tiRCULATING COPY CILECPvt. TOU~REqufN~JED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use CIRCULATING COPY Report No. P-1634-TA tQ BE RETURNED TO REPORTf 0f§K REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UNITED REPUBLIC OF TANZANIA FOR A MWANZA TEXTILE PROJECT May 20, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CUREMCY EQUIVALENTS USED IN THIS REPORT Tanzania Sh = US$ 0.14 US$ 1.00 = T Shs 7.14 TANZANIA FISCAL YEAR July 1st - June 30th REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UNITED REPUBLIC OF TANZANIA FOR THE MWANZA TEXTILE PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of US$15.0 million to the United Republic of Tanzania to help finance the expansion of the Mwanza cotton textile project. The loan would have a term of 22 years, including five years grace, with interest at 8.5% per annum. The proceeds of the loan would be relent to the Mwanza Textile Ltd. (MTL) for 13 years, including four and one-half years of grace, at an interest of 10% per annum; MTL would bear the exchange risk. The Kuwait Fund for Arab Economic Development (Kuwait Fund) has agreed to provide an equivalent amount to the Government to cover the remaining US$15.0 million foreign exchange required for the project, on a parallel financing basis. The Kuwait Fund loan would be made to the Government for 22 years, including five years of grace with interest at 4% per annum and would be onlent to the MTL on terms and conditions similar to the Bank loan. PART I - THE ECONOMY 2. The last full economic report on Tanzania (AE-26) was distributed to the Executive Directors on May 22 and June 22, 1972. This was followed by an economic updating report (30-TA) distributed on December 11, 1972 and which was especially prepared for the East African Consultative Group meeting on Tanzania of January 1973. A basic economic mission is scheduled for late 1975. An agricultural sector report was issued on December 10, 1974. An industry and mining sector report and a report on the fiscal aspects of Tanzania's recent decentralization of Government was distributed in April 1975. The Consultative Group for East Africa met recently on April 22-23, 1975 to discuss the progress and prospects of the Tanzanian economy and the need for additional resources to support the Government's development policy. Country data are provided in Annex I. 3. Tanzania has a one-party system which is embodied in the constitution. The party, TANU, is a well-organized mass party and is actively engaged at the grass roots in the promotion of popular involvement in the national development effort, and within the party democratic principles are being strictly adhered to. In economic policy-making, the long-term objective of social equality prevails over economic interests of minority groups; some progress towards reducing inequality of income distribution within the category of employed workers has been made, but large gaps continue to exist between urban and rural standards of living. 4. Between 1968 and 1973, GDP increased 4.8% per year in real terms. Exports of goods and services in constant prices grew 2.8% per year during the same period. Domestic savings were maintained at about 18% of GDP. Investment increased from 19% of GDP to 23% with public sector investment rising to 80% of the total investment in 1973. Annual price increases were moderate to low. Current Government receipts more than doubled, but current expenditures increased at similar rates so that budgetary savings stagnated. While imports, especially of capital and intermediate goods grew rapidly, export earnings grew very slowly and the increasing current account deficits were financed by a rapid increase of public capital inflow, largely on concessional terms. 5. The level of domestic savings and investment is substantial and is evidence of a serious commitment to development. The growth of GDP is probably not commensurate with the investment effort. This is largely due to the large amount of investment that went into slow gestation infra- structure and social services. This wvas exemplified by the investment of about $200 million in the Tan-Zam railway, the largest single project undertaken in Tanzania, and by the difficulties encountered in mounting investment in agriculture. The stagnation of agricultural export volumes and very slow growth in food production were the most worrisome problems. However, prudent domestic financial management, increasing inflow of external aid on concessionary terms, together with a rather sharp terms of trade improvement in 1973, made it possible to maintain a high investment rate while reserves, at the end of 1973 stood at a healthy $145 million which was then the equivalent of four months' imports. Indeed, the economy appeared in relatively good shape before the events of the winter of 1973-74. 6. Three events occurred then which resulted in a drastic change in the overall balance of payments of Tanzania. First, import prices rose sharply; most particularly petroleum prices. Other import prices increased an estimated 15 to 20%. The increased cost of petroleum imports in 1974 compared to 1973 is about $70 million. Second, the 1973 rains failed in many parts of the country resulting in a substantial reduction in food production in 1973-74. This became evident in january and February 1974 necessitating substantial increases in imports of basic food items in 1974. The drought became general in 1974 necessitating continued high levels of food imports from September 1974 to August 1975 when the new crop harvest begins. It is estimated that food imports in 1974 cost about $150 million compared to an annual average in 1970-72 of $40 million. The stagnation of food and agricultural export volumes in 1974 was largely attributable to the drought and weakness of Government agricultural policies. 7. The overall balance of payments was in surplus in 1972 and 1973 but the net result of the events of 1973-74 described above is that reserves declined by $89 million in 1974 to a level representing about two weeks' imports. The upward trend of import prices, high food imports and stagnant agricultural export volumes are expected to continue into 1975 resulting in an estimated balance of payments deficit of about $150 million. The Government has secured financing of the gap through a $30 million Bank Program Loan of December 20, 1974 (Loan No. 1063 TA) and other multilateral and bilateral sources. - 3 - 8. The projected size and persistence of the balance of payments deficit necessitate strong policy action. The Government has begun a program of investment restructuring, administrative changes, and reduction in the rate of growth of consumption that forms the basis of a sound program for the solution of the medium-term problems. Under this program, the Government has made substantial progress in reallocating public invest- ment from infrastructure development to the directly productive sectors of agriculture, industry and mining. The single largest economic weakness is the slow growth of agricultural production. Several steps have been taken to increase output. The Government has raised producer prices so as to provide greater incentive. Retail prices have been brought near world parity. Project planning and implementation is being improved by adminis- trative changes within the Ministry of Agriculture that will enable Government staff to be more effective. The negative impact of villagization on output is being reduced through more careful planning. The Government is reducing unnecessary non-development related recurrent expenditure and is using taxation and wage/price controls to reduce the rate of growth of private consumption. 9. The balance of payments problem is likely to persist through the end of this decade in spite of concentrated Government actions. Accordingly, Tanzania will require additional balance of payments assistance in 1976 and 1977, and a continued capital inflow in excess of the foreign exchange component of high priority projects if it is to achieve its development targets. Financing of some local expenditures will therefore be justified. 10. Tanzania is one of the three Partner States belonging to the East African Community. The 1967 Treaty for East African Cooperation is one of the most far reaching and comprehensive economic cooperation agreements in existence among sovereign states. However, in practice the degree of economic integration and cooperation among the Partner States is much less than what was envisaged in the Treaty. Political developments in the Partner States have created tensions within the Community and impaired the growth of interstate trade. These difficulties have been compounded by the balance of payments crisis which currently faces all three Partner States. 11. Tanzania's overall debt service ratio is currently about 6%. In terms of outstanding commitments, the Bank Group is Tanzania's largest creditor followed by Sweden, the People's Republic of China, Canada, Denmark, the Netherlands and the Federal Republic of Germany. Including a notional one-third share of the debt of the East African Community Corporations, the IBRD is presently holding 14% of Tanzania's outstanding external debt and IDA 16%; the IBRD share is expected to rise to about 20% in the next five years, and the IDA share to remain about the same. Debt service payments to the Bank are about 10% of total debt service payments; the corresponding share for IDA is about 2%. These two figures are projected to rise to about 20% and 3%, respectively, by 1980. Most capital aid to Tanzania is made available on very favorable terms and a declining share of the total is tied to procurement in the donor country. Suppliers' credits have been kept to the minimum. PART II - BANK GROUP OPERATIONS IN TANZANIA 12. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1963, 19 credits and seven Bank loans amounting to $274.8 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of nine loans, totaling $229.8 million, which have been extended for the development of common services operated regionally by Tanzania, Kenya and Uganda through their association in the East African Community. The only IFC investments in Tanzania to date, totaling $4.7 million, were made in 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. Annex II contains summary statements of Bank loans and IDA credits to Tanzania and the East African Community organizations as of March 31, 1975 and notes on the execution of ongoing projects. 13. Our lending program, reflecting the emphasis the Tanzanian Government is placing on agricultural development, has increasingly focused on directly productive activities in the rural sector. Up to the end of FY72, 10 out of 14 loans and credits have been made for infrastructure. All but one of the loans to the East African Community organizations, of which Tanzania is a beneficiary and co-guarantor, have been extended for improvements in transportation and communications. However, the approval by the Executive Directors of the Flue-Cured Tobacco Project (Credit No. 217 TA), in October 1970 opened a new phase in our lending for more directly productive activities. The Smallholder Tea Development Project (Credit No. 287 TA) and a Second Livestock Project (Credit No. 382 TA) were approved in March 1972 and April 1973, respectively. A Cotton Development Project (Credit No. 454 TA), a Cashewnut Development Project (Loan No. 1014 TA) and the Kigoma Integrated Rural Development Project (Credit No. 508 TA) were approved in 1974. Maize and fisheries projects are scheduled for appraisal in June of this year. Preparation for the Tabora rural development project and a forestry project are underway. 14. Tanzania is developing an institutional structure, stressing greater regionalization and development o' ujamaa villages, designed to promote and respond to development initiatives. These institutions are still in their formative stages, and related organizational and staffing difficulties have sometimes resulted in the project delays referred to in Annex II. Tanzania's education and training programs are expected to solve the manpower problem in the longer run, but meanwhile there will continue to be a need for technical assistance in planning and implementation if the difficulties in executing projects are to be overcome. The Govern- ment has taken steps to speed up recruitment of needed expatriate technical expertise and is giving priority to improving project implementation. At the request of the Government, about 15 technical staff have been supplied by Agricultural Development Services (ADS). With the further assistance of the Regional Mission in Eastern Africa, project implementation is expected to improve. Discussions of a technical assistance project to - 5- aid project preparation are underway with the Government. The proposed fifth education project will help improve project implementation and Government administration by providing, among other things, training for village and cooperative managers, bookkeepers, and accountants. 15. The urban Sites and Services Project (Credit No. 495 TA) approved in July 1974 marked the Bank Group's first lending to Tanzania for urban development. The Credit for the Tanzania Investment Bank (Credit No. 460 TA) was approved in February 1974 and has now been fully committed. A second loan is scheduled for appraisal later this year. A Highway Maintenance Project (Credit No. 507 TA) was approved in August 1974. A proposed project for industrial estate development at Morogoro is presently under preparation. In view of the overall balance of payments difficulties presently being faced by Tanzania (see above paragraphs) a Program Loan (Loan No. 1063 TA) was approved in December 1974. 16. The difficulties facing the East African Community Corporations referred to in paragraph 10 have affected the Bank's lending program for the Community. As a result of the agreement between the Partner States in July 1974 on measures to rehabilitate the East African Railways Corporation the Executive Directors approved a proposal on November 5, 1974 to allow the EARC to use the uncommitted portion of Loan No. 647 EA, amounting to about $7.4 million, for consulting services and to help support an emergency investment program. However, since EARC corporate funds are not being transferred in accordance with the agreed formula and Sh 60 million, out of a total of Sh 150 million the Partner States agreed to inject into EARC, have not been paid, the EARC's right to make withdrawals from the Loan Account of Loan No. 647 EA was suspended in February 1975, pending action on both these issues. Furthermore, in the current state of uncertainty regarding the future structure of the Community Corporations, appraisal of further proposed Community projects for Corporations which may have structural changes have been postponed until the issues mentioned above have been clarified. The Bank has throughout this difficult period provided assistance to facilitate solutions to the problems facing Community Corporations. This effort is continuing but in view of the fundamental and complex nature of the problems involved it would be reasonable to expect that the process of resolving these problems will not be an easy task. PART III - THE INDUSTRIAL SECTOR 17. The manufacturing sector in Tanzania accounts for only 10% of GNP but is increasing in importance. The average growth rate of value added by the sector from 1964-72 was 9.8%. The share of manufacturing employment in total non-agricultural wage employment increased from 12.5% in 1964 to about 19% in 1971 and the total number of jobs in registered manufacturing enterprises employing 10 or more was about 55,000 in 1971. Industrial investment increased from T Sh 150 million in 1966 to T Sh 157.2 million in 1971. -6- 18. The strongest growth in the period 1965-71 has taken place in the non-food consumer goods industries with their share in total manufacturing value increasing from 22% to 41%, with the largest expansion taking place in industries producing textiles, beer, cigarettes and radios. In intermediate goods industries the principal growth was in petroleum refining, printing and publishing, glass, cement and fabricated metal prpducts. More recently there was a significant expansion in the interme- diate goods industries by the establishment of a tire plant, a fertilizer factory, a steel rolling mill and a farm implements factory. The capital goods industry is still quite small and consists mostly of commercial vehicle assembly, repair and body construction plants and a few factories for the manufacture and repair of a limited range of industrial machinery. This industry is however rapidly expanding in terms of output and its share in the value of total manufacturing output increased from 1.3% in 1965 to 7.5% in 1971. 19. Since independence in 1962, Tanzania has followed a pattern of industrial development concentrating on establishing or expanding industries for import substitution. Consequently the imports of consumer goods have been reduced from 54% of total commodity imports in 1961 to 27% in 1971. The Government's long-term industrial development strategy aims to broaden the base of industry beyond pure import substitution and aims at a gradual structural transformation of the economy by giving priority to industries that process domestic raw materials for consumption in the home market and by requiring that traditional exports are locally processed as far as can be economically justified. As many of the most obvious import substitution projects have already been implemented, the future program includes expansion of the existing industries, in particular textile production, as planned under this project, sugar production, partly financed under Credit No. 513 TA and Loan No. 1063 TA and cement. In addition to investment in import substitution industries, some export oriented projects such as processing of cashewnuts, financed under Loan No. 1014 TA, sisal spinning, leather tanning and leather goods have already been undertaken and have potential for further expansion. In the mining sector, phosphate, soda ash, rare materials from local sands, iron ore, coal and natural gas are examples of mineral development possibilities. The strategy also emphasizes the development of domestic machine tool manufacturing and maintenance capacity with the promotion of metal engineering industries and training of industrial engineers. A component of this strategy will be the establishment of an integrated steel mill in Chunya district based on domestic coal and iron ore reserves. This project is under preparation and will be financed by the People's Republic of China's bilateral assistance. The scope, size and timing of the project is currently under examination. 20. In the Industry and Mining Sector Mission report, which was distributed to the Executive Directors in April 1975, the Bank has raised issues concerning the improvements required in the productivity of existing state manufacturing enterprises and the need for increasing the efficiency of the public sector. There is also the need for the Government to specify the exact role of the private sector. Since the Arusha Declaration (1967) - 7 - and the acquisition by the Government of majority interest in all important manufacturing enterprises and financial institutions most industrial activity is now in the public sector and all major projects started after 1967 have been in the public sector. Nevertheless the contribution of private firms is appreciable and accounts for about 25% of the value added and 50% of the employment in the sector. There is need, therefore, for the removal of uncertainties to the future role of private investment so that this sector, which has considerable potential, can also assist in industrial development. 21. After the Arusha Declaration, nationalized industrial enter- prises were regrouped in the National Development Corporation (NDC). Subsequent to 1970 the Government split several state corporations from NDC including those dealing with agricultural processing, tourism, forestry and textiles. These have been grouped into holding companies which manage existing enterprises and promote new projects through equity investments in their respective sectors. This step towards decentralization has helped considerably in reducing delays and in developing responsible management at the parastatal level but further steps need to be taken to strengthen management at the firm level to bring about the further devolution of responsibility to this level. The critical shortage of competent and experienced middle-level Tanzanian managers is a perennial problem and a large number of enterprises are still dependent on expatriate personnel. This dependence is expected to continue beyond 1980 which has been mentioned as the target year for national self-sufficiency in technical manpower. However, with the intensive programs underway in the different parastatals as well as the seven management training institutions for different levels of skills, effective steps would have been taken to train sufficient Tanzanians to reduce the present dependence on expatriate management. 22. Tanzania has several institutions providing finance for industry; the most important of these is the Tanzania Investment Bank (TIB) which was the recipient of a Credit of $6 million in January 1974 (Credit No. 460 TA). As estimated 25% of all new investment in the manufacturing sector is channeled through TIB and the Bank has made good progress in building up capacity to appraise projects and to form independent judgments on the financial and economic merits of projects submitted for financing. TIB loan commitments in 1974 totaled T Sh 53.7 million and disbursements T Sh 42.7 million. TIB also makes some equity investments. The Tanganyika Development Finance Company Ltd. (TDFL) is smaller than TIB and the principal banking source for private investment. It was established in 1962 and is owned in equal shares by the Government and British, German and Dutch aid agencies. Because of its limited resources TDFL concentrates on small projects; individual loans rarely exceed T Sh 3 million and its operations amount to about T Sh 10 million per year. Industrial investments can also be financed by the East African Development Bank (EADB), created in 1967, which has a Bank Loan of $8 million made in 1972. EADB's charter excludes it from financing tourism, transportation and agricultural projects. Its operations in Tanzania have amounted to about T Sh 14 million per year. The Textile Industry 23. Tanzania's textile industry has expanded rapidly in the last ten years and now ranks first in the manufacturing sector accounting for 25% of employment, 13% of value added and 11% of the value of output in the industrial sector as a whole. Employment in the textile industry is at present around 17,000 with an additional 3,000 employed in the garment industry. Starting from almost complete import dependence for textiles in 1966 Tanzania has now achieved more than 65% national self-sufficiency. Expansion of the textile industry is a key element in Tanzania's industrial strategy (referred to earlier in para. 19) of gradually restructuring the economy by linking the pattern of production more closely to domestic resource availability and local demand. The production of exportable surpluses is seen as a logical extension of this strategy once the major portion of domestic demand has been satisfied. 24. Tanzania's cotton is of the medium-long staple variety which enables the manufacture of a quality fabric. At present only 15% of the domestic cotton production is used by the local textile industry and the rest is exported as raw cotton. Consumption of cotton and other fabrics in Tanzania is still very low and stands at only 7.9 meters per capita per annum, as compared to 8.8 meters for Africa as a whole (excluding South Africa) and 15.7 meters in all developing countries. Actual consumption of woven fabrics has increased from 78 million meters in 1966 to 114 million meters in 1974. Of the 1974 fabric consumption 76 million meters was locally produced and 41 million meters imported at an estimated cost of about $40 million. The proposed project and other minor expansions currently underway, would almost eliminate import needs for cotton fabrics for the projected consumption level up to the early 1980s. Production costs of cotton textiles in Tanzania are comparable to those in major producing countries and ex-factory prices are approximately the same as the C.I.F. costs of imported fabrics, using an appropriate shadow exchange rate. In addition to the cotton fabric imports which would be substituted through the proposed project, imports of blended fabric material of about 30 million meters per year are estimated in the near future. The Government is therefore considering the next major textile project to produce blended materials. Tanzania's cotton is ideally suited for this type of fabric and there appear to be export possibilities for such material specially to other East African countries. An amount of US$200,000 has been provided in the proposed project to prepare the technical and economic feasibility report for such a project and to also examine the potential export markets for fabrics made in Tanzania. The Government has agreed, that, as part of the continuing dialogue on the development of the textile sector, it will exchange views with the Bank on the conclusions of the study and apply these conclusions to any major expansion of the textile industry (Section 4.02, Loan Agreement). 25. The National Textile Corporation (Texco) which was created in January 1974 and to which all the textile industry activities were transferred from NDC is responsible for the textile sector in Tanzania. Texco is organized as a holding company and exercises overall responsibility for -9 - management, production, planning and expansion programs of its eight associated and subsidiary companies including MTL, the beneficiary of the proposed loan. The authorized capital of Texco is T Sh 500 million (US$70 million) of which T Sh 70 million (US$10 million) is paid in. The share capital is fully owned by the Government. Texco's Board of Directors is chaired by the Minister of Industries and Commerce and consists of nine members including the Managing Director of Texco. The marketing of all products manufactured by Texco companies is carried out by the National Textile Industries Corporation (Natex), a wholly owned subsidiary of Texco. Natex is also responsible for imports and exports of yarn, fabrics, garments, as well as other textile articles and agricultural bags. The garment manufacturing and knitting industry consists entirely of small production units in the private sector. PART IV - THE PROJECT 26. An Appraisal Report entitled "Mwanza Textile Project" is being distributed separately. A Loan and Project Summary is provided as Annex III to this report. 27. The project was identified in April/May 1974 out of three textile projects for which feasibility studies were submitted to the Bank. It was appraised in the field in November 1974. Negotiations for the proposed loan were held in Washington on April 28, 1975. The Tanzanian delegation was headed by Mr. Kazaura, Principal Secretary, Ministry of Commerce and Industries. Project Scope and Location 28. The project consists of an expansion of the existing MTL plant situated eight kilometers from the town of Mwanza on Lake Victoria (see map). Mwanza town has a population of 50,000 and is the headquarters of one of the 20 regional administrations into which the country is divided. The town is at a distance of about 1,100 km (by air) northwest of Dar es Salaam and is connected by rail, road and air services to the rest of the country and by steamer services on Lake Victoria to Kenya and Uganda. The existing MTL plant has a capacity of about 25 million linear meters/year of cotton fabrics and started production in 1968. Through the proposed project the production of MTL will be expanded by another 20 million meters per year of finished fabrics. The Project wculd add about 28,000 spindles and 580 looms as well as bleaching, mercerizing, dyeing and printing equipment to the existing fac-ilities taking into account that the existing mill is not entirely balanced. The project would be built adjacent to the existing MTL plant in space which was originally earmarked for such an expansion. The existing MTL plant uses modern although conventional equipment and has a relatively high standard of quality and efficiency. The proposed expansion will use new and similar conventional machinery. 29. Mwanza is located in Tanzania's cotton growing belt and there will be sufficient supplies of raw cotton for the increased production, as at projected full production levels the mill will require 38,000 bales of cotton per annum out of the cotton crop estimated at 500,000 bales for 1980. Additional water consumption required for the project will be made available from the municipal water supply system. The power supply is provided by the Tanzania Electric Supply Company (TANESCO) and the additional power required for the project will be provided under an expansion program presently underway by TANESCO with financing from TIB and bilateral sources. The Government has agreed (Section 4.03 of the Loan Agreement) to cause TANESCO to complete its expansion program in time to allow sufficient power to be provided for the efficient operation of the integrated plant. Appropriate measures will be taken and special equipment selected for the project to avoid adverse effects on ecoloyv and occupational health. Project Costs and Financing 30. The total financing required for the project, including interest during construction, is estimated at US$44.3 million of which US$30 million wculd be in foreign exchange. Price escalation of 12% in 1975, 10% in 1976 and 8% in 1977 for foreign and 30% per annum for local expenditures has been provided for in the cost estimates, amounting to a total of US$9.1 million. The unusually high percentage rate for local price escalation is based on past and estimated future rises in local construction costs. The cost estimates also include a 5% physical contingency of US$1.3 million (this is relatively low since the project scope is well defined and the equipment to be procured is fairly standard), working capital requirements of US$4.6 million, US$0.4 million for study and training and US$3.5 million for interest during construction. 31. The proposed Bank loan of US$15 million would cover half of the foreign exchange financing required for the project. The Kuwait Fund has agreed to participate in the financing of the project on a parallel financing basis with the Bank and would provide the remaining US$15 million. The Kuwait loan would finance the foreign exchange costs for the spinning plant and equipment, civil works and erection costs and the Bank loan would be applied to cover the foreign exchange costs of the other equipment (weaving and processing), engineering and consultancy services and interest during construction on the Bank loan. The proposed Bank loan of US$15 million would be made to the Government for 22 years including five years grace and at an interest of 8.5% per annum, terms which are considered appropriate on country grounds. The Government would onlend the loan to the TTL for 13 years, including 4-1/2 years grace and would charge an interest rate of 10% per annum; MTL would bear the exchange risk. The proposed Kuwait Fund loan of US$15 million equivalent (Kuwaiti Dinars 4.5 million) would also be made to the Government for 22 years, including five years of grace, at an interest of 4% per annum. The onlending terms to MTL for the Kuwaiti funds would be similar to the Bank loan. The finalization of the financing arrangements between the Kuwait Fund, the - 11 - Government, Texco and MTL would be a condition of effectiveness for the Bank loan (Section 6.01(c), Loan Agreement). This will be the first Kuwait Fund investment in Tanzania and is expected to be followed by other joint or parallel ventures with the Bank especially in the industrial sector. 32. The local funds of US$14.3 million equivalent required for the project would be provided through an increase in MTL's equity by US$14.1 million equivalent and US$0.2 million equivalent through the companies' internal cash generation. The equity would be provided by the Government to Texco which would in turn increase the equity of MTL, thereby increas- ing Texco's shareholdings in MTL from 40% to 90%. Assurances have been obtained from the Government and Texco that equity funds would be made available to MTL on a time schedule determined by the requirements of the project (Section 3.01(d), Loan Agreement). Implementation and Training 33. The project will be implemented by MTL under the general supervision and control of Texco. Both Texco and MTL suffer from a shortage of locally experienced and qualified technical personnel. MTL has currently 26 expatriates at the upper and middle management levels and this need for expatriates will continue at least during the period of implementation and in the early stages of operation. Adequate assist- ance from consultants is also crucial for the successful implementation and operation of the project. MTL has agreed to enter into a contract with Saigol Brothers of Pakistan, who undertook the feasibility study for the project, to act as the engineering firm for the project with responsibility for project engineering, purchasing, start-up operations, personnel training and project management for the implementation of the project (Section 2.02(i), Project Agreement). Saigol Brothers will be responsible for the completion of the project according to an agreed timetable as well as for the training program. Texco and MTL have also agreed (Section 2.02(a)(ii), Project Agreement) to employ Gherzi Textil Organization (Switzerland), as technical adviser who would provide assistance in project management and implementation control mainly in supervising the work of the engineering firm in all phases of construction, erection, start-up operations and integration with the existing MTL operations. MTL has also agreed to make arrangements, acceptable to the Bank, for technical management to operate the project during a period of three years after project completion (Section 2.02(d), Project Agreement). 34, Texco and MTL have also developed a systematic job-related training program which was discussed during negotiations. Under this program a sufficient number of Tanzanians with appropriate education and experience will be selected and trained at the Pakistan College of Textile Technology in a specially designed intensive course followed by training in one of the Saigol textile mills in Pakistan. Thereby qualified operators in the different specialities will be made available at the start-up of the mill from the existing MTL cadre and those trained by Saigol. The estimated foreign exchange cost of such a training program (US$100,000)has been included in the proposed loan. - 12- Procurement and Disbursements 35. Equipment and materials financed out of the proceeds of the Bank loan will be procured on the basis of international competitive bidding in accordance with Bank guidelines except for (1) small items costing less than US$50,000 equivalent which may be purchased through international shopping on the basis of suitability, availability and price considerations following approval by the Bank of the list of items involved, and (2) proprietary equipment necessary for efficient plant operation and items in limited supply which are critical to the timely completion of the project and which are estimated to cost not more than US$2 million and which may be procured following bidding from restricted lists of qualified suppliers, with prior approval of the Bank. Equipment financed by the Kuwait Fund loan would be procured internationally according to its own procurement guidelines. Subject to prequalification, local contractors after local bidding would carry out the civil works, in part financed by the Kuwait Fund. An agreement will be entered into with the Kuwait Fund to specify the timing of procurement, method of disbursements for both the Fund and Bank, joint supervision and exchange of information to enable prompt and smooth implementation. A schedule of estimated disburse- ments is included in Annex III. The Bank loan would cover the foreign exchange cost of equipment and services under the Bank financed portion of the project and interest during construction on the Bank loan. To begin project implementation as soon as possible MTL, with the Bank's approval, is expected to enter into agreements with the textile engineer- ing firm and the technical advisory team. It is recommended that retro- active financing for eligible expenditure on these agreements up to an amount of $150,000 incurred after April 1, 1975 be included in the loan. Operating and Financial Performance of MTL 36. MTL's operating performance has steadily improved since it started operations in 1968. Capacity utilization in 1974 was almost 90% and some marginal increase in output is expected in 1975 when total production would reach 22.7 million meters. The profit situation of the company in 1974 was satisfactory and further improvement is expected in 1975 because of improvements in operations as well as favorable price changes for inputs and outputs. 37. MTL's profitability would improve substantially on account of the project. Net income after taxes will increase from T Sh 7.8 million in 1977 to 18.0 million in 1979 and 28.1 million in the years thereafter. The more than proportional increase in sales value and earnings is due to switching to more sophisticated products as well as to economies of scale from the expansion. Net income before taxes as a percentage of sales which was only 5% in 1974 is expected to increase to more than 10% in 1975, mainly as a result of higher textile prices and lower cotton prices which only in part affected 1974 earnings. After completion of the project, net income after taxes as a percentage of sales would be at about twice the level of the existing operations. As a result of the good earning potential of the project, the financial ratios of MTL show quite - 13 - satisfactory levels despite substantial additional debt financing. The debt service coverage remains about two times after the heavy loan repay- ments on the existing operations in 1975 and 1976. The current ratio would improve from 0.8 in 1974 to a satisfactory level of 1.5 in 1975 as a result of internal cash generation and the increase in share capital. The debt to equity ratio would be about 60:40 from 1976 until 1979 when as a result of beginning debt repayments, it would start to gradually improve. It has been agreed that Texco and MITL will maintain a debt to equity ratio of 60 to 40 and a current ratio of 1.5 (Sections 4.03 and 4.04, Project Agreement). 38. Since MTL's profitability and sound financial situation will largely depend on the Government's policy of pricing inputs and outputs the Goverrnment has agreed to ensure that MTL -- operating efficiently -- obtains sufficient revenues to cover all its costs, service all its debts and earn a reasonable return on its invested capital (Section 3.02 of Loan Agreement). MTL has also agreed not to declare or pay any dividends u-ntil the project has been completed and thereafter only if by so doing the current ratio would not fall below 1.5 (Section 4.05, Project Agreement). Financial and Economic Return 39. The incremental financial return of the project amounts to 24.2% before and 19.4% after taxes. It is relatively high partly because the project is an expansion using existing infrastructure and partly because existing machinery can be used more effectively in combination with the project. As usual, the return is most sensitive to changes in revenues. The return after taxes would decrease to 17.3% if a 1C% reduction of textile prices is assumed. If investment costs went up 15% combined with a one year delay in project completion the return would drop to 13.9%. If the ultimate capacity utilization of the project were to be only 80%, the return would decrease to 17.7%. 40. The project faces technical, managerial and commercial risks. However, the technical and managerial risks should be limited in view of: (i) employment of an engineering firm for project implementation, (ii) employment of experienced technical advisers, (iii) MTL's experience with similar existing operations, (iv) outside assistance for operations and job-oriented training program, and (v) allowance for a relatively long implementation period and a well-defined capital costs estimate. Much will depend on the effective meshing of local and expatriate expertise. The commercial risk should be minor in view of the opportunity for import substitution and the Government's assurances on pricing. 41. The economic rate of return of the project is a satisfactory 16% using international prices for the tradeable inputs and outputs. MTL has a good production performance and capacity utilization of the plant in 1974 was about 90%. Although the project will initially be producing primarily for the domestic market in the past five years Tanzania has exported to neighbouring East African countries between 2 to 4 million - 14 - meters of cotton textiles per year and there is potential for larger exports at internationally competitive prices. The study included in the project will thoroughly investigate this potential market and recommend the investment decisions required for the further development of the textile sector. Substantial indirect benefits from the project will be derived from the employment of an additional 1,200 workers, provision of training and expertise for Tanzanians and additional industrial activity in a less developed region of the country. PART V - LEGAL INSTRUMENTS AND AUTHORITY 42. The draft Loan Agreement between the United Republic of Tanzania and the Bank, the draft Project Agreement between the Bank, the National Textile Corporation and the Mwanza Textiles Ltd., the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. 43. Features of the Loan and Project Agreements of special interest are referred to in paragraphs 29, 31, 32, 33, 37, 38 and 40 of this report. 44. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 45. I recommend that the Executive Directors approve the proposed Loan. Robert S. McNamara President Attachments Washington, D.C. May 20, 1975 Annex I Page I1of 3 pagpa MUTR DA?A - TAnZAIA 9L.,087 13.6 Mi. (eid-1972) Tid e eo rbaln SOCIAL INDICATORS Itaefr ... Countries Tanzania Ken-- Korea lus TM 1970 17 2 OR? PER CAPITA US8$ (ATLA.S /IIS)~* 120 /b 170A~ 310 /b 430 /b DEMOGRAP1KIC Crude barrth -ate (per thousad) 46 /p 17 e 18 / 28 31' Crude denth tate (per thnoasnd) 25 2/ 18 L 8 7 L~ Infant mon tality ret. (par thousand live births) 225 160-165 ~j55 LiUZ Lif exapectancy at birth (yeara) 38 La- 1.3 18 LI. 65 59 Oroaseardati on rate 2 ..3.2 3.1 2.6 2.7 Popul.tio gwth ret. 2.232 2. .9/ Population growth rate - urba. P. ACe structure (percent) 0-11. 1.2 oA 1..18a 101 15-61. 56 c d J 53 418 5 5 65 and over 245jj 310 Age dpcpnd ...y ratio Lc0.8 c 0.9 s 1. 90 Economic dcpeodency rAiO A 1.2 1.2 .1 1.1 1.6 Urban popualotion as percent of total 1./c.d.p 7 Ln.as 10 411 /k 290 Famnily pl.nning. N.oof sceptoes .. alativa (thous.) ......220 I No. of users (% of married wonen) ......15 otllabor force (thousans 1,0 L ,60 ~ 5,0 10,500 4 ~3,200/, Prcontog, employed in agriculture 89 ~j 91 90La.i.48 1.5~ Foenotego unoopylsyad .. . . INJCSP DISTV8'UTION Percenit oFcnational 1..... raceived by highest 5%3 2 Percoet of satina1 incoms reosi,ad by highest 20% 6 Percant of na ti onal income received by lo..st 20% 5 sIL U Percent of national imoon roceiv-d by lowest 4.0%312 2 u MISTR IBJTION 02 LAND GINhNSIP 2 5 .o:.;aF57t6p 10% of owners ....2 % owned by mealleat 10% of owners . .2 RIALTH AND NUTRITION 96yo.luilon pee phyeioian ~~~~~~~~~~20,000, /d 21,570 ~d 7,830 2,710 /y 3,860 Li~.ax Population per ocesing person .. 1890d/ 1,1.70 ~y 1,760 /y 1,08(0 L, P.paO otleon par hnsvital 1-1 t30 lei 700d ~ 770 1,920 330 Per capita calorie supply as % of requiresnts by L 73 100 103 >h.4ii Fir copita pr:oteink upply , total (grass per dayj /6 1.2 4.3 71 65 L9 Oaf which, antoal aod pulse 22 / ~ 23 29 19 zna 20 L~. ra.L. rl I-.' y.ar. /7 .. .. 6 ~ ETOCATION Adjusted /t8 p,i.ary school e.roIlmont ratio 25 37 67 100, 09 Adjusted Z~ secondary schoo sorolleent ratio 2 3 9/b 13. Ta ors oschooling provided, first anod second level 13 13 13 12 13 Voca tiOnal .-coltaant as % of noc, school enrollent 23 4/ a- 2 15 3a 8 Adult literacy rate % .. 30 /ao ad 91 Ac. 9 ,d. HOUSING Average No.of persons per r... (urban) 1.8 La * . 2.7 Percent o'f cacPied unit: naithn,ttpiped water ... .80 L8&k Acces to -lcorinity (o % of' tota poplation) -.. .50 Percant of Y,.el populatinn cOnaoct.d to elontricity ... .30 CONS'JPPTIOU -ETiorieci-ors per 1000 population 2 l6& 1.V 128 &o L2 Z Passonger oa.s Fer 1000 popudlation 3.. h 9 boO 39 2 Ele ctric power consoeption (kuds p.o)5d 31/b 78 0 32 41) Newsprint oo-uptioa p.c. kp per year 0.1 a. 0.1 0.5 b 3.7 3. Note s: Vigures infer either to the latent periods or to account of ensironmentalt. peor,bdywits n the latest years. Latest period. refer in principle to distribution by age andsa of national populations. the yeore 1956-fo or 1966-70; the loteat y.ear in pr. /6, protein standards (requfreceots) for all conutriss As estat- oipl eto160 and 1970. li.hed by USDA Econoic Resneach ba.-Jos provide for a rininme /I The er Cpi "to GOPF coti-te. ir at maket prices for allowannoe of 60 grov of total p-otein poer day, aol 20 grav uf peoro other th-an 1lelO,c.lnuloited by the nate converoino animal and poles protein, of which 10 grams should ho in-Ia L techunique av tha 1972 hiorid Bank Atllas. protein. Those standards ore so ... ht lower than those of 75 2 Averag copiner of d-ughtern per cove of reproductive grams of total protein mod 23 genes of animal protein n4 C.g. average for the world, propo..od by PAO io ti'e Third h'urld Pool )Popsiotin- proth eaten ore for the decode, ending in - uvY. 1960 and 1970. /7Sae studios ha-e suggested that cruds death rates of chnildre., LL hanti of population under 15 end 65 and over to popula- ages 1 through 4. na be need ae a first appronlatioo lndsn. of tione of ages 15-61. for ago dep._ndoncy rtio and to labor eal-utriti,.- force of ages 15-61. for ecoooric dependency ratio. /8 Peroantge scrolled of corresponding popuaLUon of schoa1 age FAOPi reference stnedurds represent physiological rn- as de fined for each country. quiraa-nt for' nioral activlity and h0a0lb, taidsag Enclodiig f-reots mod postures; lb 2972; Ic 195,7; /d Tansxanyiko.; /. 1967; If IN reti-ate, 191.5-7(;; Went Mloiaysia; /h 196.0-72; /i 15 gazette_d to-hipa, 19557-67; La 2,000 or mmr !Thuhi.onns; /k Seoatl City end oooocipc.litieB of 5,000 sor .n~rc tnhabita,nts; /1 African population; Im 1969; /- 1973; /o 1971; Zo 33 gao~'t.td tonshilpo; & 1 panelled to-.ohips; /r Gzoztted areas of 10,000 or tore inaiuti-ont; /~Loer fo,-o 15-59 one b-odeL; Li noloi; / Metro toona; /, e-b-e n- register, not alltoin in n--try; /, le---el in gWvon'noet seroicee5 Cely; , , i 1-63; vuEti nte; /" 19~:-66; /. 1969; Z/sl 1ioct,i1lg t-cher train~Ing at I;rd ]i -1o; Ian i,fi,iin u.kan u 15 years~ -ci oIr a 196; Icf 97W, Zacaibar; /. 192,, . A8 nldngforen ve-i.icn; /on R.rislcred only; Z,j 1963; 1:,:T VI-te., piped Inside; Idl Ten yar ... over i aa st In s -tcid as thc oijeCtJVe -~ coan ,y Cnutc ALa TPopulain i, eCOparable in nice an.d its ecorda dcvcerr n e-or sLops ahead. 116 April 1, 1975 ANNEX I ag&e 2 of3 EflONOMIC 0E-WPXMET DATA (Amounta in milllona of U.S. dollas.) Actual Projected 19 64- 19 67 - 19 70 - 197- 1970 1971 1972 NATIONkL ACCOUNTS1970 1971 19 72 1974 1975 1976 1969 1972 1973 1976 3-Yea.r Average at 1967- 1969 Prices & Exchange Rates Averge_ Annual. Growth Rates As Percent of GOY Gross Domestic Pro tduc 1214.,1 1275.4 1342.7 1494.7 1562.0 63. 61 49 5..6 4.5 100.0 100.9 103.6 Gains from Terms ofTae0 . - 0.2 - 10.8 - 47.0 - 21.5 - 32.3 - 49.0 Gross Domestic Income 1213.9 1264.6 12 95.7 1473.2 1529.7 1563.1 5.0 4.5 5.1 4.0 100.0 1700.0 100.0 Import (cine. NY) 366.6 395.1 365.7 413.6 400.3 389.5 6.7 6.8 1.4 0.6 30.2 31.2 28.2 Exports (import capacity) 307. .5 310.6 3106.0 275.2 297~.2 329.2 2.1 2.6 0.7 2.0 25.0 24.6 23.6 Resource Gap 63.1 84.5 59.7 138.4 113.1 60.3 6.7~ 4.6 Consumption Expenditures 1022.8 1061.6 1060.0 1288.3 1315.8 1312.4 5.8 4.8 4.7 3.8 84.3 84.0 81.8 Investment '(in]l. stocks) 254.2 287.6 295.4 323.3 327.0 331.0 9.1 8.4 6.7 2.4 20.9 22.7 22.8 Domestic Savings 191.1 203.1 235.7 184.9 213.9 270.7 1.4 2.7 7.3 4.7 15.7 16.1 18.2 National Savings 198.0 206.8 235.3 180.9 207.5 261.3 3.1 3.4 4.9 4.5 16.3 16.4 18.2, MERCHNDISE TRADE Annual Data at Current Prices 1966-72 1970-7' 1973-76 As Percent of Total Tmports Capital goods 94.2 117.0 125.2 137.2 139.0 149.5 13.5 14.0 2.4 29.6 30.7 31.0 Intermediate goodsg QpaLfuels) 101.7 132.1 154.4 210.6 212.1 226.6 13.5 21.5 7.6 31.9 34.6 38.2 Fuels and related materials 27.0 35.8 41.3 139.4 145.0 161.6 16.3 27 .7 42.0 8.5 9.4 10.2 of which: Petroleum (27.0) (35.8) (41.3) (139.4) (145.0) (161.6) (16.3) (27.7) (42.0) (8.5) (9.4) (10.2) Conup tion goods 95.5 96.6 82.9 225.3 188.0 84.6 1.0 1.4 -5.2 30.0 25.3 20.5 Toa Meh.Iports (cif) 316. 4 381.5 403.8 712.5 683. 1 622.7 8.7 14.4 9.3 1700.0 100.0 100.0 Exports Y Primary products ~=] fuels) 183.1 183.1 208.6 329.5 332.7 337.4 0.6 13.2 8.2 77.4 75.4 72.3 Fuels and related materials ) . )). of which: Petroleum ) 53.4 )59.8 30.7 42.0 43.7 48.8 )14.5 )9.7 22.5 )22.6 )24.6 10.6 T ~ifaturedgo nds 49.1 54.0 59.4 65.4 ))6.6 ) 17.0 Toa ec.Exnorts (fob) 1=~ 242.9 281.4 4~25.5 45.8 45( [2 2 ES 10. 0.0 1T Tourism and BP<,rder. Tracde . . Merchandise Trade Indices Average 1.967- 69 -100 Export Price Index 100.6 102.0 112.6 174.2 170~.1 17.0 P--r.xr Price lnv9nx 99.0 10~3. ! 121.9 117.8 189.2 181. 3 Terms of Trade Index 101.6 98.5 86.7 92.7 89.9 87.0 Ex-ports Volume Index 126.0 127.0 132.0 135.3 143.0 149.8 VALUM A7CDZ 7f AS.~"C:Z-h sLs s. 9~ 1'lcea and R,c1l..nge Rateo ..verag, A,a,.al Growsth ,Pt~., As Percen! of Tot&l 1964-769 1965-70) 1966-71 1967-'5 Agriculture 446.5 442.7 471.2 3.3 4.4 1.4 2.6 40.0 36.1 38.5 Inidustry and l4iiniag 179.2 196.0 202.7 9.3 8.3 7 .2 5.0 16.0 17.0 16.5 -. .. ~~~~~~ ~~~491.1 >eo 537. 7.6 7.1 b.i **4,9 44. ~ Si Total ~~~~~~~ ~~1116.6 1F162. 7 1255.3 5.7 6.3 4.7 4.5 101.0 100.0 100.0 PUBLIC FIANAICE An-eal Data at Cnrrefnt Prices -1967-72 fis Percenit of GriP (C~entral Go-verrnment) Current Receipts 235.6 260.3 306.3 14.0 19.2 20.6 23.0 Current Exlpendit~ures 228.4 249.3 306.6 15.4 18.6 19.7 23.0 - Buidgetary Savings 7.2 11.0 -0.3 0.6 0.9 - Other Pu2blic Sector 39.0 57.0 75.0 25.0 3.2 4.5 5.6 Public Sector Iriveetmern- 163.0 233.0 233.0 21.0 13.3 16.4 17.5 CU9R ElfT FNPlDIITJP. DiETAILS Actual - Prelim.. As % Totsl Current Fapenci.) FY)971 911972 FY1973 Education ) 21.1 )17.5 18.6 Other Social Services ) 10.3 Agriculture )31.5 )27.3 12.5 Other Economic Services ) )15.4 Administration end Defense 30.5 32.0 9..55! Other 16.9 23.2 33.7 Total. Current Expenditures 100.0 1-00.0 100.0 SEI.ECTED INIDICATORS 1960- 1965- 1970- 1973- (Calculated from 3-year averaged data') 1.965 1970 1975 1978 Average ICOR 2.9 4.3 4.3 Import Elasticity 1.6 0.4 0.5 l6irginal Dnmestic Saveings Rate 0.1 0.1 0.25 Marginal National Savings Rate 0.2 0.1 0.2 IAmiOR FORCE AD,D Total. Lbor Force Value AIddnd Per Workr. (,-, current prices) OUTPJP PEP. 1W05K0 in MAillionr ~ . of Total In USDle7 eceto!- Ave,aFe 1971 1971 1971 . 971 Aggriculture 5.3 91 98 43 Induistry 0. 1 2 1590 694 lerviec . ~~~~~~~~~~~~0.4 7 2170 948 TotaLl STI'9 net appisoll not availatle 7- less th~an he.lf the sriall,vst urit shown l/ In,cludes re-expo,rts, tincla->ifild domestic exports and adjustments for tine, value and coverage Novmbe 16, 1974 i0/ Dfeiese only szMI OF PAMNE iTS U IRIAL ATAIAR MWDEW? (saiants in 3talicn:, 7or lF oll*r at current pacs) Avg. hAnsel 1910 1973. 195 1976 l12. 169f1979 SW4A 1B3ALANCE OF PANNTS Exports (mci. 575) ~~~276.8 308.8 333.1 391 .5 479.8 516.9 $43.4 646.8 713.0 802.7 915.6 13.0 oprts (incl. WN) 288.4 3 476.1 59128 776.9 757.4 765.3 859.8 964.2 1079.3 14.0 Resource Balance (X-N) -1l.6 -64.3 -116.1 -78.6 - 1=.3 -260.0 -rrr4.0 -1rr5 -t_r -161r -16r37 Interest (net) ) -2.9 ) -3 5 ) 3.30 -) 4 -159 -7.3 -13.6 -21.1 -22.6 -32.0 -49.73 DItrest Lnevt)2ent Incor, ) ) .0) ) -1.31.51.5 -1.5 .' -1.5 -1.5 Workers' Remittance 0.0 0.0 0.0 0.0 0.0 ~ 0.0 0.0 0.0 0.0 0.0 0.0 - Workers' Renittance 0.0 0. 0. 0.0 0.0 14.0 7. 8.°. 1.. Current Translafers net) 8.6 12.4 9.3 _1.7 0.7 14.0 7.0 7.7 9.3 10.2 1.7 Balance on Curan Accounts -5.9 -55.4 -=T¶ S3.7 TTBT - 2 -T2rr - r -nrr - T -7t4.r Private Direct Investnrot nil. nil niI nil nil nil nil nil nil nil nil Official Capital Grants 10.0 12.0 14.0 16.0 18.0 20.0 21.5 23.1 24.8 26.7 28.7 11.0 DisburseiM nts 44.0 49.1 49.8 126.6 154.'' 133.0 82.6 83.2 91.5 100.6 110.7 9.7 -ReDants 9.9 -9,7 -11.9 -15.4 -13.2 -14.0 -14.0 -14.0 -14.0 -14.5 -15.0 4.3 N et Disbursements 34.1 39.4 37.9 1 rr12 1 4 1. 1 1 . 68.6 tWr t 6 .1 Y 10.8 Other MtIT Loans Disbursen nts -RepayInents 0.0 0.0 0.0 : . .. ..* NeIth1ibrsements dr rr 0.0 -r4 lli.Z -irr 3.r -sr. l . 11 ffst b I~~~~~~~~~~~~~~~~~~~~~~~~~~Acmlbnt ted Capital Transactions n.e.i. -21.0 .52.0 -15.0 28.2 -6.6 1tZ 1970 1971 A1972 193 Charge in Net Reservee 2.8 -15.3 - 4.1 60.2 27.7 tlllB AND DEfiT SER I5 42 Public Debt Out. & lisb2rsed 176.4 220.2 262.5 344.5 424X.6 GREANT AN3 DOAN 01COHfrDSII'S Officil Grants & Grant-lIkce Interest on Public Debt 6.1 6.2 6.6 6.9 8.7 Repayments on public Debt 9.9 9.7 11.9 29.0 11.5 Public N< loans Total Public Debt Service 16.0 15.9 18.5 35.8 20.2 IBRD 7.0 30.0 - - - Other Debt Service (net) - - IDA 20.5 9.0 9.8 10.8 28.8 Total Debt Smrvice (net) - Othler - - - Other Multilateral - - - 3.3 2.0 Buirden on Export Zrrdns (%) Governments 48.8 232.4 26,3 49.3 94.9 Suppliers - 0.3 - - - Public Debt.Ssrvice 5.8 5.2 5.6 9.0 4.2 Financial Institutionsa 3.2 3.0 - _ _ Total Debt Servioe 5.8 5.2 5.6 9.0 4.2 Bonds _- - _ _ TDS+Direct Invest. Inc. 5.1 4.8 5.1 7.7 3.0 Public Loans n.e.i. 16.9 2.2 0.8 Tot,al Xubic HLToas Arerage Terms of Public Debt Actual Debt Outstanding on Dee. 31, 1972 lIt. as % Prior Tear DO&D 4.2 3.5 3.0 2.6 2.5 DM" Disbursed OTULV - ' Percent Anort. as % Prior Year M&D 6.8 5.5 5.4 11.0 3.3 World Sank 24.0 r. - IDA 49.1 14.2 IPRD Debt Out. & Disbursed Other Maltilateral 2.5 0.7 " as % Public Debt O&D 1.4 1.7 4.1 7.6 7.4 Govern.ments 213.5 62.0 ' as % Public Debt Service&/ 0.0 0.6 1.6 2.2 10.0 Suppliers 0.3 0.1 Financial Institutions 24.2 7.0 DA Debt Out. & Disbursed Aonds 10.1 2.9 n as % Public Debt 0&D 14.2 15.4 16.1 15.6 .13.7 Public DIbts n.e.i 20.9 6.1 " as % Public Debt ServioeY 0.6 0.6 1.1 1.1 1.9 't)1 Publlic PSkl4 Debt 344.6 100.0 Other InLT Debts iii Short-term Debt (disb. on3y) , not applicable e staff estimate lt Not including Tanzania's share in 8AC (debt) . not asailable - nil or negligible 2t IBRD/IDA debt service as 2 of total public debt service ... nct avaIlable separately -- less than half the but included in totel s:r7mllest unit shoin Ioember 16., 1974 ANNEX II Page 1 of 9 A. SUMMARY STATEMENT OF BANK LOANS FOR COMMON SERVICES GUARANTEED BY KENYA, TANZANIA AND UGANDA AS AT MARCH 31, 1975 (US$ million) Amount less cancellations No. Year Borrower Purpose Bank Undisbursed Three loans fully disbursed 75.0 638 EA 1969 EAHC Harbours 35.0 5.8 674 EA 1970 EARC Railways 42.4 17.3 675 EA 1970 EAPTC Telecommunications 10.4 0.4 843 EA 1972 EADB Development Finance 8.0 7.7 865 EA 1972 EAHC Harbors 26.5 19.0 914 EA 1973 EAPTC Telecommunications 32.5 21.3 Total 229.8 71.5 of which has been repaid 29.1 Total now outstanding 200.7 Amount sold 24.4 of which has been repaid 24.4 0 Total now held by Bank 200.7 Total undisbursed 71.5 ANNEX II Page 2 of 9 B. STATEMENT OF BANK LOANS AND IDA CREDITS TO TANZANIA AS AT MARCH 31, 1975 (US$ million) Amount less cancellations No. Year Borrower Purpose Bank IDA Undisbursed Two loans and six credits fully disbursed 35.2 43.0 586 TA 1969 Tanzania Roads 7.0 1.9 149 TA 1969 " Education 5.0 1.0 217 TA 1970 " Tobacco 9.0 6.7 715-2 TA 1974 TANESCO Power 5.0 2.9 232 TA 1971 Tanzania Education 3.3 2.1 265 TA 1972 " Roads 6.5 4.8 287 TA 1972 " Smallholder Tea 10.8 7.1 371 TA 1973 Education 10.3 10.2 382 TA 1973 Livestock 18.4 18.3 454 TA 1974 Cotton 17.5 17.4 460 TA 1974 " Tanzania Investment Bank 6.0 6.0 1014 TA 1974 Cashewnut 21.0 21.0 495 TA 1975 Sites and Services 8.5 8.4 507 TA 1975 Highway Maintenance 10.2 10.2 508 TA 1975 Rural Development 10.0 10.0 513 TA 1975 " Sugar 9.0 9.0 1041 TA 1975 Sugar 9.0 9.0 1063 TA 1975 Program 30.0 10.1 Total 107.2 167.61/ 156.1 1/ Net of exchange adjustments. ANNEX IT. Page 3 of 9 (US$ million) Amount less cancellations Dank TPA Undisbursed of which has been repaid 0.8 0.4 106.4 Amount sold 0.1 of which has been repaid 0.1 Total now outstanding 106.4 167.2 Total undisbursed 44.9 111.2 156.1 ANNEX II Page 4 of 9 D. PROJECTS IN EXECUTIONl/ (As of May 1, 1975) There are currently 16 projects under execution in Tanzania ACRICULTURAL SECTOR Credit No. 217 TA - Tobacco Prolect: $9.0 million Credit of October 9, 1970; Closing Date - September 30, 1976 As a result of the Tanzania Government's intention to complete its villagization program by 1976, the process has been accelerated and a total of about 7,200 families have been moved to villages in the tobacco complexes, bringing the number of project farmers to 10,000. As a result of these vigorous efforts, it is now likely that the appraisal target of 15,000 farmers will be reached by 1975. Strict measures to enforce minimum tobacco acreages per familv are expected to contribute to increased tobacco production. However, yields per hectare and quality of leaf have been below anticipated levels. Improvements are required to strengthen the extension and cooperative services. Pro- vision of water supplies and social infrastructure are progressing well. Credit No. 287 TA - Smallholder Tea Project: $10.8 million Credit of March 3, 1972; Closing Date - December 31, 1976 This project has experienced serious management problems both at headquarters and in the field which have largely contributed to the shortfall in planting achievements, currently 45% of target. Insuf- ficient and poor quality field supervision with inadequate control and guidance from headquarters have resulted in poor husbandry practices, low yields and poor quality of leaf produced. Of the four tea factories established or improved under the project, only one is performing satisfactorily. These problems are being reduced since all senior extension staff positions have been filled and monthly visits are being made to each project area. Financial management is improving and disbursements accelerating after the appointment of a Chief Accountant, Cost Accountant and Internal Auditor. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in par- ticular, to report any problems which are being encountered, and the actions being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX II Page 5 of 9 Credit No. 508 TA - Kigoma Rural Development Project: $10.0 million Credit of August 21, 1974; Closing Date - December 31, 1980 The credit became effective in November 1974. Government has designated two national parastatal marketing corporations to per- form the input delivery and crop marketing functions under the project rather than the Kigoma Cooperative Union which would have required a financial reorganization. Possible changes to legal documents are being studied. TRDB remains the lending channel for IDA funds under the project. The Operations Manager (henceforth designated Project Manager), Financial Controller and Land-Use Planner are now on site and heavily involved in planning implementation; several other appointments remain to be filled. A large acreage (relative to previous years) has been planted with cotton and a variety of steps are necessary (now underway) to market it effectively. The Project Management hopes that 30 project villages will qualify for loans under the project starting in September. However, this goal may be an optimistic one in view of the need for a trained bookkeeper and extension worker and preparation of a Village Site Feasibility Report for each project village as a prerequisite'to its borrowing under the project. Credit No. 454 TA - Geita Cotton Project: $17.5 million Credit of January 17, 1974; Closing Date - December 31, 1982 The conditions in which the project will operate were radically changed by the decision effective April 15, 1974, that farmers through- out the district should immediately move into villages. The move was poorly planned and in the short-run will adversely affect production of cotton and food crops. Although in the long-run villagization could well be advantageous to the project as savings in mechanization, extension and credit staff could be achieved, the initial implementation of the project will be delayed. A mission from RMEA is reviewing the project and their report is awaited. Loan No. 1014 TA - Cashewnut Development Project: $21.0 million Loan of June 24, 1974; Closing Date - December 31, 1981 The lowest bids for the five processing facilities to be constructed under the project were considerably in excess of the ap- praisal estimate for the project component. Following detailed discussions between the Government and contractor, the cost has been considerably reduced by deletion of non-essential items so as to not affect the aims of the project. The Government has requested deletion of a rural water supply and a community education center; with these changes, the loan funds will be sufficient to finance 66% of the project as compared to 69%, at appraisal. ANNEX II Page 6 of 9 Credit No. 513 TA and Loan No. 1041 TA - Kilombero Sugar Development Project: $9.0 million Credit and $9.0 million Loan of September 27, 1974; Closing Date - December 31, 1979 The project was declared effective February 24, 1975. The Government is currently making good progress toward ambitious project goals. Civil works bid documents are in an advanced stage of prepara- tion. Contracts are being let for some goods and equipment; measures to reduce possible cost overruns on the civil works components are being considered by the Government. Credit No. 382 TA - Second Livestock Development Project: $18.5 million Credit of May 23, 1973; Closing Date - DecemLber 31, 1977 The credit was declared effective on September 28, 1973 but so far implementation has been extremely slow. IDA disbursements to date have been limited to technical services and it is only during the past four - five months that the development of cattle ranching and marketing has started to get under way. The meat processing component of the project was recently scaled down by almost a third of appraisal proposals because of increase in costs. However, overall progress should improve now that responsibility for project implementation has been transferred to the newly established Livestock Development Authority. EDUCATION SECTOR Credit No. 149 TA - Second Education Project: $5.0 million Credit of May 29, 1969; Closing Date - December 31, 1975 Most project schools are complete and all are scheduled for completion by July 1975. Completed schools are adequately furnished but not yet fully equipped. Procurement and installation of the remaining furniture and equipment is in progress. The project has experienced a minor overrun of $0.4 million. Credit No. 232 TA - Third Education Project: $3.3 million Credit of February 5, 1971; Closing Date - June 30, 1975 Contracts for all 13 project institutions have now been awarded after retendering made necessary by high prices of the original quotations. As a result, the project is about 18 months behind schedule. Procurement of furniture and equipment and the fellowship training program are progressing satisfactorily. A cost overrun of about $0.45 million is expected. ANNEX II Page 7 of 9 Credit No. 371 TA - Fourth Education Project: $10.3 million Credit of April 13, 1973; Closing Date - June 30, 1978 A substantial cost overrun, possibly as much as $13 million, for civil works is being discussed within the Government. The Govern- ment has decided to defer the construction of three secondary schools in the project to reduce building standards and to seek additional financing from bilateral aid donors. INDUSTRIAL SECTOR Credit No. 460 TA - Tanzania Investment Bank Project: $6.0 million Credit of February 13, 1974; Closing Date - June 30, 1978 The credit has been fully committed. A follow-on project is under consideration. POWER SECTOR Loan No. 715 TA - Kidatu Hydroelectric Project: $3.0 million Loan of December 14, 1970 and $5.0 million Supplementary Loan No. 712-2 TA of June 24, 1971; Closing Date - June 30, 1976 Construction work for this project is nearly complete. The project is on schedule and the first unit came on stream in March 1975 and the second is expected to be completed by July 1. A mission visited Tanzania in April to appraise the second stage Kidatu power project. TRANSPORTATION SECTOR Credit No. 265 TA - Third Highway Project: $6.5 million Credit of August 6, 1971; Closing Date - December 31, 1976 After long delays in completing tender arrangements, the contract for the Mtwara-Masasi road was made at nearly three times the appraised cost. Most of the overrun is covered by a $4.4 million loan from ADB and use of the $1.8 million balance from the Bank's Second Highway Project (Loan No. 586 TA). Construction of this road is proceeding satisfactorily. Feeder road construction in Geita and Mara has been slowed by shortages of local funds, fuel, materials and personnel. This has received the attention of the Ministry of Works and some improvement has been effected. Consultants' feasibility studies for Kilombero and Kilimanjaro are proceeding satisfactorily. ANNEX II Page 8 of 9 Credit No. 507 TA - Highway Maintenance Project: $10.2 million Credit of August 21, 1974; Closing Date - June 30, 1979 The project was declared effective on November 20, 1974. Recruitment of expatriates required for implementation is being discussed by the Government with the Crown Agents. Tender documents for the first batch of equipment are being prepared by the Ministry of Works. URBAN SECTOR Credit No. 495 TA - Sites and Services Project: $10.0 million Credit of July 12, 1974; Closing Date - December 31, 1978 The project was declared effective in October 1974 and has made a good start. Contract for infrastructure construction at two sites have been awarded; tenders for two other sites have been received, and contract documents for the remaining two sites are being completed. Tender prices were high on the initial bids but are becoming competitive as more sites are tendered. At present total project costs are estimated to exceed appraisal estimates by about 3%. Training program for technical staff of Ministry of Lands, Housing and Urban Development commenced in March 1975. A consultant has been appointed for Monitoring and Evaluation of the project. PROGRAMI LOAN Loan No. 1063 TA - Program Loan: $30.0 million Loan of December 20, 1974; Closing Date - December 31, 1975 The loan is fully disbursed. The Government continues to implement policies designed to relieve the balance of payments dif- ficulties. A Bank mission will visit Tanzania in July to review the effect of the implementation of such policies. Although the Government has been successful in finding other sources to assist in financing the balance of payments gap, the overall resource gap will be larger than anticipated at appraisal owing to a more rapid deterioration in the terms of trade than expected. There are currently six projects under execution by the East African Community. TRANSPORT SECTOR Loan No. 674 EA - Third Railways Project: $42.4 million Loan of May 25, 1970; Closing Date - June 30, 1976 This loan was suspended on February 13, 1975. The reasons for suspension and conditions for lifting the suspension are discussed in Parts I and II of this report. ANNEX II Page 9 of 9 Loan No. 638 EA - Second Harbours Project: $35.0 million Loan of August 25, 1969; Closing Date - December 31, 1975 The Harbours Corporation is in a healthy cash position overall although there have been problems in transferring funds from regional offices to headquarters. It is now expected that the project will be completed by the end of 1975. Loan No. 865 EA - Third Harbors Project: $26.5 million Loan of December 18, 1972; Closing Date - June 30. 1977 A delay of six months is expected in completing civil works under this project. Cost overruns have been experienced in some project items. The situation is under study by the Corporation, which will shortly issue a plan for speeding implementation. DEVELOPMENT BANK Loan No. 843 EA - East African Development Bank Project: $8.0 million Loan of June 28, 1972; Closing Date - May 31, 1976 Operations of the Bank have been decentralized with a resulting strengthening of the Bank's supervisory capability. Mtanagement problems associated with decentralization have largely been rectified so that the pace of Bank operations is expected to quicken in FY76. Nearly $6.5 million of the loan has been committed, and a second loan is being considered for appraisal. TELECOMMUNICATIONS SECTOR Loan No. 675 EA - Second Telecommunications Project: $10.4 million Loan of May 25, 1970; Closing Date - June 30, 1975 Problems within the EAC have only marginally affected the Posts and Telecommunications Corporation due to the considerable existing decentralization of operating authority. Deterioration of the corporate cash position and rate of return has been slight in comparison to other Community Corporations; the situation will be improved by a rate increase allowed by the Community in February 1975. Loan No. 914 EA - Third Telecommunications Project: $32.5 million Loan of June 22, 1973; Closing Date - December 31, 1976 Procurement is generally on schedule with $20 million committed and the balance near tender stage. All major items are expected to be completed by mid-1975, except two microwave links which, due to long lead time for delivery, will be delayed by 18 months. ANNEX III Page 1 of 3 TANZANIA - TEXTILE PROJECT Loan and Project Summary Borrower: United Republic of Tanzania Amount: Loan of US$15.0 million Terms: 22 years, including five years' grace at 8.5% per annum Relending Terms: Government would onlend to Mwanza Textile Ltd. (MTL) for 13 years, including 4-i years of grace at a rate of 10% per annum. Project Description: Expansion of the existing cotton textile mill at Mwanza to produce an additional 20 million meters of cotton fabrics per year, bringing total production of MTL to 43 million meters. The project would be implemented by a foreign engineer- ing company and an adviser to assist the sponsors in supervision of project implementation. The project also provides for a feasibility study of a cotton blend unit including an investigation into the export potential for Tanzanian made textiles in East Africa. Estimated Cost: (US$ million) Local Foreign Total (1) Engineering and Consultancy Services 0.3 1.0 1.3 (2) Plant and Machinery 1.6 17.1 18.7 (3) Erection and Civil Works 3.2 2.2 5.4 (4) Study and Training 0.1 0.3 0.4 (5) Working Capital 4.6 - 4.6 (6) Interest during Construction 0.5 3.0 3.5 (7) Contingency and Escalation 4.0 6.4 10.4 Total 14.3 30.0 44.3 ANNEX IT. Page 2 of 3 Financing Plan: Kuwait Equity Bank Fund Totol (1) Engineering and Consultancy, Studv and Training 0.4 1.3 - 1.7 (2) Plant and Equip- ment (including freight and insurance): (a) Spinning 0.8 - 8.1 8.9 (b) Weaving and others 0.8 9.0 - 9.8 (3) Erection 0.7 - 0.5 1.2 (4) Civil Works 1.0 - 3.2 4.2 (5) Working Capital 4.6 - - 4.6 (6) Interest during Construction 2.0 1.5 - 3.5 (7) Contingency and Escalation 4.0 3.2 3.2 l0.L_ Total 14.3 15.0 15.0 44.3 Estimated Disbursements: Calendar Year (US$ million) 1975 1976 1977 1978 0.2 7.9 5.9 1.0 Procurement Arrangements: For items financed by the Bank, international competitive bidding in accordance with Bank's procurement guidelines, except (1) small items costing less than US$50,000 may be purchased througgh international shopping after approval by Bank of list of items (2) proprietary equipment necessary for efficient plant operation and items critical to timely completion of project estimated to cost about US$2 million to be procured following bidding from restricted lists of qualified sup- pliers with prior approval of the Bank. Retro- active financing from April 1, 1975 for engineering contract up to an amount of $150,000. Items financed by the Kuwait Fund are to be procured internationally in accordance with its procurement guidelines. ANNEX III Page 3 of 3 Rate of Return: Economic rate of return 16% Financial rate of return 19% Appraisal Report: Report No. 743-TA Map: A map showing location of project is attached. R~~~~ ~ ~ ~ ~ W A N D A Buim Tetl | nCD0 9 pp r A av Mills Rngwo~~~~~~~~LK TANZA r q- cEDilwSAAAy . M B@ Y ~~A Ji Nye A\ Ueedt 0 B~~~~~~~~~~~~~~~ U R E N * Nylkug MO 4 Bduli eA A ibon ~ ~~~~ Ha r I/ N Y G A \_ so ~ ~~~~~~~~ K /bnnRJ.t21a