, and preferential market access to cost-effective manner. This will improve the functioning of multiple countries. land markets and facilitate farmers’ access to credit. Modern Priority measures to support the industry include the advances in technology combined with participatory following: approaches enable a relatively fast and inexpensive systematic registration of individual land rights. For example, 1) Improve the Functioning of Land Markets and Rwanda used aerial orthophoto maps (maps established Access to Serviced Agricultural Land—Key by taking photos from an aircraft or flying objects such a Measures to Encourage Large-Scale Investments in drones) to complete land titling in less than five years, while the Sector traditional approaches can take decades (box 3.6). Lesotho Addressing land issues is a key priority to enable the can start this process with the areas that were recognized as development of commercial horticulture. It will also suitable for crop farming, about 13 percent of the country’s enable farmers to use their land as collateral and territory. Box 3.6. Registration of Individual Land Rights in Rwanda Rwanda, one of the most densely populated countries in Africa, has made significant progress in documenting land titles over the past decade. It used “a general boundary approach” to demarcate and issue leases for 10.3 million parcels of land over a five- year period. The approach was based on a systematic parcel-by-parcel and cell-by-cella participatory activity undertaken in close cooperation with local land committees. It used simple methods of boundary demarcation, designated by locally trained para- surveyors based on aerial orthophotos (such photos use uniform scale and depict accurate distances) and satellite imagery. The estimated average cost per land parcel for the five-year program was about US$10, with estimated annual recurrent costs for updating of US$0.82 and US$0.90 per urban and rural parcels, respectively. a. A cell is the smallest administrative unit in Rwanda. Source: Byamugisha 2013. The government may consider undertaking a land Future investments in road and irrigation infrastructure assessment, starting with the areas deemed suitable should prioritize the areas suitable for horticulture for horticultural production, to identify land that can development. A recent climate change assessment for be made available to investors. For example, the crop Lesotho estimates that providing irrigation on 12,000 hectares suitability map identified about 5,500 square kilometers of could increase agricultural production by an average of 50 land with a favorable climate for deciduous fruit cultivation. percent across the different climate change scenarios (World Similar suitability maps are available for other crops, such Bank 2016b). It will be important to (1) map out potential as tomatoes, peppers, and potatoes. However, not all the areas for irrigation (taking into consideration the suitability mapped areas have access to a water source; furthermore, maps for horticultural crops), which should inform future some land is occupied by public buildings (such as schools investments; and (2) identify suitable arrangements for fee and hospitals), cemeteries, private houses, and other collection and management of local irrigation schemes infrastructure. Satellite imagery combined with visits to (such as through irrigation service companies, water user communities could be used to map the land available for associations, or district utilities). The work on the Irrigation production. In the medium term, the government should Master Plan foreseen under the Smallholder Agriculture consider comprehensive surveying and registering of all Development Project (supported by the World Bank) could land. In particular, it will be useful to create an inventory of help in preparing the irrigation development framework. communal land and land held by government agencies as Similarly, it will be necessary to prioritize the construction of well as state-owned enterprises. This exercise could help rural roads in areas suitable for fruit and vegetable cultivation. identify and delineate surplus land for investors. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 47 2) Foster Market Linkages and Improve Skills to plan for operating such a center and providing some seed Support Smallholders funding to the winning proposal. The competition could be for operating the government-constructed Market Center Development of a competitive horticulture industry in Ha Tikoe Industrial Estate or for a smaller center outside in Lesotho requires upgrading the capabilities of Maseru. smallholder farmers, who constitute the majority of producers. Government interventions could focus on (1) Use Information Technology to Provide Basic Extension encouraging the establishment of productive alliances and Advice and Market Information private investment in aggregators/market centers, (2) making better use of information technologies to provide technical Given the low level of Internet penetration in rural assistance and connect farmers to markets, and (3) investing areas, SMS-based services can be used to provide basic in specialized skills. The government can consider supporting extension advice as well as price information. Gradually, the activities implemented by farmers’ associations, some this system can be developed into a simple trading platform, of which are already providing valuable services to their where potential buyers could post their interest in buying members, which include training, bulk procurement of certain products, including price offers, and farmers would inputs, and joint marketing of produce (see box 3.3 on be able to respond. Mobile-based advisory and marketing the activities of the Potato Lesotho Association). Given the services have been used successfully in many African countries higher revenue-generating opportunities of fresh relative to increase yields and strengthen linkages within the supply to processed produce, efforts should be made to educate chain. The Government of Lesotho may consider partnering farmers about optimum harvest times and the market’s with one of the existing providers to bring such services to requirements for product appearance and freshness. Lesotho. For example, Esoko, a Ghanaian firm, has a well- established model for providing two-way communication Encourage the Establishment of Productive Alliances and between farmers and other stakeholders, including buyers, Aggregators input suppliers, and governments. It offers extension support, weather forecasts, and marketplace matching to farmers in The Government of Lesotho may consider using a 10 African countries, including Zimbabwe and South Africa.12 productive alliance approach to address the constraints faced by smallholder farmers in a holistic way. A Invest in Specialized Skills productive alliance involves three core agents: a group of smallholder producers (usually a cooperative or an Strengthening skills in modern horticulture practices association), one or more buyers (for example, supermarkets, is important to improve the quality of advice offered hotels, and agro-processors), and the public sector. These to farmers. The government may consider sponsoring agents are connected through a business plan that identifies the studies of several masters- and PhD-level students in the capital and services needed by producers to meet the horticulture at one of the Universities in Western Cape. These buyers’ requirements. Implementation of the productive students could undertake part of their fieldwork in Lesotho alliance’s projects is typically supported through (1) under the guidance of South African professors. Furthermore, productive investments (for example, in machinery, seeds, targeted, short-term courses for extension workers combined and so forth), (2) technical assistance, and (3) business with visits to well-performing South African farms would help development. The beneficiaries receive matching grants to improve the quality of advisory services for farmers. Modules implement the projects (World Bank 2016). This approach on fertigation (fertilization and irrigation), post-harvest has been successfully tested in more than 20 World Bank handling, and pest management would be particularly projects in Latin America and introduced in Sub-Saharan useful. Lesotho is about to join the regional Agricultural Africa and East Asia. Evidence from evaluations has shown Productivity Program for Southern Africa, supported by the that the productive alliance approach has led to increases World Bank, which can help strengthen the capacity of the in production volumes and productivity and integration of district resource centers to provide practical training on smallholders into markets. Increases in sales have ranged modern farm practices and upgrade Lesotho’s laboratories between 20 and 60 percent, and the average net income of and capabilities for horticultural research. beneficiary producers has been around 30 percent higher compared with control groups (World Bank 2016). It will be important to encourage the establishment of aggregators to add value through packaging, reduce post-harvest losses, and improve access to markets. These facilities should be located close to the production 12 World Bank Innovation Policy Platform Inclusive Innovations Profile: centers and run by the private sector. The government may Case Study: Esoko, https://www.innovationpolicyplatform.org/system/ consider organizing a competition for the best business files/9-Multi-Stakeholder%20Platform__Agri_Profile%20Esoko.pdf. 48 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Chapter IV. ICT as an Enabler for Private Sector Development 1. Context businesses, and (3) digital skills and entrepreneurship. In doing so, it relies on several data sources: a review of Information and communication technologies (ICTs) regulatory and legislative acts; a series of focus group are transforming traditional production and service discussions with startups, SMEs, business associations, and delivery models around the world and form one of IT companies; and meetings with telecoms, Internet service the foundations of private sector competitiveness. providers (ISPs), government officials, donors, and academia. Digital technologies are facilitating the inclusion of new The data presented in this chapter are valid as of March 2018. and young firms in the global economy, notably through Lesotho has followed a sound model for ICT sector e-commerce and social media platforms. They are changing development, with the basic recipe of private sector traditional production structures, facilitating the emergence participation and independent sector regulation of new business models, and enhancing the efficiency of in place from an early stage. Lesotho was among the production. African firms that are using the Internet have on earliest of the countries in SADC to reform its ICT market average 3.7 times higher labor productivity than non-users in the 1990s, adopting technologically neutral licenses and 35 percent higher total factor productivity compared able to offer converged services. The sector is regulated with firms that do not use the Internet (World Bank 2016d). by the independent Lesotho Communications Authority Furthermore, ICTs can reduce firms’ costs of administrative (LCA). Telecommunications infrastructure has developed and regulatory compliance and enhance the delivery of considerably, with three international gateways offering public services through e-government applications. access through South Africa to the Eastern Africa Submarine This chapter describes the challenges and opportunities Cable System (EASSy), Seacom, and West Africa Cable System for the greater use of ICT to enhance private sector submarine cables. The national backbone and backhaul competitiveness in Lesotho. Specifically, it focuses networks are relatively well extended across the country by on (1) regulation of the ICT market, (2) development of the two national network operators, Vodacom and Econet. e-government to reduce the administrative burden on Furthermore, Lesotho’s Universal Service Fund (USF) is one Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 49 of the best performing in Africa and has been credited with local drivers to patients traveling to clinics; a digital app to improving access to mobile communications services in improve school management; a web-based app to support remote locations. clinics in the stock management of drug supplies; and the use of drones to provide photo-mapping services for different Lesotho has also made the first steps to develop purposes, from monitoring of construction works, to disaster e-government. With support from the African Development management programs.13 All these products and services are Bank, the Ministry of Communications, Science and currently being marketed in the country and can potentially Technology (MoCST) has set up the Lesotho Government compete in international markets. Data Network, connecting most ministry offices in Maseru and some of the government offices in other districts. Two Despite these positive developments, Lesotho is not data centers are available, and an additional data center is yet fully benefitting from the digital dividends. Weak being built approximately 120 kilometers from the capital competition in the ICT market is at the core of the problem city. The design of a digital government portal is under way and contributes to high costs of communication services and and could potentially be piloted in 2018. low Internet use by businesses and consumers. Furthermore, few public services are available online and the weak digital A small, local ICT industry has emerged, and several skills of the population constrain the development of the inspiring IT applications have been developed recently digital economy. Lesotho ranks relatively low on the World by Basotho entrepreneurs. A few examples include an Bank’s Digital Adoption Index (figure 4.1) online business training platform, featuring a virtual chat with international mentors; an Uber-like platform linking 13 Based on the interviews with IT startups and companies. Figure 4.1. World Bank Digital Adoption Index Scale: 0-1 0.70 0.60 0.50 Score (0-1) 0.40 0.30 0.20 0.10 0.00 South Botswana Lesotho Namibia Swaziland Africa Digital Adoption Index 0.39 0.28 0.37 0.54 0.27 Business Indicator 0.30 0.16 0.25 0.42 0.16 People Indicator 0.42 0.33 0.53 0.54 0.40 Government Indicator 0.46 0.35 0.34 0.64 0.24 Source: World Bank 2018. Note: The World Bank’s Digital Adoption Index is a composite index of ICT sector performance that was introduced in the 2016 World Development Report and updated in 2018. It is comprised of three sub-components showing the relative adoption by businesses, people, and government. Each sub-component consists of separate indicators. For more information, see: http://pubdocs.worldbank.org/en/587221475074960682/ WDR16-BP-DAI-methodology.pdf. 50 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Lesotho’s private sector makes limited use of digital Management software. This is also true for entrepreneurs technologies. Data from the World Bank Enterprise Surveys in the two industries— apparel and horticulture—covered show that only 15 percent of formal manufacturing and in the previous chapters of the report. Although export- services firms in Lesotho have a website compared with 31 oriented apparel firms make active use of the Internet and percent of firms in Sub-Saharan Africa. Furthermore, only specialized software, only 10 percent of domestic apparel 45 percent of formal firms use e-mail to interact with clients firms use e-mail (Enterprise Survey 2016). In rural areas, most and suppliers compared with an average of 60 percent of farmers do not use the Internet at all. Yet, digital technologies firms in Sub-Saharan Africa (World Bank 2016a). Few of the are revolutionizing both sectors globally and offer significant domestic SMEs use specialized software applications such as opportunities for productivity improvements (box 4.1). the Enterprise Resource Planning and Customer Relationship Box 4.1. Digital Technologies Can Significantly Improve Productivity in Apparel and Agriculture Digitization significantly affects apparel sourcing and manufacturing processes. Advanced analytics can help in making accurate decisions on batch size, volume flow, and replenishment sourcing based on real-time data from the demand and supply sides (McKinsey & Company 2017a). Companies can use the data to analyze thousands of variables affecting demand, including weather, trends from social media, and sensor data for accurate demand estimates, which can reduce excess stock and markdowns and increase profitability. If digitization is undertaken in collaboration with suppliers (including through system integration), it can enable automatic ordering and re-ordering (McKinsey & Company 2017a). Digitization can also improve the efficiency of apparel manufacturing. Firms that implemented 3D design and virtual sampling report reductions of two weeks or more in the sampling process and over 50 percent reduction in the number of samples needed. Digital printing combined with automated cutting can significantly reduce production time and waste. It also increases flexibility by allowing multiple small batches to run. Over 60 percent of respondents to the McKinsey survey on apparel sourcing felt that automation in manufacturing will become a major driver of sourcing decisions instead of labor cost by 2025. However, the respondents did not think that automation would displace sourcing from low-cost countries. The executives believed that high-end and time-sensitive products would be produced in developed countries, while longer lead time commodity items would be manufactured in countries with low labor cost where technology would support rather than replace workers. Agriculture is also becoming increasingly high-tech. Technology is used to provide farmers with real-time information on prices and connect them with traders, test soil quality, and provide weather forecasts. Many governments have incorporated digital technologies (for example, phone calls, texts, videos, and Internet) in the provision of extension services to reduce transaction costs and increase the frequency of interaction with farmers. in Kenya, smallholder farmers accessing agricultural advice through SMS increased their yields by 11.5 percent (Casaburi et al. 2014). Moovr, an “Uber for cows,” helps shepherds in Kenya get their livestock from rural areas to markets where they can negotiate better prices; registered drivers in the region are connected to farmers when there is a match, and all payments are processed through mobile money systems with dual confirmation for safe payment (Spaethe 2017). Sources: McKinsey and Company 2017; Casaburi et al. 2014. Few Basotho firms engage in e-commerce. E-commerce Box 4.2. Trading on eBay Helps Young South African has helped young firms in many countries overcome scale and Firms Reach New Markets distance constraints (see box 4.2 on South Africa); however, it South African firms that trade on eBay reach an average has not yet had a noticeable impact in Lesotho. Participants of 30 different markets, while traditional exporters reach of the focus group discussions organized as part of the work only five. Newcomers to this online platform (firms with no on this report showed a clear bias toward the local market; sales in the previous year) account for 27 percent of sales; few have realized the potential of e-commerce to attract the respective figure for traditional firms is 2 percent (eBay international customers. Focus group participants identified 2013). Data from eBay also show that the concentration of two main constraints to the development of e-commerce: (1) sales among the top 5 percent of South African sellers is weak demand and low Internet use by domestic customers, 33 percent compared to 90 percent for traditional firms, and (2) lack of legislation on e-commerce guaranteeing indicating that online marketplaces also level the playing consumer protection. Similar constraints were identified in field and allow for more competition (eBay 2013). a recent study on e-commerce in the tourism industry in Lesotho (Mapeshoane and Pather 2016). Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 51 Mobile money services are available and widely used, high compared with the best performing markets in Africa but other e-payment systems are not well developed. (Gillwald, Deen-Swarray, and Mothobi 2017). However, the Vodacom and Econet offer mobile money services (MPesa broadband market is significantly less developed. The fixed and EcoCash, respectively). However, the two systems are broadband penetration rate in Lesotho falls well below the not fully interoperable: while an Econet customer can send African average and is one of the lowest in Southern Africa EcoCash to a Vodacom client, a Vodacom client cannot (figure 4.4). Internet prices are significantly higher than the currently send MPesa to an Econet user. Although the usage regional average (figure 4.5). According to BDRC Continental, of mobile money is increasing in Lesotho, the country has not a 2 Mbit/s fixed broadband connection in Lesotho in yet seen the “snowball effect” observed for mobile money in December 2017 would have cost more than US$100 per many African countries. Other e-payment systems, such as month, which is almost twice that in South Africa. Prices online payments and online banking, are not widely used in are inversely proportionate to access: only one in four Lesotho. Basotho uses the Internet (figure 4.6). The negative impact of unaffordable prices on Internet usage could worsen in 2. Challenges to Greater Digital the future, if the increase in taxes planned for 2018 (VAT to increase from 5 to 9 percent; LCA levy to increase from 3.5 Adoption to 4 percent; and USF levy to increase from 1 to 1.5 percent) Several factors limit broader digital adoption in Lesotho. were to be pushed to consumers. The high cost of communication services, linked to the Figure 4.2. Mobile unique subscribers, 2017 weak competition in the market, is the main constraint. (% of population) Average fixed broadband prices in Lesotho are about 30 percent higher than the average in Sub-Saharan Africa,14 80 which restricts the use of ICT services by businesses and 70 consumers. Poor connectivity is another problem. The recent 60 ICT survey identifies high costs and slow speeds as the two 50 main factors limiting Internet use among individuals with access to the Internet (Gillwald, Deen-Swarray, and Mothobi 40 2017). These two factors were also identified as the key 30 constraints for greater ICT use by participants of focus group 20 discussions; similarly, some of the interviewed apparel firms 10 indicated that the quality of Internet connection was not 0 sufficient to have webinars and videoconferences with their a ia a o a nd ric an th ric ib headquarters and regional offices. In addition, low ownership Af ila m so w Af ts Na az h Le of smartphones and computers and inadequate access to ut Bo Sw So electricity also contribute to low ICT use, particularly in rural areas. Furthermore, the lack of a legislative framework for Source: GSMA Intelligence. secure electronic transactions and weak availability of public services online restrict the development of e-commerce and Figure 4.3. Evolution of the mobile communications efficient delivery of government services. Lastly, low digital market in Lesotho, 2013–17 literacy, particularly in rural areas, as well as the small size of the local IT industry also limit development of the digital economy. June 2017 1) Weak Competition in the ICT Market and High Costs of Communication Services 2G 3G 4G Although the mobile penetration in Lesotho is high by regional standards, fixed broadband penetration Dec 2013 is among the lowest in the region. Lesotho fares well on mobile penetration rates compared with other countries in Sub-Saharan Africa (figure 4.2). The market is approaching 0 500,000 1,000,000 1,500,000 2,000,000 saturation and progressively upgrading from 2G to 3G and (since 2013) to 4G (figure 4.3). Voice prices in Lesotho Source: Adapted from TeleGeography data. are in line with the regional average, but remain relatively 14 BDRC Continental. 52 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Figure 4.4. Fixed broadband penetration, 2017 Figure 4.6. Individuals using the Internet, 2016 (% households) (% of population) 80 16% 70 14% 60 12% 50 10% 40 8% 30 6% 20 4% 10 2% 0 0% ca a o a nd ia ric ia a o an a a th nd ri ib an ric ric th ib ila Af Af so w m ila so m w Af Af az ts Le Na an h ts Na az Le Bo Sw ut h Bo r ut Sw ha So So Sa b- Su Source: TeleGeography. Source: World Development Indicators. Figure 4.5. Average cost of fixed broadband (US$ per month) South Africa 58 Swaziland 73 Botswana 80 Sub-saharan Africa 87 Lesotho 114 Namibia 458 Italy 29 United Kingdom 41 United States 66 0 100 200 300 400 500 Source: BDRC Continental. Note: Based on an average bill for a US$2 Mbit/s connection without bitcaps (i.e. limits on monthly data usage) as of December 2017 The lack of competition among service providers is one (Telegeography 2017). LEC Communications (LECC) has not of the key factors that contributes to high prices and low yet had a noticeable impact on the market. There are two access to the Internet. There is a duopoly in the ICT market ISPs, ComNet and Leo, but their market share is negligible. in which the two main players, Vodacom and Econet, have Relatively high interconnection rates and government effectively divided up the addressable market between them. levies also contribute to the high costs of communication Weak competition is reflected in low product innovation and services. The high interconnection rates put a floor on the lack of standardized low-cost, high-value bundled services, prices that operators can offer to consumers and sustain which are available in other countries in Africa (Gillwald, the position of the dominant operator. In the data market Deen-Swarray, and Mothobi 2017). Although there is little too, interconnection is a constraint with very little margin direct evidence of collusion, there does not seem to be much between retail and wholesale rates for bandwidth. Lesotho effort around price cutting. The government has encouraged is dependent on high wholesale rates in South Africa, the emergence of a third player, a communications subsidiary over which it has no control. This constrains the scope for of the Lesotho Electricity Company (LEC), which holds a market entry by new ISPs. Lastly, the burden of levies on the Network Infrastructure Facilities License and owns a fiber ICT sector is high and some of it is passed to consumers. optic network that can be leased to other service providers Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 53 Operators are required to pay a 3.5 percent annual royalty to Government agencies have little online presence. LCA (scheduled to increase to 4 percent) and a 1 percent levy Lesotho ranks 154th of 193 countries on the United Nations for the Universal Service Fund scheduled to increase to 1.5 E-Government Development Index, and scores lowest among percent (the current legislation allows the levy to increase to the countries in Southern Africa (table 4.1). According to the 2 percent). Best practice in Africa would be around 1 percent UN methodology, the main weaknesses are to be found in the for each of these levies. low and underdeveloped provision of online public services, and in the little use of online platforms to improve citizens’ The government owns shares in several companies access to information and participation in public decision offering telecommunications services, which may result making. Government agencies have little online presence: of in a conflict of interest. Following the privatization of 25 ministries, 11 (including the Ministry of Communications, Lesotho Telecom, the government still retains 30 percent of Science and Technology) do not have websites.15 Even if Econet. It also owns 100 percent of LECC as well as a stake websites are available, they are not updated regularly and in the EASSy cable through the West Indian Ocean Cable often provide limited information. Company (WIOCC). WIOCC is a special purpose vehicle, part- owned by the International Finance Corporation, created Table 4.1. UN e-government ranking, Southern Africa to enable parties that lacked the capital to participate in countries the EASSy to have a stake; the company also serves as an Country E-Government Rank (of 193 countries) administrative arm for operating the EASSy cable (Gillwald, South Africa 76 Deen-Swarray, and Mothobi 2017). WIOCC has only partially achieved the goals of improving access to high-speed, low- Botswana 113 cost bandwidth. It reportedly has a high rate of network Namibia 125 failure in Lesotho, linked to the lack of domestic presence Swaziland 136 in managing the cable. As a result, the use of the cable by Lesotho 154 market players is limited. That LCA holds a stake in WIOCC creates a perceived conflict of interest, with LCA acting as a Source: UN Division of Public Administration and Development market player and a regulator. Although the management Management. of the network is carried out externally by WIOCC, the The lack of a legal framework providing the security perception that LCA can obtain information on the activities of online transactions hampers efficient delivery of of its competitors undermines its role as the neutral regulator online public services and commercial transactions. The (Gillwald, Deen-Swarray, and Mothobi 2017). adoption of key legislation, such as the Cybersecurity Law 2) Slow Progress in the Development of Digital and the Law on E-commerce, has been delayed. Although Government and Lack of a Legal Framework for the 2011 Lesotho Data Protection Act generally provides Secure Electronic Transactions strong data protection based on international standards, the lack of complete independence for the Data Protection Few of the government-to-business services are available Commission undermines the policy environment (Hubbard online, although there have been some improvements in 2017). Furthermore, there is no digital government strategy recent years. The One-Stop Business Facilitation Center was and action plan to guide the policy-making efforts of MoCST opened in 2014 and provides electronic business registration and other ministries. According to MoCST officials, the services to companies, but not to sole proprietors and institution would benefit from training on ICT policy making, partnerships. Currently 90 percent of the total registration is cybersecurity, and training of trainers to support other done online. The One-Stop Business Facilitation Center hosts ministries and government institutions. its system onsite and in the vendor’s cloud service, which is a security best practice. E-payment of the center’s fees has The development of online public services is severely been available since September 2017. At the municipal level, constrained by poor interoperability between Maseru City Council has created an electronic system for government platforms. Most government systems are not issuing construction permits. Maseru City Council certified linked to the digital ID. There is no interoperability between construction practitioners can submit the permit application the information systems of different government platforms. online and pay and upload all required documents and Furthermore, although the digital ID system was developed plans; document verification is also done online by Maseru and covers about 70 percent of the adult population, most City Council officers. The service is well regarded by the government systems are not linked with the Civil Registry. practitioner community and Maseru City officials. While these There are a few positive examples of interoperability between are positive developments, the overall progress in digitization the Civil Registry and ResourceLink (the public sector of government-to-business transactions is slow and few 15 Lesotho Government Web Portal, http://www.gov.ls/gov_webportal/ other public services are available for businesses online. arms%20of%20state/government%20ministries/government_ ministries.html , accessed May 3, 2018. 54 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT human resources and payroll system), the Lesotho Credit sector to leverage the success of Lesotho’s identification Bureau, and the South Africa Civil Registry, as well as a pilot system to provide services to citizens. Box 4.3 explains how collaboration with the insurance companies. Nevertheless, the introduction of a digital ID system in India facilitated the most government agencies are not linked with the digital ID development of e-payment systems. platform. This limits the ability of the government and private Box 4.3. India Tech Stack: From Digital IDs to the Digital Payment Revolution In 2010, India set out an ambitious program to provide every one of its billion plus residents with a unique identification number. The objective was to ensure that every resident had a permanent, unique, and secure digital identity. Eight years later, “Aadhaar” (or “Foundation” in Hindi) achieved much more than that, setting the basis for a wide range of efficient, cutting-edge public services to citizens and firms, and leading to a FinTech revolution for the country. The availability of digital IDs and biometric information opened many opportunities through the addition of an open technology platform, “India Stack.” Based on the open Application Programming Interface sitting atop the biometric-enabled Aadhaar system, India Stack provides a way to build an entire digital world around a uniquely identifiable individual. One of the applications built on Aadhaar is the Unified Payments Interface. The system, developed in 2016, has counted more transactions in 18 months (145 million) than credit cards in 18 years, and it is one of the most inexpensive payment systems in the world, making it the first real competitor to cash in developing countries. The combination of government-funded technology and information (specifically, the unique ID), open Application Programming Interfaces, increased smartphone penetration, and unified payment system is bringing tremendous benefits to government and businesses. Thanks to Aadhaar, an Indian farmer no longer needs to stand in line for his or her monthly farming subsidy. Instead, the government can electronically authenticate his or her identity and directly transfer the subsidy over the Unified Payments Interface to the farmer’s Aadhaar-linked bank account (Desai and Jasuja 2016). While India’s Aadhaar system is rightly lauded for its rapid rollout and inclusiveness, it has also proved to be vulnerable to data leaks, with third parties being able to acquire personal data at minimal cost. This has led to an effort to strengthen data protection regulations.1 Beyond the government, India Stack presents opportunities for the private sector. By reducing the costs of customer acquisition and ongoing maintenance, it enables new businesses to grow. Importantly, the benefits can be shared across the population: a public-private partnership in India is currently piloting a model to use information from Aadhar and the Unified Payments Interface to provide low-interest credit to small and vulnerable entrepreneurs (Jain 2018). 3) Lack of Digital Skills and Weak Opportunities for percent of the households without Internet access reported Digital Entrepreneurship not knowing how to use it, while 15 percent did not think they needed it (figure 4.7) (Gillwald, Deen-Swarray, and Low ICT skills among the general population constrain Mothobi 2017). Low smartphone and computer penetration, the development of the digital economy. The results of lack of formal ICT training at schools and inadequate access the recent ICT survey show that limited digital literacy is to electricity in rural areas may contribute to these results. among the key constraints to Internet use. Specifically, 35 Figure 4.7. Constraints to internet use for households without internet Don’t know how to use it 35 Cost of equipment is too high 21 Have access to the Internet elsewhere 17 Do not need the Internet 15 Not available in the area 7 Cost of service is too high 6 0. 10. 20. 30. 40. Percentage of Households Source: Gillwald, Deen-Swarray, and Mothobi 2017. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 55 Most Basotho do not have access to formal digital skills training is a constraint for the future employability of training unless they attend university. Connectivity workers and the competitiveness of Lesotho’s economy. and ICT equipment in schools have improved in recent Few university students major in ICT-related fields. Several years, yet only a minority of respondents to the recent ICT tertiary institutions, among them the National University of survey are accessing the Internet at educational institutions Lesotho (NUL), the Lesotho College of Education, Lerotholi compared with government buildings, community centers, Polytechnic, Limkokwing University, and Botho University, or Internet cafes (Gillwald, Deen-Swarray, and Mothobi 2017). offer specialized courses and degrees in ICT, although only at The USF administered by LCA has allocated 40 percent of the undergraduate level (table 4.2). Stakeholders’ perceptions its 2014–18 budget to broadband and ICT development about the quality of courses offered vary greatly, depending for the education sector, focusing on underserved areas. on the educational institution, with NUL degrees getting In 2016/17, USF supported the connection of 40 schools the best reviews from focus group participants. Although to the Internet, the provision of mobile labs in 10 schools, unemployment among ICT graduates tends to be low, few and teacher training (Gillwald, Deen-Swarray, and Mothobi students major in ICT-related fields: of approximately 1,800 2017). Nevertheless, the agency’s goal to connect all schools students enrolling in NUL each year, fewer than 40 choose to by 2020 is unlikely to be achieved. Given the relatively low pursue ICT-related careers. university enrollment rate, poor access to even basic digital Table 4.2. ICT courses at Lesotho’s tertiary institutions Length of Institution Courses offered Profile of graduates program National BSc Computer Science 4 years • Computer Networks Professionals University of • Analyst Programmers Bachelor of Engineering in Computer 4 years Lesotho Systems and Networks • Web Developers • ICT Trainers Bachelor of Science and Information 4 years • Database Systems Administrat ors Systems • ICT Security • ICT Managers • Library Technicians Lesotho College ICT for Primary School Teachers Diploma at Semester • ICT Teacher Trainers of Education 1st and 3rd year Courses • ICT Support Technicians Computer Awareness and Skills Diploma at Semester 1st and 3rd Year Course Computer Awareness and Skills Certificate Semester at 1st year Course Lerotholi Computer Systems Engineering Diploma at Year course • ICT Business and Systems Analysts Polytechnic 2nd and 3rd year • Software and Application Programmers • ICT Support • Telecommunications Technical Specialists Limkokwing Associate Degree in Business Information 3 years • Chief information Officers University Technology • ICT Sales Professionals of Creative Associate Degree in Multimedia and 3 years • ICT Support Technicians Technology Software Engineering • Systems Administrators Associate Degree in Information 3 years • Sales Assistants Technology • ICT Test Engineers BSc Honors in Information Technology 4 years • Multimedia specialists and Web Developers BSc Honors in Software Engineering with 4 Years • Network Professionals Multimedia • Telemarketers BSc Honors in Business Information 4 years • Gallery, Library and Museum Technicians Technology 56 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Table 4.2. ICT courses at Lesotho’s tertiary institutions Length of Institution Courses offered Profile of graduates program Botho University BSc Honors in Computing 4 years • Health Information Systems Managers – Lesotho • Telecommunications Trades Workers BSc Honors in Health Information 4 years • Media Equipment Operators Management • ICT Sales Professionals BSc Honors in Mobile Computing 4 years • ICT Business and Systems Analysts ICT graduates match employers’ expectations in countries shows that although IT jobs on average account terms of technical skill level, but local opportunities for just 1 percent of employment, they generate positive for professional development are limited. Ministries externalities through productivity improvements in sectors and government agencies, Vodacom Group, Econet, and that adopt new technologies or production processes (World Standard Lesotho Bank are the four major employers for Bank 2016d). Furthermore, given that IT jobs tend to be well- paid, they can generate additional jobs (including in low-skill ICT graduates (Mosola 2017). The interviewed employers, occupations such as in retail, cleaning, and food preparation) in the ICT and non-ICT sectors, reported that they did not through consumption and production spillovers. For face difficulties in filling ICT vacancies and were satisfied with example, in the United States and Turkey, one high tech job the technical skills of the hired graduates. This could reflect creates on average three to five additional jobs elsewhere in the relevance of university curricula for Lesotho’s job market the local economy (World Bank 2016d). needs and possibly that the local private sector does not Most IT firms in Lesotho view the government as their require advanced ICT qualifications. In neighboring South main client. Most of the interviewed firms sell their services Africa, employers struggle to find ICT professionals, and the primarily to the government, as the demand from the local availability and quality of ICT skills are considered a constraint private sector is low. Most firms have not thought about for the development of the private sector in general and the the potential to export their services internationally, for ICT industry in particular. Based on LinkedIn data, the top example to South Africa. The ones that have considered nine of 10 skills in highest demand in South Africa are in ICT- this opportunity are struggling to find partners and clients related fields (World Bank 2017g). Not surprisingly, many of abroad. Lesotho’s ICT graduates end up being absorbed by the South African labor market, which offers more competitive wages The constraints faced by IT entrepreneurs are similar and a more sophisticated and developed digital sector. to the ones reported by startups in other sectors. These include lack of access to capital, information barriers, poor The IT industry in Lesotho is small, which limits the business skills, and lack of support programs and mentors potential for productivity improvements in other for growth-oriented firms. Lesotho has not benefited from industries as well as for positive spillovers in the domestic the expansion of tech hubs across Africa (annex H) and there economy more broadly. Based on the Business Registry data, are no digital incubators in the country. ICT entrepreneurs there are only 10 firms (collectively employing 84 workers) also have low awareness about pan-African digital that provide computer programming, IT consultancy, and entrepreneurship support programs (box 4.4). related services (ISIC code 62). Evidence from developing Box 4.4. Examples of Regional Resources That Lesotho’s ICT Startups Could Tap Grants. There are several grant funding opportunities for digital entrepreneurs from across Africa that are awarded on an annual basis. These grants range in amount, but the advantage is that recipients do not have to give up equity and the prizes often come with additional benefits, such as promotion, mentorship, training, and so forth. Grants for which Lesotho-based entrepreneurs are eligible include the Innovation Prize for Africa (www.innovationpriozeforafrica.org), the Anzisha Prize (www.anzishaprize. org), and the GSMA Innovation Fund (www.gsma.com). Accelerator programs. Over the past few years, there has been an increase in accelerator programs open to digital entrepreneurs from across the continent. These include virtual programs as well as those with residencies in South Africa and other countries. Each program has its own specific set of requirements, but they often include significant support in the form of content, mentorship, training, and some funding. Examples of these would include the Injini Edtech Accelerator Program (www.injini. co.za); the Royal Academy Prize for Engineering (www.raeng.org.uk/grants-and-prizes); and Google’s Launchpad Africa program located in Lagos, Nigeria (www.developers.google.com/programs/launchpad/regional/); and XL Africa (https://www.xl-africa. com/). Online resources. Many of the larger international technology companies, such as Amazon Web Services, Google, and Microsoft, provide online resources for free or at a reduced rate for startups globally. In addition, there is also a wealth of free content and tools online for digital entrepreneurs, including Lean Iterator (www.leaniterator.com), assisting entrepreneurs to validate their business ideas; Strategyzer (www.strategyzer.com), which has free templates and tools; and Start-up Stash (www.startupstash), which provides a detailed directory of tools and resources for entrepreneurs. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 57 Few local support programs are available for digital Increase Competition among Service Providers startups, although several small-scale entrepreneurship The government should consider providing LECC support initiatives have emerged in recent years and with a full, unified services license, and bringing in a offer potential for further development. The Vodacom private sector strategic partner for LECC. LECC has been Innovation Park, based in Maseru, offers business training, successfully rolling out dark fiber and providing wholesale mentorship, and links to local financial investors to selected services to other network operators. Expanding LECC’s license entrepreneurs ages 18–35, including, but not limited to digital to a full unified license would enable it to provide capacity to entrepreneurs. The few beneficiaries (the program accepts the smaller service providers and strengthen competition in approximately six applicants per year) highlight the positive the market. LECC would benefit from a strategic partner— effects of the program, especially business training, increased preferably an international bandwidth provider—so that it access to information, reputational signaling to investors, and can compete more effectively with Vodacom and Econet, peer learning. Maseru HookUp Dinner organizes meetups which offer fully integrated services. The idea discussed in the and provides access to local mentors. NUL has secured unpublished Broadband Plan of transferring existing private some resources16 to set up an Innovation Fund to finance assets to a state-owned operator is not advisable, as this the development of digital and technological innovation would reduce the role of the private sector. If LECC cannot developed by NUL students to address firms’ business needs. compete effectively in the broadband market, an alternative However, implementation of the fund has been slow to start, would be for it simply to lease capacity on its electricity and as of February 2018, no project has been initiated under distribution network to other providers. this program. Regulation of wholesale data prices and moving to a sender-keeps-all arrangement for mobile 3. The Way Forward interconnection could also increase competition and reduce prices. Mobile market development is constrained by Strengthening competition in the ICT market is the most an asymmetrical market structure in which Vodacom controls important measure the government can implement to the major share of the market. LCA should consider moving increase the use of digital technologies by businesses toward a sender-keeps-all arrangement for interconnection and consumers. High costs and unreliable services linked (that is, zero fees for mobile call termination). This will to the duopoly in the ICT market were identified among the create opportunities for the entry of virtual mobile network key constraints to greater digital adoption. Other measures operators (VMNOs). A VMNO is a reseller of capacity from a the government may consider to support the development mobile operator. Usually, they target a particular segment of the digital economy include (1) using ICT more effectively of the market (for instance, young people or farmers) and to reduce the costs of regulatory compliance for businesses, therefore can introduce more innovation in the market. and (2) investing a higher share of USF’s resources into digital Ensuring open access to the application programming literacy programs as well as exploring the feasibility of public- interfaces for the mobile money operations of the main private partnerships to support digital entrepreneurship. operators would further promote the development of mobile 1) Unlock the ICT Market by Strengthening money, including through VMNOs. LCA should also consider Competition regulating wholesale data prices to ensure there is more of a margin between wholesale and retail rates, to allow more Improving the quality and affordability of Internet independent ISPs to enter the market. services is an important priority to help Lesotho’s businesses connect to markets and improve productivity. Another way to reduce costs would be to consider Lesotho’s mobile communications market is characterized introducing a specialized tower company, in consultation by an asymmetric duopoly in which neither player has an with the mobile network operators. This could be done, incentive for introducing price competition. Addressing this for instance, through the universal service fund or by problem will likely require the entrance of a third player and encouraging the mobile operators to divest some of their steps in this direction have been made. However, the third current towers in rural areas. A specialized tower company player would need to be independent of government to manages the antennae used by cellular operators or compete effectively with the existing service providers. Other broadcasters. Many mobile operators in Africa have followed steps toward promoting competition include a move away this route as a way to reduce costs and focus on their core from high rates for wholesale interconnection (though this is business. Specialized tower companies that are active in partly outside the control of Lesotho), greater infrastructure Africa include Helios, Eaton Towers, and American Tower sharing, and privatization of the government’s stake in Corporation. Having a specialized company charged with telecommunications companies (table 4.3). The government managing the antennae would allow the mobile operators can also consider rationalizing levies on the industry to to focus on service delivery and would reduce the level of reduce the costs of ICT services. duplication of infrastructure. The tower company could then market its services to other players in the market (for example, 16 M 1.5 million, according to the April 2017 Budget Speech. 58 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT broadcasters or companies that use only specific parts of the government may also consider reducing its stake in Econet, spectrum, such as for point-to-point microwave traffic, or for again to avoid a conflict of interest. WiFi or WiMAX17 use) in a competitively-neutral manner. Consider Rationalizing Levies and Taxes Reduce Government’s Stake in Telecommunications Companies The government may consider rationalizing some of the levies charged on the industry. For example, the current The government is considering privatizing LCA’s royalty of 3.5 percent charged by LCA is significantly higher shareholding in EASSy/WIOCC and a reduction of its stake than the fees charged by regulatory authorities in other in Econet. Selling the government’s WIOCC shares would developing countries. Best practice in Africa is around 1 end the current conflict of interest whereby the government percent and the regulatory levy should be used strictly for is perceived to be a regulator and a market player. If the shares cost recovery of expenditures incurred by the regulator. are sold to a private partner of LECC, an option that has been Because any surplus generated by the regulatory levy is under discussion, it could indeed potentially have several typically required to be passed on to the national treasury, benefits. This move would provide LECC with access to this creates an incentive for the regulator to inflate its costs. international bandwidth and strengthen its competitiveness LCA has offices in one of the best government buildings with regard to Vodacom and Econet. It would also address in Maseru, which suggests that cost inflation is happening the need for WIOCC to have local management, which could in Lesotho as in many other African countries. Therefore, improve the quality of service. However, an auction of the a better way would be to limit the regulatory levy to the assets may bring a better return to the government. The minimum needed to cover LCA’s costs. A reduction in the regulatory levy could be offset by the planned increase in the 17 WiMAX is a technology standard for wireless networking, for mobile and VAT from 5 to 9 percent, with the net fiscal impact expected fixed connections. to be neutral. Table 4.3: Summary of the key features of the ICT market and suggested enhancements Feature Status Policy reflections Fixed line Provided by Econet (formerly Lesotho Telecom), but Despite opening the market since 2007, no new telecoms in decline, from a peak of 63k lines in 2006 to just entrants have expressed interest in investing. One 28k now. Vodacom’s unified license (2016) allows it reason for this is because investment in mobile to offer fixed line telecoms, but it has not done so to infrastructure is considered more viable than in date. fixed lines, while competition from “over-the-top providers” (e.g. Skype, WhatsApp) is reducing investment in both. Mobile cellular Over 2m subscribers in 2016 with a high penetration While the market may benefit from a third operator, communications of SIM cards (over 100%). Duopolistic market it is hard to see how it would break into the existing structure with Vodacom controlling around 70% and duopoly. The market for virtual mobile network Econet 30%. operators (VMNO) has been open since 2013, but with no takers to date. Internet Service Two independent ISPs (ComNet and Leo) While prices for wholesale bandwidth remain Providers compete against the bigger mobile operators, unregulated, independent ISPs will struggle to with authorization both to build or buy network survive. The key to their viability would be a larger infrastructure. Both ISPs have only minor market margin between wholesale and retail prices. presence. Efforts by LCA to attract new market entrants have failed. Broadband Relatively weak market development of fixed LECC should be provided with a full-service internet broadband compared with neighboring countries. license to compete more effectively. However, in Econet is the main player, offering fiber and DSL the unpublished National Broadband Plan, the solutions. Vodacom offers a WIMAX solution. The government plans to consolidate the assets of government has encouraged the emergence of a the mobile operators with those of LECC into a third player – LECC (a communications subsidiary of single national backbone supplier. This reform the electricity utility) but it has only played a minor would most likely have a negative effect on market role to date. development. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 59 Table 4.3: Summary of the key features of the ICT market and suggested enhancements Feature Status Policy reflections Privatization Lesotho Telecom was privatized when its assets The Government should consider 1) the sale of the were incorporated into Econet in 2008. However, remaining stake in Econet to provide a level playing the government still owns 30% of Econet. The field; 2) bringing in a private strategic partner for Government also owns 100% of LECC and a stake in LECC and 3) privatizing the WIOCC stake. the EASSy cable via WIOCC. Regulation Lesotho has an independent sector regulator, Current plans foresee an increase in the regulatory the Lesotho Communications Authority (LCA), levy from 3.5 to 4%, but this seems unjustified, and established in 2000. It is relatively efficient but instead the aim should be to reduce the levy, and also expensive, with a levy of 3.5% of net sector to rely on sector taxes (e.g. VAT on phone calls). operating income. Interconnection Interconnection payments benefit the larger The market is sufficiently mature to move towards operator (Vodacom), which thus has an interest to sender keeps all, once the current glidepath expires. keep interconnection rates high. Mobile termination That would also benefit the entry of virtual mobile has been regulated since 2013, following a glidepath network operators. Wholesale bandwidth rates that is due to last until 2018. But rates remain high should also be regulated to allow for ISP viability. compared with neighboring countries. Legislation The main Act is the Communications Act No. 4, of While the main regulatory framework is sound, 2012. It introduced a system of unified licenses for several items of subsidiary legislation have been facilities-based operators. pending for several years, notably on cybersecurity and eCommerce. The line Ministry is the Ministry of Communications, Science and Technology Universal Service The Universal Service Fund, established in 2009, is The Universal Service Fund has proved to be viewed as one of the best in Africa, and has financed effective in fulfilling its primary mandate, but now construction of some 54 base stations to increase needs to be refocused on broadband coverage, mobile coverage to around 96%. It is financed by a with an expanded mandate to develop digital skills. 1% levy on operators, proposed to increase to 1.5%. Existing legislation allows the levy to rise to 2%. Sources: World Bank staff, based on TeleGeography 2017; Gillwald, different agencies and make the transactions more Deen-Swarray, and Mothobi 2017. reliable), and (2) adopt a single, mobile-based e-payment 2) Increase the Security of Electronic Transactions and system throughout the government. The private sector Develop E-Government Services would also benefit from the availability of the most frequently sought online services, such as certificates The government may consider strengthening the for export or tax filing. As the government’s capacity legislative framework to facilitate online transactions to operate online platforms improves, it will be useful as well as increasing the availability of public services to develop an e-procurement system, which would online. The latter would reduce administrative compliance significantly improve the efficiency and transparency costs for businesses and encourage the growth of the local of government purchasing. It will also be important IT industry. The government’s interventions could focus on: to adopt a digital government strategy, which should • Adopting legislative acts to increase the security of electronic define priorities for e-government development and transactions. It will be important to adopt the legislation delineate the roles, responsibilities, and timelines for and regulatory acts on cybersecurity and e-commerce. implementation. These laws will build public confidence in electronic 3) Allocate a Greater Share of the USF Fund for Digital transactions and provide for protection in case of data Literacy Programs and Explore the Feasibility of breach. The government may also consider establishing a Public-Private Partnerships to Support Digital national Cybersecurity Emergency Response Team within Entrepreneurship MoCST, to increase stakeholders’ confidence in electronic transactions. The successful use of digital technology to improve firm productivity and participate in the global economy • Increasing the availability of government information requires investment in the skills of the workforce. and services online. It will be important to (1) ensure Furthermore, workers who are capable of using digital interoperability between government systems and link technologies and complementing them with other skills them to digital ID (to allow for data exchange among 60 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT tend to have better employment opportunities and higher wages (World Bank 2016d). Investments in broad digital skills and specialized programming skills can improve labor market outcomes (particularly for the youth), reduce skilled migration to South Africa, and strengthen the competitiveness of the Lesotho economy. The government’s efforts to support the accumulation of digital skills and promote digital entrepreneurship could focus on: (1) improving general digital literacy, and (2) providing co-funding to an incubator in partnership with the donor community and the business sector. The government may consider allocating a greater share of USF resources for funding digital literacy programs. Findings from impact evaluations prove that access to ICT in early years is a powerful determinant of digital literacy in adult life. Thus, it will be advisable to use a larger share of USF’s resources for funding computers and Internet connectivity in educational institutions. The government may also consider partnering with the local corporate sector and international initiatives aimed at enhancing digital skills in Africa. Examples of the latter include the Intel-backed She Will Connect initiative18 in Nigeria, Kenya, and South Africa and Mozilla Learning’s partnership with UN Women,19 which supports a network of web literacy clubs in Kenya and South Africa specifically aimed at upskilling girls and women through face-to-face peer learning. The government may also explore the feasibility of a partnership with Vodacom Foundation or another corporate actor to co-fund a specialized incubation program for ICT startups. Vodacom Foundation is running a business training and mentorship program that is well regarded by local entrepreneurs. There may also be opportunities to partner with other corporations in Lesotho, such as Standard Bank, which runs several incubators in South Africa. In addition, it will be useful to raise awareness among Lesotho’s entrepreneurs about the regional funding and mentorship opportunities they can tap into (box 4.4). 18 https://www.intel.com/content/www/us/en/corporate-responsibility/ social-impact-and-educational-initiatives/she-will-connect.html. 19 https://learning.mozilla.org/blog/new-partnership-with-un-women-to- teach-key-digital-skills-to-women. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 61 Annex A. Share of Small Firms in Lesotho Compared with Other Lower-Income Countries Most firms in Lesotho are small, similar to many other developing economies Share of rms by size (%) 100 80 60 40 20 0 an an e h e a m o ay a a o Vi e rd on d s ric as bi bw th ist na de ist gu an Ve m aF so Le Af an et jik ba la Ug ra Za Le bo in h ng ra gh Ta Pa m ut rk er Ca Ba Zi Af So Bu Si Small (1-9) Medium (20-99) Large (100+) Sources: For Lesotho, Bureau of Statistics 2015; for other countries, Merotto, Weber, and Aterido 2018. 62 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Annex B. Distribution of Jobs by District and Urban vs. Rural Locations Figure B.1. Most jobs are in Maseru and Leribe Employment share by district 2% 1% Maseru 2% 1% 1% Leribe 4% 3% Berea Botha-Bothe 6% Mafeteng 42% Mohale’s Hoek Quthing Qacha’s Nek 37% Mokhotlong Thaba-Tseka Source: Bureau of Statistics 2015. Figure B.2. Rural areas have little economic activity Employment by district and rural and urban location 25 000 20 000 Number of workers 15 000 10 000 5 000 - Urban Rural Maseru Leribe Berea Botha-Bothe Mafeteng Mohale’s Hoek Quthing Qacha’s Nek Mokhotlong Thaba-Tseka Source: Bureau of Statistics 2015. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 63 Annex C. Determinants of Labor Productivity Determinants of Labor Productivity   (1) (2)       sz_10to19 0.267** 0.271*** (0.111) (0.101) sz_20to49 0.327 0.391 (0.243) (0.236) sz_50to249 1.071*** 1.110*** (0.365) (0.358) sz_250to499 0.539 0.629 (0.521) (0.423) sz_500plus -0.757** -0.754** (0.337) (0.340) age_6to9 0.0884** 0.0932** (0.0384) (0.0366) age_10to19 0.189*** 0.198*** (0.0454) (0.0441) age_20to29 0.240*** 0.239*** (0.0691) (0.0737) age_30plus 0.176** 0.175** (0.0835) (0.0838) Foreign 0.762*** 0.720*** (0.111) (0.116) Apparel -1.397*** (0.151) Metals -0.225 (0.280) Other manufacturing -0.363** (0.177) Construction 0.616** (0.249) Retail-wholesale 0.487*** (0.118) Other services 0.496** (0.193) Constant 10.16*** 10.16*** (0.183) (0.138) Observations 5,885 5,885 R-squared 0.226 0.205 Sector dummies YES NO Location dummies YES YES Year dummies YES YES Note: Omitted categories: micro, young, domestic, and food and beverages (column 2 only). Robust standard errors are in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1. Source: World Bank staff calculations based on Bureau of Statistics 2015. 64 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Annex D. Top Ten Apparel Exports to the United States and South Africa, 2016 HS Product Value MFN tariff MFN tariff for for this this product (US$ product (%) in the EU (%) 1,000) Top Ten Exports to the United States 610463 Women’s or girls’ trousers, breeches and shorts of synthetic fibers (knitted 77,126 14.9-28.2 12 or crocheted) 620342 Men’s or boys’ trousers, breeches and shorts of cotton 69,323 0-16.6 12 611030 Jerseys, pullovers, cardigans (knitted or crocheted) of man-made fibers 43,941 6-32 12 610520 Men’s or boys’ shirts (knitted or crocheted) of man-made fibers 43,370 13.6-32 12 620462 Women’s or girls’ trousers, breeches and shorts of cotton 22,410 0-16.6 12 610990 T-shirts, singlets and other vests (knitted or crocheted) of other textile 11,949 2.6-32 12 materials 610343 Men’s or boys’ trousers, breeches and shorts of synthetic fibers 9,188 14.9-28.2 12 610433 Women’s or girls’ jackets and blazers of synthetic fibers 6,627 28.2 12 610510 Men’s or boys’ shirts (knitted or crocheted) of cotton 6,579 19.7 12 610462 Women’s or girls’ trousers, breeches and shorts of cotton 2,701 10.3-14.9 12 610620 Women’s or girls’ blouses, shirts (knitted or crocheted) of man-made 2,065 14.9-32 12 fibers 620920 Babies’ garments and clothing accessories of cotton 1,802 9.3-14.9 10.5 Topt Ten Exports to South Africa 620342 Men’s/boys’ trousers, breeches and shorts of cotton 18,586 45 12 610910 T-shirts, singlets and other vests (knitted or crocheted) of cotton 13,699 45 12 620419 Women’s or girls’ suits of other textile materials 11,066 45 12 620349 Men’s or boys’ trousers, breeches and shorts of other textile materials 7,072 45 12 610342 Men’s or boys’ trousers, breeches and shorts of cotton (knitted or 5,267 45 12 crocheted) 620339 Men’s or boys’ jackets and blazers of other textile materials 5,084 45 12 610990 T-shirts, singlets and other vests (knitted or crocheted) of other textile 4,871 45 12 materials 620520 Men’s or boys’ shirts of cotton 3,746 45 12 620333 Men’s or boys’ jackets and blazers of synthetic fibers 2,628 45 12 620590 Men’s or boys’ shirts of other textile materials 2,258 45 12 Source: UNCOMTRADE. Note: In the United States, tariffs vary depending on the particular prdouct line within a given HS code. Further product disagregation is not available on UNCOMTRADE. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 65 Annex E. Tax Incentives in Lesotho Applicable to the Apparel Industry and Horticulture Investment Incentives Main Tax Incentives Corporate Income Tax • Corporate tax rate of 10% on manufacturing profits (compared with 25% for services) • Corporate tax rate of 10% on profits generated from the sale of goods produced from agricultural activities • Training and tertiary education costs for Lesotho citizens are deductible at 125% • Research and development expenses are deductible provided they are incurred in production of income subject to tax Withholding Tax • 15% withholding tax on payments made in respect of external management/technical fees, interest and royalties related to manufacturing income (compared to 25% of withholding tax for non-manufacturing activities) Non-tax incentives • Subsidized leases of LNDC factory shells • Partial credit guarantee schemes, administered by LNDC and the Ministry of Small Business Development, Cooperatives and Marketing Source: LNDC 2016; Lesotho Revenue Authority. 66 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Annex F. Revenue per Hectare and per Tree for Different Fruit Varieties Peaches tend to offer the best revenue-generating opportunities Product Variety Total sales (M) Ha M/ha Est. no. trees Est. M/tree Peaches Early Grande 70,566.50 0.45 156,814 660 107 Oom Sarel 34,155.00 0.65 52,546 980 35 Kakamas 1,922.00 0.05 38,440 20 96 Star Peach II 25,450.00 0.27 94,259 400 64 San Pedro 57,630.00 0.66 87,318 980 59 Apricots Palestyn 30,512.00 0.93 32,809 1,380 22 Harry Pickstone 27,413.20 0.65 42,174 957 29 Plums Fortune 35,869.00 0.54 66,424 800 45 Apples Royal Gala 74,435.10 1.34 55,549 1,980 38 Golden Delicious 18,281.80 2.55 7,169 3,780 5 Early Redone 42,176.50 2.15 19,617 3,180 13 Granny Smith 12,961.00 0.51 25,414 760 17 Dried apples   2,100.00         Total   433,472.10         Source: Ministry of Trade and Industry 2017b. Note: Values are based on data for the Likhothola pilot farm, with a size of 11.4 hectares; the farm was in its fifth year of operation at the time of data collection and yields and revenues are expected to improve with time. Ha = hectares; M = maloti. Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT 67 Annex G. Strategic Segmentation of the Global Food Industry There are several distinct segments in the food industry, Highly processed products are not necessarily of greater with different entry barriers and requirements to compete value than primary items of agricultural production, once the (figure G.1). Fresh food typically commands higher value contribution of services is taken into account. Agribusiness than processed food. For example, in the United States, the services add value through financing, certification, packaging, cost of fresh blackberries is 70 percent higher than that of storage, distribution, and branding and contribute more frozen blackberries (World Bank 2018). Where the shelf life of to gross domestic product (GDP) than primary production. a product is short (fresh products), the capacity to deliver to For example, in the United States, supporting activities consumers becomes a significant barrier to entry for many contribute 13 times more to GDP than primary production of the world’s producers. Competitiveness in this segment alone (World Bank 2018). Development of these services is is influenced by proximity to consumers and access to thus an important element for the growth of commercial advanced logistic service providers. By contrast, stockable agriculture. products with a long shelf life allow all global producers to compete. This segment requires high volume and economies of scale and is frequently dominated by multinationals (World Bank 2018). Figure G.1 Strategic segments in the food industry Daily use Convenience Product: fruit (e.g., apples) and vegetables Product: Products frequently consist of a combination of (tomatoes) fresh produce from different suppliers put together in a meal (e.g., packaged fresh salad, pre-cut fruit, stir-fry mix, Typical companies: products are likely fresh packaged pasta) Frequent Short to be traded in bulk and sold through Frequency of delivery shelf life supermarkets. In less developed markets, Typical companies: mostly small and medium-size – fresh products are sold through wet markets. enterprises, since product differentiation is key to survival. Firms tend to invest in anticipating consumption trends and often maintain strong cooperation with logistic companies and retailers. Products: cereals, canned and bottled Products: microwaveable TV dinners Long Infrequent goods (canned tomato pasta, sunflower oil), shelf Typical companies: most companies are large given raisins and dry fruit life – the economies of scale. The segment is dominated by stockable Typical companies: companies tend to be multinationals such as Nestle. large, e.g., Louis Dreyfus, Nestle, Del Monte Source: Adapted from World Bank 2018. Note: There is also a third segment, “indulgence” (examples of perishable products include raw oysters, truffle mushrooms, and macaroons; examples of products with long shelf life are high-end tea and gourmet olive oi), which is not covered by the analysis, as it is currently not relevant for Lesotho’s context. 68 Unlocking the potential of Lesotho’s Private Sector: A focus on Apparel, Horticulture & ICT Annex H. Tech Hubs in Africa Source: Firestone and Kelly 2017. 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