COMMARK LESOTHO TEXTILE & APPAREL SECTOR PROGRAMME Impact Assessment

COMMARK LESOTHO TEXTILE & APPAREL SECTOR PROGRAMMEImpact Assessment 11 June 2009Dr Mills Soko Founding Director Mthente Research & Consulting Services

Introduction • Evaluation Methodology • Economic Performance of Lesotho’s Textile & Apparel Sector • The Programme’s Poverty Impact • Sector-level Outcomes of ComMark’s Intervention Activities • Progress in Alleviating the Sector’s Constraints • Conclusions • Recommendations Outline

The Textile and Apparel Sector in Lesotho • One of the primary drivers of economic development • contributes 18% of Lesotho’s GDP • more than 90% of Lesotho’s total exports • employs more than half of the country’s labour force • Much of the sector’s growth and development stimulated by the introduction of the African Growth and Opportunity Act (AGOA) in 2000 • duty-free and quota-free access into the US market • Lesotho has become Sub-Saharan Africa’s (SSA) largest exporter of clothing to the US 1. Introduction

The Textile and Apparel Sector in Lesotho • 44 factories operating in the sector, mainly specialising in production of woven and knit garments • Sector produces more than 26 million pairs of denim jeans and 90 million knit garments annually • A significant number of the world’s most established brands source garments produced in Lesotho (e.g. GAP, Levi Strauss) 1. Introduction

Programme Background • A 2001/02 sub-sector study of the garment industry in Lesotho identified a number of constraints considered to be hampering the development of the textile and apparel sector • lack of investment in environmental services and infrastructure facilities • low levels of factory and worker productivity • poor perceptions of the sector among both local and international stakeholders • threats to the favourable international trading environment garment exporters • In 2003, the ComMark Trust launched a five-year Textile and Apparel Sector Programme with the aim of supporting the Government of Lesotho, employers and workers in the garment sector in addressing these constraints 1. Introduction

Programme involved 4 core interventions: • The placement of a long-term technical advisor in the Lesotho National Development Corporation (LNDC) • The establishment of Training Co-financing Scheme to encourage factory owners to invest in training • The conceptualisation and implementation of a sector-wide HIV/AIDS programme – the Apparel Lesotho Alliance to Fight Aids (ALAFA) • The provision of financial and technical trade negotiations support 1. Introduction

Objectives of the Impact Assessment: • Review economic performance of the textile and apparel sector over the 2002-2008 period & compare this performance with that of two key African competitor countries: Kenya and Swaziland • Estimate the poverty impact of employment trends in the sector between 2003 and 2008 • Establish and/or verify the sector-level outcomes of ComMark’s intervention activities • Assess extent to which the constraints and challenges identified in the Programme’s design phase in 2001/2002 have been fully addressed or partially mitigated 2. Evaluation Methodology

Methodological approach grounded in both a comprehensive desktop research phase and a multi-faceted fieldwork phase (3 separate fieldwork trips to Lesotho) • Variety of information gathering techniques adopted • Review and analysis of project documentation provided by ComMark and ALAFA • Desktop research and review of relevant literature • Quantitative analysis of statistical data • Semi-structured interviews with industry stakeholders, project personnel and key informants (78 in total) • Qualitative survey of international buyers of Lesotho’s garments • Focus group discussions • On-site factory visits and technical training assessments 2. Evaluation Methodology

Broad Findings • Since the launch of the ComMark project, the textile and apparel sector in Lesotho has grown significantly, both in terms of employment and garment exports • Much of this growth can be attributed directly to the competitive advantage generated through AGOA • The sector experienced a downturn in fortunes in 2005 • factory closures • total employment dropped by nearly one quarter • primarily due to US$ weakness and the expiry of the ATC 3. Economic Performance of Lesotho’s Textile & Apparel Sector

3. Economic Performance of Lesotho’s Textile & Apparel Sector

Employment • Total employment grew by 37% between 2002 and 2008 • Reached a peak at 53087 in 2004 but fell back to 45310 in 2008 • Total employment in the sectors in Swaziland and Kenya declined by 49% and 65.6% respectively over the same period • Given the similarities in demand and market conditions in these 3 countries the contrast in employment trends is substantial • Reflects improvements in local supply conditions facilitated by ComMark 3. Economic Performance of Lesotho’s Textile & Apparel Sector

Exports • Total apparel exports to the world more than doubled in US$ terms between 2002 and the end of 2007 • Lesotho continued to export the vast majority of its textile and apparel products to the US (80% of total exports in the sector) • After exports to the US, South Africa and Canada were the next biggest export markets • Limited progress has been made in terms of the diversification of exports to other destinations, particularly to South Africa and to the SACU and SADC markets • Exports to the EU have remained negligible • fell between 2002-2005 (from US$2.1 million to US$800 000) • reached US$2.3 million at the end of 2007 3. Economic Performance of Lesotho’s Textile & Apparel Sector

Investment: 2002-2008 • Sector remained overwhelmingly dominated by foreign-owned firms (mostly Taiwanese and South African) • Despite a small increase, local investment in the form of Basotho-owned clothing manufacturing firms remained largely confined to small enterprises servicing niche local markets • Between 2000 and 2005, 31 investment projects undertaken • A major investment came in the form of the establishment of a vertically integrated denim mill in 2004 (US$120 million) • New wave of mostly highly labour-intensive investments since 2005 • growing number of non-Chinese/Taiwanese investors • greater focusing on supplying the SACU marketplace 3. Economic Performance of Lesotho’s Textile & Apparel Sector

Costs per unit of production • Qualitative evidence revealed that there was a decline in average costs per unit of production in the sector from 2002 onwards, particularly after the expiration of the ATC in 2005 • These costs remain relatively high – especially in comparison to those faced by firms in Asian competitor countries • Costs of doing business • Some improvements in terms of tax rates and administration, business licensing and permits, access to finance, and relaxing constraints imposed by labour regulations and infrastructure service delays 3. Economic Performance of Lesotho’s Textile & Apparel Sector

Between 2003 and 2008, 965 additional jobs were created in Lesotho, while 30 646 and 15 636 were lost in Kenya and Swaziland respectively • This reflects a major impact of the ComMark programme given the massive contractions in employment in Kenya and Swaziland • The relative growth in employment in the textile and apparel sector in Lesotho has significant implications for the broader economic context in Lesotho • 46% and 47% of all textile and apparel manufacturing workers have at least one person that is entirely dependent & partially dependent on them respectively • mean number of dependants for each worker is 4.1 4. The Programme’s Poverty Impact

Individuals dependent on income of the sector’s workers • Number of entirely dependent individuals estimated to have increased from 5 642 in 2002 to 130 765 in 2008 4. The Programme’s Poverty Impact

Number of partial dependents increased from a lower bound of 15 642 and upper bound of 62 568 in 2002 to a lower bound of 85 545 and an upper bound of 121 386 in 2008. 4. The Programme’s Poverty Impact

The estimates of the substantial number of partially and entirely dependent individuals suggest that the relative growth in employment in the sector is likely to have had a significant impact in terms of poverty alleviation in Lesotho • Forecasts suggest that there is likely to be a significant decline in employment in the sector in Lesotho between 2009 and 2010, as a result of the economic downturn in the US • Could have major social and economic implications for Lesotho 4. The Programme’s Poverty Impact

5.1. Long-term Technical Advisor in the LNDC • ComMark has helped to improve the LNDC’s institutional and operational performance • Training staff and engendering a more productive work ethic • Improving the understanding of issues relating to the sector among LNDC management • Assisting the LNDC to establish a better rapport with Lesotho’s workers’ unions • Generating improvements in terms of market access for textiles and garments produced in Lesotho. • Improving the ability of the LNDC to attract additional investment in the sector • Serving as an ‘agent of change’ in the textile and apparel sector in Lesotho 5. Sector-level Outcomes of ComMark’s Intervention Activities

Number of specific outcomes were achieved for the sector in Lesotho that arose directly or indirectly from the long-term technical assistance • Reduction in corporate taxes for manufacturing exporters • Increase in investment missions to South Africa • Streamlining of the application of VAT within the sector • Reduction in the number of textile and apparel related cases brought before the Department of Dispute Prevention and Resolution (DDPR) • Improvements in the operation and performance of the LTEA 5.1. Long-term Technical Advisor to the LNDC

Despite these considerable contributions, problems relating to the structure and implementation of the technical assistance included: • Lack of sufficient transfer of skills, technical knowledge and capacity to local Basotho staff within the LNDC and LTEA • LNDC was not sufficiently pro-active in following up on ComMark’s policy proposals and sector priorities with the Government of Lesotho • Occasional inability of both ComMark and the LNDC to report directly to high-level decision makers in the Government • ‘Top-down’ approach to the development of the content and nature of the technical assistance 5.1. Long-term Technical Advisor to the LNDC

Launched by ComMark in June 2004 • Aimed to incentivise companies to train their staff so as to increase the productivity, competitiveness and profitability of the sector • Devised to reimburse qualifying companies for approved training fees on a declining annual basis • Scheme has grown considerably since its launch • Number of signed co-financed training contracts in each year grew from 2 in 2004 to 30 in 2008 • Number of registered training service providers up from 18 in 2006 to 30 5.2. Training Co-financing Scheme

Problems and challenges relating to the Scheme: • Communication difficulties between the training facilitator, factory supervisors and Basotho workers • Lack of adequate follow-up on the implementation of training techniques • Resistance to change among training beneficiaries and factory management • Managerial and supervisory level roles in the majority of Lesotho’s textile and apparel factories still remain overwhelmingly dominated by expatriate staff; comparatively little replacement of expatriate managers with local Basotho employees. • Despite the co-financing facility, some companies could still not afford to pay the balance of the costs 5.2. Training Co-financing Scheme

Formally launched in Maseru in May 2006 • Designed to be an alliance of government stakeholders, service providers, employers, labour representatives, retailers, funders, donors and multilateral organisations united in fighting the epidemic • Approach involves Policy, Prevention, Treatment and Advocacy components • Includes training for health professionals as well as a peer education programme within the factories 5.3. ALAFA

ALAFA has managed to make HIV/AIDS-related health services available and accessible to the workers when and where they need them • 90% of the sector’s workforce has access to prevention services • 70% has access to treatment services at the factories’ clinics • 25 factories have adopted a labour law-compliant HIV/AIDS policy or are in the process of developing one • “There is a lot of improvement since ALAFA started. I was missing work often because of being sick. I was planning to leave but ALAFA came into the factory at the right time. Now that I am on treatment I feel much better and I am able to continue to work.”ALAFA Beneficiary 5.3. ALAFA

However, challenges/gaps still remain: • Lack of a clear succession plan for ALAFA’s senior management • Difficulties in gaining buy-in and understanding from some factory owners and management • Relatively slow implementation of the care and treatment component • High demands for health care services that are beyond what ALAFA can offer • Limited provision of hospital services by ALAFA, tied to a policy that requires that these services be reviewed on a case by case basis • Majority of patients on ARVs are struggling to buy food (due to low salaries) and yet the ALAFA programme does not cater for food supplements to patients • ALAFA’s reliance on donor funding – if funding is cut, the programme would have to close down 5.3. ALAFA

Between 2003 and 2008, significant progress was achieved in terms of maintaining a favourable international trade environment for Lesotho’s garment exports • Extension of the AGOA preferences until 2015 • Extension of the third country sourcing provision under the AGOA agreement until 2012 • Repeal of the abundant supply provision at the end of September 2008 • EU’s complex double transformation rules of origin requirement replaced by a single transformation rules of origin requirement in 2008 • In contrast, the expiry of the ATC on 31 December 2004 exposed Lesotho’s garment exporters to increased competition from cheaper Asian producers (e.g. China, India, Bangladesh and Cambodia) 5.4. Trade Negotiations Support

ComMark’s major contributions involved providing technical briefings and papers and financial assistance to various stakeholders & lobby groups representing the interests of Lesotho in the international trade arena • Provided technical assistance to the MTICM in trade negotiations • Drafted briefing documents, position papers and strategy documents on trade-related matters for the MTICM, LNDC and LTEA, and lobby groups (ACT, ACTIF, MFA Forum) • Helped the LNDC and the LTEA to understand the implications of various trade agreements and trade preferences • Improved Lesotho’s trade negotiating capacity by training individual trade negotiators in the technical skills required to effectively defend the country’s interests in the international trade arena 5.4. Trade Negotiations Support

6.1. Environmental Constraints • 3 significant concerns in 2002 • Extraction of large amounts of water from the Caledon River • Discharge of untreated effluents, polluting the local water courses • Burning of waste at factories and at the municipal waste site • Some progress in terms of factories establishing water treatment facilities and recycling water • Also some progress in increasing the supply of water to industrial estates & improving the quality of water • Improved availability and affordability of cleaner production methods • But lack appropriate legislation and penalties or rewards to enforce the use of these methods 6. Progress in Alleviating the Sector’s Constraints

Overall, however, little improvement in terms of addressing environmental issues and constraints affecting the sector • Handling of industrial waste and effluents remains a major challenge • Only a few factories are pre-treating their waste water • Solution still not been reached about how to appropriately dispose of industrial sludge • Widespread complaints from the community about water pollution • ComMark’s main contribution to the alleviation of environmental constraints was found to be in the area of advocating and creating a need for improved environmental facilities • ComMark’s influence in encouraging firms to pre-treat effluents, recycle waste-water and use cleaner production methods was minimal 6.1. Environmental Constraints

In 2002, the sector’s most urgent infrastructure requirements were: • Serviced industrial sites • Additional factory shells • Reliable water supply • Waste-water treatment plants • Progress in addressing these constraints has been limited, particularly since 2006 • Partly due to the LNDC’s lack of financial capacity • Many potential investors have been turned away due to a lack of suitable or available factory space • Some existing investors have been unable to expand their facilities • Some strategic value chain investors could not be accommodated due to the lack of critical infrastructure 6.2. Infrastructure Constraints

ComMark’s Contribution • Government of Lesotho responsible for mitigating these constraints, with ComMark’s contribution primarily confined to an advisory role • ComMark project team did not have enough power to influence high-level decisions relating to infrastructure provision in the Government of Lesotho • Nevertheless, ComMark did make numerous calls for greater investment in industrial infrastructure • Worked closely with the Government of Lesotho through the IMTT to devise strategies to tackle infrastructure problems • Instrumental in shaping the infrastructural requirements outlined in Lesotho’s National Development Plan 6.2. Infrastructure Constraints

Several labour-related problems in the sector prior to ComMark’s intervention: • poor industrial relations • inadequate training of supervisors and labour • cross-cultural misunderstandings • poor and exploitative working conditions • high HIV/AIDS infection rates • Number of positive changes have occurred in Lesotho’s garment factories since 2003 • LTEA has begun to play a more active role in encouraging its members to abide by Lesotho’s labour code • International buyers’ compliance codes have resulted in improved labour conditions and relations in the factories 6.3. Labour Issues

Now greater collaboration between Lesotho’s workers’ unions and international buyers’ monitors • Lesotho’s labour laws are now being enforced and proper procedures followed for dealing with disputes • Many more labour disputes are now being resolved at the factory level • However, a number of labour issues still remain: • Many small factories may still not comply with labour codes of conduct • Still tension between expatriate managers and Basotho supervisors and workers • Some interviewees cited problems with poor working conditions and very low wages • Recruitment is still done informally, with factories picking up workers from “outside the gate” of the factory 6.3. Labour Issues

ComMark’s contribution • ComMark’s main contribution to alleviating labour concerns in the sector was found to have come through the Training Co-financing Scheme • ComMark assisted stakeholders such as the LTEA in preparing for wage and other labour negotiations • Also enabled employers and workers to engage with each other through its role within the IMTT 6.3. Labour Issues

Some progress in improving the internal and external image of the sector • International buyers noted benefits in terms of cost competitiveness but expressed concern about poor working conditions and over-reliance on a single market • But Basotho people raised a number of concerns in the focus groups: • Illegal and unfair deductions from workers’ salaries still occur • Expatriate managers and supervisors generally have negative attitudes towards and lack of respect for Basotho workers • Working conditions in the sector are very poor and pay is low • Lack of enforcement of regulations • Concerns about quality of some goods produced in Lesotho 6.4. Branding Issues & Public Relations

Nevertheless, many external stakeholders were encouraged by the positive impact of ComMark’s investment promotion & branding initiatives • Conceptualisation and implementation plan for the One-Stop-Shop • Work with the LNDC to attract regional manufacturers to set up ancillary plants in Lesotho • ComMark played a significant role in helping the LNDC target the right manufacturers for investment promotion and branding initiatives 6.4. Branding Issues & Public Relations

ComMark has made a considerable contribution to the performance and sustainability of the textile and apparel sector in Lesotho • Has played a key role in acting as an ‘agent of change’ in the sector • ComMark’s contribution in improving local supply conditions in Lesotho, and thereby contributing to the retention of jobs and overall growth in employment in the sector between 2002 and 2008, has been considerable • Also made a significant contribution to achieving a variety of positive sector-level outcomes 7. Conclusions

One significant weakness of the Programme has been the lack of sufficient transfer of skills, technical knowledge and capacity to local Basotho in the sector, particularly to staff within the LNDC and LTEA • It is also clear that the Programme has been unable to achieve a meaningful impact in terms of indigenising the textile and apparel sector in Lesotho • The sector still remains in a tenuous position • Over-reliance on a the US market and on AGOA • Threat to the long-term sustainability and viability of the sector posed by possibility that ‘footloose’ foreign-owners of factories will relocate operations to cheaper production destinations 7. Conclusions

Diversify the destination of Lesotho’s garment exports • Promote greater indigenisation of the sector • Produce measurable targets and outcomes in terms of skills transfer and capacity development • Greater interaction between the host institution(s) and ComMark is required in structuring future technical assistance interventions • Develop a succession plan for ALAFA • Actively engage with South African policymakers on the future of SACU 8. Recommendations

Intensify efforts to implement environmental policy initiatives • Develop specific measurable targets and outcomes relating to infrastructure provision • Provide greater support to Basotho entrepreneurs in the sector • Leverage buyers from countries in markets other than the US • Focus more attention on hands-on, grassroots work and interventions in the sector 8. Recommendations

Thank You

COMMARK LESOTHO TEXTILE & APPAREL SECTOR PROGRAMME Impact Assessment