US embassy cable - 05MASERU214

UNCLAS SECTION 01 OF 02 MASERU 000214 
 
SIPDIS 
 
AIDAC 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, ETRD, LT, AGOA 
SUBJECT: LESOTHO FACES UP TO ITS DEVELOPMENT CHALLENGES 
 
 
1.  SUMMARY:  The Government of Lesotho and the country's 
private sector held a three-day World Bank-sponsored Private 
Sector Development Forum from April 6-8, 2005 to identify and 
map out modalities for eliminating infrastructure, training, 
administrative and legal impediments to private sector growth. 
As a landlocked country, an imperative aspect of Lesotho's 
development was identified as its integration with the economies 
of South Africa and other countries of the region.  The meeting 
also looked at value chain analyses of selected strategic 
sectors, and recommended interventions for enhancing the 
country's productivity in an increasingly competitive 
international trade regime.  World Bank studies carried out in 
2004 looked into Lesotho's company registration and licensing 
procedures; immigration and customs services; incentives for 
investors; the financial sector; technical and vocational 
education - all of which were found to be cumbersome, antiquated 
and not friendly to investors, be they local or foreign.  The 
country's system of technical and vocational training was found 
to be unresponsive to the skills demands of active sectors of 
the economy.  Recommendations by working groups on each of the 
major topics are expected to form part of an Aide Memoire 
between the GOL and the World Bank.  This will outline specific 
project actions that need to be undertaken.   END SUMMARY. 
 
2.  Setting the tone for a new era of cooperation in reforming 
the environment for private sector growth,  Prime Minister Mr. 
Pakalitha Mosisili cited the ninety days it takes to register a 
company in Lesotho, contrasting it to two days in Canada. 
(Note.  In considering Lesotho's   qualification  to compete for 
funding in 2004, the Millenium Challenge Corporation also 
identified this lengthy process as substantially above the 
average among MCC countries.  End Note.)   In addition, the 
Prime Minister identified an added barrier as "the high cost and 
poor services encountered from the staff during the process of 
registering a company"  On immigration and customs services, he 
singled out an example of an investor who, rather than being 
granted an entry visa at the point of entry, was turned away 
from the South Africa/ Lesotho border near Maseru to apply for 
an entry visa at the offices of the Lesotho High Commission in 
Pretoria, five hours away. He called on participants to 
consolidate the gains made in the textile sector by retaining 
existing investors and diversifying both the country's markets 
as well as its export portfolio. 
 
Following are some of the major themes of the Forum. 
 
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TEXTILE INDUSTRY VULNERABLE TO EXTERNAL SHOCKS: 
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3.   Forum participants identified the garment industry as an 
important engine of growth which needed to be consolidated.  The 
dominance of the sector and its dependence on a single market, 
the United States, however rendered the country vulnerable to 
external shocks.  A consultant of ComMark (a non-profit 
organization funded by the UK to assist the garment industry) 
observed that the closure of seven factories employing 6,700 
workers since January 2005, could not be attributed to the end 
of the Multi-Fiber Agreement, but rather to the exchange rate 
between the Loti (which is pegged at par with the South African 
Rand) and the USD, which has shrunk profit margins in the face 
of increasing production costs. 
 
4.  Lesotho's inputs for the production of knit apparel are all 
sourced from outside the country, which renders the industry 
hostage to the inefficiencies in the delivery and sourcing of 
inputs.  Rail transport from the South African ports of Durban 
and Port Elizabeth is slow, and the Maseru Container Terminal 
inadequate for increasing traffic.  Transport of finished 
products to the ports is through trucks which make a shorter 
delivery time, although more expensive because of the rising 
cost of petrol. 
 
5.  Unlike woven fabric production, which is vertically 
integrated in the country, the knit fabric sector will be 
exposed to fabric sourcing shocks in 2007, when Lesotho's third 
country fabric allowance under AGOA expires. 
 
6.  Although Lesotho is the biggest exporter of textiles to the 
U.S. in volume terms, the value of its products per square meter 
has consistently been  lower than that of Mauritius, which 
concentrates on higher value apparel products like woven 
blouses.  The decision to move in this direction however cannot 
be made in Lesotho, whose industry consists of cut-make-and-trim 
production lines whose orders, contracts and input supplies and 
sourcing are decided by parent companies in the Far East. 
 
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LABOR COSTS AND PRODUCTIVITY: 
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7.  The textile industry in Lesotho has not traditionally 
invested much in the development of local skills. New recruits 
are  taught single machine skills over a short period of time. 
Cushioned by readily available, low wage employees, Lesotho 
managers have concentrated rather on meeting targets and 
deadlines at the expence of sharpening productivity. 
 
8.  In order to move towards higher value apparel, the industry 
would be forced to improve labor skills and productivity. 
Although Lesotho's labor costs are competitive, the operator 
productivity within the industry remains lower that competitors 
in the region, including Mauritius and Kenya.  Furthermore, the 
in-line defect rate is high, resulting in the need for 
additional labor input to make the required corrections during 
the finishing stages of production.   In cases where 
inefficiencies exist on sewing lines, the tendency has been to 
allocate more machinists to the problem, which results in the 
use of more manpower, adding further to the cost of production. 
 
9.  Another evidence of lack of skills is the high concentration 
of expatriate supervisors and line managers who are paid higher 
salaries than local employees .  This contributes to high 
overhead costs and animosity among Basotho who feel they have a 
right to hold these positions in industries located in their 
country although substantial experience and training will be 
required to achieve such levels. 
 
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LEGAL FRAMEWORK: 
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10.  The legal framework around registering and licensing of 
businesses was found to be lengthy, cumbersome and unnecessarily 
costly for the private sector.  Equally time consuming are 
procedures for obtaining residence permits for expatriate staff 
of foreign companies operating in Lesotho.  Resolutions at the 
conference called on the government to speedily enact reform 
bills to the Companies Act of 1967 to comply with 
internationally acceptable norms.  A similar recommendation was 
made regarding the Aliens Control Act of 1966, which governs the 
country's immigration and passport services. 
 
11.  The GOL was commended for its responsiveness to concerns 
raised by foreign investors.  These included the provision of 
infrastructure and recent interventions to speed up the process 
of Value Added Tax refunds by the Lesotho Revenue Authority. 
Identifying the local private sector as equally important in 
entrenching economic gains made to date, the conference advised 
the government to extend its incentive package to the local 
investors as well. 
 
12.  COMMENT: 
 
The forum was a good opportunity for the GOL to commit to 
improving service delivery to the private sector, be it foreign 
or local.  The reluctance, or slowness of the government to 
enact legislation  around issues of land reform women's rights, 
company registration, to name but a few, does not augur well for 
the immediate future.   Action on several legislative fronts has 
been further slowed by preparations for the April 30 first local 
elections and follow-up integration of newly-elected officials. 
 Nevertheless, these stated commitments will have to be followed 
up with quick action, because pending donor assistance for the 
country, including access to Millennium Challenge Account funds 
depends on implementation of reforms as well as other factors. 
The conference further created an opportunity for increased 
coordination between donors, who have displayed a strong 
commitment to provide Lesotho with technical and financial 
support to implement actions that promote private sector growth. 
 END COMMENT. 
 
 
 
 
 
 
 
 
 
PERRY