Report No. 23407 Kingdom of Lesotho Country Assistance ... · by not insisting on the inclusion of the Muela power plant as an integral part of the project under the management of

Report No. 23407

Kingdom of LesothoCountry Assistance Evaluation

December 27, 2001

Operations Evaluation Department

Document of the World Bank

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Acronyms

AfDB African Development Bank LHRF Lesotho -Highlands Revenue FundAIDS Acquired Immunodeficiency Syndrome LHWP Lesotho Highlands Water ProjectASIP Agricultural Sector Investment Program LIL Learning and Innovative LoanBCP Basotho Congress Party LNDC Lesotho National Development CorporationBNP Basutoland National Party LSMS Living Standards Measurement SurveyCAE Country Assistance Evaluation LTC Lesotho Telecommunications CorporationCAS Country Assistance Strategy LWSC Lesotho Water and Sewage CorporationCODE Committee on Development Effectiveness MOE Ministry of EducationCWIQ Core Welfare Indicators Questionnaire NDP National Development PlanESAF Enhanced Structural Adjustment Facility NGO Nongovernmental OrganizationESDP Education Sector Development Project ODA Official Development AssistanceESW Economic and Sector Work OED Operations Evaluation DepartmentEU European Union PER Public Expenditure ReviewFAO Food and Agricultural Organization of the PFP Policy Framework Paper

United Nations PRSP Poverty Reduction Strategy PaperFIA Financial Institution Act PSD Private Sector DevelopmentGDP Gross Domestic Product PSR Project Status ReportGNP Gross National Product QAG Quality Assurance GroupHIV Human Immunodeficiency Virus RSA Republic of South AfricaHNP Health, Nutrition, and Population Sector SACU South African Customs UnionIBRD International Bank for Reconstruction and SADC South African Development Corporation

Development SAF Structural Adjustment FacilityICR Implementation Completion Report SEOR Strategic Economic Options ReportIDA International Development Association SIDA Swedish International DevelopmentIFC International Finance Corporation AuthorityIMF International Monetary Fund SSA Sub-Saharan AfricaIPA Interim Political Authority UNDP United Nations Development ProgramI-PRSP Interim Poverty Reduction Strategy Paper USAID United States Agency for InternationalLADB Lesotho Agricultural Development Bank DevelopmentLEC Lesotho Electricity Corporation WASA Lesotho Water and Sewage AuthorityLHDA Lesotho Highlands Development Authority

Director-General, Operations Evaluation Mr. Robert PicciottoDirector, Operations Evaluation Department Mr. Gregory K. IngramManager, Country Evaluation & Regional Relations Mr. Ruben LamdanyTask Manager Mr. Fareed M.A. HassanPeer Reviewers Mr. Shantayanan Devarajan

Ms. Alice Galenson

The World BankWashington, D.C. 20433

U.S.A.

Office of the Director-GeneralOperations Evaluation

December 27, 2001

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Lesotho Country Assistance Evaluation

This Country Assistance Evaluation was prepared in collaboration with theAfrican Development Bank. Lesotho's economic and social development in the 1990sand the development challenges facing the country were assessed jointly; the roles of eachinstitution over the decade were evaluated in parallel. This evaluation was discussed byCODE on November 26, 2001 and a report of that discussion is included asAttachment E.

Lesotho is a poor, small, mountainous country of about two million(predominantly rural) people. The country is landlocked and completely surrounded by,and economically dependent on, South Africa. Its economy is based on limitedagricultural and pastoral production and light manufacturing (textile, clothing, andleather) supplemented by large, though declining, remittances from Lesotho miners inSouth Africa. Recently there have also been royalties from exporting water to SouthAfrica through the Bank-supported Lesotho Highlands Water Project (LHWP).

A major development challenge for Lesotho is that half the population lives belowthe poverty line and income inequality is among the highest in the world. Otherchallenges are low quality of education and health services, widespread HIV/AIDS, weakinstitutions, and lagging private sector development. External aid to address these issues,though declining, is higher per capita than the regional average. Despite somemacroeconomic successes, political instability and weak governance continue to constrainthe country's development, reducing government ownership of programs and hamperingimplementation.

World Bank assistance evolved from an emphasis on stabilization and growth to afocus on poverty reduction and private sector development in the latter part of the 1990s.The Bank supported joint work with the government and the IMF on successive PolicyFramework Papers throughout the 1990s. The Bank also supported a jointly-preparedPoverty Assessment, and a Strategic Economic Options Report, in which the governmentcharted its post-apartheid economic strategy. But other planned analytical work was onlypartially carried out. Notably absent were periodic reviews of public expenditures. TheLHWP was the most important of Bank programs, but education, health, agriculture andrural development, and private sector development also received support.

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The successful macroeconomic policies and the substantial impact of constructionin the LHWP helped Lesotho achieve an average annual GDP growth of close to 4percent during the 1990s. Although the Bank financed less than 4 percent of the first-phase LHWP cost of $3.7 billion, it facilitated an agreement between South Africa andLesotho, served as a catalyst in securing external financing, and advised on projectformulation and implementation. Although the LHWP succeeded in generatingsustained export revenue for Lesotho, the Bank did not provide adequate technicalsupport for improving rural welfare from the proceeds of water sales. And the Bank erredby not insisting on the inclusion of the Muela power plant as an integral part of theproject under the management of the central oversight authority. This would havefacilitated Muela's financing and implementation, and also created an incentive forLesotho and South Africa to save on costs. Finally, with the exception of education, otherBank programs were ineffective.

The outcome of the Bank assistance program is moderately unsatisfactory. TheBank's contribution to institutional development was modest because most of theinstitutions established were weak and unsustainable. Sustainability is uncertain sincegrowth has depended on aid inflows linked to the construction of the LHWP, which arelikely to decline. In addition, the economy remains vulnerable to changes in thesubregion. An improved environment for growth and private sector developmentdepends also on enhanced political stability and better governance, and on deeperparastatal reform. Prospects for all of these changes are uncertain.

This evaluation recommends that future World Bank assistance should continue tocenter on reducing poverty and inequality. It should do this by focusing on the quality ofeducation and human capital development (particularly in the poor mountainous regions),combating HIV/AIDS, strengthening rural institutions (such as improved land tenure,research, extension, and grazing management), and enhancing the enabling environmentfor private sector development. Given the severe data gaps in almost all sectors, the Bankshould help Lesotho improve its statistical database, most urgently in areas related topoverty reduction, and promote monitoring and evaluation systems. The Bank'sconsultation with donors on development priorities could be enhanced by a strongeroperational representation in Maseru, or more frequent interaction with the governmentand development partners from the Bank's office in Pretoria.

Contents

Preface

1. Lesotho's Political, Economic and Social Development ....................................................1

The Economy .......................................................... 1Poverty, Inequality, Social Conditions, and Gender Bias: Low Welfare Levels ...................3High but Declining Aid .......................................................... 5

2. Development Challenges and Constraints .......................................................... 6

Poverty Reduction: The Overarching Objective of Lesotho's Development .........................6Human Capital Development: Key for Jobs .......................................................... 6HIV/AIDS: A Formidable Challenge .......................................................... 6Institutional Capacity: A Major Weakness .......................................................... 7Private Sector Development: Key for Growth .......................................................... 7Political Instability: A Challenge and a Constraint to Sound Governance .............................7

3. World Bank Services and Products .......................................................... 7

Policy Dialogue and Strategic Analysis .......................................................... 8Economic and Sector Analysis ......................................................... 15Lending ......................................................... 17

OED Findings on Closed Projects ......................................................... 17Efficiency of World Bank Assistance ......................................................... 19Portfolio Performance: Quality Assurance Group (QAG) Assessments ........................ 19

4. The Development Effectiveness of World Bank Assistance ............................................ 20

Macroeconomic Outcomes ......................................................... 20Rural Development and Poverty Reduction ......................................................... 21Human Capital Development ......................................................... 23Private Sector Development ......................................................... 24

Fareed M.A. Hassan was the Task Manager for this report and acknowledges with thanks thecontributions by Oladeji Ojo (AfDB), Ellen Goldstein (OEDCR), Guy Le Moigne (Consultant), KevinLumbila (OEDCR), and Jack van Holst Pellekaan (Consultant). Oliver Rajakaruna and DinaraSeijaparova provided statistical information, and Norma Namisato, administrative support.

Contents (cont.)

5. Attribution of Performance of Development Partners .................................................... 26

World Bank Performance ........................................................... 26Borrower Performance ........................................................... 27Aid Partner Performance Issues ........................................................... 28Exogenous Factors ........................................................... 29

6. Conclusions and Recommendations ........................................................... 30

Bibliography .. 33

Boxes

1.1 A Brief Political History of Lesotho .23.1 Lesotho-World Bank Strategies .93.2 The Lesotho Highlands Water Project (LHWP) .123.3 The LHWP - Dam Safety, Environment and other Bank Safeguards

and Guidelines .14

Figures

1.1 Number of Lesotho Miners in RSA and Remittances, FY89-99 .31.2 GDP and GNP Growth Rate, FY91-00 .33.1 Net Disbursements and Net Transfers .17

Tables

1.1 Lesotho's Poverty and Inequality Profile, 1993-99 .41.2 Social Indicators in Lesotho and Comparator Countries .51.3 Official Development Assistance (ODA), annual average, 1990-94 and 1995-97 . 53.1 Relationships Between 1995 Poverty Assessment, Country Assistance Strategies,

Lending, and Outcomes for Major Programs .13.2 Sectoral Distribution of Bank Lending (FY66--99) .173.3 OED Evaluation Findings of Recently Evaluated Projects (Exit FY90s) .18

Annexes

1.1 Selected Social and Demographic Indicators of Lesotho, SADC, and SSA, 1980 .............. 351.2 Selected Social and Demographic Indicators of Lesotho, SADC, and SSA, 1997 .............. 361.3 Annual Assistance to Lesotho and Comparator Countries, average 90-97 .......................... 372.1 The Incidence of AIDS in Lesotho, SACU, SADC, SSA, and Worldwide

by the End of 1999 ........................................................... 38

Contents (cont.)

3.1 1995 Poverty Reduction Action Plan ................................................................ 393.2 Lesotho: List of Economic and Sector Work and Country Assistance Strategy .. 403.3 Costs of World Bank Programs for Lesotho and Comparator Countries, FY91-99:

a. Total Costs ................................................................ 41b. Efficiency Table ............ 42

3.4 OED and QAG Ratings for Lesotho and Comparator Countriesa. OED Ratings ............ 43b. QAG Ratings ............ 43

3.5 Summary Evaluations for Projects Closed since FY90 or Ongoing . . 443.6 Ratings Glossary and Definitions .......................................................... 454.1 Lesotho at a glance .......................................................... 464.2 Key Economic Indicators for Lesotho and Comparator Countries, 1990-00 . . 484.3 Lesotho - World Bank's Senior Management, CY91-01 ..................................................... 494.4 Private Sector Development, 1995-01 .......................................................... 504.5 The Muela Hydropower Plant .......................................................... 515. Summaries of the CAE Background Papers:

a. World Bank Support for Human Capital Development in the 1990s .............................. 52b. Poverty Reduction and Rural Development ...................................................... 58c. Evaluating Bank Assistance to Lesotho for Private Sector Development ....................... 61d. Water Sector Strategy Review ...................................................... 63

Attachments

A. The Executive Summary of the African Development Bank's Report. . 67B. Comments from the Government of Lesotho .. 69C. Comments from the Country Team for Lesotho .. 77D. Management Action Record .. 79E. Report from CODE .. 81

Preface

This is the first time that the Operations Evaluation Departments of the World Bank andthe African Development Bank have collaborated in evaluating their assistance programs forLesotho. The reviews of Lesotho's economic and social development since 1990 and thedevelopment challenges facing the country were prepared jointly and are common to theevaluation reports of both institutions. The assessment of the role of each institution during the1990s was prepared in parallel, but methodologies differ, and thus, the evaluation results are notalways comparable. The Executive Summary of the African Development Bank's report ispresented as Attachment A.

This Country Assistance Evaluation (CAE) looks at the effectiveness of World Bankassistance during the 1990s from three perspectives: the outcome of the Bank's services andproducts, the Bank's development impact, and the attribution of outcomes to the Bank and itsdevelopment partners. The evaluation builds on background studies prepared by consultants andOperations Evaluation Department (OED) staff. It draws on internal World Bank reports, onextensive interviews with government and Lesotho Highlands Development Authority officials,Bank staff at headquarters and at the Bank's office in Pretoria, and with donors, NGOs, and civilsociety. Summaries of the background studies are presented as Annex 5. The backgroundpapers are available on request. A joint AfDB-OED mission visited Lesotho from May 29 toJune 12, 2000. The mission also visited South Africa and the various project sites of the LesothoHighlands Water Project, including some resettlement villages. The visit was facilitated byarrangements made by staff of the Lesotho Highland Development Authority. The contributionsand cooperation of all those who assisted the mission are gratefully acknowledged.

The report is organized as follows: Chapter 1 assesses Lesotho's economic and socialdevelopment. Chapter 2 identifies the major development challenges facing Lesotho. Thesubsequent chapters examine the effectiveness of World Bank assistance in addressing thesechallenges from the three perspectives mentioned above. The last chapter presents conclusionsand makes recommendations for the future.

The assistance of peer reviewers in providing detailed comments on an earlier draft isgratefully acknowledged. Those, as well as other comments received during the one-stop reviewmeeting, have been taken into account in the evaluation. Comments from the Government ofLesotho and from the regional staff (Attachments B and C, respectively) have also been fullyreflected in the report. The evaluation was discussed by CODE on November 26, 2001 and areport of that discussion is included as Attachment E.

I

1. Lesotho's Political, Economic and Social Development

1.1 Lesotho which is landlocked and completely surrounded by the Republic of South Africa(RSA) has had a tumultuous history. Established as a British protectorate in 1868, Lesothobecame an independent constitutional monarchy in 1966, with a parliamentary system ofgovernment. But Lesotho's democratic process remains fragile, marked by conflict between twomajor political parties-Basutoland National Party (BNP) and Basotho Congress Party (BCP)-as well as by power struggles between civilian and military regimes. Since independence, therehave been four military coups and 23 years of authoritarian rule, including seven years ofmilitary government. Elections have been generally contested by the opposition parties andfollowed by civil unrest, army mutiny, and intervention by RSA to restore order (Box 1.1).

1.2 The 1990s saw these political upheavals escalate. After a 1993 election, a newconstitution was introduced, but the one-sided result led to tensions between the newly electedBCP government and the military. A short-lived palace-led coup d'etat followed, resulting insubstantial labor unrest in 1994 and the king's death in 1996. Another one-sided election in May1998 brought more conflict over the allocation of political power. The intervention of troopsfrom RSA and other neighboring countries to quell riots in September 1998 had major politicalrepercussions, the impacts of which are still felt throughout Lesotho. An Interim PoliticalAuthority (IPA) was created to review Lesotho's electoral system and to prepare for newelections within 15-18 months. That period passed without any elections, and a new electiondate is set for the second half of 2002, but it is possible that it will be postponed once again.The continued political uncertainty has hindered Lesotho's economic development.

The Economy

1.3 Lesotho is a poor country-its GNP per capita was $540 in 2000, at par with the averagefor Sub-Saharan Africa ($500) but well below RSA ($3,020). Eighty percent of the populationof nearly two million lives in rural areas. Two thirds of the country's area is mountains andsteep valleys with a temperate subtropical climate and erratic rainfall. Its economy is based onlimited agricultural and pastoral production and light manufacturing (clothing, textile, andleather) supplemented by large, though declining, remittances from Lesotho mineworkers inRSA and, recently, by the receipt of royalty for supply of water to RSA. Between 1990 and1999 the primary sectors (predominantly agriculture and livestock) accounted for 20 percent ofGDP with secondary sectors (including manufacturing and construction), and servicesaccounting for 38 percent and 42 percent respectively.

1.4 The country is encircled by and economically dependent on RSA. Ninety percent ofLesotho's imports come from RSA and 65 percent of its exports go there. The gold mines inRSA have been a major source of employment for Lesotho's labor force and remittances to theeconomy. The contraction of the South African gold industry, however, has, led to a sharpreduction in the number of Lesotho's miners in RSA from 127,000 in 1989/90 to 69,000 in1998/99. Consequently miners' remittances dropped precipitously from 62 percent of GNP in1989/90 to 18 percent of GNP in 1998/99 (Figure 1.1). Lesotho is a member of the SouthernAfrican Customs Union (SACU), sharing the customs receipts collected by SACU

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Box 1.1: A Brief Political History of Lesotho

Strong sense of independenceThe origins of Lesotho as a nation date back to the {9 th century, when King Moshoeshoe I rallied the Basotho from the

remnants of ethnic groups scattered in the region. In 1868, the king negotiated British protection as tension between Basothoand South African Boers increased, but in 1884 the British government took over direct responsibility for the protectorate.

In 1910, when South African provinces were united under the Union of South Africa, Lesotho remained under thecontrol of the British. South Africa assumed that it would ultimately annex Lesotho, but in 1964 a constitution adopted inLesotho provided for its independence as a constitutional monarchy, with the paramount chief serving as king, and with aparliamentary system of govemment. Beside the National Assembly there is a nonelective Senate, consisting mostly ofprincipal chiefs.

Series of electionsThe Basutoland National Party (BNP), headed by Chief lIeabua Jonathan, narrowly won the first election in 1966 at the

time of independence. Chief Jonathan became the first Prime Minister of independent Lesotho-under its king, Moshoeshoe1l---and remained Prime Minister for the next 20 years.

In 1970, an opposition party-Basotho Congress Party (BCP)- won the second election, but Jonathan retained powerby a coup. The constitution was suspended and the opposition banned, forcing its leaders into exile or into the mountainswhere they fought a low-key guerrilla war.

Rifts between Lesotho and RSAJonathan and his BNP party had initially supported cooperation with South Africa, but he adopted a more independent

foreign policy in the 1970s and 1980s, criticizing his neighbor's apartheid policies and giving refuge to members of theoutlawed African National Congress. Under pressure to reform, the BNP organized elections in 1985 but manipulatedthen-only BNP candidates stood for election. This resulted in growing opposition and intraparty strife and disunity in thearmy. In 1986 the army fought within its ranks when a faction supporting Colonel Sehlabo clashed with one supportingMajor General Lekhanya.

Annoyed by the BNP support of the African National Congress, South Africa mounted an economic blockade ofLesotho in early 1986. With South African help, Jonathan was soon overthrown in a military coup and replaced by MajorGeneral Lekhanya. A Military Council was established to rule the country in consultation with the king, and political activitywas banned. Relations between Lesotho and South Africa subsequently improved, with each country agreeing not to permitits territory to be used to mount attacks on or subvert the other.

More nmoderate forces take overIn 1991, the reorganized Military Council promised a new constitution and announced that political activity could

resume. A new constitution went into effect, following 1993 general elections. The elections resulted in a landslide victoryfor the antiapartheid BCP, led by Ntsu Mokhehle, who became Prime Minister. The party won all 65 constituencies on afirst-past-the-post electoral system with 78 percent of the popular vote. However, tensions between the new govemment andthe armed forces-where the BNP has a major influence-arose. A palace-led coup d'etat in August 1994 was reversed amonth later with political intermediation by neighboring SADC states. Also, 1994 witnessed significant labor unrest, thekilling of the Deputy Prime Minister, and the kidnapping by the police of four cabinet ministers. King Moshoeshoe It, whohad been dethroned in 1990 and had regained the throne in 1995, died in 1996 as a result of a car accident, and was succeededby his eldest son, Letsie 111.

Political instability remainsAfter a prolonged period of political instability, general elections were held in May 1998, in which a newly formed

party (Lesotho Congress for Democracy) within the ruling BCP won all but one of the 80 parliamentary seats with only 60.5percent of the popular vote. The results were contested by the opposition parties, which alleged widespread rigging. Thesubsequent protests led to civil unrest and an army mutiny in September. At the request of the newly elected government aSouth Africa-led SADC force was brought into Lesotho to restore order. A new Interim Political Authority (IPA) comprising24 members, two from each of the 12 largest political parties, was set up to promote and create conditions conducive to amore durable peace and to hold general elections by May 2000. They were not held and considerable uncertainty remains.

3

members (Botswana, Lesotho, Namibia, South Africa, and Swaziland) which are then distributedbased on a revenue sharing formula. Lesotho's share of SACU receipts rose from 12.6 percentof GNP in 1988/89 to 14.3 percent of GNP in 1998/99, largely because of the construction of theLesotho Highlands Water Project (see Chapter 3 and Box 3.2 for detailed discussion). Thesereceipts are expected to decline as LHWP-related activities wind down. The SACU revenue-sharing formula will be revised and tariff levels are envisaged to decline in line with tradeliberalization in the subregion, because the Southern African Development Cooperation (SADC)has agreed on a free-trade protocol for its members.' But the LHWP continues to have asubstantial impact on the economy. In 1998 the project accounted for 13 percent of GNP, 35percent of value-added in construction and 28 percent of government revenue (World Bank1999). Lesotho's currency (Loti) is pegged at par with RSA's Rand limiting Lesotho's monetarypolicy and raising the importance of a healthy fiscal policy and preserving the external balance.

1.5 GNP grew at an annual average rate of less than two percent during the 1990s, butdropped sharply in 1997/98 and in 1998/99 (Figure 1.2). This reversal was brought on by thesharp drop in LHWP-related investment, weak growth in agriculture and manufacturing onaccount of adverse weather conditions, and declining migrant remittances from RSA. Moreover,economic activity, particularly foreign direct investment, tapered off in response to the 1998 civilunrest.2 Lesotho's growth prospects over the medium term are expected to remain constrained asa result of (i) political instability and the uncertain outlook for foreign direct investment; (ii)continuing decrease in remittances; (iii) the expected drop in SACU receipts; and (iv) the declinein LHWP investment.

igiure 1.1: Nunber of Lesotho Miners In RSA ard Rernitances, Figure 1.2: GDP ard GNP Growth Rate, FY91 -DOFY8949

140 70 10

12i) -i0 8-_ __

c 100 500 Oo , 8-1

40~~~~~~~~~~~~~~~~~~~~~~~e 80 - - - - 40 S t 2 . ',+\

60 t 8 30 cO , -' \

O O~~~~~~~~~~- -1-33 . _ 96 S_ .'

89 90 91 92 93 94 96 98 97 9 99 -10

-6No of rinmaMrs(inthouands)-- -Mnere rances %OGNP I

Poverty, Inequality, Social Conditions, and Gender Bias: Low Welfare Levels

1.6 Lesotho's poverty and inequality remained extremely high during 1993-1999 (Table 1.1).The Gini coefficient for Lesotho is one of the highest in the world, implying that in a countrywith widespread poverty-half the population in 1999-many of the poor suffer extremedeprivation. The national average incidence of poverty changed little in the 1990s, except thaturban poverty moved slightly lower and rural poverty moved slightly higher, reflecting thesubstantial growth in manufacturing and services, the stagnation of crop agriculture and the

1 SADC members are: Angola, Botswana, Democratic Republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique,Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe.

2 A UNDP/World Bank mission estimated the total cost of reconstructing damaged properties at Maloti 160 million or $34million ("Post-conflict Needs Assessment," World Bank 1998b).

4

deterioration of the rangelands.' Poverty and inequality also have geographical, regional,occupational, and gender dimensions. Poverty is overwhelmingly rural: more than 80 percent ofpoor people live in rural areas and are concentrated among farmers, shepherds, women, and inthe country's mountainous regions. A major cause of poverty, unemployment, remainsextremely high-about 40 percent, according to the 1997 Labor Force Survey. While economicgrowth is an important prerequisite for improving welfare, strong economic performance during1994-97 was not accompanied by declining unemployment, poverty, or inequality.

Table 1.1: Lesotho's Poverty and Inequality Profile, 1993-99 (in percent)Rural Maseru (Capital) Other Urban All

1993 1999 1993 1999 1993 1999 1993 1999Incidence

Povertya 54 56 28 22 27 29 49 51Extreme Povertyb 29 37 14 10 11 15 26 33

Intensity (Poverty Gap)Poverty 27 30 13 22 12 27 24 30Extreme Poverty 10 14 4 11 5 14 9 14

Population Share 82 80 14 15 4 5 100 100Gini coefficient 0.55 n.a. 0.58 n.a. n.a. n.a. 0.57 0.60

The percentage of the population spending less than half of the mean consumption level; 'those consuming less 25 percent of the average.

Source: Sechaba Consultants (1994) cited in World Bank (1995); and Sechaba Consultants (2000). The data for1999 were prepared especially for the OED mission by Sechaba Consultants.

1.7 Lesotho's social indicators are generally better than the Sub-Saharan Africa (SSA)average, but below the SADC subregion average (Table 1.2 and Annexes 1.1 and 1.2). Forexample, Lesotho has one of the highest literacy rates in SSA. Due to inefficiency and poorquality of the educational system, however, only a small percentage of students reach the higherlevels.4 Consequently, Lesotho's secondary school enrollment is worse than the region andsubregion averages. Human Development Report 2000 ranks Lesotho as 127 'h out of 174countries based on its human development index (UNDP 2000).5

1.8 Despite progress in improving social indicators in recent years (Table 1.2), Lesotho'ssocial service delivery is weak. Health personnel are in short supply, health centers are notadequately equipped, and schools lack teaching materials. For instance, the population perphysician exceeds 20,000, double the average for SADC. The share of total governmentresources devoted to the health sector steadily declined during 1995-99 by about 7 percent in realterms. Moreover, the stated commitment to primary health care is not supported by the 30-40percent of recurrent health resources allocated to Queen Elizabeth II Hospital. Similarly, budgetpriorities and equity in the distribution of educational resources remain skewed, with theNational University of Lesotho absorbing about a fifth of all recurrent expenditure on publiceducation. In January 2000, the government started to phase-in free primary education and thefirst year of implementation witnessed increases in enrollments. With 80 percent of thepopulation in rural areas characterized by mountainous terrain and remote villages, the challengeof delivering social services is daunting.

3 The 2000 Interim Poverty Reduction Strategy Paper (I-PRSP) indicated a slight improvement in the national incidence ofpoverty in 1999 compared with 1993 (68 percent as opposed to 71 percent). CAE and I-PRSP estimates differ because the CAEestimates are on a per capita basis, the I-PRSP on a household basis.

4 Less than 4 percent of children entering primary school successfuilly complete secondary school and only 10 percent of studentsentering secondary school successfully complete that level (Goldstein 2001, p. 3).

5 The human development index is a composite index that measures a country's achievements in terms of life expectancy,educational attainment, and adjusted real income.

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1.9 Progress in improving quality of life in Lesotho has not been evenly distributed betweenmales and females (Table 1.2). Boys receive less education than girls. Lesotho's net primaryenrollment rate for boys is much lower than in the SADC subregion. The bias against boys andmen may stem from the fact that parents still view working in South African mines (having spenttheir youth herding livestock) as the most promising job prospect for males, an occupationrequiring physical strength and endurance more than literacy and numeracy. Because of thislong tradition of Lesotho men obtaining employment in South African mines, the number of defacto female-headed households is higher than in many other SSA countries. But Lesotho'swomen have the legal status of perpetual minors. For example, although the land act of 1979and the 1992 amendment provide tenure security to both women and men, women have limitedaccess to economic resources and services such as rural credit.

Table 1.2: Social Indicators in Lesotho and Comparator CountriesLesotho Comparator groups

1980 1997 Subregion (SADC) 1997 Region (SSA} 1997Life expectancy (years) 53 56 54 51Total fertility 6 5 5 5Infant mortality (per 1,000 births) 119 93 80 92Net primary enrollment (% of age group) 67 69 75 --

Male 55 63 75Female 80 74 75

Gross primary enrollment (% of age group) 104 109 106 78Male 85 103 106 85Female 122 114 105 71

Primary pupil-teacher ratio 48 48 39 34Gross secondary enrollment (% of age group) 18 29 37 30Adult illiteracy (% of pop. 15 years and older) 29 18 27 42

Source: World Bank, World Development Indicators (various issues); details in Annex 1. I and 1.2.

High but Declining Aid

1.10 Lesotho's per capita Official Development Assistance (ODA) exceeded the SSA average,but was at par with the SADC for 1990-97 (Table 1.3). Total ODA was high in the early 1990sdue to Lesotho's position as a frontline state during the apartheid era in South Africa, but since1994 it has declined steadily. IDA's net disbursements per capita to Lesotho over this period,representing less than 10 percent of the country's total ODA flows, were low relative to thecomparator countries, particularly small IDA eligible SSA countries (Annex 1.3). However,Lesotho received additional net IBRD disbursements per capita (for the LHWP) averaging $10.4per year over the 1990-97 period, indicating a high level of dependence on Bank resources.External assistance to Lesotho has been delivered in a setting of political uncertainty, whichcontinues to weaken the effectiveness of assistance programs. Also, there are considerabledifferences among donors in terms of assistance strategy because of different readings of thepolitical environment, resulting in different levels of commitment.

Table 1.3: Official Development Assi stance (ODA), an ual average, 1990-94 and 1995-97Lesotho SADC SSA

1990-94 1995-97 1990-94 1995-97 1990-94 1995-97Net ODA per capita (US$) 75 53 80 60 45 37Net AfDF-ODA per capita (US$) 8 4 4 1 8 1IDA commitments per capita (USS) 6 9 7 4 8 6IDA disbursements per capita (US$) 4 5 4 5 6 6

Source: OECD Geographical Distribution of Financial Flows to Aid Recipients, details in Annex 1.3.

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2. Development Challenges and Constraints

Poverty Reduction: The Overarching Objective of Lesotho's Development

2.1 GDP growth for agriculture, the sector that employs most of the poor, has beendisappointing-about 1.8 percent a year during the 1990s, a drastic reduction from 6 percent ayear during the second half of the 1980s. Population grew at an average annual rate of 2.6percent during the 1990s, indicating negative per capita growth in agricultural output.Agricultural GDP also suffers from wide yearly fluctuations in output, such as the drop of 16percent in GDP between 1991 and 1992 from droughts. Finally, Lesotho's agriculturalperformance was also below SSA's overall growth rate of 2.2 percent a year in the 1990s. Theslow agricultural growth has contributed to the stagnation of rural poverty (Table 1.1). Thesharp reduction in remittances from miners in RSA-on which many rural households dependfor their subsistence and resources for capital improvements-has also had an impact. For apopulation with shrinking nonfarm sources of income, lower remittances have seriousconsequences for food security in rural areas.

Human Capital Development: Key for Jobs

2.2 The size and unique geographic circumstances of Lesotho make it essential that humancapital be well adapted, not only to the domestic labor market but also to the wider regional andinternational markets. Meeting the challenges of the post-apartheid era requires a shift in thelabor force from largely unskilled miners and apartheid labor to skilled and semi-skilled workers.Thus, maintaining the competitiveness of Lesotho workers within the regional market willrequire sustained attention to the quality of education and training. Among the major challengeswill be reversing the trend of declining net enrollment rates for primary education, vastlyimproving outcomes and efficiency in primary and secondary education, adapting technical,vocational, and tertiary education to private sector demand in the regional labor market, andstriking an appropriate and sustainable balance in public funding for various levels of theeducation system.

HIV/AIDS: A Formidable Challenge

2.3 Lesotho is facing one of the most serious health and social welfare threats of the newcentury: HIV/AIDS. Based only on a very small sentinel surveillance system, UNAIDSestimates an adult (ages 15-49) HIV prevalence rate of 23.6 percent for Lesotho in 1999-one ofthe highest rates in the world (Annex 2.1). Lesotho can expect to see dramatic increases ininfant, child, and adult mortality rates, life expectancy and deliver the negative social, economic,and financial consequences of losing people in their most productive years. Lesotho's lifeexpectancy is estimated, based on a modest prevalence rate of 4.4 percent, to drop to 45 years by2010; without the presence of HIV/AIDS, life expectancy would have been 66 years (U.S.Bureau of Census 1999). More recent estimates (UNAIDS 2000) put the HIV prevalence rate sixtimes as high, only to dim the prospects for higher life expectancy even further-the differencein life expectancy, with and without AIDS, is projected to reach a staggering 31.4 years by 2015(World Bank 2000b, page 16). Preliminary estimates project that the annual loss of GDP growthdue to AIDS will rise from 0.6 percentage points in 2001 to 2.7 percentage points by 2015(World Bank 2000b, page 23). The impact of AIDS will be harder on the poor who are lesseducated about prevention and more vulnerable to rising medical costs and loss of income.

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Institutional Capacity: A Major Weakness

2.4 Inefficient government bureaucracy and limited absorptive capacity for externalassistance impede Lesotho's efforts to sustain broad-based growth and reduce poverty.Inadequate administrative and institutional capacity in many ministries and central governmentagencies appear to have seriously impeded policy formulation, coordination, and implementationfor long-term development. Data management systems are weak, raising concerns about thetimeliness and reliability of national accounts, poverty, and social data.

Private Sector Development: Key for Growth

2.5 Lesotho's labor force is growing at 25,000 new entrants a year, while the employmentabsorptive capacity is limited to about 9,000 a year (World Bank 2000a). The employmentproblems are made worse by the substantial retrenchment of migrant miners in RSA. Lesotho'scurrent employment situation is dominated by about 180,000 subsistence farmers and about31,000 small-scale entrepreneurs. While their production can grow, they cannot be a source ofsignificant additional employment.6 Any additional employment will need to come frommanufacturing. In the early to mid-1990s a number of firmns (generally foreign owned but withsome government equity) manufacturing textiles and footwear for export on a labor-intensivebasis rapidly increased their contribution to GDP, reaching 14 percent in 1994/95. This growthwas based mainly on firms from RSA who were avoiding apartheid-era trade sanctions on SouthAfrican exports. Unfortunately rapid growth was not sustained at the end of apartheid.Nevertheless, the best basis for growth is the private sector; establishing the enablingenvironment for additional private investment remains one of Lesotho's biggest challenges.

Political Instability: A Challenge and a Constraint to Sound Governance

2.6 There is no agreement among Lesotho's political parties on appropriate security andpolitical arrangements, leading to continued political uncertainty with a negative impact onpublic administration, private investment, and economic development (paragraphs 1.1 and 1.2and Box 1). Meanwhile, the government signed a defense pact with SADC countries, allowingthem to intervene at the government's invitation at very short notice should the need arise.Political stability, and therefore more stable governance, remains a key challenge.

3. World Bank Services and Products

3.1 This chapter evaluates each service and product the Bank deployed to meet thedevelopment challenges mentioned above. The services and products include policy dialogueand strategic advice, economic and sector work, and lending. The evaluation indicates amoderately unsatisfactory outcome overall. The Bank's contribution to institutionaldevelopment has been modest and sustainability remains uncertain. Ongoing lending is morerisky than average for the Bank's portfolio.

6 According to the 1997 Labor Force Survey about 13 percent (46,100 persons) of Lesotho's working population are employed ingovemment or in parastatals. The rest of the workforce (about 87 percent or 307,000 persons) is occupied in the informal sector.Of those working in the informal sector, 10 percent are working on their own, 26 percent are paid employees, 3 percent areunpaid employees, and the remaining 61 percent are subsistence farmers which suggests about 180,000 subsistence farms.

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Policy Dialogue and Strategic Analysis

3.2 The complex political and economic transitions in Lesotho and South Africa during the1990s (paras. 1.4 and 1.10), required adjustments in policy and development strategy. Moreover,with Lesotho's return to democracy in 1993, a new development strategy was needed to reflectthe new government's vision. Consequently, a national task force of the major stakeholders inLesotho's development was created to develop a medium-term (1995-2000) vision. The WorldBank and other donors provided analytical, technical and financial inputs and the task forceproduced the Strategic Economic Options Report (SEOR). The report contained detailedreviews of the issues and strategies of 19 sectors and played a part in the World Bank's dialoguewith the government on development priorities. For example, the 1996 CAS used the report asone of its inputs. In sum, the SEOR was comprehensive and relevant. While it did not rank thedevelopment priorities among sectors, it did recommend priority actions within specific sectors.

3.3 Policy dialogue was strengthened considerably through the preparation of a PovertyAssessment by the World Bank and the government, the Lesotho Council of NGOs, the EU, andUSAID. The assessment was relevant, providing a comprehensive review of poverty in Lesothothat included a detailed analysis of the impact of growth in different sectors on poverty reductionbased on a Social Accounting Matrix (Annex 3.1). The resultant strategy was, however,moderately unsatisfactory because its plan to foster labor-intensive growth in agriculture wasunlikely to succeed. It overplayed the opportunities for poverty reduction through cropdiversification, increased growth of high-value crops, and labor-intensive production of thesecrops. In the event the 1990s witnessed limited diversification and production of high valuevegetables and fruits because of inadequate credit and irrigation facilities, weak technologicalsupport, and remote markets (van Holst Pellekaan 2001). In addition, labor-intensivedevelopment of the nonfarm sectors, as also suggested in the Poverty Assessment, was unlikelybecause of the weak enabling environment for investment in light industry. The report stressedimproved social services and human resources as a way to reduce poverty; this was right on themark.

3.4 Apart from the Poverty Assessment, World Bank strategies during the 1990s werearticulated in a number of Country Assistance Strategies (CASs) and annual Policy FrameworkPapers (PFPs), which had been prepared jointly by the government, Bank, and IMF since 1988(Box 3.1). These strategies evolved from an emphasis on stabilization and growth to greateremphasis on poverty reduction and private sector development in the mid- to late 1990s. Povertyreduction was the overarching goal of the 1996 CAS, which reiterated the poverty reductionaction plan spelled out in the 1995 Poverty Assessment. The 1998 CAS reaffirmed theimportance of poverty reduction and recommended measures to enhance the enablingenvironment for private sector development. A consistent objective throughout the decade wasto maximize the poverty-reducing impact of revenues generated by the LHWP.

3.5 Evaluation of the 1990s CASs. The 1994 CAS was modestly relevant to povertyreduction and the outcome was moderately satisfactory. Macroeconomic stabilization wasachieved, which was highly relevant and beneficial to the poor. The Bank-supported LHWPhelped Lesotho generate substantial growth. Also the outcome of a sectorwide educationalreform supported by the Bank was moderately satisfactory (Table 3.1).

3.6 But the important agricultural price policy, grazing management, and poverty reductionobjectives were not achieved. For example, no progress was made on removing the import

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Box 3.1: Lesotho-World Bank Strategies

1994 CAS: A three-prong growth-oriented strategyGoals. The 1994 strategy aimed to help the government to (i) maintain and deepen macroeconomic and structural reforms,including privatization; (ii) improve capacity to implement the program; and (iii) capture the benefits of LHWP. Theearlier stabilization and reform measures were supported by IMF SAF/ESAF and six successive Policy Framework Papersduring 1988/89-1993/94. The CAS recognized the serious poverty situation and identified the lack of growth in theindigenous private sector (e.g. handicrafts, textiles, and agricultural processing and marketing) as the root cause for thehigh poverty. It also noted the existence of the import ban on wheat and maize as a reason for high food prices which hurtthe poor, but no explicit strategies for poverty reduction were proposed. On the other hand, the strategy saw prospects forincreased employment of Basothos in the new socially inclusive RSA on the basis that Lesotho labor was in a strongcompetitive position, but seemed to overlook the severe shortage of jobs in South Africa.

Assistance program. It included ongoing LHWP, Education and Health Programs and proposed Privatization and PrivateSector Development projects. Progress in structural reforms could trigger preparation of another three IDA credits (US$69million). The CAS did not explicitly list upcoming ESW.

1996 CAS: A poverty-focused strategyGoals. The 1996 CAS marked a shift in strategy toward poverty reduction. The CAS incorporated the findings of the 1995Poverty Assessment, namely: (i) foster labor intensive growth; (ii) invest in human resources; (iii) maximize the poverty-reducing impact of the LHWP, and (iv) enhance institutional capacity.

Assistance program. It embraced the ongoing LHWP, Education and Health and Population Programs, proposed a RoadRehabilitation and Maintenance Project, an Agricultural Sector Investment Program (ASIP), a Poverty Reduction Project,an Exports Promotion and Skills Development Project, and the third phase of the structural adjustment program includingthe preparation of a PFP. The high lending scenario ($122 million) envisaged two additional projects and the triggers forhigher lending levels, including a satisfactory macroeconomic program (as agreed in the IMF stand-by-facility),accelerating progress in privatization, deregulating agricultural trade, enhancing capacity building, and activating thestalled rural development component of the LHWP. The CAS did not explicitly list upcoming ESW

1998 CAS: A renewed focus on povertyGoals. Noting the shortfalls in achieving the 1996 CAS objectives, the 1998 CAS substantially reiterated the objectiveoutlined in the 1996 CAS, namely poverty reduction.

Assistance program. The FY99-00 proposed IDA program under the base case lending scenario included four creditstotaling US$50 million-Social Fund LIL, Second Education Sector Development, Health Sector Project, and Maluti-Drakensberg-GEF Project. The high case scenario envisaged, in addition to the above mentioned four projects, twoloans: Private Sector Development and Water Supply. The triggers for the high case scenario include addressing theinefficiencies of the public utility sector and reforming the LHRF into a poverty-focused fund and implementation of thepoverty reduction plan. The CAS envisaged five pieces of ESW-a Public Expenditure Review, an Education Review, aHealth Review, a Poverty Monitoring System Support, and a Regional Review of Labor Market Dynamics.

controls on wheat and maize that protected Lesotho's farmers and encouraged them to growmaize in marginal land. There was no change in the exploitive management of rangelands.There was also no sign of meeting the high expectations for poverty reduction through expandedemployment of Basothos in the RSA foreshadowed in the 1994 CAS (Box 3.1). The aim ofactivating "rural development components" in the context of the LHWP to reduce poverty inrural areas was also not achieved (Box 3.2). The 1994 Bank-assisted privatization program madeslow progress. Finally, with the exception of the privatization loan presented as part of the 1994CAS, no new lending was approved until mid-1996 (Table 3.1).

3.7 A review of the poverty reduction focus of the FY96 CASs in the Africa Regioncommended the Lesotho CAS as a best practice example at the time, reflecting the linkagesbetween the poverty assessment, strategy, and the lending program (Taddese 1996). Whilehighly relevant to poverty reduction, it had a moderately unsatisfactory outcome (Table 3.1).This CAS reflected the difficulty of implementing the proposed strategy and making progress onaddressing poverty reduction in Lesotho in the absence of effective institutions and the presence

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of overoptimistic World Bank aspirations. First, while the CAS optimistically stated that theLHWP would "focus on improving the design and implementation of the Development Fundprogram" and laid out a number of actions, the Fund never met its objectives and ruraldevelopment in the highlands stalled except for the health facilities provided as part of theLHWP (Box 3.2).7 The proposed Poverty Reduction Project to support the Fund did notmaterialize despite it was listed under the base case scenario of the 1996 CAS.

3.8 The Agricultural Sector Investment Program (ASIP, $22 million) suffered frominadequate funding and was in effect replaced later by the less ambitious Agricultural Policy andCapacity Building Project (FY98, $7 million). The Road Rehabilitation and Maintenance Project($40 million) aimed at supporting economic growth and poverty reduction including theprovision of access to roads in isolated areas and basic road related services to district centers hasfloundered (van Holst Pellekaan 2001). On the other hand, the Bank-supported education sectorprogram continued moderately satisfactorily (Table 3.1). Finally, while there was no discussionof government participation in the preparation of the 1996 CAS, it does document sectoralconsultations with the government, the Bank and other donors.

3.9 The 1998 CAS, prepared on a participatory basis with many stakeholders over sixmonths, was modestly relevant with a moderately unsatisfactory outcome because it had nodiscernible impact on poverty reduction. While stabilization aspects of the reform agenda, whichhad also involved support from the IMF, were successfully addressed, little progress was madeon political and structural problems. The political matters will be pursued in more detail below,although it is now clear that the Bank had not correctly assessed the depth of political instabilityin the 1998 CAS. The outbreak of internal conflict in September 1998 created economicdifficulties that had long-term consequences and delayed the implementation of this CAS.

3.10 The agricultural sector continued to perform below its potential and therefore had littlepositive impact on poverty reduction. The environmental and rangeland problems remained andthere was no progress on changes in land tenure or grazing rights. The rural developmentcomponent of the LHWP was still not operative. To address the problems of the nonperformingLesotho Highlands Revenue Fund, the Community Development Support Fund (a Learning andInnovation Loan (LIL) was proposed to support reforms financed by the Fund. However, bymid-2000, the new fund was not yet operational. Clearly, while construction progress on theLHWP was on schedule and successful, wheels had been spinning on the crucial ruraldevelopment and poverty reduction objectives for the LHWP (Box 3.2). These aspects were notfully designed at project inception, contributing to implementation delays, adverse publicity, andcriticism by NGOs.

7 The Lesotho Highlands Revenue Fund (LHRF) was established as an extra-budgetary fund in 1992 and inflows began in themid-1990s (initially import duties, later water royalties). With inflows averaging around S45 million per annum in the secondhalf of the decade, the LHRF had the potential to support targeted poverty reduction efforts and strengthen basic social services.While the LHRF did support local employment generation schemes, and transferred about a third of its revenue to thegovemment's general revenue account, use of the funds became highly politicized and lacking in transparency. The ProjectAppraisal Document for Phase IB of the project states in page 52, "the selection of the initial projects was not transparent,technical designs were weak (and hence some dams and roads have been washed away), and weaknesses have been detected infinancial control and monitoring."

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Table 3.1: Relationships Between 1995 Poverty Assessment, Country Assistance Strategies,Lending, and Outcomes for Major ProgramsPoverty Assessment Ongoing and Proposed Lending in Resulting Operations' OutcomesRecommendations Incorporated CASsin CASs

Foster Labor-Intensive Growth

Support agricultural Agriculture Sector Investment Agricultural Policy and Probably moderatelydevelopment Program (FYOO), $22m Capacity Building (FY98), $7m satisfactory

Stimulate small business Poverty Reduction Project Community Development and Highly relevant but notsector (FY98), $20m Support (LIL) (FYOI), $5m timely; slow start and no

progress yet

Increase export-oriented Exports Promotion and Skillslight manufacturing Development (FY99), $40m

Expand tourism

Infrastructure investments Road Rehabilitation (FY96), Road Rehabilitation (FY98), Highly unsatisfactory so far$40m $40m

Invest in Human Resources

Improve health services Health and Population II Health and Population 11 Moderately unsatisfactory(FY90, ongoing), $12m (FY90-98), $12m

Increase support to Education Sector Development Education Sector Development Moderately satisfactoryeducation (FY92, ongoing), $25m (FY92-99), $25m

Strengthen the Safety Net

Strengthen the safety net Poverty Reduction Project Community Development and Highly relevant but not

Lower the cost of staple (FY98), $20m Support (LIL) (FYO 1), $5m timely; slow start and nofoods progress yet

Expand labor-intensive Lesotho Highlands Water I A Lesotho Highlands Water IA Unsatisfactory in terms ofpublic works (FY92, ongoing), $1 1 Om (FY92-99), $68.9 poverty reduction/rural

development

Target special program to Lesotho Highlands Water I B LHWP I B (FY98, ongoing) Probably moderatelyvulnerable groups (FY98), $45m $45m satisfactory in terms of

poverty reduction/ruraldevelopment

Improve Institutional CapacityImprove institutional Poverty Reduction Project Community Development and Highly relevant but notcapacity (FY98), $20m Support (LIL) (FYOI), $5m timely; slow start and no

progress yet

Agricultural Policy and Probably moderatelyCapacity Building (FY98), $7m satisfactory

a Excludes the recently approved Health Sector Project (FYOO, $20m ) and the Second Education SectorDevelopment Project (FY99, $15m). Details in Annex 3.5.

3.11 On the whole, World Bank assistance strategies for Lesotho in the 1990s over-reached interrns of objectives given weak government ownership and over-stretched implementationcapacity.8 The strategies pursued too many goals and the measures they recommended were sobroad that government authorities, NGOs, and civic society found them difficult to gauge andimplement. For example, the 1995 poverty reduction action plan overextended itself bysuggesting between three and seven major, but unprioritized, interventions in each of ninesectors (Annex 3.1). Similarly, the 1998 CAS identified 11 out of 14 areas as high developmentpriorities (1998 CAS, Annex B1O, page 53). Thus the strategies were not sufficiently realistic;

8 Regional staff argues that whether the Bank was overly ambitious or not in its judgment of government commitment andimplementation capacity depends on the appropriateness of using current standards and priorities to judge past actions.

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Box 3.2: The Lesotho Highlands Water Project (LHWP)

Background. The LHWP is a four-phase binational project between Lesotho and the Republic of South Africa (RSA), involvingthe export of water from Lesotho (through a series of dams and tunnels) to the water-scarce Gauteng Province in RSA (whichproduces 60 percent of RSA's GDP). In addition, Muela hydropower plant was constructed to meet Lesotho's energy needs.Phase I comprises two components Phase ]A (1991-98) and PhaselB (1999-03), with costs of $2.6 billion and $1.1 billionrespectively and is governed by a treaty. The project is the lowest cost alternative, by about $1 billion, and RSA bears the fullcost and associated debt of the water transfer while the hydropower plant (15 percent of Phase IA cost) is the responsibility ofLesotho.

The role of the World Bank. Studies of the LHWP concept date back to the 1950s, but the World Bank played a significant andcatalytic role in the negotiations of the 1986 Water Treaty, including facilitating the drafting and signing of the treaty between thegovernments of Lesotho and RSA. Although the Bank financed four percent of the project cost, it was a catalyst for securingexternal financing and advised on project formulation and implementation. The Bank's objectives were to help Lesotho: (i)transfer its most abundant water resource into much needed export revenues and alleviate water shortages in RSA; (ii) direct thebenefits from the LHWP to development oriented programs to reduce poverty; and (iii) ensure that the social and environmentalaspects of the project are managed.

Substantial macroeconomic impact. The project has had a substantial impact on the Lesotho's economy both directly andindirectly: (i) the receipt of Maloti 484 million ($73 million) in water royalties during 1996/97-1999/00; (ii) buoyant customrevenues associated with the large imports for construction of the project; (iii) increased tax revenues as a result of projectactivities; and (iv) several ancillary developments, including the construction of roads and bridges. In 1998 the project accountedfor 14 percent of GDP, 35 percent of value-added in construction, and 28 percent of government revenues. But little progress hasbeen made on transferring benefits from the project to the poor through the Development Fund and Rural Development Program.

Shortfalls in the Distribution of Benefits

Development Fund. A Development Fund was established in 1992 (with part of the LHWP revenues) for financing programstargeted to the alleviation of poverty. Experience to date on the Fund was very disappointing, even though some 240 projectswere approved at a cost of Maloti 215 million, covering roads, bridges, clinics, markets, and small dams. These projects arereported to focus on increased access to public services and to have created significant short-term employment, but problemssuch as inadequate criteria for project approval, low quality construction, and poor operation and maintenance have hampered theeffective use of the funds. The Fund did not fully achieve what was intended. It was replaced by the Lesotho Fund forCommunity Development. The new Fund will be managed under the Bank-assisted Community Development Support Projectwhich became effective in July 2000. Unfortunately, this project came extraordinarily late-since it is now five years since the1996 CAS with its commitment on the use of the LHWP revenues for poverty reduction-and so far the poor have seen fewbenefits from the LHWP. Project progress continues to be slow with many bridges to be crossed.

Rural Development Program. The program was designed to provide long-term indirect compensation to households that weredirectly affected by the project on the basis that they should not be worse off due to the project. An independent evaluation of therural program was extremely critical of its limited achievements during Phase IA as a number of components of the program(such as improved livestock production, irrigated vegetable production and fruit tree distribution) were either seriously at risk offailure or not likely to succeed at all (Eriksen 1996). Also, household surveys, however, suggest that eight years after the start ofPhase IA there has been virtually no progress in terms of the incomes and welfare of households in the project area (SW-B & AConsult 1999). They also show that for many welfare indicators households in the project area are no better off than otherhouseholds in the highlands. While it should be noted that Bank staff expressed doubts about the validity of this survey, thisassessment of the impact of the project on poverty reduction is consistent with the perception of a client survey in 1997 (quotedin the 1998 CAS) showing that the respondents did not see much impact from the Bank's lending on poverty reduction.

Sustainability of the social component. The long-term future of the LHDA (the implementing agency) after the currentconstruction program is completed in about 2003 and before a possible second Phase starts up (at earliest in 5-10 years) remainsunresolved. The strategy for the transfer of health facilities, infrastructure, and human resources to the government or other thirdparties is still being developed. OED considers that sustainability of the social component is not yet certain as organizations(public, private or community) with the capabilities to take over the operations and maintenance of these assets have in manycases not yet been identified. A major challenge is linked to the international standards of the facilities built by LHDA and thesustained financing and qualifications required for their operation and maintenance may be beyond the present capabilities ofLesotho.

they did not take into account Bank and client resources and strengths, particularly Lesotho'spolitical instability, limited resources, and weak institutions.

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3.12 The relevance of the World Bank's increasing focus on poverty reduction wasundermined until late in the 1990s by inadequate attention to poverty monitoring and weakperformance benchmarks. Where there were performance indicators (for example, in the socialsectors) many exhibited such weaknesses as vague wording, input-orientation, no baseline data,or unrealistic targets (Goldstein 2001). There was a dearth of information required to evaluateprogress toward poverty reduction and benchmarks were not established. The 1995 PovertyAssessment, the 1996 CAS, and the 1998 CAS all proposed putting in place a system for datacollection that would pennit poverty monitoring. It was not until the FY00 CommunityDevelopment Project that the Bank supported a formal survey mechanism. Most of the WorldBank's projects in Lesotho do not have a poverty monitoring and evaluation mechanism. Norwere the CASs used to raise consciousness in Lesotho of the need for monitoring poverty andsetting targets. The 2000 Interim Poverty Reduction Strategy Paper again emphasized the needfor improved data on poverty (World Bank 2000a).

3.13 World Bank strategies also underestimated the extent of political instability and did notadequately assess the effect of political upheavals on the implementation of the Bank's program,despite the 1993 election experience. In particular, the Bank did not appear to understand policydecisionmaking in the country and was too optimistic in assuming that democratization andstability could be accomplished shortly after the May 1998 elections. For example, the 1998CAS, presented to the Board shortly after the election, noted that the risk to the Bank's programis "minimized by progress in Lesotho's ongoing democratization process and efforts to achievegood governance" (CAS, p. vii). The Bank's assistance strategy did not include contingencyplans in the event the democratization process fell apart, as it did. Awareness of the long-standing sources of political and social volatility in Lesotho should have indicated a far moremodest strategy for the base case scenario than the four projects proposed in the 1998 CAS.

3.14 The strategy's insufficient attention to HIV/AIDS raised questions about its relevance tobroad-based sector development. The implications of reduced incidence of AIDS and lowerpopulation growth for enhanced per capita income growth and poverty reduction were notaddressed in the Bank's strategy, despite widely available calculations that they would be ofmajor significance.9 Although the World Bank drew government attention to the importance ofthese issues, the Bank did not help Lesotho develop the most basic integrated health informationsystem and survey instruments necessary to monitor HIV/AIDS, leading to underestimation ofprevalence and, consequently, of its impact. HIV/AIDS was not then at the center of the countrydialogue, and the 1994 Population Sector Review did not trigger a shift in Bank strategy in thelast half of the 1990s toward more actively combating HIV/AIDS-this shift occurred only at thebeginning of the new decade (World Bank 2000b).

3.15 In sum, the World Bank strategies were modestly relevant to poverty reduction. Theysupported macroeconomic policies that had a substantial impact on inflation and growth. Theprograms also provided vital support for the financing and implementation of the LHWP.Support to the educational program was highly appreciated by the government. In the secondhalf of the 1990s, the strategies focused heavily on poverty reduction. But they wereundermined by a poor appreciation of the political instability which reduced ownership of the

9 For instance, it had been estimated that in countries with adult prevalence of ten percent or more, HIV/AIDS will erase 17 yearsof potential gains in life expectancy (UNAIDS 2000 and World Bank 2000c).

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Box 3.3: The LHWP - Dam Safety, Environment and other Bank Safeguards and Guidelines

Panel of experts contribution. OED commends the valuable contribution made to the project by the two Bank-financed Panels ofExperts, one for design and construction and one for environmental and social matters, and by the Disputes Resolution Board.All parties to the project met by the OED mission confirmed the quality of the Panels' contributions. In particular, the designpanel's recommendations resulted in significant cost savings while those of the Disputes Resolution Board avoided costlylitigation and arbitration. The design and construction panel also analyzed the consequences of the reservoir-induced seismicity(RIS) and concluded that there was no adverse effect on the safety or operation of the project although it recommended thatmonitoring be enhanced. The RIS impacted the villages adjacent to the Katse reservoir, requiring repairs to and construction ofreplacement houses, and created adverse publicity for the project.

Dam safety. Phase I A can be considered satisfactory in meeting the Bank's dam safety guidelines and in developing EmergencyPreparedness Plans (EPP) for the dams. However, as pointed out in the 1999 World Bank ICR, the project dam safety andsurveillance requires some further strengthening while the EPP are still to be tested with the public at large, as ongoing awarenessactivities have so far concentrated on public institutions in the area, such as police and clinics.

Environmental assessment. A National Environmental Action Plan (NEAP) included in the original project design was generic innature and covered the LHWP as a whole. While meeting the Bank's environmental guidelines in effect at the time of Phase IAproject appraisal, it was not sufficiently detailed and lacked an element of public participation. As a result of the uncertainty ofthe original plan, coupled with the Bank's optimistic assumptions about the LHDA (the implementing agency) capabilities tofully design and implement the plan, the majority of Phase IA environmental component was delayed. In addition the lack ofclarity in Phase IA as to what share of the project's environmental program was attributable to the water transfer component andshould therefore be funded by RSA, and what share was of a general development nature and should be financed by Lesotho,contributed to the delay in implementing the program. Lessons were learned, however, in preparing Phase IB and anEnvironmental Assessment (EA) was synthesized from the results of 14 coordinated baseline studies of physical, chemical,ecological and social aspects. The EA work was monitored by the Bank and an international multidisciplinary team of experts.There was also a comprehensive consultation of the highland communities.

Involuntary resettlement. Although households directly affected by Phase IA of the project have been resettled (359 householdsas opposed to 173 at appraisal), there are two residual issues being addressed. One issue includes the definitive legal transfer ofresettlement houses to their beneficiaries and the associated cutoff of all future LHDA legal responsibilities. The other issue isthe internal evaluation of resettlement performance using a set of risk indicators that include homelessness, landlessness,joblessness, morbidity, and mortality. The proposed evaluation of resettled families will provide a measure of project impact.For Phase IB the physical resettlement for the 99 families included in Stage I has been completed but not the goal of providinggardens, or sustainable jobs, for these families to achieve food security. The resettled families rely heavily on their compensationfor their basic needs, making it more difficult to wean them off this entitlement and to reestablish their integration in normalvillage life. Stage II resettlement will affect 226 households representing an increase of 40 percent from the initial 163households identified in the 1997 approved resettlement action plan. The experience of stage I has caused concern about thechances of achieving the goal of sustained food security for these households. There is a lack of understanding of thecompensation policy among the affected households due in part to the unavailability of the policy in the local language, leadingto multiple interpretations and the persistence of a number of complaints highlighted by NGOs.

Projects in international waters. The LHWP is binational project implemented in the Orange River Basin shared by, LesothoSouth Africa, and Namibia. As a riparian of the project, Namibia was notified and indicated that it had no objection.

Procurement and corruption. The alleged corruption associated with some of the procurement in Phase IA was not mentioned inthe ICR for Phase IA because (as the OED was advised by the Region) it was not known by the Bank at the time the ICR waswritten. In discussing procurement aspects for Phasel A, the General Manager of the Engineering Group of LHDA mentioned tothe OED mission that the Bank had played a key role in assisting the Tender Evaluation Team by financing "seven wise men."This assistance proved helpful in resisting pressure from various countries thereby assisting in the credibility of the evaluation. Anumber of consulting firms and contractors working on the project have been charged with paying bribes and their trial isunderway. The Bank Oversight Committee for Fraud and Corruption is investigating the alleged corruption but its report has notyet been completed.

The World Bank Inspection Panel. The panel received two requests in 1998 and 1999. The 1998 request alleged that the Bankfailed to consider demand management alternatives to Phase IB. The Panel supported the Bank's and RSA's analysis that thebenefits of the project outweigh the costs of demand management required to justify the delay. The second request alleged thatthe reservoir inundated land over which the requesters claim to have a mining lease, but the Panel did not recommend aninvestigation.

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reforn program. The sectoral strategies were not sufficiently selective'" nor realistic, and theydid not pay enough attention to HIV/AIDS, poverty monitoring" and performance indicators,rangeland problems, rural development, and Lesotho's weak institutional capacity.

3.16 As the decade came to a close, Lesotho had seen little progress on agriculturaldiversification, employment creation, and rural development. The Bank-supported educationreform program, however, achieved its major objectives. Also, substantial economic growthduring much of the 1 990s spurred by the LHWP as well as sound economic policy was achieved.For example, the impact of construction in the LHWP helped Lesotho achieve an average GDPgrowth of close to 4 percent a year during the 1990s. The annual revenues earned from thereceipt of royalty for supply of water to RSA through LHWP, amounting to 18 percent ofgovernment revenues and 5 percent of GNP in 1998, are substantial and sustainable. They havealready contributed to economic and social development expenditures, but they have so far beingunsuccessful in stimulating rural development and achieving poverty reduction. It is not clearwhat will sustain economic growth in Lesotho once the impact of the large construction programhas played out. Can the manufacturing sector contribute more than its current 10 percent ofGDP? To what extent can the agricultural sector contribute to the economy, to exports and topoverty reduction? Despite improved strategies and some investments, Lesotho is no closer tomaking progress on these questions. It therefore remains unclear how the large pool of relativelyunskilled unemployed and underemployed rural Basothos will find jobs.'2 The Bank'scontribution to resolving these questions has been moderately unsatisfactory.

Economic and Sector Analysis

3.17 The Bank completed several formal and informal sector reports in the 1990s, and Lesothowas also included in several regional studies during those years (Annex 3.2). Three areas-agriculture, education, and the financial sector-have been covered in depth, while population,health and nutrition received less attention.'3 The share of resources allocated to ESW forLesotho-averaging 15 percent a year during FY91-99-was below the SSA regional average(19 percent), but above small SSA countries average (10 percent) (Annex 3.3). While the reportswere generally of satisfactory quality, education sector work in particular was effective inproducing a coherent framework to establish priorities and to guide lending. A summaryevaluations of ESW based largely on the approach used by the Quality Assurance Group (QAG)is presented below.

3.18 Agriculture and environment. There were reviews of the agriculture sector in 1981 and1986, as well as a comprehensive National Environmental Action Plan (NEAP) in 1989. Thesector reviews were relevant and of satisfactory quality. They emphasized the potential of more

10 Regional staff argues that selectivity has not been possible because the challenges facing Lesotho are numerous and requireresources disproportionate to the size of the economy.

" The country team for Lesotho is working with the govemment in developing a Poverty Reduction Strategy Paper by focusingon strengthening monitoring and evaluation.

12 The search for work will need to range well beyond the RSA, even though it is an obvious place to look. Economic growth inthe RSA has been low and rates of unemployment are high (reported as about 37 percent in 1997 by A Gelb and G. Tidrick,2000). Furthermore the informal sector in the RSA, which would be the most logical sector for the employment of Basothos, issmall by African standards.

13A recent World Bank study indicates that ESW has significant positive impact on the quality of World Bank loans, due tobetter designed and implemented projects (Deininger, Squire, and Basu 1998). Furthermore, an analysis of OED evaluation ofBank's lending to Lesotho by sector shows that sectors with effective ESW such as education scored well.

16

intensive use of the lowlands for high-value crops and the importance of improving managementof grazing resources in the highlands. The NEAP was also relevant and of moderatelysatisfactory quality. It laid out an ambitious but unprioritized agenda and had little impact duringthe 1990s. Seven years after the NEAP's release, the 1996 CAS lamented that up to then noaction had been taken on the NEAP's recommendations. In 1993 the World Bank prepared areport on Environment and Agricultural Diversfi cation. The report was painstakingly preparedusing considerable published and unpublished data and its internal quality was satisfactory. Onthe other hand, its impact on the sector has been limited; for example (as noted earlier inparagraph 3.3) diversification in crop production has been slow and largely unsuccessful despitetheoretical case for the change.

3.19 Education. The FY90 report on Improving Quality and Efficiency in Education wasexceptionally effective in helping establish a coherent policy framework for education reform inthe 1990s. The report was of satisfactory quality and identified a reasonable number of priorityissues through a recommended core action plan. It was adequately disseminated and timed toprovide an input into the government's Education Sector Development Plan (included in its FifthDevelopment Plan, 1991/92-1995/96). Of all the sectors, analysis in education has been mostincisive-so it is no surprise that the Bank's assistance in this sector is well received. A seniorofficial in the Ministry of Education noted that, "the World Bank educated us to be able toidentify our own needs. The 1989 report was very helpful. Before, we had multiple donors, andeverything was on a first-come, first-served basis."

3.20 Financial intermediation. Two financial sector reports were prepared during the 1990s.The first, in 1990, did not envisage emerging weaknesses of the financial sector. Thus, itsuggested only modest changes on the basis that it was not necessary to make drastic changes inexisting policies. Toward the end of the decade the financial sector had deteriorated such thatthe 1998 report expressed concerns about the financial system's weak capacity to supportinitiatives in the commercialization of agriculture, tourism development, and export promotion.It therefore focused on the broader issues of financial intermediation, the perfornance of thebanking system, and small-and medium-scale enterprise development. Central to theconclusions of the second report was the need to improve the supervisory functions of theLesotho Central Bank. This report did not, however, provide a solution to the weak financialservices in rural areas.

3.21 Health, nutrition, and population. After a Health, Nutrition and Population (ffNP)Sector review in 1981, no formal analytical work on the health sector and the health system inLesotho was undertaken for nearly 20 years. In particular, there was a lack of analytic workduring the first half of the decade when the National Health Sector Plan was developed. Whilethe work done in the population sector (1994 Population Sector Review) was of moderatelysatisfactory quality it was ill-timed and too poorly disseminated to influence strategy or lending(that is, 1985-94 HNP and 1989-98 HNP II).

3.22 Summary. Some sound sector analysis was carried out during the late 1980s and 1990s,but there were some substantial shortcomings. For example, there was no broad economic workto follow up the action plan in the 1995 Poverty Assessment.'4 Notable for their absence wereperiodic reviews of the allocation and uses of public expenditures. These would have been of

'4 A Country Economic Memorandum and Public Expenditure Reviews were prepared for Lesotho by the World Bank in 1987and 1988 respectively. No such economic reports were prepared in the 1990s. The 1995 Poverty Assessment proposed putting inplace a system of data collection that would permit poverty monitoring.

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particular importance to ensure that social expenditures were strengthened given the substantialand sustained revenues generated by the LHWP. A PER was planned for 1996/97 as the basisfor reforming public expenditures proposed by the ninth Policy Framework Paper (1996), but itdid not materialize. A "Public Expenditure and Budget Management Review" currently underpreparation is highly relevant. Also, an analysis of labor markets (part of a regional study) iscurrently under preparation. Given the persistent and high unemployment level, the analysis ofLesotho's labor market under preparation is relevant and important work.

Lending

3.23 Over the past three decades Bank commitments toe Lesothoee werdes Babu Figure 3.1: Net Disbursements and Net Transferscommitments to Lesotho were about$448 million for 28 projects. Of this, 3___ _ _ .

$293 million was for 26 IDA credits and 25 ._x_- __

$155 million was for two IBRD loans. X 2D - -- --1=_-=-=

Ten-year commitments grew rapidly from 5 __

less than $50 million in the 1970's to 1 1931 '199 193 14 19 19. 1997 13' 19C '

about $100 million by the 1980's and Year

then tripled to almost $300 million in the1990s. The Bank's portfolio was ; ENetTransfer($m) +-NetDisb.($m)

changing rapidly in the 1990s due to the Iintroduction of a major water supply project, LHWP, with commitments amounting to $110million in FY92 and $45 million in FY98. While the share going to water supply increased to 51percent, the share for agriculture, transport, and urban development declined. The share going toeducation also declined, but less than the other sectors (Table 3.2). Annual average netdisbursements were $13 million and net transfers $10 million during FY90-00 with peaks ofnearly $30 million for each in FY93 following the approval of the LHWP (Figure 3.1). TheInternational Finance Corporation has no operation in Lesotho. The Multilateral InvestmentGuarantee Agency currently has an exposure in Lesotho amounting to $23.7 million.

Table 3.2: Sectoral Distribution of Bank Lending (FY6699)1966-99 1966-79 1980-89 1990-99

Sector US$M Percent US$M Percent US$M Percent US$M PercentAgriculture 34 7.7 11.6 22.7 16.0 16.9 6.8 2.3Education 78 17.4 11.5 22.5 20.0 21.1 46.2 15.3Finance 6.5 1.5 2.5 5.0 4.0 4.2 0.0 0.0Industry 21.0 4.7 0.0 0.0 0.0 0.0 21.0 7.0Health, Nutrition, and Population 15.6 3.5 0.0 0.0 3.5 3.7 12.1 4.0Public Sector Management 11.0 2.4 0.0 0.0 0.0 0.0 11.0 3.6Transportation 74.6 16.7 19.5 38.1 15.2 16.0 40.0 13.3Urban Development 36.2 8.0 0.0 0.0 26.4 27.8 9.8 3.3Water Supply and Sanitation 170.8 38.1 6.0 11.7 9.8 10.3 155.0 51.3

Source: World Bank.

OED Findings on Closed Projects

3.24 For projects exiting the portfolio since FY90, Table 3.3 shows that 67 percent (by netcommitment) of Lesotho's evaluated portfolio was found to have satisfactory outcomes, on parwith the SSA average, but significantly below the SADC subregion, small SSA countries, andBankwide results. Sustainability of projects, however, was rated likely for only 22 percent of thenet commitments evaluated, similar to the score for small SSA countries, but considerably belowother comparator countries and the Bankwide average. Institutional development fared even

18

worse; it was substantial for only 18 percent of the total lending evaluated, the lowest ratingamong comparators. Of particular concern is the fact that projects approved during FY90-00and already closed performed worse than older ones (Annex 3.4).

Table 3.3: OED Evaluation Findings of Recently Evaluated Projects (Exit FY9Os)

Satisfactory Outcome (0%) Likely Sustainability (%) Substantial ID (°%)

Country No. of Net No. of Net No. of Netprojects commitment projects commitment projects commitment

Lesotho 60 67 30 22 20 18Small SSA countries 64 72 24 20 29 36SADC 58 74 33 35 29 35SSA 56 65 29 31 24 26IDA operations 65 75 37 45 30 33Bankwide 68 77 47 60 33 39

Source: OED, details in Annex 3.4.

3.25 Project performance ratings by sector show significant differences (Annex 3.5). TheLHWP, by far the largest and most significant activity in the Bank program, has beensatisfactory in stimulating economic growth and generating sustained export revenue forLesotho. The project accounted for about 14 percent of Lesotho's GNP and about 40 percent ofvalue added in construction a year during 1994-1998. It also generated 28 percent ofgovernment revenue in 1998, including receipt of royalty for supply of water (in the order of $45million or 5 percent of GNP), SACU tariff revenues due to imports of materials for construction,and the increased tax revenue as a result of project activities (Box 3.2). The LHWP made itpossible for the government to turn a budget deficit in the late 1980s into a surplus in the 1990sand increase allocations of public expenditures to the social sectors. On the other hand, therewere until very recently serious shortcomings in progress on the distribution of benefits from theLHWP through the Development Fund and Rural Development Program. Household surveyssuggest that eight years after the start of Phase 1A there had been virtually no progress in termsof the incomes and welfare of households in the project area."5 While it should be noted thatWorld Bank staff expressed doubts about the validity of these surveys, this assessment of theimpact of the project on poverty reduction is consistent with the perception of a client survey in1997 (quoted in the 1998 CAS) showing that the Bank's clients (government, private sector, civilsociety and donor community) did not see much impact from the Bank's lending program onpoverty alleviation (Box 3.2).

3.26 In the education sector Lesotho's projects scored well. The two credits evaluated had asatisfactory or moderately satisfactory outcome. By contrast, the two health loans were ratedmoderately satisfactory and moderately unsatisfactory. At the other end of the spectrum, allcompleted agricultural and private sector development projects had unsatisfactory or highlyunsatisfactory outcomes (Annex 3.5). Most projects with unsatisfactory outcomes had problemsof quality at entry, complex and over-ambitious design given the limited local capacity, and non-involvement of beneficiaries during design, and failure to learn from previous experience.16

5 See Report on the 1998/99 Socio-Economic Survey of Phase IA, prepared for the Lesotho Highlands Water Authority by SW-B& A Consult, draft, 1999 and An Evaluation of the Agricultural and Livestock Activities of the LHWP by John H. Eriksen, 1996.

16 For example, rural development projects had unsatisfactory outcomes over a long period starting well before the 1990s. Therehas been a sequence of failed projects followed by attempted solutions in follow-up projects that so far have not yet shownpositive results. Specifically, the unsatisfactory Thaba Bostiu Area Development Project (1973-79) was followed by theunsatisfactory Basic Agricultural Services Project (1978-85). Both projects were intended to support increased agriculturalproduction but both fell far short of their targets because the necessary technology had not yet been developed, and the policyenvironment was not propitious. They were followed by the unsatisfactory Land Management and Conservation Project (1988-

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3.27 Project-level performance is an important indicator of the Bank's contribution toeconomic development, but it tells only part of the story. The Bank assistance program (lendingand non-lending) was based on a correct diagnosis of the country's problems and includedrelevant objectives such as growth and poverty reduction. The outcomes, however, weremoderately unsatisfactory"7 because the program included poorly designed and complex projects,overestimated Lesotho's implementation capacity, overlooked the need to obtain agreement onimportant project conditions before Board presentation, paid inadequate attention to HIV/AIDSand poverty monitoring, and ignored political conditions which affected ownership of theprogram. More important, the Bank provided inadequate support for the implementation of theDevelopment Fund which was designed to distribute benefits from the LHWP to Lesotho's poor.While the substantial growth achieved during the 1990s is a prerequisite for improving welfare,no reduction in poverty or inequality has been measured during the decade despite the stronggrowth performance.

3.28 In applying its safeguard policies, the Bank took all measures required to meet theprovisions of the dam safety guideline (Box 3.3). However, the reservoir-induced seismicityimpacted adjacent villages to the Katse reservoir, requiring replacement of some houses andcreating adverse publicity. The Bank also prepared an environment assessment that compliedwith its safeguard policy, but there were delays in implementation. Although a detailedresettlement plan was implemented, many issues remained unresolved. Finally, Namibia, whichshares the Orange River Basin with Lesotho and RSA, was notified and indicated no objectionsto the LHWP. OED suggests that the Bank's performance on safeguard issues should bereviewed after the completion of Phase 1B of the LHWP.

Efficiency of World Bank Assistance

3.29 The cost of operations in Lesotho ranks among the Bank's most expensive for FY91-99(Annex 3.3). Lesotho's average program cost of $81 per $1,000 of net commitment forsatisfactory and nonrisky projects, is much higher than that of SSA ($39), SADC ($31), andBankwide averages ($16). Among 107 countries, Lesotho ranks as the 93rd highest cost, andamong 50 countries with similar project size (of $20-$40 million) Lesotho ranks as the 35thhighest cost. The Bank program in Lesotho was expensive partly because of the largecommitments cancellations, amounting to 25 percent, more than double the Bankwide average of10 percent for FY90-99 (Annex 3.5).

Portfolio Performance: Quality Assurance Group (QA G) Assessments

3.30 QAG assessments of portfolio performance show that, as of April 2000, Lesotho's activeportfolio-with 50 percent of projects (3 of 6) and 71 percent of commitments at risk-is muchriskier than that of SADC (18 percent), SSA (22 percent), and the World Bank (19 percent)(Annex 3.4). Of the three risky projects-two were rated as actual problems (Road

97) that set back progress on important issues such as land policy. This was followed by the contemporary 1998 AgriculturalPolicy and Capacity Building Project that tackles land policy again. Two years after Board approval this project, apart frommeeting conditions of effectiveness one year after Board approval, has only recently met a number of important milestones onprocess issues. It has made virtually no progress on substantive matters such as improving marketing, pricing policy and landmanagement. its closing date will therefore inevitably be delayed. The most recent Community Development Support Projectbecame effective in July 2000 but is already behind schedule.

" Aggregate country portfolio performance can differ from the performance of a country program as evaluated in a CAE.Nevertheless, project portfolio performance tends to be positively but weakly associated with OED's overall rating of the Bank'scountry program (ARDE 2001, page 17).

20

Rehabilitation and Maintenance and Agricultural Policy and Capacity Building) and one as apotential problem (LHWP-Phase IB). These ratios are sensitive to the time period examined(Annex 3.4). Delays in effectiveness and slow disbursements are among the reasons the QAGcites for rating these projects as risky.

4. The Development Effectiveness of World Bank Assistance

4.1 This chapter evaluates World Bank assistance in macroeconomic, rural development andpoverty reduction, human capital development, and private sector development on itscontribution to Lesotho's development outcomes. The evaluation indicates that the developmenteffectiveness of Bank assistance was moderately unsatisfactory.

Macroeconomic Outcomes

4.2 Early achievement but subsequent disappointments. Macroeconomic outcomes wereparticularly impressive during 1990/91-1996/97 (Annex 4.2). Real GDP growth averaged 5.3percent a year; inflation was moderate; the fiscal balance strengthened; and foreign reservesaccumulated to the equivalent of about seven months of imports by 1996/97. Themacroeconomic dialogue, through the joint IMF/Bank/government PFP and IMF stand-byfacilities (that is, Structural Adjustment Facility [SAF] and Enhanced Structural AdjustmentFacility [ESAF]), helped the government set a sound framework for stabilization andadjustment."8 The economy perfonned strongly following the construction of LHWP, whichpeaked during 1994-97; the establishment of export-oriented manufacturing output such asclothing, electronics, and light manufacturing; excellent mid 1994 harvests; and a favorableexternal environment for trade. The macroeconomic performance was more favorable thanprojected in successive adjustment programs and PFPs for Lesotho.

4.3 This impressive macroeconomic performance reversed toward the end of the decade.however. Economic activity began to slow down in 1997/98 and real GDP declined by anestimated 4 percent in 1998/99. The 1998/99 budget deficit more than doubled to 4.2 percent ofGNP from the previous year, driven primarily by a large increase (7.5 percent) in currentexpenditures. Inflation increased in the last quarter of 1998 in response to the dislocation in thesupply of essential commodities that followed the September 1998 civil unrest. The balance ofpayments position weakened drastically in 1998/99, with the surplus falling from $127 million in1997/98 to $33 million in 1998/99.19 As indicated earlier, many factors contributed to thisreversal (para. 1.5). Because of these factors, macroeconomic performance was much lower thanprojected. For example, the ninth PFP for the program period 1996/97-1998/99 projected a 10.3percent annual growth in GDP; a fiscal surplus averaging 0.9 percent of GNP, and officialreserves reaching $577 million by 1998/99.

" The govemment embarked on a series of structural adjustment programs supported by the Fund-SAF for 1988/89-1990/91 oiSDR 3.0, 4.5, and 3.0 million, respectively, and ESAF for 1991/92-1995/96 of SDR 4.5, 6.0, 7.6, 8.4, and 7.2 million,respectively. The IMF and the World Bank emphasized key structural reforms, including privatization and parastatal reform, andderegulation of agricultural markets.

9 The govemment has responded to these negative developments by taking several measures. During January-September 2000,the govemment implemented an IMF Staff-Monitored Program and in December 2000, reached understandings with the IMFand the Bank on a program that would be supported by a three-year arrangement under the Poverty Reduction and GrowthFacility. In March 2001, the Fund approved a PRGF loan amounting to 24.5 SDR ($32 million).

21

4.4 The counterfactual. Could Lesotho have done better without the macroeconomicpolicies and LHWP? Despite the difficulties toward the end of the 1990s, Lesotho'smacroeconomic outcomes during the decade were better than those of all SSA countries, theSADC subregion, and small SSA countries (Annex 4.2). During these ten years, Lesotho grew atan average of 3.8 percent per year, with real per capita GDP growth averaging 1.1 percent; bothfigures were better than the comparator countries. Lesotho's inflation averaged less than 10percent during the decade, outperforming SSA, SADC, and small SSA countries. Thisperformance would not have been achieved without sound macroeconomic policy and the LHWPconstruction program. The series of structural adjustment programs, which the governmententered into with the IMF and the World Bank since 1988, laid the foundation for economicstability and growth. Under these programs, the fiscal balance turned from a deficit of 10percent of GNP in 1987/88 to a surplus of 2.1 percent on average from 1992/93 to 1997/98.Inflation halved from 18 percent in 1988 to an average of 9 percent during the 1990s. The stronggrowth performance, stimulated by the LHWP construction, may not have taken place withoutthe Bank support in formulating, financing-including leveraging significant internationalfinance-implementing and supervising the project. The LHWP also generated substantial andsustainable water royalties, but they have, so far, not been used effectively for targeting povertybecause of inadequate preparation and weak institutional arrangements. These failures wererecognized and the Bank started to address them in a more effective way toward the end of thedecade. Poverty may have increased without the LHWP, but the strong growth performanceduring the 1 990s spurred by the LHWP has so far not been accompanied by declining poverty.

4.5 While the LHWP construction program provided a major (one time) boost to overalleconomic growth, its impact on the economy will obviously not be sustained once the pace ofconstruction starts to decline. The current construction program for Phase lB of LHWP isexpected to be completed in about 2003 and a possible second phase is not expected to start up in5 to 10 years at the earliest. The end of the apartheid regime in RSA was accompanied by areduction in official development assistance and donor and foreign investor presence in Lesotho.Furthermore, the continuing political uncertainty, decreased miners' remittances and theprojected drop in SACU revenues may adversely affect future growth. An improvedenvironment for growth and private sector development depends on enhanced political stability,better governance, and deeper parastatal reform of the state sector. Prospects for all of theseimprovements are uncertain.

Rural Development and Poverty Reduction

4.6 Disappointing agricultural growth. While aggregate GDP grew rapidly during the1990s in Lesotho, GDP from primary sectors grew more slowly at about 1.8 percent a year whichwas substantially less than in the second half of the 1980s (6.0 percent a year). In the 1990sGDP from crops grew at about 3.6 percent a year but livestock declined by 1.9 percent perannum, hence the substantial reduction in the average. Per capita agricultural growth declined inrural areas by about one percent per annum, a disappointing result given that 80 percent ofhouseholds depend on agriculture. While this performance prevented any reduction in theincidence of poverty in Lesotho, it was not significantly different from the agricultural growth inboth Swaziland and South Africa in the 1990s.20 The difference is that Basothos are far moredependent on agriculture than Swazis or South Africans.

20 The growth rates for Swaziland and South Africa in the 1990s were 0.6 percent and -0.6 percent per annum respectively. Forthe second half of the 1980s their growth rates were 5.8 and 2.4 percent respectively.

22

4.7 Poverty and inequality remained extremely high. Consistent with the trends inagriculture, poverty in Lesotho remains at high levels in all rural areas and is particularly high inthe mountainous regions. The incidence and depth of poverty are as high as anywhere in Sub-Saharan Africa (see World Bank 2000d, page 90 for comparisons). And a series of studiesindicate rising inequality in Lesotho. In 1967/69 the lowest 60 percent of households earnedonly 38 percent of all income, while the top 20 percent eamed 40 percent of all income. By1972/73 the situation had deteriorated: the bottom 50 percent earned only about 15 percent of allincome (van Holst Pellekaan 2001). Later surveys show that the Gini coefficient doubledbetween 1967/69 and 1993 to about 0.57 and has remained high since then (Table 1.1).21

4.8 Poverty also high in neighboring regions of South Africa. High rates of poverty, whileof considerable concern for Lesotho, are in part a function of the harsh environment that facesmuch of rural Lesotho. Similar rates of poverty exist in neighboring regions of South Africa.Recent poverty mapping for RSA shows that two of the three provinces that surround Lesotho(Free State, and Eastern Cape) are, on average, the poorest provinces in South Africa withpoverty rates of 48 and 47 percent respectively (World Bank 2000e). Therefore, while theaverage Basotho is much poorer than the average South African, the extent of poverty in Lesothois comparable with the average South African living in the same subregion. While this is not anencouraging picture of poverty for the subregion, it might be reassuring when seeking to explainthe high rates of poverty in Lesotho. It is also sobering in terms of the difficulties in reducingpoverty among Basothos in the mountainous regions.

4.9 The counterfactual. Excluding LHWP, the World Bank provided net credits for ruraldevelopment (including agriculture, education and roads) totaling $217 million for projects thatclosed or were approved in the 1990s. Would Lesotho's economic and social development havebeen worse if the World Bank had not provided its assistance through strategic analysis andadvice as well as investment support in rural development? This evaluation concludes that,while the Bank's contribution to rural development was unsatisfactory, it had a positive impactin some areas (Annex 5b).

4.10 World Bank support of supply-led agricultural development projects in the 1970s and1980s aimed mainly at improving land management and controlling erosion to improveagricultural productivity.22 They were not successful because incentives and supportinginstitutions for increased crop and livestock production did not exist. The change in approachtowards a demand-led development program in agriculture (Agricultural Policy CapacityBuilding Project) in the late 1990s, now supported by the Bank along with other donors, has notyet shown results, but it supports changes that are in the right direction for rural development inLesotho. These changes would not have taken place without the enthusiastic support of the Bankat the design stage following the widely held conclusion that supply-led investments assisted bythe Bank had failed.

4.11 Economic and policy analysis of the agricultural sector and poverty in Lesotho wouldprobably not have been done without the World Bank. In particular the evaluation of the

21 In 1998, the UNDP found that 45 percent of all income flows to the richest 10 percent of the population, compared to less thanI percent for the poorest 10 percent, translating into a Gini coefficient of 0.57 (UNDP 1999).

22 "Supply-led" refers to a development strategy focused on generating a supply of goods and services without necessarily takingaccount of demand. "Demand-led" refers to a strategy focused on responding to a known or projected demand for goods andservices.

23

prospects for diversification and the poverty assessment were important contributions todevelopment planning in Lesotho. But the promotion of diversifying into horticultural crops as astrategy for poverty reduction proved infeasible given the limited available technology andextension, unreliable water resources for even the simplest irrigation schemes, weak financialservices, and distant and unreliable markets in South Africa.

4.12 The Development Fund created to use revenues from the LHWP to support ruraldevelopment and poverty reduction in Lesotho has had serious shortcomings since its inception(para. 3.7). Its failure was recognized by the Bank and addressed in Phase 1B of the LHWP.After a number of failed attempts to make marginal changes in the original concept, the Bankand the government agreed in FY00 on the Community Development Support Project which,though it is a small pilot, focuses on providing assistance to rural communities and theparticipation of those communities. This change in project orientation would not have takenplace without the Bank-the orientation follows models for social funds the Bank has introducedelsewhere in SSA.

Human Capital Development

4.13 Excluding IBRD loans for the LHWP, human capital development drew the largest IDAsupport, amounting to 40 percent of all IDA lending to Lesotho during the 1990s. Most of thiswent to education, a pattern repeated from previous decades. In addition to lending, the WorldBank provided analytical and advisory services, particularly in education.

4.14 The counterfactual - Education. Could the highly influential analytical support forpolicy formulation and sector planning, which laid the foundation for Lesotho to prepare itsEducation Sector Development Plan and Action Program and guided all partners' effort for muchof the 1990s been provided by institutions other than the World Bank? Probably not. The Bankbuilt on this work with effective sectorwide interventions to increase capacity throughconstruction and furnishing of classrooms and university laboratories and increased number ofteachers. Enrollment rates increased substantially at the secondary level. Central and district-level efforts at institutional development were impressive, particularly in a highly unstablepolitical environment. The Bank was effective in strengthening the MOE institutional capacityand supporting district level enhancements in primary and secondary education. The Directorateof Planning was strengthened and there was concerted attention to incentives that allowed theeducation sector to recruit and retain staff. The Bank also supported the construction andstaffing of ten District Resource Centers, bringing services closer to the community andproviding a much-valued support network to the many inexperienced teachers in rural areas. TheBank was credited for bringing about broad consensus between the state, churches, andcommunities on education policy through the 1995 Education Act. In sum, the adoption of theAct, establishing of a Teacher Service Division, implementation of decentralization and the Bankinvestments in buildings and curriculum have modernized schools, increased the govermnent'sinfluence in the education sector and laid the basis for further sector development.

4.15 Whereas enrollments at the university level doubled during the 1990s, the managementefficiency and cost containment objective in this high cost subsector was not achieved.23 . Risingtertiary spending minimizes the opportunities to balance sector budgets efficiently and equitablygiven that the government began implementation of free primary education in January 2000.

23 Under the recent FYOO ESDP II, the Bank hopes to reverse the negative trend in recurrent resource allocation through publicexpenditure review and establishment of a medium-term expenditure framework.

24

However, the ongoing FY00 ESDP II, supports special efforts to enhance school participationthrough grater emphasis on affordable access and equity.24 On balance the Bank's effectivenesson the education program was moderately satisfactory (Annex Sa).

4.16 The counterfactual - Health, nutrition, and population. The World Bank did notprovide much relevant assistance in the health sector during the 1 990s. Would it have been moreeffective for the Bank not to have intervened? The Bank's contribution, in terms of effectivelyexpanding health services and impacting positively on health status, was unsatisfactory (AnnexSa). No analytic work was done for nearly two decades in health and nutrition, although a highquality Population Sector review was completed in 1994. It was too late to affect design forBank lending (for HNPI during 1985-94 and HNPII during 1989-98) and it was inadequatelydisseminated to catalyze for a necessary shift in strategic objectives as the HIV/AIDS epidemicemerged. The link between analytic work and lending was weak. The Bank was also ineffectivein the critical areas of sector management, including resource allocation and developing basichealth information systems. Only recently did the Bank adopt a new adaptable program credit,supporting a sectorwide approach for HNP in FY00.

Private Sector Development

4.17 The sector is the third largest recipient of IDA's loans (excluding IBRD loans for theLHWP), drawing about 22 percent of total IDA lending to Lesotho during the 1990s: Industrialand Agro-Industry Project ($21 million) and Privatization and Private Sector DevelopmentProject ($1 lmillion). No analytical work preceded either of the two lending operations. CouldBank interventions have contributed more to the emergence of an efficient private sector?

4.18 The lack of analytical work was particularly evident in the attempt to develop theindigenous private sector in the context of the Agro-Industry project; it ultimately failed becauseof an inadequate assessment of the prospects and constraints in the sector. Similarly, the failureto create linkages between the manufacturing export firms and local entrepreneurs as a way ofdeveloping the indigenous sector, was partly explained by the lack of a pre-feasibility study. Theequity fund, established to assist investment by local entrepreneurs, also failed for lack of Banktechnical support.

4.19 The Industrial and Agro-Industry Project was very complex, providing, among otherthings, a line of credit for private sector investment. OED rated the outcome as unsatisfactory.The project attracted foreign investors, but required government subsidies. The project was notsuccessful in encouraging indigenous investment, nor in diversifying agricultural investmentsinto higher value added activities, or establishing linkages to the LHWP. Only a few investmentpolicy reforms were implemented to encourage private sector investment, including replacing thecostly tax holiday with a general 15 percent corporate tax. A part from political uncertainties,many constraints remained such as a land policy (absence of legal titles) that discouragesinvestors, a legal system that is not capable of protecting investors, and inadequate financialintermediation. These are the areas where a dialogue on policy should have been more forceful.Because Lesotho's indigenous private sector is still at microenterprise level (employing no morethan one or two workers) and operates mainly in rural areas, the focus of this project was

24 Until the end of the decade, Bank objectives were oriented toward expanding physical access to, and quality of, formaleducation, rather than enhancing participation through nonformal or more flexible forms of schooling and eliminating financialbarriers to participation by the poor. These omissions became obvious by decade end, leading to a revision of Bank objectives toinclude-in addition to a continued focus on improving the quality of basic education-a renewed emphasis on affordable accessand equity, nonformal education, and early childhood development to achieve universal primary education by 2011.

25

misplaced. It should have looked more at microenterprise development, policy support, andprivate sector participation in infrastructure, rather than development banking activities(dependent on subsidies), which would be expected to support mature enterprises.

4.20 The privatization project also has been problematic. The privatization process evolvedmore slowly than expected. Only 10 of 32 state-owned enterprises have been privatized for aproject that has called for a privatization of at least four enterprises each year during the period1995-2001 (Annex 4.4 provides a list of privatized enterprises and privatization proceeds in US$million). This outcome is explained mainly by: (i) Lesotho's weak private sector; (ii) delaysbrought by multiple consultations both in cabinet and parliament about each stage of theprivatization process; and (iii) the difficulty for Basotho entrepreneurs to access capital due tothe lack of collateral. The project underestimated the extent of vested interests againstprivatization. Overall, the Bank's contribution to private sector development (PSD) during the1 990s was unsatisfactory, although it improved toward the end of the decade as the Bank startedto address sectoral constraints more effectively, including the inefficiencies of the utility sectorunder the new Public Utility Sector Reform Project (Annex 5c).

4.21 The counterfactual. The Bank would probably have contributed more to the emergenceof an efficient private sector had its assistance been preceded or accompanied by the array ofinterlocking legislative, regulatory, and institutional and financial measures critical to thecreation of more congenial environment for private sector investment as well as improved watersupply and electricity services. For example, would continued Bank engagement in domesticwater supply, rather than its "low profile" in the mid- to late 1990s have been a more prudentpolicy to improve services to urban areas and the manufacturing sector (Le Moigne 2001, page6)? The Bank misjudged the interest of other donors to fill the void created by the Bank'sdisengagement from domestic water supplies in favor of the LHWP. In the event the 1998 CASproposed a renewed focus on public utilities and in 1999 the Bank, in collaboration with otherdonors, renewed its interests in domestic water supplies in Lesotho (Annex 5d).

4.22 Also, would it have made a difference if the Bank had insisted on keeping the Muelahydropower component of the LHWP as part of the total project, rather than as a separate projectoutside the management of the central oversight authority? Would the procurement problemsthat arose and the subsequent high cost of private financing of the power plant, as well as thecost of the diversion tunnel made necessary by the delay have been avoided? The higherelectricity rates (compared with the cost of supplies from RSA) have a severe impact onmanufacturers. Those close to the implementation of the LHWP claim that, since electricitygeneration was not part of the water project, the RSA was not prepared to include the Muelapower plant under the central management authority. Nevertheless, it does appear that the Bankshould have used its influence to insist on including Muela in the LHWP management. Thiswould have facilitated Muela's financing and implementation, and also created an incentive forall parties to save on costs-with Lesotho contributing a percentage corresponding to the cost ofthe power plant (Annex 4.5).

26

5. Attribution of Performance of Development Partners5.1 This chapter examines the contribution the World Bank and its development partners toBank assistance programs, as well as the impact of exogenous factors. Such attribution isobviously difficult to measure, because it requires disentangling the Bank's contribution from thegovernment's and the Bank's aid partners.

World Bank Performance

5.2 During the 1990s the reforms of the Lesotho economy supported by the Bank and theIMF achieved growth of nearly 4 percent a year. The Bank also provided strong leadership forthe review of implementation of Phase 1A of the LHWP and managed the appraisal of Phase lB.These were competently carried out and won praise from the government and all partners in theproject. The opinion is that Phases IA and lB of LHWP would never have come to fruitionwithout Bank leadership and guidance during difficult negotiations among financiers and thegovernment over 13 years. On the other hand, the Bank support did not strengthen governmentability to utilize the resources earned from the receipt of royalty for supply of water through theLHWP to stimulate rural development. It was not until the 1998 appraisal of Phase lB of theproject, when the failures in rural development became a prominent issue, that action was takenon this direction.

5.3 Another successful series of activities was in education. The Bank's support in educationwas based on relevant and timely analytic work and consistent with government and CASobjectives. The moderately satisfactory 1991-99 Education Sector Development Project led to astrong relationship with the client, allowing for effective problem solving despite considerablepolitical turmoil.

5.4 The Bank was associated with some project failures in agriculture, road, health, and theprivate sector because it had not adequately investigated the sectoral issues and the government'sweak ownership of projects and programs. In agriculture projects were unduly complex, whichmeant that start up was slow. Also, the Bank did not apply this lesson from the past: numerousconditions of project effectiveness are sure to cause difficulties if not dealt with at or beforenegotiations. As a result, quality at entry for agricultural projects was poor. Consequently,supervision became difficult and there were long delays in achieving effectiveness.25 In the roadsector the situation was more serious. Failed institutional development resulted in anunsatisfactory implementation of the ongoing road project.

5.5 The World Bank failed to do any formal analysis of health and nutrition issues, making itpoorly prepared to support two complex HNP projects from 1990 to 1994. The Bank alsoseverely underestimated the institutional capacity needed for these projects satisfactoryimplementation. This oversight was compounded by lengthy gaps in formal supervision, as wellas slow Bank action to resolve implementation problems.

25 Overall, the quality of supervision was moderately satisfactory, but Bank staff turnover was, sometimes, rapid. For instance,for the Agricultural Policy and Capacity Building Project the task manager has been the same since appraisal; also, for the ruraldevelopment component of the LHWP the task manager has been the same since the appraisal of Phase lB. However, in the caseof the Road Rehabilitation and Maintenance Project there have been three task managers since Board approval in May 1996 andvery little evidence of improvement in project performance. The problem of changing task managers also applies to theCommunity Development and Support Project approved in FY00.

27

5.6 In private sector development, the Bank did not exercise sufficient prudence in the designof projects. The projects were complex-involving multiple objectives and implementingagencies and numerous conditions of effectiveness-and experiencing delays in effectiveness,ranging from 9 to 19 months (Annex 3.5). Quality at entry was therefore poor. The Bank didnot also take measures to improve the poor performance of the Agro-industry project line ofcredit component despite warning signals on financial performance of the host institution, theLesotho Bank. Similarly, the Bank did not provide ongoing technical assistance to the equityfund in the project, on which the fund's performance was dependent. The Chamber ofCommerce and Industry's officials reported to the OED mission that the equity fund did not helpentrepreneurs because they could not meet the conditions put in place by Lesotho NationalDevelopment Corporation, the implementing agency. Thus, the fund was undisbursed for a largepart and returned to the Bank. Concerning the Privatization and PSD project, officials indicatedto the mission that the Bank's support was weak. The officials suggest that Bank's support thatwas available at the beginning of the project in terms of workshops and seminars should havecontinued during the implementation to clarify the rationale for privatization.

Borrower Performance

5.7 The government was a constructive partner in IMF and Bank efforts to improvemacroeconomic policy during the 1990s, although much of the success was due to the impact ofthe LHWP construction. The high growth rates of GDP during most of the 1990s speak forthemselves, but reductions in mine workers' jobs in South Africa since the early 1 990s led to alow growth in GNP, except for the peak in 1997 which was again due to LHWP construction.

5.8 There was, however, limited enthusiasm on the part of the borrower for the World Bank'sprojects for agriculture and rural development. It is difficult to assess the reasons for thegovernment's views, but there were, for example, bitter differences on the need for parastatalreform in agriculture, on the justification for changes in agricultural price policy, and on theurgency to amend laws on land tenure and on regulations for grazing rights. Some of thesedifferences have been resolved, but many remain.

5.9 Implementation of the rural development program in the LHWP was originally to beintegrated into ongoing national programs and managed by a "combination of governmentagencies, NGOs, and local and regional contractors."26 This approach was clearly an attempt togive all institutions using public resources some access to the large increase in governmentrevenues, but this disparate management was also the reason the program did not work. Despitegovernment commitments to efficiently manage the Fund" and the subsequent conversion of theFund into the Lesotho Highlands Revenue Fund (LHRF), the Fund management was inadequate,with insufficient internal controls to account for expenditures and weak technical appraisal andsupervision of projects.28 In 1999 the LHRF was superceded by the Lesotho Fund forCommunity Development (LFCD) which will be supported by the FY00 CommunityDevelopment Support Project. It will still take some years for the new LFCD to be activated in asubstantial way since it was only recently that key staff for this Fund were appointed in Lesotho.

26 Bank Report No. 8853-LSO, Staff Appraisal Report, Lesotho Highlands Water Project (Phase IA), July 2, 1991, page 52.

27 See Annex 7-1 of Bank Report No. 8853-LSO, ibid.

28 Bank Report No. 183 87-LSO, Project Appraisal Document, Lesotho Community Development Support Project, 1999.

28

5.10 The borrower provided considerable leadership in education. It used analytical work bythe World Bank to develop a comprehensive education sector reforn program. Consultationwith stakeholders on education policy was substantial, while consultation with, and coordinationof, external partners has been reasonably effective through the Directorate of Planning under theumbrella of ESDP I and II. Counterpart funding and programn implementation were frequentlydelayed, but ultimately satisfactory, while compliance with covenants was achieved.

5.11 In the health sector the lack of capacity and political will to generate basic data systemscontributed to the lack of meaningful analytic work and a sector strategy. This lead inevitably tothe poor "quality at entry" of lending operations. Accountable departments took insufficientresponsibility for implementation, shifting the burden to a separate Project Management Unit.The Ministry of Health also fell short in reaching agreements with nongovernmental partnersessential to achieve sector and project goals. Finally, compliance with legal covenants, whichwere admittedly excessive and imprecise, was not achieved.

5.12 The government's inadequate analysis and the absence of a strategy had a detrimentalimpact on attempts to make progress on private sector development. As a result, except forfinancial and legal covenants, project preparation and implementation of Bank assistanceprojects faced many difficulties and the outcomes were disappointing. Nevertheless, thegovernment has over the last year recognized the importance of making progress in private sectordevelopment and has strengthened the management of this effort in the context of the ongoingproject. This appears to be bringing better results.

Aid Partner Performance Issues

5.13 The strength of partnership among donors varies according to the sector. It has beenstrong in LHWP and education, moderately strong in health, and improving in rural developmentfollowing the introduction of the FY98 Agricultural Policy Capacity Building Project, jointlyfinanced by a number of donors and now effectively coordinated by FAO. Although the Bankfinanced less than 4 percent of the estimated $3.7 billion cost of the first-phase of LHWP, it wasa catalyst for aid and private capital inflows.

5.14 Donors played an important role throughout the 1990s in shaping the education sectordevelopment program and mobilizing coordinated international and government support for theprogram.19 But donors indicated that consultation was still inadequate, particularly with respectto the recently-adopted 1999-2011 education sector program supported (in its first phase) byESDP II. Donors providing parallel funding claimed that they were not invited to participate insuch key preparation events as log-frame sessions. In the HNP sector the ratio of other donors'support to IDA was lower than in education. Aid coordination in the design phase wassatisfactory, resulting in complementary inputs in many areas (rural clinics, National HealthTraining College, National Tuberculosis Program). But aid coordination was difficult in theimplementation and evaluation phases to track disbursements from other donors because ofdonors' diverse reporting standards.30 Finally, partners appreciated the Bank consultative processwith the donor community in the preparation of the Health Sector Reform Program (2000-2009).

29 Within ESDP I (1991-99) and ESDP 11 (1999-2003) IDA funding has been more than matched by parallel funding from otherextemal partners (EC and USAID for ESDP l; UK, AfDB, Germany and Ireland for ESDP It). The IDA commitment has alsohelped to mobilize government resources, amounting to nearly 30 percent of total program costs under ESDP 1.

30 A new Project Accounting Unit will be established within the Ministry of Health to allow for standardized and synthesizedreporting of all partners' contribution.

29

5.15 While donors collaborate in the major sectors, there is almost no leadership.3" The CAEmission found strong support among donors for the World Bank to provide such leadership.Lesotho's limited absorptive capacity for external assistance also means that it could benefitfrom harmonization of donor polices and procedures and from more effective aid coordination.

5.16 At present the Bank has only a liaison office in Maseru staffed by one support staff; theCountry Director has been based in RSA since 2000. This is not adequate to meet theexpectations of the client and donors regarding Bank support and leadership. A strongeroperational representation in Maseru or more frequent interaction with the government anddevelopment partners from the Bank's office in Pretoria is recommended. Such representationcould help develop a closer partnership with the government, enhance coordination with donorsand NGOs, and improve portfolio performance.

Exogenous Factors

5.17 The end of apartheid in South Africa presented Lesotho with extraordinary opportunitiesfor greater economic integration and employment. In the short-run, however, it caused a sharpdrop in foreign investment in Lesotho, reduced remittance flows from RSA, created a brain drainof skilled professionals, shifted donor resources toward RSA, reduced fiscal revenues fromSACU and lowered regional growth opportunities. Another factor that has already had aconsiderable impact and promises to cause further difficulties is the regional HIV/AIDSpandemic, destined to result in high adult prevalence rates in Lesotho (currently one in fouradults infected) because of increased interregional movement of people in Southern Africa. Thepolicy changes needed to adapt to both the opportunities and the challenges presented by the newSouth Africa occurred only slowly and, so far, incompletely in Lesotho.

5.18 In addition to subregional developments, Lesotho, one of the most vulnerable smallcountries in the world because of its limited resources, is facing a changing global economicenvironment.3 2 For instance, the trade preferences once afforded to small states have beeneroded, following the agreement on post-Lome arrangements recently concluded between the EUand the 71 African, Caribbean, and Pacific (ACP) countries. The ACP countries will have togradually give up the principle of nonreciprocal trade preferences. More important, the phasingout, by 2004, of the Multifibre Arrangement will remove incentives to invest in ACP countries.Under the current agreement Lesotho's textile exports to the United States and Canada are notsubject to quota restrictions. As a result almost all of the growth of Lesotho's exports to theUS-which increased by 73 percent between 1994 and 1998, though starting from a very smallbase-came from the textile sector, mainly garments, constituting more than 80 percent ofLesotho's total merchandise exports.

31 The UNDP is responsible for donor coordination in Lesotho and organizes the country's periodic roundtable conferences. Thelast roundtable was held in Geneva in 1997 during which it was agreed that there would no longer be a roundtable conferenceuntil the government has reformulated its poverty program (anticipated in two years time). However, no roundtable conferencehas been held since 1997 because of the political instability following the 1998 elections.

32 The Commonwealth/World Bank vulnerability index which ranks countries according to measurable components of exposure(e.g., lack of diversification, extent of export dependence, and impact of natural disasters) and resilience to external shocks listsLesotho among the most vulnerable countries (World Bank, 2000f, table 6. page 22).

30

6. Conclusions and Recommendations

6.1 Poverty, human capital development, HIVIAIDS and institutional strengthening.These are major challenges in the foreseeable future. Half the population remains below thepoverty line. The Gini coefficient of 60 percent is one of the highest in the world.Unemployment is about 40 percent. Highland rangeland resources continue to deteriorate.Adult HIV/AIDS prevalence rate is estimated at 24 percent. Poverty and inequality haveregional, occupational, gender, and income dimensions: more than 80 percent of the poor live inrural areas, particularly the mountainous regions and are concentrated among small farms,shepherds, and women. OED recommends that World Bank assistance should center on:

* Reducing poverty and inequality in the medium to longer term by focusing on the quality ofeducation and human capital development at all levels, particularly in the poor mountainousregions, to increase employment prospects for Basothos within Lesotho and South Africa.

* Increasing the focus of the Bank's assistance program on HIV/AIDS by featuring itprominently in Bank assistance strategy, such as in the support to institutions capable ofmonitoring and coping with HIV/AIDS.

* Using its involvement in the LHWP and agricultural policy formulation to enhance the policyand regulatory institutions for rangeland management in Lesotho (including land tenure,research, extension, rural finance, and grazing management) to improve the sustainableproduction of livestock in the highlands and an enhanced enabling enviroment for privatesector development.

6.2 Monitoring and evaluation. A critical need across almost all sectors is to establish bettermonitoring and evaluation systems. This is a problem with roots in the lack of data collectionand analysis. The timeliness and reliability of national accounts, fiscal, trade, monetary, andsocial data have been of particular concern. Without reliable data, neither the govermnent nordonors can monitor and assess development progress or identify more successful strategies.OED recommends that:

* The Bank should help Lesotho improve its statistical database, most urgently in areas relatedto poverty reduction (for example, household surveys and health and nutrition informationsystems) and promote monitoring and evaluation systems within key line ministries.

* Monitoring and evaluation should be accompanied by an ESW program that includes povertyassessment update and/or public expenditure reviews.

6.3 Donor coordination. There are considerable differences in views among donors aboutdevelopment assistance to Lesotho which can usually be resolved through collaboration andleadership. While there is collaboration among donors there is almost no leadership. Thisevaluation found that the leadership vacuum is real and there would be strong support for theWorld Bank to provide that leadership. The Bank's consultation with donors on developmentpriorities was viewed as insufficient but improving, hampered by lack of local representation.OED recommends:

* A stronger operational representation in Maseru, or more frequent interaction with thegovernment and development partners from the Bank's office in Pretoria. This wouldenhance coordination among donors and improve portfolio performance.

31

6.4 Political stability. World Bank assistance to Lesotho has been delivered in a setting ofpolitical uncertainty with limited government ownership, which has hampered projectimplementation. At the same time donors, who differ in their readings of the politicalenvironment, differ in their perspectives on the risks associated with the implementation of theirprograms. OED suggests:

* The Bank should improve its understanding of the political economy of policy change inLesotho and hence enhance its assessment of government ownership of assistance programsand the risks associated with those programs.

33

Bibliography

Deininger, Klaus, Lyn Squire, and Swati Basu. 1998. Does Economic Analysis Improve theQuality of Foreign Assistance? World Bank Economic Review, vol. no. 12, issue no. 3.

Eriksen, John H. 1996. "An Evaluation of the Agricultural and Livestock Activities of theLesotho Highlands Water Project - Current Status and Future Orientation," draft.

Gelb, Alan, and Gene Tidrick. 2000. Growth and Job Creation in Africa." Mimeo, WorldBank, April 28, 2000. Unpublished draft paper.

Goldstein, Ellen A. 2001. "Lesotho CAE: World Bank Support for Human CapitalDevelopment in the 1990s," background paper, OED. Washington, D.C.: World Bank.

International Monetary Fund. 1999. Recent Economic Development and Selected Issues, June30, 1999. Washington, D.C.: World Bank.

Le Moigne, Guy. 2001. "Lesotho CAE: Water Sector Strategy Review," background paper,OED. Washington, D.C.: World Bank.

Lumbila, Kevin. 2001. "Lesotho CAE: Evaluating Bank Assistance for Private SectorDevelopment," background paper, OED. Washington, D.C.: World Bank.

Sechaba Consultants. 2000. Poverty and Livelihoods in Lesotho 2000. More than a MappingExercise. Edited by John Gay and David Hall. Maseru, Lesotho.

_.___ 1999. Poverty in Lesotho, 1999. Maseru, Lesotho.

1994. Poverty in Lesotho, 1994: A Mapping Exercise. Maseru, Lesotho.

T SW-B & A Consult 1999. "The 1998/99 Socio-Economic Survey of Phase IA," draft preparedfor the Lesotho Highlands Water Project, 1999.

Taddese, Abeba. 1996. "A Review of the Focus on Poverty Reduction in FY96 CountryAssistance Strategies in the Africa Region." World Bank Africa Regional Office.

UNAIDS. 2000. The UNAIDS Report. New York, NY: Oxford University Press.

UNDP. 2000. Human Development Report. New York, NY: Oxford University Press.

. 1999. World Income Inequality database, Beta-version. New York.

van Holst Pellekaan, Jack. 2001. "Lesotho CAE: Poverty Reduction and Rural Development,"background paper, OED. Washington, D.C.: World Bank

World Bank. 2001. Annual Review of Development Effectiveness: From Strategy to Results.Report No. 21550. Washington, D.C.: World Bank.

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Bibliography (cont.)

. 2000a. Interim Poverty Reduction Strategy Paper. Report No. 21834. Washington,D.C.: World Bank.

____. 2000b. Lesotho: The Development Impact of HIV/AIDS. Selected Issues and Options.World Bank Report No. 21103-LSO. Washington, D.C.: World Bank.

. 2000c Intensifying Action Against HIV/AIDS in Africa. Responding to a DevelopmentCrisis. World Bank AIDS Campaign Team for Africa. Washington, D.C.: World Bank.

. 2000d. Can Africa Claim the 215' Century?. Washington, D.C.: World Bank.

2000e. Is Census Income an Adequate Measure of Household Welfare? CombiningCensus and Survey Data to Construct a Poverty Map of South Africa, prepared byStatistics South Africa and the World Bank; unpublished draft, January 2000.

. 2000f. Small States: Meeting Challenges in the Global Economy. Report of theCommonwealth Secretariat/World Bank Joint Task Force on Small States. Washington,D.C.: World Bank.

. 1999. "Implementation Completion Report: Lesotho Highlands Water Project (PhaseIA)." Report No. 19169.

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. 1998b. "Kingdom of Lesotho. Post-Conflict Needs Assessment." Unpublished intemalWorld Bank document.

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Annex 1.1: Selected Social and Demographic Indicators of Lesotho, SADC, and SSA, 1980

Bots- Congo Maw-i- Mozam- Sevch- ~Rep. Of Soazi- Tanz- Zih AC SACSeries Name Lesotho Angola BMs lno alaam Maun- Mo-a- Namibia Sec- South 7amhiaiZm- A A SSA

wana D9em Rep ti~ bqeelles Afia land ania abwe etries. W/o RSA

Population CharacteristicsLife expectancy at birth:

Total (years) 53 4 1 58 49 44 66 44 53 .. 57 52 50 50 55 52 5 1 48Female (years) 55 43 60 5 1 45 69 46 54 .. 60 54 52 52 57 54 53 49Malec(years) 52 40 56 47 43 63 42 5 1 .. 54 49 48 49 53 50 50 46

Mortality rate, infant (perl.Ooo0live births) 119 154 7 1 112 169 32 145 90 .. 67 100 108 90 80 103 106 115Birth rate, crude (per 1,000 people) 40 50 45 48 55 24 46 41 29 36 44 47 50 43 43 43 47Death rate, crude (per 1.000 people) 1 5 23 10 1 6 23 6 20 14 7 1 2 1 5 1 5 1 5 1 2 1 5 1 5 1 8Fertility rate, total (births per woman) 6 7 6 7 8 3 7 6 5 6 7 7 6 6 6 7

Access to Safe water (1975)Total, % of population with access . .. 45 .... . ... *

Urban . .. 95 . . . ..

Rural 39 .... . ... .

EducationIlliteracy rate:

Adult total (% of people 15+) 29 . 42 66 56 26 76 34 . 24 40 50 41 30 43 44 62Young adult female (% aged 15-24 yrs.) 5 . 25 62 60 1 5 80 20 . 1 5 24 43 35 20 34 35 55.9

Young adult male (% aged 15.24 yrs.) 30 .. 32 3 1 29 1 1 43 1 8 . 1 5 22 1 8 1 8 8 23 24 34.2

School enrollmentPrimary (% net) 67 83 76 71 43 79 35 86 .. 68 8 1 68 77 72 70 70 -L

Female (%net) 80 80 83 59 38 79 32 92 .. 68 82 .. 73 68 69 69Male (%net) 55 87 69 82 48 80 37 81 .. 67 79 . 8 1 77 70 71

Secondary (% net) 69 81 40 44 39 56 40 67 .. 62 62 .. 35 20 5 1 50

Female (% net) 82 67 45 3 1 22 55 3 1 71 .. 61 61 .. 25 17 47 46Male (%net) 55 96 34 57 57 57 49 64 .. 63 63 .. 46 24 55 55

Secondary (% gross) 1 8 2 1 19 24 5 50 5 ,. . . 38 3 1 6 8 1 9 19 1 5Ptupil-teacher ratio, primary 48 . 32 . 65 20 ... 22 . 34 4 1 49 44 39 39

HealthImmunization

DPT (% of children under 12 mnonths).. . .. . 58 87 .. . . . . 59 .. . 68 68

Measles (% of children under 12 months) -. . 63 18 49 .. . .. . .. . 45 .. . 44 44

Land UseArable land (% of land area) 9.6 2.3 0.7 2.9 13.3 49.3 3.6 0.8 2.2 10.2 10.8 2.5 6.9 6.4 9 9 5

Labor forceTotal (millions)) 0.6 3.4 0.4 11.9 3.1 0.3 6.7 0.4 . 10.5 0.2 9.5 2.4 3.2 4.0 3.5 169.9

Female (% of total) 37.9 47.0 50.1 44.5 50.6 25.7 49.0 40.1 . 35.1 33.5 49.8 45.4 44.4 43 43 42

Iment ratios are for 1990. ** lmmunizatoin rates are for 1993Members of South African Development Commnunity (SADC) are: Angola, Botswana, Congo D. R., Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, 1'anzania, Zambia and

bonly gross primary enrollment is available for the period 1993-95

Source- WDI, 1999 and African Developmet Indicators Database.

Annex 1.2: Selected Social and Demographic Indicators of Lesotho, SADC, and SSA, 1997

Bots- Congo Mauri- Mozam- Sec- Rep. of Snazj- Tanz- Zi,mb- SADC SADCSeries Name Lesotho Angola Bots Dem. Rep. w Mlait ui- bique Namibia eh South ld anSa Zambia 6ab CAt_ w RSA SSAAfrica

Population CharacteristicsLife cxpectancy at birth:

Total (years) 56 46 47 51 43 70 45 56 71 65 58 48 43 52 54 53 51Female (years) 57 48 48 52 43 75 47 57 75 68 60 49 43 54 55 54 52Male (years) 55 45 46 49 43 67 44 55 68 62 55 47 43 51 52 51 49

Mortality rate, infant (per 1,000 live births) 93 125 58 92 133 20 135 65 15 48 65 85 113 69 80 82 92Birth rate, crude (per 1,000 people) 35 48 34 47 48 17 41 36 21 25 37 41 42 31 36 37 41Death rate, crude (per 1,000 people) 12 19 15 IS 23 7 20 12 7 8 10 16 19 12 14 14 15Fertility rate, total (births per woman) 5 7 4 6 6 2 5 5 2 3 5 6 6 4 5 5 5

Access to Safe Water (1995)Total, % of population with access 62 33 70 ... 60 100 24 60 83 59 60 49 53 36 58 58 47

Urban 64 ... 100 ... ... ... ... 62 ... 90 80 ... ... ... 79 77 74Rural 60 ... 77 ... ... ... ... 45 ... 33 42 ... ... ... 51 56 32

EducationIlliteracy rate:

Adult total(% ofpeople 15+) 18 .. 25 42 43 17 59 20 .. 16 22 28 25 14 27 28 42Young adult female (% aged 15-24 yrs.) 2 9 30 42 6 58 8 .. 10 10 14 17 5 18 18 30Young adult male (% aged 15-24 yrs.) 19 .. 17 13 21 7 27 11 9 12 7 10 2 13 13 20

School enrollment

Primary(%net) 69 35 80 58 99 97 40 91 .. 100 95 48 72 93 75 73 -79

Female (% net) 74 34 83 48 100 97 34 94 100 95 49 72 92 75 73 72b

Male (% net) 63 35 78 69 97 96 45 89 100 94 48 73 94 75 73 87'Secondary (% net) 73 31 89 37 73 68 22 81 .. 95 82 42 59 63 60

Female(%net) 80 28 91 29 54 70 17 84 97 79 .. 35 56 60 57Male(%net) 66 34 86 46 91 66 28 77 .. 93 84 49 62 65 63

Secondary (% gross)* 31 .. 65 26 17 65 7 62 .. 95 54 6 27 50 42 37 30Pupil-teacher ratio, primary* 48 .. .. .. .. .. .. .. .. .. 34 37 .. 39 39 39 34

HealthImmunization

DPT (% of children under 12 months)** 57 41 76 18 95 .. 61 63 98 .. 67 74 70 78 67 67 52.5

Measles (% ofchildren under 12 months)** 53 78 79 20 87 .. 70 57 100 .. 57 69 69 73 68 68 57.9

Land UseArable land (% of land area) 10.7 2.4 0.6 3.0 16.8 49.3 3.8 1.0 2.2 12.6 9.8 3.5 7.1 8.0 9 9 6

Labor forceTotal 0.8 5.4 0.7 19.6 4.9 0.5 8.6 0.7 .. 15.9 0.3 16.0 4.0 5.3 6.4 5.6 268.1

Female (% of total) 36.8 46.4 45.7 43.5 48.9 31.9 48.4 40.8 .. 37.6 37.6 49.3 45.2 44.4 43 43 42

Note: * Enrollment ratios: 1997 or latest available. ** Immunizatoin rates are for 1993Members of South African Development Community (SADC) are: Angola, Botswana, Congo D. R., Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and

only gross primary enrollment is available for the period 1993-95

Source: WDI, 1999 and African Developmet Indicators Database.

37

Annex 1.3: Annual Assistance to Lesotho and Comparator Countries, average 90-97

Flow: Total ODA Net Net ODA Net IDA IDA Population, Net ODA Net IDA IDA(US$M) Disbursements Commitments in million per capita Disbursements Commitments

(US$M) (US$) per capita per capita (US$)(US$)

Lesotho 123.6 9.2 13.4 1.9 66.2 4.9 7.2

SACU 95.5 3.1 4.5 1.4 67.9 ... ...SADC 434.9 59.0 68.7 11.2 69.4 5.2 6.2

Angola 380.3 18.1 34.3 10.5 36.4 1.7 3.3

Botswana 114.8 0.0 0.0 1.4 81.7 0.0 0.0

Congo, Dem. Rep. 324.7 32.3 12.1 41.9 7.7 0.8 0.3

Malawi 482.0 101.1 107.3 9.4 51.4 10.8 11.4

Mauritius 40.9 0.0 0.0 1.1 37.1 0.0 0.0

Mozambique 1118.4 129.3 149.4 15.3 73.1 8.5 9.8

Seychelles 19.7 0.0 0.0 0.1 267.6 0.0 0.0

Swaziland 48.1 0.0 0.0 0.9 55.9 0.0 0.0

Tanzania 1032.4 176.0 224.0 28.4 36.4 6.2 7.9

Zambia 907.2 163.2 188.2 8.6 105.3 18.9 21.8

Zimbabwe 472.8 43.8 59.0 10.6 44.5 4.1 5.5

Small IDA eligibleSSA countries'Cape Verde 116 4.5 6.0 0.37 313.3 12.2 16.2

Comoros 45 4.5 6.6 0.47 95.4 9.5 13.9

Djibouti 121 2.5 2.9 0.58 210.6 4.4 5.1

Gambia, The 75 10.3 6.1 1.05 71.1 9.7 5.8

Guinea-Bissau 130 12.6 12.0 1.05 124.1 12.0 11.4

Sao Tome & Principe 53 5.1 4.7 0.13 419.3 39.8 36.9

Non-SADCSSA 377.6 55.4 61.8 9.3 83.5 7.6 8.1

Note: The following SSA countries are excluded: South Africa and Nigeria because of their size; Liberia, Namibia, Somalia,

and Sudan because of data problems.

Small is defined in terms of population size (countries with less than 1.5 million).

Source: WDI CD-Rom, OECD: "Geographical Distribution of Financial Flows to Aid Recipients" CD-Rom.

38

Annex 2.1: The Incidence of AIDS in Lesotho, SACU, SADC, SSA, and Worldwideby the End of 1999

No. of adults living withEstimated adult AIDS No. of children No. of orphans'prevalence (%) (aged 15-49) living with AIDS (cumulative)

Lesotho 23.57 240,000 8,200 35,000SACU 25.13 1,195,000 28,850 141,250SADC countries 15.90 1,064,545 38,482 426,636Angola 2.78 160,000 7,900 98,000Botswana 35.80 290,000 10,000 66,000Congo, Dem. 5.07 1,100,000 53,000 680,000Malawi 15.96 800,000 40,000 390,000Mauritius 0.08 ...Mozambique 13.22 ,200,000 52,000 310,000Namibia 19.54 160,000 6,600 67,000Seychelles ... ... ... ...South Africa 19.94 4,200,000 95,000 420,000Swaziland 25.25 130,000 3,800 12,000Tanzania 8.09 1,300,000 59,000 1,100,000Zambia 19.95 870,000 40,000 650,000Zimbabwe 25.06 1,500,000 56,000 900,000Small IDA eligible SSACountriesb 4.08 21,333 860 7,633Cape Verde ... ... ...Comoros 0.12 ... ...Djibouti 11.75 37,000 1,500 7,200Gambia, The 1.95 13,000 520 9,600Guinea-Bissau 2.50 14,000 560 6,100Sao Tome & Principe ... ... ...SSA 8.57 24,500,000 1,000,000 12,100,000Worldwide 1.07 34,300,000 1,300,000 13,200,000' Orphans are defined as children under 15 who have lost their mother or both parents due to HIV/AIDS since the beginning of theepidemic.bSmall is defined in terms of population size (i.e., countries with less than 1.5 million).Source: UNAIDS (2000).

Annex 3.1: 1995 Poverty Reduction Action PlanFoster Labor-Intensive Growth

In Agriculture: In Export-Oriented Light Manufacturing:* Remove price, marketing, and processing distortions * Keep minimum wages at a competitive level* Invest in rural infrastructure * Improve industrial relations* Make land tenure more secure * Reduce utility costs* Promote a reduction in herd size * Root export firms more firmly in the economy by selling factories* Reorient agricultural research and extensionIn the Small Business Sector: In Tourism:* Make it easier for small entrepreneurs (especially women) to get credit * Work much more closely with South African Travel agents

and do business * Develop a special "Lesotho package"* Shift the emphasis away from broad entrepreneurship training in

manufacturing toward training in skills needed in the export and servicesectors

* Develop rural and urban marketplacesThrough Infrastructure Investments:* Use private contractors on public works* Invest more using labor-intensive approaches

Invest in Human ResourcesIn Health Care: In Education:* Exempt children less than five from fees * Lower the cost to parents of primary schooling* Introduce a free basic health service * Strengthen informal education for out-of-school youth* Increase geographic equity * Improve vocational and technical education* Allow local facilities to retain certain fees * Invest more in education in poorer regions

* Create incentives for qualified teachers to teach in remote areas* Spend proportionately more on primary education than university

Strengthen the Safety NetLower the cost of staple foods: * Expand labor-intensive public works

-Remove trade, marketing, and processing restrictions -Decentralize planning and management-Exempt basic foods from the general sales tax -Pay in cash rather than in kind

* Target special programs to vulnerable groups, including an improveddrought relief program

Improve Institutional Capacity* Implement a poverty reduction program financed from LHRF * Privatize activities better performed by the private sector* Decentralize political, fiscal, and administrative authority * Improve planning and budgeting* Reform the civil service * Merge fragmented program management units

* Start doing annual household surveysSource: 1996 CAS (pp. 33-34).

40

Annex 3.2: Lesotho: List of Economic and Sector Work and Country Assistance Strategy

Title Date of Report Report No. TypeLesotho

Country Assistance Strategy

Country Assistance Strategy April-94* P6226-LSO CAS

Country Assistance Strategy January-96 15510 CAS

Country Assistance Strategy May-98 17751 CAS

Economic and Social Policy

Country Economic Memorandum October-83 4415 Economic Report

Country Economic Memorandum May-87 6671 Economic Report

Poverty Assessment Report August-95 13171-LSO Sector Report

Strategic Economic Options Report November-95 Economic Report

Education

Cost Effectiveness of Education January-85 5088 Sector Report

Improving Quality and Efficiency in Education: Toward a Plan for Reform and Revitalization December-89 8066 Sector Report

Implementing Educational Policies in Lesotho July-90 WDP87 Discussion Paper

Education Vouchers in Practice and Principle: A World Survey February-96 19275 Working Paper

Interactive Radio Instruction: Impact, Sustainability, and Future Directions September-99 19766 Working Paper

Financial Sector

Financial Sector Review April-90 8021 Sector Report

A Review of Strategic Options for Financial Sector Reform October-98 Sector Report

Population, Health and Nutrition

Rural Sanitation in Lesotho: From Pilot Project to National Program January-90 9359 Discussion Paper

Low-cost Urban Sanitation in Lesotho March-94 12968 Discussion Paper

Population Sector Review March-94 12553-LSO Sector Report

Strengthening Lesotho's Health Care System January-99 20001 Working PaperPublic Sector Management

Public Expenditure Priorities September-88 7243 Sector Report

Rural Development and Environment

Agricultural Sector review: The Role of Women March-80 WD7 Working Paper

Agricultural Sector Review January-81 3039 Sector Report

Agricultural Sector Review September-86 5866 Sector Report

National Environmental Action Plan June-89 EIO Env. Action Plan

Environment and Agricultural Diversification Study May-93 11906 Sector Report

RegionalInfrastructure

Promoting Regional Power Trade - The Southem African Power Pool June-98 18347 Viewpoint

Intemational Watercourses - Enhancing Cooperation and Managing Conflict - Proceedings of a July-98 WTP414 Technical PaperWorld Bank Seminar.

Population, Health and NutritionFinancing Health Services Through User Fees and Insurance: Case Studies from Sub-Saharan January-96 WDP294 Discussion PaperAfrica

Perspectives on Indigenous Knowledge Systems in Southem Africa April-98 20359 Working PaperSustainable Health Care Financing in Southem Africa May-98 17908 EDI Leaming Resource

World Bank HIV/AIDS Interventions - ex ante and ex post evaluation June-98 WDP389 Discussion Paper

Public Sector ManagementBotswana, Lesotho and Swaziland - Study of Public Administration Management: Issues and April-86 5948 Sector ReportTraining Needs

Rural Development and EnvironmentBasic Education and Agricultural Extension: Costs, Effects, and Altematives April-83 SWP564 Staff Working Paper

Agricultural Research in Southem Africa: A Framework for Action - Summary December-93 13686 Working Paper

SADC Region - Special Programme for African Agricultural Research (SPAAR) Information September-94 13926 SPAAR Working PaperSystem

* The 1994 Bank strategy was presented as part of the Memorandum of the President for the Privatization and Private Sector Development Assistance Project.

41

Annex 3.3: Costs of World Bank Programs for Lesotho and Comparator Countries, FY91-99

a. Total CostsLending ESW

Total costs completion Supervision completion Lending Supervision ESWCountry/Region SM SM SM SM Total costs (°/) completion (°/) (%/) completion (%)

Lesotho 9 4 4 1 100 41 44 15SADC 160 63 67 30 100 40 42 18Angola 12 5 5 2 100 41 45 14Botswana I 0 0 0 100 22 44 33Congo, D.R. 8 5 3 1 100 56 32 12Malawi 24 9 12 3 100 38 49 14Mauritius 7 3 3 1 100 45 38 17Mozambique 21 8 10 2 100 39 50 11Namibia I I 0 1 100 38 0 62Seychelles I 0 0 0 100 43 14 43South Africa 12 4 0 8 100 31 2 67Swaziland 2 1 0 1 100 45 18 36Tanzania 32 11 16 5 100 35 50 15Zambia 23 11 10 2 100 46 44 10Zimbabwe 16 6 7 3 100 40 44 16

Small SSA countriesa 27 11 14 3 100 40 50 10Cape Verde 5 2 3 0 .100 44 50 6Comoros 5 3 2 0 100 56 40 4Djibouti 3 1 1 0 100 46 42 12Gambia, The 5 2 3 0 100 39 55 6Guinea-Bissau 7 2 4 1 100 54 30 16Sao Tome and Principe 3 1 2 1 100 23 58 19

Bankwide 2292 979 898 415 100 43 39 18AFR 656 254 281 122 100 39 43 19

a Small is defined in terms of population size (i.e., population < 1.5 million).

Source: World Bank Business Warehouse.

Annex 3.3: Costs of World Bank Programs for Lesotho and Comparator Countries, FY91-99 (cont.)

b. Efficiency TableNet Average costs $per $1000 of

Net commitment for Average costs $ per net commitment for satisf. MemoTotal Number of commitment, satisf & nonrisky Average costs $1000 of net & nonrisky Average

Regions/Countries costs, Sm projects $m projects, $m perproject, $1000 commitment projects project size, $m

Lesotho 9.1 9 254 112 1011 36 81 28SADC 159.6 128 6881 5195.7 1247 23 31 54Angola 11.9 10 256 149 1190 47 80 26Botswana 0.9 l 12 12 900 73 1 12Congo, D.R. 8.2 5 19 ... 1640 439 ... 4Malawi 23.7 20 1051 651 1185 23 36 53Mauritius 7.1 9 84 59 789 85 121 9Mozambique 20.9 21 1285 1183 995 16 18 61Namibia 1.3 ... ... ... ... ...Seychelles 0.7 1 5 ... 700 156 ... 5South Africa 12.2 1 24 24 12200 508 508 24Swaziland 2.2 1 29 29 2200 76 76 29Tanzania 32.0 22 1338 1050 1455 24 30 61Zambia 22.9 25 1897 1407 916 12 16 76Zimbabwe 15.6 12 883 631 1300 18 25 74 tZ

Small SSA countriesa 26.8 37 412.3 242.7 724 65 110 11Cape Verde 5.2 10 127 97 520 41 53 13Comoros 4.5 8 62 7 563 73 682 8Djibouti 2.6 4 36 3 650 72 867 9Gambia, The 4.9 6 78 64 817 63 77 13Guinea-Bissau 7.0 6 82 45 1167 85 155 14Sao Tome and Principe 2.6 3 27 27 867 97 97 9

Bankwide 2292.1 2229 197103 144120 1028 12 16 88AFR 656.4 564 25157 16920 1164 26 39 45

a Small is defined in terms of population size (i.e., population < 1.5 million).

Source: World Bank Business Warehouse.

43

Annex 3.4: OED and QAG Ratings for Lesotho and Comparator Countries(a) OED Ratings

Satisfactory Outcome (%O) Likely Sustainability (%/6) Substantial ID (%)

Country No. of Net No. of Net No. of Net No. of Netprojects commitment projects commitment projects commitment projects commitment

(US$M)

Through August 2000

Lesotho 21' 166 67 69 46 33 31 27Small countries 65 476 63 70 27 24 25 31SADC 391 9,359 63 72 35 33 27 30SSA 1,636 39,277 61 63 31 31 23 23

IDA operations 2,196 60,153 68 74 36 43 28 31

Bankwide 5,194 263,133 71 75 46 58 31 37FY66-FY89Lesotho 17b 104 71 79 67 66 33 40Small countries 65 476 63 70 27 24 25 31SADC 328 5,998 62 65 33 30 22 18SSA 1,373 27,548 60 59 30 25 22 21IDA operations 1,777 41,204 67 71 33 37 25 27Bankwide 4,338 184,586 70 71 44 54 28 33FY90-FY99Lesotho 4C 62 50 53 0 0 25 15Small countries 12 119 75 76 17 8 50 61SADC 62 3,357 70 85 42 37 40 45SSA 257 11,652 61 73 33 40 27 27IDA operations 405 18,733 71 80 44 52 34 35Bankwide 862 77,689 74 84 53 65 39 45

'Ofthese 21 projects, eight projects approved in FY70s were rated in terms of outcome only.bThese projects are: Thaba Bosiu Rural Dev. (US$6M), Education I - IV (US$32m), Roads 11 (US$6M), LNDC I - II(US$5M), Rural Dev. 11 (US$4M), Roads III (USS7M), Highlands Water Engineering (US$1 OM), Water Supply Project(US$9.8M), Land Management (US$3.9M), Population Health and Nutrition II(US$12.1M), Highways ProjectIV(US$15.1M), Population Health and Nutrition (US$3.OM), Urban Sector Orientation I - 11 (US$8M).c These projects are Population, Health and Nutrition II (US$12.1M), Industrial and Agro-industries (US$21.OM),Infrastructure Engineering (US$8.7M), and Education Sector Development Project (US$24.OM).

(b) QAG Ratings (as of April 2000)

No. of Commitment Projects at Net Commitments Realism ProactivityProjects (US$M) Risk at Risk Index Index

(%) (%) (0/) aO)Lesotho 6 128 50 71 67 n.a.SADC 86 3,805 17 18 73 n.a.

SSA 359 13,374 21 22 79 70

IDA Operations 717 32,802 19 18 80 70

Bankwide 1,503 119,826 19 19 82 72a Percent of projects rated unsatisfactory on development objective and/or implementation progress-as reported in thelast Project Status Report (PSR}-to projects at risk.b Percent of projects rated as problem projects 12 months earlier that have since been restructures, closed, suspended orpartially cancelled.Note: These ratios are sensitive to the period examined. As of July 1, 1999, for example, Lesotho's portfolioat risk (by value) was only 6 percent (one of the six projects), whereas SSA's was 23 percent, and Bank-wide

was 20 percent.

Source: World Bank's Quality Assurance Group.

Annex 3.5: Summary Evaluations for Projects Closed Since FY90 or OngoingDelays in

Amount creditdisbursed as effectiveness Extension Cancellation OED Ratings OED Ratings OED Ratings

Sector/Project Commitment of 8/31/00 (months) (months) (/)a of Relevance of Efficacy of Outcome Sustainability ID impact

Water Supply

LHWP Phase IA 110.0 68.9 10 12 37 Substantial Substantial S Likely Substantial

LHWP Phase IB (ongoing) 45.0 9.7 12 ongoing

Highlands Water Engineering 9.8 10.4 3 0 0 High Substantial HS Likely Substantial

Infrastructure Engineering 9.8 9.3 6 12 II Substantial Substantial S Uncertain Substantial

Rural Development/Poverty

Land Mgmt. & Conservation 16.0 4.0 8 0 76 Modest Negligible HU Unlikely Negligible

Agr. Policy & Capacity Bldg. (ongoing) 6.8 0.8 13 ongoing Substantial Modest MS Uncertain Modest

LHWP Phase IA Developoment Fund Modest Negligible HU Unlikely Negligible

LHWP Phase IA Rural Developoment Substantial Modest MS Uncertain Modest

Community Dev. Support (ongoing) 4.7 0.0 ongoing High

Road Rehab. and Maintenance (ongoing) 40.0 8.5 8 ongoing Negligible Modest HU Unlikely Negligible

Education

Education IV 10.0 12.8 8 24 0 Substantial Substantial S Likely Modest

Education Sector Development 25.2 25.2 7 27 4 Substantial Modest MS Uncertain Modest 4-

Health

Health and Population 1 3.5 4.1 6 24 14 Substantial Modest MS Uncertain Modest

Health and Population 11 12.1 10.7 4 27 18 substantial Negligible MU Unlikely Negligible

Private Sector Development

Industries and Agro-industries 21.0 18.8 9 24 12 Substantial Negligible U Unlikely Negligible

Privatization and PSD (ongoing) 11.0 8.5 19 ongoing Substantial Negligible U Unlikely Modest

Other

Urban Sector Reorientation 20.4 5.4 12 0 73 10/95 0 U Unlikely Negligible

TotallAverage 345.3 197.1 7.8 16.7 24.5 _

Souce: background papers

Outcome Hlighly Satisfactory, Satisfactory, Mod. Satisfactory, Mod. Unsatisfactory, Unsatisfactory and Highly tUnsatisfactory.

Relevance High, Substantial, Modest, Negligible

Efficacy High, Substantial, Modest, Negligible

Efficiency: High, Substantial, Modest, Negligible

ID Impact High, Substantial, Modest and Negligible

Sustainability Likely, Uncertain and Unlikely

The Bankwide average of canceled commitments is 10 percent for FY90-99.

45

Annex 3.6: Ratings Glossary and Definitions

OED's rating methodology is constantly evolving to take account of changes inevaluation methods and operational policies. This annex summarizes the rating scalescurrently used in country assistance evaluations.

Ratings for country assistance performance (outcome): Currently, OED utilizes sixrating categories for outcome, ranging from highly satisfactory to highly unsatisfactory.The three higher ratings are gradations of satisfactory, while the bottom three aregradations of unsatisfactory.

6. Highly Satisfactory5. Satisfactory4. Moderately or Partially Satisfactory3. Moderately or Partially Unsatisfactory2. Unsatisfactory1. Highly Unsatisfactory

Rating for institutional development. The institutional development impact can be ratedas: (4) high, (3) substantial, (2) modest and (1) negligible. Ratings are based on anassessment of the Bank's assistance impact on strengthening the client's capacity tomanage, among others, the following areas:

a. economic management;b. the structure of the public sector, and in particular the civil service;c. the institutional soundness of the financial sector;d. legal, regulatory and judicial systems;e. monitoring and evaluation systems;f. aid coordination;g. financial accountability.

Rating for sustainability. Sustainability measures the likelihood that the developmentbenefits of the country assistance program will be maintained. Sustainability can be ratedas: (3) likely, (2) uncertain, and (1) unlikely. It is OED's intention over the comingmonths to increase to five the number of possible ratings.

46

Annex 4.1: Lesotho at a glanceSub-

POVERTY and SOCIAL Saharan Low-Lesotho Africa Incorne Development diamond'

2000Population, mid-year (mtilions) 2.2 659 2,459 Ufe expectancyGNI per capita (Atlas method, USS) 540 480 420GNI (Atlas method, USS bilIons) 1.2 313 1,030

Average annual growth, 1994-00

Population (%) 2.2 2.6 1.9Labor force (%) 2.1 2.6 2.4 GNI Gross

Most rrrert eStimate (late year available, 199440) per ii primarycapita enrollment

Poverty (% of population below national poverty lIne) 49Urban population (% of total population) 27 34 32Ufe expectancy at birth (years) 45 47 59Infant mortaity (per 1,000 lNve brths) 92 92 77Child manutrition (% of children under 5) 16 Access to improved water sourceAccess to an improved water source (% of population) 91 55 76literacy (% of population age 15+) 82 38 38Gross primary enrolment (% of school-age population) 108 78 96 Lesotho

Male 102 85 102 Low-ncorme groupFemale 114 71 86

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1980 1990 1999 2000Economic ratios'

GDP (USS bhons) 0.43 0.62 0.92 0.89Gross domestic Investment/GDP 37.0 52.7 42.5 42.5Exports of goods and services/GDP 6.2 16.8 24.1 26.5 TradeGross domestic savings/GDP 10.5 -53.0 -30.0 -23.1Gross national savingsiGOP 51.1 -10.0 19.3 25.7

Current account balance/GDP -47.9 -59.0 -20.4 -22.3 Domestic InvestmentInterest payments/GDP 0.4 1.3 2.2 2.4 +aviegnTotal deb/GDP 16.7 64.4 74.4 83.4 savingsTotal debt servicetexports 1.5 -31.0 9.6 12.5Present vaiue of debt/GDP 56.1Present value of debt/exports 100.3

Indebtedness1960-90 19900- 1909 2000 2000-04

(average annual growth)GDP 4.6 41 2.8 2.8 3.0 - LesothoGDP per capita 1.9 1.9 0.6 0.2 1.0 ---- Low-hcome groupExports of goods and services 4.9 8.7 -9.1 2.8 -26

STRUCTURE of the ECONOMY1980 1990 1999 2000 Growth of lnvastmwnt and GDP (%)

(% of GDP) 20Agricufture 24.6 23.8 17.3 17 3Industry 26.5 32.8 41.4 41.4 10

Manufacturing 8.4 13.9 16.9 16.9 aServices 48.9 43.5 41.3 41.3 -10 go se 0o

Private consumption 67.7 138.9 109.0 92.9 -20General government consumption 21.8 14.1 21.1 30.2 - GDI -S-GDPImports of goods and services 32.7 122.4 96.6 92.1

(average annual growth) 19809C 1990-00 1999 2000 Growth of exports and Imports ()

Agricufture 2.8 2.0 4.4 2.8 30Industry 5.6 5.3 6.0 2.8 20

Manufacturing 8.5 6.5 -1.5 2.8 10 -Services 4.0 4.5 0.4 2.8 0

Private consumption 3.6 2.8 8.4 2.8 - 10 97 07General govemment consumption 3.2 7.2 5.5 2.8 -20Gross domestic investment 5.4 1.3 -5.6 2 8 Exports 0ImportsImports of goods and services 3.5 2.5 2.1 2.8

Note: 2000 data are preliminary estimates.

The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete

47

Lesotho

PRICES and GOVERNMENT FINANCE

Domestic prices 1980 1990 1999 2000 Inflation (%)(% change) 1-Consumer prices 15.7 11.6 7.3 6.2 o Implicit GDP deflator .. 7.2 11.4 6.5

Government finance(% of GOP, includes cuffent grants) o lCurrent revenue .. 37.8 39.2 38.8 9s 9s 97 98 99 00Current budget balance 9.5 3.0 0.9 GDP deflator :CPIOverall surplus/defict .. -13.7 -8.3 -14.0

TRADE

(US$ ,illions) 1980 1990 1999 2000 ExportandImportlevels(USSmill.)Total exports (fob) 58 59 1,165 1,343 1S00

Clothing and accessories .. .. 415 171Footwear .. .. 177 43Manufactures .. .. 48 56 1,000 *

Total imports (cif) 424 673 785 774Food . .. sihhFuel and energyCapRtal goods .

Export price index (1995=100) .. .. 94 92 94 95 98 97 98 99 00Import price index (1995=1 00) .. .. .. .. * Exports * ImportsTerms of trade (1995=100) .. .. _.._..

BALANCE of PAYMENTSi 980 1990 1999 2000 Current account balance to GDP (%)

(USS rr'illions)Exports of goods and services 90 100 235 236 oImports of goods and services 475 754 833 819Resource balance -384 -654 -599 -583

Net income 266 433 206 192Net current transfers -88 -142 204 192 1111111'Current account balance -207 -363 -188 -198 30

Financing items (net) 248 380 177 125Changes in net reserves -41 -17 11 73 4

Memo: .Reserves induding gold (US$ millions) 50 72 488 431Conversion rate (DEC, locat'US$) 0.8 2.6 6.1 6.9

EXTERNAL DEBT and RESOURCE FLOWS

1980 1990 1999 2000(US$ nillions) Composition ot 2000 debt (USS mill.)Total debt outstanding and disbursed 72 396 686 741

IBRD 0 0 56 59 7 59IDA 24 112 185 183 98

Total debt service 6 -172 51 62IBRD 0 0 8 7IDA 0 2 3 4 183

Composition of net resource flows 1S1Oflicial grants 52 60 23Official creditors 8 43 20 34Private creditors 2 -1 4 17 12Foreign direct investment 5 17 163Portolio equity 0 0 0 . 231

World Bank programCommitments 10 0 26 7 A -]BRD E -BilateralDisbursements 4 9 10 18 a- IDA D- Other multilateral F - PraePrincipal repayments 0 1 6 6 C - IMF G - Short-termNet flows 4 8 4 11Interest payments 0 1 5 5Net transfers 4 7 -1 7

Development Economics 9/27/01

Annex 4.2: Key Economic Indicators for Lesotho and Comparator Countries, 1990-00

Lesotho Comparator Countries

SAuth C.pe C.I.a,- S.. To.- tP,0 .oa.,, 199.,L- SACU SAOC A9r.S %S/ So..9l SSA V. ,. Ce DIN-6o St-. r A61.. l'.4.p.

I'd4r- 1999 1991 1992 1993 199W /995 199 199 1999 /999 209 A4-.ug A-ag, A-g, A. g A- A-.g,o A-"g. .- p A-og A-r A-e.nAg-

1999-99 1990-99 1999-99 /9999 /999-99 /990-99 /999-99 /999 99 /99tg99

Re.. GDPgoowth(o Iaal %) 5.6 4.1 4.6 3.7 3.7 5.9 9.4 4.6 -3.6 0.5 2.2 3.8 1.5 1.0 1.3 3.4 2.1 7.05 0.3 -1.2 3.9 1.1 1.3

K99l P1p pi9i GDP growh (in p-rte99) 0.3 1.2 1.8 1.0 0.6 3.3 7.0 2.5 -5.7 -1.5 0.2 1.1 -1.0 -1.4 -1.20 0.4 -095 4.55 .1 .8 4.2 0.1 -0.9 -0.7

R-o1porc.pu GDP . USS, 9 l99Op -ces 363.0 368.9 374.0 378.0 380.0 393.0 421.0 432.0 407.0 401.0 402.0 391.7 2905.S 990.9 2993.4 412.0 517.9 993.77 500.4 645.2 310.7 267.0 490.3

D909twiO mviig(%ofGDP) -59.1 -53.6 -54.7 40.4 -36.9 -37.2 -24.1 -23.2 -32.3 -32.1 -27.7 -39.4 17.8 16.9 17.6 10.2 -3.6 1.1 -2.3 -8.5 6.0 0.9 -18.5

G..s Fi9d CapitolFom-toi-I%ofGDP) 53.0 594 43.3 47.1 55.7 56.1 55.S 56.9 35.5 35.6 35.8 49.8 16.9 17.1 16.1 16.5 26.7 40.2 19.5 12.8 19.4 24.9 43.5

Pnval,t Fed Cpi.1 FO-mliof (% ofGDP) 5.9 7.3 8.7 10.2 12.4 l0.l 3.0 6.5 7.8 6.4 6.2 7.8 14.4 14.1 14.4 10.1 10.9 16.7 12.4 6.5 12.0 4.1 13.7

To I.-l t-Merun (%ofGDP) 52.4 59.0 43.2 47.1 55.7 56.1 55.8 56.9 35.5 35.6 358 49.7 17.1 17.0 16.3 17.0 27.0 39.9 21.4 12.8 19.4 25.2 43.0

0-vn11 Fixal B -Ianc. ifl/di.gigg.IxN(%.oGIf3P) -0.9 -0.5 31 5.7 5.3 3.5 4.4 1. .3.0 -16.5 -1.6 03 -4.6 -5.6 -5.0 -5.0 -11.6 -104 -3.0 -6.0 .2.4 -12.5 -35.2

0v-aII Fic.[ BWi9nc,e -eiudi.ggg..M (% of GDP) -12.0 .7.9 -2.7 0.7 0.6 -I'I -0.2 -2.0 -5.4 -19.3 -5.6 -4.9 4.7 -6.3 -5.0 -6.7 .21.7 -24.6 -95.2 -6.0 -5.8 -25.6 -53.1

Pri.ary Fisoal BaI.n/I(%ofGDP) -6.8 .4.1 -0.3 3.1 2.4 0.6 1.5 -0.1 -2.8 -15.0 -2.4 -2.1 0.1 -1.1 0.1 -2.9 .17.7 22.4 -4.1 -6. -1.7 -19.9 -42.1

G- -er9r 9t -en,u i/1luding Mgt-9 I(% of GDP) 4S.5 4S.0 47.7 51.0 51.5 52.1 53.1 51.1 46.3 43.S 43.5 49.5 24.9 24.1 23 6 22.6 3053 37.6 26.6 34.0 24.0 25.1 34.7

G.- .t ev...... -ludi.grgmtr(% fGDP) 37.3 40.6 418 46.0 46.8 47.5 48.6 47.3 43.9 41.0 39,4 44.1 24.7 23.4 23.6 20.1 20.2 23.4 14.5 34.0 20.5 12.1 16.8

-ioven ten Exp-ndirure(% fGDP) 49.4 48.5 44.5 45.2 46.2 48.6 4&.7 49.3 49.3 60.3 45.1 49.0 29.4 29.7 20.6 26.S 419 48.0 29.6 40.1 26.4 37.6 69.9

Goe-tme/ W.ge .. dSa Inx(%of otl.t -p9di.re) 21.S 29.3 29.5 29.6 32.0 30.1 31.8 30.8 34.4 25.7 33.2 29.5 31.0 28.1 31.4 ... I8.6 23.1 322 .. 22.3 10.0 5.2

GovemmenlSpe-dingon Ed-ci ion(Softo -lexpe.diwr I8.5 21.1 20.1 21.3 25.4 25.4 23.0 23.0 23.0 23.0 23.0 22.4 22.2 7.8 22.3 .. 10.1 ... 12.7 1. 1.2 8.5 7.8

6ovemmenlSpeNdi.g flHeI6thcorc(%oft9-9dexpen4iw 7.7 8.5 9.8 8.7 9.7 S.1 0.0 9.0 8.0 S.0 0.0 804 11.8 3.9 12.2 . 47 3.3 6.1 7.2 2.3

ov--meot Spedi.gonDnf-n I(%oftot.1e-p..dit.e) 11.2 11.9 10.6 I1IA 10.9 11.1 10.7 10.7 10.7 10.7 10.7 11.0 S.2 S.9 0.2 . .2 . 5.7 . 3.3 1.9 1.7

6--MrenlN9,-l.ntr09tE pen-ditre(%ofGDP) 44.1 44.7 42.1 42.S 44.4 46.9 47.0 47.4 46.7 56.0 41.S 46.2 24.6 24.6 23.6 23.0 37.9 45.8 28.6 40.1 22.2 31.9 5S.0

B.o.dMoney rG.th(i. p-9999) 21.9 7.6 11.3 25.5 13.3 5.0 29.4 4.2 7.2 1.5 1.5 12.7 12.9 31.5 12.5 21.7 7.7 12.5 5.2 -0.4 13.5 24.1 51.4

Eroad Mo.y (%offGDP) 40.6 36.4 33.6 37.4 37.9 34.4 37.6 34.7 35.6 33.5 31.4 36.2 52.1 47 9 53.9 26.8 30.6 71.2 23.1 64.9 24.5 97.0 31.9

Inn6ho9.9onsumerp-99(9nnurd%) 11.5 17.9 17.0 13.8 7.2 9.9 9.1 8.5 7.8 6.0 5.9 9.3 9.9 53.0 9.9 22.4 16.4 7.3 3.4 4.2 5.7 37.6 40.5

Real Expo ofgoods 99d -Oi G roth (in p-rcn) 59.0 .32.9 25.5 16.2 33.0 -7.9 50.8 -12.2 -12 .0.1 23 13.0 4.1 2,9 4.0 4.9 9.4 20.9 12.0 48 3.0 26.2 -06

Rc/al Impo,ts of goods .d -ericon Gro0lh (in percenl) 3.0 15.4 .6.4 -3.3 4.6 6.6 10.0 0.2 -9.9 -2.7 -2.3 1.0 6.6 4.7 6.6 3.1 1.9 6.5 3.2 .4.0 4.4 0.9 /.3

spo/ftS fg- s-nd -rvi- I(% fGDP) 24.1 /5.5 9.6 20.9 26.9 23.3 32.1 26.8 27.5 28.2 27.7 24.4 25.4 27.4 23.6 29.4 29.6 20.8 /8.7 46.9 546 13.1 23.3

Impons f g.89 .nd series (%of GDP) -119.9 -133.0 -119.1 I I 1. 1 -112.1 -112.8 -113.5 -10892 -101.2 -100.9 -94.9 -113.2 -24 0 -26.8 -212 -37.3 .60.5 -59.4 42.4 -69.5 -68.0 .37.4 -86.6

/rode9baI9nc (%ofGDP) -94.2 -112.5 -95.8 .99.2 -86.4 .88.6 -06.6 -82.5 -75.1 -73.6 -68.4 -88.4 2.7 2.4 3.4 .5.2 -27.3 43.1 -17.0 .36.7 .16 .3. 14.9 -35.9

i 1t-/9I Cu-et Accotunt 1lding Gnts (% of GDP) 10.1 45.8 -30.8 .27.3 -25.6 .34.3 -29.5 -30.7 -28.9 -23.8 -20.8 .20.7 -0.1 -1.9 -0.2 -6.9 -16 5 -S.5 -1 1.1 -6.7 -4.2 -17.S -50.6

fx/cnn/ C-trnA Ac.o.nt Ercluding G-rnI(% of GDP) -30.4 -63.4 -51.3 -47.8 -47.1 -561 -49.1 -50.5 44.9 -42.0 -37.9 -48.3 -0.2 -2.9 0 2 .10.8 -28 9 -/9.6 A992 -210 -14.2 -28.7 -70.4

l,t-rl P/bl Dbtic I(%cfGDP) 62.9 64.0 601 66.7 71.9 69.2 7893 81.0 96.1 935 87.1 74.3 9.5 34.4 89 98.9 189.5 47.1 81.9 54.0 980 335.8 520.2

Ier-sofT 9 d, (I.d,n. 1990-100) /99.0 100.0 100.0 100.0 100.0 100.0 100.0 /00.0 100.0 100.0 100.0 /00.0 120.1 116.0 120.5 101.8 92.9 604 67.0 97.1 112.0 93.6 126.4

I opul9//09 (in mOi//jons) 1.0 1.9 1.9 1.9 2.0 2.1 21/ 2.1 2. 2 2 2. 2 0 43. 1 1 72 5 39.2 259.7 0.6 0.4 0.5 0.6 1A1 1A1 0.

So-e.: IUMF Affi- 09p9/0nMe d.6 b3se. March 2000. .d WEO 03/23/2000

SSA r...AdidS. h soutn Af9ci/O// Prod.c-nrs/Co/-ties 9 Con-Icl.

49

Annex 4.3: Lesotho - World Bank's Senior Management, CY91-01

Year Vice President Country Director Couintry OperationsDivision Chief

1991 Edward V.K. Jaycox Stephen M. Denning Praful C. Patel (eff. 2/1/9 1)1992 Edward V.K. Jaycox Stephen M. Denning Praful C. Patel1993 Edward V.K. Jaycox Stephen M. Denning Praful C. Patel1994 Edward V.K. Jaycox Stephen M. Denning Praful C. Patel1995 Edward V.K. Jaycox Katherine Marshall Praful C. Patel1996 Callisto Madavo Katherine Marshall ...1997 Callisto Madavo Pamela Cox ...1998 Callisto Madavo Pamela Cox1999 Callisto Madavo Pamela Cox ._._.2000 Callisto Madavo Pamela Cox/Fayez S. Omar ...2001 Callisto Madavo Fayez S. Omar I...

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Annex 4.4: Private Sector Development, 1995-01

Gross privatization proceeds (US$Privatized enterprises million)

1. Plant and Vehicle Pool Services 11.302. PVPS Plant Building 0.033. Minet Kingsway 0.224. Avis 0.055. Lesotho Airways Cooperation 2.406. Lesotho Flour Mills 10.707. Marakabei 0.028. Orange River Lodge 0.029. Lesotho Telecom Corporation 17.0010. Vodacom Lesotho 0.69Total proceeds 42.82Source: Ministry of Finance of the Government of the Kingdom of Lesotho, as cited in the ICR(Rpt. No. 22175).

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Annex 4.5: The Muela Hydropower Plant

The Muela Hydropower plant was constructed during 1998 and operated by LHDA to achieve energy self-sufficiency.The cost of the plant, which was fully met by Lesotho, was estimated at Maloti 925 million ($140 million equivalent asof January 1999), of which 57 percent was in the form of commercial loans, 38 percent in grants, and the remaining 5percent in concessionary loans. Prior to the commissioning of the plant, Lesotho imported all of its electricity fromSouth Africa (ESKOM).

The rate of return for the hydropower component at appraisal (1991) was 6 percent. The analysis was based on theassumption of a long-term 0.5 percent a year tariff increase from ESKOM. Since electricity generation was not part ofthe transfer of water, the RSA declined to finance this component, but the African Development Bank (AfDB) and theCommonwealth Development Corporation (CDC) expressed interest in offering concessional loans, amounting to $50million and $36 million, respectively. Unfortunately, the 30 percent fall in the real price of electricity from ESKOM(due mainly to over-capacity), has made the power component relatively more expensive than foreseen at appraisal. Inaddition, disagreement between LHDA and the AfDB over the award of the main construction contract led to thedecision by AfDB to withdraw from financing this component. The estimated low rate of return of the powercomponent led the CDC to pull out of financing for this component.

These decisions and the time required to secure financing from other sources were the main reasons for the 18 monthsdelay in completing this part of the project. The delay, in tum, was the main reason for the significant increase in costof this component, especially as it necessitated accelerated construction of the by-pass to ensure timely water deliveryto RSA in accordance with the treaty. Moreover, the need for LHDA to arrange alternative financing on shorter termsand higher interest rates (17.8 percent) than those offered by AfDB and CDC created severe cash-flow problems inservicing the debts and in paying contractors. An IMF report of June 30, 1999 indicates that, "in addition to servicingdebt obligations amounting to M 38 million in 1999/00, the LHDA is expected to pay M 104 million to variouscontractors for cost overruns sustained when construction of the Muela plant was suspended in September 1998." TheIMF report also adds that LHDA defaulted on its M 120 million loan from the Lesotho Bank. In addition, the LesothoElectricity Corporation to which the generated power is sold also suffered from a poor financial situation and, until thegovernment intervened this year, was unable to pay LHDA for its bulk electricity purchases. At completion theestimated ERR for the power component was only 3 percent (World Bank ICR 1999). Also, as pointed out in the ICR,LHDA's electricity charges are considerably above the rates of ESKOM and are unsustainable.

The financial restructuring of the hydropower component debt began to be implemented following discussions with theBank and IMF in December 1999. The government has had to pay some M 430 million to refinance and pay off debtsin FY 2000 and will have to make further payments in the years to come. There are indications that the recentmembership of Lesotho in the Southem Africa Power Pool, and the new Public Utility Sector Reform Project, mayeventually improve the financial situation of this component. This remains to be seen and OED should review Muelahydropower in its audit of the completed Phase 1.

In retrospect, the Bank assistance to Lesotho in the procurement and financing of this component of the project(particularly after AfDB withdrew its proposed financing) was, at best, too late to avoid severe financial difficulties tothe country. However, the May 2000 Supervision Mission considered that, since the Bank does not supervise contractsit does not finance, it was not in a position to avoid the procurement problems and its financial consequences on thepower component. The OED mission considers that, in view of the loan covenants dealing with the financial targets ofthe power component and its overall influence on Phase IA, the Bank should have provided assistance to thegovernment on the financial consequences of the delay in awarding the construction contract. The Bank, however,eventually helped the government in the financial restructuring of the power component.

With hindsight, the OED mission agrees with the comments made by both Lesotho and RSA members of the JPTC (abinational body set to safeguard the interests of Lesotho and South Africa) that it would have been preferable to includethe power component as an integral part of the project. This would have enabled JPTC to control the procurementprocedure for the power component and facilitated the financing of this component. It would also have avoided difficultand lengthy discussions within JPTC as to whether an expense belongs to the water transfer (i.e., to be paid by RSA) orto the power component alone (i.e., to be paid by Lesotho). Also, it would have facilitated govemance of the project.Would the difficulties with Muela plant have been avoided if the Bank had insisted that this component should havebeen part of the LHWP? It will be recalled that the problem with Muela was a disagreement between the AfDB and thegovemment on procurement for the main construction contract. Obviously, it is not possible to be sure whether thedisagreement would have arisen if all procurement arrangements had been handled under one set of guidelines withrecourse for settlement of disputes to one supervisory body. But, at least the same standard would have been appliedand this may have avoided the quite serious economic implications of the procurement problems at Muela.

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Annex 5a

World Bank Support for Human Capital Development in the 1990s

Author: Ellen Goldstein

1. This report evaluates the development effectiveness of the World Bank's supportfor human capital development in Lesotho in the 1990s. It is based on extensivedocument review, interviews with World Bank staff and a mission to Lesotho in June,2000.

2. Lesotho is a small, mountainous country of two million people, entirely encircledby South Africa (RSA). During the 1990s, the country experienced rapid GNP growth,largely related to a temporary increase in investment associated with the LesothoHighlands Water Project (LHWP), as well as investment by manufacturers evadingapartheid-era sanctions in neighboring RSA. By 2000, average GNP per capita stood atUS$540, at par with the average for Sub-Saharan Africa (excluding RSA). Along withstrong aggregate growth, the country experienced rising inequality (with a gini coefficientof 0.6 by decade end) and a deepening of poverty, particularly in rural areas. A 1999poverty assessment defined 51 percent of the population as poor, including 33 percentwho are extremely poor.

3. During the 1990s, development effectiveness in the area of human capitaldevelopment was shaped by four major factors exogenous to the social sectors. First,Lesotho suffered from continual political tunnoil which erupted into violence severaltimes (most recently in 1998). The high degree of political instability has led to constantturnover in ministerial and civil service appointments, resulting in slow and limitedgovernment decision-making, shifting priorities for action, and extremely weak capacityfor sustained reform or program implementation. Second, the end of the apartheid era inSouth Africa has presented Lesotho with extraordinary long-run opportunities for greatereconomic integration, labor migration and rationalization of social services. In the short-run, however, it burst the bubble of foreign investment in Lesotho, reduced remittanceflows from RSA, created a brain drain of skilled professionals, shifted donor resourcestoward RSA, reduced fiscal revenues from the Southern African Customs Union (SACU)and lowered regional growth prospects. The paradigm shift needed to adapt to both theopportunities and the challenges presented by the new South Africa has occurred onlyslowly and incompletely in Lesotho. Third, the LHWP generated substantial importduties and water royalties in the second half of the decade which could have been usedeffectively for targeted poverty reduction and human capital development. However, thiswas a missed opportunity in the 1990s. Furthernore, the temporary surge in aggregategrowth and fiscal revenues due to the project drew attention away from rising poverty inrural areas and reduced pressure to reallocate and improve the cost-effectiveness of socialspending. Fourth, the regional HIV/AIDS pandemic virtually destined Lesotho to highadult prevalence rates (currently estimated at 23.5 percent). While data are weak,anecdotal evidence abounds that HIV/AIDS is already overwhelming Lesotho'sunderstaffed and under-supplied health care system. The epidemic has already begun to

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increase mortality rates to an extent that may reduce life expectancy by a decade or morein coming years.

Human capital development in World Bank country assistance strategies

4. The World Bank's Country Assistance Strategies (CASs) for Lesotho (produced in1991, 1994, 1996 and 1998) showed increasing poverty focus, and a growing role forhuman capital development in reducing poverty-influenced particularly by acomprehensive Poverty Assessment in FY96. However, poverty monitoring andbenchmarks remained weak. A lack of monitoring resulted in a dearth of informationbetween 1993-1999 which undermined the relevance of the World Bank's strategy toreduce poverty. While performance benchmarks were established in the social sectors,many of these benchmarks suffered from weaknesses such as vague wording, no baselinedata or unrealistic targets. Benchmarks with respect to poverty reduction were notestablished until late in the decade. Although a main objective of every CAS was tomaximize the poverty-reducing impact of LHWP, both the Bank and the country failed toexploit this potential in the 1990s.

5. Along with increasing poverty focus, the World Bank increased its share of IDAlending to the social sectors from around 25 percent in the 1980s to around 40 percent inthe 1990s. While the commitment to social sector lending was stronger than it had everbeen, supporting analytic work was sparse, and the link between analysis and lending wasweak until very late in the decade. Overall, the relevance of the Bank's increasing focuson human capital development was substantial relative to Lesotho's needs and statedpolicies. However, the relevance of the strategy was undermined until late in the decadeby inadequate attention to poverty monitoring and poverty reduction. It was alsoundermined by failure to pay sufficient attention to gender disparities, particularly boys'educational participation and women's economic participation. The Bank's Board notedthese weaknesses at every CAS review.

Development Effectiveness of World Bank Support in Education and Training

6. Development effectiveness of World Bank support in the 1990s in the educationand training sector is judged as moderately satisfactory. This overall rating is based onthe following summary evaluations.

7. Outcomes: moderately satisfactory. Relevance of the Bank's strategy wassubstantial. Main objectives were to expand physical access to, and quality of, formaleducation. However, relevance was undermined by inadequate focus on deepeningpoverty and lingering gender disparities that reduced school participation and reversedlong-run progress toward universal primary education. The efficacy of the Bank'sanalytic services and policy dialogue was also substantial, with strong sector work in thelate 1980s underpinning lending and a leading role in policy dialogue. In the last fewyears, however, the Bank was more reactive than proactive on the important issue ofdeclining primary enrollment rates. Through lending, efficacy was substantial withrespect to strengthening sector management, modest with respect to improving sectoralresource allocation and the quality of basic education, and negligible with respect to

54

technical and vocational education (TVET) and tertiary education. Quality at entry waspoor for the TVET and tertiary interventions. Outcomes with respect to aid coordinationand resource mobilization were also moderately satisfactory, with Bank resources helpingto leverage equal amounts of donor support which were adequately coordinated bygovernment. Bank consultation with external partners was viewed as insufficient butimproving, hampered by lack of local representation or regionally-based technical staff.

8. Institutional development impact: modest. Considering the degree of politicalturmoil and institutional instability in Lesotho, modest progress in institutionaldevelopment impact (IDI) is a notable achievement. IDI was substantial-andparticularly notable-with respect to education system and human resources managementat the center, as well as in building decentralized support services at the district level. IDIin these areas had a direct impact on the country's implementation performance, projectoutputs and sector outcomes. However, IDI was negligible in three areas essential forimproving sectoral resource allocation and adapting the education system to the regionallabor market: financial management, TVET and tertiary education.

9. Sustainability: uncertain. Sustainability of net benefits is strengthened by theconsiderable institutional development within the Ministry of Education, the relativelygood monitoring capacity, the strong sense of ownership within the sector, a growingdegree of community participation and the priority accorded to education by the currentpolitical leadership. However, sustainability is highly uncertain in two critical areas:political instability and financial viability (introduction of free primary education in 2000,failure to rein in tertiary spending, expected sluggishness of government revenues). Forthis reason, on balance, sustainability is uncertain.

10. Bank performance: satisfactory. The Bank's support was grounded in appropriateanalytic work and consistent with the Government of Lesotho's and the CountryAssistance Strategy's (CAS) objectives. The dialogue fostered a strong sense of clientownership and stakeholder participation. The Bank maintained highly satisfactorylending supervision during a period of considerable political turmoil. The Bank team hadhigh continuity, and developed a strong relationship with the client that allowed foreffective problem-solving. Monitoring and evaluation were good, reflecting theirinclusion in project design.

I1. Country performance: satisfactory. The Ministry of Education participated in, andmade use of, analytic work to help define a comprehensive education sector reformprogram. Consultation with stakeholders has been fairly extensive, while consultationwith, and coordination of, external partners has been reasonably effective through theDirectorate of Planning under the umbrella of the two Education Sector DevelopmentProject (ESDP I and II). Counterpart funding and program implementation werefrequently delayed, but ultimately satisfactory, while compliance with covenants has beenhighly satisfactory.

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Development Effectiveness of World Bank Support in HNP

12. Development effectiveness of World Bank support in the 1990s in health, nutritionand population (HNP) is judged as unsatisfactory. This overall rating is based on thefollowing summary evaluations:

13. Outcomes: moderately unsatisfactory. Strategic objectives in HNP focused largelyon expansion of the health infrastructure network, increases in staffing, promotion offamily planning and selected disease control programs and an array of health systemmanagement issues. Relevance was, on balance, substantial, but objectives were overly-ambitious and lacking in selectivity. By mid-decade, relevance was undermined by aninadequate adaptation to the rising threat of HIV/AlDS. Efficacy of interventions isdifficult to assess due to inadequate monitoring mechanisms and failure to developreliable survey instruments and basic information systems. However, one can concludethat efficacy was modest in strengthening family planning and disease control programs.Very modest efficacy was achieved with respect to decentralized health services andpharmaceutical supply. Overall attainment of physical objectives expanded the rural andurban network of facilities and the infrastructure for distributing drugs, but was lesseffective in ensuring provision of basic health services. Efficacy was negligible withrespect to analytic services, where no sector work was done for nearly two decades inhealth and nutrition, and work on population was poorly-timed and inadequatelydisseminated. Efficacy was also negligible with respect to the policy dialogue, despiteimprovement at the end of the decade. Finally, efficacy was negligible in addressingwidespread chronic malnutrition, and in the critical areas of sector management andresource allocation.

14. Institutional development impact: negligible. IDI was substantial with respect totwo disease control programs benefiting from sustained technical assistance. IDI wasmodest with respect to integrating family planning services into primary health care andestablishing a Nutrition Unit. However, IDI was negligible where it counts the most: interms of overall sector management, resource allocation, organizational structures,public/private institutional roles, human resources policies and manpower development,information systems development and monitoring and evaluation. The failure of IDI atthis level meant that the sector was largely without leadership and direction for the entiredecade, with substantial impact on implementation performance, project outputs andsustainability.

15. Sustainability: unlikely. Net benefits of interventions in HNP in the 1990s aredifficult to ascertain due to lack of data, poor reliability of data and the confoundingeffects of HIV/AIDS. However, if net benefits could be shown to be positive, theirsustainability would be unlikely. Political and financial viability are highly uncertain,particularly given the growing financial burden of addressing HIV/AIDS. Technicalviability-especially concerning maintenance of infrastructure and retaining skilledpersonnel-remains unlikely. Sustainability with respect to government ownership,policy environment, effectiveness of institutions and participation must also be viewed asunlikely, despite progress made since 1998 in developing a broad health sector reformprogram through a consultative process that has begun to heighten ownership and raisedmorale within the sector.

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16. Bank performance: unsatisfactory. The Bank's support was not grounded intimely analytic work, and the policy dialogue was not well-sustained throughout thedecade. Simultaneous implementation of two HNP projects duringl990-94 addedcomplexity to already complex designs, and prevented the full incorporation of lessonslearned from the earlier project into the follow-on project. Hence, quality at entry for thelatter project was unsatisfactory. The Bank also severely underestimated the institutionalcapacity needed for implementation. This was compounded by lengthy gaps in formalsupervision, as well as slow Bank action to resolve implementation problems as theyarose.

17. Country performance: unsatisfactory. The lack of capacity and political will togenerate basic systems data contributed to the lack of meaningful analytic work in thesector, and the country must share accountability with the Bank for poor quality at entryof lending operations. Constant turnover in political and civil service leadershipundermined continuity and limited decision-making needed for successfulimplementation. Accountable departments took insufficient responsibility forimplementation, shifting the burden to a separate Project Management Unit. TheMinistry of Health also fell short in reaching agreements with non-governmental partnersessential to achieve sector and project goals. Finally, compliance with legal covenants-which were admittedly excessive and imprecise-was highly unsatisfactory.

Key Lessons of Experience

18. This report focuses on a few key lessons which emerge from carrying out a broadreview over the course of a decade, covering the entire range of Bank products andservices and providing comparisons between two sectors involved in human capitaldevelopment. The three most salient lessons are:

19. Analytic services (economic and sector work) benefit both the Bank and thecountry if they are high-quality, well-timed and adequately disseminated. Timelysector work in education in the late 1980s provided a strong platfonn for the Bank'spolicy dialogue throughout the 1990s, and contributed to satisfactory quality at entry forsubsequent lending operations. At the same time, this sector work assisted the country indeveloping a sense of ownership of resulting reforms and interventions. During a decadeof political disarray, strong initial sector work helped develop a coherent framework towhich the ministry could adhere. In the HNP sector, a lapse of nearly two decades informal analysis of the health sector and system undermined the Bank's role in the policydialogue, negatively affected quality at entry for lending operations and offered littlecontinuity to a ministry buffeted by political change. A high-quality Population SectorReview was produced too late to influence the design of lending operations, and was toopoorly disseminated to serve as a catalyst for a necessary shift in strategic objectives asthe HIV/AIDS epidemic emerged.

20. Relevance of Bank support within a sector can be eroded over time throughinsufficient monitoring of sector trends and cross-cutting variables. In both sectors, thecountry's lack of capacity to monitor cross-cutting variables prevented the Bank frommaximizing the poverty focus of its strategy for human capital development. The countryhas no regular poverty monitoring mechanism, making it relatively easy to overlook

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(especially in a context of strong aggregate economic growth) the impact that deepeningpoverty in rural areas has had on children's access to basic schooling. Likewise,insufficient analysis of gender-disaggregated data slowed the Bank's response to genderdisparities in education participation. Inability to monitor HIV/AIDS led tounderestimation of its prevalence and, consequently, to underestimation of its impacts onpoverty and social welfare. In the HNP sector, it is difficult to say anything definitiveabout the development effectiveness of Bank interventions due to the lack of performanceindicators and monitoring and evaluation systems. This is not simply an easily-correctedflaw in project design. It is rooted in the long-run failure of the country to develop basiccapacity to collect, synthesize and analyze data in the sector. Regardless of the country'smanpower constraints, the Bank and other external partners must bear someresponsibility for allowing the achievement of physical project objectives to overshadowthe critical development of information systems and reliable survey instruments.

21. There is no substitute for long-run development of institutions capable ofmanaging the sector. This is particularly true in a politically unstable environment. TheBank needs to take the time and provide the specialized inputs required for adequateassessment and capacity building within lead institutions responsible for sector andsubsector management. Although fragile and far from perfect, the institutionaldevelopment within the central and district-level Ministry of Education offices has had apositive impact on sector outcomes and is the most positive factor influencing thesustainability of outcomes. Institutional development fosters leadership independent ofpolitical pressures. Where institutional assessment was weak, institutional developmentforgotten or capacity building failed, outcomes were invariably poor, as in TVET andtertiary education, as well as throughout much of the HNP sector. A sustained focus onhuman resource policies, working conditions and incentives also has a high payoff interms of continuity of managers and staff-with subsequent impacts on the continuity ofvision, commitment to objectives and implementation performance. Through sector-wideapproaches and adaptable program credits in both the education and HNP sectors, theBank enters the new century with a longer-term perspective on institution building thathas the potential to enhance development effectiveness.

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Annex 5b

Poverty Reduction and Rural Development

Author: Jack van Holst Pellekaan

1. This paper evaluates the impact of the World Bank's assistance program on povertyreduction in the Kingdom of Lesotho with a focus on the contribution of ruraldevelopment. The evaluation is mainly for the decade of the nineties, but it will also lookat the period prior to the nineties in order to put the recent decade into perspective.

2. While the period covered by this evaluation was one of considerable intemalpolitical change within Lesotho, perhaps the most important change was external, namelythe transition in the Republic of South Africa (RSA) from a political economy of"apartheid" to one of racial inclusion. This transition changed the relationship betweenthe Kingdom of Lesotho and the RSA to one in which greater exchange of people andtrade would be possible. The transition also resulted in changed partnerships between thegovernment and donors and different incentives for private investment in Lesotho. Thesechanges also had implications for the Bank's assistance program. Hence the overallevaluation of Bank assistance needs to take account of the substantial socioeconomicchanges that took place in the RSA in midst of the evaluation period.

3. This evaluation focuses on the overall outcome of the World Bank's assistanceprogram for poverty reduction and rural development based on their relevance andefficacy during the nineties. It also evaluates institutional development and thesustainability of these programs.

Conclusions

4. Poverty reduction. Poverty in Lesotho, measured in terms of the headcount index,the depth of poverty, and inequality, showed virtually no change during the nineties.Nonetheless, poverty did decline in the capital, Maseru, but it increased in other urbanareas and in rural areas. Projects financed by the World Bank had little or no impact onpoverty reduction in the domains of those projects.

5. The World Bank's poverty-focused analytical and advisory (AAA) services wererelevant and of satisfactory intemal quality. Their impact and overall value, however,varied from satisfactory to moderately unsatisfactory. Giving most weight among AAAwork to the Poverty Assessment completed in 1995, the overall rating for analytical workis moderately satisfactory. On the other hand the relevance and efficacy of the povertyreduction strategies and project assistance were moderately unsatisfactory and, givingrelevance most weight, the outcome of the assistance program with respect to povertyreduction was also moderately unsatisfactory. Specifically, the strategy of labor-intensive production of high value crops such as vegetables proposed in the PovertyAssessment did not have a strong practical impact on incomes in agriculture becausesmall farmers generally did not have the resources to finance increased production,irrigation for reliable production was extremely limited, technological support was weak,

59

and markets for high value crops were remote and not strong. Essential changes in themanagement of the mountain grazing resources, along with more intensive production oflivestock in lowland areas, which would have had a major impact on the poor were alsonot achieved. Labor-intensive growth in non-agricultural sectors such as textiles didincrease but could not be sustained because of the weak enabling environment for foreigndirect investment (for example poor services) and the increased political uncertainty.Strategic sector work on social services and human capital development were relevant,but their impact was only substantial in education.

6. In terms of other sectors, the education projects were relevant and effective in termsof poverty reduction, but their benefits for the poor are long term and hence not yetapparent. Among the other projects, regardless of the strong implementation and incomegenerating performance by some such as the Lesotho Highland Water Project (LHWP),all had negligible impacts on poverty reduction. Obviously the construction activity inthe LHWP provided a major (one time) boost to overall economic growth andemployment and would have increased the wage incomes of many Basothos' who hadassets such as good health and relevant skills but these were not necessarily the poor.Apparently Phase IA of the LHWP created about 8,000 jobs of which close to 90 percentwere held by Basothos. It is not possible to assess the number of poor who participatedin this job market, yet it is known that the total number of jobs generated by the LHWP isless than the number of new entrants to the job market each year in Lesotho.

7. Institutional development for poverty reduction as a result of World Bank-assistedprojects was modest; some lasting institutions were established but there were many moredisappointments. Since no Bank-assisted projects could be shown to have had an impacton poverty reduction in the projects' domains, sustainability in terms of poverty reductionis not an issue.

8. Rural development. The relevance and quality of analytical and advisory work inrespect of rural development was generally satisfactory. In contrast the relevance andefficacy of World Bank-assisted rural development projects, taken as a group during thenineties, were modest at best. Therefore their outcome was evaluated as unsatisfactory.On the other hand the ongoing rural development project shows some promise that it willbe at least moderately satisfactory. Institutional development in rural developmentprojects was evaluated as modest, and the sustainability of these projects following theend of World Bank support was evaluated as unlikely.

Lessons Learned

9. The following main lessons emerged from this evaluation of the World Bank'sassistance programs in agriculture, rural development and poverty:

* Assistance strategies need to be realistic. Three CASs in the nineties proposedassistance strategies and investments in agriculture and rural development that fromthe first CAS in 1994 proved unachievable because of unrealistic expectations, weakgovernment commitment or inadequate implementation capacity. When the 1994

I.A person who is a national of Lesotho is referred to as a Basotho. The national language is Sesotho.

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objectives were not achieved they were then expanded in the next CAS but again notachieved. While establishing challenges is an important function for CASs, a lessonderived from this evaluation is that the Bank overreached in terms of the challengesthat it set. A more modest strategy would have been prudent in the context of theuncertain and weak political, institutional and technical circumstances in Lesothoduring most of the nineties.

* Supply-led agricultural development strategy usually fails. In the eighties andearly nineties Lesotho, with strong World Bank support, focused on a supply-led foodself-sufficiency and agricultural development strategy which foundered because therewas neither a sound technical production basis nor adequate markets for output. Thelikely failure of supply-led strategies in rural development was a lesson that theWorld Bank had already learned in earlier years.

* Successful institutional development needs strong government commitment. Aregular and logical objective in Bank-assisted agriculture and rural developmentprojects in the nineties was institutional development in areas such as land andgrazing management, road rehabilitation and maintenance, and in rural developmentin the highlands. None of these objectives were met because there was at best a weakcommitment from the government to make the necessary institutional changes.

* Substantial economic growth was not sufficient for poverty reduction in ruralareas. GDP growth of about 2 percent per capita p.a. in Lesotho during the eightiesand nineties had no impact on poverty reduction in the chronically poor rural areasbecause agricultural and rural development stalled during these years. It will beessential in the future to focus on growth and employment in agriculture, livestockproduction, agro-industry and services in rural areas, if poverty is to be reduced fromits current high levels.

* Technical change in agriculture is a time-consuming process. While prospects forsome crops (such as horticultural crops) may appear promising on the basis oftheoretical analysis, the technical changes needed to achieve the promises on asustainable basis take many years to accomplish and act as substantial constraints onfulfilling the original promise.

* Future development of a sustainable livestock industry. The World Bank should,in partnership with the government, make a renewed effort to improve landmanagement and grazing policies in the highlands, along with improved advisoryservices to achieve the sustainable development of livestock production in those areasbased on wool and mohair production, as well as the production of young steers forfattening in South Africa. There should also be increased attention to fostering theintensive production of livestock in the lowlands. This would increase incomes andease the pressures on the highland pastures.

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Annex 5c

Evaluating Bank Assistance to Lesotho for Private Sector DevelopmentAuthor: Kevin Lumbila

Summary

1. This paper evaluates the impact of the World Bank's assistance program for theprivate sector development (PSD) in Lesotho during the 1990s. This program was thethird largest in IDA's portfolio during the 1990s, accounting for about 22 percent of totalIDA lending to Lesotho. There were two projects, namely, the Industrial and Agro-Industries Project (US$21 million, approved in FY91 and closed in FY98) andPrivatization and Private Sector Development (US$11 million, approved in FY94, andclosed in FY01). As a whole, this program focuses on supporting policy changes toimprove the environment for PSD; promoting foreign and indigenous investment;developing linkages between the formal sector and SMEs; and privatization of state-owned enterprises (SOEs), banks, and utilities. The overall objective is to promote anexport-led growth leading to a reduction in unemployment.

2. The period covered by this evaluation (the 1990s) was a period of a relativeprosperity due to two major factors: the construction of the Lesotho Highlands WaterProject (LHWP) and the rapid expansion of the export-oriented manufacturing sectorowned by foreign investors (mainly South Africans) evading anti-apartheid sanctions.However, growing unemployment rates in the 1990s required a broad-based economicgrowth, forcing the Government of Lesotho (GOL) to develop a strategy that would notonly sustain growth but also develop (through linkages between foreign and local firms)an indigenous private sector capable of diversifying employment opportunities. TheWorld Bank assistance program supported such a strategy.

3. The outcome of Bank assistance has been evaluated in terms of the Bank servicesand products, the development effectiveness of the program, and the extent to which theoutcome of the program is attributable to the Bank's effort.

Main Conclusions and Recommendations

4. The Bank's program for improving the policy environment for private sectordevelopment has been substantially relevant, as has its support for privatizing state-owned enterprises and reformning the financial sector. However, outcomes have beenunsatisfactory due to the lack of sufficient government commitment, weak institutionsand poor implementation of overly-ambitious and overly-complex Bank assistance.

5. In deploying Bank products and services, overall assistance was substantiallyrelevant with a few exceptions. However, the efficacy of Bank's lending operations inachieving their objectives was negligible with regard to the first project, and is so farmodest in the second project under implementation, leading to an overall unsatisfactoryoutcome. The program as a whole was successful in supporting a number of investmentpolicy reforms and attracting foreign investors, but required government subsidies. Theprogram was not successful in encouraging indigenous investment or in diversifyingagricultural investments into higher value-added activities or establishing linkages to the

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LHWP. The privatization process evolved more slowly than expected. The other twodimensions of this evaluation, namely, development effectiveness and attribution,indicate the same results.

6. Sustainability of benefits is unlikely since growth in the private sector hasdepended on large inflows of aid and temporary increase in foreign direct investment bymanufacturers evading textile export quota or apartheid-era sanctions in RSA, all ofwhich are likely to decline. An improved environment for private sector developmentand growth depends also on enhanced political stability, better governance, deeperparastatal reform, and a stronger financial sector. The Bank's contribution to suchinstitutional changes has been modest during the 1990s.

7. This evaluation suggests that future World Bank assistance should continue tofocus on key constraints to private sector development. These include the lack of localmarket opportunities that limits the emergence of an indigenous private sector; the legalsystem that is not capable of protecting investors; the slow privatization of the largepublic enterprise sector that avoids the creation of a level playing field for the privatesector; and the financing of the public enterprise sector losses which crowds out privatesector investment. In addition, continued inefficiencies in Lesotho's public utilities andweaknesses in the financial sector have also hindered private sector development andburdened the govermment budget.

Lessons

8. No analytical work preceded either of the two pending operations to impact theirdesign phase. This was particularly evident in the attempts to develop the indigenousprivate sector in the context of the Agro-Industry Project; it did not succeed partlybecause of an inadequate assessment of the prospects and constraints in the sector.Similarly, the failure to create linkages between the manufacturing export firrns and localentrepreneurs as a way of developing the indigenous sector, was partly explained by thelack of a pre-feasibility study.

9. Privatization and private sector development is a highly political process, but indesigning its assistance program the Bank did not take sufficient account of the politicaleconomy of change. Before undertaking an ambitious sector reform such as this, theBank should assure that the government is committed and implementing agencies havethe required technical, financial, and legal capabilities. The Bank did not assess theextent of vested interests against privatization and Bank-supported private investmentpromotion agencies lacked such skills.

10. The Bank's assistance would probably have contributed more to the emergence of aviable private sector had it been preceded or accompanied by the array of interlockinglegislative, regulatory, and institutional and financial measures critical to the creation ofmore congenial environment for private sector investment. Slow progress has been madeon the imposition of financial discipline on loss-making public enterprises, includingpublic utilities, increasing their recourse to commercial bank credits and crowding outprivate sector investment. These credits were provided with government guarantees,negatively affecting the health of the banking system and crowding out privateinvestment.

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Annex 5d

Water Sector Strategy Review

Author: Guy Le Moigne

Summary

1. World Bank lending in the water sector to Lesotho since 1990 has been limited tothe Lesotho Highlands Water Project (LHWP). The exclusion of other water projectsfrom Bank assistance programs followed an explicit decision in the mid-1980s to focuson the LHWP. It was assumed that other donors would finance the development ofdomestic water supplies. In the event other donors did not assist and domestic watersupplies remained at a low standard. The Bank has, however, taken a constructiveapproach to assistance in this sector in the past year that is much appreciated byGovernment agencies and donors alike.

2. Studies of the LHWP concept date back to the 1950s, but the project was preparedin the 1980s. The main objective is to meet the growing demand for water in theheartland of the Republic of South Africa (RSA) and to help Lesotho export its mostabundant natural resource. Total lending by the World Bank for the project to dateamounts to $123.7 million equivalent (net of cancellations of $41.1 million), representingless than 4 percent of the estimated $3.7 billion total cost of Phase 1 of the project.

3. The Bank's objective of assisting Lesotho to broaden its economic base through asubstantial increase in the economic exploitation of its water resources remains relevant.There is unanimous agreement among the various agencies associated with this majorendeavor that the Bank played a significant and catalytic role in the negotiations of theWater Treaty between Lesotho and RSA, as well as in the formulation, financing, andimplementation of phases IA and lB of the project. These projects will transfer about 17and 12 million cubic meters per second of water respectively to the RSA.

4. The role of the Bank in financing consulting engineering and Panel of Expertswas beneficial to ensure the quality of construction, in developing emergencypreparedness, and in studying in detail instream flow requirements. The Bank alsocarried out a detailed analysis of the consequences of a delay in starting Phase 1B that ledto the justification of its implementation in accordance with the Treaty.

5. The parties to the project agreed to apply the Bank's environmental and socialsafeguard policies, although they were introduced too late in Phase 1A. Nevertheless, anumber of donors consider that the Bank contributed to the dependency syndrome of thepeople directly affected by the project by endorsing the extension of compensation tofamilies that were forced to resettle from 15 to 50 years. In addition, sustainability of thesocial and environmental components is not yet certain as organizations (public, privateor community), with the capacity to take over the operation and maintenance of theseassets have, in many cases, not yet been identified.

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6. Experience to date on using royalties from the project to reduce poverty in thecountry through the Development Fund (established to provide financial support foreconomic and social development) indicates that, it will require far more attention than ithas received so far.

7. In retrospect, the Bank should have made greater efforts to convince the twogovernments to bring the hydropower component under the purview of the centraloversight authority established for the project. This would have facilitatedimplementation and financing of the power component, while the sharing of the total costof the project between Lesotho and RSA (with Lesotho contributing a percentagecorresponding to the estimated cost of the power component) would have improvedgovernance and created a joint incentive to save on all costs.

8. The Bank rightly concluded that Phase 2 of the project would be postponed byseveral years due to changed circumstances in RSA, but it has not paid enough attentionto the consequences of this postponement on the future of the Lesotho HighlandsAuthority (LHDA) and its staff.

9. Bank assistance in the evaluation of bids was considered helpful by LHDA.However, in retrospect, it seems that the Bank's procurement guidelines at the time didnot prevent the alleged bribery charges and legal proceedings on this matter are nowunderway in Lesotho. The Bank Oversight Committee for Fraud and Corruption isevaluating the case. OED should carry out an audit of the LHWP at the completion ofPhase lB when key decisions affecting the achievement of the project objective ofreducing poverty and protecting the environment will have been taken and theirconsequences on the distribution and sustainability of project benefits can be assessed.

Conclusions

10. So far the LHWP has been a very successful project that has met its major goals,although it is not yet close to meeting its social goals. This shortcoming is adisappointment but vigorous action is being taken to address the problems and it ispossible that in the end the social goals will also be achieved.

11. The outcome of this project (made up of the Engineering Credit and the Phase IAand 1B loans) is evaluated as satisfactory, based on high relevance and substantialefficacy. Institutional development for the project as a whole has been evaluated assubstantial on the basis that various institutional arrangements such as commissions andpanels, as well as the core implementing authority (LHDA), performed in excellentfashion. On the other hand, there are some institutional arrangements concerned withsocial development (rural development, poverty reduction, and resettlement) that havenot performed as well and their combined performance in Phase 1A was rated asunsatisfactory. For Phase IB the outcome of the social development components is likelyto be significantly improved and has provisionally been rated as moderately satisfactory.It is likely that the LHWP is sustainable assuming the continued sound performance ofthe LHDA.

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12. The presence of a Bank Resident Representative in Lesotho would probably havefacilitated Bank assistance to GOL and LHDA in the implementation of the social andenvironmental issues of this very large and complex project. It would also have enabledthe Bank to conduct a more effective dialogue with critics of these issues from NGOs andthe media.

Lessons

13. There are five major lessons to be learnt from this project. They are as follows:

* Detailed, competent, transparent, collaborative planning and preparation of projects ishighly likely to result in sound outcomes. The work done by the various projectteams in Lesotho, South Africa and the World Bank are clearly reflected in the resultson the ground.

* Where there was far less planning (such as for the social objectives) the results weredisappointing and damaging to the status of the project so far.

* Leaving the responsibility for the implementation of an integral component of aproject to be managed outside the central oversight authority (as in the case of theMuela power plant) is likely to lead to differing standards and a lack of cohesion inthe overall progress of a project.

- Independent monitoring of the progress of projects (such as by panels of experts) isvaluable and pays high dividends in terms of efficacy and efficiency.

* Avoiding stakeholder participation in the design, planning and implementation ofprojects will inevitably mean that important issues are overlooked and support for theproject is undermined.

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Attachment A

AFRICAN DEVELOPMENT BANK

LESOTHO COUNTRY ASSISTANCE EVALUATION

Executive Summary

1. This Report evaluates Bank Group assistance to the Kingdom of Lesotho. On the basis ofan earlier understanding between the Bank and the World Bank, the evaluation was carried outjointly by the two institutions. Chapters I and 2 of the Report, which were prepared jointly, arecommon to the evaluation reports of both institutions. The present evaluation report focuses onthe main sectors of Bank's assistance, namely the transport and social sectors, while the WorldBank focuses on poverty and poverty-related issues, the Lesotho Highlands Water Project,human resource development and private sector development. Resource constraints preclude theinclusion of the agricultural sector which, on cumulative basis, accounts for 13.1% of Bank-approved loans and grants as of December 31, 1999.

2. Lesotho is a small, mountainous country surrounded completely by the Republic of SouthAfrica. It is also a poor country, with about half of the population living below the poverty line.The country is also characterized by severe income inequality, with a Gini coefficient of about60%. The country's socio-economic development has been influenced considerably by itsgeographical location inside the Republic of South Africa. Until 1994, South Africa operated anapartheid policy, which induced an array of world-wide sanctions. Lesotho suffered theconsequences of the sanctions along with the country. While the country has recorded (in spite ofthis and other constraints), some impressive growth performance in the past, it now facesmonumental developmental challenges, which include poverty, unemployment, weakinstitutional capacity, incidence of HIV/AIDS and global changes, in particular, changes withinSouth Africa.

3. Bank Group strategy in Lesotho was influenced rather inadvertently, by the political andgeographical considerations. In the early years of its intervention, Bank Group strategy wasaimed at developing the basic infrastructure with the objectives of linking the major urban areaswith the remote mountainous areas, and of obviating the necessity of making detours throughSouth African road network. As a result of this, the Bank invested heavily in the transport sector.Following the collapse of apartheid, Bank Group strategy changed from emphasis oninfrastructure to that of promoting growth and alleviating poverty. It is however doubtful if thestrategy achieved its objectives, as poverty remains prevalent in the country.

4. This Report found Bank Group strategy in the transport sector relevant to the needs of thecountry, as there was need to link up the urban areas with the remote mountainous areas of thecountry. Political expediency also required the country, during the apartheid, to reduce itsdependence on the road network of South Africa. The strategy achieved this objective in that thecountry is now more or less linked up with an efficient road network. The achievements in thetransport sector are sustainable as the Government makes regular and adequate budget provisionof the maintenance of investments in the sector. Bank assistance has similarly enhancedinstitutional development in the sector as the Ministry of Transport is now adequately equipped

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to carry out regular maintenance works. The assistance has also contributed to the developmentof indigenous road contractors.

5. There was no Lesotho-specific strategy in the social sector other than the broad Bankpolicies approved in 1986. In the health subsector, Bank interventions have increased the numberof facilities and equipment and have marginally contributed to an increase in infrastructure andto an improvement in the quality of education. They have also supported increases in the numberof qualified teachers and in strengthening institutional capacity to manage education andcurriculum development.

6. The sustainability of achievements in the health subsector is uncertain. Governmentexpenditure (capital and current) on the sector is on the decline while the institutional capacityfor managing the installed structures is not available. While there is an effective ProjectImplementation Unit in the Ministry of Health, institutional and operational linkages between thehealth centers and the four (Bank) projects are not clearly articulated. There is a dearth of humancapacity in both rural and urban areas for managing the installed structures. It is estimated thatabout 75% of trained staff have been lost, mostly to the Republic of South Africa. Thesustainability of the achievements in the education subsector is assured by the sustainedgovernment expenditure in the sector. Bank assistance has also contributed to institutionaldevelopment, as there has been a significant improvement in all the intervention schools. TheCentral Inspectorate has also been strengthened to be able to carry out its supervisory functions.

7. Overall, Bank performance in Lesotho can be rated as just satisfactory, with itsperformnance in non-lending operations (policy advice and dialogue, economic and sector work),being rated as unsatisfactory. Indeed, the Bank has not made any significant contribution to theenhancement of knowledge of the economy of Lesotho. The Bank has made some modestcontribution to the country's institutional development, while the sustainability of theachievements of its interventions appears likely. Although the bulk of Bank assistance was insocial capital and not in directly productive activity, it can still be said that to the extent that theassistance (in social capital) achieved its objectives and thereby facilitated growth, Bankassistance can be said to have an overall satisfactory outcome. Non-lending assistance was,however, not satisfactory. The sustainability of the outcome appears likely, given thedemonstrated commitment of the government (through budgetary provisions) to the interventionprojects. The impact on institutional development is, however, modest as the country continuesto experience weakness in institutional capacity. This is made worse by the outflow of trainedmanpower to the Republic of South Africa.

8. The major lesson that can be learnt from this experience is that, prior economic andsector work is critical to the formulation of appropriate Bank strategy towards a country. Thiswould tend to ensure that the Bank does not "fly blind" in its operations in a borrowing country.In terms of future directions, Bank strategy should endeavour to focus on aspects of currentdevelopment challenges facing Lesotho. These are poverty, unemployment, weak institutionalcapacity, HIV/AIDS epidemic, private sector development, and vulnerability to external (mostlySouth Africa) policy changes, and governance issues.

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Attachment B

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\I[NITRY P ELESOTO I

3rd July 2001CPO/04/ 14

Mr. Fareed HassanThe World BankGroup Washington,D.C. 20433 U.S.A.

Dear Mr. Hassan

The Government of Lesotho was pleased to receive Country AssistanceEvaluation reports following a Country Portfolio Performance Reviewmission of May 2000. The reports were circulated to all key sectors andconmments were discussed with Mr. Fareed Hassan during his rmission in June2001.

Please find attached the consolidation of Government of Lesotho

comments

I thank you for you usual cooperation

Yours sincerely

L.A Hlasoa

Director - Department of Sectoral Program

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Comments to OED's Country Assistance Evaluation of Lesotho (CAE)

The Government of Lesotho agrees with the analysis of the CAE and shares withOED the main conclusions of the report. The officials noted that the CAE rightlyfocused on areas most critical for Lesotho's development: poverty and inequality,health (HIV/AIDS), education (declining net enrollments, improving outcome andefficiency of the educational system), monitoring and evaluation, and private sectordevelopment. The authorities found most of the recommendations enlightening andof great guidance in designing future strategies conducive to poverty reduction andsocial development.

As it is correctly stated in the CAE document, addressing poverty and inequalityhas become one of the main priorities of the Government of Lesotho. The I-PRSPof March 2001 was a part of a larger process of formulating a longer-term strategyfor poverty reduction and social development (i.e., Vision 2020). To address theproblems of the nonperforming Lesotho Highlands Revenue Fund (created in 1992to support targeted poverty reduction efforts), the Lesotho Fund for CommunityDevelopment (LFCD) was established. The Bank approved in FY00 a CommunityDevelopment and Support Project to support reforms financed by the Fund.However, it will take some years for the new LFCD to be activated in a substantialway since it was recently (between July and November 2000) that key staff for thisFund were appointed.

We also agree with the CAE's conclusion that monitoring and evaluation are weakin almost all sectors, most significantly in areas related to poverty reduction. TheGovernment of Lesotho is committed toward addressing this shortcoming. TheMinistry of Development Planning is establishing a Projects Monitoring andEvaluation Unit and has already appointed staff. The new Unit will work closelywith planning units in different sectors. These efforts will require technicalassistance from international institutions. The Ministry of Development Planning isrequesting technical assistance from OED to train and strengthen the capacity of thestaff.

The absence of an adequate monitoring system in Lesotho is a problem with rootsin the overall lack of data collection and analysis. The last household survey wasconducted in 1993. There is a lack of health information system and surveyinstruments necessary to monitor HIV/AIDS. Agricultural surveys are not carriedout, and little is known about labor markets. More seriously, little is known aboutthe economics and institutions of the rural sector, where the majority of thepopulation and of the poor people inhabit and make a living. Recently, the WorldBank has proposed a Core Welfare Indicator Questionnaire (CWIQ) under theFY00 Community Development and Support Project that should produce

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significant information on poverty and its determinants. The Bank isespecially qualified to assist the country in developing a continuous systemof household surveys and/or public expenditure reviews, indispensable tomonitor and evaluate the impact of social programmes and proposeadjustment to them. Given that Lesotho is a small country, a fiveyearinterval rather than an annual survey/update may be feasible.

Government officials agree with the CAE's conclusion that combatingHIV/AIDS should also enjoy high priority in the government plans. TheCAE also concluded that the World Bank was ineffective in critical areas ofhealth sector management, including resource allocation and developingbasic health information systems. Only recently did the World Bank adopt anew adaptable programme credit, supporting a sector-wide approach forHNP in FY00, and the authorities are pleased with the new approach.

Educational objectives of World Bank's programme were oriented towardexpanding physical access to, and quality of, formal education, rather thanenhancing participation through non-format or more flexible form ofschooling and eliminating financial barriers to participation by the poor.These omissions became obvious by the end of the 1990s, leading to arevision of World Bank objectives to include a renewed emphasis onaffordable access and equity, nonformal education, and early childhooddevelopment to achieve universal primary education by 2011 (FY00Education Sector Development Project II). In January 2000, the Governmentof Lesotho started to phase-in free primary education, and the first two yearsof implementation witnessed increases in enrollments. For the 3rd gradethrough the 8th grade, the government is now providing a free mealsupported by the World Food Programme.

Comments on specific projects (for example, Privatisation and PrivateSector Development Project and Health, Population and Nutrition II) areprovided below.

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1. Privatisation and Private Sector Development Proiect

As far as the Government of Lesotho is concerned indeed the pace ofimplementation have been slow, however, valuable lessons have been learnedin privatisation process. Critical reasons for the project to have yielded lessthan expected outcomes are as follows:

The design of the project was externally driven by World Bank consultants.There was no local experts or experience of privatisation programmes. Itshould be borne in mind that the World Bank consultants were severelyhandicapped by a general lack of credible information about the enterprises,which were to be at the core of the privatisation portfolio programme. At theinception of the project the external consultants, who were retained by theproject, brought considerable experience of privatisation in other Africancountries such as Zambia and Ghana, but clearly many of the assumptionswhich they brought with them regarding such critical issues as local capitalavailability and entrepreneurship had to be tested against the practical realitiesof Lesotho.

Conditions of Portfolio Enterprises

The first sample survey of 12 portfolio enterprises, conducted by DeloitteTouche Tohmatsu as early as 1995, revealed that the condition of the LesothoSOEs was much worse than it had been generally anticipated with more thanhalf of the enterprises in a serious loss-making situation. The condition ofmanagement records was appalling. The lack of transparency had assured thatno one had the least idea of the horrific details that were to be revealed laterwhen proper due diligence exercises wvere launched under the auspices of theLesotho Privatisation Project. One of the notable successes of the privatisationproject in Lesotho is that it introduced a culture of transparent and accountablemanagement practices in state enterprises. The erosion of public resources byway of subsidies to inefficiently run loss-making state enterprises, such asLesotho Airways Corporation, was revealed for what it was for the first time,and action was taken accordingly. The poor condition of the enterprisesconcerned did not help in attracting strategic investors in an already riskyinvestment environment. The fact that there was some success in attractinginvestors even in distressed enterprises such as Lesotho Airways Corporationor Lesotho Bank has to be commended.

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Capacity Building

It has already been noted that there was no local expertise and experience ofprivatisation at the commencement of this ambitious project. The evaluatorsargue with some justification that it might have helped to have begun with amore modest pilot project. Whilst the Government of Lesotho agrees with thisobservation, it is worth noting that Lesotho Privatisation Project quickly builtup a credible local capacity to manage the project through its intricacies, andthis must be recorded as one of the notable successes of the project.

Political Sensitivity

The implementation of the Lesotho Privatisation Project has been remarkablefor its political sensitivity. Privatisation and economic restructuring arepolitically sensitive. The Government of Lesotho wisely recognised thatimplementation of the privatisation programme should test out the politicalimplications of each move for it would be not be prudent to rush headlong intocontroversial transactions at the risk of political riots and other socialupheavals as have been experiences in other African countries. The evaluatorsof the project should give due credit to the government of Lesotho for steeringthese major economic transformations with success in spite of the considerablepolitical risks that were involved.

The insistence on Cabinet involvement in monitoring and approvingtransactions may not be as negative as perceived by outside observers: onepositive is that tie precluded chances of corruption and over-hasty decisions.

Private Sector Participation

Realism and practical knowledge of Lesotho circumstances would haveindicated that there were extremely limited chances that in the period between1994 and 2000 any significant purchases of enterprises such as LesothoAirways Corporation, Lesotho Flour Mills, Lesotho Bank or LesothoTelecommunications Corporation could be by Basotho Private Sector interest.The project could do what it could to arouse consciousness, to indicate possibleopportunities, to restructure the culture of regulations in preparation forBasotho Private Sector participation that will surely come in time. It is onlynow after satisfactory completion of the first phase of the economictransformation that we can see the stirrings of local Private Sector participation

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of any significance as former employees of privatised state-owned enterprises suchas Lesotho Telecommunication Corporation and new local investor groups, such asSekhametsi Investment Holdings who purchased the Government Shareholding inVodacoin, make their first significant moves.

Time Factor

It is merely stating the obvious to say that the evaluation of the outcomes of theLesotho Privatisation Programme thus far requires time for changes to take effect.The newly privatised companies such as Lesotho Telecom require some time toreposition themselves before yielding any tangible benefits.

Lessons Learnt

It is quite possible that useful lessons can be derived from an objective evaluation ofthe Lesotho Privatisation and Private Sector Development Project using models ofexpected outcomes. For practitioners on the ground there may be even more usefullessons if evaluations take into account the peculiar circumstances in whichprivatisation and economic restructuring have been initiated in Lesotho incircumstances which could hardly have been less favourable. In the final analysiswhen an objective evaluation concludes that the pace of implementation in Lesothohas been slow the answer is a resounding yes.

2. Health

Health Population and Nutrition II

The Government of Lesotho accepts the overall evaluation of less thansatisfactory performance in this sector.

Earlier projects in the Health Sector including this one were hampered by politicalinstability of the time with attendant problems of high turnover of managers in keyproject components. This resulted in loss of direction and poor efficiency.

The preparatory work was weak as it was prescriptive and did not involve lowerlevels of the operations. It was top-down approach. This rade the problem of lack ofdirection more pronounced.

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In project design the HIV/AIDS burden and its impact was grosslyunderestimated, if not ignored. The relationship between HIV/AIDS andhuman development was overlooked.

Human Capital Development

All above adversely affected project sustainability. Hence the facilities likeQoaling are not fully utilised because of poor human resources preparation.

Leadership had been very much invisible because of poor preparatory work.The high turnover in civil service leadership and project management unitalso have contributed to poor performance of the sector.

Current Project Health Sector Reform

A more pragmatic approach has been brought into focus. The program isowned by the people and is accountable to them. The bank is now a partner,collaborating not dictating. A small degree of flexibility in the conditionalityhas been injected by free consultation with the bank and other partners.

Consensus building-participation and people-led-was the critical step outthat shaped on current program.

Consultancies aimed at capacity building are helping to the performance,supported by time-bound, joint-annual evaluation meeting of all stakeholders.These measures are aimed at bringing about project relevance andeffectiveness.

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Attachment C

Kingdom of Lesotho - Country Assistance EvaluationComments by the Country Team for Lesotho

The Lesotho Country Team (CT) is pleased to note that there was substantial consultationby OED staff with members of the Lesotho Country Team, Lesotho's developmentpartners, and the client during the preparation of this CAE. Given the wide range ofthemes and issues evaluated, the consultation process was deemed thorough andextensive and the current CAE seems to capture the main issues on IDA assistancestrategy for Lesotho in the 1990's. The report does a good job in highlighting theconstraints to development in Lesotho and adequately documents the nature of Bankassistance over the decade. The report also highlights the weaknesses in IDA assistancestrategy, in particular, by noting the tendency by the CT to sometimes be over-ambitiouson the prospects for reform in Lesotho.

While the CAE provides a number of lessons for the CT in developing future countrystrategy, it does not seem to adequately recognize the constraints faced by IDA in ternsof the limited: (i) prospects for development in Lesotho in termns of its massive resourceconstraints; (ii) management capacity both in the public and private sectors for policyformulation and implementation; and (iii) resources (both financial and availablemanpower) at the disposal of the CT. The CAE adequately documents the likely impactof the constraints posed by Lesotho being a small, land-locked, and mountainouseconomy surrounded by a major economy like South Africa. But the CAB seems tosuggest that the prospects for migration and private sector development (as the mainoutlets for poverty reduction) could come from improved education and an enhancedenabling environment (including a stable political environment). Unfortunately, whilethese sentiments are shared by the CT, it has proven to be very difficult to achieve thesegoals because of Lesotho's acute management capacity constraints. Lesotho'smanagement capacity constraint is accentuated by the high level of out-immigration ofqualified personnel (usually to South Africa), making it impossible to implementprograms, which at the time of project preparation are seemingly simple.

The CAE also does not sufficiently recognize the constraints on resources faced by theCT. In hindsight, greater attention could have been paid by IDA in being more selective(in view of limited resources) and in taking on more of a leadership role in itscoordination with Lesotho's development partners. But that has not been possiblebecause the challenges facing Lesotho are small and numerous and yet required resourcesdisproportionate to the size of the economy. As the CAE noted, and the CT concurs, thestrategy, sequencing and the content of IDA assistance program were appropriate to thechallenges of Lesotho. Whether IDA was overly ambitious or not in its judgment ofgovernment commitment and implementation capacity depends on the appropriateness ofusing current standards and priorities to judge past actions, rather than the standards andpriorities at project inception, including those of the Government in office.

The CT concurs with the CAE that greater attention needs to be paid to a thoroughassessment of the unstable political environment in Lesotho and with a focus oninstitutional development and capacity building. Complementing these recommendations,

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the CT is working with the Government in developing a Poverty Reduction StrategyPaper by focusing on strengthening monitoring and evaluation and identifying Lesothopotential sources of growth. A CAS progress report is being prepared which focusesongoing interventions on the key problems of capacity building and mitigating thenegative impact of HIV/AIDS. The CT recognizes the complex challenges facingLesotho and where IDA has the expertise and comparative advantage, such as health,education, water, and macroeconomic policy development, appropriate leadership wouldbe taken in promoting donor coordination.

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Attachment D

Management Action Record

Major Monitorable OED Recommendations Management ResponseRequiring a Response

Poverty, human capital development, HIV/AIDS, IDA agrees on OED's characterization of theand institutional strengthening are major development challenges facing Lesotho, which havechallenges for Lesotho in the foreseeable future. formed the focus of the last three CASs and IDAWorld Bank assistance should be centered on: assistance over the past decade:

Reducing poverty and inequality in the medium The focus of the last CAS (May 1998) was to supportto longer term by focusing greater attention on Government's effort for poverty reduction throughthe quality of education and human capital investing in human resource development. IDAdevelopment in the poor mountainous regions, concurs with the CAE that this strategy is in the rightso as to increase employment prospects within direction. The I-PRSP and the PRSP under preparationLesotho and South Africa. have identified unemployment as the dominant cause

of poverty and seek to address it by promoting humancapital development as an instrument to support greaterdomestic industrial development, targeted povertyprograms such as the rural development programs ofLHWP, and to promote overall growth as well as theprospects for Basotho labor in the regional labormarket.

HIV/AIDS programs should feature prominently IDA has monitored the development of HIV/AIDSin the World Bank assistance strategy through over the past decade culminating in a number ofthe development of institutions capable of reviews (including a Strategy Paper on HIV/AIDS formonitoring and coping with the epidemic. Lesotho, and a recent report entitled, Lesotho: The

Development Impact of HIV/AIDS - Selected Issuesand Options, Report No. 21103 - LSO, Oct. 2000) andhas explicit components targeted at HIV/AIDS in thepast and in the ongoing Health Sector ReformProgram, and implicitly incorporated in the LHWP,Second Education Sector Development Project, andother operations. The Country Team is alsocontemplating the development of a regional programfor the Southern African countries for HIV/AIDS inwhich Lesotho will participate.

> Using its involvement in the LHWP and Using the ongoing Agriculture Policy and Capacityagricultural policy to enhance the policy and Building Project, IDA is addressing the issues of rangeregulatory institutions for rangeland management and sustainable development of the ruralmanagement, including land tenure, research, sector by (i) building capacity for planning andextension, grazing management, and rural budgeting, including the introduction of systemicfinance to improve the sustainable production of monitoring and evaluation, (ii) strengtheninglivestock in the highlands. agricultural support services by making research and

extension more responsive to client needs, increasingmarket information, and enhancing technical supportfunctions of livestock conservation and crops, and (iii)building capacity for land management andadministration. Furthermore, the Country Team iscontemplating the application of the concept ofCommunity Driven Development for Lesotho.

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Major Monitorable OED Recommendations Management ResponseRequiring a Response

Monitoring and evaluation is weak in almost all IDA concurs with the need to strengthen monitoringsectors. and evaluation in Lesotho. Under the ongoing

preparation of the Poverty Reduction Strategy Paper,IDA is assisting Lesotho to establish a comprehensivemonitoring and evaluation program.

> The Bank should help Lesotho improve its Under the auspices of the LIL for the Lesotho Fund forstatistical database, most urgently in areas Community Development, IDA is providing assistancerelated to poverty reduction (for example, to the Bureau of Statistics in Lesotho to strengthen itspoverty assessment update and/or public poverty monitoring and evaluation functions. Aexpenditure reviews) and promote monitoring poverty monitoring unit has been established. In theand evaluation systems within key line future, working with the technical assistance supportministries. from the European Union and other bilateral agencies,

IDA intends to assist the Bureau of Statistics incapacity building. Through the Technical WorkingGroup of the PRSP, IDA would assist Lesotho to buildthe capacity to utilize poverty data for policyformulation. IDA provided assistance in the past threeyears for a preliminary public expenditure review,which culminated in the preparation of a public sectorreform program (expected for Board presentation by

* Aid coordination. the second quarter of FY02).

> A stronger operational representation in Maseru, Formal aid coordination for Lesotho is undertaken byor more frequent interaction with the the UNDP. IDA has supported this process by activelygovernment and development partners from the participating in resource mobilization (working withBank's office in Pretoria, would enhance other donors) and taking leadership (in co-financingcoordination among donors and portfolio arrangements) in the areas in which we haveperformance. comparative advantage, e.g. under the Lesotho

Highlands Water Project, the Health Sector ReformProject, the Educational Sector Development Projectand the Roads Rehabilitation Project. IDA led the UNteam in the Post-Conflict Review in 1998. The Bankhas also had a liaison office in Lesotho since 1998 andwill augment it with an Operations Officer who hasalready been selected and will represent the Bank atregular donor meetings. Also, visits by the CountryDirector to Lesotho have increased significantly sincethe directorship moved to the field.

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Attachment EDecember 20, 2001 CODE2001 -0103

Report from CODEInformal Subcommittee to the Committee on Development Effectiveness

Lesotho: Country Assistance Evaluation

1. The Informal Subcommittee (SC) of CODE met on November 26, 2001 to discuss theOED Country Assistance Evaluation (CAE) for Lesotho (CODE2001-0078), covering the1990s. OED rated the overall outcome of World Bank assistance to Lesotho during thisperiod as moderately unsatisfactory although the Bank's assistance program had beenbased on a correct diagnosis of the country's problems. In their view, the strategyoverreached in terms of objectives given weak government ownership, overstretchedimplementation capacity, and political tensions. In the end, the Bank program had littleimpact on poverty reduction. OED noted that this CAE had been carried out jointly withthe African Development Bank (AfDB) and that significant capacity for evaluation hadbeen developed in the AfDB through this process.

2. Comments by Management. Management welcomed the CAE and noted that theBank's strategy tried to leverage the two major resources of the country: people andwater. Lesotho faced major challenges including a lack of capacity, poor resourceendowments, an unfavorable geography, and the emigration of its most educated peopleto South Africa. It noted that problems like HIV/AIDS originated in South Africa andwere brought to Lesotho by migrant miners, making it necessary for the Bank to take aregional rather than country-specific approach to them. The Bank's strategy thereforefocused on increasing integration with South Africa, especially through joint projects thatused South African expertise and that thus helped improve capacity. Management statedthat poverty reduction had been central to the various CASs reviewed by OED. Ithighlighted the constraints faced by the Bank in formulating programs to deal withpoverty reduction in Lesotho, including limited sources of growth.

3. The SC broadly supported the findings of the evaluation report and raised the followingissues.

4. Partnerships. The SC welcomed the collaboration with the AfDB and noted that in thehigh-cost operating environment of Lesotho, partnerships were vital for maximizing thedevelopment impact of the Bank. Members asked how much effort it would beappropriate to devote to Lesotho, given that OED had identified the need for a strongerlocal presence in Maseru. Strategic coordination among donors and greater selectivitywould be critical in light of both resource constraints and the limited absorptive andmanagerial capacity of Lesotho. In this regard, they underlined the need for the Bank toplay a strong leadership role. Management concurred on the need for a strategic use ofdonor resources and for building partnerships, especially given the critical need for coreESW in such countries. It planned to increase support to Lesotho from Pretoria and wasworking with donors on improving capacity in agriculture. However, the UNDP hadbeen assigned the lead role for coordinating development assistance in Lesotho.

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December 20, 2001 CODE2001 -0103

5. Needs of small states. Committee members noted that the CAE's findings had broadapplicability to small countries with limited resources and capacity, which were criticalstrategic considerations for the CASs for these countries. They emphasized that OED'srecommendations should be reflected in the PRSP and CAS for Lesotho, and that theyshould be implemented in the context of the country's relationship with South Africa.Commenting that many small states function very well, EDs wanted to know more aboutthe sources of growth in Lesotho. They felt that PSD would be the key to growth, jobcreation and poverty alleviation in the country, noting the need for greater realism inprogram design. They urged IFC involvement in attracting foreign investment and inprivatization in Lesotho. Management agreed, but stated that the lack of local partnersmade IFC entry difficult in Lesotho.

6. Lessons. Members commented that the Bank's experience in Lesotho provided manylessons to improve implementation in the future, including the need for ensuringmonitoring and evaluation; the assignment of adequate resources for supervision; and, theneed for analytical work, especially on the functioning of the Govemment, to underpinthe strategy.

7. Members agreed with OED that the disappointing impact on poverty of the LesothoHighlands Water Project (LHWP) represented a lost opportunity. Members questionedmanagement about the delay in addressing the problems in the Development Fund thatwas meant to have used the revenues generated by the LHWP (from the export of waterto South Africa) to support rural development and poverty reduction in Lesotho. Theyasked for further information on the shortfalls in the functioning of the Fund. A memberasked whether the project had contributed to a decline in poverty among those resettleddue to the project. Another member wanted to know whether staff faced appropriateintemal incentives when designing such projects, since the sustainability of these projectsappeared to be declining. OED noted that a major lesson was that large projects shouldbe pursued only after critical institutional issues have been resolved. Managementresponded that the limited poverty impact of the LHWP had been recognized during thepreparation of the second phase of the project, and that the revenue fund was revised sothat a major share of revenues went to the general revenues of the govemment and theremainder to a social fund.

8. Basis for OED rating. Committee members noted that the major development concemsin Lesotho in the early 1990s had been related to macroeconomic stability, and that itappeared inappropriate to judge the LHWP on the basis of today's criteria when theproject had made a substantial positive contribution to GNP. OED responded that theyjudged outcomes against current standards and that the poverty reduction objective hadbecome more important in the recent past. However, they had taken account of theoriginal project objectives when rating the performance of management. They noted thatBank involvement in the LHWP was motivated by an interest in ensuring that the projecthad an impact on poverty and included appropriate attention to environmental and socialmanagement. In this respect, the management of revenues from large infrastructureprojects was key to ensuring that benefits were widely distributed and did not result inenclaves of development. The project had not performed well on this count. At the sametime, OED recognized the key role played by Bank support in finalizing the treatybetween Lesotho and South Africa that provided the former with a permanent revenuestream from the export of water. Management responded that the project had been

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December 20, 2001 CODE2001 -0103

9. designed to provide Lesotho with revenues but acknowledged that the rural developmentaspects had been unsatisfactory. It commented that rural development remains difficultin Lesotho because few areas are appropriate for agriculture and many products areuncompetitive vis a vis South Africa. It is actively working to find solutions to theproblems with the rural development program under the LHWP.

10. Capacity. Members also asked how OED would advise implementing the health andeducation initiatives they were recommending given the lack of capacity in the country.An ED wanted to know what the Bank needed to do and how management planned toaddress the problem of low capacity in Lesotho.

11. Political tensions. Some EDs asked how the political environment had been factoredinto the articulation of the Bank's assistance strategy, and whether Bank support couldhelp reduce political volatility. They wanted to know if management had developedcontingency plans in view of the political tensions in the country.

Matthias Meyer, ChairmanCODE Subcommittee

DISTRIBUTION

Executive Directors and AlternatesPresidentBank Group Senior ManagementVice Presidents, Bank, IFC and MIGA

Documents

Report No. 23407 Kingdom of Lesotho Country Assistance ... · by not insisting on the inclusion of the Muela power plant as an integral part of the project under the management of