Memorandum submitted by
the ComMark Trust
A. ComMark: An Introduction
1. ComMark: ComMark stands for
Making Commodity Markets Work for the Poor in Southern Africa.
ComMark was established in 2003 as an independent trust with
funding from the UK's Department for International Development
(DFID) and is managed by ECIAfrica, a South African economic
development consultancy. ComMark's objective is to further the
development of commodity and service markets in Southern African
so as to strengthen their impact on the lives of poor and unemployed
people. This entails improving the legal, regulatory, policy and
business service frameworks that underpin commodity markets sot
that they work more inclusively and effectively for the benefit
of poor people. ComMark focuses on three core sectors of the Southern
African economy: textiles and apparel, agribusiness, and tourism.
These sectors were chosen because the offer high pro-poor growth
potential.
2. ComMark's Approach:
At the heart of ComMark's
approach to development lies the conviction that inclusive, well-functioning
markets offer the only long-term basis for poverty reduction.
This contrasts with the populist view that markets work only
for the rich and that poor people need to be protected or
insulated from them. How markets
work is especially important for poor people, whether they are
consumers, employees or producers. Where markets work inclusively
and competitively they offer jobs and access to products and services.
Where markets work exclusively, or are dominated by special interests
or distorted by bad policies or inappropriate regulation,
poor people have fewer chances to participate and benefit from
the fruits of economic growth.
3. ComMark's Methodology:
ComMark was set up to demonstrate practically how markets can
be strengthened to make them more inclusive and pro-poor. ComMark's
multi-sector and multi-country approach allows us to test this
methodology in a variety of contexts. Much of ComMark's work concentrates
on working with government and the private sector rather than
setting up specific development projects. Where ComMark does engage
in specific markets it works through established partners, providing
funding and technical assistance. The aim is to avoid creating
aid-dependence by playing a catalytic role in markets so that
ComMark's inevitable exit as a funder will not cause these initiatives
to collapse.
4. ComMark's Submission to
the PSD Inquiry: This submission draws on our experience in
Lesotho where ComMark supports two sub-sector MMW4P interventions[183].
The first of these is ComMark's Lesotho Textile and Apparel Project.
This aims to improve the level of investment and competitiveness
of that country's garment sector so that it benefits the poor
by creating formal job opportunities. Our second intervention
is aimed at bringing small-scale traditional wool and mohair farmers
into the formal marketing system so they can access business services
such as extension support and animal health products and thus
increase their returns from livestock. ComMark will highlight
in these two case studies a number of the issues being reviewed
by the Inquiry on Private
Sector Development. More specifically we will try to provide
insight into the types of donor interventions ComMark believes
can change the business climate and deliver pro-poor growth.
B. Lesotho
5. Background Lesotho: Lesotho
is a small, land-locked country with a population of just over
two-million people, completely encircled by South Africa. With
a Gross National Income of US$402.8 per capita (2004), it ranks
as one of the countries on the United Nations' Least Developed
Countries list. The UNDP Human Development Report Index ranked
it 149 out of 177 countries. Lesotho's economy is mainly based
on subsistence agriculture, livestock, remittances from migrant
miners working in South Africa and a garment assembly sector.
The Lesotho economy has been stagnating for the past decade as
the most important sources of income have been shrinking. South
African mines shed more than 33,3% of their workforce during the
1990s and the agricultural sector also contracted over the same
period.
6. Agriculture is extremely important
to the Lesotho economy; 80% of the population lives in the rural
areas and more than half the population derive their primary livelihood
from crop and livestock production. Agriculture's share of the
country's Gross Domestic Product has declined from 26.8% in 1981
to 16.3% in 2001. This trend is attributed to declining productivity
as a result of soil erosion, lack of plant fertilisation, and
poor husbandry practices and farm management. Inadequate credit
and shortcomings in the agricultural policy framework have also
been cited as contributing factors.
7. The Lesotho garment sector, stimulated
by AGOA (African Growth and Opportunity Act) preferences, grew
from 20,000 jobs in 2000 to 54,000 in 2004. The advantages of
AGOA have been eroded over the past year by an appreciating exchange
rate and the end of the Multi-Fiber Agreement (MFA). The net effect
of these changes was to cut employment in the garment sector to
45,000 jobs by the end of 2005. However, surge protection against
Chinese apparel imports to the US has brought temporary relief.
Buyers are returning to Lesotho and order books at some of the
larger factories are starting to reach satisfactory levels. Another
encouraging sign that the business environment is improving is
that four new factories are set to open, once again boosting employment.
8. The Donor Response to Lesotho.
For more than three decades Lesotho has been a recipient of
Official Development Assistance (ODA). Due to Lesotho's position
as a frontline state in the struggle against apartheid South Africa,
total ODA to Lesotho was relatively high in the early 1990s, amounting
to 23% of GDP. This has plummeted over the past decade, with a
net ODA level of US$79m being reported in 2003. This equates to
6% of Gross National Income and thus Lesotho is not overly aid
dependent.
9. In support of the Poverty Reduction
Strategy (PRS) adopted by the Lesotho government, donors are increasingly
moving away from stand-alone projects towards more programmatic
support. Despite this move, in 2005 the Ministry of Finance was
quoted as stating, "The bulk of [this] development assistance
remains in the form of unharmonised 'project aid' which has a
multiplicity of conditions, reporting requirements and numerous
supervision missions including workshops and stakeholders"[184].
ComMark was set up to deliver donor support to Lesotho in such
a way to by-pass such implementation hurdles and support the PRS
without compromising DFID's governance arrangements. Using organisations
such as ComMark to absorb the administrative burden associated
with donor funding bears consideration. Using organizations such
as ComMark to absorb the administrative burden of donor funding
has been successful and should be replicated.
10. In the PRS strategy document the
government of Lesotho unequivocally states its belief that poverty
reduction can only occur in the context of rapid and sustainable
growth economic growth. Furthermore, its top two priorities include
creating employment and improving agricultural productivity and
food security. ComMark's two Lesotho projects thus fit squarely
into the Government of Lesotho's development strategy.
C. Making markets work for the poor
in Lesotho: The LNDC/ComMark Apparel Project
11. Background on the garments industry:
The formal garment industry started in Lesotho in the early
1980s. This was primarily as a response by South African-based
clothing companies to avoid the sanctions imposed on South African
manufactured goods by the USA and Europe. Also, the Lesotho National
Development Corporation (LNDC) offered incentives to the South
African industrialists who set up in Lesotho. The main incentives
were favourable rentals on pre-constructed factory shells, relatively
cheap and well-educated labour, a five-year tax holiday, which
could be extended through further expansion, and subsidised wages
during a designated training period.
12. During the 1980s Lesotho enjoyed
a number of advantages over South Africa because of trade agreements
with the Western world. Under the General System of Preference
(GSP), manufactured goods from Lesotho enjoyed preferential duty
regimes into such important markets as the USA, Canada and other
non-EU European countries. In addition Lesotho was a signatory
to the Lome Convention, which allowed duty free access of clothing
into the European Union.
13. This favourable export environment
assisted the LNDC in attracting a second wave of investment in
the late 1980s. While some new South African industries did commence
operations in Lesotho during this period, the majority of the
investment was by Southeast Asian entrepreneurs, principally Taiwanese.
The Southeast Asian industrialists in Lesotho found a degree of
comfort in operating in this country. The business environment
was such that they could successfully operate their businesses
without onerous regulatory interference. This led to further growth
through word of mouth testimony with additional industrialists
moving in to attempt to emulate the successes of their acquaintances
and competitors.
14. With the introduction of the African
Growth and Opportunity Act of 2000 (AGOA), Lesotho, as a Least
Developed Country, gained significant advantage over its competitor
countries in the developing world. It could now export its clothing
both duty-free and quota-free into the USA. AGOA thus drove the
unprecedented growth in the industrial garment subsector in Lesotho
during the period from 2001 to 2004. At the industry's its peak
workers in the industry were earning US$70 million a year, with
the money moving through the economy stimulating a plethora of
micro businesses selling goods and services as diverse as food,
transport, housing, communications, hair styling, and shoe repair
to workers.
15. While AGOA had helped stimulate
export opportunities, the strong appreciation of the rand (against
which the Lesotho Loti is pegged) relative to a weakening US dollar,
tempered this export growth. As US exports dominate the Lesotho
garments industry this has a pronounced, effect making Lesotho
apparel relatively uncompetitive.
16. Private sector industrialists are
the main drivers of the Lesotho textile industry. Some had been
active in the country before AGOA. Others came in once AGOA had
increased the likelihood that Lesotho textiles could be internationally
competitive. Most of these industrialists came from Southeast
Asia, but some were originally based in Bloemfontein, South Africa.
These entrepreneurs brought valuable capital, skills, and knowledge
of the international textile market. At the same time their lack
of familiarity with conditions in Lesotho has created problems,
but these are being reduced by various initiatives and by the
pressure of competition.
17. ComMark's Project in Lesotho.
During the design phase of
ComMark (2002/2003), one of the identified problems facing the
Lesotho apparel industry was lack of industry expertise within
the Lesotho Government and its agencies. This lack of expertise
meant that many of the recommendations made in an earlier DFID-funded
study on the Lesotho garment industry could not be implemented.
The Ministry of Trade and Industry approached ComMark to help
fill this gap. ComMark formed a strategic partnership the LNDC
and an office for the LNDC/ ComMark Apparel Project was established.
Staff was recruited and ComMark set about dealing with two distinct
sets of issues, namely forging a partnership between government
and industry and improving competitiveness.
18. Forging partnerships: Other
factors behind the expansion of the textile industry have been
the absence of barriers to hiring workers and the generally positive
manner in which the Lesotho government has worked with private
sector industrialists. ComMark has been instrumental in establishing
this relationship. The Government's proactive engagement with
industry stakeholders is highly rated by industrialists and buyers
alike. Joint visits by the minister and leading industrialists
to the USA has helped to cement relationships with some major
buyers. This is a key to the future success of the industry.
The Minister of Trade and Industry engages with industrialists
and works proactively to address their problems. He recently established
the Inter-Ministerial Task Team on Attracting and Maintaining
FDI in Lesotho's Textile and Apparel Industry to tackle the concerns
of industrialists. Initially the team, made up of industrialists
and representatives from concerned ministries and parastatal bodies,
was mandated to look into specific problems and report back promptly.
This consultative forum meets fortnightly and deals with issues
as they arise.
19. Building Competitiveness: There
are grave concerns that the Lesotho apparel producers will not
be able to survive in a more competitive global market when AGOA
ends. However, labour costs alone do not determine competitiveness.
Competitiveness has many aspects and, Lesotho producers have been
able to make critical improvements through their involvement in
the market. Price is important but response time and response
reliability also matter. Some competitors with very low labour
costs, such as Bangladesh, have not always been able to meet these
requirements. Quality of merchandise is also crucial for buyers.
Meeting these requirements often depends on effective management
systems. Strengthening management systems can therefore do much
to enhance competitiveness.
20. Becoming more price competitive
does not necessarily imply reducing the wages of workers. A more
effective way to achieve this is to increase productivity. This
can mean wages rise while the price of the good comes down. To
increase competitiveness, the LNDC/ComMark Apparel Project launched
a US$1m training co-funding scheme designed to stimulate the business
service market for training and improve productivity. To date
more than 33 firms have registered along with 16 service providers.
These providers offer training in supervisor skills, management,
health and safety, operator training and communication skills.
Positive results have already begun to emerge. Some firms have
found that instituting training programmes has boosted their sewing
production line outputs by up to 25%. It has also been argued
that employees selected for training often view this as an affirmation
of their value to the company and this itself increases motivation.
A further benefit of these training programmes has been a change
in the mindset of managers, which can significantly reduce costs.
Many of the Southeast Asian industrialists have convinced themselves
that the Basotho population do not have the skills to reach supervisor
and management levels. The training programmes are eroding this
belief. This could lead to more cost-effective management structures
as well as the emergence of managers who better understand their
subordinates.
21. Case-study Lessons: This
case study demonstrates that opportunities exist in the global
economy for less developed countries. What is important for those
who want to benefit is to understand the nature of the opportunity,
and to then devote both public and private resources to taking
advantage of it. This example from Lesotho also shows that it
is not simply a case of leaving the private sector to discover
global opportunities. Making markets work for the poor requires
the construction of a growth alliance between the state and development
agencies to enable them to respond to the concerns of the private
sector and provide various forms of assistance. This is essentially
the situation in Lesotho. The state supports the textile industry
in international negotiations, encourages investment in improved
productivity and seeks to reduce the costs of its regulations.
The state must be eager for investment, must monitor global developments,
and must react speedily and decisively to facilitate the processes
through which the private sector can access opportunities. Donors
must be poised to support this process.
C. Making markets work for the poor
in Lesotho: The ComMark Trust's Wool and Mohair Project
22. Wool and Mohair Industry Background:
After garments, the wool
and mohair industry is the second-largest export sector of the
Lesotho economy - an estimated 40% of all Basotho households own
some form of small stock. The country has around two million sheep
and goats, producing 2-million kgs of wool and 1-million kgs of
mohair. This production is, however, 40% of what was produced
by Lesotho in 1984. A subsector analysis of the industry, undertaken
by ComMark in 2002/3, found that although the industry had potential
to expand, overgrazing, limited investment in livestock improvement,
low reproduction rates, high mortality and an inefficient marketing
structure had thwarted this potential.
23. The Lesotho wool and mohair sector
has not received the same level of government support as that
enjoyed by the garment and textile sector. The marketing of wool
and mohair remains regulated and this has inhibited the development
of the private sector wool trade. More than 60% of Lesotho's wool
and mohair clip is marketed through the 98 shearing sheds owned
and operated by the government. Larger farmers, who are well organised
into farmers' associations, typically use these facilities. The
main challenge faced by these farmers is that all their interaction
with the market (both product and business services) is mediated
through the Lesotho Government's Livestock Product Marketing Service
(LPMS), whose quality of service has been falling over the past
five years because of budget constraints.
24. LPMS was originally established
by the Ministry of Agriculture[185]
to manage and support the marketing of livestock products through
the government woolsheds. LPMS helps formal wool producers from
shearing until they receive their payment from South African-based
brokers. Although the government and producers recognise that
this arrangement is no longer sustainable and that the privatisation
of the government sheds is needed, this process has stalled.
25. Government sheds do not easily cater
for small-scale traditional farmers as they often need access
to the proceeds from their wool immediately and cannot wait the
requisite six months for payment. This group of farmers can either
sell their wool through private, licensed traders who operate
34 shearing sheds around Lesotho, or use informal traders, referred
to as smugglers in Lesotho.
26. To maintain their licences, private
traders have to provide farmers with shearing and grading facilities,
submit statistics and pay over a dipping levy to government. Wool
traded through this channel has dropped off significantly over
the past few years. The reduction of livestock numbers through
stock theft is one reason for the decline, poor service and uncompetitive
prices these traders have offered being another. The standard
business model these private traders have adopted is that of paying
farmers low prices and minimising their shearing-shed operating
costs. The result is that many small-scale farmers, who have sufficient
stock to warrant shearing their animals at a shed, choose to shear
their sheep at home and sell their wool through the informal sector.
26. Informal traders have flourished
over the past few years at the expense of the licensed traders
because they do not maintain shearing sheds, ask for proof of
ownership or pay statutory levies. Typically they buy home-shorn
wool from farmers in plastic bags and then sort, grade and market
this product in South Africa. Consequently, the Lesotho wool and
mohair industry loses out on all local value addition and this
has discouraged investment.
27. ComMark's Wool and Mohair Project
in Lesotho: Based on the
structure and performance of the Lesotho wool and mohair industry,
ComMark identified two points of intervention needed to make wool
markets work more effectively for the poor. The first was the
need to deregulate the industry and privatise the government woolsheds
so as to strengthen the overall wool and mohair business climate.
The second point of leverage was the need to assist private licensed
traders to modify their business model to broaden their service
offering and offer producers higher, market-related prices for
their wool, thereby encouraging them to invest in their livestock.
28. Strengthening the private sector:
One of the primary reasons
the private traders lost market share was that they paid farmers
uncompetitive prices for their wool. The traders claim they did
this because they were not profitable. Scratching below the surface
shows that the reason they were unprofitable was their high per-unit
cost structure, coupled with the low prices they achieved for
the wool they on-sold through brokers.
29. To break this cycle, in April 2004
ComMark extended a three-year grant to Teba (a market development
facilitator) to work with two of the three private traders and
to deploy mentors to four of their sheds. These mentors were responsible
for working with traders to initiate a fee-for-service animal
health programme. Improving the availability and affordability
of animal health products is one of the main measures to increase
wool yield per animal. This in turn leads to an increase in the
volume of wool through a shed and reduces the average unit handling
cost.
30. By extending a field service to
farmers, the mentors and field workers were also able to inform
farmers of the prices they could expect to receive for their wool
and encourage them to bring their stock to be shorn at the shed.
Furthermore, the mentors were responsible for working with shearing
shed staff to ensure that quality control measures were implemented
and that the wool marketed from a shed was correctly classed and
baled.
31. The two traders participating in
the project had to agree to pay higher prices to farmers (the
target being 60-75% of the final wool price). In addition they
had to agree to follow certain woolshed management policies and
procedures. This intervention was designed so that, for the first
year, the participating traders did not have to bear any costs
for the services of the mentors. However, once a volume baseline
(Year 1) has been established, any additional increases in profits
will have to be shared (10%) with the project.
32. As a result of this project, private
licensed traders who were on the verge of closing down their operations
are now handling unprecedented quantities of wool. Prices received
by farmers were 60-65% of the corresponding final auction price.
By contrast, the smugglers paid farmers the equivalent of 30%
of the auction value, while the larger farmers, who sheared at
government sheds netted 85% of the final price. However, these
larger farmers had to wait six months before receiving their money.
33. Finally, many of the management,
training and control services the mentors are providing around
clip preparation for final sale are typically embedded services
wool-marketing brokers offer their clients. The regulated nature
of the Lesotho industry has led to a lack of competition among
brokers and reduced their need to offer such services to gain
market share in Lesotho. Aside from budgetary issues, this missing
broker business service offering strengthens the case for industry
deregulation.
34. Enhancing the investment
climate through improving the regulatory framework: While
the government of Lesotho has committed itself to deregulation
and privatisation of the wool industry for the past two years,
it has been unsure how to proceed with implementation. Issues
around possible staff retrenchments, asset transfer and service
reach have emerged as key. To accelerate this process and introduce
certainty into the market, ComMark has set aside funds to develop
the institutional capacity of the industry, and together with
the Lesotho government and the private sector is hosting a series
of sector workshops to chart the future of the industry.
35. While the need for such support
was identified in 2004, this component of the interventions is
only being implemented 18 months later. Unlike in the garments
sector, where government's support was unequivocal, in the wool
industry ComMark has had to work with the private sector to bring
the challenges faced by the industry to the attention of government.
This strategy exemplifies ComMark's view that to contribute to
regulatory reform, a MMW4P change-agent must first establish credibility
through project-level, private-sector interventions. To be heard,
you must build your voice from within the sector.
36. Case-study Lessons:
This case study demonstrates how it is possible, at a smaller,
project level, to work within the logic of the market to benefit
poor people and how this experience can be used to inform and
build support for sector-wide restructuring. While the informal
sector has a role to play, transforming traditional agriculture
requires incorporating the many small-scale farmers working at
the periphery of the formal market into established value chains.
These chains are able to deliver a range of business services
such as extension, animal health and ultimately offer better prices,
which encourages investment and reduces poverty.
February 2006
183 Aside from the project interventions described
here ComMark is also involved in a range of other initiatives.
Details of these can be found on ComMark's website, http:// www.commark.org
Back
184
Gayfer, J Flint, M and A Fourie., 2005. Evaluation of Dfid's Country
Programmes: Country Study Lesotho 2000-2004. Dfid Evaluation Report
EV657. Back
185
It now resorts under the Ministry of Trade, Industry, Marketing
and Cooperatives Back
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