INTEGRATED SAFEGUARDS DATA SHEET APPRAISAL STAGE Report No.: ISDSA5403 Public Disclosure Copy Date ISDS Prepared/Updated: 04-Sep-2013 Date ISDS Approved/Disclosed: 05-Sep-2013 I. BASIC INFORMATION 1. Basic Project Data Country: Lesotho Project ID: P144933 Project Name: Second Private Sector Competitiveness and Economic Diversification Prj (P144933) Task Team Smita Kuriakose Leader: Estimated 06-Sep-2013 Estimated 31-Oct-2013 Appraisal Date: Board Date: Managing Unit: AFTFE Lending Investment Project Financing Instrument: Sector(s): General industry and trade sector (50%), Other industry (40%), SME Finance (10%) Theme(s): Micro, Small and Medium Enterprise support (50%), Export development and competitiveness (30%), Other Private Sector Development (20 %) Is this project processed under OP 8.50 (Emergency Recovery) or OP No 8.00 (Rapid Response to Crises and Emergencies)? Public Disclosure Copy Financing (In USD Million) Total Project Cost: 15.00 Total Bank Financing: 13.10 Total Cofinancing: Financing Gap: 0.00 Financing Source Amount BORROWER/RECIPIENT 1.90 International Development Association (IDA) 13.10 Total 15.00 Environmental B - Partial Assessment Category: Is this a No Repeater project? 2. Project Development Objective(s) The development objective of the proposed project is to contribute to the development of non-textile sectors resulting in increased private sector investment, firm growth and job creation. This will be achieved by (i) improving business environment; (ii) increasing access to finance; (iii) supporting Page 1 of 9 investment promotion in new sectors with increased backward linkages to the local economy and (iv) targeted support to new growth sectors such as horticulture and tourism. 3. Project Description Public Disclosure Copy 1. The project will comprise two mutually- reinforcing components: (i) Improving the business environment; and (ii) Increasing economic diversification through targeted support to new growth sectors. In addition, the third component of the project will support project implementation. COMPONENT 1: Improving the Business Environment 2. The objective of this component is to support policy measures intended to facilitate business entry and greater access to finance. The two subcomponents are (i) Business registration, licensing and construction permit reform; and (ii) Improving access to finance. Sub-component 1A: Business Registration, licensing and construction permit reform 3. The objective of this component is to reduce the time and cost for registering a business and obtaining construction permits. This component will support the drafting and implementation of the Business Registration Bill which aims to cover all businesses, including sole proprietors and partnerships. This will enable the benefits of the OBFC system to go beyond company registration and register sole proprietors and partnerships, and also increase formalization of businesses. 4. Inspired by the success of the company registration under the OBFC, the GoL has undertaken steps to modernize its industrial licensing regime. The GoL recognizes that the current licensing system of Lesotho is cumbersome, involving multiple agencies. In order to tackle these shortcomings, GoL was supported by the PSCED Project to draft the 2013 Industrial Licensing Bill which is to replace the outdated 1969 Industrial Licensing Act. The new project will support GoL to implement this new Industrial Licensing Bill. In addition, the introduction of a streamlined risk- based environmental and health inspection procedure during the business registration and licensing procedures can further improve the process of business start-up and operation, and remove Public Disclosure Copy unnecessary regulatory burden for the private sector, resulting in saving time, cost and increasing numbers of compliant businesses. 5. With the country ranked 145 out of 183 economies globally in the Doing Business Report, one of the worst performing Doing Business indicators for Lesotho is the process of obtaining construction permits. The enforcement of construction permits creates opportunities for widespread discretion and corruption the world over . The lessons from the past indicate that there are three main positive outcomes of construction regulation reform. These include: (i) turning unrecognized assets into productive capital; (ii) help create a level playing field for businesses and (iii) contribute to enforcing increased safety and improved resource management (World Bank, 2013). A negative outcome associated with inefficient and corrupt construction-permit and inspection systems is the loss of opportunity for existing and would be entrepreneurs of a level playing field. 6. While in Lesotho, there are only 11 steps, which is below the average of 15 steps for Sub- Saharan Africa and the 14 steps for OECD countries, it takes an average of 330 days to obtain a construction permit in Lesotho. A major reason for that is the lack of coordination between the Maseru City Council (MCC) and the different departments and agencies, taking an average of 106 days and 3 separate procedures for an entrepreneur to obtain a building permit to use the building. The project will help streamline the construction permit system within the MCC, by automating the document workflow, digitizing the back-office functions of MCC and digitizing the archive wherever Page 2 of 9 possible in order to create automated, predictable and transparent systems, thus reducing time, cost and regulatory burden for the private sector, and at the same time reducing the transaction costs for the MCC. Public Disclosure Copy Sub-component 1B: Improving Access to Finance 7. The objective of this component is to improve the access to finance in Lesotho, by providing a stable and predictable loan market and credit worthiness system (credit bureau), providing a diversified set of the financial services (financial leasing and movable collateral) and extend these new services to the unbanked population. The establishment of a credit bureau will cover the entire population and provide creditors with information for assessing credit worthiness of borrowers, thus ensuring stability and predictability in the market. The introduction of a movable collateral registry will allow borrowers to use movables to secure loans, thus removing the burden from banks to require only immovable security, and include unbanked population. This registry will aim at including information on financial leasing as well. These reforms together help modernize the financial services market, by allowing lenders and borrowers new forms of asset-financing. 8. In addition, the availability and cost of credit are positively correlated with the strength of creditor rights’ protection. The protection of creditor rights includes an effective debt enforcement regime for individual creditors to recover their debt, and a robust and efficient insolvency regime, which regulates collective creditor recovery. The project will provide technical assistance to help modernize the Insolvency Proclamation and ensure coherency with the liquidation provisions. COMPONENT 2: Supporting Economic Diversification Sub-component 2A: Supporting investment promotion and increasing linkages to the local economy 9. This component of the project will aim to provide the GoL with support towards achieving sustainable diversification of the country’s export manufacturing program as well as provide support to strengthen the local SME capacity. This diversification needs to be achieved such that there is Public Disclosure Copy horizontal diversification – where non-textile industries need to be attracted, combined with increased localization – where local participation in the manufacturing sector increases in terms of providing technical and managerial skills and supplying export-oriented firms. 10. The project will focus on delivering a mixture of strategic and operational outcomes in an integrated, sequential way. There is evidence to show that the existing factory sites do not provide the desirable infrastructure and services to foreign investors due primarily to the very low rents that are paid for these sites. There are likely several options for the commercialization of factory sites, including: i) fully private development, ownership and operation of the industrial estate as a going concern; and, ii) private construction and leasing of individual factory shells on LNDC serviced industrial land. The project would support the technical evaluation of options for the commercialization of a site which can meet unmet demand for factory sites from new investors. The TA provided will support designing a PPP deal that would attract private developers to construct and manage the factory site on a commercial and sustainable basis. 11. The project will also provide technical assistance on implementing targeted programs that would facilitate linkages between these foreign investors and domestic SMEs. Support measures would help facilitate improved information flows and targeted instruments to help increase business opportunities between the two groups while simultaneously also improving capacity of the local SMEs. Page 3 of 9 Sub-component 2B: Supporting the Tourism Sector Public Disclosure Copy 12. Another vital source of growth for Lesotho could be the development of the tourism sector. The Lesotho PSCED Project to date has supported activities targeted to address fundamental tourism sector constraints. Increased competitiveness in the tourism sector mandates efforts that a) better quantify and track sector performance, (b) improve standards, (c) strengthen the country’s unique offerings, and (d) support an enabling institutional framework. This sub-component will support tourism value chain development through targeted activities including development of tourism statistics and continuing the implementation of the star grading system for accommodation. 13. Further, support will also be provided to the handicrafts sector by increasing their capacity to both produce domestically and export. In order to spur tourists and domestic demand and provide a s ustainable retail market outlet, the project will support the development of a privately managed centrally located handcraft marketplace in Maseru. The marketplace will be financially sustainable and include a tourism information hub, attracting the tourist market. The tourism information hub will offer market based services in order to meet the needs of tourists and generate income to cover operational costs. Sub-component 2C: Expanding Commercial Horticulture 14. The pilot farms under the PSCED Project, were created to demonstrate the potential for commercial fruit farming in Lesotho, test various varieties of fruit under Lesotho growing conditions and work in conjunction with Government to ensure that policies and regulations are in place to support sector development. The pilot farms have realized a number of successes, including Lesotho’s first fruit exports and production of the first Grade 1 apples in the country. Also, lessons learned from the horticultural pilot farm project are being applied to a national rollout of larger commercial farms using block farming, starting with a village association in Mahobong (Village Rollout) in March 2013. Public Disclosure Copy 15. Applying lessons learnt from Phase 1 of the Horticulture Component, the primary development objectives of Phase 2 are as follows: i) Transform strategic areas in Lesotho into major producers and exporters of early variety tree crops by demonstrating that commercial deciduous fruit production is competitive and sustainable. ii) Improve livelihoods of rural farmers through the production, export and processing of high value tree crops. iii) Facilitate shift from reliance on maize as the main source of income to a more diversified cropping structure. iv) Develop a competitive value chain for tree crops including: • Sales of fresh produce in local and export markets; • Juicing, canning and drying facilities for products of Grade 3 and lower quality; and • Food processing industry based on derivatives from tree crops. 16. The project will help support to expansion of upstream activities, including seedling nursery development, expansion of commercial production of deciduous fruits (35 hectares), and strengthen capacity of local on-farm technical support services; and downstream activities beginning in 2016 when the project anticipates increasing volume of marketable crop entering the market from existing and new farms. Of the marketable products, Grade 1 products will be targeted for export markets, Grade 2 products for domestic markets, and Grade 3 and lower for local value added processing. In Page 4 of 9 this regard, downstream activities will focus on the development of local supply and value chains for deciduous fruit, farm certification (Global Gap) which will enable Basotho farmers the opportunity to export Grade 1 products to any market in the world and expand marketing options for local products Public Disclosure Copy both within and outside Lesotho. Sub-component 2D:Lesotho Enterprise Assistance Program 17. The LEAP matching grant scheme was designed to help strengthen business capacity of the private firms, mostly Basotho-owned MSMEs, as well as their representative organizations through provision of financial and technical assistance to buy business development services with the aim to increase their competitiveness. Under LEAP, there has been direct assistance provided to individual firms through mentoring services provided by the LEAP Unit and the provision of cost-sharing grants to firms, for the use of specialized business development services. Further, cost-sharing grant assistance have also been provided to representative business and professional associations and chambers, to build their capacity to better serve their members. The LEAP program will be managed under this component and will be funded using government counterpart funding. Component 3: Project Implementation 18. This component will support the costs of the Project Management Unit. The implementation arrangements used under the PSCED Project will be used in the new proposed Second PSCED Project. 4. Project location and salient physical characteristics relevant to the safeguard analysis (if known) Component 1 activities will be technical assistance provided to the GoL administration in Maseru, while component 2 activities will be implemented in the regions once the sites are identified for the horticulture sub component; and also in Maseru for the construction of the Tourism Handicraft Public Disclosure Copy Centre. 5. Environmental and Social Safeguards Specialists Paula F. Lytle (AFTCS) Lungiswa Thandiwe Gxaba (AFTA2) 6. Safeguard Policies Triggered? Explanation (Optional) Environmental Assessment OP/ Yes The policy is triggered due to anticipated BP 4.01 moderate impacts from activities to be undertaken under the horticulture subcomponent and the proposed tourism handicraft center. Activities may include excessive use of water, tilling of land and minor to moderate use of pesticides for the horticulture sub-component and rehabilitation or construction of buildings for the tourism handicraft center. The project has been rated category B- partial Assessment for Environmental Assessment (EA) and an ESMF for the horticulture component has been drafted with Page 5 of 9 public consultation and disclosed in-country and at the Bank’s Infoshop prior to appraisal on August 06, 2013. Since the site for horticulture Public Disclosure Copy component will be selected during project implementation the ESMF lays out the framework for a uniform approach for addressing potential negative impacts and incorporates the lessons learnt from the existing pilot sites and the village roll-out under the PSCED Project. The site for the tourism handicrafts center has been identified and an ESMP has been prepared; consulted upon and disclosed both in-country and at the InfoShop prior to appraisal on August 06, 2013. Natural Habitats OP/BP 4.04 No The project does not affect natural habitats. Forests OP/BP 4.36 No The projects does not affect forests or forestry. Pest Management OP 4.09 Yes While the total land under the project is not substantial (only 30-35 hectares) and the risk of pesticides is minor to moderate due to the small amounts of pesticides being used, the ESMF incorporates an integrated pest management plan (IPMP). Physical Cultural Resources OP/ No While the project will finance a tourism BP 4.11 information hub that will provide information on tourism sites, including physical cultural Public Disclosure Copy resources, it does not have direct impacts on physical cultural resources. Indigenous Peoples OP/BP 4.10 No There are no Indigenous Peoples in the project area. Involuntary Resettlement OP/BP No The tourism information center will be built on 4.12 an identified site for which the land has already been acquired and does not have any encroachers or squatters. Other components of the project do not require land acquisition, and there are no squatters or encroachers. Safety of Dams OP/BP 4.37 No The project does not involve dams. Projects on International No N/A Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP No N/A 7.60 II. Key Safeguard Policy Issues and Their Management A. Summary of Key Safeguard Issues Page 6 of 9 1. Describe any safeguard issues and impacts associated with the Restructured project. Identify and describe any potential large scale, significant and/or irreversible impacts: There are no large scale, significant and/or irreversible impacts anticipated from the project since Public Disclosure Copy the project will mainly be providing technical assistance to the GoL in Maseru, and only sub- components 2B and 2C will support the tourism sector and horticulture, respectively. The minor to moderate potential adverse impacts envisaged would be managed through the provisions of the ESMP and ESMF prepared for the sub-components, respectively. 2. Describe any potential indirect and/or long term impacts due to anticipated future activities in the project area: There are no potential indirect and/or long term impacts envisaged due to anticipated future activities in the project area. 3. Describe any project alternatives (if relevant) considered to help avoid or minimize adverse impacts. N/A 4. Describe measures taken by the borrower to address safeguard policy issues. Provide an assessment of borrower capacity to plan and implement the measures described. In anticipation of potential adverse impacts that could arise from construction of the Tourism Handicraft Centre, an ESMP has been prepared, and for implementation of the horticulture sub- component, an ESMF has been prepared since the sites would only be identified during project implementation. All institutions that will be involved have implemented bank projects previously or are currently involved in implementation of other programs. As such they are familiar with World Bank safeguards and have gained experience in the implementation and oversight of Bank projects. 5. Identify the key stakeholders and describe the mechanisms for consultation and disclosure on safeguard policies, with an emphasis on potentially affected people. Public Disclosure Copy The key stakeholders include: (i) the Ministry of Trade and Industry, which will provide guidance to the PMU; (ii) The Ministry of Agriculture and Food Security which will provide support to the Ministry of Trade and Industry; (iii) The Ministry of Forestry, which will provide guidance to the project on matters related to technical on-farm activities; (iv) The Project Steering Committee which will consist of the principal secretaries from the MTICM, MTEC, MAFS, MFLS, the Central Bank, Registrar General and CEOs from LNDC and LTDC; (v) The National Environmental Secretariat (NES), the environmental agency responsible for reviewing and clearing all safeguards documentation for the project; (vi) operators in the handicraft sector in Lesotho who were consulted during the preparation of the ESMP for the Tourism Handicraft Center to be constructed in Maseru; and (vii) the current participating farmers in the horticulture industry who have been consulted during the preparation of PSCEDP II as well as ESMF preparation. B. Disclosure Requirements Environmental Assessment/Audit/Management Plan/Other Date of receipt by the Bank 06-Aug-2013 Date of submission to InfoShop 06-Aug-2013 For category A projects, date of distributing the Executive Summary of the EA to the Executive Directors Page 7 of 9 "In country" Disclosure Lesotho 06-Aug-2013 Comments: Public Disclosure Copy Pest Management Plan Was the document disclosed prior to appraisal? Yes Date of receipt by the Bank 06-Aug-2013 Date of submission to InfoShop 06-Aug-2013 "In country" Disclosure Lesotho 06-Aug-2013 Comments: If the project triggers the Pest Management and/or Physical Cultural Resources policies, the respective issues are to be addressed and disclosed as part of the Environmental Assessment/ Audit/or EMP. If in-country disclosure of any of the above documents is not expected, please explain why: C. Compliance Monitoring Indicators at the Corporate Level OP/BP/GP 4.01 - Environment Assessment Does the project require a stand-alone EA (including EMP) Yes [ ] No [ ] NA [ ] report? If yes, then did the Regional Environment Unit or Sector Yes [ ] No [ ] NA [ ] Manager (SM) review and approve the EA report? Are the cost and the accountabilities for the EMP incorporated Yes [ ] No [ ] NA [ ] in the credit/loan? OP 4.09 - Pest Management Public Disclosure Copy Does the EA adequately address the pest management issues? Yes [ ] No [ ] NA [ ] Is a separate PMP required? Yes [ ] No [ ] NA [ ] If yes, has the PMP been reviewed and approved by a Yes [ ] No [ ] NA [ ] safeguards specialist or SM? Are PMP requirements included in project design?If yes, does the project team include a Pest Management Specialist? The World Bank Policy on Disclosure of Information Have relevant safeguard policies documents been sent to the Yes [ ] No [ ] NA [ ] World Bank's Infoshop? Have relevant documents been disclosed in-country in a public Yes [ ] No [ ] NA [ ] place in a form and language that are understandable and accessible to project-affected groups and local NGOs? All Safeguard Policies Have satisfactory calendar, budget and clear institutional Yes [ ] No [ ] NA [ ] responsibilities been prepared for the implementation of measures related to safeguard policies? Have costs related to safeguard policy measures been included Yes [ ] No [ ] NA [ ] in the project cost? Page 8 of 9 Does the Monitoring and Evaluation system of the project Yes [ ] No [ ] NA [ ] include the monitoring of safeguard impacts and measures Public Disclosure Copy related to safeguard policies? Have satisfactory implementation arrangements been agreed Yes [ ] No [ ] NA [ ] with the borrower and the same been adequately reflected in the project legal documents? III. APPROVALS Task Team Leader: Smita Kuriakose Approved By Regional Safeguards Name: Alexandra C. Bezeredi (RSA) Date: 05-Sep-2013 Advisor: Sector Manager: Name: Irina Astrakhan (SM) Date: 05-Sep-2013 Public Disclosure Copy Page 9 of 9