World Bank Documentdocuments.worldbank.org/curated/en/795591468757174717/pdf/multi-page.pdf · Lesotho Fund for Community Development (LFCD) can: (a) effectively promote sustainable

Document ofThe World Bank

ReportNo: 18387

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

IN THE AMOUNT OF SDR 3.6 MILLION

(US$4.67 MILLION EQUIVALENT)

TO THE

KINGDOM OF LESOTHO

FOR A

COMMUNITY DEVELOPMENT SUPPORT PROJECT

December 22, 1999

Human Development ICountry Department IAfrica Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 17, 1999)

Currency Unit = MalotiM 1.00 = US$0.16

US$1 = M 6.24

FISCAL YEAR

April 1 - March 31

ABBREVIATIONS AND ACRONYMS

AT Area TeamBOS Bureau of Statistics, Ministry of Development PlanningCAS Country Assistance StrategyCDSP Community Development Support ProjectCPC Community Project CommitteeCWIQ Core Welfare Indicators QuestionnaireDMT District Management TeamDSP Department of Sectoral Programming, Ministry of Development PlanningEIA Environmental Impact AssessmentEU European UnionGDP Gross Domestic ProductGNP Gross National ProductGOL Govermnent of LesothoIDA International Development AssociationIEC Informnation, Education and CommunicationLACI Loan Administration Change InitiativeLCU Labor Construction Unit, Ministry of WorksLFCD Lesotho Fund for Community DevelopmentLHRF Lesotho Highlands Revenue FundLHWP Lesotho Highlands Water ProjectM&E Monitoring and EvaluationMODP Ministry of Development PlanningMU Management UnitNGO Non-Governmental OrganizationNPP National Poverty ProgramNES National Environmental SecretariatOM Operational ManualPCA Participatory Community AssessmentsPMR Project Management ReportPMT Poverty Monitoring TeamRRA Revenue Receiving AccountSACU Southern Africa Customs UnionVDC Village Development Councils

Vice President: Callisto MadavoCountry Director: Pamela Cox

Sector Manager: Dzingai MutumbukaTask Team Leader: Norbert Mugwagwa

LesothoCommunity Development Support Project

TABLE OF CONTENTS

A: PROJECT DEVELOPMENT OBJECTIVE ............................ ......................................... 2

1. PROJECT DEVELOPMENT OBJECTIVE AND KEY PERFORMANCE INDICATORS ................................................ 22. KEY PERFORMANCE INDICATORS ..................................................................... 2

B: STRATEGIC CONTEXT ..................................................................... 3

1. SECTOR-RELATED COUNTRY ASSISTANCE STRATEGY (CAS) GOAL SUPPOTED BY THE PROJECT ............... 32. MAIN SECTOR ISSUES AND GOVERNMENT STRATEGY .............................................. ....................... 3

3. LEARNING AND DEVELOPMENT ISSUES TO BE ADDRESSED BY LIL .............................................................. 54. LEARNING AND INNOVATION EXPECTATIONS ..................................................................... 6

C: PROJECT DESCRIPTION SUMMARY ..................................................................... 8

1 . PROJECT COMPONENTS ..................................................................... 82. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS ..................................................................... 83. MONITORING AND EVALUATION ARRANGEMENTS ....................................... 1.............................. I

D: PROJECT RATIONALE ..................................................................... 12

1. PROJECT ALTERNATIVES CONSIDERED AND REASONS FOR REJECTION ...................................................... 122. MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER DEVELOPMENT AGENCIES .............. 14

3 . INDICATIONS OF BORROWER COMMITMENT AND OWNERSHIP ................................................................... 154. VALUE ADDED OF BANK SUPPORT IN TIUS PROJECT ..................................................................... 15

E: SUMMARY PROJECT ANALYSIS ..................................................................... 15

1. ECONOMIC ..................................................................... 152. FINANCIAL ..................................................................... 163. TECHNICAL ..................................................................... 174. INSTITUTIONAL ..................................................................... 17

5. SOCIAL ..................................................................... 176. ENVIRONMENTAL ASSESSMENT ..................................................................... 187. PARTICIPATORY APPROACH ..................................................................... 19

F: SUSTAINABILITY AND RISKS ..................................................................... 20

1 . SUSTAINABILrIY ..................................................................... 202. CRITICAL RISKS ..................................................................... 213. POSSIBLE CONTROVERSIAL ASPECTS ..................................................................... 22

G: MAIN LOAN CONDITIONS ..................................................................... 22

1. EFFECTIVENESS CONDITIONS ..................... 222. OTHER ...................... 22

H. READINESS FOR IMPLEMENTATION ................................. 23

I. COMPLIANCE WITH BANK POLICIES ................................. 23

List of Annexes

Annex 1: Project Design SummaryAnnex 2: Project DescriptionAnnex 3: Estimated Project CostsAnnex 4: Procurement and Disbursement ArrangementsAnnex 5: Letter of Policy relating to the Lesotho Highlands Revenue Fund (10/23/1998)Annex 6: Summary of Project WorkplanAnnex 7: Organizational Structure of LFCDAnnex 8: LFCD Project Cycles for Technically Complex and Simple Sub-projectsAnnex 9: Summary of Participatory Community AssessmentAnnex 10: Project Processing Budget and ScheduleAnnex 11: Documents in the Project File*Annex 12: Statement of Loans and CreditsAnnex 13: Country at a Glance

LesothoCommunity Development Support Project

Project Appraisal Document

Africa Regional OfficeSouthern Africa Country Department

Date: December 22, 1999 Task Team Leader: Norbert MugwagwaCountry Director: Pamela Cox Sector Manager: Dzingai MutumbukaProject ID: LE-PE-58050 Sector: Multi sector Program Objective Category: Poverty ReductionLending Instrument: Learning and Innovation Loan (LIL) Program of Targeted Intervention: [X] Yes [1 No

Project Financing Data [ Loan [X] Credit [ Guarantee I Other [Specify]

For Loans/Credits/Others:

Amount (US$m/SDRm): US$ 4.67 million/SDR 3.6 MILLIONProposed terms: [X] Multicurrency [3 Single currency, specify

Grace period (years): 10 [] Standard Variable [] Fixed [ LIBOR-basedYears to maturity: 40Commitment fee: 0.5% (but at present is waived)

Service charge: 0.75%

Financing plan (US$m):Source: Local Foreign Total

Govermnent 5.02 0.65 5.67IDA 2.92 1.75 4.67

Communities 0.11- 0.0 0.11Total 8.05 2.39 10.44

Borrower: Kingdom of LesothoGuarantor: N/AResponsible agency(ies): Ministry of Development Planning

Estimated disbursements (Bank FY/US$M): 2000 2001 2002 2003 2004

Annual .162 1.898 1.617 .763 .230Cumulative .162 2.060 3.677 4.440 4.670

Cumulative % 3.5% 56.7% 78.7% 95.1% 100.0%

Project implementation period: 3 yearsExpected effectiveness date: April 1, 2000Expected closing date: March 31, 2003

Project Appraisal DocumentLesotho Community Development Support Project Page 2

A: Project Development Objective

1. Project development objectives and key performance indicators (see Annex 1):

The first objective of the Community Development Support Project (CDSP) is to test demand-driven andparticipatory approaches through a multi-sectoral special fund and draw lessons on how to supportcommunity development in Lesotho. In pursuing this objective, the project will explore whether theLesotho Fund for Community Development (LFCD) can: (a) effectively promote sustainable communitydevelopment by supporting participatory project planning approaches; and (b) address the needs of poorcommunities by funding participatory community demand-driven activities in a more efficient andeffective manner than supply-driven programs.

The second objective is to test various mechanisms and tools to monitor poverty trends in Lesotho andto coordinate national poverty monitoring and analysis activities. The project will seek to contribute tothe overall implementation of national poverty reduction strategies by helping build capacity to collect andanalyze data on poverty, and evaluate the extent to which development programs benefit the poor. One ofthe key tools to be tested is the Core Welfare Indicators Questionnaire (CWIQ). If successfullyimplemented, the CWIQ will help track implementation of the community-based approach supported byLFCD, and analyze its impact on poverty.

2. Key performance indicators:

The success of this project will be evaluated against how and to what extent the lessons learnt from eachstage of the project are incorporated in the next steps. Since this is a LIL, the project will measure theincremental changes of effectiveness or impact of the methodology and approaches taken by the LFCD orin poverty monitoring and analyses, rather than the absolute levels of impact made. The followingindicators will be used to evaluate the project performance against the Project Development Objectives:

* A practical and appropriate methodology adopted for community needs assessments andparticipatory planning process, and for appraisal, implementation and maintenance for communitydemand-driven sub-projects, with a view to ac4ieving the LFCD's goal of poverty reduction(indicated through a revised OM, beneficiary assessments, and evaluation reports).

+ Expected benefits to be generated by sub-project assessed by gauging, inter alia: the level ofsatisfaction from the users of facilities developed under the sub-project; the efficiency ofoperations and maintenance of said facilities; poverty targeting (e.g. resources allocated to poorcommunities, types of investment with higher impact on the poor); and relevance of investment tocommunity needs (indicated through post-completion evaluations of sub-projects, beneficiaryassessments, household surveys, and evaluation reports).

* Semi-annual reports on LFCD's activities and operations submitted to the IDA, no later than 45days after the end of every six months.

* A strategy, reflecting the lessons learnt and acceptable to IDA, adopted by June 30, 2002, tosupport community development, including an action plan for the future of the LFCD.

* The Core Welfare Indicators Questionnaires (CWIQ) piloted and its effectiveness and adequacy asa tool for poverty monitoring evaluated.


* A strategy or an action plan, reflecting the lessons learnt and acceptable to IDA, adopted bySeptember 30, 2002, to monitor poverty data and trends at the national level.

B: Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1):

CAS document number: 1775 1-LSO Date of latest CAS discussion: June 4, 1998

The Board approved the CAS on June 4, 1998. The objectives of the CAS are to support the GOL'sdevelopment agenda of promoting poverty reduction as articulated in various policy documents and tosupport its efforts to sustain macroeconomic performance through greater integration into the sub-regionaleconomy. The CAS emphasized the need for progress in GOL's poverty reduction effort is critical; onecomponent of such effort would be the reformulation the Lesotho Highlands Revenue Fund (LHRF) - aspecial fund established in order to effectively utilize royalties from water exported to South Africa underthe Lesotho Highlands Water Project (LHWP). Reform of the LHRF to increase its effectiveness and itsimpact on poverty, as well as the strengthening the national monitoring systems to improve poverty data inLesotho, are identified as core activities in the CAS. Implementation and progress in these areas are alsodefined as a trigger for continuing in the High Case Scenario where Lesotho now is.

2. Main sector issues and Government strategy:

Poverty in Lesotho: With its per capita GNP of US$570 (1998), Lesotho is defined as one of the lower-middle income countries, and has achieved relatively rapid GDP growth in recent years (7.2 percent perannum for 1990-98). However, its social indicators (e.g., an infant mortality rate of 74 per 1,000, a netprimary school enrollment ratio of 65%) leave much to be desired compared to those of other countrieswith similar per capita incomes. In addition, because of the country's inequitable income distribution, theincidence of poverty varies dramatically. In particular, of the nearly 50 percent of the population that isdefined as poor, 90 percent live in rural areas. Poverty in the mountain and Senqu valley zone (e.g.,Thaba-Tseka, Mokhotlong, and Quthing) is far more severe and widespread than in the lowlands andfoothills. Continuing high levels of unemployment (the official rate is 35 percent) and underemploymentare one of the leading causes of poverty, with declining demand for Basotho workers in South Africanmines aggravating the situation. However, changes in the poverty status are not systematically monitored,as there is no system to periodically update data on poverty in Lesotho.

Service coverage is generally higher in urban than in rural areas, with correspondingly better indicators ofsocial development, though this is not always the case in peri-urban areas where many of the urban poorreside. In health and education, access to basic education and health services has been one of the majorconstraints, especially in remote areas, although the problem is compounded by the low service quality aswell as the inadequate recurrent funding and weak capacity in management and service delivery. Provisionof clean water and sanitation facilities is also disproportionately low in rural areas. Less than half of ruralhouseholds had access to clean water in 1994, and sanitation facilities were available to even fewerhouseholds (less than 20 percent), while the equivalent figures for urban areas were 80-85 percent and 60percent respectively. Lack of adequate roads is perceived to be a major bottleneck by many communitiesin rural areas, inhibiting them from taking advantage of economic opportunities and essential services.Prospects in agriculture are limited with only 9% of total land area is suitable for cultivation. Acombination of overgrazing, soil erosion, and inadequate forest cover not only adds further constraints toagricultural productivity, but also poses a serious challenge in managing Lesotho's vulnerableenvironment and natural resources in a sustainable manner.


Poverty reduction strategies: GOL is committed to implementing policies and programs designed toreduce poverty. In particular, the Ministry of Development Planning (MODP) has undertaken a systematicapproach to identifying programs and projects specifically targeted at the poor and poor communities.Following the Bank-assisted Poverty Assessment (1995), MODP developed a Poverty Action Plan thathighlighted several key areas of reform and actions, including support for participatory community-drivenprojects for poverty reduction using LHWP royalties. This process led to the development of the NationalPoverty Programme (NPP), which was presented and discussed at a sectoral Round Table Conference ofdonors in November, 1997. The NPP document identified, as one of its five priority areas, thereformulation of the LHRF into a "social fund" to support community-driven projects that benefit the poor.The report pointed out that, as an activity complementary to sectoral programs implemented by various lineministries, a social fund has the potential to support a "bottom-up" approach to development byempowering communities and local institutions to deal with their own priorities and concerns.

Effective use of the LHRF for poverty reduction through participatory community-drivendevelopment: The Lesotho Highlands Water Project (LHWP) is one of the most ambitious multi-purposeprojects in Lesotho. By exporting water through a series of dams and tunnels to South Africa, its royaltiesalone generate substantial resources to support Lesotho's economic development goals (about $45 millionannually or 10% of Government revenues). In order to utilize such LHWP royalties to improve basicservices for the population and reduce poverty, GOL established by the Act No. 82 of 1991 an extra-budgetary fund called, Lesotho Highlands Revenue Fund (LHRF). The establishment of the LHRFprovided a potentially effective mechanism to utilize the fund to improve the quality and quantity of basicservices for the population and to reduce poverty. Although achievements were recorded in terms of localemployment generation and projects delivery, the fund operations were constrained by managerial,institutional and financial problems. A recent audit has shown that the Fund did not have solidmechanisms in place to ensure adequate standards of technical appraisal and supervision for projectsustainability; neither were there sufficient internal controls to adequately account for all LHRFexpenditures. Various other reports also attest to the technical and institutional difficulties LHRF wasattempting to deal with.

GOL therefore decided to reformulate the LHRF, and replace it with a social-fund type operation with clearcriteria and procedures in place to ensure effective and transparent operations. In so doing, GOLdeliberately chose a participatory, consultative approach to obtain the views of a wide range ofstakeholders and community members, and to build consensus on the design of the new fund. First, theobjectives and key features of the reformulated fund were agreed through consultations with keystakeholders, and spelt out in a Letter of Policy of March 23, 1998 (see Annex 5). This was followed byconsultations with various levels of stakeholders, from community members at the grass-roots levelthrough to broader civil society organizations and the government agencies and ministries. The results ofthese extensive consultations have been incorporated into the design of the reformulated fund, which is tobe named as the Lesotho Fund for Community Development (LFCD). An Operational Manual has beendeveloped that describes project cycles and operational procedures. A new Legal Notice No. 16 of 1999was passed in March 10, 1999, which has officially established the LFCD, and replaced the old LHRF.

Decentralization: Concurrent to this reformulation process, GOL was also finalizing initial arrangementsfor implementing the new Local Government Act (1997), which deals with the decentralization ofgovernment ministries at a sub-national level and the establishment of revised structures of democraticlocal government. The new local level structures will require some time and support to establishthemselves and to develop the capacity to be effective, responsive, action-oriented units. It is hoped thatthe decentralization process will lead to an improvement in the orientation of government staff towardcommunities, promote greater transparency and accountability, and empower district-level staff andcommunities to have greater decision-making authority over local-level issues.


3. Learning and development issues to be addressed by LIL

Use of a Learning and Innovation Loan (LIL) is justified since the project will test a participatory demand-driven approach and project planning to community development that is relatively new to Lesotho, and willsupport a "learning process" in reformulating the existing Lesotho Highlands Revenue Fund (LHRF) into asocial-fund type operation called, Lesotho Fund for Community Development (LFCD).

Lesotho's development programs have traditionally been supply-driven, and have not successfullyimplemented demand-driven community development projects, identified by use of participatory planningapproaches, in a sustainable manner. While there have been many previous programs and projects tosupport elements of a community-based approach, they have usually been partial, of limited duration, andreliant on donor funding. New local government structures are still not in place and will require time todevelop and be institutionalized. While substantial preparatory work and conceptualization has been doneby GOL, there is a need to test and refine the procedures and to try out various approaches through actualimplementation to see what will work and how in the local context.

Moreover, given the past experience of the LHRF, the LFCD will require extra effort in demonstrating thatit has overcome some of the main problems it has experienced in the past. To overcome some of these pastproblems the LFCD must have clear criteria and mechanisms to: target the poor, identify the needs of suchcommunities, involve communities in the management and implementation of the projects, manage theoperations and administration of the LFCD, supervise the quality of projects, and make adequate provisionsfor operations and maintenance.

The project will test the project cycle initially in 22 communities, where participatory communityassessments were conducted during the preparation phase. The lessons learnt from this initial phase will beincorporated in the operations thereafter when the LFCD operations expand to other localities. The projectwill periodically review the progress of implementation and the performance of the LFCD, and assess theadequacy of the institutional set-up, management structures, operational procedures, and project cycles.GOL, in collaboration with the World Bank, will assess the performance of the LFCD, and will make adecision on subsequent steps (e.g., scaling up the operations, adjusting/revising the modality).

In addition to the testing of new institutions and mechanisms, the project will attempt to foster behavioralchanges of the development agencies/partners (e.g., line ministries, local governments, NGOs, the privatesector) to become more responsive to the community demands, rather than prescribing development needsfor the communities through top-down planning. In that respect, the LFCD will support GOL's effort todecentralize decision-making to the grass-roots level by empowering communities to manage resources fortheir own development.

There is also a need to strengthen capacity in monitoring the status of poverty in Lesotho. The currentstatus is characterized by weak institutional and human resource capacity in poverty monitoring andanalysis, and insufficiently coordinated activities (e.g., studies, surveys) that result in duplications anddifficulties in data comparison and time series analyses. Due to the cross-cutting nature of poverty,coordination at the inter-ministerial level is critical, especially in monitoring and analyzing poverty trends.

The flexible LIL instrument will permit the testing of different approaches, and allow for adjustments andrefinements of operations through 'learning-by-doing'. Through continuous review and monitoring of theLFCD's performance, the LIL will provide instruments and technical assistance to constantly revise andrefine the project cycles and operational modalities to address implementation problems, and testalternative approaches and mechanisms where appropriate. In addition, the poverty monitoring component


will complement the LFCD's effort by providing updated poverty data and analysis to help monitor theimpact on poverty.

4. Learning and Innovation Expectations:

[X] Economic [X] Financial [ ] Technical [X] Institutional[X] Social [ ]Environmental [X] Participation [ ] Other

Key areas to be tested and further developed under the project include:

* LFCD's governance and institutional structures: The project will support GOL's effort to establishthe governance and institutional structures that ensure adherence to the LFCD's goals and guidingprinciples, as well as its transparency and accountability. Collaboration with and participation of non-government stakeholders (including communities themselves) will be critical for successfulimplementation of a participatory demand-driven fund, as well as for creating accountable systems.The project will continuously monitor the effectiveness of the LFCD's govemance and managementstructure and its effect on operations.

* Different project cycles and management suitable for various types of sub-projects: The initiallist of subproject types that could be eligible for LFCD funding include a wide range of areas: e.g.,social and economic infrastructure and community-based assets (e.g., feeder roads, footbridges, ruralwater supplies, VIP latrines, schools, health posts/clinics, markets); community-based environment andresource management (e.g., soil conservation, tree planting, land reclamation); support to small-scaleagricultural production (e.g., small-scale irrigation, small damns, improvement of vegetable production);and income-generating activities (e.g., cottage industries, small-scale manufacturing). However,different procedures, criteria, and technical standards will need to be applied to various subprojects.Community-managed assets and development activities are to be purely community-managed; i.e., thecommunity will identify, plan, manage, implement, and maintain subprojects, with technical supportfrom relevant partners as needed. On the other hand, larger-scale, technically complex projects are tobe identified by communities but to be managed and implemented by experts (e.g., private contractors,line ministries) due to their complexity. Details of these two project cycles as well as roles andresponsibilities of each player are described in the Operational Manual. These project cycles andprocedures will be tested and adjusted to suit various types of subprojects. For income-generatingactivities, the experience in Lesotho will be reviewed to determine how best income-generatingactivities could be supported in Lesotho. Based on this study the LFCD would decide on how it couldbest facilitate income generation activities. Findings of the review will help determine types ofinterventions in this area, and if so decided, the LIL will test support to income-generating activities.

* Community-based planning, prioritization, implementation, monitoring and maintenance:Building on the past experience and effort, the project will support further testing and strengthening ofcommunity planning and prioritization methods to learn how best the community could be facilitated toarticulate their needs and priorities in a participatory manner. The existing capacity in the communityto plan, implement, monitor and maintain subprojects will be tapped, utilized and strengthened to theextent possible, and appropriate approaches and partners for effective facilitation will be identified.

* Checks and balances mechanisms for community representation, accountability, andsustainability: The project will help LFCD try out various options to ensure that: (i) the choice ofprojects truly represents the needs and priorities of the community, particularly the poor; (ii) LFCDresources are used and managed properly; and (iii) LFCD-funded projects are technically, financially,


and environmentally sustainable. In addition to conventional internal, administrative controls, othermethods will be explored and tested, such as built-in verification methods for community consensus atseveral stages of the project cycle, increased transparency to the community on the LFCD operations,and community involvement in resource management including direct financing to the community.

* Poverty "targeting" mechanisms: The project will assist LFCD to define and refine mechanisms to"target" the poor by balancing its participatory demand-driven nature with its goal of povertyreduction. This could be done through various criteria built in the operational design and resourceallocation mechanisms. For instance, the LFCD could ensure that resources would benefit the poor by:giving greater resource allocation to poorer districts and localities; setting the limit in project size oramount to support small-scale operations; specifying eligible types; giving greater weight to those sub-projects which would have higher impact on the poor; and, if cash transfer is involved, setting the ratesat levels which are "self-targeting" to attract only the poor and the destitute.

* Efficiency, Effectiveness and Impact on Community Development: The project will test theparticipatory demand-driven mechanisms through a multi-sectoral special fund, which is expected torespond to communities' needs more efficiently (e.g., speedy fund disbursement) and more effectivelyin a sustainable manner (e.g., project identification according to needs, greater community participationin management and maintenance). During the course of the project, the performance of LFCDoperations will be closely monitored and evaluated to assess its efficiency, effectiveness, and impact oncommunity development compared to other government programs.

* National Poverty Monitoring and Analysis: The project will pilot a Core Welfare IndicatorQuestionnaire (CWIQ) and will assess whether the CWIQ presents an appropriate instrument tostrengthen the country's capacity to monitor poverty. The project will also contribute to strengtheningthe institutional and human resource capacity to periodically update and analyze poverty data. It willalso try out various approaches and mechanisms to coordinate poverty monitoring and analysisactivities under the National Poverty Program (NPP). The GOL's capacity will be strengthenedthrough the existing inter-ministerial Poverty Task Force and a Poverty Monitoring Team to beestablished in MODP.


C: Project Description Summary

1. Project components (see Annex 2 and 3for a detailed description and cost breakdown):

Component Category Cost Incl. 9/o of Bank- % ofContingencies Total financing Bank-

(US$M) (US$M) financing1. Support to establishment andimplementation of the LFCD[Implementing agency: LFCD]

1.1 Piloting of the LFCD project Subproject 1.3 13% 1.2 26%cycle through projects in 22 investmentcommunities and for different types costsof projects

1.2 Systems development and Institution 2.2 21% 1.5 31%operationalization for LFCD building

1.3 LFCD management and Operational 4.1 40% -

coordination costs

2. Capacity building activities forthe LFCD lImplementing agency:LFCDJ

2.1 Training of LFCD staff in Institution 0.3 3% 0.2 5%operational systems for financial and buildingproject management

2.2 Training for LFCD partner Institution 1.1 11% 0.7 15%institutions (communities, central and buildingdistrict level government staff, localgovernments, NGOs, private sector)

3. National Poverty Programimplementation and monitoring

3.1 Data for poverty monitoring Institution 0.8 7% 0.7 14%[Implementing agency: BOS/MODP] building

3.2 Program monitoring and poverty Institution 0.6 6% 0.4 9%analysis [Implementing agency: buildingDSP/MODP] ._ l

TOTAL 10.4 100% 4.7 100%

2. Institutional and implementation arrangements:

Executing Agencies: The Ministry of Development Planning will have the overall responsibility ofoverseeing the implementation of the project. The actual execution and day-to-day management of eachcomponent is as follows:


(i) LFCD-related components (e.g., community sub-projects, systems development, and capacitybuilding): implementation responsibility of these components will rest with LFCD. Close collaborationwith other government agencies, LFCD's other institutional partners and participating communities will beensured at the national level, the District Development Councils, District Development CoordinatingCouncils and the District Management Teams at the district level, and Area Teams, Village DevelopmentCouncils/Community Councils at the local level. At the community level, a Community Project Committee(CPC) will be popularly elected by the community to coordinate and administer planning andimplementation of LFCD subprojects.

An Operational Manual (OM) to guide the implementation of the LFCD has been prepared by a teammade up of Government and other stakeholders. The OM is a living document that will be continuouslymodified, subject to agreements between GOL and IDA, as new lessons are learnt and incorporated forfuture use. It includes the basic guidelines for the sub-project cycle, procurement of goods and services,disbursement arrangements, accounting and reporting requirements. Various handbooks/manuals (e.g., aCommunity Handbook, a Procurement Manual, a Financial Management Manual, and a MaintenanceManual) will be developed based on the OM, to be used by LFCD staff, stakeholders, and communitymembers to assist them in the implementation of the various activities. These handbooks that explainstakeholder roles and responsibilities as well as technical guidelines for specific activities will be revisedcontinuously as implementation proceeds.

(ii) NPP implementation and monitoring component: the Bureau of Statistics (BOS), a unit under theMODP, will have the primary responsibility for executing the Data for Poverty Monitoring sub-component. The management of the Program Monitoring and Poverty Analysis sub-component will belocated under the Department of Sectoral Programming (DSP), MODP, which is coordinating theimplementation of NPP through an inter-ministerial Poverty Task Force. GOL will assign a small PovertyMonitoring Team (about 3 staff) on a full-time basis to be responsible for coordinating poverty monitoringactivities, and also serve as a secretariat for the inter-ministerial Poverty Task Force. For simplicity, theLFCD Management Unit (MU) will provide administrative and financial management services to Bureauof Statistics and Department of Sectoral Planning, by facilitating procurement and disbursement under theproject.

Institutional Set-up for LFCD: LFCD will have delegated authority with respect to management anddecision- making on operational matters of the Fund. It will have three levels of management: (i) theLFCD Board; (ii) the Management Unit, and (iii) ten District Offices at the district level.

The LFCD Board will consist of representatives from the Government, parastatals, NGOs, the privatesector, and community representatives. The Board will provide policy oversight over the MU, and monitorthe compliance of the LFCD operations with the Fund policy and guidelines as well as the impact of theFund on poverty. The LFCD Board will be accountable to the Prime Minister, and also to the publicthrough open disclosure policy of LFCD's key documents such as annual reports of operations andactivities, audit reports, and independent evaluation reports.

The Management Unit (MU) will be headed by the Executive Director, and will have three Departments,Finance and Administration; Project Operations, and Technical Services; and three Support Units,Management Information, Communication and Capacity Building, and Internal Audit. The ExecutiveDirector reports to the LFCD Board, and is responsible for the day-to-day operations of the LFCD. TheMU staff will be recruited through a competitive process based on their qualifications and experience. Theappointment of a qualified professional as Executive Director is a condition for credit effectiveness.


District Offices: The central level will be supported by ten District Offices, each of which will be headedby a District Officer (DO), assisted by a Technical Officer and an Administrative Assistant. DistrictOffices will have staff to assist communities identify, design, plan, implement and supervise subprojects aswell as staff for office administration, accounting and technical supervision. The head of the DistrictOffice should be trained in participatory and community development, good at community relations and acommunicator, skilled in management, self motivated and knowledgeable about the workings ofgovernment that include decentralized administration.

At different phases of the project cycle, the MU and its District Officers will collaborate with existingpartners/stakeholders: e.g., the District Development Committees; the District Management Teams; NGOs;private contractors; the Local Authorities; and relevant sector officers from the national ministries of localgovernment, works, health, education, water, agriculture, etc. To strengthen LFCD's collaboration withsectoral ministries, sector officers from government ministries, will be assigned to: (a) provide detailedinformation to the MU on sectoral gaps, policies and norrns; (b) give feedback on issues arising from sub-project implementation; (c) obtain sectoral approval of subprojects for inclusion in LFCD work program;(d) ensure sectoral recurrent budget covers assets created under LFCD; and (d) staff responsibilitiesinclude LFCD projects activities. Involvement of extension workers from the line ministries and NGOswill be essential for the success of LFCD. Circulars articulating the roles and responsibilities of sectorofficers and extension workers in supporting LFCD activities will be issued by the respective PrincipalSecretaries of the key ministries to all their staff.

Financial Management: The Management Unit (MU) of the LFCD will be responsible for ensuring thatfinancial management and reporting procedures for the project meet GOL and the World Bank standards.Experience from other Bank projects in Lesotho (except for the LHWP) has shown lack of adequatecapacity in financial management. In order to address this concern, a time-bound Financial ManagementAction Plan has been developed to lay out an essential institutional set-up and internal control mechanismsas well as to set forth necessary actions for systems development for sound financial management, andincorporated in the Operational Manual (Key issues and actions in the Plan are outlined below and inAnnex 4). Additionally, the establishment of the Department of Finance and Administration, and theInternal Audit Unit, as well as the appointment of competent professionals to key posts, such as Director ofFinance and Administration, Chief Accountant, and Internal Auditor would be critical to sound financialmanagement. A Financial Procedures Manual will be developed to facilitate the implementation. Anindependent external auditor will be appointed to carry out annual audits (as well as semi-annual reviewsuntil the Internal Audit Unit develops adequate capacity). The appointment of a qualified professional suchas Director of Finance and Administration as well as the establishment of an adequate financialmanagement and accounting system are conditions for credit effectiveness.

At this early juncture of planning the establishment of LFCD's financial management system, LFCD is notyet ready for disbursements based on Project Management Reports (PMR), as discussed in the WorldBank's Loan Administration Change Initiative Handbook (LACI, September 1998). Thus, in the short-termn, existing World Bank disbursement procedures, as outlined in the World Bank's DisbursementHandbook, will be followed. The appointment of key staff for financial management as well as theengagement of a short-term consultant should facilitate the establishment and development of LFCD'sfinancial management system and the introduction of PMR-based disbursements within about 18 months ofcredit effectiveness (an action plan will be completed by September 30, 2001). In that regard, a financialmanagement review of the project should be undertaken by a World Bank Financial ManagementSpecialist in about 12 months of credit effectiveness (March 2001) to assess progress.

Management of Community Sub-projects: A Community Project Committee (CPC) will be popularlyelected by the community to help organize the planning and implementation of LFCD-financed sub-


projects. A CPC will include: Chairperson, Vice Chairperson, Secretary, Deputy Secretary, Treasurer, andothers committee members. Upon approval of a sub-project, a Project Financing Agreement will be signedbetween the LFCD and the Community, which describes terms and conditions of LFCD financing,community contributions, responsibilities of each party, with project description and specifications attached(a draft form has been developed).

3. Monitoring and Evaluation Arrangements:

Effective monitoring and evaluation of the project are critical in order to assess the performance of the pre-test and subsequent operations, analyze the effects and impact of implementation, and draw lessons andexperiences to be incorporated in any adjustments or modifications of the design and processes of theLFCD. It is also important to ensure that the LFCD, government ministries and other participatinginstitutions can learn from the activities supported by the project. To achieve this, project performance willbe monitored and evaluated through various means at different levels, each providing input into a learningprocess for the institutions involved.

First, various mechanisms will be built in the design of the LFCD's project cycle to monitor the progressand quality of subprojects. Monitoring indicators will be developed for each subproject based on anindicative list in the OM (with technical support from partners as needed), which will be important criteriafor final project approval. Technical standards of subprojects will be ensured and monitored by maintainingclose links with line ministries at all stages (e.g., appraisal, approval, supervision), using existing technicalstandards to the extent possible, involving other partners (e.g., NGOs, private contractors) who havetechnical expertise, and emphasizing rigorous supervision and reporting of subproject implementation.During subproject implementation, the Community Project Sub-committee will closely monitor theprogress and submit monthly reports to the LFCD's District Office and the VDC. LFCD's District Officers(DO), in collaboration with DMT, will carry out periodic site visits and submit reports to the MU. Uponcompletion, site visits will be conducted by DO and DMT, and a certificate will be issued by the MU.Subprojects will be evaluated 12 months after completion during another site visit by DO and DMT.

Second, overall physical outputs financed by LFCD will be recorded through the Fund's MIS, which willbe designed and implemented during the pilot phase of LFCD operations. LFCD's MIS will provide dataon project types and loan processing indicators (e.g., number of applications, number and types ofapproved subprojects by geographical areas). In addition, when linked to data from the financial andaccounting system as well as reports from the District Offices, the MIS will enable assessments of anoverall picture of LFCD performance and potential impact on poverty in terms of delivering projects cost-effectively (e.g., time elapsed between applications and approvals, speed of disbursement).

Third, capacity building activities and participation of partner institutions to LFCD operations (e.g., lineministries, NGOs, private sector) will be monitored through: types and number of training and IECactivities carried out for these partner institutions; incidence and nature of their participation to assistcommunities (e.g., facilitation for community-based planning, technical support in design orimplementation of subprojects, physical implementation as "contractors" to communities, supervision ofsubproject implementation).

Fourth, LFCD will undertake various periodic assessments aimed at providing a broader evaluation ofperformance. These assessments will include: annual audits by qualified auditors; annual performancereviews; an evaluation carried out by independent reviewers by March 2003 (six months before the creditclosing date); community-level assessments designed to assess community satisfaction with the LFCD; andspecial studies (e.g., gender or environmental impacts of LFCD operations). Terms of reference for anindependent evaluation will be agreed between the Government and IDA, and will assess, inter alia:


effectiveness and timely delivery of LFCD operations to meet the community demand and provide support;quality and sustainability of LFCD supported projects; effectiveness of the participatory planning processto identify community's priorities and their potential impact on the poor; capacity and participation ofcommunity-based organizations to plan and manage projects; capacity of the private and non-governmentalsector, local institutions, line ministries to support community-driven projects; and capacity in nationalpoverty monitoring and programming.

Fifth, the poverty monitoring component of the project will generate, monitor and evaluate poverty-relatedindicators for each key sector. Also, the CWIQ will assess access, use and level of satisfaction amongusers for key social and economic goods and services, e.g., education, health, infrastructure, naturalresource management, and agricultural services. These broader poverty measures provide an importantoverall indicator of the extent to which the LFCD, as well as other government policies and programs, arehaving a positive impact on reducing poverty, though such impact is not likely to be observed during theproject life.

Last but not least, the performance of the poverty monitoring component will be monitored through: thenumber and quality of poverty indicators produced, outputs from surveys, analyses and studies on poverty;the number and types of training carried out to strengthen GOL's capacity for poverty monitoring; and theincrease in such capacity as observed in the number of trained staff in place to lead poverty monitoringactivities.

The World Bank will supervise the project through a task team leader who will carry overall responsibilityfor carrying out and leading supervision missions. There will be two supervision missions each yearconsisting of a team of sector and operational specialists. The missions will study the implementationrecords and reports, accounts and audits, MIS data retained by the MU, and make sample visits to DistrictOffices, selected project sites, and participating communities. In addition, GOL through LFCD will submitto the Bank a copy of LFCD's reports including quarterly financial disbursement reports, semi-annualimplementation reports, and annual audit reports. GOL will also send to IDA in a timely manner a copy ofall other evaluation/assessment reports on LFCD's performance. A beneficiary assessment will be carriedout and completed by about 18 months after the inception of the project (August 31, 2001) to obtaincommunity's views and feedback on the LFCD. Its results will feed into a mid-term review of the projectto be carried out in about September 2001 in collaboration between GOL and the Bank. About six monthsbefore the closing date (by March 2003), an independent evaluation will be completed to assess: (i)whether the project has accomplished its objectives; (ii) effectiveness of the LFCD operations, theinstitutional structure and management, and the operational procedures, and (iii) the extent of capacitystrengthening for LFCD operations (among all partners) and for poverty monitoring. The GOL and theBank will jointly review the findings of the evaluation, and will agree on next steps and follow-up actionsfor the LFCD after the project.

D: Project Rationale

1. Project alternatives considered and reasons for rejection:

GOL has considered channeling all the royalty revenues from the LHWP through the Consolidated Fundand utilizing regular budget mechanisms to support the sectoral public expenditure program but decidedagainst it. The main reason for that was that centrally-driven implementation has achieved only limitedsuccess in improving service delivery, especially for poor communities, with ministries struggling to findeffective mechanisms of support. Central government decision-making and bureaucratic processing hasnot encouraged the participation of poorer communities as effectively as projects supported under thecommunity demand-driven approaches. This is consistent with government's emphasis on


decentralization. Weakness in financial management systems and inadequate capacity in the governmentare not conducive for quick and timely disbursement to respond to the community. [Effort is underwaythrough a separate operation to strengthen overall financial management systems and capacity in thegovernment.] As a result, GOS decided to set aside part of the LHWP royalties for a social fund operationthrough the LFCD.

The use of alternative implementing agencies was also considered. While NGOs could and will provideimportant complementary activities to the LFCD MU, the NGO community in Lesotho remains small withlimited capacity, and the current legal structure makes it difficult to distinguish community groups anddevelopment NGOs from politically-oriented ones. The subproject cycles of the LFCD will include checksto ensure the legitimacy of participating NGOs, and is intended to foster government-NGO partnership aswell as strengthen NGOs' capacity to be facilitators and technical support group for the community. Afurther proposal to continue to use of Members of Parliament as the conduit for community financing wasalso rejected, as this approach did not work well during the initial operations of the LHRF.

The use of regular investment credit as a lending instrument was considered, but rejected in favor of usinga LIL due to the testing and learning aspects described in Section B.3 and B.4.


2. Major related projects financed by the Bank and/or other development agencies (completed, ongoingandplanned):

Sector issue Project Latest Supervision (PSR) Ratings(Bank-financed projects only)

Implementation DevelopmentProgress (IP) Objective (DO)

Bank-financedInfrastructure (Source of Lesotho Highlands Water Project - S Srevenues for the LFCD) Phase IA (closed on 3/31/99)

Lesotho Highlands Water Project - S SPhase lB (closing on 12/31/04)

Education Education Sector Development S SProject (closing on 6/30/99)

Education Sector Development S SProgram II

Health Health and Population Project II S S(closed on 3/31/98)

Health Sector Investment Project To be appraisedin Dec. 1999

Agriculture Agricultural Policy and Capacity Effective JulyBuilding Project 1999

Environment Maloti-Drakensberg Transfrontier To be appraisedconservation and Development in January 2000Area Project

Water Water Reform Project To be appraisedin July 2000

Roads Road Rehabilitation and S SMaintenance Project (closing on12/31/01)

Public Sector Reform Public Sector Reform and To be appraisedImprovement Project in March 2000

Other development agenciesDistrict planning and Mafeteng Development Projectdecentralization (GTZ)

Microenterprises and Support to Micro-projectcommunity-based micro- Management Unit (EU)projects

Community needs UNICEF Country Programassessment and participatoryplanning

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)


3. Indications of borrower commitment and ownership:

GOL is committed to reform the LHRF to meet the principles set out for the new LFCD, and address theweaknesses experienced under the LHRF. The Principal Secretary (PS) for Development Planning hastaken a strong leadership throughout the preparation process of this project. Through a design team, madeup of representatives from Development Planning, the LHRF, and the NGO community, and a draftingteam, which represented the key ministries of education, works, health, local government and agriculture,the PS has completed the project preparation phase. GOL held a series of consultative workshops atnational (November and December, 1997, and June, 1998) and district levels (March, 1998), which wereattended by Ministers of Government, MPs, senior government officers, district staff, NGOs, chiefs andheadmen and community members. These efforts towards building a consensus in support of the LFCDhave been instrumental in building and rejuvenating confidence in Government's genuine intention to builda truly transparent fund for community development. Given that the LFCD is being prepared while theexisting LHRF is still under implementation, substantial political support was needed to ensure that thework proceeded without undue political and administrative interference. This was only possible because ofthe strong political backing the reformulation process received from the new Government through theoffices of the Minister of Finance and of Development Planning.

To finance the LFCD, GOL has allocated M 225 million (US$36 million) over the next three years fromthe LHWP royalties. Despite the political tensions in September 1998, the GOL remains committed to theLHRF reformulation and gazetted the Legal Notice No. 16, dated March 10, 1999, which fornallyestablished the LFCD in place of the old LHRF. As soon as a new institution is established and corefunctions of the LFCD become operational, all the assets and liabilities of the LHRF will be transferred tothe LFCD.

4. Value added of Bank support in this project:

The Bank has implemented more than 35 social funds throughout the world, of which about 10 are inAfrica. The accumulated experience from these experiences will be utilized during establishment andimplementation of the LFCD. In addition, the Bank is active in all the key sectors that communities arelikely to request sub-projects from, and is therefore is in a position to facilitate data exchange andcomparison of performance by the different approaches. Through a LIL, the Bank will be able to supportthe evolving process of the establishment and internalization of the LFCD operations on a learning-by-doing basis. From the poverty perspective, the Bank has supported the recent poverty analysis and istherefore well-placed to facilitate the comparison and further refinement of poverty data. With the CAS inplace, GOL and the Bank jointly monitor the overall macro-economic situation to ensure an appropriateenabling environment. The Bank's contributions will mostly be through its technical know-how and aknowledge base accumulated through its broad-based support to the country and similar operations in othercountries, rather than financial resources which in this case are sufficiently available from the LHWProyalties.

E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 1 1)

1. Economic:

[] Cost-Benefit Analysis: NPV= N/A. million; ERR= N/A [] Cost Effectiveness Analysis:[XI Other: Qualitative, process-based analysis of least-cost alternatives

Due to the pilot nature of the project, only qualitative and process-based analysis has been undertaken.Given the multi-sectoral nature of the LFCD and its participatory demand-driven approach, project benefits


are not easily quantifiable ex-ante. Progress will, however, be closely monitored during projectsupervision.

The LFCD will attempt to minimize the costs by using local labor, community participation procurementmethods, and provision of unit cost data to the community. It will also try to maximize the benefits of thesub-projects by responding to community needs, allowing to apply appropriate technology and projectdesign based on the local needs and capacity, and promoting operation and maintenance by beneficiarycommunities themselves. Unit costs of LFCD-financed sub-projects will be measured during the projectand compared with that of similar projects carried out by conventional sector programs. To the extentpossible, basic cost-benefit analyses will be carried out, comparing the LFCD sub-projects andconventional supply-driven projects.

Efficiency, Effectiveness and Equity: In contrast to the conventional supply-driven identification andprovision of infrastructure or services, LFCD's direct financing of community subprojects responding tothe demand of beneficiaries is expected to enhance efficiency in resource allocation as well as the speed ofmeeting people's needs. As experience from other countries indicates, the demand-driven identification,management and maintenance of subprojects are anticipated to increase the impact and sustainability of thesubprojects. However, such demand-driven approach does not always ensure equity. Therefore, in orderto meet the principal goal of the LFCD, poverty reduction, certain "targeting" measures would benecessary to encourage resource allocation in favor of poor segments of the society as well of types ofsubprojects that would make greater impact on poverty.

Fiscal impact: The LHWP royalties will generate revenues of about M200 million per annum ($32 million),currently equivalent of about 10 percent of total government revenues. Of these, M225 million ($36million) will be allocated to the LFCD over the next three years, up to the fiscal year 2002/03. The balanceof the royalty revenues will be transferred into the government's consolidated budget. If in the early yearsof the LFCD the rate of expenditure does not match the inflow of resources, any remaining surpluses willbe maintained as reserves of the LFCD, until the capacity of LFCD and the growing demand fromcommunities leads to a full-scale operation. After the year 2002/03, GOL will review the allocation to theLFCD based on the evaluation of the LFCD operations and impact, and prospective demand for itsresources.

Communities will be expected to contribute a share of individual sub-project costs (equivalent to aminimum of 10 percent of the value of the subproject cost). As a condition of sub-project approval,communities will also submit a plan for maintenance of the completed asset. This would showresponsibilities and also any financial contributions to be made by community members or users. It isexpected that the project will have two main fiscal benefits: (a) the productive life of the communal assetwill be longer than in the non-participatory planning case; and (b) the overall recurrent cost burden on theGovernment's budgetary resources will be lower than in the non-participatory case. Sub-project proposalswill also be reviewed to ensure that sectoral ministries can meet recurrent expenditure requirementsgenerated by the sub-project and for which the sector has responsibility.

2. Financial:

NPV= N/A million; FRR= N/A

Financial accountability: Overall public accountability for LFCD allocations is ensured as the Board,chaired by the Minister of Finance and development Planning, and is directly accountable to the PrimeMinister, and key documents such as annual reports, audit report, and evaluations will be made available tothe public. LFCD will prepare annual reports of operations (physical and financial) and have their


financial statements audited annually by an external auditor. The project would need to establish newaccounting systems that can respond to the new Fund's financial and operational systems. A FinancialManagement Action Plan has been prepared, and plans are laid out for establishment and development ofkey departmentlunit as well as rules and procedures (with a Financial Procedures Manual to be developed).LFCD's financial accounting systems would allow for fast disbursement to communities in tranches basedon: (a) subproject proposal readiness and compliance with appraisal criteria; (b) provision of an adequatejustification for funds advanced to communities by LFCD; and (c) swift accountability for funds.

3. Technical:

Sub-projects' technical design is based on the use of simple, appropriate and environmentally soundtechnologies, corresponding to the needs and community capabilities (for construction, as well as operationand maintenance). The design and standards of sub-projects will be based on the norms and standards ofthe technical ministries involved. Labor-intensive work will be preferred wherever proven as technicallyand economically efficient. Innovations in technical designs of subprojects will be encouraged whilekeeping in mind the need for technical, financial and implementation viability. Investmnent costs for thesubprojects are based on prevailing market unit costs, with appropriate allowance for inflation, and,whenever applicable, a reasonable level of physical contingencies.

4. Institutional:

The success of the project, and more broadly of the LFCD, depends on the strength of institutionallinkages, both horizontal and vertical. Weaknesses in such linkages have posed problems in Lesotho in thepast, and strengthening these linkages is one intended outcome of the LFCD. One of the major focuses ofthis project is, therefore, the development of an appropriate institutional arrangement with adequate skillsand capacity to meet the goal of the LFCD. The LFCD will collaborate, at all stages of the project cycle,with relevant government agencies, district-level authorities and officials, and other partner institutions insupporting communities, and in carrying out appraisal, approvals, and monitoring of sub-projects. Closemonitoring of how the LFCD will work with Village Development Committees (VDCs), districtgovernment, line ministries, district and central LFCD offices, non-governmental organizations, and theprivate sector, as well as how these institutions assist communities will permit a detailed evaluation of theirindividual, institutional capacity to deliver goods and services to the poor and to work in partnershiptowards this goal. The project supports a significant capacity building program, the effectiveness andflexibility of which would also be monitored. For the poverty monitoring component, the emphasis is onstrengthening existing institutions and trying out appropriate tools to improve poverty monitoring andanalysis that would be institutionalized beyond the project life.

5. Social:

The social challenge of the project and LFCD relates to understanding and effectively mobilizingcommunities around targeted investments in social and economic infrastructure, improved natural resourcemanagement and other small-scale activities that communities themselves identify as important toimproving their welfare. To this end, the project will foster partnerships with ongoing government andNGO-led programs and activities to enhance communities' capacity and organization to make productiveuse of project resources and other sources of investment opportunities. Extensive training of communitiesand their organizations will be supported by the project to promote capacity building and self-sufficiency atthe local level to lay the groundwork for transferring authority for implementation of development andnatural resource management activities to local organizations and communities.


Preliminary social data has been gathered through a series of Participatory Community Assessments(PCAs) carried out in all 10 districts and in peri-urban Maseru. The PCAs include details about localinstitutions, perceived levels of poverty, and development needs and priorities. The PCAs provide roughbaseline data on number of households, household composition, community assets and other commonproperty resources. They are also an important source of qualitative baseline data indicating communities'experiences and expectations. These qualitative findings would be monitored in the same PCAcommunities, as they participate in the LFCD, as well as in communities not in the sample but benefitingfrom the LFCD, and in communities that are not receiving LFCD benefits. PCA data has shown genderdifferentiation of needs and priorities. Therefore monitoring and evaluation should seek gender-differentiated data on perceived benefits of LFCD sub-projects. (See Annex 8 for more details.)

The poverty monitoring component would support social aspects of LFCD operations through improvingthe availability of regular information and analysis of household and community welfare. Data collectionsupported under this component will not only be quantitative, but also involve participatory assessments ofpoverty dimensions.

6. Environmental assessment:

Environmental Category []A [X]B []C

The extent and diversity of potential LFCD investments present a challenge for mainstreamingenvironmental assessment review procedures in the subproject cycle. An environmental analysis hasbeen carried out to assess potential impact of the project on environment, propose mitigation measures, andrecommend actions so that environmental concerns are adequately addressed in the project.

Most of the subprojects are expected to be small and community-based, and their negative environmentalimpacts would be insignificant, especially on terrestrial eco-system (land, forestry, protected sites, etc.) andaquatic ecology (water sources, waterflows, fisheries, etc.). However, the following areas requireattention: (a) potential negative environmental impacts of certain types of subprojects (e.g., construction ofnew relatively large infrastructure such as feeder roads); and (b) potential positive impacts that LFCDcould make on environment and natural resource management through its community sensitizationactivities and through subprojects that are directly aimed at improving natural resource management.

In collaboration with the NES and relevant sectoral Line Ministries, the project will assist the LFCD toundertake two related activities, namely: (i) to raise community awareness about environmental impacts ofthe program-funded activities and promote ways to mitigate and avoid negative effects; and (ii) to promoteimproved natural resource management through its support for subprojects aimed at improving community-level natural management of the natural resources which they control and depend on for their livelihood(e.g., soil conservation, tree planting). A working group or technical committee that will involve expertisefrom all relevant sectors will be established, including the NES, the Soil and Water ConservationDepartment, and NGOs. An environmentalist/environmental engineer will be assigned in the MU who willensure, with support from the NES and relevant line ministries, that environmental concerns are adequatelyincorporated and addressed in the project planning and design. In collaboration with the NES (and/or useof a short-term consultant), capacity of the MU as well as that of the LFCD District Offices, DistrictManagement Teams, Area Teams, NGOs and communities will be strengthened throughworkshops/seminars to enhance awareness on the environment.

Environmental screening, review and assessment of potential environmental impacts of investments will bean integral part of the LFCD subprojects from the design, implementation, supervision and monitoringstages through to evaluation. To the extent available, the LFCD will apply existing standards for


environmental impact analysis/assessments and for measures to safeguard environment from potentialnegative impacts. As part of the social mobilization activities supported by the project, LFCD willfacilitate environmental institutional capacity building to ensure awareness, enforcement and monitoring ofenvironmental standards and guidelines, as well as promoting subprojects aimed at improvingcommunities' management of their natural resources.

The poverty monitoring component is expected to support strengthened data collection and analysis of alldimensions of welfare, including environmental resource availability and use by different groups of thepopulation.

7. Participatory approach:

In addition to advancing community participation and collaboration with NGOs and civil societyorganizations in Lesotho, the project decision-making processes are expected to contribute towardsstrengthening the capacity of existing structures within local government and the traditional village systemto serve as effective mechanisms for active participation by marginalized groups (e.g., women, landless,youth) in determining options and priorities for alleviating poverty and the sustainable management of theirnatural resource base. The poverty monitoring component is expected to generate increased dialoguebetween central and local planners, public authorities and civil society, and data collectors and users, on therange of issues regarding poverty indicators, status, trends and causality. In these ways, the project isexpected to promote consensus-building on poverty-reduction interventions in country.

Primary beneficiaries and other affected groups: The project is based on the assumption that local decision-making and community contributions in LFCD-supported subprojects will have a direct effect on thesustainability of the subprojects. With that in mind, the Participatory Community Assessments (PCAs)(See Annex 8 for more details) began a process of information sharing and consultations with primarybeneficiary groups (communities) in the process of developing the Operational Manual. Joint decision-making (e.g., beneficiaries and LFCD staff will need to collaborate to improve operational procedures atthe local level) and empowerment of local communities to design, implement, monitor and sustain theirown subprojects are among the goals of the LFCD, and the project will help pilot these activities in the 22pre-test communities where the PCAs were undertaken.

Other key stakeholders: Extensive consultations with key stakeholders have been carried out during theprocess of refornulating the LHiRF into the LFCD, including: a series of regional stakeholder workshops atthe district level; a governance workshop to discuss institutional options for the LFCD; systematicconsultations by the MODP and LFCD Design Team with line ministries and NGOs; and iterative national-level stakeholder workshops involving a wide range of stakeholders. 1 An Operational Manual was draftedbased on these consultations, and was reviewed by the workshop in June 1998. As with primarybeneficiaries, the project will support continued participation of other key stakeholders beyond consultationand toward joint decision-making, like that which has been illustrated by the representative composition ofLFCD Design Team.

' Including apex and line ministry officials, district-level leaders and government officials, chiefs, parastatals, privatesector, NGOs, universities, donor agencies


F: Sustainability and Risks

1. Sustainability:

The project will support the process whereby a range of stakeholders and beneficiaries will interact andcollaborate at all stages in establishing and implementing the LFCD operations (e.g., systems developmentand operationalization of the LFCD, the entire subproject cycles). This itself is a learning process for allthe institutions and individuals involved, including the govermment, the non-governmental sector, andcommunities themselves. This will help build capacity and foster a sense of ownership among key actorsto sustain subproject activities.

Sustainability of LFCD sub-projects will be ensured through: (a) a high degree of community participationin identification, planning, implementation, operations and maintenance; (b) commitment by beneficiariesas evidenced through their contributions to subprojects in cash, kind, and/or labor; (c) a menu ofstandardized technical designs appropriate to local conditions that will be made available to localcommunities; (d) appraisal and approval criteria including an operation and maintenance plan; (e)assurance that LFCD-financed sub-projects are part of the district and village plans, in line with nationalpolicies and complementary to national programs; (f) participation of government agencies and the DMT inproject appraisal, approval and supervision; (g) agreement with government agencies to assure coverage ofrecurrent costs for subprojects that generate such requirements; (h) training provided to local communitieson how to operate and maintain the facilities; and (i) involvement of NGOs and other players in facilitatingand providing technical support to communities.

Technical quality and supervision of community subprojects will be emphasized in LFCD procedures asdetailed in the Operational Manual, and organizational responsibilities (especially vis-a-vis the LineMinistries) would be clearly spelt out. Capacity building programs for LFCD and Line Ministry staff, aswell as NGOs and the private sector would be developed, as needed, to ensure sustainability of these sub-projects, especially for operation and maintenance.

Sustainability of the poverty monitoring component will be ensured through: (a) building on the existinginstitutional arrangements and comparative advantages of different institutions to provide and analyzepoverty data; (b) introducing simple, but effective tools for data collection and analysis, which can besustained beyond project life; (c) clarifying the organizational structure for implementing the NPP,especially the role and composition of the Poverty Monitoring Team; and (d) overseeing the monitoringprogram through the Poverty Task Force, which has representatives from government and non-govermnentinstitutions covering most sectors.


2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Risk Risk Rating Risk Minimization Measure

Annex 1, cell 'from Outputs to Objective"

Change in political commitment to the M Policy Letter of March 23, 1998 clearly statesLFCD's goal of poverty reduction GOL's commitment to the LFCD's goal and

the revised Legal Notice formalized itscommitment; Progress in the LFCDoperations according to its principles is atrigger for a high case scenario in the CAS.

Collaboration under the LFCD will not lead M Continuous dialogue between GOL andto development of partnership between GOL NGOs; IEC and training to GOL and NGOs.and NGO community

Sharing poverty data between agencies will M Dissemination of data and report findings;not take place capacity building.

Inadequate interest and willingness of N Dissemination of data and report findings;policymakers and planners to base decision- capacity building.making on poverty data and trends

Annex 1, cell 'from Components to Outputs'

GOL does not delegate authority to LFCD in N Legal Notice and the Operational Manualoperational matters as in the OM clearly defines the roles and responsibilities;

establishment of open, transparentprocedures; sensitization of policymakers.

GOL does not provide incentive packages Mfor MU staff

Funds from LHWP revenues to the LFCD M Development and signing of a clear statementwill not be provided according to the agreed by GOL on its commitment and procedures inallocation allocating LHWP revenues to the LFCD.

Adequate banking services are not available M Devise alternative mechanisms to handlefor the use of communities to manage subproject funds.subproject funds.

Political and public pressures for quick M An Information, Education, andresults will undermine the effort for systems Communication campaign to policymakersdevelopment and piloting of activities in and the public.phases

Partners at central and district level will not N Continued information, education &support the goals of the fund and contribute communication; training, and collaborationto its success through LFCD operations.

Inadequate incentives for poverty M Develop and institute non-monetaryresearchers and analysts. incentives for the key staff to remain in their

posts.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)


3. Possible Controversial Aspects:

The project will support the targeting of the funds from the LHWP to the community and the poor. Due tothe high visibility of the LHWP and thus the use of its royalty revenues, the LFCD operation will besubject to a high degree of attention and scrutiny from all interest groups and stakeholders, includingpoliticians, the media and the public.

G: Main Credit Conditions

1. Effectiveness Conditions:

+ The Operational Manual adopted in form and substance satisfactory to IDA.

* Qualified professionals appointed as (i) Executive Director and (ii) Director for Finance andAdministration for the Lesotho Fund for Community Development.

+ An independent, external auditor acceptable to IDA appointed.

* Minimum financial management and accounting systems for LFCD acceptable to IDA adopted.

2. Other [classify according to covenant types used in the Legal Agreements.]:

* Adequate financial management and accounting systems, satisfactory to IDA, will be established in theLFCD before any disbursement be made from the credit for community sub-projects.

* Quarterly reports on financial disbursements will be submitted to IDA.

* Semi-annual implementation reports will be submitted to IDA.

* Annual audit reports will be submitted to IDA.

* A beneficiary assessment and an independent evaluation will be undertaken and completed by,respectively, August 31, 2001 (18 months after credit effectiveness) and March 31, 2003 (six monthsbefore the closing date), with terms of reference to be agreed between the Government and IDA. Theywill assess, inter alia: effectiveness and timely delivery of the LFCD operation to meet the communitydemand and provide support; quality and sustainability of the LFCD sub-projects; effectiveness ofparticipatory planning process to identify community's priorities and their potential impact on the poor;capacity and participation of community-based organizations to plan and manage sub-projects;capacity of the private and non-governmental sector, local institutions, line ministries to supportparticipatory community-driven sub-projects; and capacity in national poverty monitoring andprogramming.

+ The government and IDA will carry out a mid-term review by no later than September 30, 2001, toreview the progress achieved in the implementation of the Project.

* The government will: (a) open and maintain a Revenue Receiving Account (RRA) in its central bankunder the name of the LFCD under terms and conditions satisfactory to the Association; (b) deposit


into the RRA an aggregate amount of not less than 225 million Maloti which shall be disbursed in threeannual installments to be determined as follows: (i) an initial amount of not less than 40 million Malotishall be deposited into the RRA by April 15, 2000; (ii) unless it shall have been agreed upon otherwisewith the Association, the amount of the second and third installment shall be equal to 85 millionMalotiand 100 million Maloti respectively; and (iii) the amount of the said second and third installments shallbe deposited into the RRA by April 15, 2001 and April 15, 2002 respectively; and (c) ensure that theproceeds of the RRA are used by LFCD only for the purposes of funding community drivenSubprojects and other activities entrusted to LFCD with a view to fostering and monitoring thereduction of poverty in the Borrower's territory, all in accordance with the operational procedures andguidelines set forth in the Operational Manual.

H. Readiness for Implementation

[ I The engineering design documents for the first year's activities are complete and ready for the start ofproject implementation. [X] Not applicable.[XI The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.[X] A draft Operational Manual for the community subprojects and LFCD administration has beenappraised and found to be satisfactory.[(] The following items are lacking and are discussed under loan conditions (Section G):

=. Compliance with Bank Policies

[X] This project complies with all applicable Bank policies.f ] [The following exceptions to Bank policies are recommended for approval: The project complieswith all other applicable Bank policies.]

Acting Task Tei Leader: Chiyo Kanda

Acting Se fr Manager: Marito Garcia

Acting Coun4y 6irect r: Arnaud Guinard

Annex 1Community Development Support Project

Project Design Summary

[ Narrative Summary [ Key Performance Indicators Monitoring & Evaluation Critical

.. . .. AssumptionsSE(IFOR-10. A ED) ('AS ('O u.

Improve the standard Reduction in levels of key poverty Poverty monitoring system; (Goal to Bankof living of poor, rural indicators national household surveys; Mission):communities, Reduction in % of population that and sectoral statistics Strong political andespecially the most is poor institutionalvulnerable andcomtetodisadvantaged Improved access of poor to some commitment tocommunity members services and infrastructure. implement the

National PovertyProgramme

DevelopmentObjective of 'follow-on operation':

Reduce poverty inLesotho through aparticipatory demand-driven, multi-sectoralspecial fund

Annex IPage 2 of 5

Narrative Key Performance Indicators Monitoring & Evaluation Critical AssumptionsSummary

El | W 1l1l _..

1. Test demand- l.1. A practical and appropriate Revised OM; benefciary (Objective to Goal):driven and methodology adopted for community assessments; annual LFCD reaches anparticipatory needs assessments and participatory reviews; and LFCD annual increasing no. of poorapproaches planning process, and for appraisal, reports, audit and communities andthrough a multi- implementation and maintenance for evaluation reports disadvantagedsectoral special community demand-driven sub-projects, individuals (e.g.,fund and draw with a view to achieving the LFCD's goal women, unemployed)lessons on how to of poverty reduction (indicated through asupport revised OM, beneficiary assessments, and Line Ministries'community evaluation reports). programs anddevelopment in 1.2 Expected benefits to be generated by services are re-Lesotho alia: Post-completion oriented to support a

sub-project assessed by gauging, inter evauaton of sub ,bttm-pthe level of satisfaction from the users offaciXities developed under the sub-project; projects; beneficiary approach tothe efficiency of operations and assessments; household developmentmaintenance of said facilities; poverty surveys; annual reviews; Decentralizationtargeting (e.g. resources allocated to poor audit and evaluation arrangements arecommunities, types of investment with repot implementedhigher impact on the poor); and relevance reports according to theof investment to community needs Ministry of Local(indicated through post-completion Governmentevaluations of sub-projects, beneficiary implementation planassessments, household surveys, andevaluation reports).

1.3. Semi-annual reports on LFCD's Semi-annualactivities and operations have been implementation reportssubmitted to the IDA, no later than 45 daysafter the end of every six months.

1.4 A strategy, reflecting the lessonslearnt and acceptable to IDA, has been A strategy paper; an actionadopted by June 30, 2002, to support plancommunity development, including anaction plan for the future of the LFCD

2. Test various 2.1 The Core Welfare Indicators Reports on surveys thatmechanisms and Questionnaires (CWIQ) piloted and its used CWIQ; annualtools to monitor effectiveness and adequacy as a tool for reviews; and evaluationpoverty trends in poverty monitoring evaluated reportsLesotho and to 2.2 A strategy or an action plan, An action plan/strategy forcoordinate reflecting the lessons learnt and acceptable future national povertynational poverty to IDA, has been adopted by September monitoringmonitoring and 30, 2002, to monitor poverty data andanalysis activities trends at the national level

Annex IPage 3 of 5

Narrative Summary Key Performance Indicators Monitoring & Critical AssumptionsEvaluation

lIlfQ.l. ( i O | ( )t ' '1 'I ' [I'S

1. LFCD fully 1.1 No. of subprojects approved, LFCD's accounting (Outputs tooperational, with under implementation and records and Objective)effective mechanisms completed Management Continued politicalfor supporting Information System commitment to theparticipatory (MIS) LFCD's goal ofcommunity-driven 1.2 LFCD Board members and poverty reductionsubprojects tested, MU staff appointed through clear LFCD annual reports;adjusted and finalized and transparent procedures and supervision reports

1.3 Operational Manuals andother technical guidelines, manuals, Copies of finalizedand handbooks developed and manuals, guidelines,tested handbooks

1.4 Financial management LFCD MIS; Supervisionsystems and project management reportsinformation systems in place andfunctioning effectively

1.5 No. of staff trained in relevant Training reports; andmanagement and other operational supervision reportsskills

1.6 No. of communities reached IEC consultant's report;by IEC campaign and copies of IEC

materials produced anddistributed

1.7 Average delivery time for LFCD MIS; beneficiaryLFCD services is in line with assessments; andOperational Manual guidelines (e.g. supervision reportsapprovals, disbursement)

Annex IPage 4 of 5

NIarrative Summary Key Performance Indicators Monitoring & Evaluation CriticalAssumptions

2. Capacity of the 2.1 No. of sub-projects that Beneficiary assessments; Collaboration underLFCD staff, reflected communities' needs and post-completion evaluations. the LFCD leads toparticipating priorities. development ofcommunities and partnership betweenintermediaries 2.2 % of community contributions LFCD MIS and annual GOL and NGOsstrengthened to of total sub-project costs reports; supervision/field

visit reports.

2.3 Knowledge/ability of the Beneficiary assessments;community to operate and maintain supervision/field visitthe infrastructure built/rehabilitated. reports; post-completion

evaluations.

2.4 No. of LFCD staff trained by Training reports; LFCDtype of training Management Information

System (MIS); beneficiary2.5 No. of intermediaries (NGOs, assessments; supervisionLine Ministries, etc.) trained by type reports; and qualitativeof training assessments of trainees

2.6 No. of communities andcommunity members trained bysocio-economic status, gender andtype of training

3. Improved 3.1 No. of staff trained in poverty Training reports; An open access toavailability of analysis and monitoring by type of supervision reports; poverty share poverty datainformation and training monitoring database between agenciesanalysis on the status 3.2 No. of reports and studies on (maintained by poverty will prevail.of poverty poverty recorded in the poverty monitoring team); and Greater interest and

monitoring system reports for surveys and/or willingness ofstudies undertaken policymakers and

3.3 Reduction in BOS survey tum- planners to basearound time (from end of fieldwork dersio onto first report) decision-making on

systematically3.4 Reduction in duplicated or gathereduncoordinated poverty monitoring/ information onanalysis activities poverty

Annex IPage 5 of 5

Narrative Summary Key Performance Monitoring & Critical AssumptionsIndicators Evaluation

PROJ I.Ci CON()XI Pt)ONU\ IX INI Th (lit 1(t1 1 r)

1. Support to Establishment and US$ 7.6 million Supervision reports; (Components to Outputs):Operationalization of the LFCD disbursement reports; GOL grants delegated

1.1 Piloting of the project cycle US$ 1.3 million LFCD annual reports authority of the LFCD inthrough sub-projects in 22 and MIS; semi-annual operational matters as definedcommunities and for different implementation reports; in the OM and providecypesommunitiecs andfordifferebeneficiary assessments; conducive incentive packages

post-completion for MU staff1.2 Systems development and US$ 2.2 million evaluations of sub-operationalization for LFCD projects; external Continued flow of funds from

evaluation. LHWP revenues to the LFCD1.3 LFCD management and US$ 4.1 million according to the agreedoperational costs allocation

Political and public pressuresfor quick results will notundermine the effort forsystems development andphased implementation

2. Capacity building activities US$ 1.4 millionfor LFCD

2.1 Training of LFCD staff in US$ 0.3 million Adequate banking services areoperational systems for financial available for the use ofand project management communities to manage

subproject funds.

2.2 Training for LFCD partner US$ 1.1 million Partners at central and districtinstitutions (communities, central level continue supporting theand district level government staff, goals of the fund andlocal governments, NGOs, private contribute to its successsector)

3. National Poverty Program US$ 1.4 millionimplementation & monitoring

3.1 Data for poverty monitoring US$ 0.8 million Potential poverty researchersand analysts are sufficientlywell remunerated andmotivated, and not take workelsewhere

3.2 Program monitoring and US$ 0.6 millionpoverty analysis


Project Description

Project Background

1. To ensure prudent management of the royalties from the Lesotho Highlands Water Project(LHWP), GOL decided to establish a special fund that will be used for community-based developmentprojects for poverty reduction. The Lesotho Highlands Revenue Fund (LBRF) was established throughAct No. 82 of 1991, and rules and regulations were stipulated in the Legal Notice No. 91 of 1992. Whilethe LHRF created valuable employment opportunities for communities and contributed to the creation ofneeded infrastructure, it lacked adequate institutional requirements and mechanisms to ensure effectiveoperation of such a fund; for example, no detailed implementation procedures or quality assurancemechanisms were developed, and few written plans or guidelines were prepared. As a result, the LHRFhas operated with unclear, inconsistent and sometimes non-existent policies and procedures. Havingrecognized such operational problems of the LHRF, the GOL committed to reformulate the LHRF into amore effective institution, and test a variety of mechanisms that support participatory communitydevelopment.

2. In September, 1997, GOL took a decision to reformulate the LHRF into a social fund-typeoperation, with the principal objective of reducing poverty. The Ministry of Development Planning(MODP) has taken the lead role in the reformulation process. A small Design Team was appointed tocoordinate the design of the new Fund using a consultative approach, which enabled the participation of awide range of key stakeholders during the preparation phase.2 A draft Operational Manual was preparedby a Drafting Team, composed of the Design Team and other senior technical staff from key LineMinistries and government agencies. It was subsequently debated and broadly endorsed at a largestakeholder workshop. The manual was further revised and refined, incorporating stakeholders'comments and additional technical inputs.

3. GOL now wishes to press ahead and try out the institutional and financial mechanisms through anewly reformulated Lesotho Fund for Community Development (LFCD), with a view to subsequentlyscaling up the activities to cover poor communities across the country. A revised Legal Notice wasrecently gazetted and became effective, formally establishing the LFCD in place of the old LHRF. Assoon as a new institution is established and core functions of the LFCD become operational, all the assetsand liabilities of the LBRF will be transferred to the LFCD.

4. Closely related to the goal of the LFCD, the project will also help test and coordinate differentapproaches to monitoring and analyzing overall poverty status in Lesotho. This is expected to contributeto periodic updating of the poverty data, and monitoring of the potential impact of the LFCD and othersectoral programs.

5. This project has been developed to test different mechanisms in a phased manner tooperationalize a participatory demand-driven fund that is aimed at supporting community-drivendevelopment and poverty reduction. It will also test various approaches and instruments to strengthenLesotho's poverty monitoring system and analytical capacity to monitor the poverty trends moreeffectively.

2 Yroject preparation costs were mainly covered by a Japanese PHRD grant.

Annex 2Page 2 of 4

Component 1: Support for the Establishment and Implementation of the LFCDTotal cost of component: US$7.6 million (GOL: $4.8 million; Communities: $0.1 million; IDA: $2.7million).

Sub-component (a): Community subproject investment costs(US$1.3 million - Communities: $0.1 million; IDA: $1.2 million)

6. LFCD operations and procedures will be 'pre-tested' in 22 communities which participated in anearlier consultative exercise through the Participatory Community Assessment (PCA). The PCAillustrated, among others, existing institutional structures, community-based organizations, andcommunities' views on priority needs (see Annex 9 for summary findings). Returning to thesecommunities in pre-test activities would provide an opportunity for LFCD staff and community membersto learn together, while addressing priority development needs in poor communities.

7. Under this sub-component, IDA will finance all investment costs associated with subprojectsapproved by LFCD in the 22 selected communities during the "pre-test" phase, except for thecommunities' own contribution toward subproject costs. A preliminary assessment of developmentpriorities in the 22 communities suggest that subprojects to be financed during the pre-test are likely toinclude feeder roads (selected as their top priority by the majority) and other local infrastructure such asschools and water supply, natural resource management and other community-managed assets (SeeAnnex 9, Table A).

8. Lessons learnt from the pre-test phase will be incorporated into LFCD guidelines prior toexpanding the operations to other localities for further testing. In line with the capacity of the LFCD andother participating institutions, the LFCD will increase its operational scope by expanding thegeographical areas covered, increasing the range of eligible subproject types, and testing alternativefinancial mechanisms of support for the poor. GOL, through the LFCD, will finance all the subsequentsubproject investment costs, again with the exception of the communities' own contribution whereappropriate.

Sub-component (b): Systems development and operationalization(US$2.2 million - GOL: $0.7 million; IDA: $1.5 million)

9. This sub-component will invest in setting up a basic set of operational and financial systems forLFCD, and assist the LFCD in adjusting and refining the systems and procedures as various approachesare tested on the ground. Lessons learnt from operations of the LHRF indicate that local capacity todesign, implement and support such systems is limited. The project will therefore finance criticalactivities needed to operationalize the LFCD and develop it as an effective institution, includingequipment, technical assistance and consulting services to design and implement appropriate mechanismsand procedures that can be sustained beyond the project life.

10. First year activities will include: (i) support in designing a detailed institutional structure andadministrative policies for the LFCD (e.g., clear institutional roles and responsibilities covering thevarious units of the LFCD and their relationship to LFCD partner institutions, detailed personnel andhuman resource development policies); (ii) assistance in setting up a computerized financial andaccounting system; (iii) establishment of the Management Information System (MIS) to monitor physicaland financial progress of subprojects; (iv) an adviser to the Executive Director for eighteen months toassist with the establishment, implementation and first-year management of the LFCD; (v) consultancy toassist to start up an Information, Education and Communication (IEC) campaign, to sensitize keystakeholders about the procedures of the new Fund and their roles and responsibilities; (vi) development

Annex 2Page 3 of 4

of technical handbooks and manuals; (vii) special studies, e.g., to review experiences with income-generating projects and propose an approach under the LFCD; (viii) other short-term consultancies asneeded to assist with implementation of the LFCD.

Sub-component (c): LFCD management and coordination(US$4.1 million-GOL: $4.1 million)

11. GOL will finance all recurrent operational costs associated with the LFCD.

Component 2: Capacity building Activities for the LFCDTotal cost of component: US$1.4 million (GOL: $0.5 million; IDA: $0.9 million)

Sub-component (a): Capacity building for LFCD(US$0.3 million - GOL: 0.1 million; IDA: 0.2 million)

12. This sub-component will build the capacity of the LFCD staff (at the central and district levels) toperform effectively in managing day-to-day operations of the LFCD and responding to communitydemands emanating from the participatory planning process. Among others, it will provide necessarytraining (through workshops, short courses, in-service or on-the-job training) for LFCD staff to enablethem to operate the various systems of the LFCD effectively, and may include the following areas: LFCDprocedures and project cycles; social fund operations and management; basic computer skills andinformation management; basic participatory planning techniques and processes, Bank procurement anddisbursement procedures; and monitoring and evaluation. The MU will develop a training plan based onneeds and priorities, and establish clear criteria and processes to select candidates and modality oftraining that are cost-effective.

Sub-component (b): Capacity building for LFCD partner institutions(US$1.1 million - GOL: $0.4 million; IDA: $0.7 million)

13. The sub-component will provide support for capacity building activities for LFCD participatingpartner institutions in order to enable them to provide effective facilitation and technical support tocommunities. The target group includes: community-based organizations, NGOs, private sector firms,and government staff at the district and central levels. The exact form of the capacity building programswill be tailored to the individual needs of each group. Training needs of each group will be assessed, andappropriate training programs will be designed and tested during the pre-test phase; potential capacitybuilding activities include:

* workshops for sectoral Line Ministries to brief staff on LFCD operations, and to collaborate inthe preparation of appropriate sectoral guidelines;

* training on community facilitation skills;* specific training programs for local governments;* study tours for NGOs to learn about the role of NGOs in other social funds;* production and dissemination of handbooks, guidelines and other training materials, and

continued stakeholder consultations for their feedback;* attendance at the annual meeting of the Africa Social Fund forum.

Annex 2Page 4 of 4

Component 3: Implementation and Monitoring of the National Poverty ProgramTotal cost of component: US$ 1.4 million (GOL: US$ 0.3 million; IDA: US$ 1.1 million)

Sub-component (a): Data for poverty monitoring(US$ 0.8 million - GOL: $0.1 million; IDA: $0.7 million)

14. The sub-component will support the strengthening of capabilities of the Bureau of Statistics(BOS) to collect, process, analyze and disseminate data for poverty monitoring. This will include supportto implement and administer annual surveys using Core Welfare Indicators Questionnaire (CWIQ),including the provision of necessary equipment for implementation. The CWIQ will be piloted during thefirst six months of project implementation and followed by two full-scale annual surveys in years 2 and 3of the project. Short-term consultants will be hired to assist with issues of sampling, data dissemination,and cartography. A study tour will also be financed by the project together with necessary (short-term orin-service) training and workshop for staff in relevant agencies.

Sub-component (b): Program monitoring and poverty analysis(US$ 0.6 million - GOL: $0.2 million; IDA: $0.4 million)

15. The project will help strengthen the quality of program monitoring and poverty analysis: (i) byproviding technical assistance through an adviser and training (e.g., short courses, workshops, in-servicetraining, study tours) to the Poverty Task Force and a small Poverty Monitoring Team to be established(about three staff will be assigned on the full-time basis and serve as a secretariat to the Poverty TaskForce) to build their capacity in poverty analysis, program design and monitoring; and (ii) by financingpolicy analysis and related studies on poverty.


Estimated Project Costs

Project Component Local Foreign Total------------------US $ million------------------

Lesotho Fundfor Community Development:Community sub-projects 1.1 0.0 1.1Systems development and implementation 0.8 1.0 1.8Operational costs 3.1 0.3 3.4

Capacity Building and Institutional Support 1.0 0.2 1.2NPP Implementation and Monitoring:

Data for poverty monitoring 0.5 0.2 0.7Program monitoring and poverty analysis 0.2 0.3 0.5

Total Baseline Cost 6.7 2.0 8.7

Physical Contingencies 0.3 0.1 0.4Price Contingencies 1.0 0.3 1.3

Total Project Cost 8.0 2.4 10.4

Note: Totals may not add up due to rounding.


Procurement and Disbursement Arrangements

Procurement

1. It is not possible to determine the exact mix of goods and services under the project due to thedemand-driven nature of the LFCD and the adaptable feature of a LIL. Types of sub-projects to befinanced under the LFCD and their procurement details will depend of the needs identified by thecommunity. Other procurement, such as technical assistance and training, are agreed based on the needsidentified for the first year of the project. Costs for the following years are only indicative, and the exactmix of procurement will be determined on an annual basis.

2. Procurement for all IDA financed activities will be carried out in accordance with the Bank'sGuidelines for Procurement under IBRD Loans and IDA Credits (January 1995 and revised in Januaryand August 1996, September 1997, and January 1999), in particular, Section 3.15 CommunityParticipation in Procurement. Consulting services by firms or individuals financed by IDA will beawarded in accordance with the Bank's Guidelines: Selection and Employment of Consultants by WorldBank Borrowers (January 1997, revised in September 1997).

3. Institutional Arrangements: As stated in section C2 in the main text, an Operational Manualhas been prepared by the Government. It is a living document that will be continuously modified, subjectto agreements between GOL and IDA, as new lessons are learnt and incorporated for future use. Itincludes basic guidelines for the sub-project cycle, procurement of goods and services, disbursementarrangements, accounting and reporting requirements. More details will be described in various manualsand handbook to be developed, e.g., a Procurement Manual, a Financial Management Manual, and aCommunity Implementation Handbook. Procurement for LFCD-financed community sub-projects willfollow procedures described in the Procurement Manual and the Community Implementation Handbook,and the Financing Agreement to be signed between the LFCD and the community will spell outresponsibilities of each party in procurement, disbursement and financial management.

4. Procurement Management: LFCD will operate in accordance with detailed procurementprocedures to be specified in the Procurement Manual. Procurement of equipment, vehicles, supplies andservices for the LFCD will be the responsibility of the LFCD's Management Unit (MU). The MU willalso provide assistance to the DSP and BOS to facilitate procurement under the NPP implementation andmonitoring component. Procurement for sub-projects will be the responsibility of the beneficiarycommunity. In limited cases, and only when project materials are not available locally and upon requestfrom the beneficiary community, the MU will be charged. Procurement training will be offered to eachbeneficiary community at the time of project launch.

5. The LFCD's 10 District Offices, each of which will be headed by a District Officer, assisted by aTechnical Officer, will be responsible for: (i) when, asked, assisting the community, together with theDistrict Management Teams (DMT), to identify and prioritize sub-projects; (ii) provide the communitywith standardized designs (developed by line ministries) and market prices (from a databank); (iii)monitoring contracts entered into by the communities at the local level and, when asked, assisting thecommunities in undertaking the tendering process for goods and materials procured by the communities;(iv) supervise the works (this may be done by NGOs chosen primarily on a competitive basis); and (v)coordinate and obtain clearances from the MU. The DOs will also be responsible for maintaining

Annex 4Page 2 of 9

appropriate forms for contracts to be used by the communities. In cases where National CompetitiveBidding (NCB) for the sub-projects is necessary, the LFCD's Management Unit (MU), with theassistance of relevant Line Ministries, will coordinate the bidding process on behalf of the community.The MU will prepare the material requirements and bills of quantities. The MU will also be responsiblefor conducting ex-post audits of the adequacy of procurement procedures by the DO on a selective basis,for contracts US$30,000 equivalent and above. Monitoring and audit procedures for procurement by DOwill be detailed in the Procurement Manual. The LFCD staff will be trained, once recruited, in IDAprocurement procedures, and ongoing support will be provided from the World Bank throughout theproject life.

6. Price Databank: The MU will develop and maintain a data base of regionally specific marketprices, as part of the cost control system and to assure that contract selection is transparent and economic.It will include costs and rates for at least 40 of the most commonly required items based on project costsduring the previous three months, or from a random sample of suppliers and employers. Such unit priceswill be updated at least on a quarterly basis. Unit prices for other required items will be updated on arotational basis, to be updated at least twice a year. The data will be used in appraisal and monitoring, asa tool to review the project budget and as a guide when procurement is through direct contracting.Details of the methodology for preparing the database will be provided in the Operational Manual.

7. Procurement Monitoring and Evaluation: The MU will monitor all procurement-relatedinformation for project implementation. Such monitoring will provide information including the DOsupervising the procurement process, number and amount of contracts awarded under each DO'ssupervision, procurement methods, amount and nature of contracts procured through each method,number and amount of contracts subject to prior review by IDA, and number of beneficiary communitiesthat have been directly contracted to execute works.

Procurement methods (See Table A and Al) andprior review thresholds (See Table B)

LFCD Sub-projects

8. As far as possible, subprojects that involve works will be implemented through civil workscontracts. Contracts under the LFCD sub-projects would be mostly small, labor intensive, community-based activities such as construction of classrooms, water wells, dug-out ponds, and trees planting. Theywould be scattered across the country, many of which in remote areas or in mountains. It is unlikely,therefore, those contracts will attract intemational bidders. International Competitive Bidding (ICB) forworks is therefore not anticipated. A popularly elected Community Project Committee will beresponsible for procuring all goods, materials, labor, transport, and other inputs for the works, or hiringappropriate implementing agency or contractor, following the procedures described in the ProcurementManual and the Community Implementation Handbook.

9. Given the social objectives of the project and the intended use of NGO, community labor, andlabor-intensive methods, small works and procurement of goods and supplies for LFCD sub-projectscosting less than the equivalent of US$75,000 per contract will be carried out by CommunityParticipation methods in accordance with procedures acceptable to the Bank and described in theProcurement Manual. These procedures include: lump-sum, fixed price contracts awarded on the basis ofquotations obtained from three qualified domestic contractors/suppliers in response to a writtenspecification. Contracts exceeding the equivalent of US$75,000, where sufficient competition fromnational bidders maybe expected to be available, will be procured using the National Competitive Bidding

Annex 4Page 3 of 9

(NCB) procedures (also refer to para 3 above). The use of Force Account will be discouraged andprobably will not be used under the project. Government forces (e.g., Ministry of Public Works, Ministryof Agriculture) may be used, however, if no local capacity or contractors will be available on sites, up tothe aggregate amount of $200,000 (also refer to para. 3.8 of the Bank's Procurement Guidelines).

10. It is expected that subprojects will be small in size and fall under $75,000 per contract. Contractsestimated to cost $75,000 equivalent per contract or above as well as any contracts under Force Accountwould be financed on an exceptional basis, and would be subject to prior review by IDA in accordancewith Appendix 1 of the Bank's Procurement Guidelines. Bid documents, evaluation reports, andcontracts will be submitted to IDA for approval. In addition, the first three contracts under $75,000 willbe reviewed by IDA to ensure that procurement will be carried out in accordance with agreed procedures.

Annex 4, Table A: Project Costs by Procurement Arrangements(in US$ million equivalent)

Expenditure Category Procurement Method Total Cost(including)

ICB NCB Otherll NB.F 2 1 contingencies

1. Community Sub-projects - 0.2 1.0 0.1 1.3- (0.2) (1.0) - (1.2)

2. Equipment, Furniture, Supplies, - 0.1 0.3 0.7 1.1And Vehicles - (0.1) (0.3) - (0.4)

3. Consultant Services, training, - 3.1 0.9 4.0Studies, workshops, study tours - - (3.1) - (3.1)

4. Operating costs 4.1 4.1

Total 0.3 4.4 5.8 10.4(0.3) (4.4) - (4.7)

Note: Figures in parenthesis are the amounts to be financed by IDA credit.1/ Other includes: International or National Shopping; Community Participation method; Force account.Also Consultant Services; costs for in-service training, workshops, and study tours.21 N.B.F. (Not Bank-Financed) includes: the LFCD's own resources from LHWP revenues, whichcovers LFCD's operational costs, additional equipment, and routine training once it isinstitutionalized; community contributions to the sub-projects in cash, kind, or labor; GOL'scontributions in the form of staff salaries and office space/equipment for the Poverty MonitoringGroup and the BOS staff who will work on CWIQ.

Annex 4Page 4 of 9

Goods and Equipment

11. Goods and equipment to be procured would include one vehicle, office equipment, computersand software for LFCD district and central offices as well as for the Bureau of Statistics (BOS). Whiletotal estimated amount for goods and equipment is US$354,000 (US$294,000 for LFCD and US$60,000for BOS), each contract is expected to be less than US$100,000. Goods and equipment that are estimatedto cost less than US$30,000 per contract may be procured by National Shopping (NS) procedures inaccordance with the Guidelines. NS may also be used for procurement of one 4WD vehicle for the MU(estimated cost of $35,000). Goods and equipment valued at $30,000 and above, but not exceeding$100,000 per contract, may be purchased through International Shopping (IS) or the United NationsInter-Agency Procurement Office (IAPSO). If the estimated amount per contract is on or above $100,000[but less than $200,000], NCB procedures will be followed according to the Guidelines.

12. While an estimated $354,000 worth of computers, office equipment and a vehicle will bepurchased under the credit, packaging of similar items suitable for competitive bidding will not bepossible under the project. Contracts on or above the individual threshold of US$100,000 equivalent, ifany, will be subject to IDA's prior review.

Annex 4, Table Al: Consultant Selection Arrangements(in US$ million equivalent)

Consultant Services Selection Method Total CostExpenditure Category (including)

_________________ QCBS QBS SFB LCS CQ Other NB.F. ContingenciesA. Firms 0.3 0.1 0.4

(0.3) (0. 1) (0.4)

1.3 1.3B. Individuals (1.3) (1.3)

Total 0.3 0.1 1.3 1.7(0.3) (0.1) (1.3) (1.7)

Notes: QCBS = Quality- and Cost-Based SelectionQBS = Quality-Based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants, Commercial Practices, etc.N.B.F. = Not Bank-financed.Figures in parenthesis are the amounts to be financed by the IDA credit.

Annex 4Page 5 of 9

Annex 4, Table B: Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value Procurement Contracts Subject toCategory (Threshold) Method Prior Review /Estimated

Total Value Subject toPrior Review (US$ mil)

1. Community sub-projects < $75,000 Community participation First three contracts2/> $75,000 NCB All contracts

2. Equipment, Furniture, < $30,000 NS, IAPSO NoneSupplies, and Vehicles > $30,000 and IS, IAPSO None

< $100,0002 $100,000 and NCB All contracts

< $200,000

3. Consultant Servicesl/Firms < $100,000 QCBS if 2 $75,000 None3/

If below, CQ may beused

> $100,000 QCBS All contractsIndividuals < $50,000 Bank Guidelines None3/

> $50,000 Bank Guidelines All contracts

Total value of contracts subject to prior review: US$ 1.2 million

ICB = International Competitive BiddingNCB = National Competitive BiddingIS = International ShoppingNS = National ShoppingIAPSO = United Nations Inter-Agency Procurement OfficeQCBS = Quality and Cost-Based SelectionCQ = Consultant Qualifications-Based Selection

1/ All terms of reference for consulting services, including those specified in the project manualswill be subject to IDA's prior review.2/ Exemption from prior review does not apply to contracts under Force Account.3/ Exemption from prior review does not apply to consultant contracts in case of single-sourceselection of firms and individuals, assignments of critical nature, and amendments to contractsraising the original value above the respective thresholds.

Consultant Services

13. In principle, the project will encourage, to the extent possible, engagement of national consultantswith a view to develop local capacity, in accordance with the Bank's Guidelines. This may be donethorough short-listing of national consultants in cases of contracts of small value (below thresholds; seebelow) or by setting selection criteria which provides higher weights to national consultants whencandidates have similar qualifications and experience. However, foreign firms/consultants will probably

Annex 4Page 6 of 9

be used for more complex assignments and, in case of expression of interest, they will not be excludedfrom the selection process for smaller assignments.

14. The Bank-financed consultants would be contracted in accordance with the Bank's Guidelines:Selection and Employment of Consultants by World Bank Borrowers (Consultant Guidelines), publishedin January 1997 and revised in September 1997. Contracts estimated to cost on or above the threshold of$75,000 for firms will be awarded through the Quality and Cost-Based Selection (QCBS) method (referto Section II, para. 2.1-2.28, of the Consultant Guidelines). The short-list for contracts below thethreshold of $100,000, in which local capacity is readily available, may comprise entirely of nationalconsultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Contractsfor firms estimated to cost less than $75,000 equivalent may be awarded on the basis of the ConsultantQualification (CQ) selection method in accordance with paragraphs 3.1 and 3.7 of the ConsultantGuidelines. Single-source contracts with firms may be awarded on an exceptional basis, with prioragreement by IDA, in accordance with the provisions of paragraphs 3.8 through 3.1 1 of the ConsultantGuidelines; justifications for single-source contracts may include prior experience by a consultant insimilar assignments, and assignment of a specialized nature for which the availability of capableconsultants are limited. Selection of individual consultants will be made according to Section V, para.5.1-5.3 of the Consultant Guidelines.

15. For consultant services (including those provided by NGOs), IDA's prior review and approvalwill be required for terms of reference, short list(s), budgets, selection procedures and criteria, letters ofinvitation, evaluation reports and contracts in the following categories: (a) all contracts with firmsestimated to cost $100,000 equivalent per contract or above; (b) all contracts with individuals estimated tocost $50,000 equivalent per contract or above; (c) single source selection of consulting firms or individualconsultants regardless of contract values; (d) assignments of a critical nature as reasonably determined byIDA; (e) amendments of contracts for the employment of finns or individuals raising the respective totalcontract value to $100,000 or $50,000 equivalent or above. Terms of reference will be subject to IDA'sprior review for all consultant contracts.

Disbursement and Financial Management

16. The project will be implemented over a three-year period, starting April 1, 2000. The ProjectCompletion Date will be March 31, 2003, and the credit closing date will be September 30, 2003.Retroactive financing of up to 10 percent of the total credit amount, or $467,000, would be available tocover eligible expenditures incurred after February 22, 1999 (the date of appraisal) and no more than 12months prior to the credit signing. The proposed allocation of the credit is shown in Table C below.

17. The Management Unit (MU) of the LFCD will be responsible for ensuring that financialmanagement and reporting procedures for the project meet GOL and the World Bank standards. AFinancial Management Action Plan has been developed to lay out an essential institutional set-up andinternal control mechanisms as well as to set forth necessary actions for systems development for soundfinancial management, and incorporated in the Operational Manual.

18. Qualified professionals will be appointed as the Director for Finance and Administration, theChief Accountant and the Internal Auditor. Short-term consultant(s) will be engaged to assist the corestaff. A Financial Management Committee will be established in the MU, comprising of coremanagement staff. A detailed financial procedures manual will be developed and finance/administrativestaff will be trained as needed. The appointment of a qualified professional as Director of Finance and

Annex 4Page 7 of 9

Administration as well as the establishment of an adequate financial management and accounting systemare conditions for credit effectiveness.

19. At this early juncture of planning the establishment of LFCD's financial management system,LFCD is not yet ready for disbursements based on Project Management Reports (PMR), as discussed inthe World Bank's Loan Administration Change Initiative Handbook (LACI, September 1998). Thus, inthe short-term, existing World Bank disbursement procedures, as outlined in the World Bank'sDisbursement Handbook, will be followed, i.e. Direct Payment, Reimbursement and SpecialCommitment.

20. The implementation of the Financial Management Actin Plan will facilitate the establishment anddevelopment of LFCD's financial management system before disbursement is made for communitysubprojects, and the introduction of PMR-based disbursements within about 18 months of crediteffectiveness. An action plan to shift to PMR-based disbursements will be completed by September 30,2001. In that regard, a financial management review of the project should be undertaken by a WorldBank Financial Management Specialist within twelve months of credit effectiveness (in about March2001) to assess progress.

21. Funds will be disbursed directly to the community (or to the relevant implementing agency orcontractor upon CPC's request) after a bank account has been opened for the sub-project use and a copyof the Financing Agreement signed by all parties concerned has been received by the MU. Payments willbe made in four tranches (i.e., 40%, 25%, 25% and 10 % of the total sub-project cost). The first tranchewill be disbursed upon signing of the Financing Agreement, and each subsequent tranche will be effectedupon: (i) receipt of a written request from the CPC; (ii) receipt of an up-to-date Monthly Progress Reportfrom the CPC by the LFCD District Office; and (iii) proper and justified utilization of at least 75% of theprevious tranche and 100% of any prior tranche(s) as evidenced by a Project Financial Report submittedby the CPC along with appropriate documentation.

22. IDA will not finance taxes. To ensure this, IDA will only finance 90 percent of localexpenditures on equipment and supplies, where 'local expenditures' are defined as 'expenditures forgoods or services provided by suppliers/contractor of the Borrower's country or expenditures incurred inlocal currency'.

23. Use of Statements of Expenses (SOEs). All applications to withdraw proceeds from the creditwill be fully documented, except for the following, which may be claimed on the basis of certifiedstatements of expenses (SOEs): (a) expenditures for works contracts with an estimated value of US$75,000 or less; (b) goods and equipment less than US$100,000; (c) US$ 100,000 or less for training,workshops, studies, and study tours; and (d) consulting services with a value of US$ 100,000 or less percontract for firms and US$ 50,000 or less for individual consultants. Documentation supportingexpenditures claimed against SOEs will be retained by the MU and will be available for post review whenrequested by IDA supervision missions and project auditors. Disbursement and withdrawal proceduresare detailed in the World Bank Disbursement Handbook (1992 edition). All disbursements are subject tothe conditions of the Development Credit Agreement and the procedures defined in the DisbursementLetter.

24. Special Account. To facilitate disbursements of eligible expenditures for works, goods andservices, the Government will open one Special Account in a commercial bank satisfactory to IDA, to bemanaged and administered by the MU, in order to cover part of IDA's share of eligible expendituresunder the project. Authorized allocation of the Special Account would be US$500,000, coveringapproximately three months of eligible expenditures financed by IDA. However, the authorized

Annex 4Page 8 of 9

allocation will be limited to an amount equivalent to US$250,000 until the aggregate amount ofwithdrawals from the credit plus the total amount of all outstanding special commitments entered into byIDA in accordance with Section 5.02 of the General Conditions are equal to or exceed the equivalent ofSDR 1,500,000. The MU will be responsible for submitting replenishment applications regularly withappropriate supporting documents for expenditures. Applications could be submitted every month undernormal circumstances, but not less than every three months. Withdrawal applications for direct paymentfrom the credit to suppliers/contractors may be submitted with adequate documentation. To the extentpossible, all of IDA's share of expenditures should be paid through the Special Account.

Accounts and Audits

25. As soon as possible after the end of each Lesotho's financial year, but no later than six monthsthereafter, GOL will, through the MU, present audit reports of all the project accounts (including thespecial account, the LFCD accounts, and all sub-accounts) with a separate opinion on the use of thespecial account and SOEs (para. on covenants). The auditor will also be expected to prepare a separateManagement Letter giving observations and comments, and providing recommendations forimprovements of accounting records, systems, controls and compliance with financial covenants.

26. An independent, external auditor who is relevantly qualified and experienced (for financial andphysical audit) will be appointed by effectiveness, on acceptable terms of reference. In Lesotho, theOffice of the Auditor General (AG) is responsible for external auditing of all Government funds.However, Clause 31 of the Draft Legal Notice No. 6 of 1999 provides that the AG may delegate thatresponsibility to an external auditor approved by him. Terms of reference for the audit will be modeledon Annex XIX, FARAH of the World Bank (which contains "Sample Terms of Reference").

27. For IDA purposes, besides expressing a primary opinion on the Annual Financial Statementsin compliance with either IFAC or INTOSAI Auditing Standards, the auditor will be required to include aseparate paragraph commenting on the accuracy and propriety of expenditures withdrawn under SOEprocedures and the extent to which these can be relied upon as a basis for loan disbursements.Regarding the Special Account, the auditor will also be expected to form an opinion as to the degree ofcompliance with World Bank procedures and the balance at the year-end. The audit report for thecommunity subprojects shall include a review of the Community Project Committee (CPC)'sperformance on a sample basis.

28. In view of the fact that the project would have a large number of accounts including those at theMU, at the community level, and at implementing agencies/partners, and that these would need to bechecked periodically, the LFCD Board will appoint a private audit firm to carry our semi-annual reviewsas an integral part of the annual audit, pending the establishment and development of the Internal AuditUnit. In addition, the following actions will strengthen accountability for project funds: (a) maintenanceof a strong Internal Audit Unit, (b) recruitment and adequate training of qualified accounts staff at theMU and at the district offices to ensure timely justification and maintenance of up-to-date books ofaccounts, (c) training of the CPC members on project management, and where appropriate, appointmentby CPCs of project assistants to keep accurate records for them on a part time basis to be paid out of thesubproject funds.

Annex 4Page 9 of 9

Annex 4, Table C: Allocation of Loan Proceeds

Expenditure Category Amount in US$ Financingmillion Percentage

1. Community Sub-projects 1.20 100% of amounts ofcommunity grants

disbursed2. Goods and Equipment 100% offoreign,

and 90% of locala. LFCD 0.29b. Poverty monitoring 0.06

2. Consultant Services, Training, Workshops, Studies, 100%and Study Tours

a. LFCD 1.76c. Poverty monitoring 0.89

3. Unallocated 0.47

Total 4.67

- a^¢~~~~~~~~~~~~~~~~~~~q 4vure. r4u¢

Your Reference: Telephone: 311619 Maseru

< /5 > S OFFICE OF TEE MINISTEROF PLANNING, ECONOMICAND MANPOWERDEVELOPMENT

Annex 5 P.O. BOX MS 630MASERUt 100LESOTHO

CPO/Cl82101/4 23rd March, 1998

Mrs. Pamela CoxCountry Director for LesothoAfiica RegionWorld Bank1818H Street, N.W.Washington D.C. 20433United States

Dear Mrs. Cox

Re: Letter of Policy on the Lesotho Highlands Revenue Fund - Condition forapproval of Phase 1B of Lesotho Highlands Water Proiect

I have the pleasure to forward to you a Letter of Policy relating to the LesothoHighlands Revenue Fund (L{RF).

The Letter provides information on improved arrangements for managing the LHRF.It also shows extensive measures being undertaken towards reformulating theDevelopment Fund of the LIHF. The objective is to design a comnmunity-based Fundthat is more responsive to the needs of the community, particularly the poor. The keytowards achieving this objective is ensuring community empowerment both during thedesign and the operation phases.

I hope you will find all the contents of the Policy Letter to be in order. Please do nothesitate to consult with me if such a need arises.

I look forward to hearing from you soon.

Yours faity v --..

L.V. ketso -

Minister of Finance and of Economic Planning

Annex 5

Page 2 of 4KINGDOM OF LESOTHO

Highlands Water Development Project (Phase 1B)

Letter of Policy relating to the Lesotho Highlands Revenue Fund

Background

The Lesotho fighlands Revenue Fund (LHRF) was created in 1992 with a view to ensurea proper accounting and subsequent use of water royalties accruing to the Kingdom ofLesotho as a result of the development of the highlands water resources under thesuccessive phases of the Lesotho Highlands Water Project. The institutional arrangementsand operating procedures applicable for the use of the proceeds of the LHRF Fund are setforward in Legal Notice No. 9 1 of 1992.

A.s currently articulated, the objectives of the fund are to (i) promote economicdevelopment and diversification through capital expenditures on projects, consistent withLesotho's Public Sector Investment Program (PSIP) and through enhancement of thecapacity of the public and private institutions to identify, prepare and implement suitableprojects; (ii) stabilize Government revenues; and (iii) generate supplementary long-termrevenue flows for the Government from income derived from other investments.

To meet these objectives, a Revenue Receiving Account has been established, with foursub-accounts: the Development Account; the Revenue Stabilisation Account; the Long-term Revenue Supplementation Account; and the Administrative Account. Each sub-account is dedicated to a specific purpose. Through the operations of the LItF, findsfrom Development Account finance development projects expected to contribute to theoverall economic development of Lesotho. The Revenue Stabilisation Account is to beused to complement governrrent's general revenues when the need anrses. The Long-termRevenue Supplementation Account may be used to offset any shortfall in expectedgovernment's revenue on a need basis. Finally, the Admninistrative Account is set up tocover all administrative costs associated with the management of the LIRE.

Revisions to Arrangements for Managing Lesotho Highlands Water ProjectRevenues

GOL has recognised that the existing arrangements for the LIRF need revising. Howeveras against the envisaged date of I April for completion of the reformulation of the LHRF,activities still to be undertaken predict that the reformnulation will be complete with theoperational manual by end of Mlay 1998. Cabinet has already decided that approximatelyM75 million a year for the -ext four years will be available for the revised fund from theproceeds of the water rovaxtIes The remaining royalties will be managed as part ofGOL's general budget. T.,is simpler arrangement for managing the royalties ends the need

Annex 5

Page 3 of 4to maintain the system of five sub-accounts. In future, only one account, for the revisedfund, will need to be maintained.

A workshop was held on 3 November, 1997 with key policy makers, made up ofrepresentatives from governrnent ministries, NGOs, political parties and the private sector.After considerable debate, it was agreed that the revised LHRF would have the followingprimary objectives:

Obiectives

1. To reduce poverty in Lesotho, with particular emphasis in poverty-stricken areas.

2. To support local initiatives for employment creation and sustainable income generation.

3. To improve and protect the environment and the natural resource base of the country.

It was also agreed that the revised objectives will operate with the following key features:

Features

1. Community leadership in project identification, design, implementation, monitoring andevaluation. The foregoing would be reinforced through community-based training.

2. Projects that are financially, technically and environmentally viable and are subjected toconstant supervision for sustainability. Clear guidelines for project screening andprioritisation be designed and there be transparency and accountability at all levels.

3. The capacity of implementing agencies be enhanced for efficient admninistration andutilisation of resources. This includes the LHRF management, Local Governmentstructures, non-goverfmental organisations and other locally-based organisations (butonly as far as capital expenditure is concerned, such as training and office buildings, notrecurrent expenditure).

Consultative Process

In order to design and establish a revised LHRF that is responsive to the needs ofcommunities, the Ministry of Economic Planning has decided to hold a number ofworkshops with key stakeholders.The first workshop, on November 3, 1997 was for policy makers. During the workshopbroad consensus was reached on how a revised fund would operate. In particular, theworkshop agreed on the primary objectives and key features of the reformulated LHRF.

Annex 5.Page 4 of 4

Over the past two years, studies and reports by various agencies were produced thatinvestigated the operations of the existing LHRF. Many recommendationswere made relating to how the LBRF might be reformulated. These recommendationswere considered at a second workshop held in December 1997. The Decemberworkshop, focused more on the range of detailed design issues associated withestablishing a revised LBRF, including appropriate institutional arrangements.

Further consultations with communities took place at district level, from end of Februaryto mid March, 1998. The aim of these consultations was to seek the views of thecommunity, including the poor on a wide range of issues including (i) basic needs of thepoor; (ii) how the Government, the community and various stakeholder groups can joinhands to meet these needs, under the new LHRF.

Participants in these community-based workshops included: Principal and Area Chiefs,District Development Councils, Non Governmental Organisations and some members ofthe community who had been elected by the community to serve as the communityspokespersons at the workshops. This latter category was comprised of equal number ofmen and women and it had been encouraged that the category should include the poor -"the people who are actually affected by poverty". Other participants were seniorgovernment officials at the district level.

At these workshops, consensus was reached on many critical design issues concerningcommunity basic needs for poverty alleviation, and measures to strengthening communitycapacity to enable it to play an active and leading role in the LHRF.

To complement the information from community-based workshops, the Government hasselected twenty two villages all from poor areas (according to previous studies) andengaged a consultant to run a participatory needs assessment in those villages.

In April, the results of thee various consultations and workshops will be consolidated intoan Operational Manual for the revised LHRF and community contributions and inputs willbe given considerable weight during the preparation of this document. This manual willcontain information on all policies and procedures to do with the revised Fund. It will bemade available to all communities.

A one-day workshop to discuss possible new governance arrangements for thereformulated LHRF is also planned for April. A new Legal Notice replacing the existingnotice will also be prepared based on the outcomes of the workshops.

.............. ........... . . . . . . . . . . . . . . . . . . . . . ..............

L.V. KETSO(Minister of Finance and of Economic Planning)

Annex 6: Summary of Project Workplan2000

ID Task Name Duration Start Finish Dec Jan Feb Mar Apr May Jun Jul Aug

1 Establish LFCD Office 158 days Mon 12113199 Wed 7119100

2 Recruit ED, Finance Director + Chief Accountant 81 days Mon 12113199 Mon 413100

14 Recruit Adviser to ED 139 days Fri 117100 Wed 7119100

27 Establish temporary LFCD Office for pre-op phase 20 days Wed 3/1100 Tue 3128100

34 Procure essential equipmentivehicle 66 days Mon 413100 Mon 713100

40 Systems Development 153 days Mon 1216/99 Wed W5100

41 Establish basic financial accounting system 66 days Mon 12/6199 Mon 3/6100

46 Institutional design consultant 51 days Tue 2/1100 Tue 4111/00

52 Prepare Manuals 48 days Mon 511100 Wed 715100

53 Community assessment/planning manual 48 days Mon 511100 Wed 715100

60 Community Implementation Handbook 40 days Mon 5/1/00 Fri 6123100

65 Consultations with Partners 40 days Mon 4117100 Fri 619100

66 Line Ministries 40 days Mon 4117/00 Fri 619100

69 NGOs 40 days Mon 4/17/00 Fri 619100

72 Information, education and communication campaiagn 113 days Mon 1/10/00 Wed 6114100

89 PRE-TESTS IN 22 COMMUNITIES (in 5 groups) 147 days Mon 511100 Tue 11121100

90 Preparatory work for pre-test 20 days Mon 6/5/00 Fri 6/30/00

91 Recruit consultants for PRA 31 days Mon 511/00 Mon 6112100

95 Pre-test for Group 1 42 days Mon 713100 Tue 8129100

100 Pre-est for Group2 42 days Mon 7124/00 Tue 9M9100

105 Pre-test for Group 3 42 days Mon 8114100 Tue 10M0100

110 Pre-test for Group 4 42 days Mon 9/4100 Tue 10131)00

115 Pre-test for Group S 42 days Mon 9125/00 Tue 11121/00 I

Wkplanl1299 mpp Page 1 Fri 12/3/99

Annex 6Page 2 of 4

Annex 6: Summary of Project Workplan

ID Task Name ___ Duration Start _ Finish D J F Mar Apr M J120 Income-generating Activities 257 days Mon 5115100 Tue 518101

121 Recruit Consultant for Income-generating projects 101 days Mon 5115)00 Mon 1012)00

131 Reveiw micro-credit + IGP experiences in Lesotho 47 days Fri 10/6/00 Mon 12M11/00

136 Develop Plan of Action for IGP Component under LFCD 51 days Tue 12/12100 Tue 2/20/01

141 Preparatory work for pre-test/pi/ot 54 days Wed 2121101 Mon 517101

142 Start a pre-test-pilot 1 day Tue 5/8/01 Tue 5/8/01

14~3

144 Establish a Poverty Monitoring Team in MODP 37 days Tue 2/1100 Wed 3122/00

148 Develop a work plan 32 days Thu 3/23100 Fri 515/00

152 Recruit Poverty Adviser 139 days Fri 1(7/00 Wed 7/19/00

_.__ ._ ._ __ _ _ _ Y.165

166 Procure equipment for BOS 66 days Mon 413/00 Mon 713/00 I

172 Pilot CWIQ 100 days Mon 413/00 Fri 8 _8/00

W_ _ _19. rnpp Pag 2_1 2_ _

Wkplanl299.mpp Page 2 Fri 12/3/99

Annex 6Page 3 of 4

Annex 6: Summary of Project Workplan_ __ . _ _ ~~~_T__T

ID Task Name Duration Start Finish Sep Oct Nov Dec Jan Feb Mar Apr May

I Establish LFCD Office 158 days Mon 12113199 Wed 7119100

2 Recruit ED, Finance Director + Chief Accountant 81 days Mon 12113199 Mon 413100

14 Recruit Adviser to ED 139 days Fri 117100 Wed 7119100

27 Establish temporary LFCD Office for pre-op phase 20 days Wed 311100 Tue 3128100

34 Procure essential equipmentivehicle 66 days Mon 413100 Mon 713100

40 Systems Development 153 days Mon 1216199 Wed 715100

41 Establish basic financial accounting system 66 days Mon 1216199 Mon 316100

46 Institutional design consultant 51 days Tue 211100 Tue 4(11100

52 Prepare Manuals 48 days Mon 511100 Wed 715100

53 - Community assessment/planning manual 48 days Mon 5/1100 Wed 71/500

60 Community Implementation Handbook 40 days Mon 511100 Fri 6(23100

-1 ---- _________ __.,___ ____ ___ _

65 Consultations with Partners 40 days Mon 4117100 Fri 619100

66 Line Ministries 40 dayst Mon 4/17100 Fri 6/9/00

69 NGOs 40 days Mon 4117100 Fri 6(9(00

72 Information, education and communication campaiagn 113 days Mon 1110100 Wed 6114100

89 PRE-TESTS IN 22 COMMUNITIES (in 5 groups) 147 days Mon 511100 Tue 11121/00

90 Preparatory work for pre-test 20 days Mon 6/5/00 Fri 6/30/00

91 Recruit consultants for PRA 31 days Mon 511100 Mon 6112100

95 Pretest for Group 1 42 days Mon 7/3/00 Tue 8129/00

100 Pre-test for Group 2 42 days Mon 7124100 Tue 911 100


110 t Pre-test for Group 4 42 days Mon 9/4100 Tue 10131100


Wkplan1299.mpp Page 3 Fri 12/3/99

Annex 6Page 4 of 4

Annex 6: Summary of Project Workplan

ID Task Name Duration Start Finish Sep | Oct Nov Dec Jan Feb Mar Apr May120 Income-generating Activities 257 days Mon 5115100 Tue 518101

121 Recruit Consultant for Income-generating projects 101 days Mon 5115Y00 Mon 1012100

131 Reveiwmicro-credit+ IGP experiences in Lesotho 47 days Fri 1016100 Mon 12111100

136 Develop Plan of Action for IGP Component under LFCD 51 days Tue 12112100 Tue 2120101

141 Preparatory work for pre-tesUpilot 54 days Wed 2/21/01 Mon 5/7/01

142 Start a pre-test-pilot 1 day Tue 5/8/01 Tue 5/8/01 5/8

143

144 Establish a Poverty Monitoring Team in MODP 37 days Tue 211/00 Wed 3122V00

148 Develop a work plan 32 days Thu 3/23100 Fri 5/5/00

152 Recruit Poverty Adviser 139 days F 1D7100 Wed 7119100

165

166 Procure equipment for BOS 66 days Mon 413100 Mon 713100

12 Pilt CWIQ'p N FW172 Pilot CWIQ ~~~~~~~~~~~100 days Mon 4(3(00 Fri 8(118100

WkpIan1299.mpp Page 4 Fri 12/3/99


Organizational Structure for LFCD

2 Accounts Clerks SecretarISOR

Director~~~Ditic Ofie

Tecnical Advisor MaTec nialgfieren Fnanefso sar ,Am istati veAa.&Supr)t

l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~m o *11 3

|~~~~~~~~~~~~~~~~~~~~~~~sitn Ai uditor. Training Coept Director| etrjcEgnrl

|~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~omncto Assistara

CifAccountant Adrninistration Officer ProcuremwentAsitn Of oe Justiliration Clerk | _

AconatAmnsrtvIsitn Prcrmen sitn


LFCD Project Cycles for Technical Complex and Simple Sub-projects

NB:. Monitoring is a continuos activity throughout the project cycle. 3

a

| 4 SI~~~CMPLEX PROJET >f

. I .. ~~~~PROJECT CYCLEI

NB Moiorn isacniusatvt/hogottepoetcce_ r _ E \ / , _~~~~~~~~~~~~~~~~~~~~~~~~~~~3


Summary of Participatory Community Assessment

Background

1. In April, 1998, preliminary social data was gathered through a series of Participatory CommunityAssessments (PCAs) carried out from all 10 districts, in Maseru, and, in peri-Urban Maseru. A total of 22communities participated in the PCAs. The assessments were commissioned in order to inform theGovernment of the status of local institutions, perceived levels of poverty, and development needs andpriorities as articulated from local levels. Procedurally, the PCAs are also part of the participatoryapproach that has been adopted for formulating the LFCD strategies and processes.

Methodology

2. A local NGO carried out the PCAs using well-established principals and techniques from theParticipatory Learning for Action methodology. The five field teams most commonly combined datafrom focus groups, transect walks, community mapping, wealth ranking, seasonal calendars, and Venndiagrams, though the exact combination of techniques used in each community, was determined by thejudgment of each team and the local participants. Field teams collected gender-disaggregated data whereappropriate. Site selection for the PCAs was determined geographically: by district, level of urbanizationand remoteness from infrastructure and urban centers.

Findings

3. Poverty Levels: A total of 1,809 households were ranked: 16% self-ranked very poor, 51% self-ranked poor, 25% self ranked average, 8% self ranked rich. In summary, 67% of households wereconsidered to fall into the poorer categories.

4. Institutional Analysis: The most common community-based institutions were VillageDevelopment Committees (VDCs), Burial Societies, Stock Theft Societies and churches. Of these, thePCA found the function and reputation of the majority of VDCs to be questionable at best, mistrusted atworst. While both Stock Theft and Burial Societies often have bank accounts, their basic accounting andbook-keeping skills are weak. Finally, the PCA found no linkages among community-based institutions.

5. Community Links with Governmental, NGO and Private Sector: Such links were very specificto each community; and all were stated to be project-oriented rather than ongoing. For example, wheresome communities worked with government extension officers, others had (or used to have) an NGOimplementing a project. Significantly, the PCA points out that most of these projects were unsustainable.Thus many communities' experiences are with projects that did not succeed in the end. Or, as was foundin communities in the Katse Dam are of the Lesotho Highlands Water Project, with projects that they feeldamaged their lives so that they to prefer not to participate in any future development projects at all.

6. Development Needs/Priorities: In varying orders among communities and within theirpopulations, the major needs identified are: roads, footbridges, clinics, VIP latrines, donga rehabilitation,schools (pre, primary, secondary, evening for herd boys), farming co-operatives, dams for irrigation orfisheries, poultry projects, tree planting, electricity and markets. See table on page 4 of this annex foreach community's, gender-disaggregated priorities. Communities stated that they would provide localmaterials and labor (some voluntarily, others only if paid)

Annex 9Page 2 of 4

7. Lesotho Highlands Revenue Fund (LHRF): The majority of communities was unfamiliar, orhad unfavorable experience, with the LHRF. Communities feel considerably ill-informed about the LHRFand demand information sufficient for them to make informed choices.

8. Community Capacity: Basotho communities include a broad range of people from various socialgroupings. Communities therefore suggest that a local committee be elected for each sub-project toensure that different voices are represented. Many communities are dissatisfied with their VDCs whosestated responsibility is to oversee community development. However, to be effective, communities'recognize that elected LFCD sub-project committees must work closely together with the VDCs.Communities' experience working together and ability to organize varies considerably. NGOs could helpbuild community capacity particularly where their presence is known and where their own capacityexists.

9. Communities favored using locally available resources (human and material) wherever possibleto promote a sense of community ownership and local management capacity, and also to providecommunity members with skills and abilities for possible future employment.

Recommendations

Community Recommendations

10 Communities made the following recommendations with respect to how a fund for communitydevelopment should be implemented, managed, and kept sustainable. They recommend the followingimplementation measures:

* Local, transparent and accountable committees should be elected for each proposed developmentsub-project with specific roles and responsibilities

* Implementing and monitoring committees should be elected for short and long term+ Outside assistance is required for implementing sub-project activities* Communities should provide labor (some say only with pay)

In terms of management, communities recommend:

* Bank accounts for any sub-project funds* No cash system; checking systems with designated signatories necessary+ Annual audits* Bookkeeping and financial management courses for committee members* Donor follow-up and evaluation* Monthly financial statements presented to communities* Elected committees and VDCs need to cooperate* Support from Chiefs is important, and they should be responsible for local hiring

For sub-project sustainability, community recommendations include the following:

* Annual evaluation of sub-projects* Community contributions (money) for sub-project maintenance in established bank accounts* Sub-project committees elected annually, and evaluated on basis of quarterly reports+ Chief and VDC should provide security+ Technical assistance in implementation and management.

Annex 9Page 3 of 4

PCA Research Team Recommendations

11. The team of researchers carrying out the PCA adds the following recommendations:

* In order for elected sub-project committees to work hand in hand with elected sub-projectcommittees, as was suggested by communities, a redefinition of the roles and responsibilities ofthe VDCs is required. This is a sensitive and critically important institutional issue that requiresfurther deliberation and ultimately must be addressed by the Government

* To establish a genuine participatory approach, communities should be involved throughout thecycles of LFCD sub-projects. The Fund must continually revisit who is identifying, prioritizingand articulating the need for sub-projects, and who sets criteria for and takes decisions about sub-project funding.

* Communities lack information about alternative assistance other than governmental, and thishinders their ability to make informed choices. A comprehensive, ongoing information andeducation campaign is essential to the success of the LFCD.

* Piloting the LFCD in the communities who participated in these PCAs; demonstrating follow-through would enhance the credibility of the LFCD and distinguish it from its predecessor.

Conclusion: Using the PCA findings for monitoring and Evaluation

12. The PCAs provide rough baseline quantitative data on number of households, householdcomposition, community assets and other common property resources. Also importantly, the PCAs are asource of qualitative baseline data indicating communities' experiences and expectations. Thesequalitative findings should be monitored in the same PCA communities, as they participate in the LFCD,as well as in communities not in the sample but benefiting from the LFCD, and in communities that arenot receiving LFCD benefits. PCA data has shown gender differentiation of needs and priorities.Therefore monitoring and evaluation should seek gender differentiated data on perceived benefits ofLFCD sub-projects.

Annex 9Page 4 of 4

Annex 9, Table A: List of Priority Sub-projects Identified by 22 Communities

District Priority 1 Priority 2 Priority 3 Priority 4 Priority 5Communt

Mahatseng W road bridge school toilets evening class,______________ __________________ _______________ for herd boys

M road toilets sch. kitchen clinic bankThaba Moea W water mortuary feeder roads bank toilets

-M I water feeder roads mortua market

Bobatsi W road taps _ VIP toilets footbridge nursery sch.M footbridge water supply prim. school road handicraft sch.

Ha Seotsa road clinic sec, school VDC school water pipes

Ha Rankakala road/bridge donga rehab/trees police station nursery sch. clinic/arnbulanceHa Moshebi W water bridge roads health/doctor education

M erosion control bridge wool shed mortua voc sch.

Sebelekoane W road bus taps poultry project sewing mach.M ag. ext. for ag. prod. road feeder roads pre- & voc. sch. police station

Masemousa W no info on prioritiesHa Sechaba M_ _

Mekaling road donga control dams clinic tractorsHloahloeng road spring protection brid e hammermill VIP toilets

Moyeni < < community taps street lights donga tree planting road_______________ _______ _______ ___ __ ____rehab/dam

Ha Makheta, road water supply clinic VIP toilets sec. sch.Qhoaling I I I

Malefilona roa car bridge clinic high sch. VIP toiletsMotete road to B-B maliba-matso motete roads toilets

| Pela-Ts'oeu _ | road clinic coop spring protectionHa Kanono well built houses IItaps I toilets Road re sch

t . _ _ _._ __simmomomBaking W clinic trees to control voc. sch. dams footbridge

erosion _

M road footbridge renew dam donga rehab ag. ext.Ha Mapa W clinic erosion control mortuary toilets prim. ed.fI If m M tbridge t tsela gclinic erosion control education

Ha Seeiso Cl W I bridge road toilets public transpt. nursery sch.| | M | road toilets brdge footbridge nursery sch.

Makhaleng W water clinic road hammermill fruit/veg market

Lestunyane W road & 2 footbridges clinic post office reduce sch fees sec.sch.M road & 2 footbridges post office mortuary protected water irrigation/dams/

I I I I _________ _ ________________ _______________ supply fishery...Lesala W doctor mortuary road to Ketane tractor wheat harvest

I I I I __________ _ ___ ______________ I ______________ _______________ m achineI |`M | road | hospital & sekoto sa Machinery market

_______________ ________________ _ |mortuary I mothamo

Annex 10Community Development Support ProjectProject Processing Budget and Schedule

A. Project Budget (US$000) Planned Actual(At final PCD stage)

B. Project Schedule Planned Actual(At final PCD stage)

Time taken to prepare the project (months)First Bank mission (identification) July, 1997 July, 1997Appraisal mission departure June, 1998 February 20, 1999Negotiations July, 1998 May 17-19, 1999Planned Date of Effectiveness September, 1998 (est. April 1, 2000)

Prepared by: Ministry of Development Planning

Preparation assistance: Japanese PHRD GrantNo. 29235

Bank staff who worked on the project included:

Name SpecialtyNorbert Mugwagwa Social Funds (TTL from July 1998)

Ann Duncan Poverty/Human Resource Devt. (TTL up to June 1998)Chiyo Kanda HR Development/Economics (Deputy TTL)

Timothy Marchant Poverty Monitoring/M&EKam Chetty Decentralization/Institutional DevelopmentLori Geurts Task Team Assistant

Susan Jacobs Social Development/NGOsJacomina de Regt Operational issues/APLsSteen Jorgensen Social fund design and operations (Peer Reviewer)

T. Mpoy-Kamlayi LawyerElizabeth Adu Lawyer

Francesco Sarno ProcurementV.S. Krishnakumar Procurement

Steve Gaginis DisbursementAnthony Hegarty Financial Management

Annex 1 1Community Development Support Project

Documents in the Project File*

A. Project Implementation Plan

* Legal Notice for LFCD No. 16 of 1999, dated March 10, 1999* Operational Manual for Lesotho Fund for Community Development* Time table for project implementation* Job description for key MU staff for the LFCD* Terms of reference for Poverty and Social Policy Adviser (for Poverty Monitoring)* Financial Management Action Plan

B. Bank Staff Assessments

* Aide Memoire and Annexes from June 1998 mission (pre-appraisal)* Aide Memoire and Annexes from February 1998 mission (appraisal)

C. Other

* Report for stakeholder consultations workshop (Design Workshop) in December 1997* Report for the LFCD's Governance Workshop* Report for regional stakeholder consultation workshops* Report for study tours to Malawi and Ethiopia social funds* Reports for the Participatory Community Assessment (4 volumes and a consolidated

summary)* Report for stakeholder consultations workshop (Decision-making Workshop) in June 1998* Environmental Analysis of the Lesotho Community Development Support Project

*Including electronic files.

Annex 12Statement of Loans and Credits

Community Development Support Project

Difference betNeen expecand gua

Original Amount In US$ Mlilons disbursemensPtoject ID FY Bormwer Purpose IBRD IDA Cancel. Undisb. Orig Fffn Re

Number of Closed Projects: 23LS-PE-56416 1999 KINGDOM OF LESOTHO SECOND EDU SEC DEVP 0.00 21.00 0.00 20.07 0.00 0.0

LS-PE-1402 1998 GOVERNMENTOFLESOTHO AG POL & CAP BLDG 0.00 6.80 0.00 6.82 1.2 0.0

LS43E-1409 1998 GOVERNMENT OF LESOTHO HILAND UWATER lB 45.00 0.00 0.00 45.00 10.00 0.0

LS-PE-1403 19i6 GOVERNMENT ROAD REHAB. & MAINT 0.00 40.00 0.00 32.17 21.02 I1.

Total: 45.00 67.80 0.00 104.06 3Z22 13.9

Active ClosedProjects Projects Total

Total Disbursed (IBRD and IDA): 10.40 251.75 262.15of which has been repaid: 0.00 22.84 22.84

Total now held by IBRD and IDA: 123.80 229.87 353.67Amount sold: 0.00 0.00 0.00

of which repaid: 0.00 0.00 0.00Total Undisbursed: 104.06 9.17 113.23

'Actual disbursements to date minus intended disbursements to date as projected at appraisal.

LESOTHOSTATEMENT OF IFC's

Held and Disbursed Portfolio

In Millions US Dollars

Committed Disbursed1FC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

Total Portfolio:

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

Annex 13Country at a Glance

Lesotho at a glance 9/3/99

Sub-POVERTY and SOCIAL Saharan Low-

Lesotho Afrlca Income Development diamond'1998Population, mid-year (millions) Zt 628 3,515 Life expectancyGNP per capita (AUas method, USS) 570 480 520GNP (Atlas method, USS billions): 1.2 304 1,844

Average annual growth, 992-98

Population (%) 22 6 1.7Laborforce (%) Zs 2.8 1.9 GNP Gross

i f;i; ~~~per I 7 Ipnmary Most recent estimate (latst year available, 1992-98) capita enrollment

Poverty (% of,populabion below natonal povertyline) 49Urban population (% of tota population) 28 33 31Life expectancy at birth (years) 56, 51 63Infant mortality (per 1,O00 live births) 93 91 69Child rnalnutrition (% of children under 1 16 .. .. Access to safe waterAccess to safe water (% of population) 62 47 74Illiteracy (% ofpopulationage 15+) 18 42 32 -Gross primary enrollment (% of school-age population) 108 77 108 Lesotho

Male 102 84. l113 Low-income groupFemale 114 69 103 _ ___ _

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1977 1987 1997 1998Economic mtos'

GDP (US$ billions) 0.19 0.37 1.02 0.87Gross domestic investment/GOP 25.0 45.4 85.5 : rradeExports of goods and serviceslGDP 10.7 16.3 32z5 33.5Gross domestic savings/GDP -74.S -70.0 -9.8 -42.7:Gross national savings/GDP -58:0 -41.5 47.2 14.5

Current account balancelGDP -90.2 -89.0 -26.3 -27.2Interest payments/GDP 0.1 1.5 1.8 2.4 la%rrnc Investm entTotal debt/GDP 12.7 69.9 64.6 80.0 s IvsenTotal debt service/exports 0.2: 3.5 6. 6.18Present value of debtWGDP .. .. 48.4Present value of debt/exports . , 6Z4.4

Indebtedness1977187 1988-98-9 1997 1998 1999-03

(average annual growth)GDP 1.8 .t7 8.0 -3.6 5.8 - LesothoGNP per capita 402 t.3 2.1 -5.4 3.8' Low-income groupExportsof goods and services 1.6 8.0 19.1 15.8 12.61 _ _ __ __ __ _

STRUCTURE of the ECONOMY1977 1987 1997 1998 Growth ofoutputandinvestment(%)

(% of GOP) 30Agriculture 34.3 20.1 11.5 11.5 20Industry 15.5 32.5 42.0 42.0 10.

Manufacturing 5.0 14.9 17.2 ..

Services 50.2 47.5 46.5 46.5 *o_ 94 os s 07

Private consumption 157.2 147.2 82.0 120.9 -20General govemment consumption 17.4 22.8 27.8 21 7GDf -- GDPImportsofgoodsandservices 110.2 131-.8 127.8 124.7

197747 1988-98 1997 1998 Growth ras of exports and imports (%)(average annual growth)Agncutture -5.6 2.3 0.7 4.6 40

Industry 4.1 10.3 1.1 -12.3 30Manufacturing 16.5 5.3 .. .. 20

Services 4.3 6.0 6.6 4.8 I:

Private consumpton 1.4 -2.7 13.8 5.0General govemment consumption 8.0 4.4 17.0 0.9 95 90 97 "

Gross domestic investment 2.0 13.3 3.5 -10.4 .90Imports of goods and services 2.3 1.6 11.9 1.6 - Expos lmponsGross national product 2.4 3.6 4.5 -3.1

Note: 1998 data are preliminary estimates.

The diamonds show four key indicators in the country (n bold) compared with In Income-group average. If data are missing, the diamond witlbe incomplete.

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