PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE January 9, 2013 Report No.: AB7209 (The report # is automatically generated by IDU and should not be changed) Operation Name LS- 1st Inclusive Growth Development Policy Credit Region AFRICA Country Lesotho Sector Central government administration (50%);General industry and trade sector (17%);Health (17%);Other social services (16%) Operation ID P128573 Lending Instrument Development Policy Lending Borrower(s) KINGDOM OF LESOTHO Kingdom of Lesotho Lesotho Implementing Agency Ministry of Finance Ministry of Finance 3rd Floor Finance House High Court Road Maseru Lesotho Tel: (266) 22 310 826 Date PID Prepared December 13, 2012 Estimated Date of Appraisal April 2, 2013 Estimated Date of Board May 28, 2013 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Other Decision Key development issues and rationale for Bank involvement Lesotho is a lower middle-income country with per capita gross national income of US$1,210.1 It is small, mostly mountainous country of about 2 million people completely surrounded by South Africa. More than three-quarters of the population lives in rural areas. Lesotho has an open economy traditionally centered on trade. Its main exports are textiles, water, and diamonds. Lesotho’s main trading partners are the United States and South Africa, and it is a member of the Southern African Customs Union (SACU) and Southern Africa Development Community (SADC). Lesotho’s social indicators, particularly health related, are among the worst in Africa. The country has the world’s third-highest HIV/AIDS prevalence rate among adults. 1 2011 Atlas GNI per capita. Lesotho’s National Strategic Development Plan (NSDP) FY2012/13-FY2016/17 recognizes the country’s key challenge—inclusive growth. The plan identifies strong, sustainable, and private sector-led economic growth, with faster job creation, as the most effective way out of poverty. Putting Lesotho’s economy on a rapid and sustainable growth path will not be easy, but it is feasible. First and foremost, a more attractive business environment will be essential to lure new FDI. Second, a leaner and more effective public sector will be essential for poverty reduction. Third, investments in key infrastructures will be needed to propel the country’s regional development. Finally, it will be important to reduce the HIV/AIDS prevalence rate and improve the levels of human capital. This operation will focus on addressing the first two areas; the rest are being supported by other Bank operations and activities. The new Government that took office in June 2012 has initiated measures to improve the country’s external competitiveness (with emphasis on investment climate reforms), strengthen its social safety nets, and improve the effectiveness of public spending. These three areas are key to promoting inclusive growth. On the investment climate reforms, the Government has approved the Enterprise Regulations and the Industrial Licensing Bill, further streamlining the process of starting a new business. On the effectiveness of public spending, the Government has introduced measures to strengthen the financial management and public procurement systems. Finally, on reforming social safety nets, the Government has adopted a new social protection policy that addresses human development needs in a developmental and holistic manner, with a view to improve the quality of life of all Basotho. Proposed Objective(s) The operation’s Development Objective is to assist the Government in implementing a reform program aimed at promoting inclusive growth. The DPC supports progress towards the Country Partnership Strategy objectives of fiscal adjustment and public sector efficiency; human development and service delivery; and enhanced competitiveness and diversification. Preliminary Description The programmatic series, which includes two subsequent loans, is designed to assist the Government in implementing a reform program aimed at promoting inclusive growth. Specifically, the operation supports three areas that are central to the reform program: (i) improving external competitiveness, focused on implementing key investment climate reforms; (ii) improve the sustainability, stability and efficiency of public spending, focused on fiscal consolidation, revenue stabilization, strengthening the public financial management, public procurement and other budgetary systems; and (iii) improved monitoring and citizen empowerment through better access to service delivery and social transfers. The reforms supported by this operation are expected to have positive impacts on poverty and inequality. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts The policy actions supported by this proposed operation are not expected have any adverse impacts on welfare. Actions under Component I, Improving Private Sector Competitiveness, are likely to boost private-sector investment and growth on the medium and long run. This in turn is likely to accelerate poverty reduction, but perhaps increase inequality at the same time. However, actions under Component II, Improve Sustainability and Efficiency of Public Expenditure, and Component III, Citizen Empowerment to Improve Access to Service Delivery and Social Transfers are likely to help reduce poverty and inequality at the same time. Component II effects are more likely to be observed in the long run, while the effects of Component III might be experienced in the medium term. Policy actions under Component III are likely to help reduce inequality. Approximately one- third of households living on monthly incomes of less than M500 (US$57) receive some social transfer (pension and/or social assistance). However, the great majority of Government transfers goes to those earning between M300 (US$34) and M500 (US$57). Very few of the poorest of the poor receive any assistance at all—just 9 percent of those earning less than M300. Thus, policies to improve the targeting, effectiveness, and efficiency of Lesotho’s social safety net are likely to help accelerate poverty reduction in the medium run. They should also reduce inequality, but to a lesser extent because very few of the non-poor seem to receive any social assistance. With the policy reforms supported by this DPC, Lesotho should be able to better coordinate its various transfer programs and target those really in need. For instance, by establishing a central body with policy oversight and expenditure planning authority over all transfer programs, the government may be able to avoid duplication and maximize poverty reduction under current budget constraints. Consolidating some programs and improving their targeting could help to reduce poverty. Simulations using the Lesotho’s latest household survey indicate that redirecting the expenditures spread across school feeding, public-assistance grants, nutrition programs, and the tertiary bursary program could reduce Lesotho’s current poverty rate in a budget neutral matter. Figure 1: Share of Population within Income Groups Living in Households with Social Assistance or Pensions as Main Income Source. Source: CMS/HBS 2010 Environment Aspects The policy actions supported by the proposed operation are not likely to produce significant impacts on the environment, forests, or other natural resources. The investment climate reforms are not likely to have a significant negative effect on the environment. Although the reforms do promote establishment of new firms in Lesotho, strict environmental regulations are in place to mitigate any potential environment degradation. The policies aimed at improving the effectiveness of public spending are not likely to have a positive or negative effect on the environment. Finally, social protection reforms are also not likely to have a negative effect on the environment. Tentative financing Source: ($m.) Borrower 0 IDA reallocated as a credit 15 Borrower/Recipient IBRD Others (specify) Total 15 Contact point World Bank Contact: Christian Yves Gonzalez Amador Title: Senior Economist Tel: 5369+3165 / 27-12-742-3165 Fax: Email: cgonzalez@worldbank.org Location: Pretoria, South Africa (IBRD) Borrower Contact: Dr. Leketekete Victor Ketso Title: Minister of Finance Tel: (266) 22 323 703 Email: lketso@finance.gov.ls For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop