Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 22175

IMPLEMENTATION COMPLETION REPORT(IDA-26120; PPFI-P8450)

ONA

CREDIT

IN THE AMOUNT OF US$ 11 MILLION

TO THE

KINGDOM OF LESOTHO

FOR A

PRIVATIZATION/RESTRUCTUR1NG

June 21, 2001

Private Sector Development UnitAfrica Region

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective Date April 24, 1994)

Currency Unit = Maloti (M) singular is LotiMl.00 = US$ 0.31

US$ 1.00 = M3.19

FISCAL YEARApril 25 March 31

ABBREVIATIONS AND ACRONYMSBAPS Business Advisory Promotional ServicesBEDCO Basotho Enterprises Development CorporationCBL Central Bank of LesothoCAS Country Assistance StrategyDFID Development Finance International Department - United Kingdom?DOs Development ObjectivesESKOM South African Electricity CompanyETP Entreprenuership Training ProgramFDI Foreign Direct InvestmentGOL Government of LesothoLAP Industrial and Agro-Industry ProjectLADB Lesotho Agricultural Development BankLAC Lesotho Airways CorporationLB Lesotho BankLCCI Lesotho Chambers of Commerce and IndustryLEC Lesotho Electricity CorporationLPC Lesotho Pharmaceutical CorporationLIH Lesotho Investment HoldingLIPC Lesotho Investment Promotion CenterLFM Lesotho Flour MillLNDC Lesotho National Development CorporationLSPP Lands Survey and Physical Planning DepartmentLTA Lesotho Telecommunication AuthorityLTC Lesotho Telecommunication CompanyLSE Lesotho Stock ExchangePEs Public EnterprisesPPI Private Participation in InfrastructurePPSDAP Privatization Private Sector Development Assistance ProjectPU Privatization UnitUSAID United States Agency for Intemational DevelopmentUSRP Utilities Sector Reform ProjectWASA Water and Sewerage Authority

Vice President: Callisto MadavoCountry Manager/Director: Fayez Omar

Sector Manager/Director: Demba BaTask Team Leader/Task Manager: Marilyn Manalo

FOR OFFICLk USE ONLY

LESOTHOPRIVATIZATION/RESTRUCTURING

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 96. Sustainability 117. Bank and Borrower Performance 128. Lessons Leamed 149. Partner Comments 1510. Additional Information 22Annex 1. Key Performance Indicators/Log Frame Matrix 23Annex 2. Project Costs and Financing 26Annex 3. Economic Costs and Benefits 28Annex 4. Bank Inputs 29Annex 5. Ratings for Achievement of Objectives/Outputs of Components 31Annex 6. Ratings of Bank and Borrower Performance 32Annex 7. List of Supporting Documents 33

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

Project ID: P001401 Project Name:PRIVATISATION/RESTRUCTURING

Team Leader: Marilyn Swann Manalo TL Unit: AFTPSICR Type: Core ICR Report Date: June 27, 2001

1. Project Data

Name: PRIVATISATION/RESTRUCTURING L/C/TF Number: IDA-26120;PPFI-P8450

CountryIDepartment: LESOTHO Region: Africa Regional OfficeSector/subsector: BR - Public Enterprise Reform; BY - Other Public

Sector Management; DV - Privatization

KEY DATESOriginal Revised/Actual

PCD: 12/01/1992 Effective: 09/01/1994 12/27/1995Appraisal: 06/04/1993 MTR: 11/01/1996 12/12/1997Approval: 05/17/1994 Closing: 12/31/2000 12/31/2000

Borrower/Implementing Agency: GOVERNMENT/GOLOther Partners:

STAFF Current At AppraisalVice President:Country Manager: Fayez Omar Stephen DenningSector Manager: Demba Ba David CookTeam Leader at ICR: Marilyn Manalo Thyra RileyICR Primary Author: Lucy Fye

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU-=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: Yes

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:Background: The Privatization and Private Sector Development Assistance Project (PPSADP) wasdesigned as an integral part of Structural Adjustment in the Kingdom of Lesotho where private sectorpromotion was central. Specifically, the Government of Lesotho (GOL) established new investmentpromotion facilities; increased the access of indigenous businesses to project and equity financing; andundertook substantial steps to improve the regulatory environment for private sector. As a consequence ofthese successful efforts (between 1987 and 1991), the manufacturing sector (with a high rate ofemployment creation) had an annual growth rate of 16 percent compared with 8 percent for the economy asa whole. As a next step, the government indicated its commitment to rationalize the public sector. ThePublic Enterprise (PE) sector became the obvious target for reform. The PE sector consisted of 32enterprises of which 17 were directly owned by GOL, 12 were owned by Lesotho National DevelopmentCorporation (LNDC) and 3 owned by financial institutions. In addition, GOL owned minority shares inanother 31 companies. The PEs presence in some sectors was very strong, mainly due to the fact that GOLinitially established these PEs to ensure domestic ownership of strategic industries and services in theabsence of indigenous private sector. In this regard, GOL decided to revisit its strategy in the PE sectorreform and renewed its commitment to privatization and private sector development objectives by adoptinga revised privatization strategy and program in July 1992. GOL passed a policy statement on privatization,and at the same time undertook additional strong measures to demonstrate its commitment. These measuresincluded: (i) restructuring of the Basotho Enterprise Development Corporation (BEDCO); (ii) divestingfrom the Co-op Lesotho and the Bus and Foreign Transport Services; (iii) the LNDC sold Pioneers Motorsto a private indigenous investor; and (iv) the Lesotho Bank Act was amended to permit it to sell its sharesand to offer them to unit trusts as a product. Following the democratically held elections in March 1993,the new government continued with the privatization program and renewed its commitment in their Partymanifesto and again during the budget speech of June 1993. By 1994 some of the PEs were still a seriousdrain on GOL's limited budgetary resources and in some cases crowded out the private sector.

The original objectives of the PPSDA project were to promote expansion of the private sector as a leadingelement in the government's development strategy. To achieve these development objectives (DOs),government was to: (a) encourage the expansion of the role of the private sector in the economy through itsprivatization program; (b) enhance the competitive environment for the private sector operations; (c)encourage private investment in sectors that require the transfer of technology and the heavy infusion ofcapital; (d) develop capital market instruments to support the PE reform and privatization effort; and (e)improve the efficiency and productivity of enterprises currently in the PE sector. In achieving theseobjectives, the government would give important focus to: (a) reducing the PE sector's drain on the budget,(b) increasing company ownership and overall business activity, particularly by indigenous investors, and(c) mobilizing indigenous investment capital for the purchase of companies being privatized.

Relations to the CAS: The project's original DOs were consistent with the Bank's country assistancestrategy and, to a degree, complementary with the other Bank operations (Industry and AgroindustryProject (TAP- FY91). The LAP introduced a range of investor friendly reforms, overhauled the incentivesstructure, removed bureaucratic bottlenecks to foreign investors and established institutions for promotinglocal and foreign investment. As a result, the PPSDAP was designed to address capacity constraints ingovernment and reduce the size of the public sector through continuation of the privatization andrationalization of public sector activities.

Clarity and realism of the original DOs: Although, the development objectives reflected the priorities ofthe economic reform agenda as identified and agreed by the government and the Bank at the time, they seem

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too general. Firstly, these objectives were prepared under the assumption that the project aims to improveall the intended aspects of private sector development, resulting into an overly ambitious and unfocusedDO. Secondly, the DO lacked logic and could not be readily translated into development outcomeindicators. The only measurable indicator defined in the project document relates to the number ofprivatization transactions to be undertaken in each year with its estimated fiscal impact. Although this wasone of the key indicators at the time, during midterm review, the Bank should have reviewed this issue ofmeasurable indicators. It could have re-casted the logframe matrix ex post suggesting the followingindicators: (i) decreased budget subsidies to the PE sector, (ii) improved economic indicators in theremaining PEs (such as productivity, profitability, utilization of resources); and (iii) increase institutionalcapacity within ministries to monitor, supervise and enforce hard budget constraints of the PEs.

3.2 Revised Objective:Project objectives were not revised.

3.3 Original Components:The project had five major components as follows:Component 1: Privatization: Cost: US$4.2 million. The project provided technical assistance to: (a)implement a five year program and to develop procedural guidelines for various aspects of privatization;(b) help the privatization committee prepare companies or government services for sale or privatization; (c)develop and assist with the implementation of a public awareness/investor education effort to includedevelopment of printed and broadcast media, seminars, to educate the public about the government'sprivatization and private sector development program. The project also provided office equipment tosupport the Privatization Unit (PU).

Component 2: Private Sector Development: Cost: US$2.2 million. The following efforts were to beundertaken: (a) strengthening the legal framework for the private sector through the development of along-term strategy and action plan, especially to ensure fair and rapid enforcement of contractedobligations; (b) studies to develop action plans in areas where reforms were required to support privatesector development. These included issues related to Lesotho's labor market and reviewing and revising thestructure of utility tariff rates to make it consistent with the country's strategy for attracting investments inlabor intensive, export oriented industries; (c) efforts to strengthen the Ministry of Home Affairs,Departrnent of Land, Surveys, and Physical Planning; the Lesotho Investment Promotion Center, theBusiness Advisory and Promotional Services, and the Lesotho Chambers of Commerce.

Component 3: Capital Market Development: Cost: US$2.2 million. Technical assistance was madeavailable to: (a) develop regulatory capability related to new capital market investment; (b) prepare aprospectus for the Lesotho Investment Holdings (LIH) unit trust, the Lesotho Bank unit trust, or both; c)access the value of LNDC subsidiary companies to be sold through LIH or another unit trust; and (d)market the unit trust shares to the private sector including close liaison with the public awareness/investoreducation effort. The design of this component was to provide much needed flexibility in terms of financialassistance to the private sector so that they can participate in the privatization process and at the same timepromote development of the financial institutions and instruments.

Component 4: Training Cost: US$33 million. Training was to be offered to improve technical skills for:(a) implementing privatization at the level of the privatization committee and GOL officials enterprises; (b)improving the entrepreneurial and management capacity of retrenched workers, indigenous business menand local entrepreneurs who took over privatized enterprises; and (c) handling legal matters identified in thestudy of the commercial law reform strategy.

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Component 5: Implementation Fund: Cost: US$3.3 million. Implementation Fund (includingcontingencies), was designed to accommodate some level of flexibility in terms of financial resources thatwill be made available to finance investments that were identified by the legal framework study or otherprivate sector development studies carried out under the project's Component 2. In addition, a link was tobe established with the line of credit under the Industrial and Agro-industries Development Project to makeresources available for new investments and restructuring requirements of privatized companies.

3.4 Revised Components:The project's mid-term review in December 1997, recommended to refocus the project on utilities andbanking institutions. Consequently, Component 5 - Implementation Fund was canceled for a total ofUS$3.0 million equivalent and funds were transferred to Component 1 - Privatization.

3.5 Quality at Entry:The project predates the introduction of the Quality Assurance Group (QAG) process, therefore quality atentry exercise was not performed. Judging ex post the quality at entry is rated unsatisfactory for thefollowing three reasons. Firstly, the project did not take into account of Lesotho's environment. TheBasothos were opposed to privatization due to the fear of transferring ownership of privatized enterprisesto South Africans rather then nationals. This led to lack of champions and inconsistency in ownershipduring implementation of the privatization program. Secondly, the definition and classification of PEs wasnot clear, resulting in inclusion of government departnents. In addition, most PEs lacked financialinformation making it difficult to access the financial stance of the sector. Hence, it was difficult toprioritize the PEs to be privatized and the extent of preparatory work required to package the PEs for sale.The prepared annual program was highly hypothetical and proved difficult to implement. Finally, takinginto account of the private sector profile, characterized as small and foreign dominated with inadequatefinancial accountability, recommended capital market instruments were not appropriate to create a dynamicprivate sector in Lesotho. Simpler measures such as venture capital and equity fund could have beensuggested to increase the chances of Basotho entrepreneurs and PE employees to participate effectively inpurchasing PEs offered for sale. These design flaws became apparent during the midterm review.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:Overall project's outcome is rated satisfactory as most of the project's objectives were met. Although only10 out of 32 PEs were privatized, the privatized PEs were from key sectors of the economy, such as,finance, transport and telecommunication. In addition, the privatization was done despite strong resistancefrom vested interests and a difficult political environment including the political unrest in September 1998.Furthermore, restructuring activities for the utilities PEs were completed and their privatization isprogressing well.

The first DO - to accelerate the privatization process, the banking and utilities sectors, in particular, israted satisfactory. The project was able to privatize PEs from major sectors of the economy includingLesotho Bank, Lesotho Agricultural Development Bank, Lesotho Telecommunications Corporation,Lesotho Airways Corporation and Lesotho Flour Mills. (See Section 10 - for details on privatizationtransactions). By the end of the project, 10 out of 32 PEs were successfully privatized. Confidence hasbeen restored in the banking sector and recently a new bank has been negotiating its terms of establishmentin Lesotho.

The second DO - to develop capital market instruments to support the privatization effort is ratedsatisfactory. Capital market activities were limited to development of a Unit Trust and a Privatization

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TrustlWarehouse. The Unit Trust has been established and will become fully operational by end of July2001. Further work on the Privatization Trust/Warehouse (which will be a repository for privatizedenterprise shares) will be completed under the Utility Sector Reform Project (USRP). GOL found itdifficult to embark on developing the suggested capital market instruments to support the privatizationprogram due to a limited number of profitable PEs, a weak financial system and lack of technical capacity.

The third DO - to enhance the competitive environment for private enterprises is rated satisfactory. Thelegalframework to enforce contractual obligation has been achieved through the establishment of theLesotho Commercial Court on May 4, 2000. The private sector has acknowledged it as a majorachievement from the project in particular with regards to its efforts to address constraints in the financialservice sector. In addressing labor market issues, Lesotho maintained its comparative advantage anddecided to remain cost effective in terms of minimum wages compared to East Asian and neighboringcountries. GOL improved its relations with the industrial firms and resolved issues surrounding minimumwage, working permits and visas for expatriate workers. Moreover, the utilities tariffs studies conductedby the project, influenced GOL's decision to adjust its utilities rate structure and tariffs for water,telecommunications and electricity to enhance their competitiveness and contribute towards private sectordevelopment. The operational and financial situation of the utilities sectors was reviewed by GOL with aview to reform and promote private sector participation and increase efficiency in delivery of expandedservices. With the assistance of other donors, diagnostic studies were launched and their implementationwas supported by the project.

4.2 Outputs by components:1. Privatization: This component is rated satisfactory. The technical assistance acquired through theproject enabled GOL (through PU) to prepare and successfully privatize 10 PEs, representing 24 completedtransactions. This included five transactions in key sectors of the economy namely telecommunications,banks, industries and transportation. A number of privatization transactions on smaller PEs are stillongoing and will be completed with support from USRP.

(a) Privatization of Banking sector: To address the difficulties in the banking sector in 1997, GOL decidedto put in place conservators in Lesotho Bank (LB) and the Lesotho Development Agricultural Bank(LADB). The privatization of the two banks was successfully completed despite their severe managerial,operational and financial problems. The liquidation of the Lesotho Agricultural Development Bank(LADB) was completed in August 2000. In addition, the Asset Recovery Company was contracted for oneyear to recover outstanding debts to LADB and pay out unclaimed deposits (representing 19 percent ofLADB deposits). The collections by the Asset Recovery Company averaged Ml million per month. AVesting Act was passed in 1999 to allow Lesotho Bank (LB) to sell its assets and transfer its liabilities toLesotho Bank (1999) Limited. This was followed by the placement of new managers, auditors, andlawyers to regularize loans and improve the debt repayment rate. The completion of LB's privatization wasone of the most significant reform measures undertaken in the financial sector. As a result, confidence hasbeen restored in the banking sector and recently a new bank has been negotiating its terms of establishmentin Lesotho.

(b) Privatization in the Telecommunications Sector - Reforms in the telecommunications sector have beenimplemented at a satisfactory pace. The Lesotho Telecommunications Authority Bill was passed byParliament, after which the Lesotho Telecommunications Authority (LTA) was established and becameoperational in July 2000. The privatization of Lesotho Telecommunication Company (LTC) advancedwell and was completed in February 2001. It is estimated that there will be a total 50,000 telephone mainlines by 2005 in Lesotho (representing 50 percent increase over 2000 status) and 1,250 public pay phonescompared to 125 that are currently available. The transfer of LTC from the public sector to the private

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sector and the issuance of a second mobile operator license to the privatized TLC from June 2001 raised aset of issues in the context of the commercial provision of services in a multi-operator environment. Theseinclude: ensuring compliance with roll out plan and other conditions of LTC license; provision of safeguards against anti-competitive behavior; ensuring equitable interconnection regime; regulating the tariff ofdominant operator and promoting greater access to services. Resources will be provided under the newproject - USRP to address these issues.

(c) Restructuring in the Water Sector - Significant improvements have been registered within Water andSewerage Authority (WASA) in terms of both operational and financial performances. On operationalside, by year 2000 operating efficiency had increased from 72 to 90 percent and the unaccounted for waterhad reduced from 32 to 22 percent. These operational activities were undertaken with the collaborationwith DFID. The number of permanent staff was also reduced from 743 in 1995 to 455 in 2000. On thefinancial side, the debt collection rate has improved significantly from 82 percent in 1996 to 95 percent in1999 and the billing rate was as high as 98 percent. As a result of debt recovery, an increase in operatingefficiency and rightsizing, the overall cash flow for WASA has improved substantially reporting abreak-even on cash balance for the first time in 1999/2000. Despite the operational and financialimprovements, WASA did not have adequate resources to implement its investment programs. GOL hasdecided to introduce Private Participation in Infrastructure (PPI) for WASA. Future support for thissector, including a Private Sector Participation Options Study for the WASA will be provided under theproposed IDA-funded Water Supply Reform Project.

(d) Restructuring of Electricity Sector - The Lesotho Electricity Corporation (LEC) has been highlyinefficient in providing electricity services due to poor financial and overall management and, hence, lack ofresources for system maintenance and expansion. Significant work was done to review the legal andregulatory framework of water and electricity sectors. This resulted into drafting of an electricity billwhich was approved by Cabinet in November 2000. The project funded the restructuring activities of LECand it is currently under an interim management task force. Additional financial resources to support theinterim management task force, transaction advisory group and the privatization of LEC will be providedunder the new IDA funded project - USRP.

(e) Communication Campaign: The national consensus over privatization program has not been achieved.This maybe due to two reasons: (i) continued resistance for various reasons including political partyideologies and affiliations, and (ii) ineffective communication campaign despite applying differentstrategies.

() Fiscal, Sociopolitical and Economic efficiency Impact of Privatization Component. GOL is makingsubstantial savings in terns of outflows of funds and subsidies to the PE sector. For example, it used topay more than M60 million per annum to the banks for operational support. With the liquidation of theLADB and privatization of LB, GOL is making annual savings of approximately the same arnount. Totalprivatization proceeds were expected to amount to US$30 million, however US$42.82 million has beenreceived. Liabilities amounting to US$11.4 million have been paid out of the total proceeds. There havebeen some increases in tax revenues from increased productivity in the economy as a whole, includingfrom the privatized fims. From consultations with the major privatized companies, it was confirmned thatthey have almost doubled their tax payments to govemment apart from dividends.

Socio political impact: The process of creating Basotho shareholders and middle class property ownersthrough promoting ownership of privatized enterprises has been rather slow. Out of the 24 transactions,Basothos bought only three enterprises. The number of retrenched staff was 1,200 instead of the estimated500. It however, represent only 3 percent of the total public sector labor force. Safety net measures were

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put in place and 486 retrenched workers received training and counseling through the ETP. Arrangementsare being made to provide similar services for LEC and LTC retrenched workers. Due to appropriatesafety measures put in place through ETP, retrenched workers acquired useful skills which enabled 60percent to be self employed or found employment in the private sector.

Economic efficiency and output. The overall efficiency of the consulted privatized companies haveincreased significantly: capacity utilization has doubled; and sales have grown in manufacturing, transportand financial sector. In many cases, privatization has paved the way for management innovations that led tonew and/or improved product mix and services. Investment in machinery, electronic equipment, buildingsand land (as reported by major privatized enterprises), has increased amounting to equivalent of US$50million.

2. Private Sector Development: The component is rated satisfactory. The Studies to develop actionplans in areas for reforms to support private sector development, were completed on time. They includedthe legalframework study, utilities tariff studies and labor market study. Upon completion of legalframework study, PU created a legal review panel comprising government officials and representativesfrom the private sector. They were to consider its recommendations that relate to accessibility of legalinformation, business dispute settlement, women and law issues. As a result, the commercial court wasestablished in May 2000 to address business dispute settlement. Commercial Court Practice Direction andRules were finalized and signed by the Chief Justice and High Court judges have been appointed. Within ayear, the commercial court has reviewed 2 cases while 11 are registered for hearing. The Law ReformCommission in adopting the recommendation of the Women and Law study has prepared a bill to addressissues of legal status of married women. Consultations to build consensus for its approval by Parliamentcontinues to be held nationwide as it has enormous cultural implications. The Utilities tariff rate studyprovided valuable information that enabled GOL to adopt reform strategies including private participationin infrastructure sectors.

(b) Entrepreneurship Training Program: ETP was created to provide counseling and training ofemployees from PEs to be privatized. By May 1999, ETP had provided counseling and training of 466retrenched PE employees. From results of follow-up activities, ETP revealed that out of the 223participants, 145 have been applying their acquired skills from ETP. The institutionalization of ETPwithin BEDCO was successfully completed and ETP has become an integral unit of BEDCO under itsEnterprise Development Department. Moreover, ETP seek to diversifying its product and clientele toensure its sustainability. Apart from public sector employees, ETP has trained 519 entrepreneurs inmanagerial and financial skills.

(c) Institutional Strengthening: Ministry of Home Affairs, Department of Land, Surveys, and PhysicalPlanning (LSPP). With support from the project, LSPP succeeded in decentralizing a number of help desksfor the delivery of land title to eight out of Lesotho's ten districts. In addressing issues of property rightsincluding land ownership a Land Policy Review Commission was created to recommend a way forward. Asa result, GOL will prepare a Cabinet memorandum to recommend changes to permit land ownership byforeigners.

(d) Lesotho Investment Promotion Center (LIPC) received support from the project to promote foreigninvestment to Lesotho. IPC was to promote Lesotho intemationally and also market the PEs to beprivatized internationally in order to attract large investors. IPC made several attempts to promoteenterprises to be privatized but could not yield positive results.

(e) Business Advisory and Promotional Services (BAPS). Project resources were utilized to conduct a

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Microfinance Training to micro-finance operators. It was offered by BAPS a unit of BEDCO. Thisoperation was successfully prepared and completed in November 21-22, 2000.

69 Lesotho Chambers of Commerce and Industries (LCCI) received support from the project to enhanceits ability to act as a voice for the private sector and to communicate more effectively with the governmentduring the privatization effort. LCCI succeeded to increase its membership and scope of activities and wasable to generate some revenues to cover only 50 percent of its operation. LCCI has revived its offices in thedistricts and active branches increased from 6 to 21, improved its relations with GOL through frequentdialogue and increased its membership base.

3. Capital Market Development: This component is rated satisfactory. Capital market activitieswere limited to development of a Unit Trust and a Privatization Trust/Warehouse. The Unit Trust has beenestablished and will become fully operational by end of July 2001. Further work on the PrivatizationTrust/Warehouse (which will be a repository for privatized enterprise shares) will be completed underUSRP. GOL found it difficult to embark on developing the suggested capital market instruments to supportthe privatization program due to a limited number of profitable PEs, a weak financial system and lack oftechnical capacity.

4. Training. This component is rated highly satisfactory. Training offered improved technical skillsthat enabled the implementation of the privatization program in PU, privatization committee, and severalcivil servants from relevant ministries, in addition, to study tours to Zambia's Privatization Agency andJohannesburg Stock Exchange. Several staff from ETP, BEDCO were sponsored by the project toundertake short courses in their respective discipline. A total of 499 retrenched employees and 519indigenous business men, women and local entrepreneurs were trained in entrepreneurship andmanagement. Six workshops were organized and funded by the project. The titles of the workshops are asfollows: Privatization for Journalists; Economic Reporting for Journalists; Electricity Tariff; Labor MarketIssues; Valuation Methodologies; and Negotiation Skills (two workshops).

5. Implementation Fund. This component is not rated because it was cancelled and funds werereallocated to Privatization component.

4.3 Net Present Value/Economic rate of return:N.A

4.4 Financial rate of return:N.A

4.5 Institutional development impact:

The project had positive institutional development impact on the PU. These skills will ensure thesustainability of the divestiture and reform exercise. Capacity building was facilitated by the followingmeasures:

(a) Responsibility for implementing the privatization program was vested with the Basotho. PU wasresponsible for the administration of the project and coordination of activities supported by it. The ProjectDirector as well as the majority of the supporting staff are Basotho. By end of project, PU has built areasonably good reputation for its capacity to manage the privatization process professionally, efficiently,and transparently. In addition advice, assistance and on-the-job training was provided by the in-house

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consultants seconded by the project. The same unit will serve as the project implementation unit for USRP.

(b) Use of consultants and international advisors. A consulting firm was recruited to provide long termassistance and short term consultants were engaged as well to assist in the implementation of variouscomponents of the project. The quality of consultancies as well as GOL's implementation of the advicereceived was satisfactory.

(c) Institutionalization of ETP. The ETP has been a successful experience as the program has beeninstitutionalized by being merged with BEDCO.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

There were two major factors outside the government's or implementing agency's control that affected bothimplementation and outcome of the project, these are: (a) a high level of country risk perception byinvestors; and (b) limited capacities of the private sector to participate in the privatization program.

The country risk perception at the beginning of the program was high due to inadequate regulatoryframework in crucial sectors of the economy in Lesotho. Although Lesotho was creditworthy, foreigninvestors were not confident that they would be able to make profitable business in Lesotho. Thisperception was reinforced during the 1998 political unrest which resulted in s-abstantial business lossesfollowing looting of property in commercial areas. Moreover, LCCI membvrship declined and privatizationof several transactions were slowed as both international and domestic investors were hesitant to invest inLesotho. However, by the end of the project, investor confidence has been restored with three majorinvestors (banking, telecommunications and manufacturing sectors) consideiirg a possibility to enter theLesotho market.

Private sector capacity limitations were recognized during project preparation. However, due to lack oflocal capital resources and entrepreneurship skills in the private sector, privatization was perceived as ameans to transfer ownership to foreign investors, in particular from South Africa. In order to foster abroad-based national shareholding community, GOL set up a Privatization Trust Unit and a Unit Trust.Although both instruments were not fully developed by the end of the project, they would facilitate theacquisition of public enterprise shares by Basotho individuals in future privatization transactions. In viewof these developments, the level of tolerance and acceptance of South African investors by the public hasimproved thus allowing more transactions to be completed.

5.2 Factors generally subject to government control:

Factors subject to government control that affected project performance were: (a) cumbersome and lengthyprivatization procedures with in-built political interference during implementation of the privatizationprogram; (b) ineffective communication campaign to PEs and the public; and (c) failure to establish aregulatory framework for the utilities.

Throughout implementation of the privatization program, substantial delays occurred in decision-makingmainly due to lengthy and cumbersome political considerations that were in-built in the procedures. Anumber of measures were agreed upon in order to accelerate the privatization procedures. These were,however, not implemented as they required amendment of the Privatization Act. There was no political will

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to review and amend the Act. Thus the slow pace of the privatization program continued. It took the GOL alot of time to agree on the annual privatization program as it entailed the review of the PE sector,discussing and agreeing on acceptable measures to either privatize or restructure operations. Coupled withthe precarious financial condition of most of the PEs and weak local entrepreneurship culture what wasachieved in terms of completion of transactions was noteworthy.

Lack of effective and continuous communication with the general public did not help in maintainingconsensus in favor of privatization program. Mis-communication and lack of partnership with enterprisesmanagement teams became an obstacle during implementation. A more vigorous communication campaignthat emphasize the dissemination of information including positive impact of the privatization program inthe economy would have generated more interest and support from the public and PE sector.

Failure to establish regulatory framework for the utilities before privatization have discouragedinternational investors to effectively consider investing in Lesotho. By the end of the project only thetelecommunication sector had established a regulatory agency.

5.3 Factors generally subject to implementing agency control:

Two factors subject to PU's control that may have negatively affected the implementation of the projectwere: (a) its inability to influence changes of the privatization procedures and clearly define theresponsibilities of technical staff and the Cabinet, and (b) lack of appropriate implementation skills at thebeginning of the project.

PU staff tried to introduce measures that would have simplified the privatization procedures withoutamending the Privatization Act, but the measures were rejected by Cabinet. At the beginning of the projectPU was overburdened by meetings and demanding procedures from donors who were providing financialassistance to the privatization program. The task of packaging PEs for privatization was underestimatedand PU found itself taking longer to do the work as new set of skills were required. To address capacityshortcomings and to enhance the in-house skills, on-the-job training and seminars for staff together without-sourcing of expertise for specialized tasks was exercised. By and large, the process is now almost fullymanaged by Basotho. Hence, the capacity building process has been gradually fostered, PU staff has gonethrough a leaming process before expertise in privatization was achieved. These developments helped toaccelerate the pace of implementation of the privatization program and other private sector developmentactivities of the project.

5.4 Costs andfinancing:

The original credit amount was SDR 7.9 million (US$1 1.0 million equivalent). At the end of the project,SDR 6.5 million (US$8.9 million equivalent) was disbursed. The remaining undisbursed balance of SDR1.4 million (US$1.8 million equivalent) will be canceled.

6. Sustainability

6. 1 Rationale for sustainability rating:

The overall project sustainability is rated as likely. GOL continues to show commitment towards itseconomic reform program including its privatization program in spite of increasing political pressures dueto upcoming elections in 2002. The sustainability of the achievements is dependent on a stablemacroeconomic environment, the development of a favorable business climate, establishment of utilities

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regulatory framework, a stronger financial system, and a speedy development of national entrepreneurs inmanagerial, financial and technical skills. Moreover, Government' commitment towards regional economicintegration is an essential condition to attract more foreign investors to participate in its economy.

The Privatization Component has been instrumental in establishing an acceptable regulatory framework, inparticular in the telecommunication sector. To ensure its sustainability, the new regulatory agency LTA,will be required to achieve financial self-sufficiency. Further support to the telecommunication regulatoryframework and the electricity sector will be provided through USRP. The development and growth of theprivatized enterprises in banking, transport and telecommunication sectors is also likely to be sustainable.GOL will continue to monitor post-privatization impact and issues including collection of outstanding salesproceeds and payment of claims of creditors and depositors of LB and LADB.

The capacity building efforts through the project's four components have produced substantial results forboth the public and private sectors. The project has achieved its objective of institution/capacity buildingfor the government's privatization program, legal framework for private sector development and training ofentrepreneurs. The expertise built in PU is substantial and PU is now capable, with limited technicalassistance, to complete the privatization program. The existence of the commercial court would enableproper enforcement of business laws. The institutionalization of the ETP will ensure continuous skillenhancement of the private sector.

6.2 Transition arrangement to regular operations:

The development of the private sector, the growth of efficient supply response, and the sustainability of theutilities sector's support is contingent upon macroeconomic stability and the elimination of obstacles in thebusiness environment that impede private investment and export growth. The government is implementing afollow-on operation - USRP. The project has incorporated lessons learnt from achievements as well asshortcomings of its predecessor PPSADP. This would allow to sustain and expand the developments underthe privatization and private sector development program.

The follow-on operation USRP Project aim to: (i) support the restructuring and privatization of LECthrough providing resources for the interim management task force, transaction advisors, and safety netmeasures for retrenched employees; (ii) support regulatory reform in the utilities sector in particular,telecommunication's regulator LTA and the establishment of an electricity regulator; (iii) develop a futurestrategy for the energy sector; (iv) support the development of Unit Trust and Privatization Warehouse andconduct private sector studies to identify and imnplement recommendations for regional integration; and (v)strengthen technical capacity in selected government ministries and Technical Advisory Services to theBoard of LEC, Ministry of Communication and Ministry of Finance.

Performance indicators under the proposed USRP include:(a) Telecommunication sector: (i) completion of installation of 8,000 new telephone connections by year2002; (ii) consolidation of LTC privatization by June 2002; (iii) additional 25,000 working telephone linesby December 2002; (iv) achievement of 100 telephone connections per employee by 2004; (iii) completionof LEC privatization by December 2002;(b) Electricity Sector: (i) zero budgetary transfers from GOL to LEC by December 2002; (ii) establishmentof electricity regulator by June 2003; (iii) installation of 8,000 new electricity connections by July 2002;(iv) successful completion of LEC's streamlining by July 2002;(c) Private Sector Development (i) establishment of unit trust and privatization warehouse by March 2002and June 2003 respectively; (ii) completion of Muela's commercialization study; (iii) develop strategies forthe development of non-traditional exports by June 2005.

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(d) Regulatory Reform: (i) updated regulations; and (ii) institutional capacity strengthened by end ofproject

For an operation with the objectives and components summarized above to be successfully implemented, astable economic environment where major market distortions have been eliminated, would be necessary. Toensure a smooth transition between projects, USRP will build upon the experience of PU from PPSDAP tocarry out the technical work and coordination of utilities sector reform and privatization activities. The PUwill (i) strengthen its measures to do regular monitoring and analytical work on program's impact, (ii) putin place a continuous communication program on privatization and (iii) ensure appropriate administrativeand budget support to sustain the privatization program. By the end of USRP, PU will be fully absorbedinto the structure of the Ministry of Finance.

7. Bank and Borrower Performance

Bank7. 1 Lending:

Despite an inadequate definition of objectives for a private sector development project, the performance ofthe Bank in the identification, preparation and appraisal of the project is rated satisfactory. There was a lotof collaboration and consultation with GOL officials in particular during the process of consensus buildingwithin the country to support the economy-wide privatization program. Although initially the design of theproject was not adequate, it was reviewed to ensure that the project was technically, financially andeconomical viable. Nonetheless, some aspects were properly addressed, these included:

(a) Insufficient review of the PE sector issues - the definition of PEs was not clear and the list includedgovermment agencies which were not functioning as enterprises. It was thus difficult to prioritize the PEs tobe privatized and the workload of packaging the enterprise for privatization became tedious.

(b) Insufficient review on the privatization procedures. Although the institutional arrangements were givenadequate attention, the implementation procedures of the privatization process were not. As a result,lengthy and time consuming procedures were in-built in the Privatization Act. In addition, a uniformapproval of all transactions by all Cabinet members was required before the PU could continue with theprivatization transaction. With such politicized procedures, implementation of the privatization programwas difficult and slow.

It is well recognized that an independent privatization agency is more appropriate then a unit within thegovernment. In order to avoid problems encountered by the privatization unit the designing of theprivatization implementation agency should have been given more attention during preparation stage andchanges should have been introduced.

7.2 Supervision:

The Overall, project supervision is rated satisfactory. There was continuity in the Bank's team, its approachwas pro-active and flexible to address issues in a changing environment. The supervision period wasinitially planned for semi annual supervision missions with a minimum of two specialists including theTask Team Leader. Most implementation issues where addressed during mid-term review which resultedinto restructuring of the project and preparation of another project to address the utilities reform.Appropriate skill mnix of specialized staff in privatization and private sector development were used duringsupervision missions. The project had a moderate turnover of Task Team Leaders - three over the course of

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project life - continuity was thus maintained. The project has always been rated satisfactory during the 10supervision missions. The studies conducted under the project were satisfactorily done and the project wasaudited regularly. Nevertheless, insufficient attention was given on the requirements to promote Basothoownership of the privatized enterprises. Although privatization methods which would have promotedBasotho ownership were identified during project preparation, the privatization action plan and itsimplementation did not follow them. This was mainly due to the fact that the Basotho workers have lowincomes and limited capacity to produce a high quality proposal to the banks to provide financing toimplement management and employee buyouts. The suggested method to assist the Basotho to acquireprivatized assets was not appropriate, resulting in low participation of the Basotho in the program. TheBank should have been more pro-active in this area to ensure that altemative measures were beingconsidered to achieve objective.

7.3 Overall Bankperformance:The overall Bank's performance was satisfactory. In recognition of the project's design flaws in some of thecomponents, the Bank took the responsibility of initiating changes to address such shortcomings. As aresult funds were transferred from one component to another to address pressing restructuring andprivatization issues of the banking institutions and the utilities. However, the Bank was slow in takingaction to correct the design flaws in capital market component and consultations to embark on activities todevelop unit trust and privatization warehouse were rather delayed.

Borrower7.4 Preparation:

Borrower's performance during project preparation was satisfactory. The project was initiated by GOLthrough the Ministry of Finance who then requested technical assistance from IDA to prepare an economywide privatization program. It took GOL two years to review the PE sector, discussing and agreeing withgovernment and PE management on acceptable measures to either privatize or restructure operations. Anational workshop was organized in June 1993 to ensure that there was consensus on implementation of theprivatization program. The seminar was attended by ministers, Members of Parliament, principalsecretaries, management and staff of PEs and leaders of Labor Unions. Following the national consensusworkshop, a public awareness campaign was launched in April 1994. The political situation was tough butGOL was fimnly committed and the Privatization Act was passed by Parliament in late December 1995.Despite commendable efforts, project effectiveness was delayed by 1.5 years. The delays in meeting theconditions for project effectiveness was mainly due to the delay in the enactment of the Privatization Lawthat was satisfactory to IDA. This condition although necessary was highly unrealistic in particular at atime when the political environment was unstable.

7.5 Government implementation performance:

Government's implementation performance was mixed. Despite of delays in project effectiveness, PUcommenced its work using resources from both Ministry of Finance and the IDA Project Preparationfacility, this included hiring of advisors, consultants to conduct studies and core staff for the unit. Theconflict in the army, two attempted coup-d-etat, assassination of the Deputy Prime Minister of Finance andthe suspension of the Parliament in 1997 created a difficult political environment. Nevertheless, GOL'simplementation performance throughout the project remained at least satisfactory. Stable macroeconomicconditions provided a good policy environment and kept government commitment coherent with theprivatization program. There was also a high tumover of Ministers of Finance and Permanent Secretaries,(4 ministers and 4 permanent secretaries over the course of the project) which increased the delay in

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approving transactions. A number of privatization transactions on smaller PEs are still ongoing and couldhave been completed if GOL's had not been reluctant towards "sale of assets" approach for theseenterprises. The public awareness campaign had compelled senior public officials to travel country wide tohold consultations with local constituencies. GOL provided counterpart funds in a timely manner. It actedproperly whenever its involvement was required, and collaborated closely with Bank missions and followedup on the agreed action plans. The Private Sector Advisory Group was established and held frequentdialogue with GOL. The dialogue provided an important forum for private sector to raise their concerns onbusiness environment.

7.6 Implementing Agency:

The performance of the implementation agency - PU was satisfactory in the execution of the project.Procurement, financial management and reporting functions were performed satisfactorily throughout theproject's period. PU ensured compliance with all project covenants although there was some delays insubmission of progress and audit reports. The Project management team had experienced a low turnover ofstaff throughout the project. This management continuity ensured stability in administrative and financialcapacity throughout project implementation. The experience gained by the team in the execution of thisproject has made it possible for GOL to prepare future IDA funded projects. However, the issue of theproject getting qualified audits could not be resolved mainly due to the banking institutions which failed toreconcile the project accounts. This problem was encountered uniformly by other project implementationagencies and business entities.

7.7 Overall Borrower performance:

The overall performance of the Borrower is rated was satisfactory. Key staff of PU and Ministry ofFinance showed consistent commitment to the objectives of the project and worked hard to improve theirown skills. The complex nature of the project demanded a high level of coordination and attention todetails. Procurement procedures were adhered to with a high standard of reporting which was maintainedthroughout the project. The Bank was kept informed of all critical developments of project activities.

8. Lessons Learned

The following lessons can be learned from design, implementation and outcomes of project:

* Quality at Entry is essential in designing of projects. Intensive consultation during projectpreparation with stakeholders, in particular, the private sector, facilitates understanding of reformsespecially privatization. Political risk assessment to consider political realities including instability'sshould be adequately reviewed during project preparation.

* Strong and consistent government commitment and ownership of the privatization program areessential to the success of the program.

* Strong privatization agency, with skilled staff, empowered with appropriate authority to carry outthe reform and appropriately defined responsibilities, is another key to its success. PU was not anagency but rather a unit under the Ministry of Finance. As a result it was subject to politicalapproval and endorsements. Moreover, institutional capacity building is a slow process and

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expectations should be modest. Greater attention should be given to monitoring and reporting on theimpact of privatization. This is necessary to demonstrate that the processes are delivering thebenefits promised and thereby maintain consensus to keep up the momentum of reforms.

* Public awareness, participation of stakeholders and consensus building are essential to theprogram. The stakeholders must be kept informed and engaged from early on in the process toensure their active participation in designing the policies and implementation of the reform.

9. Partner Comments

(a) Borrower/implementing agency.The Government prepared its own Implementation Completion Report for the project based on interviewswith and reports of the beneficiary institutions, discussions with Government officials, project progressreports, and other materials from project files in Lesotho.The Government's implementation completionreport, which rated the project as satisfactory, is reproduced below:

REPORT ON THE PRIVATISATIONAND PRIVATE SECTOR DEVELOPMENT PROGRAMME

INTRODUCTION:

1.1 At the inception of the Privatisation Programmne in February 1995, the privatisation portfoliocomprised of at least 32 named parastatals, including 17 Government of Lesotho directly-ownedenterprises, 12 Lesotho National Development Corporation companies, and 3 Lesotho Bankcompanies. Government and the general public believed that most of the parastatals werepotentially viable given efficient management and fresh capitalisation. But with the exception ofLesotho Flour Mills, enterprises that were initially offered for privatisation by both theGovernment and the Lesotho National Development Corporation (LNDC) were generally poorperformers that had been regular recipients of Government subsidies for their survival.

1.2 Throughout its duration the project was pervaded by a public perception that by withdrawing fromcommercial activity, the Government was either abdicating its responsibility to deliver services tothe nation, or handing over the country's sovereignty to a new form of economic colonialism.These concems were at times voiced reservedly by members of Government itself, as in the case ofLesotho Flour Mills, where the inclusion of a "Golden Share" clause in the sale agreement becamean ultimate condition before Cabinet assent could be given as the enterprise was consideredstrategic.

1.3 In cases where Government disclosed mismanagement, abuse and fraud as responsible for poorperformance, the general criticism was that Government was equally guilty of inaction in allowingthese faults to go unchecked for years. Perhaps fearing to invest their savings in enterprises thatmight continue to perform badly, potential local investors who tried to participate in some of thesales considered it their right to expect Government concessions and subsidies to finance thepurchase. In other instances the public in Lesotho felt that the project has been badly designed innot having set aside financial resources to provide venture capital on favorable terms for Basothoentrepreneurs as the Lesotho commercial banks were notoriously averse to granting investmentcredit.

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1.4 The Privatisation Act, which defines the policy and operational framework goveming theprivatisation process and programme was enacted in November, 1995. The Act established thePrivatisation Unit as the agency responsible for carrying out the process on behalf of Government,and defined various methods that could be used to effect the process. Through powers defined inthe Act, the Unit in the same year appointed the firm of Deloitte Touche Tohmatsu to act as theproject's consultants in the implementation of the privatisation programme.

1.5 The primary objectives of the Lesotho Privatisation Project were to restructure the economy insuch a way that Government would be unburdened of heavy subsidies to badly-managed stateenterprises; to attract private sector management skills and capital; and to allow Government toconcentrate on regulation and facilitative roles rather than on direct business operations which weredistorting the functions of the public service. The vision of Government was always clearlyarticulated although the proposed changes met unexpectedly fierce resistance from vestedinterests. The intensity of the resistance seemed to be always underestimated by external observersincluding successive missions of the World Bank and the International Monetary Fund who seemedto question instead clarity of the vision as well as the commitment to restructuring the economy.

2. LESSONS DRAWN FROM ENTRPRISE-BASED ACTIVITIES:

2.1 LESOTHO AIRWAYS CORPORATION:

2.1.1 The first enterprise to be privatized was Lesotho Airways Corporation during the latter part of1997, through the sale of assets for operation of the business (aircraft, spares, etc) to a SouthAfrica based company, ROSSAIR. Lesotho Airways Corporation was technically insolvent atprivatisation, and had become a recipient of an annual Government subsidy amounting to M5annually million over a period of five years. The sale excluded assets relating to landed propertieswhich remained under the ownership of Government.

2.1.2 Air Lesotho suspended operations in February 1999 because it could not sustain the competitionfrom Air Link, a subsidiary of South African Airways whose decision to exercise its right to fly toLesotho coincided with the privatisation. Additionally it seems that Air Lesotho was handicappedby outmoded regulations that restricted leasing of aircraft.

2.1.3 The privatisation of Lesotho Airways Corporation resulted in the retrenchment of all the workers,giving proof to observers, of the negative label that had been used by labor union leaders inwarning the nation against privatisation.

2.1.4 The Government's commitment to pay terminal benefits proved to be an expensive exercise whichdrew some disquiet among some members of Government who felt that the workers who hadcontributed towards the downfall of the enterprise did not deserve a "golden handshake". Thissituation could have come as a matter of course had the Government decided to liquidate this andother similar enterprises.

2.1.5 This uneasiness over the payment of terminal benefits affected the Plant and Vehicle Pool Services,where again it was felt that poor management and abuse by some of the workers had led to thedownfall of the parastatal. The retrenchment packages and the decision of Government toguarantee the savings of depositors' in the privatisation of the two state banks led to frequentreference to what was to be referred to as "the heavy cost of privatisation".

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2.2 LESOTHO FLOUR MILLS:

2.2.1 Although a historically profitable enterprise, Lesotho Flour Mills faced stiff competition as a resultof the deregulation of grain products in Southern Africa in 1997. The sale of majorityshareholding to Seaboard Corporation of the United States was effected in May, 1998. The saleagreement provided for the transfer of 51% shareholding to Seaboard, with 10% shareholdingreserved for sale to employees, and 39% to the public. The sale included a "Golden Share"provision to ensure protection of the vital national interests in the company. This divestiturehighlighted the high sensitivity attaching to a crucial staple food processing and marketingenterprise.

2.2.2 Because of its historically profitable performance and positive worker morale, the employees ofLFM were able to gain better dividends from its privatisation. When the enterprise was listed forprivatisation, a group of workers expressed a desire to purchase some shareholding in theenterprise. As a result, 10% of the shareholding was reserved for them, and a payment mechanismfor this Employee Share Ownership Scheme is being devised.

2.2.3 The strategic investor agreed to take over the contracts of all workers, with Governmentundertaking to meet the retrenchment packages ofworkers retrenched during the first year of operation. As part of the sale agreement, the investorundertook to allocate funds for the retraining of workers retrenched during the first three years ofoperation. These workers were retrained for alternative employment through the EntrepreneurshipTraining component of the project. Subsequently arrangements were made for those who passedtheir training programmes to receive start-up loans for own businesses from the training fund.

2.3 INTERNATIONAL FREIGHT AND TRAVEL SERVICES:

For purposes of privatisation, The International Freight and Travel Services was divided into itsthree components, the car rental, the freight service and the travel agency. Avis (South Africa)bought back 80% of the assets of the car rental shareholding in April 1998, with 20% shareholdingwithheld for future sale to the public. A local investor has purchased these shares. The freightservice elicited no investor interest, and its business was wound up. The travel division, AmericanExpress, received unresponsive bids and was eventually put under liquidation by its direct owner,Lesotho Bank. The former workers of American Express have since established their own privatesector driven travel agency, and share the market with a few other private sector agencies that havestarted operating in Maseru.

2.4. PLANT AND VEHICLE POOL SERVICES:

2.4.1 In its initial privatisation scheme, the Plant and Vehicle Pool Services was divided into its ninecomponents each of which was viewed as affordable and manageable for local investors. Althoughseveral attempts were made to attract local interest, this enterprise was still on the privatisation listby 1998. A December, 1997 forensic investigation into the operations of the service revealedserious fraud and abuse of public funds. This strengthened Government's resolve to privatize theentity. An interim management team with the mandate to seek a buyer for the enterprises wasengaged in 1998, and the enterprise was eventually privatised through the sale of 80% of its

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shareholding to Imperial Fleet Services of South Africa in January, 2000. Essentially this meansthat the Government of Lesotho now leases up to two thirds of its vehicle fleet needs from theprivate sector which is a major departure from the previous arrangement whereby the Governmentowned and maintained all its vehicles. Inperial Fleet Services (Lesotho) has leased some of theforner Government workshops. Those that are not needed are being sold. The main Heavy PlantPool workshop which was no longer needed has subsequently been sold to a local investor inAugust, 2000.

2.5 LODGES:

In earlier efforts to stimulate tourism the Government had constructed and run tourist lodgeswithout much success. Consequently it was decided to privatize the lodges. In the absence of anoutright buyer, Marakabei Lodge was, in April 1998 sub-leased for a period of three years toMCM Enterpises, a company consisting of two South Africans and a local investor. Towards theend of the three-year lease they have expressed an interest to purchase the lodge, and negotiationsare currently underway with the Privatisation Unit. The Orange River Lodge was disposed of bypublic auction in October, 1999 to a local investor.

2.6 Minet Kingsway (Ptv) Ltd:

The Government also decided to divest its majority interest in the insurance brokerage business. Inresponse to a proposal from Aon Risk Services, U.K. to take over the entire shareholding of theformer Lesotho Bank in Minet Kingsway (Pty) Ltd, negotiations were held in February 2000. Thenegotiated agreement provides for the acquisition of an additional 31 per cent shareholding in thecompany by Aon Risk Services. This brings the total Aon Risk Services shareholding to 80 percent, leaving the Government of Lesotho with 20 per cent which will possibly be transferred to theUnit Trust for Basotho investor participation.

3. UTILITIES AND THE BANNING SECTOR:

3.1 Utility Tariff Studies undertaken at the inception of the project recommended the restructuring ofthe three utility companies and the review of tariffs rates to attract foreign investors and satisfy theexisting private sector. Although undertakings were made to effect these changes, none of themwere followed up with action. Coupled with the severely distressed condition of the state banks,which reportedly date back to the early nineties, some observers are disposed to argue that theproject might have started with the privatisation of these entities as a prerequisite to private sectordevelopment. On the other hand the complexities of utilities and bank restructuring have turnedout to be so taxing that the initial experience gained from other parastatals has been a practicalbenefit.

3.2 One of the major developments during the World Bank mid-term review of December 1-14, 1997was the decision to give high project priority to the restructuring of the state banking sector and theutility companies. Intemational Development Ireland (IDI) was appointed as conservator for bothLesotho Bank and the Lesotho Agricultural Development Bank in December, 1997. The LADBwas finally liquidated in December, 1999. Lesotho Bank was privatised by disinvestments of a 70per cent shareholding to Standard Bank with GOL retaining 30 per cent in the new Lesotho Bank'99.

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3.3 The project successfully laid the groundwork for restructuring of the telecommunications sectorwith the Telecommunications Bill leading to the establishment of the TelecommunicationsAuthority and the privatisation of Lesotho Telecommunications Corporation, LTC.

3.4 The project also laid the groundwork for restructuring of the energy sector through support forpreparation of an electricity regulation bill. Staff of the Privatisation Unit were actively involvedin the preparation of the new Lesotho Utilities Reform Project.

4. PRIVATE SECTOR DEVELOPMENT:

4.1 PUBLIC PARTICIPATION:

4.1.1 DIRECT PARTICIPATION:

Although the size of enterprises in the portfolio varied, most of them were evidently too large forthe traditional individual ownership by local investors. Apart from an inability to prepareconvincing bid documents, a major impediment to local participation was the absence ofmechanisms for raising funds from commercial banks, and the absence of resources for venturecapital as part of the project.

4.1.2 The management of Loti Brick and employees of Maluti Highlands Abattoir expressed interest inEmployee Buy-out arrangements, but neither were able to raise the requisite capital. Although theUnit suggested and was willing to arrive at affordable payment arrangements, none of these werefollowed up to successful conclusion by the groups. A three-year lease arrangement with theoption to buy was only arranged successfully in the case of Marakabei Lodge.

4.1.3 The offer of sale of Government's 12% shareholding in VCL (widely perceived to be profitable),has inspired the formation of a local investment holding company, Sekhametsi InvestmentConsortium, which successfully raised funds from the public to bid for the shareholding. In itsnegotiations with Sekhametsi, Government has agreed to grant preferential payment mechanisms tofacilitate this commendable initiative. This is a transaction that is being closely watched, and hasgenerated great public interest. It is hoped that this initiative will encourage other groups toundertake similar investmnents in the other privatized enterprises.

4.2 INDIRECT PARTICIPATION: Establishment of Unit Trust:

4.2.1 The considerable time taken in establishing a vehicle for public participation in the programme hassomewhat eroded, in the eyes of the public, Government's assertion that the programme ofrestructuring could be of benefit to potential Basotho investors. This despite the fact that many ofthe enterprises privatized could not have qualified for listing had such a mechanism existed earlieras the enterprises did not have a track record of profitability.

4.2.2 Following protracted consideration of various options for promotion of public participation, it wasfnally recornmended to Cabinet that the chosen vehicle be a Unit Trust. The willingness ofGovernment and the LNDC to sell some of their shareholding in profitable enterprises to form theTrust's portfolio should make this investment mechanism popular among the Basotho.

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5. ENTREPRENEURSHIP TRAINING PROGRAMME:

The project correctly identified that restructuring of the economy would create many newopportunities requiring new kinds of entrepreneurial skills. Privatisation has been accompanied byoutsourcing of various non-core services as part of deliberate government policy. Unfortunatelythe linkages between privatisation and ETP have not been very successful and training programmesmounted by the ETP have not been adequately responsive to the restructuring process.

6. PUBLIC AWARENESS PROGRAMM:

The need to depolitisise the process of economic transformnation in Lesotho is highly critical for theprivatisation programme. The "siege" mentality which is historically derived from Lesotho'sgeographical position as an enclave within the borders of South Africa has not changedsignificantly despite political changes in South Africa. It is quite obvious that the Basotho peoplestill do not fully understand the economic implications of the political changes in the region. Thiscalls for a sustained public awareness effort on the new economic situation that has the full supportof the highest authorities in Government.

7. CAPACITY BUILDING OF LESOTHO CHAMBER OF COMMERCE ANDINDUSTRY:

Over a period four years the project gave direct assistance to the capacity building of the LCCI toenable the Chamber to play a more proactive consultative role in its interactions with Governmentand positive mobilization of potential membership. At the end of the project the LCCI is a strongerand vibrant organization - actively participating in regular consultative meetings with Governmentand other nongovermnental organizations locally and internationally.

8. ESTABLISHMENT OF COMMERCIAL COURT:

The inauguration of the Commercial Court on May 2, 2000 was one of the signal achievements ofthe project in the creation of an environment that facilitates business by speeding up resolution ofdisputes and assuring investors about the availability of conflict resolution mechanisms. Thecommercial banks in Lesotho were particularly concerned about lengthy delays in processing loandefault cases and had become reluctant to grant loans.

9. DONOR SUPPORT:

Although the Lesotho Privatisation Prograrnme has primarily been a project of the LesothoGovernment and the World Bank (IDA), it also attracted modest support from other donors in thecourse of its implementation. The British Government gave staff support through the OverseasDevelopment Institute (ODI) by sponsoring two ODI fellows who served as Economists in theproject. The Govermrnent of the Federal Republic of Germany sponsored an advisor to theDirector. The Government of the United States of America sponsored the Director on amonth-long study tour of privatisation initiatives in the U.S.A. at Municipal, State, and Federallevels. The Government of the Republic of France also sponsored Privatisation Unit staff to attenda Southern African regional workshop organized by the French Government on privatisationexperiences in Africa. The Privatisation Unit received maximum cooperation from the local officeof the United Nations Development Programme which also provided the Unit with useful currentpublications about privatisation projects throughout the world. Useful contacts were also

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maintained with the Delegation of the European Union to Lesotho and with the Embassy of thePeoples Republic of China. The European Investment Bank took particular interest in theprivatisation of Lesotho Telecommunications Corporation. The Consulate of the Republic ofIreland also showed active interest in the evolution of the privatisation programme, and sponsoreda workshop on Internet Connectivity and Regulation which was a significant contribution to thetelecommunications restructuring programme.

10. NEED FOR PARTNERSHIP IN DEVELOPMENT: WORLD BANK:

One of the lessons of the project has been the need for the World Bank to fully appreciate theintensity and character of local resistance to privatisation, some of which was actually directedrightly or wrongly, at the World Bank itself. The fact that the economic restructuring programmewas a joint venture of the Government of Lesotho and the World Bank was not adequatelyprojected by successive World Bank Missions. The tendency has been for the most SeniorOfficials of the World Bank associated with the project to occupy remote seats of judgment aboutthe pace of project implementation without taking into account the depths and complexities of localresistance. In future it will be helpful if Senior World Bank Officials maintain some directinteraction with local project officials to gain a full understanding of implementation problems.The Director for Lesotho visited the Privatisation Project only once in a period of 4 years despitenumerous visits to Lesotho, and clearly never fully understood the complex dynamics of the projectat the implementation level.

11. ACKNOWLEDGEMENTS:

Many people and offices have contributed to the attainment of whatever achievements the projectmay have reached in five years against all odds. The Project was fortunate to have a highlydedicated team in the Privatisation Unit. The Project appointed some extremely talentedConsultants to assist in the implementation of some of the key assignments of the project. ThePrivate Sector Advisory Committee provided immensely useful advice and criticism, and last butnot least the Government of Lesotho gave consistently strong support to the programme ofEconomic Restructuring in spite of sometimes fierce opposition.

Privatisation UnitMaseruApril 2001

(b) Cofinanciers:

USAID, CDF, DFID contributed to the privatization program in terms of technical assistance.

(c) Other partners (NGOs/private sector).-N.A.

10. Additional Information

LESOTHO: Privatization in Lesotho 1995 - 2001

Name of PE Gross Proceeds (US$ million)1. Plant and Vehicle Pool Services 11.302. PVPS Plant Building 0.03

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3. Minet Kingsway 0.224. Avis 0.055. Lesotho Airways Cooperation 2.406. Lesotho Flour Mills 10.707. Marakabei 0.028. Orange River Lodge 0.029. Lesotho Telecom Corporation 17.0010. Vodacom Lesotho 0.69

Total Proceeds 42.82

Note: 9 PEs were liquidated by end of project.

Source: Government of the Kingdom of Lesotho: Ministry of Finance

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

ItndicatorlMatrix Projected In last PSR ActualLatest EstimateGovemment divestiture for two state banks Liquidation of Lesotho Bank was approved by Donecompleted. Cabinet in Oecember 1999. New company

Lesotho Bank (1999) was created and 70%of shares were privatized. GOL own 30%.

Liquidation of Lesotho AgriculturalDevelopment Bank was completed in August Done2000.

Govemment divestiture for state GOL awarded LTC to winning bidder in Done.telecommunications completed. November 2000 and commenced Negotiations completed in February 2001.

negotiations on the Draft Agreements withprivate strategic investor. Draft agreementincluded roll out target for investor onconnected lines, public pay phone, intemetaccess infrastructure and fixed capacity foreach of the five years.Privatization of Lesotho TelecommunicationCompany was completed in February 2001.

Telecommunications Regulatory reform is Lesotho Telecommunication Authority was Done.placed, resulting in increased competition. established and became operational since

July 2000. The LTA is independent and hasan equitable interconnection regime in place.However, since there is no Competition Lawin Lesotho, the LTA lacks competitivesafeguards. These will be dealt with by thesuccessor project USRP.

Output Indicators:

IndicatoffMatrix Projected in last PSR ActualLatest Estimate1. Privatization:

(a) Secure two state banks by appointment of Conservators were appointed in 1998. Doneconservators. (Dec 97)

(b) Completing Privatization of at least 10 Government approved sale of assets of 4 Partially done.small and medium sized PEs before Cabinet state owned enterprises.by December 1999. The privatzation of the remaining PEs is

constraint by lack of serious privateinvestors, lack of capital for local investorsand governments' protracted decision toconsider the sale of assets approach for thePEs.

(c) Bring Lesotho Agricultural Bank to point Liquidation of Lesotho Agricultural Done.of closure by June 1998. Development Bank was completed in August

2000.

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(d) Bring Lesotho Bank to point of sale by Liquidation of Lesotho Bank was approved by Done.June 1999 Cabinet in 1999.

(e) Streamlined prvatization procedures - Small enterprises to be privatized will Not done.require Cabinets sub-committee approval;- 10 day limit for Cabinet decision on large Not done.enterprises to be privatized;- Interagency steering Committee was Not done.established to facilitate privatization process,once enterprise is gazette for privatization;- Privatization Unit has observer memberstatus on Boards of enterprises to be Not done.pnvatized by June 1998.

2. Utilities Reform:

(a) Agree draft telecommunications law and The Telecommunication Law was enacted in Doneagree divestiture strategy for state operator November 1999.by June 1999 The TLC divestiture strategy was agreed by

GOL in 1999

(b) Bring Telecommunications operator to The winning bid was selected in November Donepoint of sale by June 2000. 2000. Privatization of TLC was completed in

February 2001.

3. Regulatory Reform:

Draft regulatory framework for water and Completed in November 1999. Doneelectricity sectors promoting PPI by June2000

4. Capital Market Development:

(a) Framework for Unit Trust to promote local A consultant has been appointed to develoP Partially done

private sector participation ready (June 99) framework for Unit Trust and itsestablishment. Assignment to be completedin Febnuary /March 2001 and operational byJuly 2001.

(b) Improve Central Bank Supervision The Central Bank of Lesotho Bill of 1999 was Done

capacities by December 1998 enacted in August 2000.

5. Training:

(a) Entrepreneurship training schemes in The Entreprenuership Training Program was Doneplace. (Dec. 97) incorporated into Basotho Enterprises

Development Corporation (BEDCO) inDecember 2000. It continues its trainingactivities for trainers and small scaleentrepreneurs, It has recently beencontracted to cover training requirements ofemployees affected by privatization ofenterprises and services in the agriculturesector.

(b) Training of at least 500 trainees for Trained 486 retrenched employees and 519 Done

Entreprenuership and re-deployment. private entrepreneurs. 60 percent of thosetrained are utilizing their new acquired skills.

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6. Strengthening of Private SectorAssociation.

(a) Encouraging greater seHf sufficiency in Lesotho Chambers of Commerce and Partially doneorganized private sector groupings - Lesotho Industry became 50% self sufficient by endChambers of Commerce and Industry of 2000 instead of 75% as targeted mainly

due to the September 1998 political unrestwhich disrupted business infrastructure. I

End of project

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent) __._.

Appraisal ActuallLatest Percentage ofEstimate Estimate Appraisal

Project Cost By Component US$ million US$ millionPrivatization 4.50 5.71 126

Private Sector Development 2.20 2.20 100Capital Market Development 0.20 0.00 0Training and Institution Building 0.90 0.90 100

Total Baseline Cost 10.80 8.89

Price Contingencies 1.60 0.00 0Total Project Costs 12.40 8.89

Total Financing Required 12.40 8.89

Project Costs by Procurement Arran ements (Appraisal Estimate) (US$ million equivalent)Procurement MethodI

Expenditure Category Ica NCB Other2 N.B.F. Total Cost

1. Works 0.80 2.50 0.00 0.00 3.30(0.30) (2.50) (0.00) (0.00) (2.80)

2. Goods 0.00 0.00 0.30 0.00 0.30(0.00) (0.00) (0.30) (0.00) (0.30)

3. Services 0.00 0.00 7.30 0.00 7.30(0.00) (0.00) (7.30) (0.00) (7.30)

4. Others (recurrent costs 0.00 0.00 1.50 0.00 1.50and unallocated)

(0.00) (0.00) (0.60) (0.00) (0.60)5. Miscellaneous 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)6. Miscellaneous 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)Total 0.80 2.50 9.10 0.00 12.40

(0.30) (2.50) (8.20) (0.00) (11.00)

Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)~

Procurement MethodExpenditure Category ICB NCu Other' N..F. Total Cost

1. Works 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 0.00 0.00 0.30 0.00 0.30(0.00) (0.00) (0.30) (0.00) (0.30)

3. Services 0.00 0.00 8.80 0.00 8.80

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(0.00) (0.00) (8.40) (0.00) (8.40)4. Others (recurrent costs 0.00 0.00 1.60 0.00 1.60and unallocated)

(0.00) (0.00) (0.20) (0.00) (0.20)

5. Miscellaneous 0.00 0.00 0.00 0.00 0.00_______________________ (0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 0.00 0.00 10.70 0.00 10.70(0.00) (0.00) (8.90) (0.00) (8.90)

' Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2 1 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted

staff of the project management office, training, technical assistance services, and incremental operating costs related to(i) managing the project, and (ii) re-lending project funds to local government units.

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Annex 3. Economic Costs and Benefits

Not Applicable

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No, of Persons and Specialty Performance Rating

(e.g. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/Preparation11/1992 6 Task Team Leader, Investment

Promotion Specialist, CapitalMarket Specialist, PrivatizationSpecialist, Intern, FinancialSpecialist

Appraisal/Negotiation6/1993 5 Task Team Leader, Counsel,

Investment PromotionSpecialist, Lawyer, CapitalMarket Specialist,Privatization Specialist

Supervision03/18/1995

03/29/1996 7 Senior Operations Officer (Team S SLeader), Privatization Specialist,Energy Specialist, Private SectorDevelopment Specialist, TourismSpecialist, Investment PromotionSpecialist, Export PromotionSpecialist

08/28/1996 2 Senior Operations Officer (Team S SLeader), Privatization Specialist

06/27/1997 2 Senior Economist (Team S SLeader), Senior OperationsOfficer

12/12/1997 5 Senior Economist (Team S SLeader), Privatization Specialist,Financial Sector Specialist,Telecommunication Specialistand Project ManagementSpecialist

04/24/1998 3 Senior Economist (Team S SLeader), Privatization Specialist,Telecommunication Specialist

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02/17/1999 3 Senior Economist (Task Team S SLeader), Operations Analyst,Micro-Finance Specialist(Consultant)

06/10/1999 2 Senior Economist (Task Team S SLeader), Utilities andPrivatization Specialist

11/11/1999 3 Senior Economist (Task Team S SLeader), Operations Officer,Utilities and PrivatizationSpecialist

03/10/2000 4 Operations Officer (Team S SLeader), Senior Private SectorDevelopment Specialist, SeniorAdvisor, Private SectorDevelopment Specialist,

09/13/2000 3 Team Leader, S STelecommunication Specialist,Senior Private SectorDevelopment Specialist

ICR03/26/2001 1 Private Sector Development S S

Specialist

(b) Staff:

Stage of Project Cycle Actual/La est EstimateNo. Staff weeks USS ('000)

Identification/Preparation 23 63.1Appraisal/Negotiation 31.1 81.6Supervision 83.9 215.2ICR 10 35Total 148 394.9

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingI Macro policies O H OSU*M O N O NA

? Sector Policies O H * SUOM ON O NArI Physical OH OSUOM ON *NA

O Financial O H OSUOM O N O NA

E Institutional Development 0 H O SU O M 0 N 0 NA

OI Environmental O H OSUOM O N * NA

SocialZ Poverty Reduction O H OSUOM * N O NA

LGender O H OSUOM *N ONAM Other (Please specify) O H OSUOM O N O NA

Retrenchment of PE workersI Private sector development 0 H O SUO M 0 N 0 NA

F Public sector management 0 H O SUO M 0 N 0 NA

El Other (Please specify) 0 H O SU O M 0 N 0 NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

M Lending OHS OS Ou OHUI Supervision O HS * S OU OHU

Z Overall OHS O S O U O HU

6.2 Borrower performance Rating

Z Preparation O HS OS O u Q HUE Government implementation performance O HS OS 0 U 0 HU

M Implementation agency performance OHS OS O U O HUZ Overall OHS OS 0 U O HU

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Annex 7. List of Supporting Documents

1. List of Studies included in Project2. ICR Mission Aide Memoire3. Implementation Completion Report prepared by the Borrower4. Lesotho Privatization Unit Quarterly Progress Reports and Annual Reports5. Report on National Dialogue on Privatization and Restructuring of Lesotho Economy - September 19996. Lesotho Privatization and Private Sector Development Project - Final Report: Privatization AdvisoryServices

Contract 1995-2007. Minutes of ICR review meeting

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