Document of

The World Bank

FR OMCIaAL USE ONLY

Reprt No. 4987

PROJECT COMPLETION REPORT

LESOTHO: LESOTHO NATIONAL DEVELOPMENT CORPORATION (LNDC)

AND

BASOTHO ENTERPRISES DEVELOPMENT CORPORATION (BEDCO)

(CREDIT 702-LSO)

March 14, 1984

Eastern Africa Projects DepartmentIndustrial Development and Finance Division

r This docu_ent hb a restricted distnbutio and may be ued by recipients only in the perfonmamce oftheir official dutie Its contents nmy not othrwise be diased witbout World Dank aoriion.

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CURRENCY EQUIVALENTS

Currency Unit = Maloti (N)February 1977 US$1.0 = RO.87

R 1.0 = US$1.15January 1980 US$1.0 = MO.83 = RO.83

M 1.0 = US$1.20 - R1.0June 1983 USS1l0 = M1.08 - R1.08

H 1.0 = US$0.93 = R1.0

GLOSSARY OF ABBREVIATIONS

ADB: African Development BankBEDCO: Basotho Enterprises Development CorporationCDC: Commonwealth Development CorporationCIDA: Canadian International Development AgencyDEG: Deutsche Gesellschaft Fuir Wirtschaftliche Zusamuenarbeit

Entwicklungsgesellschaft (Gbh)EDESA: Economic Development for Equatorial and Southern AfricaEDF: European Development FundEIB: European Investment BankFMO: Nederlandse Financierings - Maatschappij Voor

Ontwikkelingslanden N.V.FRIDA: Fund for Research and Investment for the Development of AfricaKFW: Kreditanstalt far WiederaufbauLBFC: Lesotho Building Finance CorporationLHF: Lesotho Housing FinanceLIH: Lesotho Investment HoldingsLNDC: Lesotho National Development CorporationLNIC: Lesotho National Insurance CompanyRMA: Rand Monetary AreaRSA: Republic of South AfricaSACU: Southern Africa Customs UnionSSE: Small Scale EnterpriseSTIC: Sebaboleng Trade and Industrial CenterUNDP: United Nations Development Program

FISCAL YEAR

BEDCO: April 1 - March 31LNDC : April 1 - March 31

FOR OMCIAL USE ONLY

PROJECT COMPLETION REPORT

LESOTHO: LESOTHO NATIONAL DEVELOPMENT CORPORATION (LNDC)

AND

BASOTHO ENTERPRISES DEVELOPMENT CORPORATION (BEDCO)(CREDIT 702-LSO)

TABLE OF CONTENTSPage No.

Preface iBasic Data SheetHighlights iii

I. Introduction 1II. Hacroeconomic, Industrial and Financial Sector Objectives 2III. LNDC: The Institution 6IV. LNDC: Allocation of the Credit 13V. LNDC: Operational and Financial Performance 14VI. LNDC: Conclusions 18VII. BEDCO: The Institution 20VIII.BEDCO: Allocation of the Credit 22IX. BEDCO: Operational and Financial Performance - 23X. BEDCO: Conclusions 25

Annexes

LNDC

A-1 List of Subprojects Financed under Credit 702-LSOA-2 Financial Characteristics of Subprojects Financed under Credit 702-LSOA-3 Economic Characteristics of Subprojects Financed under Credit 702-LSOA-4 Sum-ary Description and Present Status of Subprojects

Financed under Credit 702-LSOA-5 A Comparison of Forecast and Actual Operations (1977-1983)A-6 Portfolio as of March 31, 1983A-7 A Comparison of Forecast and Actual Income Statements (1977-1983)A-8 A Comparison of Forecast and Actual Balance Sheets (1977-1982)A-9 Consolidated Income Statements (1977-1982)A-10 Summarized Consolidated Balance Sheets (1977-1982)A-11 A Comparison of Forecast and Actual Financial Ratios (1977-1983)

BEDCO

B-1 List of Subprojects Financed under Credit 702-LSOB-2 Characteristics of Projects Financed under Credit 702-LSOB-3 Summary Description and Present Status of Selected Subprojects

Financed under Credit 702-LSOB-4 Summary of Operations (1977-1982)B-5 Analysis of Equity Portfolio as of June 30, 1982B-6 Forecast ana Actual Income Statements (1977-1982)B-7 Forecast and Actual Balance Sheets (1977-1982)

COMMENTS

C Coumments Received from Borrower

This document has a rstied distribution and may be used by repients only in the pofonnance ofltheir offidc duties. Its contents may not othdwise be dislosed without World Bank authorization.

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PROJECT COMPLETION REPORT

LESOTHO: LESOTHO NATIONAL DEVELOPMENT CORPORATION

AND

BASOTHO ENTERPRISES DEVELOPMENT CORPORATION(CREDIT 702-LSO)

PREFACE

This is a completion report on Credit 702-LSO to the LesothoNational Development Corporation (LNDC) and the Basotho EnterprisesDevelopment Corporation (BEDCO). The credit of US$2.5 million was approvedin April 1977, signed in May 1977 and fully disbursed in December 1982.

The Association's Eastern Africa Regional Office has preparedthis report on the basis of information gathered during missions in July1982 and March 1983. The report presents a factual review of LNDC's andBEDCO's institutional development and their utilization of the proceeds ofthe credit.

BEDCO has offered some specific comments and clarifications;these have been taken into account in finalizing the report and arereproduced as Annex C.

This project has not been audited by the Operations EvaluationDepartment.

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PROJECT COMPLETION REPORT

LESOTHO NATIONAL DEVELOPMENT CORPORATIONAND

BASOTHO ENTERPRISES DEVELOPMENT CORPORATION(CREDIT 702-LSO)

BASIC DATA SHEET(Amounts in US$ millions)

As of 6/30/83Original Disbursed Cancelled Repaid Outstanding

Credit No. 702-LS0 2.5 2.29 0.21 - 2.29

Cumulative Loan Disbursement

1978 1979 1980 1931 1982

(i) Estimated 1.0 1.6 2.2 2.5 -(ii) Actual 0.1 0.6 1.2 2.1 2.3(iii) (ii) as Z of (i) 10.0 38.0 55.0 84.0 92.0

PROJECT DATA.

Original Credit Dates Actual or Re-Estimated

Board Approval 4121/77Credit Agreement 5/20/77Effectiveness 8/23/77Credit Closing 12/31/81 12/10/82Physical Completion 12/31/79 12/31/80

MISSION DATA

No. of No. of Date ofMonth/Year Weeks Persons Manweeks Report

Identification 3/73 0.43 2 0.86 4/23/73Preparation 8/75 0.43 2 0.86Preappraisal 2/76 0.36 1 0.36Appraisal 3/76 3.00 4 8.43 5/5/76Technical Assistance 6/76 1.00 1 1.00Post Appraisal 8/76 1.00 3 3.00 .9/10/76Supervision I 8/77 1.00 1 1.00 10/12/77Supervision II 1/78 1.43 2 3.00 4/11/78Supervision III 4/79 2.00 3 6.00 6/11/79Supervision IV 8/80 1.90 2 3.80 10/14/81Supervision V 8/81 1.90 2 3.80 10/14/81Completion 7/82 2.00 2 4.00 9/13/82

FOLLOW-UP PROJECTS

Second Lesotho National Development Corporation Project, Credit 985-LSO, approved onJanuary 15, 1980 in the amount of US$4.0 million.

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PROJECT COMPLETION REPORT

LESOTHO: LESOTHO NATIONAL DEVELOPMENT CORPORATION

AND

BASOTHO ENTERPRISES DEVELOPMENT CORPORATION(CREDIT 702-LSO)

HIGHLIGHTS

The Association's involvement with the Lesotho NationalDevelopment Corporation (LNDC) began in 1973. Between 1973 and 1976 theAssociation provided LNDC with technical assistance and advice to assist itto overcome a significant deterioration resulting from a period ofmanagement instability. In 1976, the Lesotho Government requested theAssociation to provide LNDC and its subsidiary, the Basotho EnterprisesDevelopment Corporation (BEDCO), with financial assistance. The creditunder review aimed at both institution building of the two corporations andproviding financial support to Lesotho's industrialization effort, whichfaces numerous. inherent constraints, thereby creating much neededemployment. The credit provided US$ 2.2 million to LNDC for medium andlarge scale investments and US$ 0.3 million to BEDCO, which was separatedfrom LNDC in 1978, for small scale indigenous enterprises.

At the time of credit appraisal, LNDC had numerous seriousweaknesses. Almost all of its subsidiaries and associated companies wereexperiencing severe problems, ranging from poor management tounsatisfactory financial performance and condition. LNDC had an inadequateorganizational structure, poor procedures, especially financial control,inadequate staffing, and weak project identification and preparationcapabilities and relied significantly on expatriate staff. During theperiod of credit implementation, LNDC made important progress in overcomingmany of these weaknesses, with specific achievements includingstrengthening and improving control of subsidiaries, significantlyimproving financial control, recruiting and training Basotho staff andlocalising some managerial positions, implementing a quite successfuldivestiture program and introducing an active investment promotionprogram. However, LNDC has a number of weaknesses yet to overcomeregarding procedures, staffing, portfolio quality and financialperformance, which has consistently been poor, with losses in all years.Since 1978, three experts, provided under the auspices of Irish Aid, haveoccupied key positions in LNDC and made important contributions towardsstrengthening the institution. LNDC will need to rely on expatriate staffin key areas for some years to come, in view of the extreme shortage inLesotho of qualified professionals. Although, the appraisal did not setspecific employment targets, the slower than forecast growth in LNDC'sportfolio suggests that achievements in the appraisal projection period(1977-81) fell short of expectations. Nevertheless, the limited statistics

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show that LNDC's role in employment generation was significant. MoreoverLNDC's performance in creating jobs has been improving markedly as a resultof the investment promotion program. In addition, LNDC has made asignificant contribution to policy and planning in the sectors in which itoperates. LNDC utilized the IDA credit for fourteen projects, of whicheight are now operating profitably.

BEDCO, only recently established at the time of credit appraisal,has benefitted from a comprehensive financial and technical assistanceprogram from the Canadian International Development Agency (CIDA),and thus the role of the Association in assisting BEDCO's development hasbeen minor. BEDCO has succeeded in establishing fairly sound systems andprocedures, having made substantial progress in overcoming weaknessesduring credit implementation, particularly regarding supervision andfinancial control. In addition, it has launched a satisfactory program fortraining its client entrepreneurs, and has made good progress instreamlining its organizational structure and recruiting Basotho staff. Onthe other hand, the bulk of BEDCO's portfolio, including the thirty-oneprojects financed under the IDA credit, is of poor quality, andBEDCO'sfinancial performance has been much poorer than anticipated. Likeother institutions in Lesotho, it continues to rely on expatriate staff inkey areas. Overall, given the difficulties of launching successful smallenterprises, particularly in Lesotho with its numerous constraintsBEDCO has performed reasonably well in exposing Basotho nationals to smallscale industrial and commercial activities.

Other points of interest are:- Special characteristics of Lesotho's economy (Section II)

- Features of LNDC's operations (paras. 5.01-5.04)

- The evolution and status of LNDC's portfolio (para. 5.05)

- LNDC's weak financial performance (para. 5.06)

- BEDCO's subsidiary status (para. 7.02)

- BEDCO's portfolio and causes of poor quality (paras. 9.05 and9.06)

PROJECT COMPLETION REPORT

LESOTHO: LESOTHO NATIONAL DEVELOPMENT CORPORATIONBASOTHO ENTERPRISES DEVELOPMENT CORP0RATION

(CREDIT 702-LSO)I. INTRODUCTION

1.01 The Lesotho National Development Corporation (LNDC) wasestablished under the Lesotho National Development Corporation Act in 1967as a statutory corporation to promote and finance modern non-agriculturalprojects in Lesotho. LNDC got off to a good start under its first ManagingDirector, a South African industrialist, who was successful in establishingabout 15 projects and setting up good internal operational procedures.After his departure in 1973, a suitable replacement could not be found forsome time. Instead, the General Manager of the Lesotho Bank, a whollygovernment-owned commercial bank, was assigned responsibility for managingLNDC, while also continuing to serve as head of the Lesotho Bank. Aseparate Managing Director for LNDC was appointed only in 1975, although ona temporary basis, under a UNDP project for which IBRD was the executingagency. In mid-1976, a full-time Managing Director was provided by theCanadian International Development Agency (CIDA).

1.02 The uncertainty concerning management which prevailed between1973 and 1976 had considerable negative effects on LNDC and offset theprogress which had been made in the early years. Good staff could not berecruited and retained; the organization structure became ineffective andinternal procedures deteriorated; there was inadequate follow-up on theinvestments which had been made, leading to a rapid deterioration in theirperformance; and the very few new projects which were started were notadequately evaluated.

1.03 The Association's involvement with LNDC began in March 1973,with a very brief fact finding mission at about the time of departure ofthe first Managing Director. Although the Association subsequently fieldedfour brief technical assistance and updating missions, continued to provideLNDC advice on policies and procedures, and assisted Government inrecruiting the temporary Managing Director in 1975, it was not untilFebruary 1976, that Government requested the Association to providefinancial assistance to LNDC, as well as to its recently acquiredsubsidiary, the Basotho Enterprises Development Corporation (BEDCO), whichhad been established in 1975 as a government company to promote thedevelopment of small-scale indigenous enterprises. An appraisal missionvisited Lesotho in March 1976, and a post-appraisal mission followed inAugust 1976. The post appraisal mission recommended a credit of US$2.5million, of which US$2.2 million for LNDC and US$0.3 million for BEDCO.

1.04 The credit under review, Credit 702-LS0, based on AppraisalReport No. 1332a-LSO dated March 17, 1977, was approved on April 21, 1977,signed on May 20, 1977 and declared effective, as scheduled, on August 23,1977. The credit was fully disbursed on December 10, 1982, about one andone-half years behind schedule.

1.05 The credit was to be passed on by Government at 8.5Z perannum and 7X per annum to LNDC and BEDCO respectively. The creditconditions for LNDC included a free limit of US$100,000 and an aggregatefree limit of US$700,000. BEDCO would submit for prior approval the firstten projects for which it sought IDA financing; after these, it wouldsubmit, on a quarterly basis, a summary list of projects for IDAreimbursement. A debt to equity ratio of three to one was specified forboth corporations. On loans made by LNDC out of its portion of the credit,Government would bear the foreign exchange risk for a one percent fee to bepassed on to subborrowers; Government would bear the risk on loans made byBEDCO out of its portion of the credit for no fee. LNDC would repay itsportion of the credit according to the standard composite amortizationschedule applicable for development finance companies; BEDCO would amortizeits portion of the credit through LNDC according to a fixed schedule over10 years including four years of grace. Finally, both LNDC and BEDCO wereto onlend the proceeds of the credit at a minimum 12% per annum.

1.06 The project had two objectives, namely to (i) facilitate thedevelopment of non-agricultural enterprises in Lesotho through theprovision of foreign exchange resources for extending term financing tosmall, medium and large scale projects in Lesotho, thereby creatingemployment opportunities locally for the expanding labor force; and (ii)further the development of LNDC and BEDCO as effective developmentinstitutions and financial intermediaries. The one project risknoted in the appraisal report related to lending to small-scale enterprises(SSEs). This risk was deemed worth incurring because development andtraining of new Basotho entrepreneurs were key to future expansion of theindustrial sector, and employment effects of BEDCO's lending were expectedto be high. In order to minimize the risk of SSE failures, BEDCO wouldprovide training and technical assistance to its subborrovers.

1.07 Credit 702-LSO was followed in 1980 by a second credit forLNDC of US$4 million (Credit 985-LSO), which is only partially committed.BEDCO was projected to have sufficient resources at least through 1982, andthus the second credit did not provide it with additional IDA assistance.

II. MACRO-ECONOMIC, INDUSTRIAL AND FINANCIAL SECTOR OBJECTIVES

2.01 Lesotho is one of the UN designated (1976) least developedcountries. The country is small, with a 1980 population of 1.3 million,growing at 2.3% per annum, occupies 30,350 sq. km., and is completelysurrounded by the Republic of South Africa (RSA). Although Lesotho ismountainous, soil erosion is extensive and only 13% of its land area issuitable for crop farming, subsistence agriculture and livestock farmingremain the leading sectors of the economy, providing livelihood for some90% of the resident population. Given the constraints to agriculturaldevelopment, Government has looked to the sectors of industry, tourism andcommerce to play a crucial role in employment generation. LNDC and BEDCOwere created in order to promote these sectors, through the provision ofvarious types of financial assistance (loan, equity, buildings/sites forlease on industrial estates and guarantees) to medium/large local andforeign enterprises (LNDC) and small indigenous enterprises (BEDCO).Lesotho faces formidable constraints in its efforts to develop inmanufacturing. These include: the scarcity of natural resources other than

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water and small diamond deposits; the small size of che domestic market;the dearth of local entrepreneurs; the shortage of Basotho managerial staffand skilled workers; and, as a result of its membership in the SouthernAfrica Customs Union (SACU), which provides for the free movement of allgoods in the area, competition from more experienced manufacturers in theRSA, which makes it difficult for local establishments to meet their marketexpectations.

2.02 The most significant characteristic of Lesotho's economy isits critical dependence on the RSA, from where more than 95Z of its importsoriginate, as do all of its electricity and most of its foreign investmentand tourism. Its exports either end up in the RSA or transit through theRSA's ports to the rest of the world. More than 23% of its labor force andabout one-half of its male labor force depend upon employment in the RSA,mainly in mining, and over 70% of the Government's income comes fromreceipts from SACU.

2.03 Despite the country's handicaps, Lesotho's econony grewrapidly in the 1970's, with real GNP and GDP increasing at annual rates of9.3% and 7.7% respectively. This growth was primarily due to four factors:(i) a substantial rise in external assistance; (ii) increases in miners'remittances; (iii) increased customs revenues from SACU; and (iv) theexpanded output from the diamond mine which opened in 1977, but closed in1982. Despite the growth, the structure of the economy changed little, andreal per capita GNP remained at a low M 135.8 in 1980/81.

2.04 Unfortunately, the impressive growth achieved in the 1970s isunlikely to be maintained in the 1980s. The increase in resourceavailability was used to fuel consumption and consequently imports, whilepublic expenditure grew to levels unmatched by public revenues. Over thepast three years, customs revenue has stagnated as have the number ofmigrant workers and hence miners' remittances, as a result of the growinguse in the RSA mines of local labor and increased mechanization of themines. These factors, coupled with a dramatic drop in external assistance,have translated into serious budgetary and balance of payments deficits.Government's first priority will have to be to restore the country'sfinancial health. Nevertheless, Government's longer term challenge remainshow to provide non-agricultural employment opportunities for the growingpopulation.

2.05 The industrial sector - mining, building and construction.and manufacturing -, while still small and at an early stage ofdevelopment, has been one of the fastest growing sectors of the economy,although growth slowed down significantly after 1977/78. Industrial valueadded as a percentage of GDP grew from about 3 in 1970/71 to 19.1 in1977/78 and an estimated 20.1 in 1979/80. The mining and constructionsubsectors have been the growth areas; the value added from manufacturingand handicrafts grew only sluggishly over the decade, and theircontribution to domestic product in fact declined from 5.7% in 1974/75 toan estimated 4.8% in 1979/80. The poor performance of the manufacturingsector is largely due to Lesotho's significant development constraints(para. 2.01) which have led to low production and in some cases failure.During most of this period, LNDC concentrated more on strengthening itsexisting portfolio than promoting new investment, while BEDCO could count

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few successes among the small projects established with its assistance.The mining and quarrying sector fared better because of the opening of theLetseng diamond mine, and because of buoyant demand from the constructionindustry. The upsurge in construction, in turn, resulted from the increasein infrastructural projects and housing.

2.06 Employment in industrial activities remains small. It isestimated that in 1980, total modern sector employment was 41,307, of which890 were employed in mining, 4593 in construction and 3906 in manufacturingand handicrafts. In terms of employment generation, the performance ofmanufacturing has been disappointing: while during the period of the FirstNational Development Plan (1970/71-74/75), some 2000 jobs were created,during the first three years of the Second National Development Plan(1975/76-1979/80), only an estimated 630 of the targeted 4500 jobs werecreated.

2.07 In 1982, there were about 80 firms involved in medium ardlarge scale manufacturing activities, which still have a subsectoralstructure typical of early industrial development. In terms of employment,the largest subsectors are textiles and furniture/joinery, with othersincluding building materials, chemicals and metal based products. Mostmedium and large scale enterprises have been sponsored by foreign,particularly South African, investors who have established in Lesothospecifically to take advantage of Lesotho's preferential access to the EECand access to other African countries. As a result, a high 50% of outputis exported. Nevertheless, manufactured exports represent only a smallfraction of manufacturing imports, and the trade gap in manufacturing issizeable. Comprehensive data on small scale industries is not available.However, informal handicraft and service activities may be substantial,employing as much as 23,000, although the number of modern small scaleindustries, about 30 in 1978, are still few.

2.08 The tourist sector experienced rapid growth following theconstruction and subsequent expansion of the 470-bed Holiday Inn withcasino facilities, and the number of tourists increased from less than 5000a year in 1969 to an estimated 175,000 in 1977. In 1979, employment intourism was estimated at about 1500, up from 500 in 1975. The performanceof the commercial sector has been influenced by a substantial increase incatering, in response to the needs of the tourist population, whilewholesale and retail trade, dominated by a few large operations belongingto chains in the RSA, grew little or not at all in real terms between1974/75 and 1977/78. Together, the contribution of tourism and trade as apercentage of GDP declined from a peak of 19.5 in 1975/76 to 12.1 in1979/80.

2.09 The capabilities of the Ministry of Trade, Industry andTourism to formulate policies and plan for industrial development arerelatively weak, and the institutional framework for industry rudimentary.Government 's strategy emphasizes industrial development through privateenterprise, although it has been prepared to take the initiative instarting enterprises itself, if necessary. Since approval of the creditunder review, some new initiatives have been taken to strengthen theindustrial development effort. While the primary policy instrument remainsa set of fiscal incentives, including tax holidays or a series of

deductions from taxable income, LNDC has begun offering workers' traininggrants on an experimental basis to selected industries. A Trade PromotionUnit and Trade Promotion Council have been established to encourageexports, the former to provide assistance to exporters, the latter toadvise Government on policies. However, the Trade Promotion Council hasrarely convened; in addition, there are still no specific incentives forsmall scale enterprises. Moreover, a recent study of Lesotho's incentivesystem vis-&-vis other countries in Southern Africa concludes that whileLesotho's investment incentives are superior to those offered in Zimbabweand Swaziland, they are significantly less competitive than those offeredin Bostwana and the South African "homelands. The study further concludesthat Lesotho does not have the resources to match these incentives, and,therefore, it should concentrate on improving the administration anddelivery of its incentive package.

2.10 The Third National Development Plan (1980/81-1984/85)anticipates the creation of 1500 and 750 jobs per annum respectively inmanufacturing and commerce. It goes further than the Second NationalDevelopment Planning in setting out specific objectives for industry, andthese include the promotion of foreign investment from diversifled sources,the development of small scale local entrepreneurs, the promotion of importsubstitution, export and agro industries, the diversification of exportmarkets and the maximization of local raw material use.

2.11 LNDC and BEDCO are part of a financial system which includesthree commercial banks, the Lesotho Building Finance Corporation, theLesotho National Insurance Company, the Lesotho Agricultural DevelopmentBank and the Central Bank of Lesotho. The latter four institutions werecreated in the last five years, with the Central Bank of Lesotho replaclngthe Lesotho Monetary Authority (LMA), itself established in 1978. Thecommercial banks, of which the Lesotho Bank Is the largest, perform thetraditional commercial banking functions, lending mostly short term and nowheavily to Government. While the commercial banks do engage in some termlending, LNDC and BEDCO remain the principal industrial sector termfinanciers. The banks traditionally have had substantial surplus liqulditywhich used to be invested in the RSA, but Is now, by requlrement, inventedin the LMA. While bank liquidity tightened In 1982, It began to ease nearthe end of the year, as government borrowing declined.

2.12 Lesotho is part of the Rand Monetary Area (RHA), and lts localcurrency, the Maloti, first issued in 1980, is fully backed by and freelyconvertible at par into the Rand. Lesotho's membership in the RH& makesit largely dependent upon monetary and credit pollcies set by the SouthAfrican Reserve Bank. Interest and inflation rates generally follow trendsin the RSA, with interest rates somewhat lower, due to the smaller demandfor credit, and inflation rates somewhat higher. In 1975, interest ratescharged to borrowers ranged from 8.5% to 14Z, with long term rates rangingfrom 8.5% to 12x; inflation, which was about 19S in 1975, was forecast bythe Association to decline to an average 9% between 1976 and 1980.Actually, the level of interest rates declined at the end of 1978 and.remained more or less stable until the end of 1980. after which it began toincrease sharply, reaching as high as 222 in mid-1982. Inflation was about162 in 1977, 12.5% in 1978, 15.9% in 1979, 15.72 in 1980 and 14.9Z in 1981.

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III. LNDC: THE INSTITUTION

3.01 The following issues and recommendations were discussed andagreed at the time of credit appraisal (March 1976), post appraisal (August1976) and negotiations (February 1977) or raised during the period ofcredit implementation. Those issues which arose during the period ofimplementation regarding LNDC's operational and financial performanceare discussed in Section V.

(a) Audit

(i) The audits of LNDC for both FY1974 and FY1975 werequalified with respect to LNDC subsidiaries (companiesin which LNDC's shareholding is at least 51%) andassociated companies (in which LNDC's shareholding is50% or less), as the extent of their equity erosion hadnever been properly assessed, and their fiuancialperformance and position were not consolidated intoLNDC's accounts. The appraisal mission recommendedthat LNDC be required to submit by October 1976, anunqualified audit for FY1976, which would include aconsolidated balance sheet for the LNDC group. Thedraft FY1976 audit was submitted November 17, 1976, andjudged satisfactory, and the finalized audit waspresented at negotiations.

(ii) Starting in 1980, the fourth year of creditimplementation, LNDC became subject to the state auditsystem, according to which LNDC's auditors areappointed by and responsible to the Auditor General,and the audit remains a draft until after it has beenreviewed by the Auditor general and approved byParliament. Since this time, LNDC has been able tosubmit to the Association only draft audits, withoutnormal audit opinions or management letters; moreover,these have not been completed within their deadline offour months after the end of LNDC's fiscal year. InApril 1983, the Auditor General agreed with an IDAmission to allow arrangements enabling LNDC to meet theAssociation's requirements for a full and comprehensiveaudit.

(b) Policies

(i) In 1975, LNDC adopted a Policy Statement. Although theStatement was largely based upon the Association'ssuggestions, a few new clauses, (e.g. regarding foreignexchange risk exposure), still needed to be added and anumber of existing ones amended. At the time of post-appraisal, IDA and LNDC agreed upon a suitably revisedStatement, which was subsequently adopted by LNDC'sBoard.

(ii) LNDC's Policy Statement limits the Corporation'sequity and total exposure per project to 10X and 20%

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respectively of LNDC's net worth . Two of LNDC'sFY1981 approvals - a brewery/soft drinks plant and ashopping center - violated these limitations. 1/Particularly given LNDC's history of problems withsubsidiaries, the Association strongly recommended thatLNDC undertake responsibility for the shopping centeronly on a managed fund basis, and that it reconsiderits approval of the brewery/soft drinks plant or reduceits exposure. Government and LNDC agreed that theshopping center would be administered by LNDC on amanaged fund basis, although the agreement has yet tobe legally formalized. However, without decreasing itsexposure as suggested, LNDC proceeded with thebrewery/soft drinks plant, which it consideredimportant for LNDC, as the project's expected highreturns would contribute to improving LNDC's financialperformance and reducing its dependence on governmentresources. Unfortunately, the project incurred a largeloss in FY1983, its first year of operations.

(iii) In July 1982, and April 1983, LNDC proposed changes invarious provisions of its Policy Statement specifyingmaximum permissible exposure limits. Among theproposed changes was that leased premises be excludedfrom the definition of financial commitment in theprovision limiting total financial commitment in anygiven project to 60X of the project's total capitalcost. This was considered necessary by LNDC in view ofthe need, under existing circumstances (para. 5.03),for investors to lease from LNDC, rather than own theirpremises. The Association advised LNDC that it couldnot agree to the various amendments proposed, but thatwith respect to the provision cited above, it wouldaccept an increase in the percentage specified from 60to 75. LNDC has accepted the Association's position onthe proposed changes.

(c) LNDC's Board. The LNDC Act specifies that theCorporation's Board of Directors shall consist of notless than four and not more than nine directors. Atthe time of appraisal, LNDC's Board had four directors,including the Prime Minister as Chairman, the Ministersof Finance and Industry, and LNDC's Managing Director.The appraisal mission noted that the Board had not beenproviding LNDC with sufficient direction, in part dueto inadequate preparation and also because of itspolitical composition. Accordingly, the missionrecommended that the Association urge Government to

1/ LNDC requested financing under Credit 985-LSO for the soft drinksplant. The project was rejected primarily because of the policyviolations it entailed.

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enlarge and strengthen the Board by appointingnon-government Directors with technical expertise.Three additional Directors from business circles wereappointed prior to negotiations. While at the time,Government planned shortly to fill the two remainingpositions, as of April 1983, the Board had not yet beenfurther enlarged. However, there have been changes inthe Board's composition: inter alia, the Ministerresponsible for both planning and foreign affairs hasbecome a Director, the Minister of Trade, Industry andTourism has replaced the Prime Minister as Chairman,and Cabinet has approved a proposal that the PrimeMinister become LNDC's President. LNDC has requestedseveral external institutions, including DEG, FMO andIFC to become LNDC shareholders, and is proposing thatthe remaining two Board vacancies be reserved forrepresentatives of these institutions.While its quality has improved since the appraisal ofCredit 702-LSO, the Board is still weak in providingLNDC guidance; it remains subject to politicalinfluence; and both ministerial members and theirpermanent secretaries, who serve as advisors to theBoard, apparently are unable to devote enough time toreview LNDC's projects and programs.

Cd) Organization: The appraisal mission noted thatalthough LNDC's organizational structure at the time ofappraisal represented a noticeable improvement over thepast, it still suffered from a number of weaknesses.In particular,responsibility for project implementationand supervision, and' ntrol of subsidiaries was notwell defined, and there as no entity in charge offinance, accounting and nistration, which werebeing handled on an ad hoc is. Duringpost-appraisal, LNDC proposed new organizationalstructure, which, although diff ent from the onerecommended by the appraisal miss an, the Associationfound satisfactory. This new struc ire was adopted byLNDC in 1976. During subsequent yearK LNDCsuccessively streamlined its organizati al structure,which now comprises four departments and a. office ofinternal audit. The four departments are eIndustries, responsible for project promotion,appraisal and implementation as well as administrtionof LNDC's property portfolio; Operations, responsiN,efor LNDC subsidiaries and associated companies and \after care of all projects; Finance; and Administrationresponsible for personnel, administration, training,and legal issues. LNDC's current organizationalstructure is generally satisfactory.

(e) Staffing: The appraisal and post appraisal missionsnoted that LNDC remained understaffed at headquarters,particularly in the areas of accounting, technical

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aspects of project processing and finance, that somemanagerial positions in subsidiaries were vacant, andthat LNDC was still heavily reliant on expatriates.Certain key staff, in particular, a FinancialController and a Director of Operations, needed to berecruited as soon as possible. While by negotiationsthe position of Financial Controller remained vacant,the appointment of a candidate had been finalized. Asit transpired, the candidate changed his mind, and aFinancial Controller was not recruited until 1978. Atnegotiations, it was agreed that LNDC would recruit aDirector of Operations, satisfactory to theAssociation, by November 30, 1977, and this conditionwas met. LNDC and the Association also agreed atnegotiations on a five-year training program forBasotho staff, which LNDC had prepared, and that LNDCwould start to implement it right away. LNDC launchedan active recruitment and staff training program andalso created a special management training unit.

(f) Share Capital. Although LNDC's Act authorizes theBoard to determine LNDC's share capital, the appraisalmission noted that it had not yet done so. Atnegotiations,Government and LNDC agreed that the sharecapital of the Corporation would be determined, and theGovernment's share defined, at the latest by May 31,1978, unless The Association agreed to an alternativedate. LNDC's Act was amended and the Corporation'sauthorized share capital set at M10 million prior tothe deadline. However, it was not until 1979, afterit had been made a condition of negotiations for thesecond LNDC credit, that Government's share was fixedat M4 million, and that existing Government grants andloans to LNDC were converted into paid-in capital.

(g) Corporate Stra*egy: The appraisal mission noted thatLNDC had no clear cut strategy and recommended that assoon as possible LNDC adopt (i) a short term corporatestrategy emphasizing analysis and consolidation ofexisting subsidiaries to place them on a financiallysound footing, and, where necessary and feasible, sellthem off; and (ii) a medium to long term strategy to beoutlined by LNDC's new management. A satisfactoryshort term strategy was adopted in 1976. Atnegotiations, LNDC submitted its proposed long termstrategy, which was discussed and agreed upon by LNDCand the Association. This strategy emphasizes thepromotion of new economically viable investments thatwould create added employment for Basotho. Inaddition, it enunciates LNDC's intention to concentrateon providing loans and factories for lease, inpreference to making equity investments.

(h) Operations Manual. LNDC had been operating without anydocumented guidelines, with the result that projects

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were not being thoroughly evaluated, supervision wasundertaken on an ad hoc and unsystematic basis, andfinancial reporting and accounting records were weak.At the time of appraisal, LNDC was in the process ofdrafting a comprehensive Operations Manual and wasrequested to submit the completed draft for discussionand agreement at negotiations. However, LNDC was notable to finish the draft in time and promised tocomplete and submit the draft for the Association'sreview by June 30, 1977. Although an initial draft wascompleted within the year, it was not until 1979, as acondition for the second LNDC credit, that a finaldraft was submitted and agreed upon.

(i) Legal Agreements. Following suggestions from previousAssociation missions, by the time of appraisal LNDC hadmade progress in formalizing relations between it andits subsidiaries, and had entered into legal form muchof the financial assistance it had previously grantedthem without formalised agreements. Nevertheless,much legal work remained to be done. As a condition ofnegotiations, LNDC was requested to finalize alloutstanding legal agreements, in some casesretroactively, and ensure that proper documentation wasavailable for all its commitments. This condition wasnoted as fulfilled. However, LNDC's legal proceduresremained weak during the period of creditimplementation, and legal agreements are lacking nowfor a number of loans and a significant number ofleases, mainly site. In addition, LNDC apparently hasno share certificates for a number of investments. TheAssociation has requested LNDC to finalize all legalagreements by October 31, 1983.

(j) Divestiture. Majority ownership of companies entailedsignificant administrative and financial burdens toLNDC. In order to reduce these burdens, atnegotiations, it was agreed that LNDC would annuallyreview each of its subsidiaries to determine theirsuitability for divestiture on the basis of criteria(e.g. the profitability of the subsidiary concerned),which had been agreed with IDA at negotiations. LNDChas made very good progress in its divestiture program,and by April 1983, had sold or completed negotiationsto sell all or part of its holdings in 21 companies.For most companies, in view of their traditionally poorperformance, LNDC realized little on their sale. Indivesting, LNDC has taken particular care to sell onlyto buyers having the expertise and resources requiredto turn the companies around. While LNDC has attemptedto sell its shareholdings locally, the lack ofcompetent Basotho technical partners has required it todivest in most cases to foreign entities. It isapparent that LNDC's care in selecting buyers isgenerally having positive results as measured by

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improvements in the turnover, employment and financialperformance of companies following divestiture.

(k) Financial Reporting. At the time of appraisal, LNDClacked a systematic internal financial reporting systemand, as a result, financial control was very weak,especially with regard to the subsidiaries andassociated companies. Accordingly, the appraisalmission recommended that LNDC should develop afinancial reporting system acceptable to theAssociation. By negotiations, LNDC had engaged aninternational management consulting firm to develop andimplement a new management information system, and bythe end of 1977, a uniform reportingsystem had already been installed in most subsidiairiesand associated companies.

(l) Interest Rate. The draft Project Agreement providedfor a minimum interest rate of 13% per annum to becharged on subloans. At negotiations, the Lesothodelegation maintained that a rate of 13% per annumwould be too high in comparison with rates charged byother financial institutions in Lesotho and inneighbouring countries, and that the rate woulddiscourage foreign investors from coming to Lesotho.It was tnerefore agreed to reduce the lending rate to12% per annum, which was expected to be positive inreal terms (para. 2.12). LNDC's other charges - 152per annum on development costs for buildings, withannual escalation of 5%, and 1% per annum on guarantees- were considered satisfactory. LNDC maintained a 12Xper annum interest rate on all of its loans until thesecond IDA credit, when it reduced the rate to 11% perannum. LNDC is now charging up to 2% per annum onguarantees, but has not changed its charge on leasedbuildings.

Development during Credit Implementation and Present Status

3.02 Management. In August 1977, Mr. Montsi took over as ManagingDirector of LNDC, following a government decision to localise theposition. Mr. Montsi provided LNDC with strong leadership, helped tocorrect many of the deficiencies of the past, and broblened LNDC's roleinto the main actor in the industrial development field. LNDC tookimportant initiatives during Mr. Montsi's tenure, including theintroduction of an investment promotion program (para. 3.03), the creationof a unit trust - the Lesotho Investment Holdings (LIH) - as the firstattempt to develop the rudiments of a capital market, and the establishmentof the workers' training grant scheme. Mr. Montsi resigned at the end ofSeptember 1982, and was replaced by Mr. Mofolo, a lawyer and previouslyhead of LNDC's Administration Department, as Acting Managing Director.Although Government was aware substantially in advance of Mr. Montsi'splanned resignation, it has still not officially appointed a new ManagingDirector. The appointment of a replacement for Mr. Montsi is long overdue,

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and the Association has stressed to Government the importance of resolvingthe situation as soon as possible.

3.03 Subsidiaries. During the period of credit implementation,LNDC succeeded in streamlining and strengthening control of itssubsidiaries and associated companies. Initially, LNDC was involved inday-to-day management of those companies in which it was a majorshareholder, and in most cases, even had to prepare their accounts.Progressively, however, LNDC moved into an advisory, rather than managerialrole, and encouraged the subsidiaries for the first time to take onresponsibility for their own performance. Through the years, LNDC exertedconsiderable efforts to strengthen its companies. Nevertheless, LNDC wasnot able to improve the financial performance of many of its companies, andconsequently the need for an active divestiture program (para. 3.01 (j) wasreinforced.

3.04 Project Identification, Promotion and Development.Supervision missions to LNDC during the early years of creditimplementation noted that the Corporation's project identification andpreparation capabilities were weak, and urged LNDC to concentrate ondeveloping bankable projects. LNDC's approach to investment promotionemphasizes identifiying target companies which may be persuaded to locatein Lesotho because of its advantages and relying mostly on projectsprepared by investors, rather than generating projects from within.Consequently, while the investment promotion program has begun to yieldpositive results, LNDC's own project identification and developmentcapabilities remain weak. However, at the request of Government, LNDC hasbegun to research what possibilities remain for import substitution, and,where potential exists, plans to prepare project profiles for attractingpromoters.

3.05 Staffing. LNDC's total and Basotho professional staff havegrown respectively from 19 to 34 and 12 to 29 between negotiations ofCredit 702-LSO and April 1983. Since 1978, LNDC management has beenassisted by a team of three (initially four) experts under the auspices ofIrish Aid. The experts have occupied the key positions of FinancialController, Director of Operations and Director of New Industries and baveplayed a crucial role in assisting LNDC to improve its performance. LNDChas exerted considerable efforts in training the local staff, both inLesotho, particularly in accounting, and abroad. In addition, it haslocalised several middle level managerial positions. Although LNDC hasmade progress in developing its manpower, it has failed to place sufficientemphasis on training of staff on-the-job. LNDC has also experiencedproblems of turnover of competent staff. As a result of these problems,LNDC will need to continue to rely on expatriate staff for some time tocome.

3.06 Despite LNDC's recent efforts to review and improve itsoverall staffing situation, a number of divisions have vacancies which LNDCintends to fill as soon as possible. The Operations Department hastraditionally been understaffed, which, until now, has precluded it fromextending its monitoring and control functions beyond LNDC subsidiaries andassociated companies where LNDC is the major shareholder. As the divisionresponsible for project appraisal/implementation needs considerable

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strengthening, LNDC needs to recruit a division manager. LNDC has notechnical expertise and, in view of the importance of factories among itsoperations, urgently needs to recruit a building engineer, and eventuallyalso an industrial engineer. Recruitment of additional staff is also apriority for LNDC's legal and real estate and internal audit sections.While LNDC has strengthened the staffing of the traditionally weak FinanceDepartment, it needs to consider whether recruitment of an additional andexperienced accountant is necessary.

3.07 Procedures. LNDC has been least successful in strengtheningits procedures. Despite the Association's repeated recommendations, it hasonly recently taken steps to efficiently operate internal managementinformation and central filing and recording systems. The quality ofproject appraisals remains weak, particularly regarding the market,financial and economic analysis. As explained above (para. 3.06)supervision has been neglected for companies in which LNDC is not the majorshareholder. However, the Operations Department is now developing asystematic monitoring system, and once adequately staffed, plans toregularly supervise all projects in LNDC's portfolio. Regarding legalprocedures, the failure to formalize many financing operations in legalform has been discussed above (para. 3.01 (i)); another weakness has beenthe tendency of the legal section to become involved in operations at toolate a stage. While financial control has improved significantly sinceCredit 702-LSO was approved, there remain weaknesses to overcome, e.g. inthe areas of debt collection and medium term planning. Finally, LNDCurgently needs to improve control of its property portfolio and thusstrengthen and define the responsibilities of its real estate section.

3,08 Project Implementation. By the original completion date ofDecember 31, 1979, LNDC had committed only US$1.4 million, or 65Z, of itscomponent of the credit, for the following reasons: (i) LNDC received morefunds from Government than had been anticipated at appraisal; (ii) someprojects were approved by LNDC at too early a stage and required furtherpreparation before complete appraisals could be submitted to theAssociation, or were submitted but subsequently withdrawn, or were alteredafter submission; (iii) LNDC responded to questions raised by theAssociation on some subprojects only after substantial delays. As aresult, the final date for subproject submission had to be extended by oneyear to December 31, 1980. The slower than originally anticipated rate ofdisbursement (see Basic Data) was clearly a result of the longer commitmentperiod, as well as LNDC's delays in submitting disbursement requests whenit did not urgently need reimbursement for expenditures incurred. Whileall disbursement requests were submitted by the revised closing date ofJune 30, 1982, clarifications required delayed the last disbursement toDecember 1982.

IV. LNDC: ALLOCATION OF THE CREDIT

4.01 As shown in Annex A-1, the proceeds of Credit 702-LSO wereused to finance ten subprojects above the free limit for a total of US$1.7million and four free limit subprojects for a total of US$0.3 million.Thirty-eight percent of amounts approved were for subloans, and 62Z werefor construction of factory buildings for lease. While no subprojects wererejected by the Association, one subproject was cancelled when the sponsorsabandoned it. The Association's review of and comments on the subproject

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applications were instrumental in leading to changes in the design of orfinancing arrangements for several of the subprojects. Six of thesubprojects required LNDC financing only in the form of leased factorybuildings, and for these, as agreed with the Association, LNDC submittedsimplified appraisals, which limited the scope of the Association'sreview. Given the importance of factory buildings in LNDC's operations, inmid-1982, LNDC and the Association agreed that in the future LNDC wouldprepare comprehensive appre sals for all projects, including thoseinvolving only factory buildings. LNDC itself bears the foreign exchangerisk on its investment in factory buildings.

4.02 The economic characteristics of the subprojects financed aresummarized in Annex A-2. Six of the projects were new and eight wereexpansions, mostly of projects in which LNDC was already involved. Theyinclude two textile projects, three projects in the food sector (a maizemill, a bakery, and a wholesale fruit distributor), two furniture projects,a shoe project, one wholesale operation (with three outlets), a tannery, anumbrella assembly project, a hotel laundry, a candle project, and atransport project. Seven of the projects export one hundred percent oftheir output, but only three make any signficant use of domesticresources. All of the projects are located in either Maseru, the capital,or Maputsoe, the only other significant industrial center, although onebranch of the wholesale operation is located in the interior. Ten of theprojects are from 50% to 100l foreign-owned. About 1000 jobs have beencreated at an average cost of about US$3,478 per job.

4.03 Annex A-3 summarizes financial aspects of the subprojects inso far as information was available from LNDC. It shows that LNDCfinancing accounted for an average 71% of total project costs, as a resultof the large number of projects which were expansions and which entailedonly the construction of new premises for lease. As a general rule, LNDCoverestimated project costs in its appraisals, and compared project costestimates in the final versions of appraisal reports (para. 3.08 (ii)),only one project had cost overruns of any magnitude. Eight of the projectsare now operating profitably, including one which was liquidated, two areoperating unprofitably, one is under liquidation, and three consistentlyunprofitable projects have been divested. In March 1983, one project wasan LNDC subsidiary and four were LNDC associated companies. As of March31, 1983, three of the subprojects were in arrears of more than 24 monthson loan repayments; these included the subproject under liquidation and onefor which the loan will be rescheduled once the divestiture is legallyfinalized. The loans for an additional three subprojects previously inarrears have been rescheduled. As of the same date, three projects were inarrears of more than three months on rental payments.

4.04 Summary descriptions of the fourteen projects financed underCredit 702-LSO, their historical performance and present status areprovided in Annex A-4.

V. LNDC: OPERATIONAL AND FINANCIAL PERFORKMANCE

5.01 Operations. Since its inception, as of March 31, 1983, LNDChad approved (net of cancellations) a total of M 33.4 million for about 115

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projects, including 50 leasing only sites. 2/ Amounts approved weredistributed as follows: M9.1 million in loans, M6.7 million in equityinvestments; M12.5 million in factories and sites; and M5.1 million inguarantees. As LNDC only recently began to keep comparable records ofcommitments and disbursements, data on commitments is available only since1980, although LNDC has been able to reconstruct historical disbursementsby year back to 1977.

5.02 Annex A-5 provides a summary of LNDC's actual operations inthe period 1977-83, and comparative data as forecast at the time ofappraisal for 1977-81. As shown in Annex A-5, the pattern of LNDC'soperations has been somewhat erratic, with approvals in the period 1977-83fluctuating between M2.2 and M8.4 million. Approvals increased between1977 and 1979 from 12.2 million to M4.8 million, and thereafter decreasedeach year to a low M2.5 million in 1982, before increasing to a peak ofM8.4 million in 1983. Similarly, the volume of approvals by category alsofluctuated. In contrast, following 1977, for which projected approvalswere based upon LNDC's pipeline, appraisal forecasts assumed annualpercentage increases in the various types of approvals and, accordingly, intotal approvals. Cumulatively, and by year, however, over the 1977-81appraisal projection period, actual total approvals of M18.2 millionexceeded appraisal forecasts of M10.5 million, although this was not alwaysthe case for individual types of approvals. Over the period on the whole,equity approvals, amounting to M4.9 million, and factory approvals,amounting to M5.6 milion, were substantially higher than appraisalforecasts of M.2.6 million and M4.1 million respectively. On the otherhand, loan approvals, M3.5 million, were slightly less than forecasts ofM13.8 million. During the projection period, LNDC also approved 13.2million in guarantees, which were not incorporated in appraisal forecasts,mainly to support borrowing by LNDC subsidiaries and associated companies.LNDC's operations also included the development, with grant financing, ofindustrial estate infrastructure in Maseru and Maputsoe; a third estate, atThetsane on the outskirts of Maseru, was completed in February 1983.Available commitment and disbursement data indicate that the rate ofproject implementation was substantially slower than forecast atappraisal. While it is valid that there often have been significant delaysbetween approval, commitment and disbursement of projects, it should benoted that the appraisal forecasts, in assuming that all projects would becommitted in the year approved, appear over-optimistic as compared to theperformance of most development finance institutions.

5.03 The significantly higher than forecast level of equityapprovals was largely due to one project, the brewery/soft drinks plant,which accounted for more than 40% of total equity approvals. The higherthan forecast level of factory approvals was in response to a greater thananticipated demand from investors as a result of (i) their desires tominimize their risks in Lesotho by renting, rather than owning buildings;and (ii) the difficulties in acquiring land under the land tenure system,and, since its passage, under the 1979 Land Act which precludes majorityforeign-owned enterprises from leasing land directly and implicitly also

2/ LNDC has not yet been able to provide a complete breakdown of its siteportfolio, and the number of projects leasing sites is an estimation.

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from owning buildings on land leased from LNDC. In addition, the provisionof factory buildings is a facility offered by other countries in SouthernAfrica and the "homelands" as an incentive to attract investors,and LNDC needs to provide them if Lesotho is to remain competitive. Withregard to loans, during the appraisal projection period there was littleadvantage for foreign investors in borrowing from LNDC, and they tended tobring in capital from the RSA; it was not until the surge in commercialinterest rates in the RMA starting in 1981 that LNDC's comparatively lowrate of 12Z per annum became attractive.

5.04 The pattern and nature of LNDC's approvals reflect itscharacter as a holding company, as well as its need to be flexible in thetype of assistance it offers, given its position as the only significantsource of investment financing for medium/large scale enterprises inLesotho. For many projects, LNDC provided more than one source offinancing. LNDC's approvals included projects in various activities commerce, construction, manufacturing and tourism, and project sizes alsovaried considerably, ranging from as low as MO.1 to 110.5 million for thebrewery.

Portfolio

5.05 In March 1976, about 72% each of LNDC's equity and loanportfolios, and 19 of the 28 projects included in the portfolios, relatedto projects with financial difficulties. Almost all of the loansoutstanding were to companies in which LNDC was already exposed throughequity investments. As of March 31, 1983, a still high 55% of LNDC's totalportfolio (equity, loans, factories, and guarantees, but not includingsites for which complete and accurate data is unavailable), 70% of theequity portfolio, 58% of the loan portfolio and 74% of the guaranteeportfolio were outstanding in non-profitable companies (Annex A-6). Thequality of the factory portfolio, on the other hand, was significantlybetter, with only 31% in problem projects. The quality of the portfolio asa whole was significantly influenced by the poor performance of two of thelarger projects included; 28 of the 42 projects in the total portfolio wereoperating profitably. The total portfolio included ten subsidiaries, andtwelve associated companies and was distributed as follows: equity, 22%;loans, 19%; factories, 40%; guarantees, 15%; and sites, 4%. While thelevel of arrears in 1976 was not ascertainable, they were estimated to besubstantial. As of March 31, 1983, 28% of the loan portfolio was affectedby arrears of more than three months, with arrears amounting to M240,000,or 7% of the portfolio. Factory rental arrears of over three monthsamounted to about N243,000, affecting about 30% of the factory portfolio.

Financial Performance and Condition

5.06 Annexes A7-8 and 11 provide actual and forecasted incomestatements, balance sheets and financial ratios for LNDC in the period1977-81, as well as actual and estimated results for 1982 and 1983respectively. LNDC's financial performance since 1977 has been below theAssociation's expectations when Credit 702-LSO was appraised. TheCorporation has operated at a loss in all years since 1976, when it stoppedreceiving non-operational income from sugar levies and mining royalties.As anticipated, rental income has been LNDC's primary source of revenue,

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accounting, however for only 44Z of gross operating revenue in 1977-81 ascompared to appraisal forecasts of 582. Dividend income in absolute termshas been at about the same level or more than forecast, and has representeda substantially higher return on equity investment than anticipated. Whilethe appraisal projected net profits of between 4.7Z and 6.2% of averagetotal assets in 1977-1981, the Corporation made net losses in this periodwhich successively amounted to 38.1%, 3.2Z, 9.5Z, 1.4% and 4.5Zof averagetotal assets. LNDC's net loss increased to 7.9Z of average total assets in1982 and is likely to represent some 6% of average total assets in 1983.In 1980 and 1981, LNDC received government subvention(s) totalling 1619,000 to cover expenses for the investment promotion program and in1979-81,government subventions totalling M514,000 in lieu of dividends fromthe Holiday Inn3/. LNDC did not receive either of these subventions in1982 or 1983; their loss was an important factor in LNDC's particularlypoor performance in 1982, when it made a large operating loss, although aless important factor in 1983, for which LNDC's estimated large lossresults mainly from excessively high provisions. Three main factors havecaused LNDC's poorer than expected performance. First, a slower thanexpected growth in the portfolio, particularly through 1980, when the totalgross portfolio amounted to M10 million as compared to the forecast M13million. Second, LNDC's portfolio did not improve as fast as expected,leading to substantially higher provisions than forecast in all years.Third, administrative expenses, ranging from between a low 6.8Z (1980) and15.2% (1977) of average total assets, have been higher than forecast, as aresult, inter alia, of costs of the manpower development program andinadequate financial control. In 1983, LNDC was able to markedly reduceits administrative expenses, which contributed to a significant improvementin its performance before provisions. LNDC's prospects for becomingprofitable will depend upon its success on divesting or turning aroundremaining unprofitable projects in its portfolio, selecting new projectswhich realize appraisal profitability expectations and containingadministrative expenses.

5.07 Despite losses, LNDC's long term debt/equity ratio hasthroughout remained low, never exceeding 1.411, and below expectations.This has been a result of significantly lower than anticipated borrowingsand higher than anticipated government capital expenditure grants.However, LNDC has intermittently experienced a precarious cash flowsituation, and its net working capital position has throughout been worsethan forecast. The consolidated financial performance and condition(Annexes A-9-10) of the LNDC group have followed more or less similartrends to those of the Corporation.

5.08 Resource Mobilization. LNDC has been relatively successful inmobilizing resources from foreign multilateral institutions other than theAssociation, including the European Investment Bank (EIB), the AfricanDevelopment Bank (ADB), the European Development Fund (EDF), and theKreditanstalt fur Wiederaufbau (KfW). It has also been successful inmobilizing resources from the domestic banking system for projects, in mostcases by guaranteeing commercial bank loans. While the Corporation has had

3/ In 1980, 1981 and 1983, LNDC also received additional operatingsubventions (M9,000, M470,000 and M187,000 respectively) which havenot been incorporated as income in the analysis of LNDC's performance.

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little success in mobilizing equity from local sources for projects, as aresult of a lack of an equicy investment tradition among savers in Lesotho,it has made an important first step towards establishing a capital marketthrough the creation of LIi.

Reporting

5.09 Despite repeated reminders, LNDC has yet to begin submitting _quarterly reports to the Association, which consequently has relied almostentirely upon supervision missions for information on developments. LNDCseems to have considered preparation of the quarterly reports low on itslist of priorities, given the number of problems it has had to tackle overthe years.

7I. LNDC: CONCLUSIONS

6.01 LNDC's performance in achieving the objectives of the firstline of Credit has been mixed. One main objective of the Association'sassistance to LNDC was to generate local employment opportunities bysupporting the creation of medium and large scale enterprises. While theappraisal did not set specific employment targets, the disappointingperformance of the manufacturing sector in creating jobs d'iring 1975(76 -1979/80 (para. 2.06) and the slower than expected growth in LNDC'sportfolio suggests that achievements fell short of appraisal expectations.This failing results from LNDC's particularly weak project identificationand preparation skills in the early years of credit implementation andsubstantial delays between initial project approvalsand implementation; inaddition, LNDC's limited staff resources were burdened with the difficulttask of strengthening the performance of the large number of LNDC managedcompanies. Now that many companies have been divested, remainingsubsidiaries and associated companies are far less reliant on LNDC than lnthe past for day to day guidance, and the investment promotion program hasbegun to show results, LNDC should perform, and indeed already has begun toperform better in creating new jobs. However, LNDC's performance under thecredit cannot be evaluated in isolation; it should be stressed again thatLNDC operates in an extremely difficult environment where Industrialdevelopment efforts face numerous constraints. Even lf LNDC did notachieve appraisal expectations, the limited statistics availaole indicatethat LNDC's role in employment generation was, nevertheless, significant.A survey conducted by LNDC in June 1978 of its subsidiaries and associatedcompanies shows that in 1978 LNDC companies already contributed 57Z ofestimated modern manufacturing employment in 1980. Moreover, LNDC's impacton the Lesotho economy goes beyond what can be demonstrated by statisticson job creation and the operational results of companies it has assisted.In the absence of a strong parent ministry, it has contributedsignificantly to planning and policy formulation in industry, commerce andtourism. It has actively promoted Lesotho as a tourist and investmentarea. Finally, it has succeeded in developing a modern handicraftsindustry.

6.02 Regarding institutional developments, while LNDC has madesignificant progress in correcting many of the numerous problems noted atthe time of appraisal, it still needs to achieve much to develop into astrong institution. The limited availability of trained and experienced

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staff in Lesotho has made achievement of credit objectives a difficulttask, and LNDC will need to exert considerable effort to overcoae theproblems it still has. Provided it is willing to exert such efforts, andit receives the full support of Government, it has encouraging prospects.

Role of the Association, Beneficiary, and Borrower

6.03 LNDC and the Association pursued a constructive dialoguethroughout credit Implementation, and LNDC was generally receptive and inagreement with suggestions made by successive supervision missions.Probably because of other views on priorities, staff weaknesses andoverstretched management, LNDC was not always successful In implemntingmeasures agreed upon. The Association's role In advising LNDC, ratherimportant during the early years of credit implementation, declined withthe beginning of the Irish assistance program; nevertheless, LNDC seemed tovalue the Association's contribution in providing an outside, and thus moreobjective, assessment of performance. Government officials werecooperative in receiving missions and openly discussing their conclusionsand concerns. As for the Association's role, it probably would have beenuseful if it had fielded more frequent supervision missions and exertedmore efforts to assist LNDC in such areas as strengthening projectappraisal.

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BASOTHO ENTERPRISES DEVELOPMENT CORPORATION

VII. BEDCO: THE INSTITUTION

7.01 Despite its recent establishment, by the time of appraisal, BEDCOhad made reasonably good progress in recruiting staff and developing basicoperational procedures. In view of its anbitious plans - establishment ofan SSE credit scheme, development of industrial estates and establishmentof a number of enterprises which would eventually be sold to Basothoentrepreneurs, it was agreed that BEDCO would need to implement a number ofmeasures before approval of the IDA credit. These included: recruitment ofessential expatriate staff, preparation of a training program for Basothostaff and an operations manual and adoption of a revised policy statement.During the course of appraisal, loan negotiations and supervision of theproject, the issues outlined in the following paragraphs were discussed:

7.02 BEDCO's Subsidiary Status: At the time of appraisal in May 1976,BEDCO was a wholly-owned subsidiary of LNDC. Due to the poor relationshipbetween the Managing Directors of LNDC and BEDCO, the latter was in theprocess of breaking away from LNDC by seeking a separate corporate status.As LNDC's management was expected to change, and in order to avoid thewasteful duplication of staff and efforts that a separate BEDCO wouldentail, the mission recommended that BEDCO should retain its subsidiarystatus. BEDCO was nevertheless separated from LNDC in 1978, andestablished as a separate public corporation under the Ministry of Trade,Industry and Tourism.

7.03 Subsidiary Loan Agreement: The Association had proposed that theUS$300,000 portion of the credit earmarked for BEDCO should be channelledthrough LNDC, and that BEDCO would pay a fee of 1% per annum of theprincipal amount outstanding for administrative service rendered by LNDC.During negotiations, however, the Lesotho delegation argued that there wasno need to channel the BEDCO component of the credit through LNDC. It wasagreed, therefore, that the US$300,000 would be passed on by Governmentdirectly to BEDCO.

7.04 Policy Statement: During negotiations, the Association reviewedand commented on BEDCO's proposed revised Statement of Folicy. Thestatement specified that BEDCO could finance projects with capital costs ofup to M 50,000. This was agreed, but in order to formally delineate thelines of responsibility of LNDC and BEDCO, the Statement was amended byadding a provision limiting BEDCO's maximum investment in a single projectto M 30,000. In 1979, BEDCO revised its Statement of Policy without priorconsultation with the Association, including changes in two major lendingpolicies which had been agreed with the Association, namely:

(a) Interest rate: The new statement provided that BEDCO's interestrate would generally be the minimum commercial bank lending rate, regularlyadjusted on a monthly or quarterly basis; this suggested a floating rateover the term of its loans. The minimum rate which had been agreed withthe Association for BEDCO loans was 12Z per annum. It had further beenagreed that BEDCO would not lower this rate without the concurrance of bothGovernmeat and the Association. BEDCO ultimately decided to maintain itslending rate at 12%.

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(b) BEDCO Exposure: In the revised policy statement, BEDCO's maximumloan financing per project was raised to M 50,000 with no explicit limit onthe size of projects. While the Association agreed that, because ofinflation, increases in the limits originally specified might be necessary,in order to ensure that the delineation of roles between LNDC and BEDCO wasmaintained, it suggested to BEDCO that a limit be put on the size ofprojects it would finance. Initially, BEDCO management argued that such alimit would be too restrictive. Subsequently however, BEDCO amended theStatement once again, limiting its assistance to projects with capitalcosts not exceeding M200,000 and its maximum investment per project toM100,000 and/or 80Z of the project's capital costs, whichever was less.BEDCO maintained that the higher cost projects would be the exceptionrather than the norm , and that it fully intended to continue to assist thesmall scale entrepreneur. Accordingly, the Association accepted thechanges BEDCO had made.

7.05 Recruitment and Training of BEDCO Staff: During negotiations, theAssociation reviewed BEDCO's five year program for training Basotho staffand found it to be satisfactory. It was agreed that BEDCO would begin toimplement the program immediately. It was also agreed that BEDCO wouldrecruit a senior Projects Officer by November 30, 1977; this condition wasmet.

7.06 Board of Directors: When BEDCO was still an LNDC subsidiary,LNDC's Managing Director was a member of BEDCO's Board. Following theincorporation of BEDCO as a separate public corporation, however, the Boardwas reconstituted, and LNDC's representation was terminated. IDAsupervision missions which visited BEDCO in 1979 and 1980, recommended toGovernment and BEDCO management that LNDC be reappointed to BEDCO's Board,because of LNDC's greater experience in promoting industry, and also inorder to facilitate coordination of the activities of the twoinstitutions. In 1982, LNDC was reappointed to the Board and is currentlyrepresented by a Senior Project Officer.

Developments and Present Status

7.07 Management, Organisation, Staffing and Procedures: Until 1980,BEDCO had been headed by three successive Managing Directors provided bythe Canadian International Development Agency (CIDA), the main entityproviding technical and financial assistance to BEDCO. In July 1980, Mr.Sebatane, who had been Deputy Managing Director, was appointed BEDCO'sfirst Mosotho Managing Director. Mr. Romatete, a Mosotho with BEDCO fortwo years, was appointed Deputy Managing Director in September 1981. Overthe past year, BEDCO has had a CIDA funded expatriate advisor to theManaging Director. Overall, BEDCO's current top management is committedand has been fairly effective in redressing the Corporation's weaknesses.

7.08 BEDCO has made good progress in developing and streamlining itsorganizational set up and improving its institutional capabilities in thepast five years. BEDCO now comprises five departments (Projects andInvestments, Management Services, Marketing, Secretariat, and Finance),each with faily well defined responsibilities. The existing organizationstructure is suitable for BEDCO's operations. BEDCO's professional staffhas rapidly increased from 11 professional of whom 6 were Basotho, at the

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time of appraisal, to 24 professionals, of whom 18 are Basotho. Theexpatriate staff include the Advisor to the Managing Director, theFinancial Controllei, and the Manager of the Technical Services Division,all of whom are provided by CIDA, two advisors to the Projects andManagement Services Departments and a woodwork expert. Most of the 18Basotho professional staff are recent graduates of the National Universityof Lesotho and are still relatively inexperienced. BEDCO will needexpatriate support in the finance department and key technical areas for atleast the next three to four years.

7.09 The major weaknesses noted by IDA supervision missions relate toproject supervision, financial control, and debt collection. BEDCO hasbeen exerting efforts to strengthen its procedures, and has madeconsiderable progress redressing the problems it has had in these areas.

7.10 Project Implementation - The US$300,000 BEDCO component wascommitted at a slower pace than anticipated at appraisal. Although it hadbeen expected that the amount would be fully committed by December 31,1979, only US$57,000 had been committed by this time. The slow commitmentrate was due partly to a low level of lending operations and to theavailability of resources for lending from other sources - mainly CIDA.The slow commitment rate was also caused by BEDCO cancelling commitmentswhich the Association had already approved; altogether a total of [ 100,060committed for some 13 subprojects was cancelled and subsequentlyreallocated to alternative projects. Consequently, BEDCO, likeLNDC, required an extension of the deadline for submission of subloanapplications. As a result of the slow commitment rate, disbursements inthe first two years also lagged begind appraisal estimates. However thedisbursement rate picked up in the subsequent two years, and the thecomponent was fully disbursed on schedule by the original closing date ofDecember 31, 1981.

VIII_ BEDCO: ALLOCATION OF THE CREDIT

8.01 The US $300,000 BEDCO component was utilized to finance 31 smallscale enterprise projects (Annex B-1). IDA reviewed in detail the first 10SSE projects submitted for financing, and thereafter approved the rest onthe basis of summary project profiles submitted by BEDCO. Twcnty of the 31subloans (65%), representing about 30% of the amount of the component, wereless than US$8,000 each. The largest subloan approved amounted toUS$57,000, or about 20% of the component. About one-half of the subloanswere for a period of three years and the other half for more than three tofive years; all subloan maturities included a six-month grace period. Thestatus of the 31 subprojects financed under the component is summarized in a

Annex B-2 4/. As of June 30, 1982, only six subprojects, accounting for40% of the total amount disbursed under the component, were operatingprofitably, while nine, accounting for 22% of amounts disbursed, wereclassified as marginal projects (i.e. those breaking even and some expectedto make a small profit by the end of 1982). The majority of the

4/ As only a few enterprises regularly prepare and submit to BEDCOfinancial statements, there are no data on the financialcharacteristics of the subprojects financed by the Association.

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subprojecrs, representing 38% of the total amount disbursed, wereunprofitable. Poor manarement was cited by BEDCO as the major cause of thepoor performance of most of :he projects it has assisted (para. 9.06).

8.02 The main characteristics of IDA financed projects are summarizedin Annex B-2. Twelve of the 31 subprojects are concentrated in theproduction of garments and account for 30% of the total amount disbursed bythe Association; the other principal economic activities are metalworking(11%), leather processing (9%), food processing (8%), furniture and woodworking (6%) retail trade (6%) construction materials (3%) andmiscellaneous services (27%). Except for four projects - two garmentmanufacturers, a leather processing enterprise and a producer of wood andstone carvings - which export part of their production, all of theprojects produce for the local market, and 55% depend entirely on importedraw matrials. About 75% of the subprojects and 86% of the subloan amountsare concentrated in Maseru, mostly on BEDCO's industrial estate. All ofthe projects were new concerns. The 31 projects financed created 304permanent jobs at an average investment cost per job of M 2300 - about thelevel estimated at appraisal. Brief descriptions of some of thesubprojects are provided in Annex B-3.

IX. BEDCO: OPERATIONAL AND FINANCIAL PERFORMAINCEOPERATIONS

9.01 Industrial Estate Construction Program: At appraisal, BEDCO hadcompleted the first of three phases of the construction of the SebabolengTrade and Industrial Center (STIC) in Maseru. In addition to completingthe final two STIC phases, BEDCO planned to build three mini-industrialestates at Maputsoe, Thaba Tseka and Mohales Hoek by the end of 1981.Although the industrial center in Maseru was completed as planned, theconstruction of the mini-industrial estates have not progressed due to lackof funds. Recently, the British Government agreed to finance theconstruction of the Mohales Hoek estate, which is expected to be completedby March 1983. Neither the Association nor CIDA consider the constructionof the mini estates a priority at the moment, given the need for BEDCO tofocus on strengthening the performance of enterprises at STIC, and CIDAdoes not plan to provide financing for that purpose.

9.02 SSE Credit Scheme and Equity Investments: The evolution ofBEDCO's operations from 1977-1982 and a summary analysis of its loan andequity investments approved up to March 31, 1982 are presented in AnnexB-4. The volume of loan operations over the six year period ended March1981, was lower than projected at appraisal largely due to two factors:BEDCO did not construct the mini-industrial estates as expected atappraisal, and the number of Basotho nationals attracted by the assistanceBEDCO could provide, and who were considered likely to succeed in runningsmall businesses, turned out to be much smaller than previously expected.As of March 31, 1982, BEDCO had approved 104 loans totalling M 1.1 millionof which about 80% had been disbursed. Loan approvals stagnated in thefirst three years, grew sharply in 1980 and 1981 but declined rapidly inthe last fiscal year following BEDCO's decision to consolidate its existingportfolio. Annual loan approvals averaged M 213,000 for 17 projects ascompared to M 263,000 for 80 projects forecast at appraisal. During thesix year period (1977-82), BEDCO approved 12 equity investments (for which

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no forecasts were made at appraisal) for a total of M 138,220. Twoinvestments in companies facing severe operational problems were sold offin 1981, and BEDCO is in the process of selling two more unprofitablecompanies (Annex B-5).

9.03 BEDCO's loans have ranged from M 1000 to M 57,000; the majorityhave been less than M 5000. However, larger loans in the M 10,000-50,000range accounted for about 72% of the total amounts approved; overall, theaverage loan size was about M 10,000, about two and a half times the sizeestimated at appraisal. In number, production of garments was the dominantactivity for which loans were approved, although the retail trade sectoraccounted for the bulk of the value of approvals, followed by garments andproduction of construction materials. Nearly 97% of both the number andamount of loans were for new projects. Ninety percent of the amountsapproved were for fixed capital investments and the rest for workingcapital purposes. Equity investments approved (Annex B-5) ranged from M 8to N 27,000 with BEDCO's shareholding varying from 27% to 100l. Allcompanies in which BEDCO holds equity investments were also recipients ofloans from BEDCO.

9.04 Entrepreneur Training: BEDCO launched an entrepreneur trainingdevelopment program in 1979. In addition to giving induction courses tonew BEDCO clients, the training department has conducted several seminarsin basic management principles, bookkeeping, tailoring, dressmaking,salesmanship etc. for groups of entrepreneurs. The majority of BEDCO-assisted entrepreneurs have attended at least one course each. Thetraining department also sends entrepreneurs to courses conducted by otherinstitutions such as the Lesotho Opportunities Industrialization Center.

9.05 Portfolio. As of June 30, 1982, BEDCO's total portfolio amountedto M 3.6 million, consisting of M 2.1 million in real estate holdings(mainly in the industrial estate in Maseru), M 1.0 million in loans and M0.9 million in equity investments. Overall, BEDCO's loan and equityportfolios are of poor quality, which has necessitated provisions of M 0.6million. As of June 30, 1982, out of 96 projects in BEDCO's loanportfolio, 77 projects accounting for about 72% of the outstanding loanportfolio were unprofitable, and seven out of the 10 companies in whichBEDCO had equity investments were operating at a loss. Loan arrears ofover three months amounted to M 163,000 at the end of June 1982,representing a high 48% of the outstanding loan portfolio; 52% of the loanportfolio was affected by arrears. Rental arrears of more than threemonths amounted to H 23,000, representing about 35Z of the annual rentalincome from the arrears affected factory buildings.

9.06 The poor performance of BEDCO assisted enterprises is attributedto a number of factors of which the most important are: (i) PoorManagement: At the time BEDCO was created, it had been expected that thecredit facilities and other promotional services it would offer wouldattract from South Africa Basotho nationals who had acquired commercial andsome industrial skills to set up their own small businesses with BEDCOassistance. To date, however, Basotho nationals who have returned from theRSA represent a small number of BEDCO's clientel. The majority of BEDCOclients are former civil servants and rural artisans, who had had verylittle experience in running modern commercial enterprises and much less in

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industrial activities. While a number of them have gradually ixuroved theperformance of their small businesses as they have acquired e7perience, themajority still lack basic management capabilities. For example, no morethan about 25% of BEDCO-asissted enterprises keep books of account on aregular basis; (ii) Lack of Skilled Workers: Inadequate managementcapabilities on the part of project sponsors is exercabated by lack ofskilled workers. This problem is particularly prevalent in enterprisesengaged in manufacturing activities. In addition to tne poor quality oftheir products, most of these enterprises are not able to maintainconsistent levels of production because of frequent machinery breakdownsdue to poor maintenance. As a result of these constraints, Basotho ownedsmall enterprises are not able to compete with nearby South Africanenterprises of similar size which have ready access to the Lesotho market;(ili) Working Capital: The majority of BEDCO assisted entrepreneurs citelack of adequate working capital resources as a major constraint. Becauseof poor management and financial performance and lack of collateral, BEDCOclients have no access to short term commercial bank credit to financetheir working capital needs. To address this problem, BEDCO startedfinancing working capital loans in 1979 and set up a subsidiary company(BEDCO Trading) which purchased raw materials in bulk for sale to BEDCOclients at prices marginally above cost.

9.07 At the time of appraisal, it had been expected that some of BEDCOassisted entrepreneurs on the industrial estate would graduate and move offthe estate to make room for new entreprises. To date, however, none of theentrepreneurs have "graduated; the few that have left, have done sofollowing the collapse of their bussinesses.

Financial Performance and Condition

9.08 Due to the high cost of providing training and extension servicesto SSEs, rather poor financial prospects were forecast for BEDCO atappraisal, and it was expected that it would make losses up to 1981.BEDCO's actual performance has been much poorer than projected (AnnexB-6). Due to the poor performance of enterprises in its portfolio, overthe period 1978-82 factory rental, loan and dividend income was lower thanforecast, While promotional and technical assistance expenses have exceededestimates by about 40% in each year. (BEDCO's performanace in 1977 wasbetter than forecast). BEDCO's losses have averaged a high 34% of totalassets compared to only 12% forecast at appraisal. To finance itsoperations, BEDCO has relied on grants from bilateral agencies, notablyCIDA, and on Government subventions to meet its operating expenses; BEDCOhas not incurred any major long-term debts. As of June 30, 1982, BEDCO hada debt equity ratio of only 0.4:1, well below the 3:1 limit agreed with theAssociation.

X. BEDCO: CONCLUSIONS

10.01 The general objectives of IDA's assistance to BEDCO, i.e.providing foreign exchange resources for financing small-scale enterpriseprojects, thereby creating employment opportunities, and contributing tothe building of BEDCO into an effective institution have partially been

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met. BEDCO's performance over the past five years has been satisfactory incertain respects and below expectations in othera. On one hand, BEDCO has,over this period, established fairly sound systems and procedures,mobilized resources to support a modest volume of lending operations and toimplement part of its industrial estates construction program; it has alsodeveloped a satisfactory program for training its client small scaleenterpreneurs. On the other hand, the bulk of BEDCO's portfolio is of poorquality, and its financial performance has been much poorer thananticipated. In addition, BEDCO continues to rely extensively onexpatriate support at middle management levels and for its key technicaland professional staff needs - a common problem in Lesotho due to ageneral shortage of qualified and skilled nationals. Overall, despitevarious constraints such as a shortage of adequately qualified Basothostaff, lack of special incentives for SSE development, and a dearth ofskilled Basotho entrepreneurs, BEDCO has played an important role in thedifficult task of promoting and assisting the development of small-scaleentrepreneurs in Lesotho. Prospects for BEDCO becoming a more effectiveinstitution will largely depend on continued support from both externalagencies and Government.

- 27 - An A-1

LISUIH) NATMNXL LEELN CORPOATMN (LNOC)list of S ects rized tinex Credit 702-4M

TotalDaIte AmoUt &igxmt Amalt

Nme of &ftmject Number Audwrized astforizd Cfld Dfs Lzred

Internatinal Txtila (Pty) Ltd. AL-i 03/08/78 316.2 130.4 185.8Selkol Joinery Ltd. AL-2 10/04/78 127.2 - 127.2lesotbo Milling Co. AL-3 12/13/78 150.1 19.1 131.0Iesotbo Sboes Ltd. AL4 1Z/19/78 126.5 - 126.5

Dto Iesotio ltd. AL-5 12/5/79 495.9 65.6 430.3Mbluti SkiDn AL-6 1/10/80 200.0 - 200.0kbputaoe Bakery Ltd. AL-7 6/26/80 151.2 8.5 142.7Iesotbo IheellUa FAhifacturexs

(Pty) Ltd. AL-8 8/27/80 112.4 30.7 81.7Juripe Fruits ALr9 2/10/81 244.7 43.2 201.5Iesotho CLothing AL-10 2/10/81 113.2 - 113.2Hote1 Victoria Landry iL-1 12/13/77 33.4 - 33.4lolonyam Cardl"e L,-2 6/27/78 92.8 - 92.8Mblu]ti Furniture T3dustries Ltd. BL-3 10/278 45.3 - 45.3Frniture lndistri ILtd.(canoel3d)EL-4 11129/79 48.0 48.0 -

Freigitpdck Internaticnal BL-5 12/1/80 83.6 2/ - 83.6

1/ Aa additional US$107.9 tbxusand mm astborzed tier the next INC credit: Credit 985-LEM.

2/ ha additiomal US$76.6 thcusand sa authorized inder the next LNDC Credit: 985-L90.

EAPIJLme 1983

somIpSOn NTAnAL DEVELir PaQACIN (LbW)

Ecxndc Characteristics of pUbprojects Finarncd Vnder Credit 702-LSO(M'Q(Xb)

% RawPennanent Materials Rates of Retum

Economic NW or X Basotho EAloyuent ltic Z Sales per AppraisalNae of Sebproject Sector location ETpansion (Omership Created 1/ Sources Irted ERR FLR

Internatlonal Textiles Textiles MHeru tw 50 130 noe 100 27.0 23.5Selkol Joinery Wbod Products Maaeru Eaion 100 35* none now 28.0 28.0leslth, !Ilulirg Maize Millirg Mapwtae ESqseion 33.3 - 50 10 not sppilcable 2/lesotho Shoes Footar Maputee Nw none W50t 67 100 not applicable 7/Metro lEsothD fIlesale Maseru Expaion 50 8) noe noe not applicable 7/

Retail MaputaceTrade Mtahes-

HokMaluti Sldr Tannery Maseru EKpansion 50 5 none 100 72.0 68.0Maputsoe Bakery Bakery Maputwce N now 60k 98 none not applicable 2/Lesotho ULbrella Mainufacturers Umbrellas Maput,e EKpansion none 270 noe 100 not applicable 7/Smripe Fruits Vegetable/Fnit Maseru NMw 50 46 5 none 21.4 23.2 9

Distributionlesotho Caothirg Textiles HMputooe ow none 110* none 100 not applicable 2/Hotel Victoria lanry Service Meseru Naw 100 nca 10 100 n.a. 134.0iblonyam Cugle Cardle Maseru ExUISion 50 none none 30 128.0 103.0Maluti Furniture LIndustrie Frniture Maputsoe EKpansion 100 50 none 100 132.0 131.0Freightpak Intemational Transport Masetu Rehabiltation nome 10 n.a. n.a. not applicable 2/

Distribution

I/ Appraisal data less marked with asterisk (*), in dch mse latest actual data.7/ For factory buildirzs, the siaplfied apraisal format required from INC did not provide for calcilatixi of ERR and FIRR

Note: n.a. - not available

EAPIDMarch 1983

LMo NCW& WMKme OWATIM (110C)Fimrial Qcractarimati of Nrojects Financed under tedt 7M-LEO

Profit bBfoze Tai/lypc LlD Total latest Year for Total Project

Tbtal Prolect Cost Fll ns Lhidl actual DIta Profit Mefore mc cost (X)Non of &bgwoject Appr Actulal Oerrmn Lj,EFIG 3 ! la AvaLable Apra Actual kap l An ts

lnternatiaial Textlke 877.0 le t sau0p 2/ L,e 273.8 308.0 5/ n.a. 35.1 n.a. in lqddathaformst 2/

Selkol Jointy 189.0 180.7 - (8.3) L 9n.6 1982 58.0 (43.9) 30.7 (24.2) sodd - profitable in 1983Iesotlho Milling (silos) 148.5 150.5 2.0 F 150.5 1982 54,5 6/7/ 215.3 617/ 36.2 n.a. 11/ profitableLwotho ioms 530.5 523.6 (6.9) F 160.4 1981 126.9 #/V/ 220.0Or 23.9 8/ 4.?oT proitableMbtro Lesotto (3 proJects) 1575.8 1377.0 2/ (198.8) 2/ E,F 677.2 2/ 1981 137.2 Tr 636.77 S 8.7 n.:. pI ofitableIaluti Sdns ( reappraised) 161.0 167.5 6.5 L 167.5 1961 225.9=/ (58.4)71 n.a.1 1 / n.e./ soldHrztes bbery 407.0 394.8 (12.2) F 163.0 1983 59.8 91.0 14.7 23.1 profitbleLesotlo Uehlla fscacwn 153.1 151.1 (2.0) F 150.1 1981 9OO.0 IO/ 301D0I10/ n.a.II/ n.a. profitableSnarips Frnits (as reappraised) 4B.0 365.1 (72.9) F,E,G 270.0 1982 48.7 (90.7F 11.1 (24.8) utprofitableLesotho C1othfin.g 360.6 359.8 2/ (0.8) 2/ F 229.8 nom 474.2 / n.a., 131.5 n.m. profitablaIbtel Victoria Ladry 32.5 29.1 - (3,4) - 1 29.1 1982 56.3 /9/ 170.1 7/9, 173.2 n.. mot1o Hotsls for ia ted -

profitable forflast tin ln 1962Iblpm Cdlla 84.0 8D.7 (3.3) L 80.7 1981 101.7 9/ (18.7) 9/ n../ n facto moldHluti Funidtue nD tris 78.4 75.3 (3.1) 2/ L 36.3 1983 (e) 77.2S/ (83.0) I/ n.a.w n. l. aver baim =*t -taVrofiftable

Fuijghtpok Intanrtknal !/ 89.5 W8.5 69.0 P 158.5 nIm 171.5 5/ n.s. 191.6 n.a. pwfitable

t/_Part af thb project finanhed under Credit 702{90 ald prt under Crit 9W-11Miain estista baed an m t acbally disbused am mzbrojeot a data not available fzde L2 N/ L:loan Elequdty; FMfactory; C:g.ate 'U %UIh otherwim indioated, apprial figre is for sar Smar of opezutis a actual.p/ pfuial flgurea third yer of qnr tior whil acbmal for dLffeznt yer of opestiou, or Mt available.

Apprial firew firet yer of oaratima tilu acul for differet ywr of oprations or not avilable.3f Jpa l re for pr~ject. ctual fl for .get ,.

</ OUiuapprol eal dact.l fijure for IB3Twrh d y , not jut prqject.

Ib/DOdh appraisal aid Actual fi.ws a hfor uDIr Tid for iftle c W ruter thn tde project./CalaIation rut possibLe -profitf Is for ulea eq = ile total ant is for poject.

Ami 1983

- 30 -

Annex A-4Page I-of5

LNDC

Summary Description and Status of Subprojects Financed under Credit 702-LSO

(i) International Textiles (ITPL). ITPL "-.s created in 1976 as ajoint venture, owned 75 percent by Taiwanese investors experienced in thebusiness and 25 percent by LNDC, to manufacture kritted outer garments withimp rted materials. According to the original project design, ITPLwould subcontract the manufacture of about 50% of each garment as pieceworkto some 500 Basotho housewives, who would use knitting iachines purchasedfrom ITPL on hire purchase. ITPL would manufacture the balance of eachgarment and assemble the component pieces in its plant. However, whileITPL purchased the knitting machines intended for the housewives,subcontracting never started, and the machines are being held in storage.LNDC left management of the company to the Taiwanese investors, whoperformed unsatisfactorily. LNDC has been unsuccessful in soliciting anyinformation from the -company regarding its performance, and ITPL has builtup substantial arrears on its LNDC loan, for which the loan agreement wasnever finalized. ITPL was finally put into liquidation in mid-1982.

(ii) Selkol Joinery. Selkol Joinery, an indirectly ownedLNDC subsidiary, was created in 1976 to manufacture a variety of woodenproducts out of imported wood. In 1978, Selkol undertook anexpansion/modernization which was financed in part by an LNDC loan underCredit 702-LSO. While the expansion was expected to enable a 30Z increasein production and sales, turnover at first stagnated, subsequentlydeclined, and in 1982 amounted to only 75% of that prior to the expansion.The company has throughout been operating at a loss. Principal reasons forSelkol's poor performance include (a) increases in the cost of rawmaterials; (b) a lack of competent technical management; and (c) a toodiverse product range. After an unsuccessful attempt to sell Selkol to agroup of BEDCO clients, in the latter part of 1982, LNDC sold the companyto a South African firm involved in furniture manufacture anddistribution. As agreed at the time of the sale, the acquiring firm firststreamlined the range of Selkol's products to include mainly beds andwardrobes sold both domestically and in the RSA, and is now expandingoperations by introducing the manufacture of mattresses. LNDC has approveda loan of M200,000 for the expansion, which it has submitted for approvalunder Credit 985-LSO. Selkol's employment has increased fro. 35 in August1982 to 60, and the expansion will create an additional 40 jobs. As in thecase of other companies which have been divested, the new owners haveassumed the LNDC loan granted under Credit 702-LSO.

(iii) Lesotho Milling Company (LMC). Lesotho Milling Co. wasestablished in Maputsoe in 1973/74 and Is a joint venture (50/50) betweenTiger Oats of South Africa and Lesotho Food Industries, which in turn isjointly owned by a small South African Milling company (60.3Z) and LNDC

- 31 -

Annex A-4Page 2 of 5

(39.7%). LMC produces maize meal for domestic consumption out of maizeprimarily imported from the RSA. Although the mill is a protectedindustry, initially its financial performance was weak because ofcompetition from illegal imports of subsidized maize products from theRSA. However, performance improved starting in 1979 when Tiger Oats, whichis closely involved with millers in the Republic, acquired the sharespreviously owned by two other South African companies. Since then, LMC hasbeen increasingly profitable and a source of dividends for LNDC, eventhough, for a short period in 1982, Government temporarily liberalized theimport of maize/maize products into Lesotho. The IDA loan was used tofinance the construction of two storage silos for lease to LMC.

(iv) Lesotho Shoes. Lesotho Shoes was established inMaputsoe in 1979 by Braun Holdings of the Netherlands (76Z) and JaguarShoes of South Africa (24Z) and operates out of premises leased from LNDCand constructed with proceeds of the IDA credit. Initially manufacturingonly ordinary footwear for export to the RSA, Lesotho Shoes subsequentlyacquired a franchise to manufacture athletic footwear. The company hasrecently undertaken a small expansion, for which LNDC approved a loan ofM150,000. Since the second year of operations, the company has beenincreasingly profitable, and its employment has grown from the initial 30to 150 in 1982.

(v) Metro Lesotho. Metro Lesotho was until recently owned50% by LNDC and 50% by Metro of RSA, which is one of the largerwholesale/retail chains operating in Southern Africa. Metro Lesotho wasincorporated in 1974 and began as a wholesaler distributor of consumergoods in Lesotho, with outlets in Maseru (1976), Maputsoe (1978) andQacha's Nek (1979). In 1980, it expanded by opening a wholesale outlet forvarious types of building materials in Maputsoe and a wholesale/retailoutlet for consumer goods in Mohales' Hoek to serve Southwestern Lesotho.The buildings for this expansion were financed under Credit 702-LSO andleased to Metro. According to the project appraisal submitted to theAssociation, the expansion was also expected to include a second buildingmaterials outlet in Maseru; however, this outlet was apparentlysubsequently dropped. In mid-1982, LNDC and subsequently IDA, under Credit985-LSO, approved a further Metro expansion, involving establishmentofwholesale warehouses in Butha-Buthe and Mafeting; after substantial delayresulting from difficulties relating to land titles, LNDC exepctsconstruction of the new buildings to begin shortly. Metro Lesotho ishighly profitable and a source of dividends for LNDC. In 1981, LNDCtransferred its shares in the company to its newly formed subsidiary,Lesotho Investment Holdings (LIH).

(vi) Maluti Skin Products (MSP). Maluti Skins wasincorporated in Maseru in 1978 as a joint venture between LNDC and the Fundfor Research and Investment for the Development of Africa (FRIDA) to takeover the business of the liquidated Lesotho Sheepskins Products (LSP),which had been an LNDC associate company. As much of the equipment

- 32 -

Annex A-4Page 3 of 5

inherited from LSP was obsolete, LNDC extended MSP a loan, under Credit702-LSO, in order to purchase replacement equipment as well as a dryingunit. While LSP had manufactured a variety of sheepskin products, MSPconsolidated production to include primarily car seat covers as well asslippers and coats, all of which for export. While initial expectationsfor MSP were high, the company has throughout operated at a loss as aresult of (a) poor management: (b) production inefficiencies and inadequatecost controls; (c) quality inconsistencies and excessive waste; (d) morerecently, obsolete equipment; (e) insufficient working capital; and (f)inadequate technical expertise. By early 1980, it became apparent that !SPwould require a substantial injection of new funds to continue. In April1982, LNDC and FRIDA sold MSP to a consortium of American, holding majoritycontrol, Zimbabwean and South African interests, which together have therequired technical expertise, market and funds to turn the company around.As conditions of the sale, the consortium Agreed to (a) repay the IDAsub-loan according to an agreed schedule; (b) increase MSP's equity byM150,000; and (c) reserve a seat for LNDC on MSP's Board. With M285,000 infinancing from LNDC, the consortium is currently expanding NSP's capacityas well as modernizing its tanning equipment. While MSP Is not yetprofitable, it operated at break-even in the six months ending March 31,1983. The consortium plans to establish a separate handbag operation inLesotho with financing from LNDC. The MSP expansion and the handbagconcern are expected to create 70 and 160 new jobs respectively.

(vii) Maputsoe Bakery. Maputsoe Bakery was established in1980 by the proprietor of Border Bakery in Ficksburg, South Africa, withLNDC providing leased premises financed under Credit 702-LSO. The bakery,which opened in early 1981, initially produced only bread loaves, usinglocally produced flour; it is now, in addition, producing confectionery.The bakery produces entirely for domestic consumption, particularly in thenorthern part of Lesotho, and has been granted protection against importsof bread from the RSA. The bakery has been operating profitably.

(viii) Lesotho Umbrella. Lesotho Umbrella, incorporated inLesotho in 1972, is owned by German and South African investors, andoperates in a factory leased from LNDC at the Maputsoe Industrial Estate.The company imports components for umbrella frames from its main parentcompany in West Germany, and uses the components to produce both completedumbrellas and assembled umbrella frames. Most of its output Is exportedto Europe, mainly (75%) to West Germany, from where the umbrella frames areexported to umbrella manufacturers in other European countries. To meetrising demand in Europe, in 1980 Lesotho Umbrella undertook an expansion,for which LNDC financed an extension of the leased factory under Credit702-LSO. Lesotho Umbrella has been very profitable, and its employment hasexpanded from the initial 45 to 300.

(ix) Sunripe Fruit and Vegetable Wholesale Cold Stoe (Lesotho).Sunripe Fruits (Lesotho) started operations in 1980 as a 50/50 jointventure between LNDC and Sunripe Fruits (Pty) Ltd. of the RSA to take over

- 33 -

Annex A-4Page 4 of 5

the Lesotho operations of Sunripe's (RSA) Ficksburg branch. Sunrips(Lesotho) distributes In Lesotho fresh fruits and vegetables produced inSouth Africa. LNDC financed part of the project costs under Credit 702-LSOIn the form of a loan for equipment and construction of a factory/warehousefor lease. As a result of management problems, high wastage, overuanningand high overheads, Sunripe (Lesotho) operated at a loss in both 1981 and1982. LNDC is confident that Sunripe's (Lesotho) performance can be turnedaround with proper management and tightened controls, and, in 1982, assumdfull ownership of the company and installed new management. However, thecompany continued to have serious financial problems, and LNDC decided totransfer 50% of its holding In Sunripe to a new partner with expertise Inthe business. Sunripe's turnover has since increased, and improvedpurchasing practices have resulted in better prices for fruits andvegetables Imported from the RSA. LNDC is in the process of developing aprogram of backward integration for Sunripe (Lesotho) in conjunction withanother LNDC project, Basotho Canners, by developping nucleus farms tosupply the two companies with produce which could be exported in variousforms to Europe. LNDC envlsages that Sunripe's shares would eventually besold to the local farmers supplying the company.

(x) Lesotho Clothing Industries. Lesotho ClothingIndustries was Incorporated In Lesotho in 1980 as a joint venture betweenPhoenix Clothing of South Africa (52X) and an Ainrican Investor (48X), whosubsequently assumed full ownership of the company. Lesotho Clothingoperates in Maputsoe out of premises financed under Credits 702-LSO and985-LSO and leased from LNDC. The company has been producing malnlywomen's and men's shorts for export, primarily to the USA and SouthAfrica. Lesotho Clothing undertook a first expansion to produce jeans forexport, and recently completed a second expansion involving an increase incapacity for existing operations, diversificatlon of markets to Includeinter alia the EEC, and addition of wetsuits to its existlg productlines .=tE will manufacture the wetsults under franchise from an Americanfirm and will export them to the RSA and the USA. Lesotho Clothlg hasbeen profitable since its first year of operations.

(xi) Hotel Victoria Laundry. The project in question was alaundry for the Victoria Hotel, which at the time was one of several hotelsoperated by Lesotho Hotels (Pty) Ltd., Itself a wholly-owned subsldiary ofLNDC. After successive bad managements and a h'story of losses, theLesotho Hotels was put into liquidation in 1981,82. Paradoxically, theliquidator brought in Its own managernnt team, end, for the first time, theVictoria and Lesotho Hotels made a profit In the year endlng March 31,1982. The various hotels in the group have been split up and the Victoria,with two others, sold to an Italian concern, which assumed the IDAsub-loan.

(xli) KolonyaUa Candle Company (KCC). KCC started operations in1968 as an LNDC subsidiary (about 512) to mnufacture fluted candles forthe local market. An lnitlal expansion was undertaken In 1971, wben XCCioved to the Maseru Industrial Estate, occupying preimies leased from

- 34 -

Annex A-4Page 5 of 5

LNDC. A second major expansion was undertaken in 1978 with financing fromLNDC out of the proceeds of Credit 702-LSO. At the time of the 1978expansion, KCC had a history of losses, primarily due to low outputresulting from the lack of sufficient machinery, a problem which theexpansion was expected to resolve. LNDC's new joint venture partner inKCC, a South African company experienced in the industry, and which hadbeen KCC's source of imported wax, was also expected to assist in improvingKCC's performance. Despite substantial increases in turnover, KCCconzinued to operate at a loss after the expansion, as a result ofcompetition from he RSA, where candle makers were receiving transportrebates for which KCC was not eligible. In September 1981, LNDC divestedits interest in KCC to its co-shareholders, which would be able to benefitfrom the rebates. Conditions of the sale included (i) that KCC's productswould be diversified according to an agreed timetable by the addition ofsoap and plastic masterbatch; (ii) that the production machinery of KCCwould be modernised; and (iii) that the IDA loan would be repaid accordingto an agreed schedule. The program, to be implemented over one year, wouldrequire additional investment of M 0.75 million and create 70 new jobs.KCC has started manufacturing plastic masterbatch and plans to beginproducing soap shortly. The company as a whole is operating at aboutbreak-even.

(xiii) Maluti Furniture Industries. Haluti furniture beganoperations in 1973 as a family owned business which manufactured anincreasingly diverse range of pine wood products, mainly householdfurniture, for export to the RSA and Europe. The company ran intofinancial problems, which were corrected in part by LNDC's injection ofcapital in 1978. As a result, LNDC became the majority owner, holding 51%of the enlarged share capital, with the original owners maintainingresponsibility for management. In 1978, Maluti Furniture undertook anexpansion which was financed by LNDC under Credit 702-LSO. Weakmanagement, obsolete machinery and an inadequate marketing strategy havesince plagued the company, which operated at a loss. As a result, thecompany ended up requiring a large capital injection, which LNDC was notprepared to invest, to remain viable. In mid-1982 LNDC came to anagreement with a South African furniture company, a major exporter of pineproducts, to buy out LNDC's interest in Maluti Furniture. Unfortunately,the minority shareholder would not agree to work with the new partner, and,consequently, the rescue package was never implemented. LNDC is once againsearching for a suitable partner.

(xiv) Freightpak International. Freightpak International wasestablished in 1978 by an international freight services company toundertake the following activities: international shipping, road transportservices, local furniture removals, warehousing and export packing ofindustrial, commercial and household goods, and distribution. In 1980, itrequested assistance from LNDC in the form of leased premises (warehouseand office), as its business was expanding and existing premises would nolonger be available. Construction of these premises was financed by LNDCunder Credits 702-LSO and 985-LSO. Freightpak is operating profitably.

u onDuEsonD ONTIONML IWDRgN GMPCRATION (WX)

A ovrison of Atual arni Forecasted Operatium (FY 1977-82)(H mflions)

1977 1978 1979 1980 1981 1982 1983Year endig Harch 31 Foreast /Actuwl Foreat Actual Forecast Actual Forecast Actud! Forecst Actual Ptail Acttnl

APPJRVA1S (net carollatfois)loan 0.5 0.3 0.6 1.2 0.7 0.8 0.9 0.6 1.1 0.6 0.3 3.5Equity bwtrnzt 0. 0.8 0.5 0.4 0.5 1.1 0.6 2.0 0.6 0.6 0.2 0.9Sites and Factory adldirgs 0.7 0.8 0.7 1.0 0.8 2.6 0.9 0.3 1.0 1.9 1.9 2.7

wrantees 2 / - 0.3 - 0.3 - 0.3 - 1.8 - 0.5 0.1 1.3Total 1.6 2.2 1.8 2.9 2i. ti T. 4.7 2.7 3.6 2.5 8.4

Cmitmzts.loas Om sm ama aeM 0.7 0.2 - 1.9Equity Iviestmnts as as as as 2.0 as 0.5 0.2 0.8Sites and Factory BLIhdirge approvals n.a. appwals n.a appvals na. apprmas 0.4 apprvals 1.0 0.5 1.7Qaraztee 2/ - - 0.3 0.5

Tbtal T7 T. i

Dishrnstloam 0.8 3/ 0.1 0.6 - 0.7 0.5 0.8 1.3 1.0 0.5 - 1.2 6/Equity Dwtes 0.8 0.2 0.5 - 0.5 0.5 0.6 - 0.6 1.5 2.4 -Sites ad Factory Izwutum t 0.5 1 0.5 0.7 0.5 0.7 0.9 0.8 0.6 0.9 1.0 1.1 0.2 /

iDtal 2.1 0.7 1.8 05T 1.9 T; I2 1.9 2.5 3.0 3.5 T7Y'

LiquUatioiu 6/loaM - - _ - _ _ _ 0.1 - 0.5 0.2 - 6/Equity lwestomtB - - - 0.1 - - - 0.2 - 0.3 0.1 - W/Sites art Factory lurtS - - - 0.1 - - - - - - - -

Tbtal - 0.2 - 0. - 0.3

Pymat of Omratees - - 0.1 0.1 0.1 _ 6

no w rnt i.i Llustrial estate infrastructure of MI.7 milUin for ditch disbur_mas wre to be mad w 1977-794Apraisal forasts did mt ir&1ds forwAst of gamrhtem.1nwludeH 0.4 miUlon appvsd, ad outstazdtzg at 3/31/76TnoAule H 0.4 allion ap rwd sd oitstadie at 3/31/76b Euks H 0.2 milit sppIved ard outsteiti at 3/31ln6As of 1rbr 30, 1982

/ AISAL FWS DID NZ DUIE FEWr3AMs tF I M NMR (F PAMUIS ON G MnS.

EAPIDJune 1983

- 36 - Annex A-6

IESUD NATBiAL muEW caRNAn (I})Suu7 &Aly_ds of LZ's Ebrtfo]io as of NIrh 31, 1983

(W00O(b)

51_eidiarias Aobiated Ciowdes Others Totalig. am--l b. Ami b. himm lb. Amun

A. Profitabe ProjertsEqity lIestets 4 924 6 369 - - 10 1293TaoS 3 242 1 175 4 558 8 975Factory EJlldis I/ 2 320 4 2858 12 2222 18 541XQiarantees 1 75 3 610 - - 4 685

Sub-total 10 Ml6 - W IT w

B. lkn-Pbofitable ProJetsEqpity Inuectaeats 6 2851 5 218 - - 11 3069loanrs 5 1410 2 68 3 6D4 10 2C82Factory Buildfnp g I 1 565 2 306 2 570 5 1441-QmN-nnrmir 1 18is 3 298 1 75 5 2175

Sub-total TIf -(T 62B1T

C. Projects in liqziddatimEqqty Invesbxets - - 1 15 - - 1 15Loens - - 1 259 - - 1 259Factory, UildiM s 1 / _ _ _ _ 1 185 1 185

Sub-total T 185

D. OtbersLoans 3 / - - - - 2 290 2 290Factorj Bildrgs 4 J - - - - 7 765 7 765Qarwantees 5 4 75 4 75

Sib-Wt - - - - --9ubrtotal ~ ~ ~ ~ ~ ~~ ~ 13 1130 zy 13

E. TotalEuuity Iiuevstmenta 2/ 10 3775 12 602 - - 22 4377Loans 8 1652 4 502 9 1452 21 3606Factory Bbldi.n 1/ 3 885 6 3164 22 3742 31 7791Qn^2rntees 2 1877 6 908 5 150 23 2935

Sub-total 23 8189 28 5176 36 5344 87 18709Sites 61/- - - - 771 - 771Total. 23 8189 28 5176 36 7/ 6115 87 7/ 19480

/ Factory building and site amDmnts axe as revalued on the Ltsis of r1aweenEt cost lessdepreLatim

2/ FairxlJes con profitble mAsbsidiary In ibdih UIDC's hAlding Is not direct but tbrough a adsidiaryinterediate buoldLg cmpany.

3/ Tnc-loe coe lomn to am indiildual for purposes otber tban a project aod one loan to a coany hibthhas just stated operatin.

4/ Tneclbxe three factorier leased to osopanier for hdich LNDC we not able to proede Information cnourrent perfornene, coe nmket area, c_e h AldLng ocoiied by a gnuexnment service entity, onebuilting which is unocrupied but will sbDrtly be leased tD handicraft companies as sales ctlet, andome brlding leased to a coqpy, ubidh has just started operatins8.

5/ TnIclxks a guarantee tD a divested company for icdh lNDC does not haue informatimi an performanee,and guarantees for thdee sets of staff loans.

6 LNDC has not yet been able to oo pile an acozzate and cowplete lrekd&ur of its site portfolio./ Farludlng mater of sites.

EAmJuxe 1983

A~~~~~~~~~~~~~~~~~~~~~~n .uWo WIONAL m aRr ONV11-XI (M):

A Mqparim of Forecest NWd ktul Incooe Statements CFY1977-M)(H millins)

1977 1978 1979 1980 1981 1982 1983 (P)Year eu llng March 31 F Forecsao t ktual Forecast ktual. Forecast Aktual Forecast Actuil 77 _ s

INEhitreat 152 104 212 98 258 165 406 145 456 303 218 278Divdernds 1/ 200 190 200 197 200 205 200 284 238 260 161 583PRetal LInEci 412 216 539 236 777 340 965 432 1151 563 818 944kcamting wId mapent Fees - 7 - 16 - 4 - - - 188 117 -Ilnytxant Prxtion 9ubyentim - - - - - - - 310 - 309 - -Otler 30 4 30 12 30 - 30 48 30 114 92 196

Gross Ino 794 521 g91 559 1,265 764 1,601 1,219 1,875 1,737 1,406 2001

Interest 45 51 124 ,74 2Ms 105 298 123 377 171 340 416Wag ard Salares 360 140 432 234 518 522 622 213 3/ 746 266 3/ 471 512

dministrative 380 278 274 635 970 652Iepreciati,m 12 19 14 23 16 26 17 27 18 160 199 224lwestn t Prmticn 2/ - - - 19 - 16 - 310 - 309 78 73

Tbtal pEnses 71 3M 37M M 737-M ' ITIRW 1,541 2,058 T77

Project (Lose) Extnerdinary ItemAd Proviulca 377 (69) 411 (69) 523 45 664 272 734 196 (652) 124

Provsions (75) (1289) (53) (117) (60) (430) (70) (376) (83) (644) (519) (1299)Otler (net) - 3 - 55 - (146) - - - (3) 53 -

Not Profit (I1s) 302 (1,355) Mr TWIT g (1 4 -65T (478) (1,118) T175)

Additial Gmnert Iubwticn - - - 9 470 - 187

tbt Profit (Loss) to FetainedramLnm302 (1355) 358 (131) 463 (531) 594 (95) 651 (8) (1118) (988)

a- a - - -~s=

/ In Acktul Statemnts 1n i yemant subwenticn in ieu of Ibliday In dividan of M 157,000 in FY1979, H 157,000 in FY1980 aMl H 200,000 in FYl9BI.In F& 1977 u-d 78, dividenis weare reived frmn the Ibliday In.

2 hn MY1980 and 1981, LNZ) allocated to tle actqpry "Isnentamnt prowticW" varying parcinteps of the dLf ferent types of othr expensm. In otlhr yea,W0 asUocated to "Investnt prowtion" aly those eua directly attrihbtabl to prortion activities. Mdis dhnge in acaunting e32lais tIeaimificant drop in investment promotion esesm in FY1982.

3/ An additional M 81,000 in 1Y1980 and M119,000 in FY1981 of salaries + wag ame included In intesteint proDtii expqrnse

u A-8

IESED N NLEEnQLM"N CaVTN (tUDmA ia i of tat ad AcuI Q l urn (FT1977-2)

1977 1978 1979 iD 19811 l9 1903To"r edng hdi 31 Foit Aci Fi Acit sl tAcablt Mii Fomat Jf htcwt AM 1 Aetii AC

A59u$

tbt Ga-met Am_" (12) (133) (90) (115) 3D 31 355 228 579 532 119 (176)1/

Isv 1894 1633 2350 2381 2813 1967 3363 3081 404 3525 30Equfty 1360 734 1861 769 2371- 1089 2S33 - 1094 333m 2283 4417 591

__i 3,5 2,3S 91 3,150 5,14 1 ij 4175 7,372 5,7 4207 ID,ao* l Paowlslm (8%) (2108) (967) (2179) (1007) (¶616) (lam (1779) (1160 (207 (2322) (3212)*t noufo 2,360 -259 3,244i 4,177 -171 5,119 IS UI3Y751 s -prFMS

b ling ad tranuwm 4/ 3594 3217 5180 3747 6434 4871 7026 5863 7673 803 2/ 9197 2/OtImr(net) 111 144 127 123 141 129 154 133 166 144 141

t1 3,705 3,361 5,307 3,87 6,575 ,C000 7,180 5.996 7,839 8.547 9,3 94821L ASSEIS 6,053 3,487 8,461 4,726 11,052 6,451 12,654 8,620 14,635 12,830 15,342 165061

MUM= AND armM

10 bobtlitesA - - 169 - 766 181 1Z4 540 1866 981 154A -

CDC 149 183 13D 179 111 175 92 170 73 165 160 -1 1340 - 1100 - 160D - 1547 - 1494 - - -

EL - - - - 20D - 600 - 140D - 76 -meodBlat 150 1W 0 150 150 ISO 142 425 134 4Z1 536 --mernment 850 - 1950 100 280D 530 3000 250 30DD 13C 1332 -

Ostr - 136 - 135 - 106 - 20D - 227 759 56901449 469 3499 146(4 5627 1140 6635 158 795 141 407 5O

Lem Curst Ihntla - (33) - (30) - (31) - (110) (152) (371) na

Sue Capital - - - - - 4D00 - mm - 400 4M0 40_twiqat GMa 2743 253 2743 2633 V43 1133 2743 26C8 2743 3706 5693 5693

SHw 1U wc 7 w WUhitahat Emznlm (lonea) 1113 (545) 1471 (676) 1934 (1207) 3528 (13M2) 3179 (3MO) (22 (3363)

W1-rT mri7 4677 3936 11591 5 1a,2W liF -iM-Cigdta uRr*s 748 1063 748 1335 748 1416 748 1763 748 365 4041 401

w TU4,6 3,051 4,962 a,m22 5,425 5,362 6,019 7.145 6,67 0 11,306 10.371

SDML IusAnX AMs Es 6,053 3,687 8,461 4,726 11,052 6,451 12,654 8,6M 14,635 12,830 15,342 16,061

Quraas Assadtln - 15 - 650 - 888 - 857 - 457 1968 2930 3/

I/ M of at 31. 192 l1 had abont W600,080 nested In suldiries In ft fo biddging lms. lMo Imseve shmle lud;atal, - thewIeldiaresl hd ovedlrt fdUls 'dlh dutw o e use ets!. Mim. inp ince, *I s netC' t ting spitalL pitlcn peitive.

2/ VIe fixt tgn dprecatirg lad ad bLddLp In Ffl981 with tte edffectiv s of te taId Act.Mhm, tde ant dsn hl Is nat of deacatim.

4/ F wts did not bpa opn rxwalstla of property, dle In sal atttmus property Is a evlmd.

* APm1901

- 39 - kc A-9

IFSCII NATIONAL DAMMW C(XRKATM (ISC_u_unzized Cwsolidatd ma StatSents 1977-1982

Year ended March 31 1977 1978 1979 1980 1981 1982

Sales 5155 5003 8636 9582 10163 13490oup Operatinqg Lo (873 ) (529) (291) 26 T223) (1051)

TMx (10) (9) (34) (153) 3 (74)Subtotal (883) (538) (325) (127) (220) ({1125)

(Prcofits) Lsses Attributable tDOatside Shareboldeza 102 66 9 2 (14) 14Tbtal (781) -(472) (316) (125) T (1111)

AlD Dividenis frm An odated Clmnaies 149 210 48 117 16 217Profit (loss) Before

Iten (632) (262) (268) (8) (218) (894)

Provisions (426) (267) (117) (96) (269) (251)Other: Profit (Loss) - 54 - - 9 27Project leelopmernt Ependitnre - - (146) -

Profit (loss) fron CGntimhig OpertiO (1058) (475) (531) (104) (478) (1118)

Covbenment Subvention 1/ - - - 9 470

Tose (236) - - - - -Pewrsal on Disposal of Cbmpay - 282 - - - -

LsOthnD lkxsing ioporatimlTsses (61) (38) - - - -

----- It Grant - 99 - - - -

N1t Grwp Profit (LOSS) to iettnmedEarnings (1355) (132) (531) (95) (8) (1118)

1/ Otber tn in lieu of Holiday Ina DLvIdend, and to ceer inves t pralnione2lpandita , both of bic 1bihL ave b x nrporated iu arriving at Group operatingloss.

EAPMDJune 1983

- 40 - Akh A-10

Smumidze 2oldtd Balance Sbeets 1977-1982

As of Mch 31 1977 1978 1979 198D 1981 1982

OirEslt AssetsStodc 599 374 804 1484 1461 1781Debtors 512 564 824 1435 1753 2053Bank al & Cash 493 694 379 722 1704 2501Total 1604 1632 2001 341 49718 6425

Pbrtfoliointel st in As datedCapyares 424 532 8;73 1043 921 672T 176 174 - 600 457 676

6 706 843 1643 1378 T348

Otler Assets - 439 6 6 6 6Tihxed Assets (net) & Deferred Expendituxe 5201 5299 6187 7856 12255 20835

TMASL SETS 71d 8076 6996 94C93 15

LIABWS- AD) EANOmunclt Liabilities

loB and Overdrafts 767 1383 717 950 911 1526Cxeditoxs and Provdsicxs 1193 963 1265 2353 3070 4850Taxatten 29 33 65 350 162 160

Total 1989 2379 2047 3653 4143 6536

OtherIxig tern I 1172 2255 1431 1947 3055 7887Deferred TamiaL 22 20 16 12 9 -Attributable tD Oatsie Sbrhldels 79 40 196 266 931 2332Total 1273 2315 1643 2225 95T 10219

E]rShare Capital - - 4000 4000 4000 4000AcamlatEed Firxs 3614 2685 1133 2684 3725 5968Total 3614 2685 5133 6684 7725 9968

Retaind Faxnings (Loe) (545) (676) (1207) (1302) (1310) (2428)Total 3061 2010 3ga6 5382 6I45 7544

Capital Reserve 1073 1372 1427 1886 4096 4425Total FquLty 4142 3382 5353 7268 10511 11965

1U0AL LIABTI-E AlD EY 7404 8076 6996 9493 14506 22184

Oitstanding Girantees 635 187 564 522 367 135

EAFD..me 1983

- 41 -

A~ Af-il

*orn mL (UB:)A Orai oft Fbm . ct md Acual FnuMl tIon (rm1n-)

1977 1978 1979 1910D 131 1i2 19UTowr aidi twh 31 tt3 m J mi bt 1 tIbt 41a Ibuct ktl Ibnt 1 ii

1. 1 Stant In -

* tornm Ins 16.4 14.7 LI.5 13.6 3. 12. 13.5 16.2 13.9 16.2 10.0 G.6(izerdI asit ia

kw. ka. Fr ) - - - - - - - (4-1) - (2.9) - -

1yr: Fudatu 0.9 1.4 1.7 1.8 2.1 1.9 2.5 1.6 2. 1.6 2.4 1.9aMinarlw ELVuaa/ 7.7 15.2 6.1 13.0 5.5 9.6 5.4 6.8 5.6 1L00 IL6 7.4

* hen t1atISq_us - - - 0.5 - 0.3 - 4.1 - 2.9 0.6 0.4

Qea ftoR (ls) 16.4 (1.9) 5.7 (1.7) 5.4 0.8 5.6 3.6 5.5 1.8 (4.6) (1.2)Ims: twAnlara for [ME

ad 1ean 1.6 36.3 0.7 LB 0.6 7.7 0.6 5.0 0.6 6.0 (3.7) (5.7)Itt prolt (ama) fr qradu 6.2 (38.1) 4.9 (3.2) 4.7 (9.5) 5.0 (1.4) 4.8 (4.5) (7.9) (6.9)Eat Pof it( (I) to IElatai

lann 6.2 (38.1) 4.9 (3.2) 4.7 (9.5) 5.0 (1-3) 4.8 0.1 (7.9) (6.0)

2. Selectad -an Go t ItBAsa lues - 2 of Aheap

gdJAI Pbgtfello 13.0 7.2 32.3 6.8 13.4 7.9 14.3 80 1L56 7.9 9.3 7.3 5Jnwl-hmd - 2 of Amap

rpz1d POrtfalD 20.3 24.3 12.5 2L2 9.5 2L1 7.7 26.0 7.7 15.4 4.8 n.a.lateist Jrmw -0 2 of hApo

lowtrfolio Z10.0 7.5 10.0 4.9 10.0 7.6 13.1 5.7 I.3 9.2 6.0 n_aGet of Det -sCof bein

Ig Tame Dabt 3/ 5.1 3.5 5.0 7.9 4.6 8.3 4.9 9.5 5.2 7.7 9.7 6.3

3. Pin SutnarnA.

*amursao - 0.6 - 0.9 - Ll - 1.4 - L4 LI 0.9LaThrnflabc/E 4/ity' 0.4 0.2 0.8 0.7 1.2 0.3 1.3 0.3 1.3 0.5 0.6 0.9

aIg Tam has_QannajEq4td/-- L2 - l.I - 0.5 - 0.5 - 0.6 0.8 L4PmvMa - 2 of asqutt

ftol Zo 0.3 9.1 0.2 69.2 0.2 53.2 0.2 42.6 0.2 35.4 a.3 33.8law _d Prndph Cc ump 6.7 - 4.7 - 4.2 - 4.2 - 4.1 - - -

LaOAgnnatdo - 0.8 - 07 - L0 - 1.0 - 1.2 l.0 m.lg Tarl D!bus/ iqty 4/ - 0.4 - 1.1 - 0.4 - 0.4 - 0.5 1.0 n.log Tea Dat + Oats

Equfly4/ - 0.6 - 1.2 - 0.5 - 0.5 - 0.5 1.1 ma.

4. Itt PofitMet Prhft (las) fro O4enti -- Z of lowr ad aqity 6.6 (44.4) 7.2 (4.0) 8.5 (9.9) 9.8 (1.5) 9.8 (4.9) (9.9) (10.4)

Eat Prdit (lo) to lealedEarnn as Z of yaS ad equity 6.6 (44.4) 7.2 (4.0) 8.5 (9.9) 9.8 (1.3) 9.8 (0.1) (9.9) (9.0)

Eat rEfit (lea) to Eata1z,Eranln - Z of A fw Y

End Spdy 7.6 (42.7) 7.5 (4.2) 8.9 (12.3) 10.4 (1.5) 10.3 (0.1) (10.6) (66)

Ws ad aalaris. other anisttw epes ad &d decia_2, Interut inn lndz inc ct t te &yaita.1, Eludhw Onus Gt dtis.I r e d captal e.

a5/ A wdz

FAPX9Jun 1933

- 42 -

Annex B-1

LESOTHO

BASOTHO ENTERPRISES DEVELOPMENT CORPORATION (BFDCO)

List of Subprojects Financed Under BEDCO Component of Credit 702-LSO

(US$)

Date Amount Amount Amount

Name of Prolect Number Authorised Auchorised Cancelled Disbursed

E.M. Lephaila AS-1 12/77 4,685.00 616.25 4,068.75

J. Rhoabane (Planet Rest.) AS-2 12/77 5.750.00 1,099.30 4.650.66/L

Mohalalitoe Pty. Ltd AS-3 12/77 5,750.00 5,750.00 --

Mphata Cane Furniture AS-4 12/77 8,449.70 8.449.7213.

A. M. Noruthoane AS-5 12/77 4,25.00 1,395.30 2,629.69

M. M. Steel AS-6 6/79 6,900.00 6,900.00 --

M. Pereko AS-7 6/79 3.394.00 3.395.00 --

City Dressmakers AS-8 6179 1,419.60 1.419.56

Leribe Steel AS-9 6/79 11,500.00 11,500.00 --

M. Noshoeshoe AS-10 6/79 6,900.00 6.900.00 --

M. Mahomed AS-1l 1180 5,683.40 105.60 5.683.51

D. Cenraus AS-12 1/80 7,592.40 7,592.36

T. Mahaletele AS-13 1/80 2,015.30 2.015.37

N. Mothomang AS-14 1/80 3,663.30 3,663.42

Mohalatibe Arum Lily AS-15 1/80 16,745.00 16,745.02

F. Moleko AS-16 1/80 4,556.90 4,556.97

J. T. Tsolo AS-17 1/80 5,524.70 5.524.59

Supersol AS-18 1/80 17,416.90 17.416.85/3.

A. Massa AS-19 1/80 5.399.10 5,399.10

Mekhabiso Ltd. AS-20 1/80 8,231.50 8,231.48

Kabi Leather Works AS-Z1 1/80 24,201.25 24.201.23

B. Mothibe AS-22 1/80 3,963.50 3.963.64

Kane Food Products AS-23 1/80 20,769.00 20,770.28

B. Mahlatia AS-24 1/80 5,610.80 5,610.78

D. Makhubu AS-25 1/80 13.200.00 13,200.00 ---

T. C. Mokorosi-Imota AS-26 1/80 9.420.00 9.420.00/I

M. Shale AS-27 1/80 6.000.00 6,000.00

L. Ramapepe AS-28 1/80 7,200.00 7,200.00

C. R. Mashape AS-29 1/80 36,000.00 36,000. 00 ---

M. Ntlatlapa AS-30 1/80 4,364.00 4,364.00

T. Beukes AS-31 1/HO 13,200.00 12,521.00

E. S. Tumo AS-32 1/80 13,200.00 13,200.00

L. Motemekoane AS-33 1/80 6,000.00 2,781.02

T. Holm AS-34 1/80 6,367.30 6,367.32

L. Sekhauana AS-35 8/80 2.630.00 1,896.91

Maluti Pony Trekking AS-36 8/80 18,960.00 14,264.58

N.E. Ntsere AS-37 8/80 4,875.00 4,875.00

Sello Hlapo AS-38 8/80 5,435.00 5,435.00

M. C. Hanese AS-39 8/80 5,850.00 4,907.00

Lesotho Photo Labs AS-40 8/80 57,105.70 57,105.70 /I

399,953.35 100,061.45 289,730.51

1/ Subloan has been repaid in full.2/ Company has been placed under liquidation and subloan has been written off.

EAPIDFebruary 1984

LESOTHO

BkSOTRO ENTEUYRISEB DEVEWP!ENT CORPORATION (BEDCO)

Economic Characteristics of Subprojects Financed Under BEDCO Component of Credit 702-LSO

Product or PermanentMain Economic New or Materials troea Sales EmploymentName of Project Number Activity Location Expansion Domestic Sources Exported Created

E.H. Lephaila AS-1 Electric Accessories STIC G New -- _ 5J. Khoabane AS-2 Restaurant/Groceries STIC " 40 12Mphata Cane Furniture AS-4 Furniture making STIC 0 Z 2 11A.M. Moruthoane AS-5 Garments Qeme " -- 7City Dressmakera AS-8 Garments STIC " - 11M. Mahomed AS-ll Garments Maseru" -- -- 9D. Genrams AS-12 Carmeqts Maseru " __ _ 12T. Hahaletele AS-13 Bee Keeping Hafeteng 100 __ 5N. Mothomang AS-14 Furniture STIC 10 - 7Mohalatibe Arum Lily AS-15 Unifcrms Leribe -- -- 17F. Moleko AS-16 Garments Haseru --J.T. Taolo AS-17 Coffins STIC 20 7Supersol AS-18 Solar appliances STIC - -_ 8A. Massa AS-19 Garments STIC 10 12Hekhabiso Ltd. AS-20 Garmencs STIC -- - 6Kabi Leather Works AS-21 Leather processing STIC 40 75 16 b'B. Hothibe AS-22 Art design STIC 70 80 37Kane Food Products AS-23 Food processing STIC 80 8B. Kahlatia AS-24 Garments STIC -- 5T.C. Mokorosi-Imota AS-26 Sawing Machines Agency STIC -- -- 6M. Ntlatlapa AS-30 Garments Hafeteng -- 10T. Beukes AS-31 Metal Work STIC 5 -- 16E.S. Tumo AS-32 Garments STIC -- 10 4L. Motemekoane AS-33 Blockmaking Qeme 90 9- 9T. Holm AS-34 Water Drilling STIC -- _ 13L. Sekhamana AS-35 Leather processing Thabatseka " 75 4- 4Maluti Pony Trekking AS-36 Pony trekking Maseru 100 8M.E. Ntsere AS-37 Garments Maseru -- -- 9Sello Hlapo AS-38 Garment Knitting Semonkong -- 8MNG. Hanese AS-39 Blockmaking Buthabothe " 90 13Lesotho Photo Labs AS-40 Photo processing Kaseru -- _ 16

_ ~~~~~~~~~~~~~~~304

1/ STIC a Sebaboleng Trades and Industrial Centreis BEDCO's industrial estate In Maseru.

EAPID

JuMt 1983

- 44 -

Annex B-3Page 1 of 2

LESOTHO

Basotho Enterprises Development Corporation (BEDCO)

Summary Description and Present Status of Selected Subprojects

Financed Under Credit 702-LSO

(i) Kane Food Products: Subloan US$20,770. The subloan was approved inJanuary 1980 to finance the cost of a cold room, machinery and the initialstock of packaging materials. Initially, the company started with thebottling of guava and orange juices processed from concentrates. In 1982,the company expanded into bottling milk for home deliveries around theMaseru area and also packaging a variety of food products, beans, pasta,salt, etc. The concentrates from which the juices are pressed and all thepackaging materials are imported. The company employs eight workers.Despite competition form large South Africa food processing firms whichsupply most of Lesotho's needs, the company is moderatly profitable. Itssuccess is largely attributed to the sponsor's management capabilities andprevious experience working for a large food processing company in SouthAfrica. The company is expected to move off the estate into its ownpremises in the next two to three years.

(ii) J. Khoabane - Planet Restaurant: Subloan US$4,651 - The projectconsists of a restaurant and a small grocery store in the Sebabolengindustrial estate. It was started in 1977, by Mr. and Mrs. Khoabane, bothretired school teachers, and caters for low income people at the industrialcenter and neighboring residential clusters. The sponsors, who hadpreviously owned a small cafg and a couple of taxis, contributed one-halfof the initial US$10,000 total project cost. The US$5000 loan from BEDCOhas been paid off. The company has a staff of 14, including thetwo owners, and has made a profit each year since it was started. Itsprofits have, however, declined since the opening of a large South Africanbased supermarket on the inlustrial estate. The sponsors plan to expandand improve the quality of the restaurant.

(iii) Lesotho Photo Labs Ltd. (LPL): Subloan US$57,105. Thecompany was established in 1979, and is the only photographic filmprocessing establishment in Lesotho. It also distributes cameras,projectors and related accessories. The IDA subloan - the largestapproved under the component - financed about one half of the totalproject cost of US$118,000. LPL is one of the few profitable BEDCOassisted enterprises and plans to expand its film processing facilities tomeet growing demand. LPL currently employs 15 workers of whom six areskilled. The company is managed by a qualified photo processing technicianwith several years of experience in the industry. The subloan has beenrepaid in full.

- 45 -

Annex B-3Page 2 of 2

(iv) Kabi Leather Worns Ltd: Subloan US$24,201. The projectwas started in 1979, by a former senior civil servant and manufacturessheepskin slipper and leather sandals. Due to the poor quality of locallyavailable sheepskin and leather, the company imports these materials fromthe RSA. The company has expanded rapidly in the past three years withsales growing from US$96,000 in 1979 to US$194,000 in 1981. About 75Z ofits output is exported, mainly to the RSA. The company made a loss in thefirst year of operations, but has subsequently become profitable. Itslabor force of 37 is gradually becoming experienced and skilled. Thecompany plans to build its own factory, expand its product lines anddiversify into the production of sheepskin coats. The company has goodexport market prospects in EEC member countries, if it can sufficientlyupgrade the quality of its products.

(v) J. T. Tsolo: Subloan US$5525. This small projectupholsters furniture and produces coffins. The sponsor had receivedtraining in carpentry and upholstering at a local technical school and hadworked for a large furniture and hardware store for 10 years beforestarting the project In 1979. The IDA subloan financed 802 of the initialinvestment - mostly for the purchase of tools and machinery. The sponsorhas attended a series of bookkeeping courses arranged by BEDCO and uses thewood workshop common facility at the industrial estate. The projectappears destined to fail; after the sponsor was crippled in a roadaccident, the quality of the work has deteriorated, leading to a rapiddecline in sales. The BEDCO loan is in serious arrears.

(vi) Mahalalitoe Aurum Lily Ltd.: Subloan US$16,745. Thecompany, owned by 36 Basotho businessien, started operating in 1970, andreceived the IDA subloan in 1980 to expand its uniform manufacturingoperation. Until 1980, it had been efficiently run by a General Managerand a Production Manager, who both had long experience in the clothingmanufacturing industry. Following the resignation of these managers at theend of 1980, the company made a loss due to a rapid decline in sales.Since then the company's performance has continued to deteriorate, and in1981, sales amounted to N 18,000 (less than 302 of annual sales three yearsearlier), and the company made a loss of N 10,000. The company has 16workers, including a Manager who has had llttle training In the clothingindustry. With no working capital, the company faces financial collapse;its loan from BEDCO is in serious arrears. BEDCO has recently agreed toreschedule the loan, and to provide technical advisors to assist thecompany revitallze its operations, so as to improve its performance.

Saotbo Katerurises Devolopmat Corporatleo. (30CO)

Sar, of 0Oeratlaas (1917-1952)

Ueoqtr ie Nalotli

VI ?71 1971 160 _191 1962Approvalh lmI_er Ao,t Pe: Ammout ImFer Aet _=t lA-er tl mir AEt

Lo&ns 9 21,140 I 109,429 It 134.963 I9 339,00 22 417,249 7 S4037tquly _ -- 4 207,720 2 000 2 2 - - -

tOtAL 9 21,1U4 20 217,139 13 140,965 305,550 22 417,249 7 S4,017Dlebugsemsts

Loans 17 10.223 12 47,775 36 290,654 43 446.423 I 44,671tquity 4 93.000 2 20,000 2 23.100 - - I 1.400

TOtAL 21 201,253 14 67,775 30 313,754 43 4U1.133 9 46,03S

For.ecat LoanApprovalas 30,000 250,000 320,000 320,000 320.000 320,000

Analsi of lo AL prod e of tarse 31, 1962(Naloti)

A. Rise lumbor Am t x

p to 1,000 S 52 3,346 O01,001 - 2,500 7 7 22,436 222.S01 - 3.000 40 371 132,273 12S.001 - 7,3S0 11 1O0 70,380 it7,501 -10,000 10 102 62,359 71Over 10.000 33 312 824,872 731

Total 1T jT 1,IwS1 lus TM*. nor tconmic Aetivitr

Retail trade 11 394,897 352Leather Procssin g 92 62,471 72Care teo 35 342 205.39 1n2Building rAterialo/Construetim 12 112 163,601 142Natal Vertr 6 62 44,635 4tWmod-rkbJVrmlture 12 III 77,412 72Aaricaltutu 3 St 60,942 32Ni$CelGlaau $GeviCes 7 72 102 94 n

total TM 151 1.1336 TM

C. Ten of Lem

up to I year 14 1Us 45,491 42I - 2 years 10 1Ot 94,697 as2 - 5 years 39 372 270,09S 1423 - * years * 62 147,044 1324 - Jears 30 a29 S02O615 44o"rysyear. 5 52 77 726 n

Total IN UM TT3.1K TM

v. tMo of Retentet

1w .,100 us l,10,321 96laMOSIeM A A2 16 44 2

Total n 113T5 TM

Fixed Capital 1,013,751 anUa 1^^ Capital - - 112 117 11t

Total T ' I3l E5 U

lu'ndk 1983-

3SO*O KNIfUs DItYLNMl CDUCIIUtZ

Analy of Us rflec fJ 1 §

Aitlyity areholdiAl t, Kane tios of Value Itmt atlemat terfeterac

0Omtating Ptofitabillty

1. Kabi Leather Works (ity) Ltd. Ieather Products 36 23,230 5.000 lU210 Al ?refits growng steadily2. Superatates (tty) Ltd. Croeery store 20 10,000 - 10.W0 53 rofltauble. compay pays

diwideada3. Lesotho Pthto LbW Photo ?reeaaalsg 10 2,000 - 2,000 17 UIIC0 beat equity heUd

Operating at a lose

1, LUbepe Cty) Ltd. Coal orehhasta 100 31000 3.000 - Obpa0 be-ng sold2. Nerag KAltVmr (Itc) bitted gata 100 o - a 15 Expected tn beake d *of

YrI3. Ithobanc Clay Productie(ty)Ltd. ticrh mkiig 713 21.711 21.614 - 33 aclng racoitreted4. Supernol (Pty) Ltd. slar beeting ejets" 60 10,000 10000 - - DormantS. m Drillins (tty) Ltd. Noeable drilli 48 4.000 - 4 000 ees beis steadily reduced6. Maseru Broom City) Ltd. Crec broom 39 7.5C0 - 7.500 - oay bein sold7. Sebabelang Auto Center(Ity)Lt4. sto Costae 27 4.000 - 4.00 to sale "c_sercted

TO0ML 91,552 42,814 48,733 113

June 1983

Ib

; 8~~~ASOTHO ENTERPRISES DEVELOPHZN CORPORATION (BEDCO)

Forecast and Actual Income Statements (1977-82)(Amounte Haloti '000)

Year Ending March 31 1977 1978 1979 1980 1951 1982Projected Actual Prolected Actual Projected Actual Projectd Actual Frobeated Actual Actual

Incomeiftereat on Loans 2 19 19 18 SO 18 73 16 62 56 106

DLvLdena Income -- - 7 -- 9 -- 7 4 6 2Factory Rental Income 16 - 59 25 189 71 261 96 320 119 1507ndoo from machine

shop and other sources 33 47 117 39 141 81 146 35 150 54 66

Total Income 51 56 202 82 389 170 487 151 558 231 322

ExpensesAdministrative expensea 214 195 510 580 619 474 664 503 714 733 785(of which depreciation) (12) (24) (112) (73) (182) (48) (182) (54) (182) (li8) (128)Financial charges -- 3 5 20 15 3 20 2 i1 27 57Other - _ 2 8 3 28 3 13 3

Total Expenses 214 198 517 608 637 505 687 515 735 760 842 1

Profit (loss) beforeProvisions and Tax (163) (132) (315) 526 245 335 (200) 368 (177) (529) (520)

ProvLSions and write-offe (9) (4) (25) (144) (S2) (203) (32) (298) (32) (564) (208)Income Tax - -- -- _Net Profit (Loss) (172) (136) (340) (670) (280) (538) (232) (666) (209) (1.093) (728)

EAPIDJune 1983

to

J r C~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

J t ,.*

LUOTHO

BASOTIP ENTERPRIS3 DEELOPHENT OPOPATION (35CC)

Projected and Actual Balence SheetU (1977 - 1982)

A. at Karch ~~~~~~~~~~ 1~977 1978 1979190 1981 :1952gihP tdted Actuc1 projected Actual Project.d Act.,, Projccted Actu nProject Actua1

Asset.

Not Current Assets 92 141 50 (114) 50 BS 50 5) 50 (87) 471

Portfolio

Loans 50 110 283 36 503 173 617 347 639 516 611

Equity Investa nts147 93 397 78 599 63 643 48 312 377

Lose Provisions (16) (106) (41) (198) (73) (378) (15 54(17 368 '56U

Net Portfolio Ty i "3 ' ST .9 573 '.6 550 0392

Net Fixed Assets 355 335 1,680 1,220 2;508- 1,607 2,876 1.845 3,194 2.070 2,070

Total Assets 584 627 2,065 1,341 3,066 2,0S9 3,01 2,266 3.794 2,443 2,933

Liabilities

Long Term Debt -- -- 125 31 260 40 260 169 260 422 805LoengTomebutyGrantr/Equtty 107 214 191 360 392 879 484 ,-1,236 986 1,633 2,138

Government of Canada 695 6 5 1,757 1.902 2,702 2,652 3,277 3,009 3,277 3,547 3,894Oth4r - ~~~~~~~-- 550 550 9. 550 11 550 17 8

Total Orante/Equity -Fdr -ow2,498 YI&I6- 3,644 3. 540 4,3S11 -4.1256 4.8-13 5.197 T6 I.Lota Arunts/equits (218) (282) (538) (952) (838)((1,491) (1.070) (2 160) (1,279) (3,177) 3,912Ntam rantsuguiatedLs 584 627 1,940 1.310 2,806 2,049 3,241 2,096 3,534 2,020 2,128

Total Liabilities & Equity 54 627 - 2.065 1.341 3.066 2.089 3.501 2,266 3.794 2,443 2,933

EAPIDJune 1983

l~~~~~~~~~~~~~~~~~~~~~

- 50 - Annex CPage 1 of 2

6 E_ BASOTHO ENTERPRISES DEVELOPMENT CORPORATIONP.O. BOX 1216. MASERU ICC LESOTH. CDLESB "EDCOC. TELEPHONE 204. TEIEX 370DO

COHMENTS RECEIVED FROM THEI BORROWER

BDC/AID/4 5 December, 1983BNS/gm

Mr. Shiv S. KapurDirector - Operations Evaluation DepartmentThe World Bank (IDA)1818 H Street N.W_Washington DC 20433USA

Dear Mr. Kapur:

RE: PROJECT COMPLETION REPORT ON LESOTHO-BEDCO CREDIT 702-LSO

Thank you for your letter of November 2, 1983 and the encloseddraft Project Completion Report on the above IDA Credit.

We have read the above draft Report and make the followingcomments thereon -

1. Present Status of Sub-Projects Financed.Under Credit 702-LSO

(i) E.M. LEPHAILA AS-1

The borrower has gone bankrupt and the whole loanamount has been provided for or written off.However, small amounts are being collected fromthe principal through the courts.

See Anex B-3 para. (jj) (ii) J. KHOABANE AS-2and Annex B-1 foot-note 1/ The whole loan has now been paid up in full.

Text amended Annex (iii) MOHALALITOE AS-39-3 para. (vi)

Due to the poor financial performance of thecompany and lack of technical production expertise,BEDCO has agreed to reschedule the loan toJanuary, 1984 and to provide technical advisorsto assist the company to improve its performance.

Anex B-3 para. (iii) (iv) LESOTHO PHOTO LABS (PTY) LTD. AS-40Anne B-1 footnote1/ Loan has been fully paid up.

Annex B-1 footnote 2/ (v) MPHATA CANE WORKS AS-4

1he borrower's business was liquidated and lessthank M1 ,000 received from the sale of the business.The unrecovered loan of M8,OOO has been written off.

Annex B-1 footnote 2/ (vi) SUPERSOL AS-18

The company has been put into liquidation andbalance of loan written off.

-51 - Annex C-age 2 of 2

BEDCO

Mr. Kapur 5 December, 1983

Annex B-1 footnote 1/ (vii) T.L. MOKOROSI-I MOTA AS-26

Loan fully repaid.

Annex X-; footnote I/ (viii) G.R. MASHAPE AS-29

Loan fully repaid.

Annex B-1 footnote 2/ (ix) MALUTI PONY TREKKING AS-36

Business has gone bankrupt and the loan is nowfully provided for as unrecoverable.

2. General Performance of BEDCO

I enclose herewith some of the recent analytical dataon the Corporation's financial and operational performancesince inception which we trust you might find appropriateto incorporate in the final Report.

Text amended para. We wish to correct one reference to BEDCO Trading on9.06 page 25 of the draft. This company still exists, but

its operations have been streamlined so as toconcentrate on the supplying raw materials to BEDCO'sclients at prices sufficient to enable it to makea small profit. Marketing assistance to BEDCO clientsis provided by the Marketing Department of the Corporation.

We shall appreciate to receive copies of the final Reportas soon as it has been cleared for publication.

Yours faithfully,

.

B. N. SebataneManaging DirectorBEDCO

0S