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.[78]
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$79 million 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".[79]
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 2001-04. 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 (2002-03), 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 2002-03, 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[80]
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.
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.
32. 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.
33. 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.
34. 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.
35. 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.
36. 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.
37. 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
78 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
79
Gayfer, J Flint, M and A Fourie, 2005. Evaluation of DFID's Country
Programmes: Country Study Lesotho 2000-04. DFID Evaluation Report
EV657. Back
80
It now resorts under the Ministry of Trade, Industry, Marketing
and Cooperatives. Back
| 
