Lesotho - Lesotho National Development Corporation (LNDC) Project

FILE copy Report No. 1332a-LSO Appraisal of the Lesotho National Development Corporation (LNDC) and Its Subsidiary the Basotho Enterprises Development Corporation (BEDCO) March 17, 1977 Industrial Development and Finance Division Eastern Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization  CURRENCY EQUIVALENT Rand (R) 1 = US$1.15 ABBREVIATIONS BEDCO Basotho Enterprises Development Corporation CIDA Canadian International Development Agency EDF European Development Fund EIB European Investment Bank KfW Kreditanstalt fur Wiederaufbau LNDC Lesotho National Development Corporation RSA Republic of South Africa SSE Small Scale Enterprise FISCAL YEAR BEDCO April 1 - March 31 LNDC April 1 - March 31  FOR OFFICIAL USE ONLY APPRAISAL OF THE LESOTHO NATIONAL DEVELOPMENT CORPORATION AND ITS SUBSIDIARY THE BASOTHO ENTERPRISES DEVELOPMENT CORPORATION TABLE OF CONTENTS Page No. SUMMARY ........ ....................................... i I. INTRODUCTIOiN ......1*.........................1 II. THE ENVIRONMENT ....................................... The Economy ........ .................................. Industry and Tourism. 2 Government's Industr:ial Policies. 3 Financial Environment .4 The Role of LNDC and BEDCO. 5 III. THE LESOTHO NATIONAL DEVELOPMENT CORPORATION. 5 The LNDC Act . . 5 Policy Statement .. 6 Board and Management .. 6 Organization and Staffing .. 7 Operating Procedures. 7 Accounts and Audit .. 8 Interest Rates and Other Charges .. 8 IV. LNDC'S OPERATIONS AND FINANCE. 9 Investment Approvals .. 9 Equity Investments. 9 Loans ........................................... 10 Factory Buildings ............................... 10 Portfolio ............................................ 10 Profitability ........................................ 11 Financial Situation .................. ................ 12 V. THE BASOTHO ENTERPRISES DEVELOPMENT CORPORATION ...... 13 Establishment and Articles of Association ............ 13 Share Capital and Resources ............ .. ............ 13 Operations ............................................ 13 Board of Directors and Management . . 14 Organization and Staffing ..14 Policies and Procedures ..15 Financial Performance and Situation . .16 This document hs a rtrited 4distribution and may be used by recipients only in the performance of their official duties. It contents may not otherwise be disclosed without World Sank authorization.  -2- Page No. VI. PROSPECTS .......................................... 16 Industry and Tourism ................................ 16 LNDC's Strategy and Projected Operations ............. 17 BEDCO's Projected Operations ................ 17 Resource Requirements .............. ................. 18 LNDC's Financial Prospects ..... ..................... 18 BEDCO's Financial Prospects ......................... 19 VIIo THE CREDIT - ITS JUSTIFICATION, RISKS AND FEATURES ... 19 VIII. RECOMNENDATIONS ...................... 21 This report is based on the findings of an appraisal mission con- sisting of Messrs. Nouvel, Tsui, West (Consultant) and Ms. Kanga which visited Lesotho in March/April 1976 and a follow-up mission consisting of Messrs. Tsui, Mante and Barham which visited Lesotho in August 1976.  LIST OF ANNEXES Annex LNDC's Policy Statement 1 LNDC's Board of Directors 2 LNDC's Organization Chart 3 LNDC's Equity & Loan Portiolio as of June 30, 1976 4 LNDC's Income Statements: 1973-1974-1975-1976 5 LNDC's Consolidated Income Statements: 1975 & 1976 6 LNDC's Balance Sheets: 1973-1974-1975-1976 7 LNDC's Consolidated Balance Sheets: 1975 & 1976 8 LNDC's Project Possibilities 9 Assumptions for LNDC's Financial Projections: 1977-1981 10 LNDC's Projected Operations: 1977-1981 11 LNDC's Projected Income Statements: 1977-1981 12 LNDC's Projected Balance Sheets: 1977-1981 13 LNDC's Projected Resources and uses: 1977-1981 14 LNDC's Financial Ratios: 1973-1981 15 BEDCO's Proposed Policy Statement 16 BEDCO's Board of Directors 17 BEDCO's Proposed Organization Chart 18 BEDCO's Investment Portfolio as of August 20, 1976 19 BEDCO's Projected Investments and Assumptions for Financial Projections: 1977-1981 20 BEDCO's Actual and Projected Income Statements: 1976-1981 21 BEDCO's Actual and Projected Balance Sheets: 1976-1981 22 BEDCO's Actual and Projected Cash Flow Statements: 1976-1981 23 Estimated Disbursement Schedule of IDA Credit 24  !~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  APPRAISAL OF THE LESOTHO NATIONAL DEVELOPMENT CORPORATION AND ITS SUBSIDIARY THE BASOTHO ENTERPRISES DEVELOPMENT CORPORATION SUMMARY i. The Lesotho National Development Corporation (LNDC), a Government owned company, was established in 1967 to promote and finance industrial, com- mercial, tourism and mining enterprises in Lesotho. In 1976 it acquired as a subsidiary, the Basotho Enterprises Development Corporation (BEDCO) established by the Government in 1975 to promote the development of Basotho owned small scale enterprises. LNDC has developed to be the principal institution for promotion and long term financing of large and medium scale non-agricultural enterprises in Lesotho. ii. Lesotho, a small country surrounded by the RSA, is one of the 29 countries classified as least developed by the United Nations. Lesotho has few natural resources, and less than 15% of its land area is suitable for crop cultivation. The economy is characterized by the dominance of sub- sistence agriculture and by migration for employment in the mines of the RSA. The recent growth performance of the economy has been satisfactory, (average annual growth of 5% in real terms between 1969/70 and 1974/75) mainly because of a recovery in agricultural production. The contribution of the industrial sector has been increasing steadily (from 1% of GDP in 1969/70 to 3% in 1974/75), although the small size of the local market and the unavailability of local raw materials makes industrial development a difficult task. Tourism has also developed as an important new sector, depending largely on the vast South African market. Lesotho uses the South African rand, and has no central bank of its own; it relies on monetary policies controlled by the South African Reserve Bank. Lesotho's financial markets are not well developed; there are three commercial banks but they are not very active in long term lending for industrial development. iii. LNDC has promoted and provided financial assistance to enterprises in a variety of sectors, including handicrafts manufacturing, food proces- sing, construction, hotels, and commerce. It has provided financial assist- ance in the form of loans, equity participations, leasing of factory buildings and guarantees. Because of a shortage of Basotho with the skills to promote and manage large enterprises, LNDC holds a majority shareholding in most of the enterprises it has assisted, and therefore directly manages these enter- prises. As of June 30, 1976 LNDC had approved investments amounting to R4.7 million for 38 projects, of which R1.1 million represented investments in subsidiary companies in which it had a majority shareholding. One of these subsidiaries, BEDCO, provides financial assistance, technical assistance, factory shells and leased equipment to small Basotho enterprises. It is estimated that LNDC assist:ed enterprises account for about 90 percent of industrial output and employ about 2000 persons. The economic impact of its operations has therefore been significant.  - ii - iv. Although most of the projects LNDC has assisted are well conceived, their financial performance has fallen short of expections because of manage- ment problems. As a result they have not provided much income to LNDC. Instead, until 1976, LNDC's income came mainly from sugar royalties which the Government transferred to it. These royalties enabled LNDC to make profits. Although LNDC no longer receives income from royalties, and did in fact make a loss in FY 1976 as a result of substantial provisions against possible losses of investments, its financial situation is good because it has con- sistently received significant Government support through equity contribu- tions. Its subsidiary BEDCO made a loss in FY 1976 (its first year in opera- tion) but also remains in a good financial situation because of adequate grants it has received from the Lesotho and Canadian Governments. v. LNDC has recently acquired a new management which is dynamic; it is recruiting suitable staff and improving its organization and procedures. It forecasts an active operational program in the next five years with expected investment approvals of R3.3 million in FY 1977 (including R1.7 million for industrial infrastructure), R1.8 million in FY 1978 and R2.0 million in FY 1979. Its strategy is to concentrate investments in FY 1977 on restructuring its exist- ing investments so as to improve their financial performance, and to actively promote and finance new enterprises, especially in the industrial and tourism sectors, beginning in FY 1978. BEDCO plans to invest R5.5 million over the next five years, of which R1.3 million will be SSE loans, R2.2 million in industrial estates to provide factory shells for Basotho enterprises, and R2.0 million for training, technical assistance, and equipment rental schemes for Basotho entrepreneurs. Financial projections for LNDC show that it will be profitable and creditworthy during the next five years. BEDCO is projected to run operating losses mainly because of its planned extensive training and technical assistance activities. It will however receive grants from the Government to finance these deficits. vi. LNDC's planned commitments for FY 1978 and FY 1979 are R3.8 million of which an estimated R2.9 million would be in foreign currency and for which it will require new resources. BEDCO's planned investments for the same period amount to R3.3 million out of which RO.6 million would be for its SSE credit scheme. The foreign exchange component of the scheme is estimated at RO.5 million. LNDC is an important institution in Lesotho, and its subsidiary BEDCO also has potential for developing into an important and effective insti- tution. To help meet their foreign resource needs from mid-1977 through mid-1979, an IDA credit of US$2.5 million is proposed for the Lesotho Govern- ment, US$2.2 million to be on lent to LNDC at 8.5 percent and US$0.3 million to be lent to BEDCO at 7.0% to finance its small scale credit scheme. An individual free limit of US$100,000 and an aggregate free limit of $700,000 are recommended for LNDC, whilst for BEDCO it is recommended that its first ten SSE subloans to be financed out of the credit require prior approval by IDA. vii. Agreement having been reached on the principal issues, the project is suitable for an IDA credit of US$2.5 million to be utilized as outlined above.  I. INTRODUCTION 1.01 The Lesotho National Development Corporation (LNDC), was established under the Lesotho National Development Corporation Act (1967) as a 100 percent Government-owned statutory corporation to promote industrial, tourism, mining and commercial projects. LNDC got off to a good start under its first Managing Director, a South African industrialist who was successful in developing its operations along sound commercial lines and in implementing about fifteen projects. After his departure in early 1973, however, LNDC's operations and situation gradually deteriorated as a result of a number of problems. First there was management instability and second, LNDC could not recruit sufficient numbers of qualified staff, both expatriate and Basotho for its expanding operations; thiese staffing problems prevented LNDC from developing an effective organization and procedures, and resulted in inadequate follow up on the progress of its investments. More recently, LNDC has acquired new management which is effecting important changes that should enable the corporation to fulfil muich of its potential as the leading development finance institution in Lesotho. 1.02 IDA involvement with LNDC commenced in March, 1973 with a brief fact-finding mission. Although IDA continued to provide advice on policies and procedures to LNDC, and even assisted the Government in recruiting a temporary Managing Director in 1975 it was not until February 1976 that the Government requested IDA to provide financial assistance to LNDC. An IDA appraisal mission visited LNDC in March/April 1976 and reviewed its policies, procedures, organization and portfolio. The mission also reviewed the organi- zation, policies and procedures of the Basotho Enterprises Development Corpo- ration (BEDCO), an LNDC subsidiary engaged in the development of small Basotho owned enterprises. This report reviews the performance and prospects of the two institutions and recommends on IDA credit of US$2.5 million to the Govern- ment of Lesotho. Of this, $2.2 million would be onlent to LNDC at 8.5 percent for LNDC's investment in industrial and tourism projects whilst $0.3 million would be onlent to BEDCO at seven percent for on-lending for its small-scale enterprise credit scheme. LNDC will undertake a part of the administration work related to BEDCO's portion of the credit. II. ENVIRONMENT The Economy I/ 2.01 Lesotho is a small country (11,716 square miles) entirely sur- rounded by the Republic of South Africa (RSA). With a population of around 1.2 million and a per capita GNP of around US$180 in 1975, Lesotho is among the 29 countries designated as least developed by the United Nations. Lesotho has few natural resources, and less than 15% of its land area is suitable for crop cultivation. The economy is characterized by the dominance of subsistence agriculture and by migration for employment in the mines of the Republic of 1/ For detailed informiation on the economy of Lesotho refer to "Economy of Lesotho" (Report Nc. 331a-LSO; June 25, 1974) and "Economic Memorandum on Lesotho" (Report No. 1083a-LSO; July 8, 1976).  - 2 - South Africa. Subsistence agriculture (mainly production of maize, sorghum and wheat) and livestock rearing provide the main economic activity of about 85% of the population and account for about 45% of the domestic product. 2.02 Lesotho has developed close economic ties with the Republic of South Africa. Together with the RSA, Botswana and Swaziland, it belongs to the Southern Africa Customs Union which provides for free circulation of goods between the member countries. It belongs to the South African Rand Currency Area, and uses the South African Rand as its currency. In addition, about 200,000 Basotho (including half the country's male labor force) are estimated to be employed as migrant workers in the RSA, mainly in mining and agriculture. Lesotho does derive economic advantages from the customs and currency ties. Its industries have full access to the large South African market, its agricultural exports benefit from the high support price paid to South African producers, and it can draw upon the foreign exchange reserves of South Africa. The main disadvantage lies in the resulting unavailability of the set of policy instruments that an independent country can use to control its economy. Lesotho has also benefitted from the migration through substantial remittances which have become critical to improving the living standards of a large segment of the population. Nevertheless, it remains a major economic problem for the Government since its continued existence depends very much on political and economic developments in the RSA. 2.03 Because of these close economic ties with the RSA, inflation rates in Lesotho closely reflect the rates there. The South African wholesale price index increased by 8% in 1972, 13% in 1973, 17.9% in 1974 and 17.2% in 1975, and wholesale prices in Lesotho are estimated to have increased at roughly the same rates. For the future, Lesotho's economic planners expect the rate of inflation to decline, as economic conditions in South Africa become normalized. They therefore project an average annual infla- tion rate of about 9% between 1976 and 1980. 2.04 Between 1969/70 and 1974/75, the growth performance of Lesotho's economy was satisfactory, with GDP growing at an average annual rate of 5% in real terms. This was due mainly to a recovery in agricultural production from a low level in 1969/70, and to expansion in the Government and tourism sectors. During the same period, GNP grew at almost 10% a year, mainly as a result of substantial migrant remittances. The prospects for future satis- factory growth of the economy will depend mainly on the performance of the agricultural sector, and to a lesser extent on industry and tourism. Illus- trative projections indicate that, with favorable weather conditions and continued satisfactory execution of rural develoment projects, the agricul- tural sector could propel the economy to an average annual growth in GDP of 6% in real terms between 1976 and 1981. Industry and Tourism 2.05 Lesotho's industrial sector is in a rudimentary stage of develop- ment. In 1969/70 the sector accounted for slightly over one percent of GDP and employed fewer than 600 persons. By 1974/75 its share of GDP had  -3- increased to about three percent and it provided employment to about 3,000 people, thus accounting for an estimated 12 percent of total cash employ- ment in Lesotho. The sector is also estimated to have accounted for just under 20 percent of total recorded merchandise exports in 1974/75. There is incomplete information oil the structure of the sector and hence the relative contribution of subsectors to total value added in industry is unknown. However, there appears to have been considerable diversification in the products manufactured during the first five year plan period (1969/70 - 1974/75). New units established included factories for manufacture of pottery, umbrellas, sheepskin products, candles, electric lamps, furniture and hand loomed rugs. Processing units for diamond cutting and tyre re- capping were also started. 2.06 The constraints to the development of industry are many and varied. Given the scarcity of raw material resources in Lesotho, the bulk of inputs for industrial development has to be imported. The size of the local market is small, necessitating an export oriented industrial development, and there is a shortage of entrepreneurs and skilled manpower. To aggravate these problems the Republic of South Africa is already industrially advanced and therefore tends to attract the new enterprises. Because of these problems, the development of industry will be a long and difficult task. Success will derive mainly from Lesotho's ability to exploit its limited advantages which include its access to the vast Southern African markets and other African and European markets respectively through its membership of the South African Customs Union and its associLate membership of the European Economic Community. 2.07 Next to manufacturing, tourism is the other sector which has potential for diversification of Lesotho's economy. Until 1969, tourism played a minor role in the domestic economy; the number of tourists was less than 5,000 per annum. By 1974, however, largely as a result of construction and subsequent expansion of a 470-bed Holiday Inn Hotel with casino facilities in the capital city of Maseru, tourist traffic had increased to about 80,000. About 90 percent of all tourists come from the Republic of South Africa, and the average length of stay is estimated at 2.5 days. Although these casino facilities in Maseru are a major tourist attract:ion, the future of the sector will depend largely on successful diversification of tourist attractions to broaden the base of the sector. Government's Industrial Policies 2.08 Because of the importance of direct private foreign investment in providing the capital and knowhow for the industrial development of Lesotho, the primary objective of government's industrial policy is to promote such investment. The Government will, however, not hesitate to take the initiative in starting new enterprises itself, if the private sector does not. The second objective of industrial policy is to promote the development of indigenous small manufactur;ing enterprises, and the government therefore provides free training and t:echnical assistance to such enterprises. 2.09 Lesotho offers generous incentives to industrial enterprises. A "Pioneer Industries Encouragement Act" (1969), provides generous tax incen- tives to "pioneer industries." These include a choice between a six-year  - 4 - tax holiday, or depreciation allowances of up to 150% of the initial inivestmne: the first year of operation; a citizen training allow- ance eqa'l to 10/ of the cost to the manufacturer; and a citizen wage allowance equal to 10% of the wages paid to Basotho. The incentives related to ltrainlng and employment of Basotho are particularly innovative and useful in Lesotho's context. F iann - _,_E-_vt 2.10 Lesotho has no central bank of its own and is largely dependent on monetary and credit policies set by the South African Reserve Bank. 'The operations of commercial banks are nevertheless subject to some local regulation ir, accordance with a Financial Institutions Act of 1973. This legislation set-s minimum levels of capital and liquid assets, prescribes the levels of ifvestment to be maintained, influences the direction of lendirg operations, and provides for the periodic inspection of accounts. Tn additio- i has established a comprehensive system of statistical reporting and inspection of accounts for financial institutions. 2.11 Th^Cue 2a- three commercial banks in Lesotho. The largest of these 1s Ls Lesothc Bank, a fully government owned commercial bank which started operations in 1972. It was set up to mobilize savings and to improve the channelling of credit to local businesses, and it took over the assets and liabilities of the then Post Office Savings Bank. Although the Lesotho Bank has so far been successful in attracting local savings, it has done little in providing credit facilities to local businessmen. The bulk of its resources have been either loaned to public agencies, used to acquire fi^xed property or deposited temporarily with other com- mercial banks, because staffing problems have prevented it from developing an aggressi-ve lendig posture. The two other commercial banks are the Starndar& E- ' f_' Led and Barclays International Ltd. both of which belong to the lag .ternational commercial banking groups headquartered in the Unit-ed Kinar5-mI -but were incorporated in Lesotho recently. These banks attraCt considerable local savings but invest most of their funds abroad because of l mited opportunities for short term investment in Lesotho. They have not been very active in term lending for industrial development in Lesotho. T-hus at the end of 1975, about 60 percent of the total consolidated assets of the commercial banks in Lesotho were foreign assets, rinanced mafra]y by local savings and time deposits which accounted for 64 percent of their total resources. 2.12 Other financial institutions operating in Lesotho include branches of several South African building societies, an Agricultural Development Fund (ADF), the Lesotho Credit Union Scheme for Agriculture (LECUSA) and . a2rious small credit unions. All insurance business is handled by South African insurance companies. The Government is considerin- ,eg_isation to strengthen the operations of building societies, and to estab-i- sh an agricultural development bank and a local insurance company. These measures are expected to result in mobilization of more domestic resources for development.  -5- 2.13 A recent addition to the financial scene is a deferred payment scheme, which woxuld provide for repatriation to the Lesotho Bank of 60 percent of the earnings of migrant workers. Previously these savings were held with the Chamber of Mines in South Africa and earned no interest. Under the new scheme, these deposits will earn interest at a rate of 5 percent per annum. When the scheme was established it was estimated that by the end of 1977 when all migrant workers were expected to be covered, the fund would accumulate between R20 to R24 million, part of which could be utilized for development. Because of the reluctance of the South African Chamber of Mines and of the migrant workers to cooperate however, actual funds repatriated so far have been very small, and it is doubtful whether in the near future the scheme would contribute the expected resources for development. 2.14 Interest rates in Lesotho are generally in line with those in the RSA. With the exception oi- the Government, which pays a concessionary 6 per- cent interest on its overdrafts, interest rates charged to borrowers range from 11% to 14% for short-i:erm money, 9% to 13.5% for medium term money, and 8.5% to 12% for long-term money, depending on the security provided. Savings accounts with commercial banks yield between 3.5% and 5% interest, and time deposits from 5.5% to 7.5%. The Role of LNDC and BEDCO 2.15 LNDC was established to provide the equity capital and long term loans needed by both large and small enterprises mainly in the industrial and tourism sectors, and thus fill in an institutional gap which existed in the financial environment. LNDC is also the principal vehicle of Government s industrial policy, and is primarily responsible for promoting industrial development in Lesotho. In addition to its financing activities therefore, it is responsible for attracting foreign investors, and where it is unable to locate such investors, take the initiative in establishing and managing suitable enterprises. With the establishment of BEDCO, the role of LNDC was slightly redefined, and. it now concentrates on the promotion and financ- ing of medium and large enterprises. The promotion and assistance of in- digenous small enterprises, an important objective of Government's industrial policy, is thus the full responsiblity of BEDCO. The roles of the two insti- tutions are thus intended to be complementary, and do not involve costly duplication of responsibilities. III. THE LESOTHO NATIONAL DEVELOPMENT CORPORATION The LNDC Act 3.01 LNDC was established under the Lesotho National Development Corporation Act (1967), "to initiate, promote and facilitate the develop- ment of manufacturing and processing industries, mining and commerce in a manner calculated to raise the level of income and employment in Lesotho." The Corporation is also empowered to manage businesses for the purposes of safeguarding its investments. The Act exempts the Corporation from taxation.  - 6 - 3.02 Although the Act authorizes the Board to determine the share capital of the Corporation, this has not yet been done. As a result the Corporation has been operating without an authorized capital, making it impossible to determine what the amount of uncalled capital is. While this does not hamper LNDC at present it may in the future, when the Corporation seeks to raise new equity funds from non-government sources. LNDC's manage- ment has accordingly requested that the Act be amended to stipulate the share capital and to define the shares of the Government. The Government and LNDC have agreed that the share capital of the Corporation will be determined, and the Government's shares will be defined not later than May 31, 1978. Policy Statement 3.03 LNDC's Board adopted a policy statement in 1975 which specified limits to LNDC's financial involvement in projects and contained other provisions relating to investment policy. The Board has recently adopted a revised policy statement (Annex 1) which more clearly specifies limits to LNDC's financial commitments. The significant new provisions are: (i) LNDC should not invest more than 10% of its net worth in the share capital of any one project, and its aggregate equity investments should not exceed its net worth. (ii) LNDC's total financial commitment (viz. equity, loan, guarantee, and building) in any single project should normally not exceed 20% of the Corporation's net worth nor 60% of the project's total capital cost, including permanent working capital. (iii) LNDC should not incur exchange risks with respect to those of its borrowings that are repayable in foreign currencies. (iv) LNDC should over time, seek to revolve its funds by selling off its equity portfolio. Board and Management 3.04 The LNDC Act specifies that the Board of Directors may consist of not less then four and not more than nine directors. Seven of these positions have been filled so far. The present members (see Annex 2) are the Prime Minister (who is Chairman), the Minister of Commerce and Industry (Deputy Chairman), the Minister of Finance, LNDC's Managing Director, a prominent Basotho businessman, the Regional Controller for Southern Africa of the Commonwealth Development Corporation and a Swiss businessman. 3.05 LNDC's present Managing Director, Mr. Roger Gurr, joined in July 1976 on a two-year CIDA (Canada) contract. He is a Canadian whose previous experience includes working as a consultant with Currie, Coopers and Lybrand of Montreal. His deputy is Mr. Sam Montsi, a Basotho Economist who joined LNDC in 1975 and was previously the Director of Planning in the Ministry of Finance. The team is competent and is providing LNDC effective leadership.  -7- Organization and Staffing 3.06 LNDC has four departments: Project Financing and Development, Operations, Finance, and Administrative Services. All project identification, promotion and appraisal work are undertaken in the Project Financing and Development Department. The Operations Department is responsible for the control of LNDC's subsidiaries 1/ and associated companies 2/ which are grouped on the basis of their products, markets or technology into eight sectors (handicrafts, agro and food industries, consumer products, building materials and construction, tourism, distribution, and automotive). Each group is headed by a director to whom all the managers of the companies within the group report; the group director, in turn, reports to the Director of Operations. In addition there is a unit within the Operations Department pro- viding technical consulting services to the subsidiaries. The Finance Depart- ment performs all financial management and accounting functions for the cor- poration, provides similar support to the subsidiaries and associated companies and undertakes some project supervision work, whilst the Administration Depart- ment is responsible for all personnel, administrative and legal functions. This organization structure (Annex 3) reflects the special nature of LNDC as both a development bank and an industrial and commercial holding corporation. The structure is suitable for LNDC since it clearly delineates the responsi- bilities for project development, control of subsidiaries and associated companies, finance and administration. 3.07 An acute shortage of suitable Basotho professionals has made it dif- ficult for LNDC to meet its staffing requirements from local sources. As a result it has to rely heavily on overseas aid organizations to finance expatri- ate staff for a majority of its key positions. At present, LNDC has a profes- sional staff of nineteen cf whom nine are expatriates. This includes the key post of the Financial Controller and three new professionals for his group who were recruited during the past twelve months following discussions with the Bank. The new Director of Operations will be recruited not later than November 30, 1977. LNDC has prepared satisfactory five-year recruitment and training plans and is not expected to encounter serious difficulties in their implementation. Operating Procedures 3.08 Project Appraisal and Supervision. LNDC has prepared an Operations Manual which includes guidelines on procedures for project appraisal and supervision. In the past LNDC's staff have operated without documented guidelines and some projects have thus been inadequately appraised and supervised. Appraisal reports have not always included a comprehensive assessment of the financial, economic and technical merits of a project. 1/ Companies in which LNDC's shareholding is 51% or more. 2/ Companies in which LNDC's shareholding is 50% or less.  - 8 - At the request of LNDC's management, the IDA follow up mission conducted a short seminar on financial and economic appraisal of projects for LNDC's staff and recommended a format for the preparation of project reports which LNDC has adopted. As LNDC builds up its staff, it plans to use appraisal teams consisting of an engineer, an economist and a financial analyst. 3.09 Supervision of projects during implementation is presently under- taken by the Projects Officer who appraised the project. The system involves the preparation of monthly progress reports which outline the physical pro- gress, compare actual costs with estimates, and report on any additional financing that might be required. The system for supervision once the project is in operation is being improved through a clearer description of procedures. In most previous cases, supervision had been undertaken on an ad hoc basis by the Projects Officers or through the management of the subsidiaries. The Operations Manual includes a description of the improved procedures. 3.10 Legal, Procurement and Disbursement Procedures. LNDC has an acceptable standard form of loan agreement for legally documenting its loans, and a suitable standard lease form for entering into lease agree- ments. Because of staff constraints in the past however, legal agreements on many of its operations were never finalized. LNDC has now finalized such agreements. Procurement and disbursement procedures for LNDC financed purchases are being finalized. Accounts and Audit 3.11 In the past a major weakness in LNDC's accounting system has been the absence of an internal financial reporting system to generate timely financial information on operations. Financial control was therefore very weak especially with regard to the subsidiaries and associated companies. In addition, although LNDC published annual accounts, these did not usefully reflect the true financial performance and position of the Corporation because the financial performance and situation of the subsidiaries were not consoli- dated into LNDC's accounts. The FY-1976 audit, undertaken by Peat, Marwick and Mitchell has rectified this problem, and the final FY-1976 financial reports include consolidated accounts of LNDC and its subsidiaries. LNDC has also engaged the services of the international management consulting firm of Coopers and Lybrand to develop and implement a new Management Information System which will include a system for internal financial reporting. Interest Rates and Other Charges 3.12 LNDC presently charges 12% on its loans although in the past it had charged 9 to 10%. LNDC has agreed to set its minimum lending rate at 12% for the future and charge its borrowers a 1% foreign ex- change risk fee (to be paid to the Government who will absorb the risk). This lending rate will be positive in real terms, given Lesotho's ex- pected inflation rates, and will give LNDC an adequate spread. LNDC now charges a rent of 15% per annum on development costs for its factory build- ings which is enough to permit a recovery of the capital costs of such  -9 - buildings, cover the maintenance costs, and yield some profits. The Corpora- tion also charges a fee of 1% per annum for guarantees. IV. LNDC'S OPERATIONS AND FINANCE Investment Approvals 4.01 Summarized below is LNDC's operations since its establishment through June 30, 1976. Total Approved of which Subsidiaries (in R' millions) Number Amount Number Amount % Equity Investments 30 0.9 16 0.5 56 Loans 20 1.8 12 0.3 17 Factory Buildings 20 1.3 4 0.1 8 Guarantees 11 0.7 5 0.2 29 81 4.7 42 1.1 23 The 81 investments LNDC has approved have provided assistance to 38 projects, since LNDC has assisted most of these projects with equity investments, loans, buildings and guarantees. The projects assisted operate in a large variety of sectors, and include handicrafts manufacturing enterprises, food processing enterprises, commercial undertakings, hotels, and construction enterprises. These operations are in keeping with LNDC's role, which is to promote the development of medium and large scale enterprises in the modern non-agricul- tural sector. Although LIbDC has not as yet undertaken a comprehensive assess- ment of the economic impact of its investments, it is estimated that about 90 percent of all industrial output in Lesotho is accounted for by LNDC assisted enterprises which now employ about 2,000 persons. The fixed asset cost per job of its investments has been low, ranging from about $650 to about $9,500. 4.02 Equity Investments. LNDC's largest single equity investment ap- proved to date was R100,000 in a hotels holding company it wholly owns. It has also approved token inivestments of R500 or less in six companies. If one excludes these six investments, however, its average equity investment has been about R38,000. Because there are presently very few Basotho entrepreneurs with the necessary financial resources or experience to promote and manage their own medium and large scale enterprises, LNDC has taken majority ownership in a number of enterprises. Sixteen of the thirty equity investments LNDC has approved were for such majority owned subsidiaries, for which LNDC bears the management responsibility. In addition to the heavy burden which the manage- ment of these 16 companies places on LNDC's managerial resources, its majority ownership position exposes it to high financial risks. It is LNDC's policy to reduce these risks by progressively divesting itself of these subsidiaries.  - 10 - The Corporation will annually review each of its subsidiaries to determine their suitability for divestiture on the basis of criteria which have been agreed upon with IDA. Following its annual review, LNDC will consult IDA on steps it intends to take. LNDC's management has recently sold half of its interests in some of its handicrafts manufacturing enterprises to EDESA 1/, a privately owned international corporation which invests in development projects in countries in Equatorial and Southern Africa. It is intended that EDESA would assume management responsibilities for the enterprises involved. 4.03 Loans. Much of LNDC's lending have been to the tourism sector, which have accounted for about 49% of its total approvals. The largest loan was R800,000 which was made to the Amalgamated Hotels Ltd., owner of the Holiday Inn complex at Maseru, and the smallest was for R3,000 to a weaving company. Most of the loans were in the R10,000 - R50,000 range with an average loan size of about R30,000. Repayment periods for these loans have ranged from one year to seven years, reflecting LNDC's flexibility in dealing with its subsidiaries and associated companies whose needs have included short term working capital funds as well as term finance for fixed assets. 4.04 Factory Buildings. To eliminate delays in project implementation which would otherwise result from the difficulties companies face in acquiring land in Lesotho, and to attract foreign investors who are offered similar facilities in other Southern African countries, LNDC has been investing directly in factory buildings for rent to investors in Lesotho. These build- ings have been built to the specifications of the applying companies. As at June 30, 1976 LNDC had invested R1.3 million in buildings for 20 companies out of which RO.1 million was for four of its subsidiaries. LNDC also develops building sites for lease to companies which prefer to put up their own build- ings. Leases on these buildings and sites range from 5 to 20 years and annual rental charges have, in the past, averaged 14% of the initial cost of develop- ment. This investment in buildings and site development ties up part of LNDC's investible resources in fixed assets and creates additional administra- tive costs through property management responsibilities. It is LNDC's policy therefore to sell off the buildings so as to release the resources for new investments whenever possible. Portfolio 4.05 Annex 4 shows LNDC's outstanding equity and loan portfolio as at 31st March, 1976. The equity portfolio amounted to RO.6 million of which RO.3 million (50%) represented investments in the 16 subsidiary companies. The financial performance of these companies in which LNDC has outstanding equity investments has not been particularly good. For the year ended March 31, 1976, only 4 of the 16 subsidiary companies and only 5 of the 12 associated companies showed profits. The operating losses attributed to LNDC from the subsidiaries amounted to RO.29 million (equivalent to 96% of its outstanding 1/ Economic Development for Equatorial and Southern Africa.  - 11 - equity investment in these companies). This overall unsatisfactory financial performance of the subsidiaries, for which LNDC has direct management responsi- bility has been due mainly to: (a) poor and discontinuous management: there has been frequent disruptions in the management of these companies as a result of personnel turnovers and a shortage of competent managers in Lesotho. (b) inadequate capitalization: some of the companies were started with too small a capital base and were thus overburdened with debt servicing problems. (c) poor marketing programs: there has been no serious attempt to identify markets and no comprehensive marketing strategy has been formulated or utilized by the companies. (d) inadequate management information: compilation and timely reporting of operating and financial information has been inadequate, thereby affecting the quality of management decisions. 4.06 LNDC's new management is dealing effectively with these problems, and it is expected that the financial performance of these projects which are basically soundly conceived would be improved in 1977. 4.07 The loan portfolio amounted to R1.1 million of which RO.4 million (36%) were loans to subsidiaries. In addition RO.7 million of the total outstanding were to associated companies of LNDC. Almost all the outstanding loans were therefore to companies in which LNDC was already financially exposed through equity investments. Because of the inadequate past record keeping practices of LNDC, and because some of the loans, especially to sub- sidiaries and associated companies, were made in the form of advances with no fixed repayment terms, it is not possible to determine the proportion of the outstanding loans that were in arrears on principal and interest payments as at March 31, 1976. In general, however, because of the poor performance of the companies involved (para 4.05) it is estimated that the level of arrears was very high. For its FY1977, LNDC will, as a result of its newly improved accounting system and its completed legal agreements, provide detailed informa- tion on the arrears situation on its outstanding loans. Profitability 4.08 Annex 5 shows LNDC's income statements for its fiscal years 1973 to 1976. From 1973 to 1975, LNDC earned substantial income from sugar royalties transferred to it by the Government. In addition, in 1974 and 1975, it received substantial dividends from the Holiday Inn at lIaseru in which it has a token investment transferred to it by the Government. As a result of these non-operational revenues, and because it did not make any  - 12 - provisions against possible losses on its portfolio, LNDC showed net profits in all three years. In 1976, LNDC received no income from sugar royalties, and its dividends from the Holiday Inn was half what it received in 1975. As a result its profit before losses on investments and provisions was only R38,000 compared to R387,000 in 1975. After write offs of losses on invest- ments (R293,000) and setting aside provisions (R924,000), LNDC made a net loss in 1976 of R1.2 million. The substantial write offs and provision were necessary, but belated steps to reflect the erosion of LNDC's capital investments in its subsidiaries and associated companies, most of which had accumulated large losses over the years. 4.09 Annex 6 shows consolidated income statements for LNDC and the sub- sidiaries for its fiscal years 1975 and 1976. In 1975 the whole group made a net profit of R189,000 largely as a result of the non-operational revenues received by LNDC. As a result of the substantial reduction of this non- operational income in 1976, LNDC's own minor profit before investment losses and provisions (R38,000) was not enough to offset the substantial operating losses of the subsidiaries (R287,000) and the group thus made an operating loss before investment losses and provisions of R249,000. With the addition of investment losses (R115,000) and provisions against losses (R566,000) the net group loss comes to R930,000. Financial Situation 4.10 Summarized balance sheets for LNDC for the fiscal years 1973 to 1976 are shown as Annex 7. As of March 31, 1976 LNDC had a net worth of R3.3 million (consisting of accumulated funds, Government grants and capital reserves from revaluation of fixed assets) and long term debts of only RO.3 million, thus giving it a very low long term debt to equity ratio of 0.09:1. Its total debt was RO.5 million, and this still leaves it with a very low total debt to equity ratio of 0.15:1. The Corporation was temporarily in a tight liquidity situation, with current liabilities of RO.2 million compared to current assets of only R0.07 million. Its gross equity and loan portfolio of R1.7 million had also been substantially written down by provisions of RO.8 million to a net of only RO.9 million. However, LNDC had a substantial investment of R2.8 million in fixed assets (mostly factory buildings). 4.11 Annex 8 shows the consolidated balance sheets of LNDC and its subsidiaries for 1975 and 1976. The consolidated net worth of the group as at March 31, 1976 was R3.7 million, and the group's outstanding long term debts amounted to RO.7 million, thus yielding a low long term debt to equity ratio of 0.18:1. As with the corporation, the group was temporarily illiquid at 31st March, 1976, with net current liabilities of RO.3 million. This compares with a group liquidity position of RO.2 million in net current assets a year earlier, indicating that during FY 1976 the group lost a considerable amount of liquid resources through its operating losses and had to borrow short term funds to maintain operations. The group's principal assets were its fixed assets (mainly  - 13 - factory buildings and plant and machinery) of R3.7 million, and portfolio in- vestments of R1.0 million., Overall, as at 31st March, 1976 the Corporation and the group had both financed their assets largely with equity, leaving con- siderable scope for increased borrowing. Except for the temporary liquidity problem, which has subsequently been alleviated by an injection of R 1.0 mil- lion in additional equity contribution from the Government, the financial situation, both on a Corporation and group basis, was sound. V. THE BASOTHO ENTERPRISES DEVELOPMENT CORPORATION Establishment and Articles of Association 5.01 The Basotho Enterprises Development Corporation (BEDCO) was estab- lished in 1975 as a limited liability company under the Lesotho Companies Act, to promote the establishment and development of small-scale Basotho-owned enterprises, and in mid-1976, it became a wholly owned subsidiary of LNDC. BEDCO is empowered under its Memorandum of Association to provide financial assistance to Basotho entrepreneurs through loans, equity investments and financial guarantees. It can also provide factory shells, equipment and technical assistance to these entrepreneurs. The company is empowered to promote and develop subsidiaries as well as to borrow or raise money for its operations. Share Capital and Resources 5.02 BEDCO has an authorized share capital of R4,000 of which only a token R2 has so far been issued. As of its FY1976, BEDCO had received RO.4 million in grants consisting of RO.1 million from the Lesotho Government and RO.3 million from the Canadian Government. Operations 5.03 BEDCO has been active in four areas: (a) Development of an industrial/commercial estate in Maseru. This estate will provide workshop, factory and commercial retail space for lease to Basotho-owned and operated enter- prises. The estate is planned to be constructed in three phases, the first of which will bS ready for occupancy by mid 1977. It will provide 1060 m for workshops2 500 m for a BEDCO office and a machine shop, and 670 m for commer- cial shops and offices. (b) Development of a credit and technical assistance scheme to assist Basotho-owned SSE's. Although BEDCO has started out cautiously, it is aiming to make up to 80 loans p.a. through this scheme.  - 14 - (c) Promotion and operation of four subsidiary companies (all Basotho training-oriented) active in the field of brickmaking, stone crushing, construction and coal distribution, and (d) Establishment of a mobile equipment pool to service the needs of small manufacturers. Board of Directors and Management 5.04 BEDCO's Articles of Association specify that the Company's Board shall consist of between five to nine directors. Seven members, all selected by the Government, sit on the Board at present: the Chairman (a former Deputy Managing Director of LNDC), LNDC's Labor Relations Officer, a representative from the Lesotho Bank, two prominent Basotho businessmen, BEDCO's Managing Director and Deputy Managing Director. The Board has delegated approval of all financial commitments up to R5,000 to the Managing Director and Deputy Managing Director acting jointly. Approval of financial commitments between R5,000 - R10,000 has been delegated to a Loans Committee composed of the Chairman, the Managing Director, two directors and a project officer from LNDC. All financial commitments in excess of R10,000 must be approved by the full Board. 5.05 BEDCO's Managing Director since its inception has been Mr. Don Pruden, a Canadian who was previously in charge of cooperative handicraft development in Lesotho. His Deputy is Mr. Ben Sebatane a Basotho on second- ment from the Ministry of Commerce and Industry. Both men appear to be energetic and capable and are laying a good foundation for BEDCO. Organization and Staffing 5.06 Because it is a new institution, BEDCO is still developing a suitable organization; Annex 18 shows the proposed structure of the organization. There will be two departments (Administration and Operations) headed by directors under the Managing Director and his deputy instead of the present six units (administration, accounting, business extension, physical development, equip- ment pool, and subsidiary companies). The Administration Department will perform the administrative, accounting and legal functions, and the Operations Department will be in charge of the SSE credit scheme, training scheme, equipment rental scheme, the industrial estates and the subsidiaries. This new structure is simple, with clearly defined lines of responsibility, and is suitable for BEDCO's operations. 5.07 BEDCO has a staff of 11 professionals, 6 of whom are Basotho. In addition to the Managing Director, there are expatriate managers of the business extension and equipment pool units, all financed by Canadian aid. The manager of the physical development unit is also an expatriate. It is BEDCO's policy to provide a Basotho understudy to every expatriate with a view to phasing out their assistance by 1981. In this connection BEDCO has prepared a satisfactory 5-year training and development program for its Basotho profes- sional staff. Although BEDCO professional staff are capable and well motivated,  - 15 - it still needs to recruit aLdditional staff especially to strengthen its project evaluation capability. It therefore needs an expatriate Senior Projects Officer for its SSE credit scheme who will also undertake training of Basotho projects officers. Because of the importance of this position, BEDCO has agreed to appoint a qualified person not later than November 30, 1977. IDA is assisting in the recruitment of candidates and in the identification of overseas aid financing for the position. Policies and Procedures 5.08 BEDCO recently adopted a new policy statement in consultation with IDA which, inter alia, specifies that BEDCO shall normally invest only in projects with total capital costs of not more than R 50,000 with a maximum investment per project of R 30,000. Other significant clauses in the draft revised policy statement are: (i) BEDCO shall not finance more than 75% of a project's total capital cost; (ii) BEDCO shall not normally take more than 50% of the share capital of any one enterprise; (iii) BEDCO's total investment in share capital shall not exceed its net worth; and (iv) BEDCO shall seek to protect itself against the exchange risks of foreign borrowings. 5.09 BEDCO has recently completed an Operations Manual which is satis- factory. To date, however, it has based loan approvals mainly on field inter- views with clients, credit checks with other financial institutions and the quality of the security provided. The degree of financial analysis attempted has been very rudimentary, and loan terms have been based more on client requests than on analysis of the repayment capacity of the projects. While analysis of SSE projects will not involve the amount of detail required for medium and large scale projects, the development of a simple analytical framework to be used in conjunction with the personal interviews should lead to better investment decisions. To this end, the new manual should be useful. BEDCO normally allows its SSE borrowers to locate their own sources of mate- rials supply, as the amounts involved are small, however, at times it places orders on their behalf when price discounts on quantity orders are obtainable. 5.10 Disbursement for BEDCO's loans are undertaken at present by the Lesotho Bank, with BEDCO acting as guarantor by depositing sums equivalent to the amounts to be disbursed with the Lesotho Bank. BEDCO earns between 5% to 7.5% per annum interest on these funds depending on the period of deposit, while the Lesotho Bank charges 10% to the borrowers on the amount disbursed. This system has the advantage of shifting the administration of loan disburse- ment and collection to the more experienced Lesotho Bank, but ties down funds which could be used directly for additional lending because of the 100% advance deposit requirement involved. IDA has agreed with BEDCO on a new system which will eliminate this problem by permitting BEDCO to disburse its loans directly from its own resources using the Lesotho Bank as the administer- ing agency. BEDCO will charge an interest rate of 12% per annum on funds so disbursed compared to the 10% presently charged by Lesotho Bank, and pay the Lesotho Bank a fee of 1% on these funds for its services.  - 16 - Financial Performance and Situation 5.11 BEDCO's accounts for its first year of operation (FY 1976) are shown in Annexes 21 & 22. It did not generate any income from its operations and had an operating deficit before provision of R39,000g This consisted entirely of administrative expenses. After provisions for losses on its loans and investments, its net loss came to R46,000. BEDCO received a grant of R50,000 from the Government to finance these losses. As a small-scale enter- prise development institution which provides both financial and technical assistance, however, BEDCO's performance should not be evaluated purely on. the basis of financial results since it will require annual Government subsidies to offset its administrative overheads. It is BEDCO's objective, however, to eventually generate enough income from its loan, equity and rental operations to cover its necessary high overheads and eliminate its dependence on Govern- ment subsidies. 5.12 As at March 31, 1976, BEDCO had an investment portfolio of R63,000 consisting of R23,000 in loans and R40,000 in equity investments. It had fixed assets (mainly equipment and motor vehicles) of R77,000, and it was very liquid, with net current assets of R242,000 These assets had been financed wholly with grants, which consisted of R107,000 contributed by the Lesotho Government, and R314,000 contributed by the Canadian Government. Because of its small authorized capital, BEDCO is expected to continue relying on grant financing for most of its operations. Annex 19 gives details of BEDCO's investment portfolio. All its loans are being repaid satisfactorily. VI. PROSPECTS Industry and Tourism 6.01 Despite the numerous constraints to its development, (para. 2.06) industry is one of the sectors which could reduce the dominance of subsistence agriculture and create jobs for Lesotho's expanding labour force. The contri- bution of the sector to GDP is projected to increase from the present 3% to about 4.5% to 5.0% in 1979/80. Opportunities for investment exist mainly -in import substitution projects e.g., in the building materials subsector (pro- duction of bricks, building components such as doors and window frames) and in export oriented projects (processing of wool and mohair and other raw ma- terials, handicrafts). The development of these prospects will however be a difficult task and will greatly depend on a more effective and dynamic LNDC. In the tourism sector, the potential lies in Lesotho's beautiful mountain scenery and pleasant temperate climate, To exploit this potential, more in- vestments in tourist facilities and attractions will have to be undertaken. These would include expansion and improvement of existing hotels and estab- lishment of new recreational complexes and other ancillary facilities. Again the development of these prospects will be a difficult task in which LNDC is expected to play an active role.  - 17 - LNDC's Strategy and Projected Operations 6.02 LNDC's Board has adopted a short term strategy emphasizing analysis and consolidation of its existing subsidiaries and associated companies to improve their financial performance, and where necessary and feasible, sell- ing them off. As a result, LNDC's investment commitments in FY 1977 are con- centrated mainly on restructuring and recapitalizing existing projects, al- though a few new projects are being promoted. These FY 1977 commitments are being financed by Government. LNDC has decided upon a longer-term corporate strategy emphasizing promotion of new, economically viable enterprises in the country that will create added employment for Basotho. 6.03 LNDC's list of project possibilities as at June 30, 1976 is shown as Annex 9; Annex 11 shows its projected operations for FY 1977-FY 1981. In FY-1977, LNDC expects to approve a total of R3.3 million in investments. Half of this (R1.7 million) is for the development of industrial infrastruc- ture in Maseru and other parts of the country which is being financed by the European Development Fund. The remaining approvals in 1977 will, as noted in paragraph 6.02 above, be mainly for restructuring and recapitalization of existing projects. In FY-1978, LNDC expects to shift its emphasis to promoting and investing in new projects. Approvals are expected to amount to R1.8 million in that year, growing gradually to R2.7 million by 1981. This proposed level of operations appears reasonable given the restructuring which LNDC is undergoing, the increasing importance of industry and tourism in Lesotho's economy, and the role of LNDC as the principal institution for the development and long term financing of these sectors. LNDC will con- tinue financing projects through loans, equity investments, and provision of factory buildings. The proportion of total approvals for equity investments and factory buildings will initially be high (66% in 1978) for the reasons already noted in paragraphs 4.02 and 4.04. However, because funds invested in equity and buildings will not be recycled as easily as funds provided through loans, LNDC will gradually reduce the proportion of its approvals (59% in 1981) in these areas. BEDCO's Projected Operations 6.04 BEDCO's projected investments for FY 1977-1981 (Annex 20) have been planned to complete projects and programs started in its first year of opera- tions (para 5.03), as well as to start new projects and programs. In FY 1977 and FY 1978 it p:Lans to invest RO.8 million to complete the industrial estate in Maseru. Beginning in FY1978, it also plans to invest RO.9 million in new industrial estates in other parts of Lesotho. This program of invest- ments in industrial estates is necessary since it will enable BEDCO to provide much needed factory shells for small Basotho manufacturers. BEDCO plans to provide R50,000 in SSE loans in FY 1977, and will increase this to an annual average of R320,000 by FY 1981. The mean loan size is expected to be R4,000 which means that by 1981, BEDCO would be providing about 80 loans per year. This target is reasonable considering the anticipated demand for such loans. Other important projected investments during the 5 years include, RO.2 million for expansion of its equipment rental activities, R1.4 million for  - 18 - special projects (a foundry, a machine workshop and a brick plant) to be used as training centres in the respective technical skills for Basotho, and R0.3 million for other training and technical assistance activities. The total projected investment is R5.5 million. Resource Requirements 6.05 The resources requirements of LNDC and BEDCO for FY-79 and FY-79, the two years during which the proposed IDA credit is expected to be committed, are summarized below. Expected Commitments LNDC R Million BEDGO R Million Loans 1.3 SSE Loans 0.6 Equity 1.0 Industrial Estates 1.2 Factory Buildings 1.5 Other Investments 1.5 Total 3.8 3.3 The foreign component of LNDC's expected commitments is estimated as R2.9 million, for which it would require new resources. It is looking primarily to IDA to finance this requirement, and expects the European Investment Bank to finance the remainder. The R1.9 million earmarked for LNDC out of the proposed IDA Credit of R2.2 million (US$2.5 million) will thus meet 65% of the estimated foreign currency requirements of LNDC for FY 1978 and FY 1979, leaving the rest for possible financing by EIB. LNDC's local currency re- quirement of RO.9 million will be financed mainly with loans it expects from the Government, with the gap being filled by funds generated from its opera- tions. The foreign component of BEDCO's expected investments will amount to R2.5 million; of which RO.5 million will be the foreign component of SSE loans. The RO.25 million (US$0.3 million) of the proposed IDA credit allocated to BEDCO will thus finance 50% of the foreign currency requirements for the SSE loans during FY 78 and FY 79. The remaining 50% and other foreign currency requirements of BEDCO are expected to be financed mainly with Canadian aid. The local currency requirements of BEDCO will be financed by the Government. LNDC's Financial Prospects 6.06 Projected financial statements and ratios of LNDC for the period 1977-1981 are shown in Annexes 12 through 15. Because of an increase in its rental rate and the increased investment it is currently undertaking in indus- trial infrastructure and factory buildings, rental income is expected to in- crease substantially from 1977. Interest income from its loans is also ex- pected to increase significantly because of an increase in its lending opera- tions and because it plans to more effectively collect interest on existing loans to its subsidiary and associated companies. Its administrative expenses are projected to increase by 20% each year, and the average cost of borrowing  - 19 - is projected at 5.0%. On the basis of these projections, profits will rep- resent 7.6% of average equity in 1977, rising to 10.3% in 1981. This level of profitability, although lower than the average of 19.7% experienced in 1973 to 1975 because of the loss of its income from sugar royalties, is still high enough to permit: LNDC to generate funds internally for expansion of its operations, and to build up an adequate equity base. 6.07 LNDC is projected to increase its total assets from R3.6 million as at March 31, 1976, to R]4.6 million by March 31, 1981. This will result largely from increases in its loans and equity outstanding, and from its in- creased investments in industrial infrastructure and factory buildings. Al- though it will expand its borrowing (from RO.3 million outstanding at 31st March 1976, to R7.9 million by 1981), its debt equity ratio will remain acceptable, rising from 0.1/1 in 1976 to 1.1/1 by 1981. This is largely because of its present underutilized borrowing capacity. To set prudent limits on its borrowing howiever, LNDC will limit its debt to three times its equity. LNDC expects to continue relying on some short term borrowing to meet its liquidity needs until 1.979, by which time it expects to have built up enough liquid resources from its own internal funds generation. Because its debt servicing requirements are minimal until 1980, however, it does not ex- pect any liquidity problems. Its debt service coverage will remain adequate. BEDCO's Financial Prospects 6.08 Annexes 21 through 23 show projected financial statements for BEDCO for the FY 1977-1981. The principal sources of income for BEDCO would be ren- tals from its industrial estates and from its equipment pool. These are ex- pected to adequately cover the administrative and other expenses involved in these operations. The interest income from SSE loans is also expected to cover the interest charges on the proposed IDA credit, and the nominal fee to the Lesotho Bank for the administration of the credit scheme. However, because of the expenses involved in its SSE training and technical assistance scheme, depreciation of its fixed assets, and provisions against investment losses, BEDCO expects to make subst:antial annual losses. The cash deficits resulting from these losses would be financed with grants from the Government. 6.09 Apart from the proposed IDA credit, BEDCO does not expect to incur any long-term debts. However, as a precautionary move, BEDCO wil), limit its debt to three times its equity for the present. It expects to inc -ease its total assets from RO.4 million as at 31st March 1976 to R3.8 million by 1981, mainly as a result of its investments in industrial estates. Because these investments will be financed with grants, BEDCO is not expected to encounter any debt servicing problems on the proposed IDA credit. VII. THE CREDIT - ITS JUSTIFICATION RISKS AND FEATURES 7.01 The proposed credtit will add to the foreign exchange resources available for providing term financing to small, medium and large scale in- dustrial projects, as well as tourism development projects in Lesotho and  - 20 - thereby help create employment opportunities locally, for the expanding labour force. It will also provide IDA the opportunity to make significant contri- butions to the further development of LNDC and BEDCO as effective development institutions and financial intermediaries. The capacity of LNDC for select- ing financially and technically viable, and economically justified projects will be strengthened, particularly through the introduction of economic and technical analysis in its project appraisals. BEDCO's financial analysis of SSE loan applications will also be improved. 7.02 Although there is a more than normal risk involved in lending to small-scale enterprises, this risk is worth taking in Lesotho because develop- ment and training of new Basotho entrepreneurs is key to future expansion of of the industrial sector and the employment effects of BEDCO's lending are expected to be high. To minimize the risk of SSE failures BEDCO will provide training and technical assistance in business management to its SSE borrowers. 7.03 The proceeds of that part of the proposed credit earmarked for LNDC ($2.2 million) will be onlent by the Government at 8.5 percent per annum and will be utilized to finance the c.i.f. cost (i.e. the price at Lesotho's border) of imported goods, the foreign exchange cost of ancil- lary services, and the foreign component of imported goods purchased through normal trade channels and of civil works. This portion would be repaid by LNDC according to a flexible amortization schedule conforming to the aggregate amortization schedules of LNDC's subloans. The subloan terms are expected to range from 8 to 12 years with an average life of about 10 years. The grace periods included in these terms will vary between 1 and 3 years. The foreign exchange risk on this portion of the credit will be borne by the Government, charging a fee of 1% to the sub-borrowers for loans made. LNDC would need IDA's prior approval for all projects using $100,000 or more of the proposed credit, and would not be able to use more than $700,000 in total without IDA's approval. 7.04 The proceeds of that part of the proposed credit earmarked for BEDCO ($0.3 million) will be lent by Government to BEDCO at 7%. The funds will be utilized by BEDCO's SSE Loan recipients to finance the c.i.f. cost (i.e. the price at Lesotho's border) of imported goods, the foreign exchange cost of ancillary services, and the foreign exchange component of imported goods purchased locally through normal trade channels and of civil works. The principal would be repaid through LNDC on a fixed amortization schedule over 10 years including 4 years' grace. The foreign exchange risk on this portion would be borne by the Government without a fee. BEDCO would submit to IDA for prior approval full details on the first ten SSE projects for which it has approved SSE loans for financing by IDA. After these, BEDCO would submit, on a quarterly basis, a summary project list of projects for which IDA reimburse- ment of its financing is required.  - 21 - VIII. RECOMMENDATIONS 8.01 Agreement having been reached on all the principal issues, the project is suitable for an IDA Credit of US$2.5 million to be utilized as outlined above.  !  ANNEX 1 Page 1 of 4 LNDC STATEMENT OF POLICY 1. The Board of Directors has the responsibility for setting policy and ensuring that Management will effectively implement such policy. The purpose of this statement is to set forth procedures and matters which will clarify the Corporation's powers and responsibilities. 2. The Board of Directors shall meet as frequently as necessary to conduct the business of the Corporation; it shall meet at least once each quarter. 3. LNDC's Management shall be responsible for preparing and submitting to the Board an annual. program of action, which will include a budget. Such a program and budget should be supported by financial projections on a period of at least three years. The program and budget should be submitted to the Board two weeks prior to the Board meeting at which it will be examined. Such a program shall, inter alia, show the resources available to the Corporation, a project by project review of activities and proposed investment and/or loans by the Corporation, the resource gap, if any, and proposals regarding ways and means to close such a gap. Included in the annual program proposal will be any proposed major changes in the structure or areas of responsibility of the several staff and/or sections of the organizations. ThLe Board shall be informed on a regular basis of proposed changes, modifications and additions to the anmual program. L. To further ensure that the LNDC program is consistent with Government policy, the armual program will be forwarded to the Ministries of Finance and of Commerce and Industry, and the Central Planning and Development Office at the time it is forwarded to the Board. All written comments received will be presented to the Board before discussions of the annual program. 5. To ensure full discussion of all matters brought before the Board, Government members of the Board may, provided there is no Board objection, each be accompanied by an adviscr(s) who will be permitted to participate in Board discussions. The Board has the right, however, to close the meeting to non-Board members at such times as the Board considers necessary. 6. The Corporatiorn shall, under normal circumstances, not manage or attempt to manage the affairs of any of its subsidiaries or investments. However, it will nominate Directors and ensure that competent managers are employed and performance is carefully monitored. In projects encoun- tering severe difficulties in which the Corporation has made an investment, the Corporation will take such action as it considers necessary to protect its investment.  ANNAE 1 Page 2 of 4 7. The Corporation shall compile and transmit to the Board each quarter the financial and operating record of those enterprises in which it has major outstanding commitments in the way of loan, equity, guarantee, and any other assistance of a financial nature. Sach submissions shall include an analysis of the accounts by the Corporation's staff. 8. The Board in considering the program of the Corporation will ensure that the resources and activities of the Corporation are allocated in such manner that the interest of the national business community are adequately considered. 9. Before a loan, equity investment, guarantee, or building is undertaken by LNDC, LNDC management shall circulate to the Board members two weeks prior to a meeting, an appraisal document on the project including a projected profit and loss account, balance sheet, and a cash flow statement for at least five years, and an evaluation of management, marketing arrangements, and the project's financial and economic viability. However, the Managing Director of LNDC may individually approve LNDCts financial commitments (viz., loans, equity, guarantee, and building) as follows: (a) for individual projects having already been approved in principle or included in a capital budget, up to R 50,000 (b) for individual projects not having received approval in principle, up to R 25,000. The Managing Director shall report to the Board such commitments at the next Board meeting; in no case should total commitments under category (b) exceed R 50,000 prior to Board approval. 10. In entering into a commitment the Corporation will be generally guided by the following principles in addition to those provided by law. (a) All loans should be reasonably secured and the Corporation shall charge interest rates, and fees which are compatible with the prevailing market rates and/or which enable it to earn a reasonable return on its operations. (b) All loans shall be by formal written agreement stipulating rate of interest (plus any additional charges) grace and repayment period, security and other relevant details. (c) The Corporation should not invest more than 10% of its net worth in the share capital of any one project. (d) Total aggregate investments in share capital should not exceed the net worth of the Corporation.  ANNEX 1 Page 3 of 4 (e) The total financial commitment (viz., equity, loan, guarantee!, and building) by the Corporation in any single project should normally not exceed 20% of the Corporation's net worth. (f) The Corporation's total financial commitment (viz., equity, loan, guarantee, and building) to any single project should not normally exceed 60% of the project's total capital cost, including permanent working capital. (g) The Corporation shall not normally take a controlling interest in the voting stock of projects it invests in, unless it is unable to interest other investors to take a controlling interest in the projects it is promoting (excluding property development for future lease or manage- ment by cther parties, and aid-funded projects for which it is the executing agency). However, in accordance with Government policy, LNDC will take the initiative where private investors; are not available for projects which are financially and economically viable and in the national interest. 11. In assessing proposals for financial assistance the Corporation will take into account primarily the prospects of success of the project, the ability and integrity of the applicant and the socio-economic benefits of the project. Furthermore, enterprises assisted should be financially and technically viable and have competent management. 12. The Corporation will assist credit-worthy enterprises contributing to the development of Lesotho including: (a) ManufactLring and Processing Industries (b) Construct-ion and Building Materials Industries (c) Tourism -Industries (d) Commercial Enterprises (e) Agro-Industries It will not normally lend for: (a) Wbrking capital - (except for permanent working capital) (b) Projects where alternative finance is available. (c) Refinancing. 13. The rental charges for building and industrial sites shall reflect the prevailing market rates and enable the Corporation to earn a reasonable return over and above the cost of its own resources. Such rental charges shall usually be based ito yield 15% per annum of actual construction cost with a provision for escalation based on general increases in construction costs.  ANNEX 1 Page a of h 14. In the case of a joint venture in which LNDC is a minority shareholder, the Corporation should arrange for the auditors of the enterprise's accounts to be appointed by the Corporation. 15e The Corporation shall not incur exchange risks with respect to those of its borrowings that are repayable in foreign currencies. 16, The Corporation's total debts including guarantees shall not at any time exceed three times the amount of its paid-in share capital plus surplus and reserves. 17. The Corporation's financial policy will aim at maintaining the value of its own capital, and to manage its funds in such a manner that the Corporation is, at all times, able to honour its obligations on time and to achieve a profit margin that enables it to cover its operating costs and build up adequate reserves. 18. The Corporation will develop and maintain a solid and well balanced organization and a management team capable of appraising the requests submitted to it, assist enterprises in the formulation of their projects and supervise their execution. It will give special attention to the training of its professional staff both locally and abroad. Professional and other staff shall be recruited solely on the basis of their qualifications and experience. 19. Each enterprise receiving financial assistance from the Corporatinn shall have an accounting system which meets the requirenents of sound management. The Corporation shall, as necessary, exercise its right to check the activities and inspect the accounts and books of enterprises assisted. Each enterprise shall be required to submit annual budgets and quarterly financial accounts. 20. The Corporation and its subsidiaries' accounts shall be kept in accordance with generally accepted international accounting principles. The Corporation and its subsidiaries shall engage the services of an independent accounting firm of international repute to audit their annual accounts. 21. The Corporation will ensure that enterprises to which it provides assistance will be capitalized with an adequate level of equity fund. 22. The Corporation shall over time, seek to revolve its funds by selling off its equity portfolios where prices which give it a reasonable return on its investments are obtainable. Such sales shall be made to as wide a range of Basotho shareholders as is feasible. EAPID March, 1977  ANNEX 2 Page 1 of 1 LESOTHO NATIONAL DEVELOPMENT CORPORATION BOARD OF DIRECTORS (as of March 31, 1977) Chairman : Rt. Hon. Leabua Jonathan Prime Minister, Lesotho Directors : Hon. K.T.J. Rakhetla Minister of Commerce and Industry, Lesotho Hon. C. Sekhoyana Minister of Finance, Lesotho Mr. Van DDrsen Regional Controller for Southern Africa, Commonwealth Development Corporation Mr. J- M. Nthongua Private Businessman, Lesotho Mr. R. Gurr Managing Director, LNDC Mr. R. A. Riby Swiss Businessman EAPID March, 1977  L N D C ORGANIZATION CHART Board of Directors Managing Director |Deputy Managing Director Director of Director of Corporate Director of Project Financing Operations Controller Administrative & Development Services Manager Manager Group Manager Manager Manager Manager of of Directors of of of Group Personnel Office Legal of Project Technical & Coordi- Financial Budgeting Accountants Manager Manager Advisor Planning Development Services nators Operations & Controls Systems (Vacant) (vacant) (Vacant) Public Project Engineer Relations officers (vacant) Officer F(3 vacancie EAPID H March, 1977  LESOTHO NATIONAL DEVELOPMENT CORPORATION SUMMARY OF EQUITY AND LOAN PORTFOLIO AS OF MARCH 31, 1976 (in Rands) Subsidiaries Area of Activity LNDC's Equity LNDC's Loans Remarks Outstanding Holding % Outstanding Interest BEDCO Small Enterprise 2 100 688 n.a. New company, catering to SSE sector. Development Lesotbo Construction Ltd. Construction 65,300 100 1,036 n.a. Profitable company. Materials Lesotho Hotels Ltd. Hotels 100,000 100 - _ Holding company for new hotels most of which are beginning operations. Lesotho Housing Corporation Housing 15,000 100 639 n.a. Profitable company. Lesotho Pharmaceuticals Pharmaceuticals 255 51 50,702 12 May need affiliation with major pharmaceutical concern. Lesotho Tourist Corporation Tourism Development 100 100 105,471 12 Hired a new manager to strengthen marketing. Libeso Ltd. Coal Distribution 2 100 32,127 n.a. Profitable firm recently sold to BEDCO. LNDC Trading Agency Handicraft Retailing 4,000 100 61,384 12 Unprofitable branch closed; problems being resolved. Maseru Tyre Company Tyre Recaping 46,500 100 11,550 n.a. Company doing well; new manager appointed. National Motor Company Motor Vehicles 19,851 51 21,470 12 New manager and accountants hired; new accounting system. Oxbow Enterprises Handicrafts 500 100 15,012 n.a. Project still being developed Pioneer Motors Ltd. Motor Vehicles 3,486 51 84 n.a. Outstanding overdraft reduced; and new capital injected. Royal Crown Ltd. Handicrafts 20,000 100 23,654 12 New marketing strategy adopted. Sherra Ltd. Handicrafts 100 100 29,730 12 Financial structure eing reorganized. Swiss Lesotho Watch Centre Watch Repair 2,600 100 21,527 12 Possible sale to BEDCO. Thaba Bosiu Ceramics Handicrafts 20,000 10 15,613 12 Sale of 50% share to EDESA pending. Sub-total 297,696 390,687 Amalgamated Hotels Ltd. Hotels 20 20 100,000 - n.a. Company doing well. Domolux Ltd. Manufacture of lamps 83,300 49 126,510 10.5 New management appointed. Frasers Manufacturing Ltd. Building Materials 1,000 1 - - Information not available. Lesotho Food Industries Agro-industries 66,167 40 35,823 n.a. Just became profitable. Lesotho Mohair Industries Ltd. Mohair products 50,000 25 - - Company being established. 0 Lesotho Sheepskin Products Ltd. Handicrafts 22,800 43 92,655 12 Financial record-keeping being improved. 4 Kolonyama Candle Co. Ltd. Candle Making 16,050 50 118,741 12 Profitable company. it Metro Lesotho Ltd. Distribution 25,000 50 179,141 10 Company recently began operations. I Optichem Ltd. Agro-industries 10,000 25 28 n.a. Company doing well. Royal Lesotho Tapestry Ltd. Handicrafts 8,500 50 1,476 n.a. Company profitable. Seacrest Clothing Ltd. Garments 17,500 28 54,227 12 New production man hired;company potential looks good. Taiwan Construction Co. Construction 10,000 33-1/3 10,766 n.a. Company profitable in 1975,but temporarily unpro- fitable in 1976. Sub-Total 310,337 719,367 Total 608,033 1,110,054 EAPID March, 1977  AlNNEX Page 1 of 1 L N D C ACTUAL INCOME STAT34ENT (YEAR ENDED MARCH 31) (R'000) Audited Income 1973 iti9r 1 ; 7 Income from Commercial Agreements 400 410 133 - and Mining Interest on Loans 6 17 49 27 Interest on Investments 101 36 60 42 Rental Income 70 85 137 187 Dividend Income 14 213 267 130 Income from Management & Accountancy 16 20 22 11 Other Income - 4 1 8 Gross Income 607 785 669 405 Fxp -= e =S interest Charges 54 18 11 31 Depreciation 5 7 15 20 Administrative xcpenses 151 175 256 316 Total Expenses 210 200 282 367 Profit before Provisions and Tax 397 585 387 38 Provisions - - - (924) Loss on Investments - - - (293) Net Profit (loss) 397 585 387 (1,179) FY: April 1 - March 30 FAPID March, 1977  ANNEX 6 Page 1 of 1 LNDC AND SUBSIDIARY COMPANIES CONSOLIDATED INCOME STATMNTS (in R'OOO) Year Ended March 31, 1975 1976 Sales 2,534 4,290 Operating Loss (120) (337) Interest Payable (8) (79) Taxation (1) (25) (129) (441) Less losses attributable to outside shareholders 51 41 (78) (400) Dividends from Associated Companies 267 151 Profit (loss) before exceptional Items 189 (249) Investments in Subsidiaries written off - (116) Provisions against Investments in Subsidiaries (176) Provisions against interest in Associated Companies - (390) Net Group Profit (loss) 189 (931) EAPID March, 1977  ANNEX 7 Page 1 of 1 L N D C Summarized Balance Sheet (as at March 31) (R,0001 s) 1973 197-4 1975 1976 Assets Current Assets Cash and short term investments 1 ,354 708 350 1 Other 72 96 78 73 Total 1,,426 804 428 74 Portfolio Loans 202 495 712 1,140 Equity Investments 384 433 XL 608 Total Portfolio 586 928 1,216 1,748 Provisions -- -- -- (819) Net Portfolio 586 928 1,216 929 Fixed Assets (Net)-/ 947 1,314 1,782 2,840 Total Assets 2,959 3.046 3,426 3,843 Liabilities and EquitZ Current Liabilities Accounts Payable 599 81 70 64 Overdraft -- 26 35 158 Total Current Liabilities T99 107 105 222 Long-term Liabilities Long-term Loans 352 345 340 319 Equity Accumulated Funds 2008 ,4 2,981 3,302 Total Liability and Equity 2,959 3,046 3,426 3,843 FY ends March 31 EAPID March, 1977 1/ including factory building and infrastructure  ANNEX 8 Page 1 of 1 LNDC AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (in RtOOO) As of March 31, 1975 1976 Assets Current Assets Stock 663 660 Debtors 420 460 Bank Balances & Cash 388 498 Total Current Assets 1,1471 1,618 Good Will 30 - Pbrtfolio Interest in Associated Companies 546 765 Unsecured Loans 130 30 Other Long-Term Loans 189 174 Total Portfolio 865 969 Fixed Assets (Net) 2,154 3,697 Total Assets 4,520 6,284 Liabilities & Equity Current Liabilities Loans and Overdrafts 779 1,174 Creditors & Provisions 489 727 Total Current Liabilities 1,268 1,901 L.T. Liabilities Loans 533 655 Deferred Taxation - 23 Losses Attributable to Outside Shareholders (33) (33) 500 645 Equity Accumulated Funds & Grants 2,752 2,975 Capital Reserves _ 763 Total Equity 2,752 3,738 Total Liabilities & E)quity 4,520 6,284 EAPID March, 1977  LESOTHO NATIONAL DEVELOPMENT CORPORATION LIST OF LNDC PROJECT POSSIBILITIES (7s -o June 30, 1976' Estimated Potential ILNDC Area of New or ProJect Cost Fnnci Activity Expansion Location Ownership (R'000) (R'OO0) Wool and Mohair Agro-industry New Maseru Jt.Venture 2,000 850 Lesotho Milling Company Food Processing Expansion Maputsoe Jt.Venture 94 94 Poultry Processing Plant Food Processing New Maseru Jt.Venture 120 80 Thaba Bosiu Ceramics Handicrafts Expansion Maseru Jt.Venture 45 25 Royal Lesotho Tapestry Weavers Handicrafts Expansion Maseru Jt.Venture 150 50 Lesotho Sheepskin Handicrafts Expansion Maseru Jt.Venture 280 280 Stone Crushing Building Materials New Maseru Jt.Venture 725 362 Steel Company & Joinery Building Materials New Maseru Jt.Venture 48 16 Cement Manufacturing Plant Building Materials New N/A Jt.Venture 1,250 600 Gonski Knitwear Textiles New Maputsoe Jt,Venture 1,100 450 Carpet Manufacture Handicrafts New Maseru Jt.Venture 170 100 Spenser Textiles Textiles New Masenot Jt.Venture 650 250 Plasma Freeze Drying Manufacture New Maseru Jt.Venture 80 30 Seacrest Clothing Expansion Maputsoe Basotho 47 47 Lesotho Hotel Groups Tourism Expansion all over the Basotho 750 750 country Ceramic Wall Tiles Building Materials New Maseru Jt.Venture 1,250 450 Maputsoe Cash & Carry Distribution New Maputsoe Jt.Venture 600 400 National Motors Automobile Expansion Maseru Jt.Venture 75 50 Pioneer Motors Automobile Expansion Maseru Jt.Venture 26 26 Industrial Estates Industrial Expansion mainly in Basotho 1,700 1,700 Infrastructure and New Maseru Total 11,160 6,610 EAPID March,1977  ANNEX 10 Page 1 of 2 LESOTHC NATIONAL DEVELOPMENT CORPORATION ASSUMPTIONS FOR FINANCIAL PROJECTIONS 1. Approvals and commitments are synonymous. FY 1977 : Based on Pipeline FY 1978-81 : Loans increase by 15% until 1979 and by 25% thereafter. Equity increases by 10% per annum.Buildings increase by 10% per annum 2. Disbursement Loans 60% in year committed 40% in following year Equity 90% in year committed 10% in following year Buildings 50% in year committed 50% in following year Infrastructure disbursed as follows: R 300,000 in FY 1977 R 900,000 in FY 1978 R 500,000 in FY 1979 3. Income Loans: Average yield; 10% on average portfolio from 1977 - 1979. 12.5% on average portfolio from 1980 - 1981. Buildings and Infrastructure: Average yield; 15% on portfolio at beginning of period. Equity Stream: Old portfolio R 200,00 per year Nlew portfolio 5% per annum beginning in Lth year after disbursements. Short-term Investment Income - 6% on net-current assets Other income: R:30,000 per year 4. Expenses Administrative: 20% per annum increase based on 1976 expenses Depreciation : 10% per annum on administrative assets Provisions 5% of annual disbursements of loans and equity  ANNEX 10 Page 2 of 2 5. Resources New Equity : R1.0 million provided by government in FY 1977. New Loans : a) IDA: R1.9 million available from FY 1978: at 8.5% with 0.75% commitment fee. Repayment-as per subloans. b) EDF: FY 1977; R1.6 million specially for infrastructure development at 2%. Repayment over 30 years with 3 years grace. e) EIB: FY 1979; R 2.0 million at 5% for 20 years with 3 years grace. d) Government of Lesotho; R3.0 million from FY 1977 at 5% per annum for 20 years with 5 years grace. 6. LNDC's Loan Collection a) For loans outstanding at 31st March 1976, assume collection over 10 years including 1 year's grace. b) For new loans assume repayment over 12 years including 2 years grace. 7. Sales of Investments Beginning in 1980, 5% of equity and buildings portfolio will be sold off per year. 8. Fixed Assets Assume administrative assets will increase by R30,000 per year. EAPID March, 1977  ANNEX 11 Page 1 of 1 LESOTHO NATIONAL DEVELOPMENT CORPORATION PROJECTED OPERATIONS (in R'OOO) Year Ending March 31 1977 1978 1979 1980 1981 Approval & Commitments Loans 535 615 708 885 1,106 Equity 441 485 534 587 646 Factory Buildings 653 716 790 869 956 Infrastructure :1,70O - - - - Total 3,329 1,818 2,032 2,341 2,708 Foreign Exchange Component 2,497 1,364 1,524 1,756 2,031 Disbursements Loans 754 1/ 583 665 814 1,018 Equity 752 2/ 481 530 581 640 Factory Buildings 547 / 686 754 830 913 Infrastructure 300 900 50- - _.353 2,650 2,449 2,225 2,571 _/ Includes R 433,000 approved and outstanding at 31st March 1976 2/ Includes R 355,000 approved and outstanding at 31st March 1976 3/ Includes R 220,000 approved and outstanding at 31st March 1976 EAPID March, 1977  A=NE 12 Page 1 of 1 LESOTHO NATIONAL DEVELOPMENT CORPORATION PROJECTED INCOME STATEMENTS (in R'000) Actual Projected Year Ending March 31 1976 1977 1978 1979 1980 1981 Income Interest on Loans 27 152 212 258 386 430 D vidends 130 200 200 200 200 238 Rental Income 187 412 539 777 965 1,151 Interest on short-term investments 42 - - - 20 26 Other 19 30 30 30 30 30 Gross Income 405 794 981 1,265 1,601 1,875 Ixpenses Interest Charges 31 45 124 208 298 377 Depreciation 20 12 14 16 17 18 Administrative Expenses 316 360 432 518 622 746 Total Expenses 367 417 570 742 937 1,141 Profit before Provisions 38 377 411 523 664 734 Loss on investments (293) - - - - - Provisions (92L) (75) (53) (60) (70) (83) Net Profit (loss) (1,179) 302 358 463 594 651 FAPID March, 1977  ANINEX 13 Page 1 of 1 LESOTHO NATIONAL DEVELOPMENT CORPORATION PROJECTED BALANCE SHEETS (R?000) As of March 31, Actual Projected 1976 1977 1976 1979 1980 1981 Assets Net Current Assets (148) (12) (90) 300 355 579 Portfolio 1/ Loans 1,1)40 1,894 2,350 2,813 3,363 4,o46 Equity 608 1,360 1,8I41 2,371 2,833 3,331 Total 1,748 3,254 4,191 5,184 6,196 7,377 Provisions (819) (894) (9)7) (1,007) (1,077) (1,160) Net Portfolio 929 2,360 3,244 h,177 5,119 6,217 Fixed Assets Buildings and infrastructure 2,747 3,594 5,180 6,434 7,026 7,673 Other (net) 93 111 127 141 154 166 Total 2,840 3,705 5,307 6,575 7,180 7,839 Total Assets 3,621 6,053 8,461 11,052 12,654 14,635 Liabilities Pr Equity L.T. Liabilities DA - - 169 766 1,254 1,864 CDC 168 1l49 130 111 92 73 EDF - 300 1,100 1,600 1,547 1,494 EIB - - - 200 600 1,400 Lesotho Bank 150 150 150 150 142 134 Government 1 850 1,950 2,800 3,000 3,000 Total 319 1,449 3,499 5,627 6,635 7,965 Equity Accumulated Funds 2,554 3,856 4,21) 4,677 5,271 5,922 Capital Reserve 748 748 748 748 748 748 Total 3,302 4,604 4,962 5,425 6,019 6,670 Total Liabilities & Fquity 3,621 6,053 8,461 11,052 12,654 14,635 1/ Includes R30,000 of unsecured loans EAPID March, 1977  ANNEX 14 Page 1 of 1 LESOTHO NATIONAL DEVELOPMENT CORPORATION PROJECTED SOURCES AND USES OF FUNDS (in RFOOO) 1977 1978 1979 1980 1981 Sources Funds from Operations 389 425 539 681 752 Collection of Loans - 127 202 264 335 Drawdown on Borrowings ISA - 169 597 488 610 EDF 300 800 500 - - EIB - - 200 400 800 Government 850 1,100 850 200 - Funds from Sale of Equity & Buildings - - - 357 408 New Equity/Grants 1,000 - - - - 2,539 2,621 2,888 2,390 2,905 Uses Disbursement on Loans 754 583 665 814 1,018 Equity Investments 752 481 530 581 6h0 Buildings 547 686 754 830 913 Insfrastructure 300 900 500 - - Other Fixed Assets 30 30 30 30 30 Repayment of Loans 20 19 19 80 80 2,403 2,699 2,498 2,335 2,681 Net Cash Flow 136 (78) 390 55 224 EAPID March, 1977  LESOTHO NATIONAL DEVELOPMENT CORPORATION ACTUAL AND PROJECTED FINANCIAL RATIOS Actual Projected 1973 1971 1975 1976 1977 1978 1979 1950 1951 1. Income Statement Items as % of Average Total Assets Gross income 20.6 26.1 20.1 11.2 16.4 13.5 13.0 13.5 13.9 Less: Financial Expenses 1.8 0.6 0.3 0.9 0.9 1.7 2.1 2.5 2.8 Administrative Expenses 5.3 5.6 8.4 8.6 7.4 6.o 5.3 5.2 5.5 Gross Profit 13.5 19.9 11. i 1. I _ 5J7 54 7 5. 5 Less: Provision for loans and investments - - - 26.6 1.6 0.7 0.6 o.6 o.6 Net Profit (loss) 13.5 19.9 11.4 (33.9) 6.2 4.9 4.7 5.o .4.8 2. Selected Income and Cost Items Dividend income as % of Average equity portfolio 3.6 52.1 56.9 23.4 20.3. 12.5 9.5 7.7 7.7 Income from loans as % of average loan portfolio 2.9 4.9 8.1 2.7 10.0 10.0 10.0 12.5 12.5 Cost of debt as % of average total debt 5.7 2.7 2.4 6.3 5.1 5.0 L,6 4.9 5.2 3. Net Profit Net profit (loss) as % of year end equity 19.8 22.6 13.0 (35.7) 6.6 7.2 8.5 9.8 9.8 Net profit as % of average equity 19.8 25.4 13.9 (37,5) 7.6 7.5 8.9 10.4 10.3 . Debt Long-term debt/equity 0.2/1 0.1/1 0.1A 0.1/1 0.3/1 0.7/1 1/1 1.1/1 1.2/1 Interest and Principal coverage - - - 6.7/1 L.7/1 4.2/1 4.2/1 4.1/1 , Mm RAPID March, 1977 Y t  ANNEX 16 Page 1 of 3 LESOTHO BASOTHO ENTERPRISES DEVELOP'4T CORPORATION (BEDCo) STATX4E`T OF POLICY AND REGULATIONS 1. AIMS AND OBJECTIVES OF THE CORPORATION The Basotho Enterprises Development Corporation is a development institution created by the Government of Lesotho for the purpose of furthering the economic development of Lesotho by assisting in the promotion, establishment and expansion of Basotho owned and managed enterprises throughout the country. In pursuance of this objective it shall be the purpose of the Corporation to achieve and maintain a satisfactory return on capital invested. BEDCO will only assist enterprises in which the majority equity holding and management are in the hands of citizens of Lesotho. 2. FORKS OF ASSISTANCE BEDCO will promote the development of Basotho enterprises through one or a combination of the several of the following methods:- a. Provision of short, medium and long term loan finances; b. Direct equity investments, c. Provision of guarantees for loans from other sources; d. Provision of infrastructural facilities such as industrial estates, commercial centres and services for hire; e. Provision of extension services through training, advice and guidance in management, marketing, accounting and other technical fields; f. Establishment and operation of new manufacturing projects for the purpose of training Basotho in new technical skills and the operation of new business with the ultimate objective of disinvestment in such projects in favour of Basotho ownership and management. 3. INVESTMENT GUIDELINES a. BEDCO shall charge for its loans, guarantees and services, interest rates, and/or fees which are compatible with the prevailing commercial rates and/or which enable it to earn a reasonable return on its operations. b. BEDCO shall take such security for its loans and guarantees as shall be determined adequate or reasonable for each investment.  ANNEX 16 Page 2 of 3 c. BEDCO shall norma'Lly not invest in any project with a total capital cost including buildings and working capital of more than R 50,000 and will normally not invest more than R 30,000 in any single project (excluding aid-funded projects for which BEDCO is the executing agency and projects with a high training component mentioned in 2(f)). d. BEDCO shall norma'Lly finance only economically sound, financially viable and technically feasible projects. * e. BEDOO shall norma'Lly not finance more than 75% of the project's total capital costs (including buildings and working capital), or R 30,000 whichever is less. BEDC0 will expect its local partner to raise at least 25% of the :Droject's total capital costs (as defined). f. Except for projects established under 2(f) and aid-assisted project, BEDCO will not normally hold more than 50% of the share capital of any one enterprise or manage enterprises. g. BEDCO shall not invest more than 10% of its net worth in the share capital of any one project excluding aid-funded projects and projects mentioned in 2(f). h. Except for aid-funded projects, for which it is the executing agency, and projects under section 2(f), BEDCO's total financial commitment to any single project (viz., equity, loan, guarantee, and building) should normally not exceed 20% of BEDCO's net worth (defined as paid- in-share capital, grants, and accumulated reserves). i. BEDCO's total investments in share capital (excluding aid-funded projects for whic't BEDCO is the executing agency and projects under section 2(f)) sha'll not exceed its own net worth, defined as paid up share capital, grants and accumulated reserves. j. BEDCO shall supervise its investments to protect its interests and to enable it to assist its projects to the maximum extent possible. k. BEDCO shall not normally undertake refinancing. 1. BEDCO will seek to protect itself against the exchange risks of foreign borrowings. m. BEDCO's total debts including guarantees shall not at any time exceed three times the amount of its paid-up share capital plus grants and accumulated reserves. n. BEDCO shall give special consideration to enterprises processing or utilising local raw materials and local labour resources.  ANNEX 16 Page 3 of 3 o. BEDCO shall focus its efforts and assistance on projects which will create manufacturing, processing or service industries with emaphasis on the first two. p. BEDCO1s management shall be responsible for preparing and submitting to the Board an annual program of action, which will include a budget. g. In all instances the Board of Directors shall lay such rules and regulations as are necessary to govern the day to day operations of the Corporation. 4. FINANCING OF SMALL-SCALE ENTERPRISES - THE CREDIT SCHEME Assistance shall be provided by the Corporation in accordance to the following conditions: a. The Board of Directors shall establish a Credit Scheme whose main purpose will be to provide financial and technical assistance to small-scale Basotho entrepreneurs. b. The Credit Scheme shall be administered by the Board of Directors through the medium of a Credit Committee to be appointed by the Board. c. The Credit Committee shall be empowered by the Board to approve all loan applications. However, the Board may authorize the Managing Director to approve loans up to R 5,000, without reference to the Committee. d. It shall be at the direction of the Board to determine the scope of operations of the Credit Scheme, in consideration of the funds available to the Corporation at any time, and appropriate staffing to administer the programme effectively. e. The specific operating procedures and guidelines governing the Credit Scheme are contained in BEDCO's Operations Manual.  ANNEX 17 Page 1 of 1 BEDCO Board of Directors As of August 20, 1976 Chairman: Mr. Manare (B) - M.D. Lesotho National Bus Service Directors: Mrs. Mokete (B) - Labor Relations Officer, LNDC Mr. Ramakatane (B) - Businessman Mr. Ramarou (B) - Businessman Mr. Molelle (B) - Accountant, Lesotho Bank Mr. Sebatane (B) - Deputy M.D., BEDCO Mr. Pruden (Canadian) - M.D. BEDCO (B) = Basotho EAPID March, 1977  BEDCO PROPOSED ORGANIZATION . I Managing Director Deputy Managing Director Director of Administration Director of Operations Office Legal. Finance & |3absidiary Project Industrial Training SSE Manage- Personnel Services Accounting Companies Development Estates & Tech. Credit ment Ass7t Scheme Scheme EAPID March, 1977 O I(D J  BASOTHO ENTERPRISE DEVELOPMENT CORPORATION INVESTMENT PORTFOLIO AS AT AUGUST 20 1976 (in Rands) Date of BEDCO Equity Loans Disbursed Maturit Name Activity Esta- % Share under BEDCO SSE & Rate of Observations blishment Capial Amount Credit Scheme Interest M. Molapo Chain 1976 - - 100 6 months; Repayments being Manufacture 10%, made. M. Mapitse Brickmaking 1976 - - 100 6 mos.; 10%, N. Sehloho Watch Repairs 1976 - - 466 20 mos.;10% " J. Moshoeshoe Leatherworks 1976 - - 1,813 33 mos.;10% n B. Ntisa Leatherworks 1976 - - 5,000 36 mos.;10 it Mohokare Heavy Brickmaking 1975 51% 26,814 - Start-up problems, expected to break- even in FY-77. Senqu Construction Construction 1975 51% 13,000 - _ Expected to break- Co. (Pty) Ltd. even in FY-77. Lesotho Quality Stone Stone Crushing 1976 51% 15,300 Expected to be ,Supplies (Pty), Ltd. profitable in FY-77. EAPID March, 1977 0t'I H P H o 'w  ANN-EX 20 Page 1 of 3 BEDCO PROJECTED INVESTMENTS AND ASSUMPTIONS FOR FINANCIAL PROJECTIONS A. Projected Investments (R'OOO) FY77 FY78 FY79 FY80 FY81 TOTAL 1. SSE Credit Scheme 50 250 320 320 320 1260 2. Sebaboleng Industrial Estate a) Phase I 290 - - - - 290 b) Phase II - 537 - - - 537 c) Phase III - - 500 500 3. Mini-Industrial Estates a) Maputsoe - 250 - - 250 b) Thaba Tseka - - 410 - - 410 c) Mohales Hoek - - - 250 - 250 4. Equipment Pool & Mobile Service Units - 100 100 - - 200 5. Machine Shop - 250 - - 250 6. Foundry - - 200 - - 200 7. Brick Plants - 300 300 300 - 900 8. Training Scheme - 100 100 100 100 300 9. Libeso (Pty) Ltd. 40 _ - - - 4