CA. 7h?F Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3547-TA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 5.9 MILLION (AN AMOUNT EQUIVALENT TO US$6.3 MILLION) TO THE UNITED REPUBLIC OF TANZANIA FOR A COAL ENGINEERING PROJECT .May 2, 1983 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Tanzania Shilling (TSh) TSh 1.00 = US$0.11 US$1.00 = TSh 9.40 US$1.00 = SDR 0.927 (As the Tanzania Shilling is officially valued in relation to a basket of the currencies of Tanzania's trading partners, the USDollar/Tanzania Shilling exchange rate is subject to change. Conversions in this report were made at US$1.00 to TSh 9.40 which was the level set in the most recent exchange rate adjustment in March 1982. The USDollar/SDR exchange rate used in this report is that of March 31, 1983.) ABBREVTATIONS AND ACRONYMS CDC - Colonial (now Commonwealth) Development Corporation MOM - Ministry of Minerals MWE - Ministry of Water and Energy STAMICO - State Mining Corporation TANESCO - Tanzania Electric Supply Company TPDC - Tanzania Petroleum Development Corporation toe - tonnes of oil equivalent tpy - tonnes per year FISCAL YEAR Government - July 1 to June 30 TrANZANIA FOR OFFICIAL USE ONLY Coal Engineering Project Credit and Project Summary Borrower: United Republic of Tanzania Beneficiary: Ministry of Minerals (MOM) and State, Mining Corporation (STAMICO) Amount: SDR 5.9 million (US$6.3 million equivalent) Terms: Standard Project Description: The project would support Government efforts ro evaluate the economic potential of the indigenous coal resources of Tanzania. Its objectives would be (i) to provide the Government with updated geological data on the Kabulo Ridge area in the Songwe-Kiwira coalfield, and to complete a feasibility study for commercial development of this deposit, if warranted, and (ii) to assist with .the exploration and delineation of further reserves at Tanzania's only producing coal mine at Ilima. The project would also strengthen the technical and management capabilities of MOM and STAMICO in coal operations and financial administration, Benefits: The project would broaden Tanzania's energy supply base by establishing the costs and most appropriate technical means of extracting coal from new sites. Foreign exchange savings of about US$3 million per year could be achieved by 1987 from industrial uses of domestic coal, if follow-up investments were made at Ilima. In the longer term, confirmation of coal availability at Kabulo Ridge at a reasonable cost would open up attractive alternativas to hydroelectric and hydrocarbon based power generation facilities. Risks: There is a small risk that further coal exploration work will not confirm the existence of economically and technically viable deposits at Kabulo and Ilima. The main exploration component would hence be phased to allow assessment of preliminary geological results, as well as the market outlook for coal, prior to undertaking further expenditures. This document has a-restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization, Estimated Local Foreign Total Project Costs:' US$ million- Kabulo Ridge Exploration and 0.44 3.77 4.21 Feasibility Study Ilima Exploration 0.14 0.15 0.29 Training and Technical 0.13 0.45 0.58 Assistance Sub-total 0.71 4.37 5.08 Contingencies: Physical 0.10 0.54 0.64 Price 0.26 0.99 1.25 Total 1.07 5.90 6.97 Financing Plan: Local Foreign Total % ---------US$ million------ IDA 0.40 5.90 6.30 90% Government 0.67 - 0.67 10% Estimated Disbursements: IDA Fiscal Year 1984 1985 1986 1987 ---------US$ million----------- Annual 0.19 2.36 2.12 1.63 Cumulative 0.19 2.55 4.67 6.30 Rate of Return: Not applicable. Staff Appraisal Report: No separate Staff Appraisal Report has been prepared. 1The project would be exempted from identifiable taxes and duties. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A COAL ENGINEERING PROJECT 1. I submit the following report and recommendation on a proposed credit to the United Republic of Tanzania of SDR 5.9 million (US$6.3 million) equivalent on standard terms to help finance a Coal Engineering Project. The proceeds of the credit would be passed on to the State Mining Corporation by the Government as an equity contribution. PART I - THE ECONOMY 2. The last economic memorandum on Tanzania (Report No. 3086-TA) was distributed to the Executive Directors on January 23, 1981. A revised memorandum, based on the work of two economic missions which visited Tanzania in July and September 1982, will be issued in late 1983. Background 3. At Independence in 1961, Tanzania (then Tanganyika) was one of the poorest countries in the world. Almost solely dependent on subsistence agriculture and a few estate crops, the country had a very modest indus- trial base (less than 5% of GDP), and a very small number of educated and trained personnel. For the first six years after Independence, the Govern- ment's development objectives resembled those of many other less developed countries, stressing growth in per capita income and national self-suffi- ciency in skilled manpower, based on market forces and capital intensive agricultural projects. This approach had a number of drawbacks, such as high investment costs in the agricultural sector, and led in the Govern- ment's view to unacceptable economic and social conditions, such as widen- ing income differentials and unequal opportunities for advancement in the rural areas. In response to this situation, the national development strategy was reassessed in 1967. The new priorities, enunciated in the Arusha Declaration and related policy statements, were directed towards establishing a socialist society, with greater emphasis on broad-based rural development, self-reliance in development efforts, and the intro- duction of mass education. To accomplish these ends, the State, with guidance from the Party, was expected to play the leading role, especially in the reform and creation of appropriate institutions. This led in the late 1960s to the nationalization of large-scale industry, commerce and finance, the creation of numerous parastatal bodies, the formation of ujamaa (cooperative) villages, the decentralization of government (1972), and the mass campaign of viliagization (1974-76). -2- 4. Despite some disruption arising from these major institutional changes during the period, Tanzania managed to show improvemnnts both in social welfare and in macroeconomic performance. Primary school enroll- ments increased by more than 50%, life expectancy rose by almost 5 years, and access to safe water increased in both the rural and urban areas. GDP grew by 4.4% per annum from 1966 to 1973, investment averaged 24% of GDP from 1970 to 1973, and domestic resource mobilization improved with recur- rent revenues rising from 15% of GDP in 1967/68 to 19% in the mid 1970s. However, the productive sectors grew slowly and the rate of return on new investments (which was centered on the industry and transport sectors) was poor. Perhaps the principal disappointment was in agriculture, the domi- nant sector in the economy, which grew by only 2.3% per annum from 1966 to 1973. This growth was also uneven among regions and precluded any narrow- ing of rural-urban income differentials. Tanzania made rapid progress towards localizing key posts in the economy, but large gaps in manpower requirements remained. Dependence on foreign aid to finance both domestic investment and the widening balance of payments gap also increased. By 1973, the issues which were to be so important for Tanzania throughout the 1970s and early 1980s were becoming clear: How quickly could a country with limited trained personnel develop a strong and efficient centrally administered economy? The Government's emphasis on equity was often at the expense of efficiency and incentives; how long could the country afford these costs? What could be done to improve the growth rate of the monetized, productive sectors? 5. The oil price increases and world recession of 1973-74 coincided with two years of below average rainfall in Tanzania. Agricultural produc- tion also was affected by disruptive changes in the rural areas at this time (decentralization and villagization), and there was a serious short- fall in foodgrain production. The Government was forced into the world market, making large purchases of foodgrains for cash. Export crop production also fell during this period and the barter terms of trade dropped by about one-thl'rd during these two years. As a result, the current account deficit rose from US$118 million in 1973 to around US$340 million in both 1974 and 1975. Domestically, the recurrent budget fell into deficit and GovE:nro-,nt bank borrowing rose from TSh.416 million in 1973/74 to TSh.1061. millivo in 1975/76. 6. The Government prepared a program to deal with at least the short-term effects of the crisis and was able to receive some assistance from the IMF and a program loan from the Bank, Under this program, import levels were tightly restricted, wages were frozen, government development expenditures were redirected towards the productive sectors, and the Tanzanian shilling was devalued by 10% against the SDR. Producer prices for food crops were substantially increased and at the same time, the National Milling Corporation (NMC) was instructed to purchase a number of drought-resistant crops such as cassava, sorghum, and pigeon peas in addi- tion to the usual foodgrains like maize. While these steps were taken to increase food production, they also discouraged the production of export crops, weakened the financial position of NMC and required the banking system to extend large amounts of credit to NMC. Aside from the devalua- tion, little scope was given to market forces and Tanzania made no basic changes in its system of administered prices and government controls. The basic weaknesses of the economy persisted: declining export volmes, -3- limited trained manpower, disappointing growth in the monetized and productive sectors, and poor maintenance of existing capital stock and infrastructure, especially in agriculture and transport. 7. Nonetheless, the Government program, boosted greatly by the coffee boom of 1977, additional foreign assistance and reasonable weather for agriculture, was able to keep the economy in balance until 1978. During 1978, the overly stringent import controls were relaxed at the same time as the terms of trade began to deteriorate again. The balance of payments went into deficit and foreign reserves were drawn down. Then, in October 1978, the country was invaded by forces from Uganda. The resulting war, the oil price increases of 1979 and flooding and drought in different parts of Tanzania led to a worsening balance of payments deficit and the Government built up major arrears on its import payments for the first time since Independence. The domestic budget fell heavily into deficit as expenditures (led by defense) rose by 50% from 1977/78 to 1978/79 and revenues improved by only 10%. As a result, Government borrowing from the banking system increased from TSh. 600 million in 1977/78 to more than TSh. 3,000 million in 1978/79. Such borrowing was the major factor in money supply growth, which exceeded 53% in this period. 8. According to the official National Accounts statistics, GDP in constant prices has risen by 4.7% per annum since 1966, and by a slightly higher rate of 5.1% per annum over the past six years. However, this latter trend assumes an 8.6% per annum increase in subsistence agriculture, which seems somewhat overstated in the light of Bank Group project experience and the known marketed surpluses of food. Assuming a more realistic growth rate of 4.0% per annum for subsistence agriculture, overall GDP growth since 1973 would also be reduced to 4.0% per annum. With population growing by around 3.3% per annum, this implies an increase in per capita GDP of only 0.7% per annum. There also has been a change in the structure of the economy over the past seven years, away from the productive monetary sector and towards subsistence and service activities. Excluding public administration, commercial services and trade, the monetary sector has grown by only 2.3% per annum over the past seven years, well below the population growth rate. This change in the structure of the economy has been a major factor hampering the Government's efforts to mobilize domestic resources. 9. Although Tanzania has sustained a high investment ratio, this has not been matched by a similar success in the mobilization of domestic savings or in the return on investments. Up to the mid-1970s, foreign savings had financed 20-40% of domestic investment. However, the depend- ence on foreign savings rose sharply to more than 60% of domestic invest- ment during the crisis years of 1974-75 and again from 1978. The major shortfalls in domestic savings have occurred in the Government sector, where they have actually been negative in some years since 1975. The low return on investments is reflected in the incremental capital-output ratio for the monetary sector, which was around 4.5 at the start of the decade and rose to between 6 and 7 by 1980. 10. Agriculture remains the most important sector in Tanzania, accounting for 90% of total employment, 50% of GDP and 80% of exports. The long-term trend growth rate of agricultural production has hardly kept pace -4- with population growth and apparently has fallen in more recent years as the initial expansion of export crop production (through the mid-1960s) has been reversed. This poor performance cannot be adequately explained by the limitations of the natural environment. Although the importance of rural development has continuously been highlighted in Government statements, including the Arusha Declaration and successive plans, this has not always been reflected in the allocation of resources to the agricultural sector or in policy formulation and implementation. The general direction of the Government's post-Arusha agriculture strategy has also tended to emphasize the transformation of the institutional structure of rural development (tWrough the formation of villaaes and increasing public involvement in the sector) over measures designed to improve agricultural production direct- ly. Many of these institutional changes were introduced too rapidly, with- out careful planning or sufficient recognition that by themselves they could not compensate for inadequate incentives and shortages of skilled manpower and managers. More recently there has been a greater awareness of the role of incentives, and recent price adjustments attest to the Govern- ment's willingness to use them to influence the pattern of agricultural production. Available manpower, however, is still stretched rather thinly throughout the sector, mainly because of the predominant role assigned to the public sector. This has resulted in weakened capacity for policy planning and implementation, especially in the areas of research and extension, and deficient distribution of fertilizers and other on-farm supplies and equipment. Another factor underlying the poor performance of agriculture has been the deterioration of transport services. Road, rail and water services have declined owing to a lack of spare parts, poor maintenan-e and inadequate planning and management. The Current Balance of Payments Crisis and Medium Term Prospects 11. The slow growth in agricultural production, transport bottlenecks and external shocks described above have all contributed to the severe deterioration in the balance of payments over the past three years. Export volumes have fallen to a level one-third below the peaks of the mid-1960s and early 1970s. Furthermore, the terms of trade have declined by 27% since the coffee boom of 1977, due to a sharp increase in import costs, especially for petroleum, at a time when the overall level of export prices has been rising very slowly. Owing to these adverse developments, the purchasing power of Tanzania's exports in 1980 was one-third lower than in 1977 and only one-half of the 1966 level. Part of this shortfall has been offset by additional external resources, including a sharp increase in commodity and program aid to more than US$200 million in 1980, as well as by drawings under the IMF standby program concluded in September 1980. But Tanzania has also had to utilize large amounts of exceptional financing, including suppliers' credits and an increase in import payment arrears. Despite this, the volume of imports has had to be severely curtailed, and in 1982, was still no higher than in the mid-1970s. 12. Given the deterioration in international commodity prices, as well as the limited scope for further exceptional financing, there is little immediate prospect for an improvement in the balance of payments. This continuing balance of payments constraint is inevitably having a debilitating effect on the economy, with lower imports reducing production and maintenance of existing assets, resulting in further falls in exports and available foreign exchange. This vicious circle will be difficult to break, unless there is a substantial injection of foreign exchange and major improvements in producer incentives, parastatal operations, import allocations, the promotion of non-traditional exports, and overall government planning and budgeting. In March/April 1981, the Government introduced a number of significant measures--such as higher producer prices for coffee, sisal and tobacco and the establishment of a Special Agricultural Account at the Bank of Tanzania to ensure that a substantial proportion of foreign exchange earnings are returned to the agricultural sector. This Export Rehabilitation Program was supported by a US$50 million credit from IDA (Cr. No. 1133-TA). 13. During negotiations of the Export Rehabilitation Credit in March 1981, agreement was also reached on a Memorandum of Understanding on Follow-Up Measures. These included more restraint and selectiveness in the public investment program, more emphasis in the recurrent budget on the operations and maintenance needs of the economy, improved foreign exchange buidgeting, a re-examination of the roles (particularly purchasing mandates) of the State-owned crop authorities, the introduction of more payment-by- results schemes in industry and a review of subsidy and cost recovery arrangements in the public sector. The Government also agreed that an independent Advisory Group would be established to assist the Government in preparing a comprehensive program of economic rehabilitation and recovery. 14. The Advisory Group began work in November 1981 and completed its Report in April 1982. The Government adopted a large number of its recommendations and incorporated these in a Structural Adjustment Program which was issued in July 1982. This Program includes a series of important initiatives and propcsals. The development budget for 1982/83 has been substantially cut back for the second year in a row to release resources for the operations and maintenance needs of the economy. Difficult decisions have? been taken in the light of limitations on available foreign exchange and physical resources. The price control system has been reviewed and food marketing arrangements are to be reorganized. The Government has begun to allocate a larger, though still inadequate, share of foreign exchange resources to agriculture through the Special Agricultural Account established under the Export Rehabilitation Program. Agricultural producer prices have been adjusted to maintain them broadly constant in real terms, and the Government has announced its intentions to relax restrictions on interregional trade. It has also opened up the marketing of some funds (mainly minor grains such as millet) to anyone interested in conducting such trade. Special steps are being taken to control Government recurrent spending and to reduce parastatal losses. The functions of key agricultural agencies are being reduced and will be taken over by other bodies, such as cooperatives. All of these measures will serve to trim overall burdens on the public sector and give further encouragement to smallholder production. 15. However, while most of the key issues of economic recovery have been raised in the Government's Structural Adjustment Program, important decisions remain to be taken on matters such as the exchange rate and real adjustments to agricultural prices. Furthermore, the Government has yet to complete the preparation of specific action programs in key sectors (e.g. transport) which would have a measurable impact on production. In -6- the most important economic sector - agriculture - a Presidential Commission has recently prepared a detailed set of recommendations, and a Government policy paper on agriculture has been issued. Measures proposed include the elimination of most consumer food price subsidies, reduction in the field marketing responsibilities of the export crop parastatals, relaxation of import procedures for agricultural inputs and equipment and the strengthening of research and extension services. However, follow-up work is still needed to permit implementation of some of these measures and to define appropriate policies in other key areas, especially the decentralization of input distribution and the diversification of crop marketing channels. Further work is also necessary in estimating the resource requirements of a medium term adjustment program and indicating precisely how domestic and foreign exchange budgets will be administered to support the program. 16. A Bank economic mission reviewed the Government's program in September/October 1982. The recommendations of the Government's Agricultural Commission, and an agricultural sector report prepared by Bank staff were also discussed with senior Government officials in Dar es Salaam in March 1983. Bank staff will assist the Government during the next few months in further strengthening its proposed agricultural rehabilitation program. 17. Discussions with the IMF on a possible Standby Arrangement are continuing. Tanzania has had no access to Fund facilities since December 1980, when the Government failed to meet performance targets under a previous Standby. Following three rounds of discussions in May, June and August 1982, the Government invited a Fund mission to visit Dar es Salaam for three weeks in October 1982. No agreement was reached during this mission, particularly on the appropriate magnitude of an exchange rate adjustment, and discussions were resumed briefly in Washington in March 1983. An IMF mission visited Tanzania again for Article IV consultations in April 1983. 18. Even with a much improved export performance, Tanzania will continue to face a very difficult balance of payments situation, especially over the next three to five years. To sustain an increase in per capita GDP will require increasing amounts of aid in real terms and a careful review of import requirements, especially those for low-priority projects with long gestation periods and high foreign exchange costs. Otherwise the prospects would be for generally stagnant economic activity over the 1980s as a whole, with a substantial decline in per capita incomes. To avoid this, there will need to be continued emphasis on export performance and a concerted effort to improve the level of capacity utilization and effi- ciency in the economy. Furthermore, this must be done without jeopardizing vital food production. 19. Although it may be possible to finance a small portion of the current account gap through commercial borrowings, the scope for this is clearly limited; in addition to the difficulties of raising commercial credit during a period of balance of payments problems, Tanzania simply cannot afford the heavy burden of debt service payments. Therefore, the bulk of the financing requirements will have to be met by additional foreign assistance. Possible sources for this include further drawings from the IMF (which could add US$100 million per annum), deferred payment arrangements and other concessional financing from oil-supplying countries, -7- additional new commitments from traditional bilatera.l and multilateral sources, and a continued movement towards non-project assistance. External Debt 20. Owing to the very concessional terms on which past aid has been given to Tanzania and the Government,'s previous reluctance to use higher cost commercial loans and suppliers' credits, the country's overall debt service ratio has historically been less than 10%. However, the debt service burden is expected to increase as past loans fall due for repayment and new borrowings, including some on commercial terms, are required to meet the widening balance of payments gap. Such borrowings, together with very poor export prospects, could raise the debt service ratio to 15%-20% during the 1980s. In 1981, it is estimated that the Bank held 14% of Tanzania' s external debt outstanding and disbursed (for the Bank Group, it was 33%) and the Bank Group received 21% of Tanzania's debt service. Including Tanzania's share of obligations under East Africa Community loans, the Bank's exposure was 17% (and the Bank Group share, 36%). This level of Bank exposure reflects in part the impact of recent debt write-offs, totalling US$277 million in 1978 and 1979. We are projecting the Bank Group's share in debt service to fall over the coming decade owing to the reduced IBRD component in the lending program and the continued need for Tanzania to borrow funds on less concessional terms from other sources. PART II - BANK GROUP OPERATIONS IN TANZANIA 21. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1963, 54 IDA credits and 19 Bank loans, two of these on Third Window terms, amounting to US$1046.8 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 10 loans totalling US$244.8 millioz. which were extended for the development of the common services and development bank operated regionally by Tanzania, Kenya and Uganda through their association in the East African Community. IFC investments in Tanzania, totalling US$4.7 million, were made to the Kilombero Sugar Company in 1960 and 1964. This Company encountered financial difficulties and in 1969, IFC and other investors sold their interest in the Company to the Government. A new IFC investment of US$1.7 million in soap manufacturing in Mbeya was approved by the Executive Directors on June 8, 1978 and an investment of US$1.5 million in metal product manufacturing was approved in May, 1979. Annex II contains summary statements of Bank loans, IDA credits and IFC investments to Tanzania and the East African Community organizations and notes on the execution of ongoing projects. 22. Bank Group lending in Tanzania has been centered on: (i) agriculture; (ii) transport and communications; (iii) industry; and (iv) education and manpower development. Since FY81, new Bank Group lending has been focussed primarily on rehabilitation and use of existing productive facilities and the introduction of infrastructure and services (such as power generation and education facilities) of long term use to the economy. Projects have been designed to minimize new demands on the Government's recurrent, development and foreign exchange budgets; have been centered on already experienced or financially healthy institutions; have been logistically insulated, as far as possible, from general supply difficulties i.n the economy; and have included considerable technical 8- assistance and training for better maintenance and use of existing capital facilities and more effective resource allocation in the economy. Recent lending along these lines has included a second petroleum exploration project, a third technical assistance credit (focussed on key manpower gaps in the agricultural sector), and a rehabilitation credit for the Dar es Salaam sewerage system. 23. A small number of other projects may be proposed in the agriculture, energy and transport sectors during the next three years. A fourth power project, a rehabilitation program for the port of Dar es Salaam and an eighth education project have been appraised. A sixth highways project, involving mainly the reconstruction of sections of the Tanzania-Zambia highway, and a sugar and cotton rehabilitation project are also under preparation. 'nowever, the design of viable projects in the productive sectors of the economy, especially agriculture and industry, will remain problematical in the absence of a wide ranging economic adjustment program. 24. In addition to financing specific projects, the Bank Group has provided non-project assistance on three occasions in support of Government efforts to deal with its balance of payments difficulties. The first such Credit was made in 1974, the second in 1977, and the most recent, an Export Rehabilitation Program Credit (No. 1133-TA), in April 1981. 25. Project implementation in Tanzania has been adversely affected during the last four years by the disruptions of the Uganda War and the country's extreme foreign exchange difficulties, which have resulted in shortages of fuel and building materials, even when budgetary allocations for purchasing them have been adequate. External financing agencies have been increasing the share of direct and indirect foreign exchange costs covered by pr'ject budgets; however, it is impossible to cushion projects completely, particularly in remote areas, from the ramifications of the economic crisis. Despite implementation difficulties, disbursements have remained remarkably steady; Bank Group disbursements grew from US$58 million in FY78 to US$81 million in FY81 and reached US$114 million in FY82. A comparison with other portfolios in the Eastern Africa Region indicates that Tanzanian disbursements have been slightly below average for the Region, ranging as a proportion of outstanding commitments at the start of the financial year, from 18.9% in 1976 to 15.7% in 1980 (compared with 20.6% and 16.5% in the same years for the Region as a whole). 26. Supervision missions have been concerned with adapting project implementation to difficult factors facing the country or individual sectors, which were not anticipated or have proved worse than expected at appraisal. A major Country Implementation Review was held in Dar es Salaam in October 1982 during which Government officials and Bank staff agreed to recommend the restructuring or discontinuation of several projects which have faced persistent implementation problems. At the same time it was agreed that the Project Implementation Monitoring Unit at the Ministry of Planning and Economic Affairs would. be strengthened as a focal point for further consolidation and itriprovements in the Bank Group program. Intensive supervision, and in the case of the Mufindi Pulp and Paper Project, timely assistance from co-financiers have already had soiMe - 9 - remedial results. Even in the agricultural sector, where constraints on imnlementation have been most severe, there have been important improvements in some projects, e.g. Dairy Development. However, considerable work remains to be done in improving project implementation and disbuis;e;ents. The next Country Implementation Review will be held in October 1983. East African Community (EAC) 27. Developments affecting the East African Community (EAC) were outlined to the Executive Directors in a iieraorandum, dated December 29, 1977, (R77-312) and in a statement made on May 6, 1980 (Sec M80-364). One of the positive results of the ongoing mediation effort has been the Partner States' decision, taken upon the mediator's recommendation, that the East Africa Development Bank (EADB) -- one of the former Community's institutions -- should continue, and a revised charter to this effect has been enacted. The three Governments commented on the mediator's proposals for the three Partner States during their meeting in Nairobi in July 1981, and decided to commence negotiations based on the mediator's proposals. The negotiations started in December 1981 in Arusha and continued in April 1982 in Jinja, September 1982 in Nairobi and December 1982 in Kampala. The discussions have passed the fact finding stage and are now focussing on details of a division formula for assets and debts. While it is generally accepted that both location of assets and the principle of equal rights of all former EAC partners should be taken into account, the weight to be given to these pri ncinips from case to case remains the major issue in the continuing negotiations. III. THE ENERGY AND COAL SECTORS Energy Resource Base and Development Strategy 28. Total energy consumption in Tanzania in 1980 was about 5 million tonnes of oil equivalent (toe) or 7.5 million tonnes of coal equivalent (tce). About 87% of total consumption comes from the country's forest resources in forms of charcoal and firewood, mainly in the subsistence sector. The remaining 13% is commercial energy, consisting of imported crude oil and refined products, hydroelectricity and domestic coal. 29. Per capita consumption of commercial energy (about 52 kg of coal equivalent in 1979) is considerably lower than that of other African countries such as Kenya (180 kg), Angola (208 kg) and Zambia (858 kg). This reflects constrained demand for imported petroleum and the limited access to electricity in the rural areas as well as a less important industrial and mining sector. Nonetheless, Tanzania spent US$260 million in 1980, or about 50% of its foreign exchange earnings, for imported energy. 30. In 1970-75, demand for commercial energy grew at an average rate of 4.9% p.a. In 1975-80, this rate of growth slowed to 1.4% p.a. following steep increases in oil product prices, import restrictions, higher domestic prices and conservation measures and an overall decline in economic - 10 - growth. Consumption of commercial energy is expected to grow at about 3% p.a. in the 1980s, including a 6.6% per annum increase in electricity sales following expansion of the national power grid. 31. The Government's development strategy in the sector is to foster domestic exploration of oil, gas, and coal and hydroelectric sites with a view to eventual developmenc of such resources and to lowering the country's dependency on imported oil. The Government is looking to coal development (i) to satisfy the immediate and future demand of industries for which energy is an important cost item and coal an appropriate fuel (cement, paper, sugar), (ii) to substitute for firewood and charcoal in household uses and hence reduce deforestation, and (iii) to replace fuel oil in power generation, as far as possible, in the 1990s. Institutional Framework 32. The central authority for energy development in Tanzania is the Ministry of Water and Energy (MWE). Three parastatals report to MWE: the Tanzania Electric Supply Company (TANESCO) manages electricity generation, transmission and distribution on the mainland; the Tanzania Petroleum Development Corporation (TPDC) is responsible for exploration and exploitation of oil and gas; and the Rufiji Basin Development Authority (RUBADA) is intrusted with harnessing the multi-purpose potential of the Rufiji River. While none of these institutions would be directly involved in implementing the proposed project, TANESCO and TPDC have a particular interest in seeing the long-term benefits of coal development assessed as a possible basis Lor major power generation facilities in Western Tanzania. 33. The Ministry of Minerals (MOM), which would have the primary role in executing the project, was established in 1980 with responsibility for policy and planning, administration and coordination of the mineral sector; these matters had previously been the responsibility of MWE. The Ministry is working to clarify sector policies and goals in an effort to spur development. In this respect, the Ministry has prepared a mining sector paper which was approved by the Cabinet in February 1983. The paper (i) defines mining policies on private participations, dividends and royalty payments, (ii) suggests short and long term goals, and (iii) establishes mining priorities, essentially for development of industrial minerals, gold and coal. The Ministry is working towards completion of a mining investment code which will encourage greater private sector involvement. 34. MOM has one parastatal organization reporting to it: this is the State Mining Corporation (STAMICO), which is responsible for development and exploitation of the country's mineral resources, including coal (paragraphs 45-47). Coal Sub-sector 35. Resources. The occurrence of coal in Tanzania was first reported around 1880. However, until about 1930, little systematic work was undertaken. At that time, some reconnaissance geological mapping took place, principally in the southwestern part of the country. No additional work took place until 1949, at which time the Colonial Development Corporation (CDC) was invited by the then Government of Tanganyika to evaluate coal deposits of the country with a view to their economic development. This program extended from 1949 to 1957 and extensive geological investigations were conducted. These investigations included diamond drilling in the Ngaka, Mchuchuma and Songwe-Kiwira coalfields. The investigations established the presence of coal in significamt quantities but no development was attempted because of the limited market prospects. Tanzanian coal resources are estimated at about 1,900 million tonnes of which about 300 million tonnes are considered proven. 36. Two further exploration projects have been undertaken in the past six years: a geological investigation of the Songwe-Kiwira coal areas by a team from the People's Republic of China and a study into the feasibility of developing the Mchuchuma coalfield by a consortium of Dr. Otto Gold GmbH, Rodeco GmbH and Saarberg-Interplan GmbH. The latter work was financed by the Federal Republic of Germany (GTZ). The primary objectives were the development of these coals for use in conjunction with the nearby iron ore deposits. Both these exploration projects have recently been completed. The iron ore projects were found to be uneconomic and no further work on iron ore development is to be undertaken in the foreseeable future. 37. Production. Coal production is limited to one small mine in the Songwe-Kiwira coalfield. This mine, the Ilima colliery, has been worked since 1953. Production is about 10,000 tonnes per year (tpy), which is barely sufficient to meet present market demands in Western Tanzania. Moreover, the present mine has not been developed systematically and poses safety hazards. The Association has informed MOM and STAMICO officials and the Mining Commissioner of the imminent dangers involved. At recent production le-rels, the mine will be depleted and closed down in late 1983. However, the proposed project would provide for the exploration of the Ilima area with a view to establishing 10 years of additional reserves in areas adjacent to the existing mine. If there were positive results from exploration, production could be expected to resume by 1985 and reach about 40,000 tpy by 1987. 38. Future Demand and Development Prospects. Although the use of coal in Tanzania is currently limited to domestic heating, brick burning and tea-drying, a major increase in demand is expected to occur during the 1980s among established local industries and among households as a replacement for firewood and charcoal which is being depleted. A breakdown of the latest anticipated industrial demands is to be found in Annex IV (page 2). Other possible users by 1990 are the cement factories at Dar es Salaam and Tanga which are being studied for conversion to coal use (80,000 tpy), the brick factory at Dodoma (16,000 tpy), and textile and sugar industries (up to 150,000 tpy). However, severe transportation problems,including the distances involved (920 km from Songwe Kiwira to Dar es Salaam), will probably inhibit the early development of these markets. The largest potential demand for coal in the 1990s would be for thermal power generation in Western Tanzania. While lower cost power sources may materialize (including new hydroelectric sites currently being investigated), transmission costs appear to favor coal as an eventual energy source in the western parts of the country. Other means of electrical generation (including natural gas and hydro-based facilities) would probably meet demand in the Central and Coastal regions of Tanzania. - 12 - 39. The initial development to meet this increasing demand would be the expansion of the Ilima mine on the Songwe-Kiwira field (paragraph 37). The Government is also looking into two new mine developments: the Kabulo Ridge project and the Ivogo Ridge project, both of which are also part of the Songwe-Kiwira coalfield. This coalfield is most suited for early development because of its relative proximity to infrastructure and markets, compared with the Mchuchuma coalfield - Tanzania's other major coal resource. The proposed project provides for exploration and a feasibility study in support of the Kabulo Ridge development. The Chinese Government is assisting in the development of the Ivogo Ridge project, including preliminary infrastructure, such as an access road and staff housing, for an eventual mine. 40. The preliminary results of the Chinese study indicate that coal development at Ivogo Ridge could be extremely costly because of the requirement for underground mining, which is complicated by poor geological and water conditions; by contrast, the Kabulo Ridge development could likely permit relatively straightforward open pit mining techniques. The Ivogo Ridge project has been reduced in scope in the last year from a production level of 300,000 tpy to 150,000 tpy. Detailed feasibility work on the project will be completed in late 1983. The Government would provide the Association with a copy of the feasibility stujdy for Ivogo Ridge and other sites to be examined as soon as they are available and exchange views with the Association on their findings and recommendations (Section 3.05(a) of the draft Development Credit Agreement). The purpose of such consultations would be to establish, in due course, an appropriate investment program for coal development, taking into account the differential costs associated with various mine sites (paragraph 53). 41. Kabulo Ridge appears to offer excellent prospects for the production of low grade coal suitable for industrial consumers and for thermal power generation at relatively low cost. In general open-pit coal mines are technologically more simple to develop and to operate and require less capital and operating cost per annual tonne of production. Kabulo Ridge appears a classic example of an area where a low overburden to coal ratio open pit can possibly be developed. This is in distinct contrast to Ivogo Ridge where no open-pit possibilities exist. An Indian team which assessed the Songwe-Kiwira coalfield in 1973, evaluated Kabulo Ridge, based on the CDC drilling, and suggested that in excess of 20 million tons of low grade (less than 30 percent ash) coal would be amenable to recovery by open-pit methods. A review of the data used and conclusions reached in the Indian report confirms the probability of these findings. 42. To preclude potentially sub-optimal developments in the industry, the MOM would consult with the Association on the appropriate sequence of future investments in the coal sector, based on the conclusion of exploration work to be carried out under the proposed project and the Government's economic assessment of the feasibility of various coal exploitation alternatives (Section 3.05(b) of the draft Development Credit Agreement and paragraph 53 below). - 13 - Energy Pricing 43. The prices of oil products and other types of energy are controlled by the Government. Oil prices are based on the imported cost of crude oil and refined products plus transportation and tax. However, there are some cruss subsidies (e.g. between kerosene, industrial diesel and fuel oil), to lessen the cost of household energy uses. 44. Because coal has been used only to a limited extent, little emphasis has been given to coal pricing policies or procedures by the Government Pricing Commission. At Ilima colliery, the coal price has been based roughly on production costs plus a mark-up. The Government has indicated its willingness to review and establish systematic coal pricing policies when the prospect of significant coal production is more clearly established. The State Mining Corporation (STAMICO) 45. Organization and Management. STAMICO was created in 1972 as a parastatal corporation to take over mining companies that had recently been nationalized. The Corporation reports to MOM. STAMICO is managed by a Board of 7-11 members chaired by the Minister of Minerals. The General Manager of STAMICO is appointed by the President. The legal functions of STAMICO are extensive, enabling STAMICO to (i) carry on the business of prospectors, producers, buyers, sellers and distributors of minerals; (ii) conduct or engage in prospecting and mining operations at all levels; (iii) acquire interests in any mining undertaking; and (iv) carry on operations as principal agent or contractor. In practice, STAMICO acts as a holding company for six operating subsidiaries, and directly oversees mine project work up to the point of commercial production. STAMICO also engages in mineral marketing on behalf of its subsidiaries and imports certain commodities (e.g. salt) at Government request. 46. STAMICO's financial condition and management capability are weak. No formal financial statements have been prepared since 1980, and those completed previously (1978-80) were considered by the Tanzania Audit Corporation to be inadequate. The position of Director of Finance is vacant, and only four out of the 16 senior financial and accounting positions in the Finance Department are filled. Strengthening of STAMICO's financial and accounting structure and organizational capability are essential to the sound management of its future operations (paragraphs 55-56). 47. STAMICO has recently prepared preliminary financial statements for 1981 and 1982 and has agreed that audited accounts for those years will be submitted to the Association by September 30, 1983 (Section 4.03 of the draft Project Agreement). As a part of the proposed project, training and technical assistance in financial accounting and management systems would be provided to strengthen STAMICO's operations. (For additional information regarding STAMICO, see paragraph 55 below and Annex IV, pages 3 and 4.) - 14 - Previous Bank Group Lending in the Energy Sector 48. The Bank Group has made three loans to Tanzania for the development of TANESCO's hydroelectric facilities. The first was Loan 518-TA for US$5.2 million to cover part of TANESCO's development program for the period 1967-70; the second was Loan 715-TA for US$30 million and a supplementary loan for US$5 million to finance part of the construction of the First Stage of the Kidatu Hydroelectric Scheme, which was completed in 1975 (Project Performance Audit Report, December 19, 1979); and the third was for the Second Stage of the Kidatu Hydroelectric Project, with Loan 1306-T-TA for US$30 million and a supplementary Special Action Credit of US$7.0 million, which was completed in 1981, and for which a project completion report is being prepared. These projects were implemented satisfactorily, and a fourth hydroelectric project has recently been appraised. Tanzania has received two IDA credits for petroleum exploration, the first for US$30 million in 1980 for the initial phase of the Songo Songo offshore exploration program, and the second in 1981 for US$20 million to finance the second phase of this program. These projects were also implemented satisfactorily, and a combined completion report is being prepared. There has been no previous direct Bank Group involvement in Tanzania's mining sector. IV. THE PROJECT Background 49. In 1979 a Bank mission carried out a preliminary assessment of the coal sub-sector in Tanzania. A follow-up identification mission in September 1981 singled out the Kabulo Ridge area of the Songwe-Kiwira coalfield as having potential for the development of an open-pit coal mine. The proposed project was prepared with the cooperation of MOM and STAMICO and was appraised in December 1982. A follow-up mission visited Tanzania in February/March 1983. Negotiations were held in Washington on April 19-22, 1983. The Tanzanian delegation was led by Mr. S. Lwakatare, Principal Secretary, Ministry of Minerals, and included Mr. W. Manning, General Manager of STAMICO. A Credit and Project Summary is given at the beginning of this report. A Supplementary Project Data Sheet is attached as Annex III. 50. Project Objectives and Description. The proposed project would support Government's efforts to evaluate the economic potential of the indigenous coal resources of Tanzania. The project's objectives would be: (i) to provide the Government with updated geological data on the Kabulo Ridge area in the Songwe-Kiwira coal field and to complete a feasibility study for this deposit, if warranted; (ii) to further assist with the exploration and delineation of reserves at the Ilima colliery; and (iii) to strengthen the technical and managerial capabilities of MOM and STAMICO in coal operations. - 15 - 51. The project would consist of three components: (a) exploration/feasibility studies of Kabulo Ridge. The exploration is to confirm and supplement the existing data to a stage at which the potential for economic open-pit coal mining could be clearly established and a subsequent feasibility study for an open-pit coal mine couild be undertaken; (b) exploration of the Ilima coal reserves in the immediate vicinity of the Ilima colliery; and (c) technical assistance and training to strengthen the capabilities of both the MOM and STAMICO in the coal sub-sector. Detailed Features 52. Kabulo Ridge Studies. This work would be a three-phase program carried out sequentially. Detailed exploration work and the feasibility study, both of which would require significant additional expenditures, would be carried out only after successful completion of the previous phase. The first phase would consist of assessing and interpreting the available geological data base, and performing initial geological fieldwork. A new interpretation of the area would be prepared as a basis for identifying priority drill sites and rejecting unpromising areas. The geological fieldwork would include the drilling of about fifteen exploratory holes in the area. The second phase would be designed to obtain all the data required for a feasibility study. It would include the drilling of about 120 drillholes and the subsequent evaluation of all data obtained. Reliable information would be obtained on coal quality as well as the physical characteristics of the associated floor and roof rock strata which would be important for any mine development plan. Additional geological mapping, topographic mapping, test pitting, and bulk sampling would also be carried out. Both phases are necessary to confirm that the deposit can be mined by open pit methods. The third phase would be a feasibility study for an open-pit coal mine which would determine the economic, financial and technical viability of the most favorable area located by the exploration program. The feasibility study would evaluate alternative mining systems that could be used to recover the coal and recommend the optimum system. The capital and operating costs for the selected method would be determined. A study of infrastructure requirements for the proposed mine would include consideration of supplying coal both for a mine mouth power plant and for the industrial market, and long-term market prospects would be assessed. The safe operation of the mine and the training of both management and labor would be provided for in the development plan. Special care would be taken to assess the environmental impact of the mine development, particularly the risk of possible pollution through acid water drainage from the mine. The impact on the local population would also be assessed carefully. 53. Regular progress reports and final reports for each phase would be prepared and submitted to the Association. Transition from phase one to phase two would be undertaken only after careful appraisal of the results of the earlier phase and agreement with the Associatioa on the work program - 16 - for the next phase. Transition from phase two to phase three, which entails commitment to feasibility work, would be based on satisfactory review by the Association of the detailed completion report for phase- two as well as an assessment of economic considerations, such as the market outlook for coal at the time, the likely development costs of alternative production sites and the availability of investment financing for the technical options identified (Section 2.06(c) of the draft Project Agreement and Schedule 1, paragraphs 3(b) and 3(c) of the draft Development Credit Agreement). If the results of the earlier work did not justify undertaking a feasibility study, the balance of funds for this component would be cancelled. 54. Ilima Exploration. The second component of the project would be the exploration of the Ilima area of the Songwe-Kiwira coalfield to determine whether there are additional reserves for continued production. There are three blocks of coal reserves in Ilima. The present mine is operating in only one of these blocks and it may be exhausted by December 1983; the other blocks have yet to be properly explored. The proposed program at Ilima would involve drilling 10-12 boreholes over 4-6 months followed by preparation of an appropriate mining plan. 55. Technical Assistance and Training. The project would also attempt to build up a nucleus of expertise at MOM and STAMICO to manage the development of the coal sub-sector in Tanzania. The technical assistance would be internationally recruited and would include a full-time secondment to MOM of a senior coal mining adviser, attached directly to the Minister's and Principal Secretary's office; the adviser would be appointed by February 1, 1984 (Section 3.02(a) of the draft Development Credit Agreement). He would provide guidance to MOM on coal sector development, including coordination of sectorwide investment analysis (paragraph 53), and would establirsh a training program for MOM and STAMICO in conjunction with the training officer at STAMICO. A full-time senior financial, expert would also be appointed to the Finance Department of STAMICO by December 31, 1983 (Section 2.03(b) of the draft Project Agreement). The expert would be responsible for organizing and structuring a financial management and control system for STAMICO and its subsidiaries. The senior financial expert would also establish a training program for the accounting staff of headquarters and projects divisions, and provide guidance and training to the junior staff. STAMICO would appoint two senior accountants and appoirt three other accountants to positions now vacant in the two accounting divisions by January 1, 1984 (Section 3.01 of the draft Project Agreement). 56. Training would be provided in coal geology and mine engineering so that future operations could be handled principally by local specialists. Two geologists would be trained initially by the consultants at the drill camp at Kabulo Ridge. After a period of six to eight months at the site they would each spend four to six months abroad at an exploration camp and at the consultants' office. This would enable them to prepare the detailed geological reports required for mine planning and operation. The three mining engineers at Ilima would be trained abroad in coal mine planning, development and extraction (in geological conditions comparable to those at Ilima) and in mine safety. The overseas training period would last about two months for each person, part of which would be spent in an institute of mine planning and design, and the rest in a coal mine. - 17 - Project Execution 57. The project would be implemented under the authority of STAMICO, with guidance from MOM. While weak in many respects, STAMICO is the appropriaLe institution for this purpose. Major emphasis would be given to strengthening the agency through technical assistance and training (paragraphs 55-56). Steps have already been taken to establish a project implementation unit (PIU) within STAMICO which will report to the Director of Mining Development. The PIU will be chaired by a senior administrator and include a senior geologist, a senior coal mining engineer and a senior financial manager. These staff will have qualifications satisfactory to the Association (Section 2.02 of the draft Project Agreement). Work in the PIU would be part-time, allowing STAMICO to make use of some of its existing staff without diverting them from their existing responsibilities. Following the exploration work at Kabulo Ridge, a review would be made by MOM and the Association to determine if additional staffing of the PIU was required. 58. Internationally recruited geology and mining consultants would be retained to undertake the Kabulo Ridge component of the project and to assist STAMICO staff with exploration and mine planning at Ilima. The consultants would be responsible for training a number of local geologists who would be associated with the project at the working level from its inception. Since Tanzania has other potential coalfields, the acquisition of appropriate managerial and technical skills in the coal sector is considered essential. The consultants would report directly to the PI-U who would oversee their activities. The appointment of consultants on terms and conditions acceptable to IDA would be a condition of effectiveness of the proposed credit (Section 5.01(a) of the draft Development Credit Agreement.) 59. Mineral rights required for the execution of the project would be issued to STAMICO by the Government in accordance with the Mining Act of 1979 (Section 3.06 of the draft Development Credit Agreement). Receipt of evidence that such rights had been issued would be a condition of effectiveness of the credit (Section 5.01(b) of the draft Development Credit Agreement). Project Cost and Financing 60. The total project cost is estimated at about US$7.0 million equivalent, of which US$5.9 million would be in foreign exchange. Detailed cost estimates are shown in the Credit and Project Summary. Most of the foreign exchange costs would be incurred on the Kabulo Ridge exploration (US$4.4 million) and feasibility study (US$0.7 million); the remaining costs would be accounted for by the Ilima exploration component (US$0.2 million) and technical assistance and training (US$0.6 million). The average cost of the foreign consultancy services for exploration and feasibility work at Kabulo Ridge, including travel, subsistence and other reimbursable costs, is estimated at US$11,000 per man-month which is considered reasonable. These cost estimates are based on December 1982 prices and include 10% for physical contingencies. Price contingencies are based on assumed annual inflation rates of 14.0% for 1983, 13.0% for 1984, 12.0% for 1985 and 10.0% for 1986 for local costs, and 8.0% for 1983, 7.5% - 18 - for 1984 and 7.0% for 1985 and 6.0% for 1986 for foreign expenditures. The project would be exempted from identifiable taxes and duties. A short list of consultants to carry out the Kabulo Ridge component of the project should be ready by June 1983. It is expected that proposals would be invited in July 1983 and a contract awarded in November 1983. 61. The proposed Credit of SDR 5.9 million (about $6.3 million equivalent) would cover 90% of total project costs, including 100% of the foreign exchange costs and 30% of local costs (US$300,000 equivalent). The credit would be made to Government on standard IDA terms. The proceeds of the credit would be passed on to STAMICO by Government as an equity contribution. In the event that a mine development project were undertaken with Bank Group financing, the engineering costs financed under the credit would be capitalized and its proceeds refinanced. The balance of project expenditures in local currency, estimated at US$0.7 million, would be financed by the Government. Procurement and Disbursement 62. Consulting services for the exploration and mine feasibility study would be obtained in accordance with the Association's Guidelines for the Use of Consultants. These specialized consulting services would cost about US$2.1 million. The drilling activities (US$2.5 million) would be sub-contracted by the consultant in accordance with international competitive bidding (ICB) procedures and subject to approval by STAMICO and the Association. Procurement of equipment such as bulldozers, trucks and jeeps would be by limited international tendering acceptable to the Association. Individual packages would be limited to US$150,000 with an aggregate ceiling of US$0.5 million. The Association would require prior review of all ICB packages while the equipment procurement would be subject to selective prior review of approximately 50% of the total value. 63. The credit would be disbursed against: (a) 100% of foreign expenditures and 85% of local expenditures on equipment, vehicles and spare parts; (b) 100% of total expenditures on drilling and exploration services; and (c) 100% of foreign expenditures and 30% of local expenditures on consultants' services and training. Reports and Audits 64. STAMICO would maintain separate project accounts which would be audited annually by an independent auditor acceptable to the Association. STAMICO would also be required to submit to the Association audited annual accounts for 1981 and 1982 and for subsequent years during the project, not later than six months after the end of each fiscal year. STAMICO would submit progress reports to the Association within 45 days of the end of each quarter, and a final report for each phase of each component within three months of the completion of that phase (Section 2.06 of the draft Project Agreement.) Environmental Issues 65. The proposed project itself would not entail significant environmental issues, as disturbances of the surface, such as drill sites - 19 - and test-pits, would be minor. The project, however, would include a preliminary assessment of the environmental impact' of any eventual coal' mining-project and attempt to minimize any adverse potential edffects. Benefits and Risks 66. The project would be an important step towards broadening the energy supply base in Tanzania by increasing the supply of indigenous coal and thus substituting for imported fuel. In the short term, the project would provide the basis for coal production from the ilima colliery of 10,000 tonnes in 1985, increasing to 40,000 tonnes in 1987. In view of the anticipated demands for coal in Western Tanzania from the Mbeya cament plant, and the local tea estates, this increased coal production wiould provide savings in imported coal of approximately US$1.0 million in 1985 and US$3.2 million in 1987 when full production is achieved. Following development of lower cost coal at Kabulo Ridge, savings in foreign exchange from import substitution would increase 'substantially even if international fuel prices were to decline further from present levels. In the medium term, if coal can be produced at.US$25 per tonne, which is a reasonable expeL3LLion for the Kabulo Ridge project, it ccule be an economically attractive basis for power development in Western Tanzania in the early 1990's. 67. The project would provide important institutional benefits to MOM and STAMICO through technical assistance in geology, mining and finance that would strengthen the management of the respective institutions in operations, reconnaissance and development of coal resources. Personnel of MOM and STAMICO would benefit from the transfer of exploration and engineering technology through on-the-job and more formal training to be financed under the project. 68. There is a risk that the proposed exploration activities would not result in establishing economically and technically viable coal deposits. However, the extent of geological work already conducted in the area makes this risk accentably small. To further minimize the risk of unproductive expenditures, the second and third phases of the major exploration component of the project would only be undertaken following a careful assessment of previous results and the market prospects for coal in the light of other possible coal mine developments at the time. PART V - LEGAL INSTRUMENT AND AUTHORITY 69. The draft Development Credit Agreement between the United Republic of Tanzania and the Association, the draft Project Agreement between the Association and the State Mining Corporation, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. Special conditions of the credit are listed in Section III of Annex III. 70. It would be conditions of effectiveness of the proposed credit that consultants, satisfactory to the Association, had been appointed to undertp':e the major exploration and engineering activities at Kabulo Ridge, - 20 - and that STAMICO had been assigned the necessary mineral rights by the Government to permit such work (Section 5.01 of the draft Development Credit Agreement). It would be a condition of disbursement in respect of the second and third phases of the Kabulo Ridge component of the project that the conclusions and recommendations of the preceding phase and the work program for the subsequent phase had been accepted by the Association (Schedule 1, paragraphs 4(b) and 4(c) of the draft Development Credit Agreemuent). 7i. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 72. I recoimmend that the Executive Directors approve the proposed Credit. A. W. Clausen President Attachment May 2, 1983 Washington, D.C. AN N i IAX I -2z1 - E1Pgc I fF 6 TABIE 3A TANZ.ANIA -'!;CIAL. [I C.AT(Rh l)ATA SIIEFT TA.NZANIA RF.FERF,NCE :ROUPS (WEIG;TED A¶.yLA(:IS ARF.A (T i US AUNi S!L. KM.) - MnST RECFNT FSTIH TE- IOTAL. P FOST RECENT LOW INCUME MlLF;L: AL;RICULI'URAL 401.4 1960 /b 1970 /b ESTIMATE /b AFRICA SOUTH np SAHARA AFRIC; Lol:l! J !o SAHLARA GNP PER CAPITA (IS5) 70.0 130.0 2O.OD 250.8 1053.2 ENERGY CONSUP0'TION PER CAI'ITA (KILOCkA.MS OF COAL LQUIVALErT) 41.1 63.0 50.5 66.5 610.1 POPULATION AND VITA!. STATISIICS PLOPULATION, HlO-YE.AR (l;USANDS) 10201.0 13300.0 18650.0 URBAN POPULATION (PERCENT OF TOTAL) 4.8 6.9 11.8 17.8 28.3 POPULATION PROJECTIONS POPULATION IN YEAR 2(W0O (MILLIONS) 36.2 STATIONARY POPULATION (MILLIONS) 110.5 YEAR STATIONARY POPULATION IS REACHED 2100 POPULATION DENSITY PER SQ. KM. 10.8 14.1 19.1 27.7 54.7 PER SQ. KM. AGRICULTURAL LAND 26.6 33.4 44.9 86.7 129.9 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 42.7 44.4 46.0 44b8 .46.0 15-64 YRS. 54.3 52.5 50.9 52.3 51.1 65 YRS. AND ABOVE 3.0 3.1 3.0 2.9 2.8 POPULATION GROWTH RATE (PERCENT) TOTAL 2.2 2.7 3.4 2.7 2.8 URBAN, 5.0 6.3 8.7 6.2 5.2 CP.'DE BIRT'I RATE (PER THOUS:,'!R' /'.6 46.8 46A3 47.3 47.2 CRUDE DEATH RATE (PER THOUSAND) 22.4 18.6 15.1 19.5 15.7 GROSS REPRODUCTION RATE 3.0 3.1 3.2 3.2 3.2 FAMILY PLANh'lNG ACCEPTORS, ANNUAL. (THOUSANDS) .. .. 93. USERS (PERCENT OF MARRIED WOMEN) .. .. .. FOOD AND NUTRITION INDEX OF F OOD PRODUCTION PER CAPITA (1969-71-100) 95.0 104.0 89.0 88.7 90.7 PER CAPITA SUPPLY OF CALORIES (PERCENT OF R.QUIREKEN TS) 90.0 91.0 86.5/d 90.2 93.9 PROTEINS (GRAMS PER DAY) 46.3 48.8 47.671 53.1 54.8 OF WHICH ANLMAL AND PULSE 17.8 21.2 20.5/df- 18.4 17.0 CHILD (AGES 1-4) MORTALITY RATE 33.1 25.6 19.4 26.7 23.9 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 41.7 46.7 51.6 45.6 51.0 INFANT MORTALITY RATE (PER THOUSAND) 151.5 125.3 102.9 129.9 118.5 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 13.0 39.0/e 23.9 URBAN .. 61.0 88.07; 54.9 RURAL .. 9.0' 36.07e 18.5 ACCESS TO EXCRETA DISPUSAL (PERCENT OF POPULATION) TOTAL .. .. 17.0/e 25.8 URBAN .. .. 88.07Te 63.1 RURAL .. .. 14. 0o7 20.2 POPULATION FER PHYSICIAN 18216.1 22240.8 17553.1/d 32097.3 14185.2 POPULATION PER NURSING PERSON 11886.9/f, 7162.1 2387.57U 3264.6 2213.2 POPULATION PER HOSPITAL BED TOTAL 595-5/8 717.8 499.8/cr 1225.0 1036.4 URBAN 55.37; 58.6 81.3/h 249.5 430.8 RURAL 1532.9.j .. 119./d 1712.1 3678.6 ADMISSIONS PER HOSPITAL BED .. .. HOUSING AVERAGE SIZE OF HOUSEIIOLD TOTAL .. 4.41 . URBAN 3.1/h 3.2/.1 RURAL - 4.57i 5.3 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. .. URBAN 1.8/h .. RURAL .. .. ACCESS TO ElECIRICITY (PERCENT OF DWEI.LINGS) TOTAL .. .. URBAN, .. . RURAL .. .. ANNF'X I - 22 - Page 2 of 6 TAix,E 3A TANZA31r --SOCIAL INDICATORS DATA StlEET TANZANIA REFERENCE GROUPS (WEIGHTED AVERAGES - MOST RECRNT ESTIMATE )L- MOST RECENT LOW INCOMI MI E COME 1960 Lb 1970 /b ESTIMATE /b AFRICA SOUTH OF SAHARA AFRICA SOUTH OF SAHARA EDUCATION ADMZED ENROLLMENT RATIOS PRIMARYs TOTAL 25.0 39.0 104.0 63.2 83.3 MALE 33.0 47.0 113.0 72.7 96.1 FEMALE 18.0 31.0 94.0 50,3 80.4 SECONDARY: TOTAL 2.0 3.0 4.0 10.2 15.3 MALE 2.0 4.0 5.0 13.2 19.4 FEMALE 1.0 2.0 2.0 6.6 11.3 VOCATIONAL ENROL. (% OF SECONDARY) 22.6 ., 1.6 7.9 4.7 PUPIL-TEACHER RATIO PRIMARY 45.3 45.9 41.4 47.4 38.6 SECONDARY 19.6 16.4 19.0 26.2 23.4 ADULT LITERACY RATE (PERCENT) 9.5.j 28.1/1 66.0/c 34.0 35.6 CONSUXPTION PASSENS-R CARS PER THOUSAND POPULATION 2.4 2.5 2.6/d 3.0 31.9 RADIO RECEIVERS PER THOUSAND POPULATION 2.0 11.3 27.7 34.8 71.8 TV RECEIVERS PER THOUSAND POPULATION .. 0.3 0.3 1.7 17.9 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULA.ION PER THOUSAND POPULATION 2.5 .. 10.1 2.9 19.1 CINEMA ANNUAL ATTENDANCE PER CAPITA 0.5 .. 0.2/d 1.1 0.6 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 4734.7 5841.7 7660.5 FE.ALE (PERCENT) 37.2 36.7 36-0 34.1 36.5 AGRICULTLURE (PERCENT) 89.0 86.0 83.0 78.4 56.5 INDUSTRY (PERCENT) 4.0 5.0 6.0 9.2 17.7 PARTICIPATION RATE (PERCENT) TOTAL - 46.4 43.9 41.1 41.4 37.0 MALE 59.1 56.3 53.1 53.9 46.9 FEMALE 34.0 31.8 29.2 29.1 27.2 ECONOMIC DEPENDENCY RATIO 1.0 1.1 1.2 1.2 1.3 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. 24.7 HIGHEST 20 PERCENT OF HOUSEHOLDS .. 50.4 .. .. LOWEST 20 PERCENT OF HOUSEHOLDS .. 5.8 LOWEST 40 PERCENT OF HOUSEHOLDS .. 16.0 POVERTY TARGET GROUPS ESTIMATED ABSOLL7E POVERTY INCOME LEVEL (USS PER CAPITA) URBAN , .. .. 147.0 134.3 507.0 RURAL .. .. 109.0 82.9 200.6 ESTIMATED RELATIVE POVERTY INCO7a LEVEL (US$ PER CAPITA) URBAN .. .. 125.0 96.4 523.9 RURAL .. .. 74.0 60.4 203.6 ESTLMATED POPLULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN ,, ,, 10.0 39.3 RUJRAL .. .. 60.0 69.0 Not available Ndt applicable. NOTES La The group averages for each indicator are population-weighted arlthmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. Ib Unleas otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Hlost Recent Eatimate, between 1978 and 1980. /c 1976; /d 1977; /e 1975; /f Registered, not all practicing in the country; A 1962; /h 1958; Ii 196-, / for Mainland Tanzania only. May, 1982 '. - 0 :.- I- - B -t B - co B. I 2BB ~ BB t . BB U8B BBa t . B.5 ; 7B B B BBEB B* B. B BBB B~ BB B BBBB BBB BBB BBB B B B B - B B B BB - B BB BB -.BB BK 4 B-. Z BBBB BB B B B B. " BBB . B B.BBBBB B BBB BBBBBB B 0 BB B BB BBBBBBBB BBB BB B BBBB BB B BB -BB B B BBB.B. .B - B BBB B'-BB . B B B BB BBB BBB .BB BBB.B BBBB B BR BBBBBBBB B B BBBB B> B I B B- B B B BB B , BB B BB -B - BB BItBB B~ B ~B BBBBBB BBB BBI 9B . .B ..B..B.B ,.B . B .B.BB . . 7B- B B '~~fl BBBBBB It BB B , B B B B 3 B B B B B B B B .- . .B .- . . B B B BB.B~BBBB B B BBB Z,BB BBBB.BBB B B B BBBBBBBBB -B B B BB B B B B B BBBBBB BBB BB BB BBBB B . BB B BTB B BB BB B . BB BB B.BBBBBBI- B BB BBBB~BB-BBE A B B BB BB B B BBBBB BBB BBB B B B BB B B B BB B B B B . BB B B B BB BB B B B BA .--. BB B.B.B. B Z- . B BB BB.BB B. .B BB B arB B BB .BB B B B B B BBB BBBB BBB-B BBBB B -K EB B OBBB B B B B B .BBBB BB . B BB B B B BB B B B B B BBBBBBB BB B *B BBBBBB. IB7 R B V B BB BB BBBB B B B B B BB. - BB BB B B B B B BB. B . BB B B B BR ANNEX I Page 4 of 6 - 24 - Pop.i I at ion * 17 .5 mi InI n (mid- 1979) G!tP Per Capita: USS270 (1979) TANZANIA - ECONOMIC_INOICATOR Sb/ Amount (million US$ at At ntnal Growth Rates () - Indicator current prices) - Actual a/ Projected. - 1979 1976 1977 1978 1979 1980- 19181 1982 1983 1984 985 !ATIONAL ACCOI'IrS Gross domestic/productd/ e/ 4,564.3 6.7 4.7 5.4 3.9 -1.5 3.7 3.6 3.6 3.6 . 3.6 Agriculture-/ 2,210.2 9.8 7.5 7.4 8.0 -6.1 4.2 3.6 3.6 3.6 3.6 Induitry 549.0 0.9 3.1 -2.2 3.1 - 3.0 4.0 4.0 4.0 4.0 Services 1,374.8 3.4 5.5 6.5 3.4 4.0 3.4 3.4 3.4 3.4 1.; Consumption 4,115.8 1.6 12.3 14.6 -3.4 1.7 4.6 1.9 3.2 3.1 3.? Gross investment 958.6 11.5 2.1 3.8 10.9 -6.2 3.6 3.6 3.6 3.6 1.6 Exports of GNFS 647.9 16.8 -22.8 -2.4 -2.8 -9.6 1.7 7.9 5.2 5.2 5. 3 imports of O,NFS 1,158.0 O.5 4.4 34.9 -19.2 1.9 -2.9 -1.) 2.9 2.6 3.1) Gross national sav ings 468.0 64.5 -6.8 -58.0 99.-4 -16.9 -23.9 19.0 8.8 9.7 8 .i ~~~~~- - .- ..- -- - -- - - - .- -- -- - -- - - - -- -- -- -- -- ---------.------------------.. F? IC E S GOP deflator (1978 = 100) 77,2 92.4 100.) 108.5 124.8 140.4 154.4 168.3 181.8 194.5 Exchange rate (T.Sh. per USS) 8.4 8.3 7.7 8.3 8.2 8.2 8.2 8.2 8.2 8.2 Share of GDP at Marker Priqes (e/) Average Annual Increase (,,) a curr -It pri':e-,1 - (at constant 1978 prices. 1970 1975 L980 1985 1990. 1970-75 1975-80 1980-85 '93959(0 Gross domestic producte/ 100.0 10J.O 100.) 100.0 100.0 4.9 4.1 3.6 3.6 Agroculturee o 36.9 36.9 47.5 47.8 47.9 2.1 5.8 3.7 3.6 Industry 15.5 14.5 11.9 12.1 12.3 3.7 0.7 3.9 4.0 Services 37.2 37.8 31.1 30.8 30.6 6.6 4.6 3,4 3.4 Consumption 81.9 91.7 90.3 88.2 86.4 5.9 6.0 3.1 3.1 Gross investaent 22.5 2;.1 20.0 18.0 18.0 0.2 4.6 2.1 3.16 Exports SNES -24.0 -18.2 -12.! -13.9 -15,2 -5.3 -6.2 5.3 5.4 imports CNFS 28.4 31.0 22.5 20.2 19.7 -3.8 4.2 1.1 3.0 Gross national savings 18.3 7.8 9.g 11.6 13.5 -2.4 -3.6 5.7 7.0 As % of GDP PU3LIC FINAMM. 1970 1975 1979 Currea, C.Z-.Uo 17.5 20.2 13.5 Current expen-li-:jres 16.2. 20.2 23.9 Surplus (+) or Iefi.it ˘-) 1.i - -5.4 Capit3i expendticue. 8.3 11.6 12.7 Foreign financing 2.0 5.4 6.7 1970-75 1975-80 1980-85 1985-90 OTHELR INDICATORS GN? growth rate (7) 4.7 4.2 3.6 3.6 GNP per capita growth rate (Z) 1.3 0.8 0.2 0.2 ICOR 5.0 5.5 5.1 5.1 Marginal savings rate -0.1 -0.1 0.1 0.2 Import elasticity -0.8 1.0 0.3 0.8 e/ Estimate b/ Apart from trade projections, which include small but offsetting amounts of Zanzibar trade, all data in this table are for Mainland Tanzania only. e! Projected years at constant prices. d' At market prices; components are expressed at factor cost and will not add due to exclusion of not indirect taxes and subsidies. e! Historical trend from 1973 to 1979 is based on official estimates, which include subsistence production growth rate of 8.6% per Bonum. We estimate that a more realistic growth rate for subsistence production over this period would be-nearer 4% per annum, reducing agricultural growth to 3.4% per annum and CDP growth to 3.6% per annum. ANN EX I Page 5 of 6 Population : 17.5 million (mid.1979) 25 - GNP Per Capita: USS270 (1979) TANZANLA - EXTERNAL TRADE-' Amount Annual Growth Rates (7) Indicator (million US$ at (at constant 1978 prices) current prices) Actujal 8/ Projected 1979 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 EXTERNAL TRADE Merchandisc exports 543.6 7.8 -9.4 -6.5 6.1 -7.8 2.1 8.5 5.3 5.3 5.3 Major primary products 339.5 9.5 -20.1 -9.7 -0.1 -4.8 3.0 8.8 4.1 4.1 4.1 Others 204.1 3.3 -18.1 2.7 21.5 -14.0 - 8.0 8.0 8.0 8.0 Merchandise imports 1,099.6 -16.4 7.7 36.8 -18.8 1.0 -3.4 -1.5 2.8 2.3 2.9 Foodgrains 19.3 -65.2 23.3 -14.7 -42.4 334.0 -3.0 -47.5 - - - Petroleum 171.7 11.0 -11.5 12.8 -8.9 2.1 -7.9 5.0 3.1 3.3 3.4 Machinery and equipment 515.0 -15.2 25.1 55.1 -10.0 -7.6 -5.4 2.9 2.9 2.9 2.9 Others 393.6 -13.9 0.7 33.9 -28.9 -7.6 0.7 3.0 3.0 3.0 3.0 ?PICES Export price index 77.4 106.9 100.0 106.9 122.1 116.6 123.8 136.2 149.4 163.4 Import price index 81.1 89.5 100.0 118.2 138.2 155.7 173.3 188.5 234.4 220.9 Terms oE trade index 95.4 119.4 100.0 90.4 88.3 74.9 71.4 72.2 73.1 74.0 Composition of Merchandise Trade (-/) Average Annual Increase(Z) (at current prices) (at constant 1978 prices) 1970 1975 1980 1985 1990 1970-75 1975-80 1980-85 1985-90 Exports 100.0 100.0 100.0 100.0 100.0 -4.5 -5.2 5.6 5.5 Major primary products 59.2 66.3 69,,2 67.6 63,5 it.2 -6.9 5.0 4.1 Others 40.8 33.7 30.8 32.4 36.5 -12.9 -1.0 6.8 8.0 Imports 100.0 100.0 100.0 100.0 100.0 1.8 2.6 0.9 3.0 Foodgrains 2.5 15.3 9.2 4.5 3.9 44.8 -5.8 -14.1 - Petroleum 8.5 11.9 12.7 13.1 13.7 4.8 - 2.0 3.9 Machinery and equipment 35.2 30.8 41.2 38.8 36.9 0.7 11.1 1.7 2.9 Others 53.8 42.0 36.9 43.6 45.5 -1.7 -3.3 2.7 3.1 Share of Trade with Share of Trade with Share of Trade with Industrial Countries (%) Developing Countries (%) Capital Surplus Oil Exporters (x) 1970 1975 .1978 1970 1975 1978 1970 1975 1978 DIRECTION OF TRADE Exports 54.0 48.2 68.0 40.0 43.3 23.2 0.6 0.4 0.7 Imports 57.9 59.7 74.2 27.3 25.1 17.9 1.2 3.2 0.8 a/ Estimate V/ Data are for all Tanzania (Ma3i-1and and Zanzibar) ~2 ~12 - T .0 - '.3. 0 .0 -- Z co'*-3-33-.. , - 1K ---