Tanzania - Second Poverty Reduction Support Credit and Grant Project

Documentof The World Bank FOR OFFICIAL USEONLY ReportNo. 29616 -TZ INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAMDOCUMENT FORA PROPOSEDCREDIT INTHEAMOUNT OF SDR41.0 MILLION (US$60MILLIONEQUIVALENT) AND A PROPOSEDGRANT INTHE AMOUNT OFSDR61.6 MILLION (US$90 MILLIONEQUIVALENT) TO THE UNITED REPUBLIC OF TANZANIA FORA SECONDPOVERTY REDUCTIONSUPPORTCREDIT AND GRANT July 6,2004 PovertyReductionandEconomicManagement2 Africa Region This document has a restricted distribution and may be usedby recipients only inthe performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  GOVERNMENTFISCALYEAR: July lJune30 CurrencyEquivalents Currencyunit:Tanzaniashilling (T.Sh.) US$l = T.Sh. 1,106 (Julyl, 2004) ACRONYMSAND ABBREVIATIONS AfDB African DevelopmentBank LGAs Local GovernmentAuthorities AIDS AcquiredImmuneDeficiencySyndrome LGRP LocalGovernmentReformProgram A0 AccountingOfficer M & E MonitoringandEvaluation APL Adaptable ProgrammaticLoan MDAs Ministries, Departments, andAgencies ASDP Agriculture SectorDevelopmentProgram MDGs MillenniumDevelopmentGoals ASDS Agriculture SectorDevelopmentStrategy MoF Ministryof Finance ATIP Accountability, Transparency, andIntegrity MoH Ministryo fHealth Project MTEF Medium-TermExpenditureFramework BEST BusinessEnvironment Strengtheningin NationalAnti-Corruptionstrategy and Tanzania NACSAP Action Plan BOT Bank o fTanzania NAO NationalAudit Office BRU BetterRegulationUnit NDS NationalDebt Strategy CAG ControllerandAuditor General NationalEnvironmentalManagement CAS Country AssistanceStrategy NEMC Council CDF ComprehensiveDevelopmentFramework NEP NationalEnvironmentalPolicy CEM Country EconomicMemorandum NGO NongovernmentalOrganization CEO ChiefExecutiveOfficer NHIF NationalHealthInsuranceFund CFAA Country FinancialAccountability NMB NationalMicrofinanceBank Assessment NPES NationalPovertyEradicationStrategy CHF Community HealthFund NPV NetPresentValue CPAR Country ProcurementAssessmentReport NSC NationalSteeringCommittee CTB Central Tender Board O&M OperationandMaintenance DAWASA Dares SalaamWater and SewageAuthority OCAG Office o fthe ControllerandAuditor General DFID Departmentfor InternationalDevelopment PAC PublicAccounts Committee (U.K.) PAF PerformanceAssessmentFramework DHS DemographicandHealthSurvey PCB PreventionofCorruptionBureau DPT Diphtheria-Pertussis-Tetanus PED PovertyEradicationDepartment DSA Debt SustainabilityAnalysis PEDP PrimaryEducationDevelopmentProgram EA EnvironmentalAssessment PER PublicExpenditureReview EAC EastAfrican Community PublicFinancialManagementReform EIA EnvironmentalImpactAssessment PFMRP Program EPZ ExportProcessingZone PHDR PovertyandHumanDevelopmentReport ESDP EducationSector DevelopmentProgram PMO PrimeMinister's Office ESW Economicand SectorWork PMS PovertyMonitoringSystem EU EuropeanUnion P0:PSM President's Office PublicService EWURA Energyand Water UtilitiesRegulatory Management Authority President's Office-RegionalAdministration FDI ForeignDirect Investment PO-RALG andLocalGovernment FIAS ForeignInvestmentAdvisory Service PPA ParticipatoryPovertyAssessment GDP Gross DomesticProduct PPAA PublicProcurementAppeals Authority GER Gross EnrollmentRatio PPB ProcurementProfessionalsBody GFS GovernmentFinanceStatistics PRBS PovertyReductionBudget Support GGCU GoodGovernanceCoordinationUnit PRGF PovertyReductionandGrowthFacility GNI GrossNationalIncome PRS PovertyReductionStrategy GOT GovernmentofTanzania PRSC PovertyReduction SupportCredit HBS HouseholdBudget Survey PRSP PovertyReduction StrategyPaper HIPC Heavily IndebtedPoorCountries PSAC Programmatic StructuralAdjustmentCredit HIV HumanImmunodeficiencyVirus PSD Private Sector Development HSDP HealthSector DevelopmentProgram PSI Pre-shipmentInspection ICC ImplementationandCoordination PSIA Povertyand SocialImpactAssessment Committee PSRP PublicServiceReformProgram ICRG InternationalCountry Risk Guide PWC PriceWaterhouse& Coopers IDA InternationalDevelopmentAssociation R D S RuralDevelopmentStrategy IFMS IntegratedFinancialManagement System RPED RegionalProgramEnterpriseDevelopment IFPRI InternationalFoodPolicyResearchInstitute ROSC Review of StandardsandCodes IMF InternationalMonetaryFund SASE SelectiveAcceleratedSalary Enhancement IMG IndependentMonitoringGroup SDS ServiceDeliver Survey IMTC InternationalTechnicalCommittee SEA Strategic EnvironmentalAssessment IRT Investor Roundtable SECAC SectoralAdjustment Credit IT InformationTechnology SECAL SectoralAdjustment Loan LAFM Local Authorities FinancialMemorandum SME Small andMediumEnterprise LDP LetterofDevelopmentPolicy  FOROFFICIAL USEONLY SUMATRA SurfaceandMarineTransportRegulatory TRA TanzaniaRevenueAuthority Authority TWG Technical WorkingGroup SWAP Sector-WideApproach UNDP UnitedNationsDevelopmentProgramme TACAIDS TanzaniaCommissionon AIDS WE UniversalPrimaryEducation TADREG ThmniaDevelopmentResearchGroup URT UnitedRepublicofTanzania TANESCO TanzaniaElectricitySupplyCompany USAID U.S.Agencyfor InternationalDevelopment TAP Tax Administration Project . VAT ValueAdded Tax TAS TanzaniaAssistanceStrategy VFQ VicePresident's Office TNBC TanzaniaNationalBusinessCouncil Sector Director: Paula Donovan I Sector Manager: Kathie Krumm I Task Team Leader: Robert Utz I This document has a restricteddistributionandmay be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   THE UNITEDREPUBLICOFTANZANIA SECONDPOVERTY REDUCTIONSUPPORT CREDIT AND GRANT CONTENTS I INTRODUCTION . .................................................................................................... 1 I1 . TANZANIA'S POVERTY REDUCTIONSTRATEGY ..................................... 2 A. The Current PRS (PRS I) B. PRSIReview during2004andPreparationofaNew PRS(PRS 11).................................... ...................................................................................................... 2 2 C. IntegrationofMDGs into the PRS........................................................................................ 3 I11 RECENTECONOMIC DEVELOPMENTSAND PROGRESSINPOVERTY . REDUCTION ............................................................................................................ 4 A. Macro-economicDevelopments............................................................................................ 4 B Growth andPovertyReductionOutlook ............................................................................... . 6 C. RecentDevelopmentsinNon-income DimensionsofPoverty and Public Service Delivery......................................................................................................... 9 IV FINANCINGNEEDSFOR THE IMPLEMENTATIONOF THE PRSAND . ABSORPTIVECONSTRAINTS .......................................................................... 12 A RecentExpenditureTrends inFundingthe PRSPriority Sectors....................................... . B. CostofImplementingthe PRS andFinancingRequirements............................................. 12 C. Absorptive Capacity............................................................................................................ 12 13 V . WORLD BANK GROUPSTRATEGY ................................................................ 17 A. Consistency ofthe PRSCwith the Country Assistance Strategy........................................ B. Analytic Underpinnings....................................................................................................... 17 19 D. Coordinationwith OtherDonors......................................................................................... C. Alignment of PRS, CAS, andPRSC................................................................................... 20 21 VI THE PRSCSUPPORTEDREFORMPROGRAM . ............................................ 24 A. Overview............................................................................................................................. B. Progress since PRSC-1........................................................................................................ 24 25 D. Private Sector Development................................................................................................ C. The ProposedPRSC-2ReformProgram............................................................................. 28 . .............................................................................................................. 29 F. MacroeconomicStability ..................................................................................................... E RuralDevelopment 31 34 H. Public ServiceReform........................................................................................................ G Public ExpenditureManagement........................................................................................ . 36 IFinancialManagementandAccountability.......................................................................... 38 . 41 J Anti-Corruption Activities . .................................................................................................... 45 L. EnvironmentalSustainability............................................................................................... K. ManagementofDevelopmentAid Resources..................................................................... 47 48 N. Prior Actions for PRSC-2andTriggersfor PRSC-3........................................................... M. MonitoringProgressonPovertyReduction....................................................................... 50 53 VI1 THE PROPOSEDCREDIT AND GRANT . ...................... .................................. 57 B. ImplementationandMonitoring.......................................................................................... A. PRSC-2Prior Actions andPRSC-3 Triggers...................................................................... 57 C. PRSC-2 Credit andGrant Administration........................................................................... 58 59  D. Benefits andRisks............................................................................................................... 61 SCHEDULES Schedule 1: Letter of Development Policy................................................................................... 64 Schedule3: Indicator List of PRSPRBSPRSC Performance Assessment................................ Schedule2: The Performance Assessment Framework for PRBSPRSC .................................... 85 108 ANNEXES Annex 2: Tanzania Social Indicators.......................................................................................... Annex 1: Tanzania at a Glance................................................................................................... 113 Annex 3: Tanzania Key Economic Indicators............................................................................ 115 116 Annex 4: Tanzania Key ExposureIndicators............................................................................. Annex 5: Tanzania Balance of Payments................................................................................... 118 .......................................................................... 119 Annex 7: Partnership Framework Memorandum ....................................................................... Annex 6: Statusof IBRDandIDA Operations 120 Annex 8: Relation with the Fund................................................................................................ 121 132 FIGURES Figure 1: Economic GrowthandPoverty Reduction...................................................................... 7 Figure 3: SelectedGovernanceIndicators for Tanzania. 1996-2002 ........................................... Figure 2: Per-capita Expenditures inPriority Sectors (inUS$). FY99-FY05.............................. 12 15 Figure4: Alignment ofPRSP. CAS. PRSC. Analytic Work. andKey Surveys .......................... Figure 5: Supporting PRS Implementationthrough a PRSC........................................................ 21 24 TABLES Table 1: Tanzania: SelectedMDGand PRS Targets and Status (1990-2015) ............................... Table 2: SelectedEconomic Indicators .......................................................................................... 3 Table 3: Constraints to Private Sector Activities............................................................................ 5 Table 4: EducationSector Progressand Achievements ................................................................. 8 Table 5: Health Sector Progressand Achievements ..................................................................... 9 11 Table 6: Summary of PER and MTEFfull-Financing Estimates (Tsh billions) 2003/04 -2004105 Table 7: Assessment o f progress againstthe triggers for PRSC-2 ............................................... .............................................................................................................................................. 13 27 Table 8: PRSPRSC-2 Focus Areas and Priorities ....................................................................... Table 9: BudgetManagement, Key Results Indicators................................................................ 28 Table 10: Prior Actions for PRSC-2............................................................................................. 38 54 The Bank task team includesRobertUtz (Task Team Leader). Allister Moon. Philip Mpango. EmmanuelMungunasi. Ben Tarimo. Alema Siddiky. Mary-Anne Mwakangale. and Arlette Sourou (AFTP2). Preeti Ahuja (AFC04). Robert Townsend. Shem Migot-Adholla and Ladisy Chengula (AFTS2). Dieter Schelling (AFTTR). Denyse Morin. Denis Biseko (AFTPR). Marius Koen and Mercy Sabai (AFTFM). RogatiA . Kayaniand Pascal Tegwa (AFTPC). Michael Wong. Vedasto Rwechungura (AFTPS). IndumathieHewawasam (AFTES). Johannes Hoogeveen (HDNSP). Roland White (EASPR). Matthew Glasser (AFTU1). PascaleDubois (LEGAF). and ManushHristov(LEGPI). Jeni Klugman (AFTP2). BennoNdulu(DECRS). andRitvaReinikka(DECRG) servedas peerreviewers.  THE UNITEDREPUBLICOF TANZANIA POVERTY REDUCTIONSUPPORTCREDIT AND GRANT FinancingandProgramSummary Borrower: The UnitedRepublicof Tanzania Amount: US$150million (US$60 millionIDA Credit andUS$90millionIDA Grant) Terms: StandardIDA terms: 40-year maturity with a 10-year grace period Description: The Second Poverty Reduction Support Credit and Grant (PRSC-2) will support the implementation of Tanzania's Poverty Reduction Strategy (PRS). The financial support providedthrough the PRSC-2 will narrow the gap betweenthe cost of implementingkey elements of the PRS and resources available from government's own domestic revenue and other donor support. A policy dialogue and performance assessment framework under the PRSC-2focuses on the following cross-cutting and institutional actions which will facilitate progress towards the PRS objectives: (i)Sustainand accelerateeconomic growthand broadenitsimpact: Reducing income poverty is one of the key focus areas of the PRS. Privatesector and rural developmentare the two areas where reforms are expected to have the biggest impact on reducing income poverty in Tanzania. Reforms inthe areas of agriculturaland rural development are intended to improve producer incentives and raise agricultural profitability and thus enhance incomes in rural areas, where poverty is most widespread and most deeply entrenched. Measures include improving export crop quality, reducing marketing cost and the tax burden on farmers and improving access to markets and finance. With respect to private sector development, the focus will be on strengthening of the business environment, in particular for SMEs, and legal and administrative reforms to enhance the functioning of land, credit, and labor markets. (ii)Supportresultsorientationofpublicservicedelivery:Thesecond area of impact is through monitoring and leveraging progress in the implementation of sectoral programs to reduce poverty, covering the priority sectors identified in the PRS, Le., primary education, basic health, water, rural roads, agricultural research and extension, the judiciary, and HIV/AIDS. The PRSC-2 policy dialogue focuses on the establishment of a robust monitoring and evaluation system that allows an assessment of the impact and results o f sectoral programs. The information derivedfrom the monitoring and evaluationsystem will then feed into the assessment of progress towards the PRS objectives, on which future PRSC support will be contingent. Finally, the resources provided through the PRSC-2 complement government and other donor resources infinancing priority programs for poverty reduction. The well developed participatory Public Expenditure Review and Medium Term ExpenditureFramework(PER-MTEF) process provides a mechanismfor the monitoring ofthe use ofresources. 1  (iii)Enhancepublicsectorperformance: Measures inthis areawill have a direct impact on poverty reduction as they enhance public sector capacity to implement poverty reduction programs in the priority sectors and generate additional funds for poverty reductionby reducing leakages in the form of low allocative or operational efficiency of public expenditures. Key areas of reform include strengthening of financial management through the implementation o f the public financial management reform program, strengthening o f the national audit office, implementation of pay reform coupled with improved performance management in the public sector, procurement reform, the implementation of anti-corruption strategies, and enhanced efficiency in the use of development assistance. (iv) Strengthenenvironmentalmanagement: Finally, the PRSC-2 also supports government's efforts to enhance the environmental sustainability of Tanzania's development program. The PRS identifies this as an important element of efforts to improve the quality of life and social well-being. Benefits: The proposed PRSC-2 will help the United Republic of Tanzania to implement the PRS and reach the goals set out in the strategy. The reforms supported by the operation will help to raise growth, make progress towards achieving the Millennium Development Goals and strengthen the institutional infrastructure needed to improve the public sector's capacity to carry out its role more effectively, as envisioned in the PRS. Improved delivery of public services is essential ifthe United Republic of Tanzania is to reach its goals for poverty reduction and improve the quality of life inTanzania. Risks: There are several risks associatedwith PRSC-2: (i) o f the reforms many supported by the credit and grant mightencounter resistance from vested interests, but government has in the past shown determination to overcome such special interests; (ii)government tries to build broad consensus for reforms through consultative processes which sometimes tends to slow down the pace o f reforms, however, the benefits of this approach clearly outweigh the risk; (iii) utilization of PRSC-2 funds the is determined by the budget process and there is a risk that resource allocation and use is not fully consistent with the PRS, however, government has adopted an open and participative budget process including an annual PER process which helps to align and monitor resource allocation and its consistency with the PRS; (iv) the CFAA and the CPAR identified significant fiduciary risk, which the proposed reform agenda is meant to address; and (v) capacity for program implementation and service delivery at both the central and district level is weak, however, in key areas programs are in place to strengthen capacity. Estimated Disbursements: SDR 102.6 million (US$l50 million equivalent) will be disbursed upon PRSC-2 effectiveness. ProjectID Number: PE-PO74073 .. 11  IDA PROGRAMDOCUMENT FOR A PROPOSEDADJUSTMENT CREDIT AND GRANT TO THE UNITEDREPUBLICOF TANZANIA FORA SECONDPOVERTY REDUCTIONSUPPORT CREDIT AND GRANT I. INTRODUCTION 1. This program document presents a single-tranche Second Poverty Reduction Support Credit and Grant (PRSC-2) to the United Republic of Tanzania in the amount of SDR 102.6 million (US$150 million equivalent). The proposed operation selectively supports the implementationof key priority areas of Tanzania's poverty reductionstrategy (PRS), as set out in the Poverty Reduction Strategy Paper (PRSP) prepared in 2000 and its subsequent updates in three annual PRS progress reports. PRSC-2 is the second of a series of three annual PRSC operations. 2. The implementation of the program supported by PRSC-1 has been satisfactory. All triggers for PRSC-2 have been satisfied with the exception of the preparation of a prioritized strategic plan and a corresponding program to strengthen the administrative capacity for implementationof the LandAct and Village Land Act. The outstandingtrigger is expected to be completed by the end of 2004. Overall, the satisfactory progress made since the approval of PRSC-1fully warrants a moveto PRSC-2. Subjectto satisfactoryprogress inthe implementation of the PRS, it is envisagedthat in2005 there will be athird singletranchePRSC. 3. PRSC-2 will focus on the following cross cutting and institutional issues: (a) reducing income poverty through private sector and rural development; (b) improving poverty monitoring and evaluation through continuous development of the PRS process and implementation of the poverty monitoring master plan; (c) sustaining macro-economic stability; (d) improving the effectiveness of the delivery of public services and the overall incentive environment; (e) minimizing resource leakages and strengthening accountability; and (0 fostering environmental sustainability. Sector-specificissues will continue to be dealt with inthe context of sector-wide programs. 1  11. TANZANIA'S POVERTYREDUCTIONSTRATEGY 4. Tanzania launched the participatory PRS process in 1999 with the preparation of an interim PRS, which was followed by the approvalof afull PRS (PRS I) 2000. Endorsement by in the Bank and IMF Boards ofthe PRS andthe first progress report enabledTanzaniato reachthe completion point under the enhanced HIPC Initiative in December 2001 and thus gain access to irrevocable debt relief. The second progress report was preparedin2002/03 and submittedto the Bank's Board together with the PRSC-1. The third progress report was submitted to Board in June 2004. A new PRS (PRS 11)will be preparedduring 2004, including a comprehensivereview of experience andPRS achievements to date. A. THECURRENTPRS(PRS I) 5. PRS Ifocuses onthree main areas of outcomes and actionsfor realizing them. The first is reduction inthe breadthand depth of income poverty. The outcome targets include reductionof basic needs poverty and food poverty, with a particular focus on rural areas, where poverty is most prevalent. The second area is improving the quality of life and social well-being. This entails improved human capabilities, enhanced longevity and survival, social inclusion and personalsecurity, improvednutrition, and containmentof extreme vulnerability (mainly through social safety nets). The third broadarea concerns sustaining an environment that is conduciveto development,which encompassesmacroeconomicstability and good governance. 6. The first and third areas entail cross-sectoraland institutional measures, and the second is primarily dealt with through sector-specific interventions in areas such as health, education, and water, which are designated as priority sectors. As part of the PRS process, the government has prepared, realigned, and approved sector development programs for health, basic education, agriculture, and water. These now provide the framework for supporting the implementationof the PRStargetsthat are specific to these sectors. B. PRS1REVIEWDURING2004 AND PREPARATIONOFA NEWPRS (PRS 11) 7. During 2004, the government will prepare PRS I1and a first draft is expectedto become available by the end of September 2004, which will be finalized by the end of 2004. The preparationprocess will include a comprehensivereview of the adequacy and impact of the PRS I,underpinnedbynewanalyticworkandconsultationswithawidearrayofstakeholdersin Tanzania. Government intends to undertake future comprehensive revisions every fourth year to have arevisedPRS ready for the fifth year when anew PRS cycle would commence. 8. During the planning process for the comprehensive PRS review, it was agreed that the three overarching pillars of the PRS I1should remain those of PRS I.However, the review is expectedto yield a sharpened focus on growth, and re-examine the macro-meso-micro linkages between economic growth and poverty reduction. Another objective of the review is to improve the integrationofcross-cuttingissues such as HIV/AIDS,environment, gender, andage (young& old) into the PRS I1and ensure that sufficient attention is given to governance, security, and peaceas fundamentals to the enabling environment for povertyreduction. 9. Furthermore, the PRS updatewill also review the definition and scope of priority sectors and areas within the PRS to ensure that the PRS I1provides appropriate guidance for budgetary allocations. It would seek to strengthen the poverty monitoring system (PMS) institutional framework, including revision of PRS indicators and targets especially for environment, 2  governance and agriculture. It would also provide the opportunity to further integrate the Millennium Development Goals (MDGs) into the PRS. Other areas o f focus within the PRS update will aim at strengthening the awareness and ownership o f the PRS across all levels (especially sub-national) and sectors o f government. The exercise will also be designed to increase the participationo fthe public and grassroots organizations inthe PRS. C. INTEGRATIONOFMDGSINTOTHE PRS 10. The MDGtargets are a subset o fthe PRS objectives, however, the PRS and MDGtargets have yet to be fully harmonized with respect to quantitative targets and time horizons. While the MDGtargets are definedover the periodupto 2015, PRStargets are upto the year 2010. 11. As indicated inTable 1,the PRS targets for income poverty reduction and access to safe water are clearly more ambitious than the MDGtargets. On the other hand, with respect to the reduction in maternal mortality the PRS target is significantly lower than the MDGtarget. Other targets lie broadly on the same trajectory for both MDGs and PRS. Efforts are currently underway to fully integrate the MDGtargets into the PRS and the results o f which are expected to be presented inthe PRS 11. Table 1: Tanzania: SelectedMDG and PRSTargets and Status (1990-2015) 2015 MDG Indicator Baseline* Actual 2010 PRS (latest) Target MDG Target the Proportion Of Popu1ation 38.6 Basic 35.7 Basic 19.3 Basic 17.8 Basic PeopleLivingBelow the national poverty the National Poverty line("h) needs needs needs needs Line 21.6 Food 18.7 Food 10.8 Food 9.3 Food Achieve Universal Net Primary 100 Primary Education Enrollment Ratio 51.4 89 100 (Literacy) Ratio ofgirls to Promotegender boys inprimary equality and secondary 97 93 100 100 education("h) Halvethe Proportion of Population without 41.7 Peoplewithout Access to an 58.3 32 Urban 20.85 15 Rural to Safe Drinking Water improved water % 51.5 Rural ReduceUnder-five Under 5 mortality 163 Mortalitybytwo-thirds rate (per 1000) 169 48 79 ReduceMaternal Maternal Mortality Mortality by three- Ratio (per 100,000 530 200-700 133 265 quarters live births) BirthsAttended by Skilled Personnel 43.9 36 90 80 (YO) 6-27% (Sero- PrevalenceofHIV, positive SpreadofHIVIAIDS and Reversethe female (% ages 15- 5.5 13 < 13 prevalence 24) rate among pregnant women *MDG baselinedata are for 1990 (World Bank development indicators)except for poverty estimates(HBS, 2000/01), maternalmotality (PHDR, 2002) 3  111. RECENTECONOMIC DEVELOPMENTSAND PROGRESSINPOVERTY REDUCTION A. MACRO-ECONOMIC DEVELOPMENTS 12. Since the mid-l990s, Tanzania has made substantial progress in macroeconomic stabilization and structural reforms of the economy. At the beginning of the reform process, economic growth was slow to pick up, but over the last five years or so it has averagedmore than five percent and reached 6.3 percent in 2002. Tanzania's economy has also become more resilient to economic shocks and real growth in 2003 is estimated at 5.6 percent despite the impact of the drought on agriculture. Inflation remained below five percent in 2003, but increased slightly to 6.4 percent by May 2004, on account of increases in food prices and the price of oil. 13. Fiscal consolidation has been central to the success in macroeconomic stabilization. Improved budget formulation and management together with strict adherence to cash budgeting have allowed Tanzaniato refrain from domestic and non-concessionalborrowing. This has ledto lower interest rates and stimulated private sector growth. At the same time, in support of Tanzania's reform program, donors have provided sizable financial assistance which allowed a rapid expansionofexpendituresinthe priority sectors. 14. Domestic revenue has increased from 12.1 percent of GDP in FY03 to 12.9 percent in FY04. The budget for FY05 projects a further increase in revenue to 14 percent of GDP. The improved revenue performanceis attributable to improvedtax administration, measuresto curtail smuggling of petroleumimports, removalof tax exemptions, and the impact of strongcollections of income tax. Public expenditure increased from 19.8 percent of GDP in FY03 to 22.5 percent of GDP in FY04. In February 2004, Parliament passed a supplementary budget which covers additional drought related expendituresinthe power sector and for restockingthe strategic grain reserve, but also for the purchase of a new government aircraft. The additional expenditure of about TSH 187 billion is to be financedthrough a combinationof higher than budgetedprogram support inflows, lower than budgeted debt service payments, as well as additional domestic borrowing from the Bank of Tanzania. The budget for FY05 foresees a further increase inpublic expenditure, made possible by improved revenue performance (including the impact of the new Income Tax Act which was passed by Parliament in April 2004) and increased inflows of development assistance. 15. The discussionof the macroeconomic framework inthe last PRS Progress Report points out that the continued low revenue yield is a major challenge for Tanzania. The projected medium-term revenue targets are achievable, with implementation of a comprehensive strategy for reform of tax administration and policy. In this respect, the report notes appropriately the importance of eliminating exemptions, as well as of a review of tax laws. In addition, the organization of the national tax administration, the strengthening of the Large Taxpayer Department, and the integration of VAT and income tax departments will be of particular importance. 16. The Bank of Tanzania (BOT)maintaineda tight monetary policy with a view to meeting the establishedreserve moneytargets. Increasedcompetition andefficiency inthe sector have led to a decline inthe interest rate spreadfrom 15.5 percent in2001to 11.4 percent in2003. In2003, credit to the private sector increased by 43 percent, fueled in part by increased competition inthe 4  banking system, and the reduction in interest rate spreads. The rapid increase in credit to the private sector continued in2004 with antwelve months increaseof 42 percent inMarch 2004. Table 2: Selected Economic Indicators Indicator 2000 2001 2002 2003 2004 2005 Actual Projection Annual Average Inflation ("h) 5.9 5.1 4.6 4.4 5.0 4.0 Nationalaccounts, percent growth rates Agriculture 3.4 5.5 5.0 3.5 5.5 6.3 Industry 6.7 6.4 8.5 8.7 7.4 7.1 Services 7.8 6.8 6.8 6.3 6.7 6.5 GDP at factor cost 5.6 6.1 6.3 5.6 6.3 6.5 Real per capita GDP 3.6 3.3 4.2 4.1 3.4 3.7 Nationalaccounts (%o f GDP at market price) Gross domestic investment 17.4 16.8 18.9 18.5 19.0 19.6 Public investment 6 5.6 7.6 7.4 7.6 7.8 Private investment 11.4 11.2 11.4 11.1 11.4 11.8 Gross domestic savings 9.2 8.4 9.6 10 8.6 9.1 Balance of payments ("hof GDP at market prices) Current Acct Balance (excluding grants) -9.7 -9.5 -7.5 -11.0 -11.0 -9.6 Current Acct Balance (including grants) -5.3 -5.4 -3.1 -4.0 -5.2 -4.4 External Indicators Debt Service (after rescheduling, 6.6 6.7 6.7 8.1 8.6 % o f exports o f goods and services) Reserves (in months of imports) 5.7 5.3 5.9 6.7 7 7 Government Finance 1999/00 2000l0l 2001102 2002/03 2003/04 2004105 (% of GDP at market prices) /1 Domestic Revenue 11.3 12.0 11.8 12.1 12.9 14.0 Public Expenditure 17.1 16.5 17.7 19.8 22.5 25.7 Overall Deficit (excluding grants) -5.8 -4.5 -5.9 -7.7 -9.6 -11.7 Overall Deficit (including grants) -3.3 -1.6 -1.1 -1.6 -2.9 -5.2 External borrowing (net) 1.5 1.2 1.4 2.0 3.1 3.4 Domestic borrowing (net) 0.1 0 -0.3 -0.4 -0.2 1.9 Prirorty Sector Expenditures ("hof GDP at market prices)/l Education 3.2 3.3 4.0 4.3 4.4 4.7 Health 1.2 1.3 1.6 1.9 1.9 2.4 Water 0.2 0.2 0.4 0.5 0.5 1.0 Agriculture 0.3 0.2 0.4 0.6 1.o 0.9 Lands 0.0 0.1 0.1 0.2 0.1 0.0 Roads 1.0 1.2 2.1 I.9 2.0 2.2 I Judiciary 0.1 0.1 0.2 0.2 0.3 0.3 TACAIDS21 0.0 0.0 0.0 0.1 0.2 0.4 Source: W B and IMF database Note : 11Government finance and prirority sector expenditures are calculated infiscal year. 21TACAIDS i s a Government agency formed in 2001 to coordinate AIDS related interventions. For fiscal years 1998199-2002/03,HIV1AIDS expenditure is shown as expenditure made by TACAIDS agency, while other HIVAfiDS expenditure was shown under the health sector. However, for fiscal year 2003104, all HIVIAIDS expenditure is shown as expenditure made by TACAIDS, the Ministry of Health as well as Other Ministries, Departments, Regions and Local Governments. 17. Tanzania's overall balance o f payments position improved in 2002 because of larger inflows of donor assistance and the impact of debt relief under the HIPC Initiative. The current account deficit, excluding official transfers, also declined to 7.5 percent o f GDP as a result of increasing exports and stagnant imports. In2003, the current account deficit (excluding official transfers) increasedto 11percent o f GDP, on account of large increases in imports o f petroleum, capital and intermediate goods, and food. Exports increased by about 11 percent on account of increased exports o f gold. International reserves substantially exceeded projections, as scheduled debt-service payments to Japan and Brazil were not made and the BOTsold less foreign exchange than anticipated. The exchange rate against the US.dollar depreciatedto T Sh 1110per dollar by 5  end-January 2004, and since has remainedstable. Inreal effective terms, it depreciatedby about 2 percent, which combinedwith a modest recovery of the terms oftrade, improvedthe environment for exports. The exchange rate is now close to what the IMFhas estimated as an equilibrium real exchange rate. 18. The government has made further progress in implementing reforms in the public enterprise sector. At end2002, a concessionfor the Dar es Salaam Water and Sewerage Authority (DAWASA) was grantedto a British-Germanconsortium. Meanwhile, the financial position and managerialcapacity of the TanzaniaElectricity Supply Company (TANESCO) have continuedto improve following the introduction of a new management team in mid-2002. High level consultations held in March 2004 resulted in broad agreement on a strategy to restore financial sustainability of TANESCO and to reform the power sector. The sale of 49 percent of Air Tanzania to South African Airways was completed in November 2002. In December 2003, government offered 49 percent of the shares of the National Microfinance Bank (NMB) for sale to a strategic investor. This will be followed by the sale of a further 21 percent of shares to domestic investors. B. GROWTH POVERTY REDUCTION AND OUTLOOK 19. A household budget survey carried out in 2000/01 showed a rather modest decline in poverty over the preceding decade. Basic needs poverty decreased from 38.6 percent to 35.8 percent and food poverty from 21.6 percentto 18.7 percent between 1991and 2001. The survey also revealed important differences between urban and rural areas. In Dar es Salaam poverty declinedquite significantly from 28 to 18 percent. Poverty in rural areas is considerably higher than in urban areas and declined only marginally from 41 percent in 1991to 39 percent in 2001 (Figure 1, ChartsA and B). 20. The rather modest decrease in poverty is the result of low average per capita real economic growth of only 0.6 percent annually during the same period. However, as Figure 1, Chart C shows, this low average growth rate masks important economic developments during the decade. During the first half of the 1990s, per-capita incomes actually declined, mainly as a result of poor economic management. Once Tanzania startedto implement economic reforms in the mid 1990s, economic growth startedto accelerateandreached 6.2 percent in2002. However, because of the contraction during the first half of the 1990s, per capita income in 2000 was as high as it was in 1990. Inassessingprogress it is importantto keep this is mind, because it means that in2000 the per capitaresource envelope was as big (or as small) as it was in 1990. Only after the year 2000 didmore resourcesbecome available. Expressedinconstant US$per capitaincome in 2003 is 13 percent higher than that in 1990. Reforms underlying the economic turn-around include macro-economic stabilization through prudent monetary and fiscal policy, the liberalization of prices, interest rates, and the exchangerate during the 1990s, andthe withdrawal of the state from economic activities throughthe privatization of parastatals. 21. The simulations of poverty incidence shown in Figure 1, Chart D illustrate how the specific pattern of economic growth observed during the 1990s is likely to have led to an initial increase in poverty followed by a decline in poverty. According to these simulations, negative per capitaincome growth ledto an increase inpoverty from 38.6 percent in 1991to 40 percentin 1994. After 1994, as per capita income growth started to accelerate, income poverty also fell more rapidly, leadingto an estimateddecline of poverty from 40 percent to 35.8 percent between 1994 and 2001. The simulations also indicatethat during 2002, poverty may have droppedby a further 1.5 percentage points to 34.3 percent. The simulations show that most of the poverty decline took place in Dar es Salaam and other urban areas. In rural areas poverty remained virtually unchanged, though in2001 and 2002 it starteddropping by about 1.5 percentagepoint a 6  year. As most poor live in rural areas, changes in national poverty rates are almost exclusively determined by changes inrural areas. Figure1: EconomicGrowth and PovertyReduction Chart A. Percentage ofthe Populationbelowthe ChartB. Percentageofthe Populationbelowthe Basic NeedsPoverty Line, 1991192and 2000101 FoodPoverty Line, 1991192 and2000/01 45% 25% 40% 35% 20% 30% 25% 15% 91/92 20% W/O1 1056 15% 10% 5% 5% 0% O* DSM Otheruban Rural Total DSM Otherurban Rural Total I Chart C. Per capitaGDP growthrate, 1991-2002 Chart D.SimulatedPoverty Incidence 4.Wh Simulated changes in poverty 2 surveyapproach, using within stratum distribution u) I 2.Wh 1.Wh 0.Wh -1.m -2.WA - I J.G% 1992 1993 1994 1995 1996 1998 1999 2000 2001 2002 -MainlandTanzania-----Dar .. ...........Otherurbanareas ea Salaam Rural areas Source:TanzaniaPovertyandHumanDevelopmentReports2002 and 2003, Staffcalculations 22. This implies that if Tanzania is able to maintain or increase the growth rates achieved during the past few years, a significant further decline in poverty can be expected. The only caveat to this is the fact that in the past, urban areas and in particular Dar es Salaam generated higher growth rates andsaw more rapidreductioninpoverty than rural areas. Progress inpoverty reduction will thus also depend on the pattern of growth and require attention to rural and agricultural development. 23. Facilitating sustainedand acceleratedgrowth of agriculture, which contributes 45 percent o f GDP, is a key element of Tanzania's efforts to reduce poverty. Limitedaccess to agricultural credit, highlevels of agriculturaltaxation, insecurity with respect to property rightsto land and its use as collateral for credit, as well as limited access to markets as a result of poor transport infrastructure, have been identifiedas key constraints to agriculture sector growth to be addressed under the PRSC. Other key constraints such as poor technologies are currently beingaddressed by project interventions. These measures are expected to allow the agriculture sector to grow on a sustainedbasis by 5 percent annually. 7  Table 3: Constraints to Private Sector Activities I I Taxrates I 72.1 I 72.2 I 72.1 I I II Cost ofFinancine 1 56.2 I 42.6 I 59.5 II'I I I I LePal svstem/Conflictresolution I 19.6 I 25.9 I 18.0 I I Telecommunications I 11.6 I 13.0 I 11.3 I Source:InvestmentClimate Assessment:ImprovingEnterprisePerformanceandGrowthinTanzaniaWED, The WorldBank. June2004 24. In addition to agriculture sector growth, achieving the above poverty reduction targets will also require accelerated growth in the industrial and service sectors, with a particular focus on strengthening the backward linkages to agricultural production through agro-processing. The government has withdrawn from most economic activities, and the private sector is now unequivocally recognized as the main player inthese sectors. As a result of the liberalization of the economy and sustained macroeconomic stability, the industrial and service sectors have grown between 5 and 6 percent annually in recent years. However, high cost and limited availability of infrastructure services, human resource and labor market barriers, and redtape in the public sector arethe principal constraints to evenhigher growth rates(Table 3). Infrastructure bottlenecks and human resource constraints are primarily addressed through sectoral interventions. The PRSC focuses thus primarily on further improvements in the business environment and PSD, with particular attention to SMEs. Implementation o f these measures, which are leveraged by the PRSC, should allow a scaling up of growth in industry to between 8 and 10 percent per year and to between 6 and 8 percent per year inthe service sector. Sustained strong performance inthe miningand tourism sectors, which have been important contributors to economic growth in recent years, will add to the overall positive outlook for sustained growth performance and poverty reduction. 8  c. RECENTDEVELOPMENTS INNON-INCOME DIMENSIONSOFPOVERTYAND PUBLICSERVICE DELIVERY 25. This section assesses progress inthe social sectors, using newly available data presented inthe PHDR2003 andthethirdPRSprogressreport. 26. Education. Government has sustained its commitment to increasing access to and the quality and equity of the education system. Key measures inthe achievement of these objectives include the abolition of primary school fees in 2001, significant increases in budgetary funding for primary education, and the implementation of the Primary Education Development Program (PEDP). As a consequence, primary education witnessed a further increase in the gross enrollment ratio from 100.4 percent in 2002 to 105.3 percent in 2003 and a parallel increase in net-enrollment from 80.7 percent to 88.5 percent. A key challenge in the education sector is to sustain and improve the quality of education as enrollments increase. Progress in this area includes the recruitment of 10,7 19 new grade "A" teachers, construction o f 13,396 classrooms and 7,732 teacher houses inFY03, increase inpre-service teacher training from 9,728 in2002 to 15,285 in 2003, and subsidies for the purchase of teaching and learning materials through a capitation grant which amounted to almost US$ 5 per pupil in FY03. Indicators of education quality and efficiency showed some modest improvements. The primary school drop out rate stood at 3.8 percent in 2003 as opposed to 5.5 percent in 2000, the pass rate in standard 7 examinations increased from 24.9 percent in2001 to 27.1 percent in2002, and the transition rate from primary to secondary education has marginally risen from 21 percent in 2001 to 21.7 in 2002. 27. Enrolment in secondary schools increased by 8 percent in 2003 and the number of secondary schools increased from 937 in 2001 to 1,024 in 2002. A Secondary Education Development Program has been preparedwhich aims at increasing the proportion of the relevant age group completing secondary education, especially underserved groups who are now getting better opportunities to complete primary education through the PEDP, improving learning outcomes of students, especially at the lower secondary level, and enabling the public administration to manage secondary education more effectively through the devolution of authority to lower levels and the strengtheningof managementcapacities. Table 4: EducationSector Progressand Achievements Education indicators Baseline (year) Current status (most recentyears) Illiteracy rate 28.6 % (2000) 30.88 % (2001) Primarygross enrollment 77.6 % (2000) 106.3 % (2004) rate Primarynet enrollment 58.8 % (2000) 88.5 % (2003) Rate Dropoutrate (primary) 5.5 %(2000) 3.8 %(2003) Girl-boy ratio (primary) 0.98 % (2000) 0.95 % (2003) Girl-boy ratio 0.85 % (2000) 0.84 % (2003) (secondary) Source:TanzaniaPovertyandHumanDevelopmentReport(2003), Tanzanianauthorities. 28. HIV/AI.S. UNAIDS estimates that at the end o f 1999 about 8.1 percent of all adults were infected with HIV and data from blood donors suggest an increasing trend in HIV prevalence. Prevalence among women is higher than among men.' Recent developments in 'Resultsof anationalHIV/AIDS surveyconductedduringthe secondhalfof2003 will providenewestimatesby age and sex atthe nationallevelas well as regionalestimates, together with informationonknowledgeandbehavior. 9  Tanzania's fight against HIV/AIDS include the establishment of the Tanzania Commission for AIDS which has a fully staffed secretariat since January 2003, and the appointment of members o f the commission including representatives from civil society. A multi-sectoral strategic framework was launched in May 2003, which addresses some of the previous weaknesses and provides strategic guidance for the planning of programs, projects, and interventions by various stakeholders in the fight against HIV/AIDS. Government ministries, departments, and agencies are developing plans for mainstreaming HIV/AIDS interventions into routine activities and receive regular budgetary allocations for the implementation o f these activities. The government, in collaboration with the Clinton Foundation, has formulated a draft Care and Treatment Programme that aims to provide care and treatment to about 400,000 people living with HN/AIDS with an estimatedcost of about US$535 million over five years. 29. Health. In 1999, the GOTembarked on a health sector reform program to focus on implementing the essential and most cost-effective health interventions given the burden of disease, and to transform financing, management and delivery roles by emphasizing quality, empowerment o f local authorities and the beneficiary, and greater use of non-government agents. A three-phase, long-term (2000-2011) Health Sector Development Program (HSDP) was jointly developed by the GOTand development partners and is supported through a Sector-Wide Approach (SWAP). The first phase of the Program (2000-2003) concentrated on initiating reforms within the health sector and putting systems in place, in particular those related to decentralization. Progress has been made in key areas, including (a) better availability of health services at the district level, (b) rationalization of the health work force, (c) strengthened central support systems such as the pharmaceuticals and commodity management system, (d) establishment o f the National Health Insurance Fund (NHIF) and expansion of the Community Health Fund(CHF), (e) expansion of district block grants and district planningto all districts, and (0improvedsectorbudgetingandbudgetexecution. PhaseI1(2003-2008) was recently launched and aims at improving the provision of quality health services by continuing to support the reforms, capacity development and improved management of resources, while focusing on quality. 30. The availability of up to date quantitative indicators o f healthsector service delivery and outcomes is limited. However, the forthcoming census analysis and the demographic and health survey in 2004 will provide updates for most indicators. Fertility rates are on the decline, the number of outpatient visits has increased, and so has immunization coverage. Nonetheless there appears to be nothing short of a health crisis. A PRS objective is to ensure that life expectancy returnsto the level of 1988 of 52 years. This is, at best, a very modest objective considering that it is 25 years less than life expectancy inthe EU, 20 years less than that inChinaand 10years less than that in India. Nonetheless, even this objective may be very difficult to obtain. HIV prevalence rates are still rising, increasing in its wake the fraction of children that are orphans. The health crisis is not solely attributable to HIV/AIDS. It goes beyond that as is illustrated by the facts that child mortality is stagnant (and high), 44 percent of children under five are severely stunted, and 29 percent o fchildren under five are severely underweightfor their age. 31. For the health sector, human resources is a significant challenge. Delivering health services requires sufficient staff, yet the staff per population ratios have dramatically decreased, while demand for services (especially with HIV/AIDS) has gone up. Staff salaries have not significantly increased, and the international demand for medical professionals results in both attrition and low morale, which translates into poor quality o f care. Because decentralization does not (yet) allow districts to modify compensation packages, less attractive districts are at a particular disadvantage in recruiting staff. To complicate the situation further, given the employment freeze, which was only partially lifted in 1998, the health workforce is predominately comprised o f older staff. This has implications for both performance and the anticipated loss of a largeproportionof staff due to retirement. 10  32. Investment in infrastructure has been limited over the past decade and resulted in deteriorating facilities. Capital investmentwill be requiredfor facilities and equipment, together with budgets andplans for improvedmaintenance. Table 5: Health Sector Progressand Achievements Health indicators Baseline (year) Currentstatus (most recent years) Outpatientvisits per capitaper 0.5 (2000) 0.7 (2002) annum DPTHb3 coverage 81 % (1999) 89 %(2002) HIV prevalencerate 15-24age 10.7 % (2000) 12.1 %(2001) group, female HIV prevalencerate 15-24age 6.9 (2000) 8.1 (2001) group, male TB treatment completion rate 78 %(2000) 81 % (2001) (cure rate) Source: TanzaniaPovertyandHumanDevelopmentReport(2003). 33. Water. Governmentcontinuedthe rehabilitationand expansionof urban and rural water supply schemes, which led to enhanced access to safe and clean water. Achievements in the water sector include an increase inrural water supply coverage from 50 percent in June 2002 to 53 percent in June 2003. Access to safe and clean water in urban areas was sustained at 73 percent, while sewerage service coverage intwo cities and seven municipalities increased from 10 percentinJune 2002 to 17percent inJune 2003. The divestiture ofDAWASA was completed and City Water Services Ltd. has taken over DAWASA operations since August lst, 2003 with a ten year mandate to improve technical efficiency of existing water and sewerage systems and ensure reliable services to about three million beneficiaries. In March 2003, a new National Water Policy was launchedand preparationof a Water Sector DevelopmentProgramis underway to harmonizesector activities by government, donors, NGOs, andthe private sector. 11  IV. FINANCINGNEEDSFORTHE IMPLEMENTATION OF THE PRSAND ABSORPTIVE CONSTRAINTS A. RECENT EXPENDITURE TRENDS FUNDING PRSPRIORITYSECTORS IN THE 34. One of the key elements of Tanzania's PRS is increased budgetary funding for the priority sectors, which are defined as (a) education (notably at the primary school level); (b) health (primary health care); (c) agriculture (research and extension); (d) roads (in the rural areas); (e) water; (0 the judiciary; and (g) HIV/AIDS. As Figure 2 shows, per capita public spendingabout doubled inmost of the priority sectors over the past five years and is budgetedto increase further in FY05. However, the figure also indicates that for sectors for which international spending norms exist, Tanzania's expenditures are still significantly below these norms. For example, the cost of a minimum health care package has been estimated to be betweenUS$9 andUS$ 12, while spending inTanzaniawas only US$5.9 inFY04. Figure2: Per-capita ExpendituresinPrioritySectors (in US$), FY99-FY05 18.0 16.0 15.3 - 14.0 d 12.0 &2 Q 10.0 8.0 - 7.6 7.2 tft v) 3 6.0 4.0 2.0 0.0 B. COST OFIMPLEMENTINGTHE PRSAND FINANCING REQUIREMENTS 35. The PRS contains estimates of the cost of its implementation, which are annually refined and updated inthe context of the preparationof the MTEF and the budget. Taking into account absorptive capacity and resources available from all sources (including IDA and PRSC support), the budget guidelines indicate an annualfinancing gap of aboutUS$ 285 million inFY04 and of about US$107 million in FY05, if programs were to be funded as per the sectoral requirements (Table 6). A recent review of these estimates indicates several weaknesses in arriving at these figures. Targets are sometimes not sufficiently operationalized,costing does not cover all inputs to achieving the targets, and for some sectors there appears to be only a weak relationship between the PRSMDG targets and the costed strategy. Preliminary results of a study carriedout by the UNMillenniumproject suggest significantly higher resource requirementsfor reachingthe MDGs thanthe estimates cited above. 12  Table 6: Summary ofPER and MTEF full-Financing Estimates(Tsh billions) 2003104 2004/05- Sector 2003104 2004105 Likely MTEF Rq Outurn. MTEF Rq Budget. Agriculture 116 113 134 111 Education 518 518 540 581 Health 362 217 398 291 HIV/AIDS 43 21 43 52 Water 98 64 97 128 Roads 392 235 411 274 Total 1,485 1,200 1,580 1,473 Source: URT, Guidelines for the Preparationof Medium Term Plan and Budget Framework for 2004/05- 2006/07, January 2004, URT, Budget SpeechFY05,June 10,2004 36. Government's strategy to narrow the financing gap includes enhancements in strategic resource allocation, increases in expenditure efficiency, an expansion of domestic revenue and enhanced access to external concessional resources in the form of grants or concessional loans. Domestic borrowing or commercial external borrowing are not considered as financing sources in the medium term. Domestic revenue increased to 12.1 percent of GDP in FY03 and to an estimated 12.9 percent in FY04. The budget for FY05 has an ambitious revenue target of 14.0 percent of GDP and in the medium term the revenue to GDP ratio is targeted to increase to 15 percent. Removal of tax exemptions as well as a revision of the Income Tax Act are key measures on the tax policy side. The Bank supported Tax Administration Project (TAP) aims at enhancing tax administration. Concerning access to external concessional resources, government is keen to enhance aid effectiveness through better aid coordination, better integration of aid into government systems, and increased use of programmatic and budget support facilities. While finance is clearly a key constraint to the implementation o f the PRS, there are also a series of other absorptive constraints that will needto be tackled to ensure the efficient use of resources. C. ABSORPTIVECAPACITY 37. Macroeconomic constraints. One of the key concerns about increased aid flows to Tanzania is their effect on the exchange rate and Tanzania's international competitiveness. However, recent analysis carried out by the Bank and the IMF indicates that while the real effective exchange rate has been appreciating during the second half of the 1990s, coinciding with increasedgold exports and aid inflows, it has in fact depreciated by about 30 percent since 2000. Partial sterilization of aid inflows, an increase in imports, and the fact that the mining sector operates in relative isolation from the rest of the economy explain the recent depreciation despite continuing increases in exports of gold and foreign aid. According to the IMF, the real exchange rate is now broadly inline with its equilibriumvalue. 38. Debt sustainability. After receiving HIPC debt relief in 2001, Tanzania's NPV debt to export ratio had declined to about 130. Updates o f the debt sustainability carried out by the IMF in2002 and 2004 and by the authorities in 2003 show that Tanzania's debt remains sustainable. The latest update of the debt sustainability analysis carried out by the IMF shows a significantly strengtheneddebt sustainability situation as compared to the assessment at the time o f the HIPC completion point. Taking into account bilateral relief beyond the enhanced HIPC initiative, the original projections of the NPV of debt-to-exports ratio were between 115 and 118 for the period FY04 to FY12. Preliminary results of the update carried out by the IMF in 2004 estimate this ratio at 97.0 in FY03 and project it to decline to well below 90 by FY12, mainly on account of stronger export performance than anticipated at the time of the HIPC completion point. These updates also suggest that Tanzania can absorb its full IDA allocation without exceeding 13  "sustainable" debt to export ratios, provided that export performance and growth remain strong. Inaddition, progress insecuringdebt relieffrom non-Paris Club creditors is critical to ensure the continued sustainability o f Tanzania's debt. 39. Public expenditure and_financial management. Tanzania has developed a solid track record of sustained fiscal stability, with the virtual elimination of domestic and non-concessional borrowing. It has also undertaken significant reforms in public expenditure and financial management, including the implementation of an Integrated Financial Management System, revisions of the Public Finance and Procurement Act, and adoption of a participatory MTEFPER process. Work on strengtheningprocurement systems is underway. 40. While public expenditure and financial management at the central government level is fairly well developed in Tanzania, capacity in local authorities is generally much weaker and shows much variation across districts. At present, most government expenditure, including spending by local authorities funded through central government transfers, is under fairly tight control of the central government with only limitedscope for leakages at the district level. The public finance managementreform program as well as the local government reform program are the principal mechanisms for strengthening financial management systems and capacities at the local levelto ensure that as decentralization progresses adequate capacities are beingput inplace. 41. Quality of public administration. Tanzania has been implementing a public sector program since the early 1 9 9 0 ' ~which has contributed significantly to the rationalization and ~ strengthening o f the public administration. Nonetheless, various factors still constrain the quality of public administration, including low pay levels and a generally low level of education in the population which is reflected in the level of education found among civil servants. Capacity constraints are generally larger at the district than at the central government level. The Local Government Reform Program is intended to strengthen the capacity o f local authorities to plan and execute programs as under the fiscal decentralization program responsibilities are shifted to them. 42. Increasing low pay levels in the public sector is seen as one of the pre-conditions for creating an environment in which other reforms to enhance public sector performance can become effective. The medium term target is to implement a pay reform which would increase the wage billfrom currently about 4.2 percent of GDP to about 4.9 percent of GDP. 43. Governance. Duringthe past few years, Tanzania undertook a wide range of governance related reforms. Governance indicators prepared by Kaufmann et. al. show that in most dimensions of governance (voice and accountability, political stability, government effectiveness, regulatory quality, and rule of law) Tanzania is now above the 25 percentile rank among countries. In addition, on all dimensions except political stability (possibly reflecting developments in Zanzibar at the time of the survey) Tanzania's rating improved compared to 1996. The main weakness inthe area of governance refers to the control of corruption, where Tanzania appears to be among the worst performing countries. Government has put in place an Anti-corruption Strategy which is currently under implementation. Systemic reforms of public financial management and procurement systems, tax administration, the public sector management system and incentive structure, and the regulatory framework are important elements of Tanzania's efforts to reduce corruption. 14  Figure 3: SelectedGovernanceIndicatorsfor Tanzania, 1996-2002 TRNZRNIR (2002) Voice and Accountability P o l i t i c a l Stability ~QV#"ent Effectiveness Regulatory Quality Control of Corruption e 25 i e 75 3 e Conparison betueen 2802, 2888, 1998, 1996 (top-botton order) Country's Percentile Rank (0-188) Source: 0. Kaufrmnnr A. Kraav and H. Hastrurrir 2003: Gouernance Hatters 111: Gouernance Indicators for 1996-2002 ~http:~/wurr.worldbank.org/lrbi/gouernance/pubs/goun;rtters3.html~ 44. Policy and institutionalframeworks at the sectoral IeveL As a low income developing economy, the policy and institutional capacity of Tanzania is modest. While in some of the priority sectors under the PRS the institutional capacity is reasonable, in others it remains weak. Sector development programs are an important instrument for putting appropriate policy and institutional frameworks in place. Sectors that already have operational sector development programs in place, such as the education and health sectors, are able to use available resources reasonably effectively, and could absorb additional resources. In other sectors such as roads, power, or water, major increases in budgetary funding will only be effective as policy, institutional, andcapacity constraints are addressed. 45. With the change in the role o f government in many sectors from implementer to regulator, the capacity of the private sector is a factor. In the water and roads sectors, for example, there are not enough private contractors with adequate expertise and necessary equipment who can handle tasks or deliver services ontime. The weakness is again acute inrural areas. However, experience from other countries indicates that the private sector is quick to develop adequatecapacities once business opportunities become available. 46. Human resources. The share of Tanzania's population with post-primary education is among the lowest inthe world. This i s a legacy of policies that put emphasis on achieving basic literacy, but paid little attention to post-primary education. However, inrecent years government has recognized the need to raise educational levels inthe population as a necessary condition for enhancing economic growth and appropriate programs for primary and secondary education are beingput inplace which are intendedto enhance access and increasethe quality of education. 47. As the private sector and its demand for qualified labor expands, the public sector finds it increasingly difficult to attract and retain qualifiedpersonnel. Public sector pay reform as well as the "strategic accelerated salary enhancement'' scheme are important elements of government's strategy to enhance public sector capacity. In addition, since the overall supply o f qualified human resources in Tanzania is very limited, it is also critical to limit the role of government to 15  activities for which there is a clear rationale for public sector involvement to avoid crowding out o f private sector activities. 48. The large donor community in Tanzania and the large number of donor supported projects add significantly to the competition for human resources. Donor supported projects also often create distortions by biasing incentives for civil servantstowards a focus on narrow project activities rather than on the overall public sector objectives. The move to programmatic donor support such as the PRSC or sector programs which support government systems instead of setting up parallel systems is intended to reduce distortions and the demand for a very limited supply o fspecialized skills. 49. Finally, HIV/AIDS poses a major challenge to Tanzania's efforts to strengthenits human resources and has ledto significantly increasedlevels of attrition inthe public sector and imposes binding constraints on sectors such as health, where it further exacerbates the shortage of qualified nurses. Sustained government attention to combating HIVIAIDS and the implementation of HIV/AIDS programs is thus critical to prevent debilitating erosion of human resources, both inthe private and public sector, inTanzania. 16  V. WORLD BANK GROUPSTRATEGY 50. The proposed PRSC-2 for Tanzania is a core operation to support the implementation of the Tanzanian PRS.It will be the second ina series of three single-tranche PRSCs to support the implementation of policies and institutional development programs for sustainable growth and poverty reduction. These policies and programs are contained in the country's own PRS. Through coherence and stronger coordination with other externally assisted programs, particularly the PRBS, the proposed PRSC-2 will help to further integrate Bank support into the overall strategy under the Tanzania Assistance Strategy (TAS)2for raising the effectiveness of development assistance andreducingthe transactionscost of aid deliveryto Tanzania. 5 1. Incoordinationwith other external assistanceprograms, the PRSC-2 supports Tanzania's effort to scale up growth, broaden the impact of growth on reducingpoverty, and improve access to and quality o f public services. To these ends, the proposed credit and grant will support actions to foster rural and private sector development, sustain macro-economic stability, strengthen public sector performance through public sector and public expenditure reforms, enhance accountability and minimize resource leakages through reforms of financial management, procurement, and aid management, and foster the sustainability of poverty reduction efforts through reforms of the institutional and policy framework for environmental assessments. Schedule 2 presents the performance assessment matrix for the medium-term program and for the PRSC-2. The matrix also shows the harmonizationwith the PRS targets. 52. The design of the PRSC takes into account requirements for coordination and harmonization with other development partners, particularly the PRBS donors. The motivation for this effort derives from the clear desire of both GOTand the development partners to ensure that all operations adopt: e a clear poverty focus guidedby the homegrown PRS, e coherence inpolicy dialogue at cross-cutting levels and insector-wide programs, e enhancedefficiency inpolicy dialogue and performance assessment, and e enhancedflexibility and predictability of resource flows. 53. To that end, the PRSC-2 has been harmonized with the PRBS with respect to both substance and process. A common Performance Assessment Framework (PAF)/policy matrix, includingthe set of prior actions for PRSC-2 and triggers for the PRSC-3, has beendeveloped in close cooperation among the government, the PRBS donors, andthe World Bank. A. CONSISTENCYOFTHE PRSCWITH THE COUNTRY ASSISTANCE STRATEGY 54. The high case scenario of the CAS for fiscal 2001-03 envisaged a Public Expenditure Reform Credit (now PRSC) to support Tanzania's efforts in combating poverty, spurring rural development, and promoting protection of the environment as a basis for sustainable development. It was planned that the PRSC would be the instrument through which the Bank would systematically addressthe issues o fpoverty reduction across sectors that were identifiedin the PRS. The triggers for moving to this scenario were specified inthe Tanzania fiscal 2001-03 CAS and all actions under the triggers have been implemented, which paved the way for the launch of the PRSC program and the preparation and Board approval o fthe PRSC-1. * TheTAS laysout principlesfor the effective provisionanduseof foreign aid 17  55. Preparationof a new CAS has beendelayedto allow full alignment and consistency with the new PRSP, which is expected to be ready towards the end of 2004. In order to achieve greater donor harmonization and coherence among donor support and the PRS, it is envisaged that the Bank together with interested donors will prepare a Joint Assistance Strategy (JAS) instead of the traditional Bank CAS. It is expectedthat the JAS will be presentedto the Bank's Board during the first half of 2005. To supportthe implementationof Tanzania's PRS, efforts to maintain macroeconomic stability are continuing, but the focus is increasingly shifting to sector- level and cross-cutting public sector management issues. The key challenge is to replicate the excellent macroeconomic policy and implementationrecordat the sector level to facilitate overall economic transformationandpoverty eradication. 56. One of the key themes of the JAS will be the full alignment of Bank instrumentswith the principles of local ownership and leadershipof development efforts as set out in the PRS and, more specifically, inthe TAS. Because government policies and the government budget are the key instruments for implementing the PRS, the Bank will increasingly provide general budget support, a shift that has already beeninitiated under the current CAS. Over the mediumterm, the PRSC will become the main instrument for the transfer of financial resources and policy dialogue. A shift in lending modalities is considered necessary because sector interventions through investment projects have been characterized by variable local ownership and have not always been well integrated with other sectoral activities, leading to low sustainability. Also, development of government systems has received limited support, because most donors have tended to focus on their own aid delivery mechanisms. The shift to programmatic lending was precipitated by the government's call for a change in donors' lending modalities, and was justified on three grounds: (1) the PRS has evolved to be the overarching framework for policy dialogue and formulation, both within Tanzania and between government and the donor community, (2) progress on the macroeconomic front has lessened the need for traditional adjustment lending, and (3) progress in planning and budget management provides confidence that public resource allocationsare consistentwith PRS priorities. 57. It is envisaged that the transitionwill be a gradualone. InitialPRSC supportwill coexist with budget and investment support to well-articulated sector programs and technical assistance for the strengtheningof government systems and capacities necessary for increased reliance on program support. This approach, in which the PRSC initially covers primarily cross-cutting issues and policy dialogue and only gradually embraces sectoral support, provides scope for learning for both the Bank and the government as well as continued evaluation of the appropriateness ofthis approach. 58. Supportto the healthand educationsectors will be folded into the PRSC over the coming years and current Bank support to these sectors is being designed to facilitate this transition from sector-specificfinancial support to generalbudget support. Currently, bank support to the health sector is in the form of an APL, the second phase of which has been approved by the Board on December 4, 2003. The proposedstrategy is to gradually shift IDA financing for health to the PRSC through the period of the proposedPhase I1APL. Disbursementswould decrease over the life of the project (3.5 years) while the PRSC would increase, and MoF allocations for health would be closely monitored to ensure that the total health sector budget does not decrease as a result ofthe moveto the PRSC (a fear inmany Ministries of Health inthe Region). Inaddition, a larger share of the crediugrant will be disbursedthrough the basket to foster improved planning and budgeting. It has been agreed with the MoH that certain items which were previously financed off-budget will, as of FY05, be financed through the basket or the government budget. The health project will also focus particular attention on the institutional issues required to confidently shift away from sectoral investment financing, including procurement capacity, financial management, intrasectoralbudget allocations andbudget execution, and M&E. 18  59. Bank support to the Primary Education Sector Development Program (PEDP) is currently in the form of an education sector adjustment credit which provides sectoral budget support of US$ 50 million per year. It is envisaged that after its closure in FY05, financial support to this program will be channeled through the PRSC. A sector development program for secondary education has beenpreparedand its implementation will be supported by an Secondary Education Sector Adjustment Credit for three years, before switching to support provided through the PRSC. 60. The proposed PRSC-2 is a blend of a credit and an IDA grant. The fiscal 2001-03 Tanzania CAS provided for HIPC debt relief to enable the country to increase spending for poverty-focused programs. The government intendsto use the IDA grant component to protect or increase allocation of resources to sectors with the largest impact on poverty and human development. Within each sector, poverty priorities are being specified in the context of the Tanzania PRS and its annual updates. Domestic support for reforms is particularly important at this stage to cushion against a potential backlash from privatization of the large utilities and infrastructure and ensure continuance o f the focus on supporting poverty reduction beyond the tenure of the current reformist president. IDA grants will therefore enable and sustain a virtuous cycle of reforms. B. ANALYTICUNDERPINNINGS 61. Poverty analysis: An elaborate poverty monitoring system (PMS) is in place in Tanzania. Four technical working groups (TWGs) underpin the PMS structure, viz., the (i) Surveys and Censuses; (ii)Routine Data Systems; (iii)Research and Analysis; and (iv) Dissemination, Sensitization and Advocacy. The establishment of the PMS has resulted in significantly improved availability of data and analytics which provide feedback on the overall progress in the government's poverty reduction agenda and inform the policy and financing decisions of the authorities. The PMS is also underpinningthe results focus of the PRSC by providing information as to whether PRSC supported reforms and PRSC financing yield the expected poverty reductionoutcomes. 62. The second annual Poverty and Human Development Report was launched in October 2003 and provides an overview o f the status of poverty in Tanzania, as well as more detailed analysis on topics such as vulnerability and social protection, benefit incidence, the relationship between governance and poverty reduction and vulnerability containment, and agriculture. Results of a comprehensive household budget survey carried out in 2001 were publishedin 2002, and a participatory poverty assessmentwas completed and a report publishedin2003. Inview of the poverty work being carried out by the research and analysis group, the Bank has refrained from carrying out a separate poverty assessment and has focused primarily on supporting local efforts. 63. Poverty and social impact assessments (PSIAs): Specific to the PRSC reform agenda in the area ofrural development, the Bank is carrying out a PSIA ofthe reform of crop boards. The objective of the work is to examine options for reform of the coffee, cotton, cashews, and tea boards with close attention to the impact of reform options. Aside from this PSIA supported by the Bank, Tanzania can draw upon significant work by local researchinstitutes as well as studies carried out inthe context of donor supported projects or international researchefforts that analyze the social andpoverty impactofa large variety ofpolicy and institutionalreforms. 64. Country Economic Work: In 2000, government and the Bank prepared a CEM which focused primarily on economic growth, with particular attention to the agricultural sector and contained a detailed analysis o f poverty and its linkages to economic growth inTanzania. During FY04, the Bank started work on a new CEM, which focuses on the linkages between growth and 19  poverty and vulnerability. The analytic findings of the CEM will feed into the preparationof a new PRSP for Tanzania. 65. Related to the focus of the PRSC on private sector and rural development, the Bank is supporting several pieces of analytic work that complement the analysis done by government, donors, and research institutes. This includes an investment climate survey carried out by the regional program on enterprise development (WED), a rural investment climate survey and a supply chainanalysis for selected agriculturalproducts. 66. Fiduciary work: Inthe contextof Tanzania's government led, participatory PERprocess, a wide variety of analyticalactivities are carriedout everyyear. This includesthe annualexternal evaluation of budget performance and management led by the Bank (the most recent one was published in October 2003); sector PERs carried out for the priority sectors, and more recently, also for selected non-priority sectors; and thematic PER studies on issues such as environment, governance, or gender. A CFAA was prepared in 2001 jointly with DfID and a CPAR was completed in 2003. Technical assistance for the implementationof the recommendationsof the PER, CFAA, and CPAR will be provided through a Public Finance Management Reform Program, while policy dialoguetakes place inthe context or the PER and PRBSPRSC program. It is foreseen that updates of the CFAA will be combined with the PER external evaluation in FY05. C. ALIGNMENT OFPRS, CAS,AND PRSC 67. The Bank's assistance to Tanzania is geared towards supporting the implementation of the PRS. On the substantive side, this implies that Bank assistance is consistent with priorities identified in the PRS. Inaddition, Bank processes need to be properly sequenced with the PRS. As showninFigure4, the first PRS(PRS I) the period from FYOl-FY04 and government covered intends to undertake a comprehensivereview and update of the PRS every four years. In the interveningyears, government is committedto preparingannualPRS progressreports. The third progress report was presented to the Board on June 2, 2004, and a comprehensive review and update of the PRS are being carried out during 2004 with, as mentioned earlier, the objective of publishing a new PRS (PRS 11) inSeptember2004. 68. The Bank's current CAS covers the period FYO1-FY03. It was originally planned to prepare a new CAS during 2003. However, to ensure complete alignment with the PRSP it was decided to delay the preparation of the CAS. A Joint Assistance Strategy (JAS) covering the planned assistance by the Bank and other participating donors will be prepared in 2004105, synchronized with and drawing on the preparationprocess of the new PRS. The time period coveredby the JAS will also be alignedwiththat ofthe PRS. 69. The current PRSC programcovers the periodFY03 - FY05. Since the new PRSP andthe JAS are only expectedto become available in late 2004 or early 2005, it is appropriate that the current PRSC Program covers FY05 to ensure continuity in financing. The new PRBSPRSC program will be launched in FY06, and it is expected that policy actions to be monitoredunder the new PRBSPRSCwill be asub-setofthe actionsidentifiedinthe new PRSactionplan. 70. One ofthe objectives of providing supportthroughthe PRSC instrument is to enhancethe predictability of program support to Tanzaniaand its full integrationinto the budget process. To this end, the PRSCFRBS review process is fully aligned with Tanzania's budget process. Tanzania's fiscal year runs from July to June. The assessment as to whether prior actions have been met takes place inthe context of the PRBSPRSC mid-year review in April. At that time, government would get a firm indication of how much program support will be available for the coming fiscal year and this can thus be factored into the budgetary decision process. Enhanced 20  predictability andmakingthe Bank's programsupport available at the beginningof the fiscal year also provides the basis for improved budget execution as it allows for better cash flow planning andthus more predictableexpenditurereleasesto the spendingunits. 71. The last area of alignment concerns analytic work. The Poverty and Human Development Report as well as the PERwork are carriedout on an annual basis, closely linkedto the government's PRS and budget/MTEF process. It is envisaged that CFAA updates and monitoring will be integrated into the PER process. The CEM's role is to provide analysis on growth and poverty related issues as inputs to the comprehensive PRS update. A CEM is scheduledto be completedinFY05, followed by another one inFY07. 72. Government, the donor community, and other stakeholders are currently engaged in fine tuning the alignment of a variety of processes, including the PRS, the PER/MTEF, sector development programs, the PRBSPRSC, and the PRGF with the budget process. The objective is to enhance the effectivenessof these processes while reducingtransactioncosts. Figure4: Alignment ofPRSP, CAS, PRSC, AnalyticWork, and Key Surveys FYOO FYO1 FY02 FY03 FY04 FY05 FY06 FY07 PRSI1 1st PR 2ndPR CAS FYO1-FY03 ' JAS FY05-FY08 ~ ~ 71 1" PRSCProgram 2"dPRSCProgram PRSC-1 PRSC-2 PRSC-3 PRSC-4 PRSC-5 /Budget 1- -Budget jBudget 1 Budget 1 BudgetBudget I 1Budget Budget /Budget ' 1 PER i1 CPAR PHDR PHDR PHDR ' CEM 1 I ! j , CEM Notes: CAS - Country Assistance Strategy, CEM Country Economic Memorandum, CFAA - Country Financial Accountability Assessment, CPAR - Country Procurement Assessment Report, DHS - Demographic and Health - PER- Public ExpenditureReview, PHDR - Poverty and Human Development Report, PPA - Participatory Poverty Survey, HBS - HouseholdBudget Survey, ILFS IntegratedLabor Force Survey, JAS - Joint Assistance Strategy, Assessment, PR - Poverty ReductionStrategy Progress Report, PRSC - Poverty ReductionSupport Credit, PRSP - PovertyReductionStrategyPaper D. COORDINATIONWITHOTHER DONORS 73. Tanzania receives development assistance from a large number of bilateral and multilateraldonors andNGOs. For the past five years, enhancingthe effectivenessandefficiency of foreign aid and the establishment of a conducive relationship between government, domestic stakeholders, and donors has been an importantelement of Tanzania's developmentagenda. The Tanzania Assistance Strategy lays out principles governing the government-donor relationship. Key elements for rationalizing donor assistance include the move towards sector development programs (already inplace for education, health, and agriculture and under preparationfor water and roads) and general budget support. These aid modalities are seen as appropriatemechanisms for increased donor coordination, better integration of donor assistance into government systems and processes, enhanced ownership, and reduced transaction costs. The local Development 21  Partners Group, facilitatedby the UNDP and a bilateraldonor, is the principal mechanism for ensuringoverallcoordinationamongdonors insupportof governmentprograms. 74. With respect to the proposed PRSC-2 operation, the key areas of coordinationare (a) other donors providingbudget support, (b) sector development programs supportedby the Bank andother donors, and(c) the IMF. 75. The PRBS donor group. The government has reached agreement with 11 donors3, accounting for more than 60 percent of official development assistanceto Tanzania, to establish the PRBS facility to support the implementation of the PRS. Using this facility, donors have agreedto seek improvedflexibility, reporting, andpredictabilityof flows throughthe budget. To ensure impact, the government and donors have agreed on an annually reviewedand updated Performance Assessment Framework with a three year horizon for monitoring progress in implementingagreed reforms under the PRBS. These reforms target improvedeffectiveness of public services, a better incentive environment, minimizedresource leakage, and strengthened accountability. To unify policy dialogue and minimizecosts associatedwith multipledialogues, the PRBS donorsandthe governmenthave decidedto use existingprocessesfor policydialogue. 76. Duringthe preparationof PRSC-1, it was agreedthat the Bank's PRSC programandthe PRBS PAF should be harmonized and integrated. To this end, a draft Partnership Framework Memorandumhas beenagreeduponamongthe development partnersandwith the government as a basis for harmonizing the PRBS and PRSC instruments. It lays out the principles for coordinationoffinancingto ensure predictable andsmoothflows, andpaysparticularattention to anchoring support, dialogue, and monitoring in the implementation of the PRS, minimizing transactions costs, andensuringconsistency ofpolicy dialogue. 77. A three-year PAF has beenagreedupon betweengovernment, the PRBS donors, andthe Bank as the framework for monitoring progress and decisions on budget support. The PAF serves as framework for this operation andis reviewedanddevelopedjointly by the PRBSgroup, the Bank, andgovernment. As is the case for other participatingdonors, within the framework of the PAF, the Bank retains flexibility to determine specific benchmarks and form an independent judgment as to whether significantprogresshas beenmade. The individualfinancingagreements under the PRBS provide for different judgments of performance assessment and any other additional considerations. However, all involvedparties encourage minimizingsuch differences which, if left unchecked, would undermine efficiency objectives and predictability of resource flows. The only substantivearea where the Bank's policymatrix deviates from the PRBS PAF is environment, where support and dialogue of PRBS donorstakes placeoutside the budget support mechanism. 78. The M E After successfully implementing reforms supported by the last PRGF arrangement, a new three year PRGF arrangementwas approvedby the IMF BoardinJuly 2003. Reflecting Tanzania's improved external position and to highlight the authorities' progress toward an exit from the PRGF, access under the new arrangement is only 10 percent of quota. The new PRGF-supported program focuses on a three-pronged strategy aimed at mobilizing revenue, in order to strengthen domestic savings and reduce aid dependency; continuingtrade liberalizationin order to enhance efficiency and strengthen the tradables sector; and improving the economy's supply response by removing impediments to growth, including measures to improve the eficiency ofthe financial sector andpromoteprivatesector development. Canada, Denmark,Finland, Ireland,Japan, theNetherlands,Norway, Sweden, Switzerland, the UnitedKingdom, and the EuropeanUnion.KfW provides cofinancingfor the PRSC-2 22  79. The reform program supported by the PRSC and the new PRGF arrangement are complementary and mutually reinforcing. The PRSC i s closely coordinated with the PRGF according to the agreed institutional division of labor, with the IMF taking the lead on macro- economic sector issues and the Bank taking the lead on structural and social issues. Ina number o f areas where the mandate of the two institutions overlap, there is close coordination and collaboration to ensure that consistent advice is provided to the authorities. Maintained macro- economic stability is part of the performance assessment framework and the IMF Article IV and PRGF reviews are an important input into the assessment o f the macro-economic situation by the Bank. With respect to the timing of operations, the PRGF and PRSC are aligned with the PRS reviewprocess, includingthe work onthejoint staff assessment. 80. Sector development and thematic programs. Another area o f close coordination between the PRSC and other donors is inthe area of sector development and thematic programs. At present, the PRSCPRBS is the principle instrument for resource transfer in the form of general budget support and for policy dialogue on cross sectoral issues, including private sector and rural development. Sector development programs, which are in place for primary and secondary education, health, and agriculture and under development for roads and water serve as instruments for sector specific policy dialogue and tied resource transfer. The role of the PRBSPRSC vis a vis these sector programs is to (a) ensure alignment of sector development programs with the PRS; (b) monitor outcomes and focus on adequate monitoring and evaluation systems; (c) foster cross-sectoral resource allocation and prioritization through the budget process; (d) strengthen service delivery through public service reform; (e) reduce resource leakagesthrough strengtheningfinancial management and accountability systems, and (0provide resources for the implementation of sector programs through general budget support. It is envisaged that resource transfers will increasingly take place through the PRBSPRSC instrument, while policy dialogue will take place in the context of the sector development programs. 81. In addition to sector development programs, there are also several "thematic" donor supported programs that are closely linkedto the PRBSPRSC. These include the Public Sector Reform Program, the LocalGovernment Reform Program, the Legal Sector ReformProgram, the Public Finance Management Reform Program, the Public Expenditure Review process, and the tax administration programs, which are supported by various donors through harmonized basket funding arrangements. These thematic programs relate directly to areas of policy dialogue and monitoring under the PAF. Here the role of the PRBSPRSC is primarily that of leveraging reform and monitoring progress, while the thematic programs provide the necessary technical assistance for the implementation of reforms. 23  VI. THE PRSCSUPPORTEDREFORMPROGRAM A. OVERVIEW 82. The focus ofthe PRSC is on cross cutting issues falling under the first and third pillar of the PRS, i.e., "reducing income poverty" and "achieving and sustaining a conducive environment for sustainable development". Specific areas covered by these two pillars and supported by the PRSC include sustaining macroeconomic stability, rural development and export growth, private sector development, and governance. 83. Support to the second pillar of the PRS of "enhancing human capabilities, survival, and well being," is provided by the Bank and other donors in the context of sector development programs and specific projects and thus not directly part of the policy dialogue under the PRSC. However, the PRSC monitors resource allocationto and outcomes inthese areas which form part o f the overall assessment as to whether PRSC resources contribute to the achievement of poverty reduction results. The only area under the second PRS pillar covered under the PRSC is "environment" reflecting the cross-sectoralnature of environmental issues. 84. Inaddition, as the PRSC provides fundingfor the implementation of Tanzania's PRS, it pays particular attention to poverty monitoring systems which allow an assessment as to whether poverty reduction objectives (including income and non-income dimensions of poverty) are indeedachieved. Figure 5 shows the three PRS pillars and the PRS priority areas ineachpillar. It also illustrates areas which form part of the PRSC performance assessment framework and policy dialogue and those areas where the role of the PRSC is limitedto monitor resource allocation and outcomes. 1 -1 1 Figure 5: SupportingPRS Implementationthrough a PRSC Achieve and Enhance human capabilities,survival and well o ~ ~ ~ e sReduce income poverty conducive development I I environment 1 Outcome monitoringlpublic Policydialoguelspecific expenditure dialogue 85. Sustaining macro-economic stability. The PRS recognizes sustained macro-economic stability as crucial for accelerating economic growth and providing a conducive environment for the implementationofthe PRSinTanzania. The PRSC acknowledges the institutionaldivision of labor between the Bank and the Fund and implementation o f the PRGF supported program is an important indicator inthis area for overall macro-stability. Specific issues targeted and monitored under the PRSC include (a) broadening o f the tax base and enhanced efficiency in tax 24  administration, (b) a simplified and efficient local revenue structure, and (c) improved debt management. 86. Rural development and export growth. The focus on rural development in the PRS derives directly from the poverty profile o f Tanzania, with poverty being still very much concentrated in rural areas, and with the urban rural gap widening during the past decade. Reforms in agricultural and rural development are intended to improve producer incentives and raise agricultural profitability and thus enhance incomes in rural areas, where poverty is most widespread and most deeply entrenched. 87. Private sector development. Reforms related to private sector development and strengthening o f the business environment, as well as legal and administrative reforms to enhance the functioning o f land, credit, and labor markets, are intended to foster economic growth and enhance employment opportunities. Access to formal and informal sector employment has been identified as one o fthe key areas for sustainable poverty reduction inthe PRS. 88. Environment. The PRSC also supports government's efforts to enhance environmental sustainability o f Tanzania's development program. The PRS identifies this as an important element o f efforts to improve the quality o f life and social well-being. 89. Governance. The two governance areas targeted by the PRSC are (a) improving the effectiveness o f public services and (b) minimizing resource leakage and strengthening accountability. Actions in this area will have a direct impact on poverty reduction as they enhance public sector capacity to implement poverty reduction programs in the priority sectors and generate additional funds for poverty reduction by reducing leakages in the form o f low allocative or operational efficiency o f public expenditures. Key areas o f reform include strengthening o f financial management through the implementation o f the public financial management reform program, strengthening o f the national audit office, pay reform coupled with improved performance management inthe public sector, procurement reform, the implementation o f anti-corruption strategies and action plans at both central and local government levels, and enhancing efficiency inthe use o f development assistance. 90. Monitoring and Evaluation. Appropriate domestic systems that allow the monitoring and assessment of tangible results in the implementation o f the PRS are the basis for greater results-orientation o f public policy in Tanzania. The PRSC program thus focuses on the monitoring o f poverty indicators and the strengthening o f Tanzania's poverty monitoring system. The PRSC policy dialogue focuses on the establishment o f a robust monitoring and evaluation system that allows an assessment o fthe impact and results o f sectoral programs. The information derivedfrom the monitoring and evaluation system will then feed into the assessment o f progress towards the PRS objectives, on which future PRSC support will be contingent. The well developed participatory PER-MTEF process provides a mechanism for monitoring the use o f resources. B. PROGRESS SINCEPRSC-1 91. Overall Progress. The assessment o f progress has three core elements. Firstly, progress inthe implementation of the PRS is assessed inthe third PRS progress report with a focus on outcomes. To monitor results, government has developed a list o f key indicators which are also part of the PRSC assessment framework (Schedule 3). Progress in this area has already been discussed earlier in this document. The second area relates to budget formulation and implementation, which is assessed in the context o f the PER process through the external evaluation. Finally, Government, PRBS donors, and the Bank reviewedjointly progress in the 25  implementation of the PRBSDRSC supported reform agenda during the Annual Review in November 2003 andthe midyear review inApril 2004, which is the focus ofthis section.. 92. The Annual Review assessed progress inall areas and concludedthat overall progress as of November 2003 was moderately satisfactory. Subsequently, the mid-year review which was carried outjointly with the other PRBS donors concludedthat progress is satisfactory. 93. Progress in the areas of private sector development, rural development, macro-economic stability, improved budget management, public sector performance, and environmental sustainabilitywas assessed as beingsatisfactory. 94. Progress in the area of public financial management was assessed as moderately satisfactory as there have been delays in finalizing the institutional arrangements for implementingthe Public FinancialManagement Reform Program. Similarly, there was also only limited progress instrengtheningthe National Audit Office. 95. Progress in the area of reducing corruption was judged as being moderately unsatisfactory. The key factors behind this assessment are delays in issuing quarterly reports depicting progress in the implementation of anti-corruption plans and in the preparation and funding of anti-corruption action plans by local government authorities. However, there is improvement in the publication of the quarterly reports with the third and fourth quarter 2003 reportsnow available. 96. Finally, progress in improving poverty monitoring and evaluation was assessed as not satisfactory, as at the time of the annual review inNovember 2003 the third PRS progress report hadnot been finalized. Subsequently, government issued the first draft of the progress report in early December2003. 97. An detailed assessment of progress in implementing the PRSC supported reforms is presented inthe discussion of the individual focus areas of the PRSC. This section discusses in more detail progress against the PRSC-2triggers. 98. Review of progress againstPRSC-2 triggers. Overall, government has made satisfactory progress in implementing actions defined as triggers for PRSC-2. Out of the six triggers, only one trigger has not yet been met, namely the preparation and issuance of a prioritized strategic plan anda correspondingprogramto strengthen the administrativecapacity for implementationof the LandAct andVillage LandAct. The preparationofthe land sector strategicplanwas initially expected to start in October 2003 and be completedby March 2004, with financial support from EU-EDF. The start of this activity was delayed as agreement on the work plan, scope of work, and budget for the preparationof the strategic plan betweenthe Ministry of Lands and EUtook longer than originally envisaged. The work is now underway. Table 7 summarizes progress against the triggers. 26  Table 7: Assessment of progressagainst the triggers for PRSC-2 Drafted amendmentsto the Land Act and presentedthem to parliament. The Land (Amendments) Act, 2003 Bill was submitted for first reading to the November 2003 Parliamentary Session. (Bill Supplement No: 20 of October 17, 2003 published inthe GovernmentGazette No. 42 Vol. 84 dated 17" October 2003). Subsequently, the bill was passed and executed by the President April 14,2004. Prepared and issued a prioritized strategic plan and a corresponding program to strengthen the administrativecapacityfor implementationof the Land Act and Village Land Act. Agreement on the work-plan, scope of work, and budget for the preparationof the strategic plan between the MinistryofLandsandEUtook longer thanoriginally envisaged. The work is now underway. Progress in strengthening and sustaining capacity of the VPO secretariat to support and monitor implementationof the PRS accordingto an updated action plan to be aIlprovedby Government. An action plan for building capacity in support of the PRS was submitted to the PRS technical committee and approved in August 2003. A full-time poverty monitoring officer has been recruited inthe PRS/PMS secretariat and the Poverty Monitoring Advisor has been replaced. Local area network including purchase o f new computers and internet services have been upgraded. Outsourcing is also used to cover internal human capacity gaps. In order to ensure the sustainability of capacity building efforts, a VPO medium- term strategic plan has been developed with technical support from PWC and was finalized in February 2004. The plan is expected to enable VPO to access the SASE scheme, in order to provide the minimum incentivepackage necessaryfor sustainability ofthe growing capacity. Progress in strengthening and sustaining capacity of the coordination and monitoring unit in PO- RALG for collecting, collating, and analyzing administrative data according to an updated action plan to be approved by government. Senior programmer recruitedto lead MISunit inPO-RALG; two senior staff permanentlyassignedto RDS TWG; report by consultanton MIS strategy for PO-RALG completed; Database on LGA Social Economic Profile was to be completedby end Oct 03; local Area Network installed and domain registeredto facilitate e-communication with Regional Secretariats and LGAs; purchased 11 additional (on top of 8 previous) computers for Regional Secretariats for storing and managing data. In addition, The President's Office Public Service Management approved PO-RALG's Medium Term Strategic Plan 2004-7. The Permanent SecretaryPO-RALG also endorsedthe MIS Strategy. Progress in the implementationof the recommendationsof the national debt strategy according to a - work plan (includingactivities, timeframe, and responsibilities)to be approved by government The PAD debt Section has developed a work plan to guide their operations. Commitment to implement NDS recommendationsis strong, ind various NDS proposals havebeen, and continue to be, enadted (for example, prolongation of the debt maturity profile through the introduction of 5-,7- and 10- year Treasury bonds; amendment ofthe 1974 Loans, Guarantees and Grants Act to grant sole authority to the Minister of Finance to authorise new loans; preliminary establishment of the National Debt Management Committee; production of Quarterly Debt Reports; lowering the external debt component of debt stock through continuednegotiationswith PC and non-PC creditors; etc). Progress in the implementation of the revised Public Financial Management Reform Program (PFMRP), includingdevelopment of a monitoringsystem and regular reportson progress. Progress has been made inthe implementation of most of the components of the PFMRP, but in particular in areas where there are supporting projects already inplace, such as the further development of the IFMS, external resource managementand procurement. Further efforts are requiredon other components in order to address fiduciary concerns related to budget support. Establishing the PFMPR as a coordination mechanism, which ensures that reforms address fiduciary concerns in a comprehensive manner, and are well coordinated and sequenced, took more time than expected. The action plan and budget for the first year, an operations manual, and a Memorandum of Understanding for coordinated donor support to the programhavebeenpreparedand endorsedbythe PFMRP Joint SteeringCommittee. 27  C. THEPROPOSEDPRSC-2REFORM PROGRAM 99. The PRSC-2 reform program covers the second year o f a three year program in support of the implementation of Tanzania's PRS and reforms supported under PRSC-2 build on reforms implemented under PRSC-1. Table 8 provides an overview o f the focus o f policy dialogue under PRSC-2, which is discussed in more detail in the remainder o f this section. For each area we discuss the key issues which government is addressing, the reform strategy, progress made under PRSC-2, monitorable actions planned to take place under PRSC-3, expected results o f the implementation o fthe PRSC supported reform program, as well as monitoring indicators. Table 8: PRS/PRSC-2 FocusAreas andPriorities PRS Objectivehnpact PRSC/PRSFocusArea PRSC-2 Areas ofDialogue Indicator PRSPillar: ReduceIncomePoverty Breadth-proportion RuralDevelopment Reform of crop boards below povertyline Enforcementof micro-finance legislation and regulations Monitoring ofASDP implementation Land and Village Act implementation District roads maintenanceand rehabilitation Private Sector Landmarketreform Development Labor marketreform PSD and SME strategydevelopment Designof new civil procedurecode Strengtheningofbusiness environment PRSPillar:Achieve and Sustaina ConduciveDevelopmentEnvironment Macro Stability Debt contracting and Implementation ofNational Debt Strategy management 0 DSA update 0 Enhancedreporting on debt 0 Inventory and audit ofparastataldebt Domestic Revenue 0 Review oftax exemptions 0 Strengtheningoftax administration 0 Rationalization of local taxes Governance-Improve Budget formulation and Approval and execution of budget consistent effectivenessin the management with PRS deliveryof public 0 Improvementofbudgetclassification for central services and the overall and localgovernment incentiveenvironment Enhancedbudgetaryreporting of LGAs Completion expendituretracking study Introduction of formula basedallocationsto districts Governance-Improve Public ServiceReform Servicedelivery surveys the performanceof the 0 Annual plans and performancebudgets public sector 0 Performancemonitoring 0 Pay reform 0 Public ServiceAct 28  PRS ObjectiveDmpact PRSCPRS FocusArea PRSC-2 Areas of Dialogue Indicator Governance- FinancialManagement PFMRP approvaland implementation Minimize resource 0 IFMS seck& leakage and strengthen 0 accountability Audit committeesand internalaudit 0 MoF re-organization 0 StrengtheningofNAO 0 Local GovernmentFinancialManagement Procurement 0 LGAtender boards 0 CPARcompletedandactionplanendorsed Anti-Corruption 0 Reportingon anti-corruptionactivities 0 Capacityenhancement ofthe central coordinationunit 0 Code o fconduct 0 Actionplansfor LGAs Aid Management 0 Inclusionof aid inbudget 0 Reportingo fLGAs on aid 0 MonitoringofTAS implementation PRS Pillar: Improve Quality of Lifeand SocialWell-being Environment Environment Frameworklegislationonenvironmental management Implementationof institutionalframework for environmentalmanagement Capacitybuilding Monitoringindicators EnvironmentPER PovertyMonitoring and Evaluation PovertyMonitoring PovertyMonitoringand PRSreporting and Evaluation Evaluation CapacityBuilding MDG integration D. PRIVATE SECTOR DEVELOPMENT 100. Issue. For the governmentof Tanzaniato reach its objective of reducing poverty it must provide a basis for the creation of sustainable income for households, which will also secure present social expenditures and investments by strengthening the revenue base. The primary issue for government is to create an environment in which households can participate in viable productive activities of their choice by responding to labor or product markets opportunities. Thus as a major priority, governmentmust revamp its operating environmentwhich is rooted ina state controlled economy and dated to an environment which is better able to support its productivesectors to succeed ina globalizedeconomy. 101. Reform Strutegy. The PRSC supports government in building a competitive operating environment by working on two major pillars (1) establishing effective services of public institutions interfacing with the private sector and (2) establishing the foundation for efficient factor input markets in starting with land and labor. Pillar 1: the government has started reviewing regulations, focusing onremovingobstacles andre-organizingthe most importanttasks of government. Inpractical terms this means (1) harmonizationof local governmenttaxation to remove excessive tax burdenon private enterprise; (2) resolution of outstanding issues emanating from the LandAct; (3) review and amendment of labor laws constrainingbusiness operations; (4) streamlining of work permit procedures; (5) review and amendment of licensing legislation to 29  reduce the cost o f business establishment and continuation; (6) review and revision o f export- import procedures to reduce time costs and corruption-related costs; and (7) design and implementation o f a program for enhancing access to commercial courts by SMEs. Pillar 2: efficient factor markets are critical for efficient resource allocation and competitiveness o f the Tanzanian economy. The government has already embarked on two critical areas (a) the labor laws and (b) the land and village act. Complementing these actions supported by the PRSC, the government is also focused on enhancing the efficiency in infrastructure services, ports and harbors and inutilities such as electricity and water. 102. Progress under PRSC-2. (Pillar 1) The government has appraised the business environment strengthening (BEST) programme in collaboration with donors and agreed on the implementation framework, by establishing a Better RegulationUnit (BRU). Work plans for the first year have beenproduced and an adequate budgeto fU S D l million provided for. Currently, 3 government staff have been seconded to BRU and they have started to execute some o f the activities stipulated inthe first year plan. BRUis currently working on Phase I1o f the labour laws reform, BRELA as well as elements related to land reforms. The recruitment process o f CEO is ongoing. The recruitment o f the Lead advisor will follow thereafter. The Ministry o f Industry and Trade has prepared a draft government position paper to guide business licensing reform. In the budget speech for FY05, important measures to rationalize business licensing were announced. These include the abolition o f business license fees for health facilities operated by religious organizations and small businesses. Inaddition, business licenses have to be issued only at the time o f the establishment o fthe business and no longer annually. 103. (Pillar 2) The government started the review and reform o fthe labour laws intwo phases. Phase Icovers employment relations, collective labor relations, dispute resolution and labor market institutions. A new Labour Act has been submitted to Parliament in November, 2003. Phase 11, which includes occupational safety and health, workers compensation act, and employment and skills development has already started and scheduled to be completed under PRSC 3. 104. Regarding land, the government has submitted amendments to the Land Act (1999) to Parliament. Government has put in place a quick procedure for the acquisition o f title deeds and other related documents. During2002/03, budgetary provisions were made for the surveying o f 20,000 new plots in Dar es Salaam. By June 2003, 76,000 plots had been established out o f which 46,670 were allocated and owners o f 36,470 surveyed plots were issuedwith title deeds. 105. Monitorable Actions under PRSC-3. The Better Regulation Unit will begin implementing a first year action plan to improve the efficiency services o f key institutions interfacing with the private sector. This includes the implementation o f the new business licensing framework and the design o f a new civil procedure code. To help focus its role, the government plans to develop a private sector strategy which will be completed under PRSC 3. Government also intends to revise the land policy and formulate and issue land regulations in line with the amendment to the Land Act. Furthermore, the Government will be implementing the second phase o f the reforms o f the labour laws. As these are completed, issues relating to the efficiency o f other factors i.e. energy will be included inthe programme. 106. Expected Results of Program The actions implemented under the PRSC program are expected to leadto four key mediumterm outcomes, namely: 0 Improved efficiency o f public institutions interfacing with the private sector, these include the Business Registration, Customs and Tax administration; 0 Improved efficiency o f factor inputmarkets starting with land and labor; 30  0 Enterprise creation and growth; and 0 Increased value addition of production and competitiveness of Tanzania based production. 107. Monitoring Indicators. Specific quantitative monitoring indicators underthis component of the PRSC include4: 0 Employment law index' (currently 61 on a scale of 0 to 100 with a higher value meaning more regulation); 0 Cost to register a business (currently 199percent of per capita income); and 0 Time to enforce a contract (currently 127days). E. RURALDEVELOPMENT 108. Issues: The PRS highlights several causes of income poverty, particularly in the agriculture sector, identified by groups consulted during its preparation. The highest priority items identified were poor technology, non-availability of farm inputs, poor roads, limitedaccess to markets, and non-availability of credit. Inaddition, recent researchshows that rural poverty is associated with lack o f access to land, particularly by women6. Addressing these constraints requires reforms of crop boards particularly with respect to input supply, product quality, and competitiveness; micro-finance legislation; the institutional arrangements governing rural roads; local government taxation; property rights; and overall co-ordination of public interventions in the agriculture sector. 109. Policies governing export crops - crop boards: Crop boards play a significant role in determiningthe regulatory and institutional environment for crop export and investment growth, and are key determinants in reaching Tanzania's ambitious agricultural growth targets. Performance among boards has varied significantly, beingset up to address concerns of declining quality o f exports, uncompetitive private buyer behavior, and a breakdown o f input supply systems. There are, however, concerns about the inadequate accountability of the boards to traders and farmers whom they are supposed to serve, disruption o f marketing and exports, distortion o f inputmarkets, and insome casesthe exclusion ofthe private sector from marketing. 110. Micro-finance legislation: Access to finance in rural areas is low. The 200011 H B S shows that only 3.8 percent of rural households with one or more members have a savings account, 2.8 percent participate inan informal savings group, and 1.3 percent innon-bank formal savings groups. Only 0.4 percent took a bank loan in 199912000. Access to finance was highlightedby about one-third o fthe groups involved inthe PRS consultation as a key constraint in agriculture. While some farmers have access to credit through contract farming arrangements (e.g. tobacco), or through various input schemes operated by the boards (e.g. the voucher and passbook programs), more attention is needed on the legal and regulatory framework governing formall savings institutions - particularly micro-finance. In addition, raising the overall profitability of agriculture will raise the demand for these financial services. 111. Institutional arrangements governing rural roads: Rehabilitation and maintenance of rural roads are key requirements for reducing agricultural marketing transaction costs, with These indicators are reportedinthe Bank's "Doing Businessin2004" publicationandwill be updated annually. Compositeof flexibility of hiring index, conditions of employment index, and flexibility of firing index. Ellis, F. and Mdoe, N. (2003). Livelihoods and Rural Poverty Reduction in Tanzania. World Development,3l(8): 1367-1384. 31  improved market access essential for the transformation from subsistence to commercial agriculture. The district road network continues to be in generally poor condition with ninety percent of district and feeder roads being impassableto vehicles during the rainy season. Current institutional arrangements for the maintenanceandrehabilitation of district roads remainweak. 112. Local government taxation: Prior to the implementationof PRSC supportedreforms in this area, rural Tanzanians paidan array oftaxes, levies, fees and cesses which inmany cases had a negative impact on producer incentives and incomes. Direct taxes on agriculturalexport crops for example amounted to about 20 percent, inclusive of localtaxes and levies. While the revenue generated from some of the taxes and levies is rather small, they are perceivedto be a significant constraint to economic activity and create opportunities for abuse and corruption. As local governments are increasingly called upon to deliver more services and maintain more infrastructure, it is critical for government to develop a strategy on financing local governments' responsibilities, including the role of own-sourcerevenues and transfers, that is consistent with a supportive incentiveframework for economic activity. 113. Property rights: Lack of access to land is associated with poverty, particularly among women. With the change in land use and increasing population over time, the demand and competition for land for cropping and grazing has increased. Conflicts between different categories of land users, rapid urbanization leading to establishment of unplanned settlements, increased demand for surveyed land for industrial and commercial investments and poor land administrationwere key drivers for the development of the National Land Policy and subsequent 1999 Land Act and Village Land Act. The Acts provide the legal framework for strengthening property rights. While there has been some progress in the implementation of the Acts, implementationremains largely uncoordinated,respondingto un-prioritized demands. 114. ASDP co-ordination: The Agricultural Sector DevelopmentProgram(ASDP) provides a framework for the implementation of the sector strategy, however, co-ordination of the three main agriculture ministries (Ministries of Agriculture and Food Security; Co-operatives and Marketing; and Livestock and Water) remains a challenge for implementation. Efficiency of resource use and effectiveness of service delivery remain key concerns. The fixed costs associated with the creation of multiple structures is high, with concerns about the lack of coordinationandduplicationof activities. 115. Reform Strategy: The governmentreform strategy which the PRSC supports includes: 116. Improving policies governing crop boards: Options for reform of the coffee, cotton, cashew and tea boards will be examined by reviewing existing institutional arrangements for these crops and evaluating the effectiveness of the boards' functions in relation to existing or potential alternative arrangements - particularly in the area of quality control, input supply, and private sector competition. Based on the findings of the review, relevant amendments to the respectiveCropBoardActs will be made. 117. Improving micro-finance legislation: In an effort to ensure the emergence of more efficient and sustainable financial intermediaries, a legal and regulatory framework for micro- finance is to be establishedand enforced. 118. Strengthen the institutional arrangements governing rural roads: Work is underway to revisethe Roads Act which will establishappropriate financial and management arrangements for the road network in Tanzania, including rural roads. As part of the preparation, options to strengthen the institutional arrangements for district road maintenance and rehabilitation will be developed. Followingthis work, the revisedRoads Act will be submittedto Parliament. 32  119. Local government taxation: Government is developing an overall strategy on financing local governments' responsibilities, including the role of own-source revenues and transfers. Measures to simplify and rationalizelocal government taxation will be undertakenand the design of a new intra-governmental transfer system covering both recurrent and development expenditures is at an advanced stage. 120. Improving property rights: A prioritized strategic plan for implementation of the Land Act andVillage Land Act will be developed. This will providepriority focus to areas which are likely to have the highestreturnwhile fitting into the overall budgetresource envelope. 121. ASDP eo-ordination: Co-ordination arrangements for the implementationof the ASDP will be established, including a National Steering Committee (NSC). The NSC will oversee implementation, comprising the permanent secretaries of key ministries involved in implementation, and will endeavor to ensure co-ordination and resolve impasses and disputes across the agriculture sector ministries. In addition, the overall budget allocations to the agricultural sector line ministries will be monitoredto ensure that an increasingshare is going to ASDP priority areas. 122. Progress under PRSC2: Uneven progress has been made on these elements of the program. Work on the crop boards, drafting of micro-finance regulations, streamlining local government taxation, and improving ASDP co-ordination has advanced with slower progress on landand ruralroads. 123. The reviews of the cotton, coffee, cashew, and tea boards are nearing completion and stakeholder workshops on the options for reform have been held. The regulations supporting micro-finance legislation are at an advanced stage of preparation. Nuisance taxes at local government level have been removedand the National SteeringCommittee to provide oversight for the implementationof the ASDP is inplace. 124. While significant progress has been made, in a commendably transparent manner, on delivering surveyed plots in Dar es Salaam, there has been slow progress on developing a prioritized strategic plan to better guide broader implementation of the Land Act and Village LandAct. Delays have been caused by lack of timely funding to undertakethe work. This has now been resolved and the work is currently underway. In addition, progress on strengthening the institutional arrangements for road maintenance and rehabilitation has been slow with initial lack of clarity over responsibilities on policy and institutional strengthening for districts roads betweenthe Ministry and Works and the Presidents Office - RegionalAdministration and Local Government. This has now beenresolvedandthe work is underway. 125. Monitorable actions under PRSC3: There are several monitorable actions under PRSC3: (i)commencing implementation of the recommendationsof the crop board review; (ii) the approvalofnew regulationsfor the micro-financelegislation; (iii) finalization ofthe RoadAct and its tabling in Parliament; (iii)development of an overall strategy on financing local governments' responsibilities, including the role of own-source revenues and transfers; (iv) developmentand finalization ofthe landsector strategic planfor implementationofthe Land Act and Village Land Act; and (v) the changingshare of the agriculture sector line ministries budgets goingto ASDP priorities. 126. Expected results of program: The actions implemented under the PRSC program are expectedto leadto: 0 Improvedinstitutional arrangements governingkey export crops; 0 Facilitative legal andregulatoryframework for micro-finance; 33  0 Strengthenedinstitutionalarrangementsfor ruralroadmaintenance andrehabilitation; 0 Streamlined local government taxes and levies; 0 Improvedframework for implementation of the LandAct and Village LandAct; and 0 Increased focus ofrelevant Ministries on ASDP priorities. 127. Monitoring Indicators: Specific monitoring indicators under this component of the PRSC include: 0 Number ofregisteredandoperating micro-finance institutions (MFIs) 0 Number ofMFIs' clients 0 Proportion of improved quality of agricultural exports 0 Percentage increase involume of agricultural exports 0 Relative increase inpremiumprices of agriculturalexports 0 Number ofpeople usinglandas collateral for accessingland 0 Number ofwomentaking loans andusinglandas collateral. F. MACROECONOMIC STABILITY 128. Issue. Tanzania has successfully implemented a program o f macro-economic stabilization, resultinginsustainedgrowth, low rates of inflation, and the buildup of international reserves. Tanzania has also refinedits monetary and fiscal instruments and institutions to provide a solid basis for sustained macro-economic stability. Weaknesses remain in the areas of debt management and tax policy and administration. The PRSC supports efforts to eliminate residual weaknesses inthese areas. 129. Tanzania's public and publicly guaranteed external debt is assessed as being currently sustainable after obtaining irrevocable debt relief under the enhancedHIPC Initiative (amounting to US$ 2.026 billion in NPV terms). However, continued sustainability of Tanzania's external debt is contingent on the sustained implementation o f macroeconomic and structural reform policies, as well as prudent managementof external debt. 130. Tanzania's revenue performance has increased in recent years from 11.3 percent in 1998/99 to 13.0 percent in 2003/04 but is still low compared to other countries in the region. Improving Tanzania's comparatively low revenue effort is a key element o f government's strategy to ensure sustainable financingfor the implementationofthe PRS. 131. Reform strategy. Tanzania's reform strategy for debt management is spelled out in the national debt strategy, the implementation of which is monitored under the PRSC program. Key elements of this strategy are actions to (a) ensure fiscal sustainability and an optimal debt structure, (b) deal with domestic contingent liabilities, (c) develop financial markets, (d) strengthenthe institutional arrangement for public debt management, and (e) strengthenthe legal framework for borrowingand debt management. 132. Tanzania's strategy to enhance government revenue focuses on broadening the tax base and improving tax administration. Technical support for improving tax administration is providedby the Bank and other donors. 34  133. Progress under PRTC-2. Government continued prudent debt contracting and management and close monitoring of the debt situation. A work plan for the execution o f the recommendations of the National Debt Strategy was prepared and will be further refined. Government has continued to implement the National Debt Strategy, including furthering debt negotiations, improving public accessibility o f debt data, reform of the legislative framework for debt contracting, preparation of an updated debt sustainability analysis and an inventory of domestic contingent liability as well as presentation of an annual borrowing and repayment plan (concessional and non-concessional loans and attention to limits) to Parliament, together with the budget for 2003/04. Provisional results of the annual debt (domestic and external) sustainability analysis for the period ending inJune 2003 indicate that debt is sustainable with a debt to export ratio o f about 126 in 2003104. However the analysis also indicates that if agreement on debt relief from non-Paris Club creditors is not reached or if GDP and export growth are less than projected, Tanzania's debt is likely to be unsustainable. Contingent liabilities amounted to about T.Shs. 375.2 billion(about 3.8 percent ofGDP) as of endNovember 2003. 134. Concerning government revenue and taxation issues, the authorities revoked, effective October 2003, all government notices granting tax exemptions that were issued before 1997 and discussions are on-going about extending similar treatment to post 1997 government notices. With technical assistance from the IMF, government has prepared a revised income tax act which is expected to enhance revenue mobilization. The income tax act was presentedto Parliament in February 2004. Following approval of the five-year corporate plan for the Tanzania Revenue Authority (TRA) at endJune 2003, organizational and personnel steps were taken towards its implementation. A new Customs Code for the EastAfrican Community (EAC) is currently being drafted with the aim to establish a Customs Union. Amendments to the EPZ regulations are being prepared and the EPZ (Customs) regulations will be amended to be in line with this new code. 135. Monitorable actions under PRSC-3. The implementationof several measures foreseen to be implemented under PRSC-3 already commenced under PRSC-2 and is expected to be continued or completed during PRSC-3. This includes the establishment of a National Debt Management Committee which meets quarterly to advise the Minister of Finance on all proposals for new credit and to monitor the implementation o f the National Debt Strategy. Government is committed to strengthen the debt data management system by improving institutional arrangements and coordination between all departments generating and hosting debt data. Government will also issue circulars to ministries, departments, and agencies (MDAs) to reinforce adherenceto the Loan, Guarantees, and Grants Act and refine and update the work plan for PAD'S debt department. Progress on the implementation of TRA's new corporate plan, the publication of revisedregulations for customs under the EPZ act as well as the submission o f tax laws including clear provisions for tax exemptions are actions to strengthentax administration. 136. Expectedresults of theprogram. The key results o fthe macroeconomic reforms pursued under PRSC-2 are (a) prudential debt contracting and management consistent with the annual repayment and borrowing plan presentedto Parliament together with the annual budget and with maintaining macro-economic stability and (b) an equitable and efficient tax system that supports an increase inthe revenueto GDP ratio without impingingon economic growth. 137. Monitoring indicators. The following indicators will be usedto assess the effectiveness of reforms inthis area: 0 Net present value of public external debt to exports (as an indicator of sustainability; informationsource: DSA) e Ratio betweenactual and budgeted: a. Debt service (domestic and foreign) 35  b. Gross borrowing(domestic andforeign) 0 The eight key performanceindicatorsusedby the Tax Administration Project. G. PUBLICEXPENDITURE MANAGEMENT 138. Issues. The budget is a key instrumentfor the implementationof the PRS. An effective budget process which can translatePRS priorities into budgetary allocations and execute these is critical to ensure that both domestic resources and program aid are used effectively. At the central government level, Tanzaniahas established fairly robustsystems for budget allocationand execution as documented inthe annualPERexternalevaluationreports, IMFmonitoring, and the HIPC expenditure tracking exercise. While initial reform efforts have rightly and successfully focusedon strengtheningbudgetmanagement at the centrallevel, budgetmanagementat the local government level has received less attention and still displays considerable weaknesses. The ongoingdecentralizationprocess which gradually gives greater responsibility for the management of fiscal resources to local governments, makes reformsofthe intra-governmentaltransfer system and of budget management at the local level an important focus of current reform efforts. Progresshas also beenmade inintegratingdonor resources into governmentsbudgetmanagement systems. However, an estimated 20 to 30 percent of donor support are still provided to governmentoutsidethe budgetarysystem. 139. Reform strategy. The PER and MTEF processes are the main instruments to align budget allocations with the PRS. In March 2004, the PER external evaluation reviewed Government's approach to strategic decisions on medium-term resource allocations and developedproposalson how the process could be strengthened. 140. The PRSC monitors that resource use is consistent with PRS priorities and supports reforms which are aimedat maintaining fiscal discipline and enhancingallocative and operational efficiency. While initially the focus has been on increasingand monitoring the share of budget allocations goingto the priority sectors defined inthe PRS, there is now need for greater attention to the efficiency of public spending and intra-sectoral resource allocations both in priority and non-priority sectors. The PER process is the primary instrument to carry such reforms forward. Performance budgeting as well as the focus of public sector reforms on improved performance management are critical complementsof efforts to strengthenthe results orientationof the public sector. 141. The reform of the intra-governmental reform system has at its core the adoption of a formula based and incentivized fiscal transfer system, covering both recurrent and development expenditures. Local government budget management is now a key focus of budgetary reforms, which includes capacity building at the local levelthrough the local governmentreform program, the phased roll-out of the Integrated Financial Management System, and improved budget classificationandreporting. 142. Progress under PRSC-2. The budget for 2003104 and the budget guidelines for the period 2004105 - 200617 continue to support the implementationof the PRS. The reporting of expenditures based on clearly identified budget codes for priority sectors and items allows for improved monitoring of poverty reducing expenditures. The budget for 2003104 shows an increase in budget allocations to the priority sectors by about T.Shs. 235 billion or 25 percent comparedto actual spending in2002103. The allocation going to the priority sectors remainedat around 46 percent of total government spending. A major increase outside the priority sectors occurred in the energy sector relatedto the Songo-Songo natural gas development project. The budget guidelines indicate further increases in real spending in the priority sectors in 2004105, however their share in total spending is projected to remain constant. However, the fact that 36  around US$ 200 million of resources have been left unallocated inthe budget guidelines leaves some uncertainty as to the final budgetallocations for 2004105. 143. Budget execution in 2002103 and the first half of 2003104 was consistent with the approved budget and the PRS, as allocations to the priority sectors remained protected and expenditure releases were provided at a quarterly basis. In 2002103, the application of the new procurement act led to delays inthe implementation of the expenditure program with a bunching o f expenditures in the last quarter of the fiscal year. The first half of 2003104 showed significantly less delays in expenditure execution, suggesting improvements in procurement planning and implementation. InFebruary 2004, Parliament approved a supplementary budgetto finance drought related expenditure in the power sector and for the re-stocking of the strategic grain reserve as well as for the purchase of a government aircraft and additional transfers to local authorities to compensatefor revenue losses after the abolition ofthe development levy. 144. With respect to reforms of local government budgeting, recurrent and development budgets have beenprepared usingthe GFS classification. A new format for the reportingof local government expenditures to PO-RALG and the Ministry o f Finance has also been developed and was usedfor the preparation o f quarterly budget execution reports inthe third quarter of 2002103. Transfers from the central government to local governments, which currently account for about 85 percent o f their spending, are also classified according to the GFS. Cabinet has approved the introduction of formula based transfers to local authorities for recurrent expenditures in the education and health sectors. This is expectedto enhance the transparency, fairness, and poverty orientation o fthe intergovernmentaltransfer system. 145. Expenditure tracking work in the education sector, foreseen to be completed under PRSC-2, has been delayed and only a draft report which still requires substantial revisions has been prepared to date. It is expected that the approach and methodology o f that study can be replicated inother sectors. The Ministry of Finance confirmed the strategic importance it intends to give to expenditure tracking studies inthe future, especially through its Technical Audit Unit. However, some more limited expenditure tracking took place. A pilot for the education sector supported by the Bank indicated that there are virtually no leakages inthe flow of funds from the center to schools. The study also suggested that large-scale tracking of the per-capita grants should only take place once the grants have increased from around US$ 2 at the time o f the survey to the target of US$ 10per pupil. The technical audit unit of the Ministry of Finance with EUsupport carried out anexpenditure tracking study for the roadsector. 146. Monitorable Actions under PRSC-3. The budget for 2004105 and the budget guidelines for the period 2005106 - 200718 are expected to reflect PRS priorities and support the implementation o fthe PRS. Furthermore, budget execution for 2003104 and the first six month of 2004105 should be consistent with the approved budget. 147. As PRSC-3 coincides with the preparation of a new PRSP for Tanzania, there is a particular focus on strengtheningthe linksbetween the PRS and the budgetprocess. To this end, government will complete the medium-term costing o f priority policies and actions contained in the new PRSP inrelation to the annual and medium term performance targets. Furthermore, an important aspect o f strengthening intra-sectoral resource allocation and operational efficiency is the implementation of recommendations from the sector PERs. 148. Government is also committed to implement the recommendations of expenditure tracking studies and develop appropriate action plans based on the findings of various tracking studies. LGAs are expected to display the receipt of central government on notice boards and in newspapers. 37  149. Finally, to further enhance the capture o f donor funding in the budget, ministries, departments, and agencies will prepare quarterly reports that show the amount o f foreign assistance receivedby donor. This is intended to allow for the checking o fconsistency o f data on donor spending by the MDAs, the Ministry o f Finance and the donor agencies and the identification o f any systematic differences inreporting. 150. Expected Results of the Program The key result o f these actions is to ensure that budgetary allocations and spending are consistent with the objectives and strategies set out inthe PRS. Furthermore, the actions are also intended to yield greater transparency in budget formulation and execution both at the central and local government level. 151. Monitoring Indicators. There are three broad indicators that are used to monitor progress inthis area. The first is spendingon the PRSP priority sectors, which tries to capture the extent to which outcomes of the budget process are consistent with the PRS. Recent discussions in Tanzania have put in question the usefulness and possible moral hazard problems in monitoring budgetary inputs to priority sectors instead o f focusing primarily on outputs o f government activities and the integrity o f the budget process. Inaddition, since the definition o f priority sectors in the PRS focuses primarily on social sectors and excludes important spending categories related to economic growth such as infrastructure expansion, operation, and maintenance, the usefulness o f focusing on expenditure shares o f the priority sectors has also been questioned. The second indicator thus focuses on the integrity o f the budget process by monitoring to which extent budgets are executed as approved. The share o f budgetary votes for which the deviation between budgeted and actual expenditures is more than five percent captures this aspect o f public expenditure management. The last indicator is the number o f benchmarks met inthe HIPC expenditure tracking assessment, as a composite indicator covering many aspects of budget formulation,. execution, andreporting. I I1 2002103 2003104 - I I I Share of priority sector spending intotal 46% I 46% 1 46% 1 spending Share ofvotes with budgetdeviations 1 35% 1 20% greater than 5 percent HIPC expendituretracking benchmarks met (out of 15) 152. The external evaluation under the annual PER process, which also includes an update o f the HIPC expenditure tracking exercise, serves as the main monitoring tool inthis area. As part o f the PRBSPRSC annual and midyear review, a detailed budget review is also carried out and it is intended to mainstream PRBSPRSC monitoring requirements, both with respect to substance and timing, with the PERexternal evaluation function. H. PUBLIC SERVICE REFORM 153. Issues. Despite good achievements in structural reforms in the mid-nineties, much remains to be done to translate these results into improved service delivery to the people o f Tanzania. Although substantial progress had been made inreducingthe size o fthe public service and implementing other cost containment measures, GOTfelt that it needed to focus on the transformation o f the public service into an institution that will play a pivotal role in economic 38  growth and reducing poverty. It believed that, under severe budgetary constraints, it was important to put inplace a work force that would become more accountable for its performance. It is against that background that GOTopted for a more comprehensive public service reform program launched in2000. The PRSC supports this comprehensive program. 154. Reform Strutegy. More specifically, the PRSC supports government's effort to improve the performance o f the public service by: (i) institutionalizinga strategic process to sustain the structural reforms; and (ii) strengthening the capacity for improved delivery o f public services. The PRSC supports the government's long-term process o f sustainable capacity building and transformation o f the public service to result-orientation. Under this process, the public service is learning to utilize strategically the limited public resources available towards service improvements. Within this framework, key capacity requirements are identified and so are appropriate institutional incentives for performance. Key components o f the program include the acceleration o f pay reform, the installation o f performance management in the MDAs, the monitoring o f performance and decentralization o f human resources management closer to the people. A key constraint to public service performance is low public sector wages. This has led to difficulties in attracting, motivating and retaining qualified staff. However, government recognizes that pay alone will not improve performance o f the public service and that there is a need for wage increases to be linked to improved performance. Thus government is institutionalizing in MDAs the implementation o f a range o f performance-focused instruments including annual plans, performance budgets, service delivery surveys, and open performance appraisal as part o f performance monitoring. Performance improvement is at the core o f GOT'S public sector reforms and its plan to build sustainable capacity in the public service. Inorder to ensure that the program is truly contributingto delivery o f better services, GOTis puttinginplace a comprehensive monitoring and evaluation (M&E) system. 155. Progress under PRSC2. The overall implementation o f the "improved performance of the public sector" component o f the PRSC is satisfactory. The Public Service Management Office (P0:PSM) has moved steadily with the reform agenda. One o f the key achievements has been pay enhancement in line with the approved budget for FY 2004. Salaries have been increased between 6 and 10 percent with the minimum wage rising from T.Shs. 35,000 in 1999 to T.Shs. 55,000 hence up by 57 percent. P0:PSM would like to accelerate the implementation o f its pay reform strategy. However, since pay reform is dificult to implement and there could be some wavering o f commitment, it will be important to continue to monitor closely the implementation o f this element o f the PRSC matrix. A key issue to be considered is the use o f the selective accelerated salary enhancement (SASE) as a tool to accelerate salary enhancements particularly for professional, technical and managerial staff. Although Cabinet approved the principle o f accelerating implementation o f the pay reform strategy, it remains uneasy about the mechanism presently being used (SASE) and would like to see more thoughts being given to other options. This will continue to be monitored closely since any back tracking on that front could jeopardize the implementation o f the overall PSRP. This will continue to part o f the ongoing dialogue with government. 156. P0:PSM also supported the completion o f strategic plans for 23 MDAs during the past year out o f a total o f 33 MDAs. Of those, 13 have completed their annual operational plans and action plan exceeding the target o f 11. These operational and action plans were based on self- assessments and service delivery surveys (SDSs). 157. Therefore, the overall installation o f performance management in the MDAs is progressing as envisaged and 80 per cent o f the exercise is now completed. The key challenge i s making it a sustainable feature o f the management o f the public service with genuine ownership by the MDAs with a clear link to resource requirements and allocation. P0:PSM is considering preparing on a yearly basis a report on the "state o f the public service", which would make use o f 39  the information generated through the performance management process and more specifically from the M&E system installed inP0:PSM and the MDAs. Close linkages between the strategic plans and resource allocation are crucial to success since MDAs can only be held accountablefor their performance ifresources are aligned with the plans. Progress is beingmade in integrating strategic planning and budget preparation. 158. To date, the M&E system has been piloted satisfactorily in 8 MDAs and the roll-out is proceeding in 19 MDAs. An elaborate system has been developed and training is ongoing in MDAsto ensurethe quality of informationthat it generates. The importance ofhaving inplace a strong result-based M&E system can only be emphasized if performance of the public service is to be assessed in terms of improving service delivery and ultimately to have an impact on poverty. However, P0:PSM has to re-assess which instruments are the most appropriate to monitor the latter and how it needs to collaborate with other parts of government who are actually deliveringthe services, i.e., local governments. 159. A Public Service Act has been approved by Parliament, forming the basis for a more meritocratic process of human resourcesmanagement. However, the new Act is inconsistent with Government's decentralization policy, reducing local government authorities' control and management o f staff employed at the local level. Although P0:PSM claims that government i s operating within the framework of the Public Service Management and Employment Act, and thus is committed to decentralizing the managementand control of human resources, it appears that this might not be the case. P0:PSM and relevant ministries have initiated the process to launch an independent study to review issues requiring"harmonization". The lack of a clear and unified position with respect to decentralization of human resources managementraises concern and it is hoped that the study will provide a clear direction for the way forward. 160. Monitorable actions under PRSC3. It is expected that for the PRSC3 period, the GOT will have approved updated annual plans and performance budgets for all MDAs taking into account results of service delivery surveys (SDSs). It is also envisaged that SDSs will be completed for the remaining MDAs. However, it will important that P0:PSM addresses the issues raised by the implementation of SDSs and seeks to find an appropriate mechanism to assess regularly the client satisfaction. Close collaboration with local governments will be key. In addition the M&E performance monitoring system will have been rolled out in all MDAs. More importantly, pay enhancement in line with the pay reform targets and approved budget for FY05 and implementation of accelerated salary enhancements will yield improvements for professional, managerial and technical staff. It is also hoped that a study on the decentralisation of human resources will have beentranslated inan action plan indicating how the harmonization of the public service act and local government service act and regulations will take place. 161. Expected results of the program. The PRSC actions are expected to lead to the following outcomes: 0 Improvedpublic service capacity and performance to support the delivery o f services; 0 Improvedclients' awareness of what they can expect from the public service and increasedsatisfaction; and 0 Enhancedprofessionalization o fthe public service through improved motivationand retention of staff. 162. Monitoring indicators. 0 Results of SDSs demonstrating the level o f client satisfaction; 40  0 M&Eperformancemonitoringsystemfunctioning inallMDAs indicatingincreased outputs from the public service; 0 Pay enhancementin line with pay reform strategy targets; and 0 Gradual but increaseddecentralization of human resourcesmanagementto local governments. I.FINANCIALMANAGEMENT ANDACCOUNTABILITY 163. Issues. The Country Financial Accountability Assessment (CFAA) that was carried out in 2001 indicated that inadequate financial accountability systems both at central and local government levels poseda major fiduciary risk. The specific weaknesses include: (i) Central and local government accounting and financial reporting is constrained by a shortage o f qualified and experienced accounting and internal auditing personnel due to unattractive civil service salaries; lack of effective sanctions against violation o f fiduciary procedures; and, weaknesses in government IT policy and records management. (ii)Public Sector auditing i s inadequately resourced, interms of bothfinancial and human capacity. 164. A Country Procurement Assessment Report (CPAR) was carried out during fiscal year 2003 as part o f PRSC-1 preparation. This second CPAR (first CPAR was carried out in 1996) undertook a diagnostic review of all areas of public procurement systems inTanzania, including: the legislative framework; the performance of regulatory functions; the enforcement regime; the capacity o f public sector institutions to conduct procurement; and the effects of corruption on procurement. Recommendations of the CPAR include: (a) separating the operational and regulatory functions of the Central Tender Board and transforming the Central Tender Board into a regulatory authority responsible for procurement policy and monitoring of public procurement; (b) fully decentralizing procurement operations to MDAs; (c) establishing a new cadre of procurement specialists and a system of certification for the same; (d) restructuring the composition o f the District Tender Boards to exclude councilors; (e) abolishing the Government Stores and introducing framework contracts for common items that will be managed by a slim government agency; (f) abolishing the Materials Management Board and establishing a new Procurement Professionals Body (PPB); (g) publishinga weekly Procurement Journal where all procurement opportunities will be advertised; (h) establishing a whistle-blowing mechanism to curb corruption inprocurement; and (i) replacingthe system of pre-shipment inspection(PSI) by destination inspection (DI). 165. Reform strategy. The CFAA and the CPAR have identifiedkey actions that need to be taken forward over the short and medium term. The government is now taking measures to address some of these gaps and weaknesses. Inthe past, financial managementreforms had been undertaken in a piecemeal fashion which could not ensure that reforms are comprehensive, properly coordinated, and well sequenced. To address this weakness in the reform process, Government has developed a revisedPublic Financial Management Reform Program (PFMRP)', which serves as a coordinating framework for financial management reforms and associated technical assistance. It sets out a methodology to mitigate the associated fiduciary risk and strengthen the country's financial accountability framework. It also incorporates the findings of the recent HIPC tracking and IMF Fiscal ROSC studies. The thirteen main output targets of the revised PFMRP have been sequenced to reflect the logical progression from macroeconomic forecasting through revenue mobilization and resource allocation to expendituremanagement and The originalPFMRPhadbeendevelopedin2000 as a conceptby SIDA but itwas notyet completelydevelopedand only partially fundedby SIDA. However, MoF was keen to use the existingframework to avoidduplicationwith ongoingefforts.The CFAA actionplanwas therefore usedas a basisto reviseandimprovethe PFMRPrather than developacompletely new program. 41  oversight. It recognizes the need to address constraints to improve public financial management beyond as well as within the MoF and it will take forward existing public financial management reform initiatives and address outstanding weaknesses. The revised PFMRP provides an analytical underpinning for design of the financial managementcomponent o f the PRSC-2 and in particular to establish appropriate targets and output indicators/measures. 166. There is ongoing donor collaboration in designing a common set of benchmarks for the "Financial Management-pillar" for the PRSCPRBS. The medium term policy matrix for the PRSCPRBS now combines revisedbenchmarks in the PAF and supports the critical ones from the PFMRP. Under PRSC-1 the government has made steady progress in strengthening its financial management arrangements. It also supported Tanzania in furthering the steps it has already taken inputtinginto place a sound financial management system with the introductionof an Integrated Financial Management System (IFMS), and the enactment of the new Public Finance Act No. 6 of 2001 and the Public Procurement Act No. 3 o f 2001. The speed of implementation and integration of the IFMS and the legislative changes have, however, left a number of gaps, which unless filled, will negate the benefits of the recent achievements. Also, under the PRSC-1, the government had approvedthe revisedPFMRP and submitteda final copy of the program to all development partners. The government undertook a number of actions to strengthenthe accounting and financial reportingfunction within MDAs. Audit committees have beenestablished inall MDAsandtraining for the committees have commenced. The government has approved the implementation of improved terms the conditions of service of staff of the National Audit Office (NAO). All the high level staff of NAO have received training in the application of IFMS. 167. The government's vision of the future for Local Government Authorities (LGAs) is well articulated inthe reform agenda, which is being implementedthrough Local Government Reform Programme (LGRP). The LGRP includes activities on financial management reforms. The functions, resourcing, reporting requirements, and other mandates o f LGAs are clearly stated in the various laws and regulations. Inevitablythe processof change is slow as the concept of local participation is still in its formative stages in Tanzania. Currently 28 LGAs are fully using the IFMS as of January 2004. The LGRP is inthe process of identifying an additional 29 LGAs to start implementingthe IFMS. 168. ProgressunderPRSC2. Establishment of the revised PFMRP. Establishing the PFMPR as a coordination mechanism, which ensures that reforms address fiduciary concerns in a comprehensive manner, and are well coordinated and sequenced, took more time than expected. The action plan and budget for the first year, an operations manual, and a Memorandum o f Understanding for coordinated donor support to the program have been prepared and were endorsed by the Joint PFMRP Steering Committee on June 24, 2004. A Public Sector Working Group has been established and is, inter alia, responsible for ensuring that key implementation strategies o f PFMRP and PSRP are explicitly linkedand complement each other. Financial accounting and reporting. The IFMS is at the core of Tanzania's efforts to strengthen financial accounting and reporting. The system has now been operational for several years. During 2003/04, progress included a substantial upgrade of the hardware, training of a large number of staff, and direct access to the system by regional administrations. An IT-consultant assisted and advised on the implementation of a disaster recovery pladsite which is now at an advanced stage. A task force has prepared draft recommendations on the revised MoF organization structure while approval for the change in structure is vested with the President's Office -Public Service Management and may take some time to be confirmed. 42  Internal audit. Audit committeeshave been established and are operational inMDAs. Currently training sessions are being conducted in order to sensitize the MDAs on the effective use of the committees. An Internal Audit Manual has been preparedand will be issued soon while training will be conducted over the next few months. A draft staffing report on the review of internal audit staffing levels andassessment of skills and other resource requirementshas been issuedand reviewedby the Accountant General's Department. External audit. The disparity insalaries betweenaccountingandauditing staff has beenremoved. The NAO carried out ajob evaluationexercise and is awaiting approval of more generalpolicies inthe area of staff retention and salary structure. Access to the IFMS by the NAO has not been achieved due to infrastructureand funding limitations. This will be addressed inthe coming year with the support of a SIDA. Training is expected to take place in2004. Following the approval of an organizational restructuring plan in May 2002, the NAO carried out a job evaluation exercise and has recruited additionalstaff which were deployedby November 2003. Only a few (about 5) senior positionsneedto be finalized, pendingapprovalby the PO-PSM. Local Government Authorities. At the local government level, a recent PRBS review indicated problems with the plannedroll out of the IFMS at LGAs and a need to set up a central support mechanismto providethe necessaryback up for following up the rollout process. Inaddition, an important issue that will be addressedis the identification of legal inconsistenciesbetweencentral and local government financial regulations Procurement. An action plan for the implementation of the CPAR recommendations was preparedinJuly 2003. Amendments to the Public ProcurementLaw have been finalized and the Attorney Generalhas informedthe Ministryof Financethat said amendments will be submittedto Parliament during the June/July/August 2004 budget session. Initially it was expected that the amendments would be submitted by March 2004. However, the need for more extensive consultations than originally anticipated has led to a delay in the submission. The government has issued the new Local GovernmentAuthority ProcurementRegulations in line with the Public ProcurementAct of 2001. Subsequently, local GovernmentAuthority Tender Boards have been establishedand Councilors are no longer involved inthe procurementprocess. This is expected to have asubstantialpositive impact on corruptionat the local government level. 169. Monitorable Actions under PRSC3. Government is committed to complete the following actions under PRSC3: Operationalizationof the PFMRP. The major challenge over the next few months will be to set up a small Secretariat under the supervision of the Program Coordinator. Consequently the development of a more focused phase one program should be a priority -the revised program document shouldreflect the coordinatedand sequencedprogram activities, outputs and outcomes over time. Also, the basket-funding arrangements as defined in the Memorandum of Understanding and Operations Manual (covering the Institutional arrangements, Reporting arrangements, Financial Management & Procurement arrangements, and Monitoring & Evaluation) shouldbecomeoperational. Financial accounting and reportinv. The MoF and Civil Service Department are currently preparingimprovementsto the payroll systemwhereby ministries will be requiredto enter payroll changes themselves. The foreign and local debt had been consolidatedand also the debt data is regularly reconciledwith that of the BOTwho runs a parallel system. Tax and non-tax revenue will be captured in the IFMS and an IFMS disaster recovery plan and site will be implemented. Also, the government plans to have at least 30 percent of all financial management positions filled with qualified staff. 43  Internal audit. Relevant training materials have been developed(based on the new Manual) and negotiations are underway with local training institutions to provide the required Internal Audit (IA) training. In addition, the new proposed IA structures will be agreed with CSD by March 2005. Also, the Accountant Generalwill monitor the performanceof the audit committees in all MDAsby reviewingtheir minutesofmeetings. External audit. The NAO will develop a computerisationstrategy followed by the procurement and installation of computer equipment that will eventually allow access to IFMS. The CAG plans to submit to parliament the audit report for fiscal year ending 30 June 2003 during the June/July 2004 parliamentarysession onthe budget. This would reduce the time lagby 8 months and allow the Office to movetowards compliance with the statutory requirementof nine months. Local Government Authorities. The legal inconsistencies between Financial Regulations (for Central Govt.) and Financial Memorandum (for Local Govt.) will be resolved. With regard to preparation for the eventual roll-out of the IFMS to additional LGAs, the Accountant General's Departmenthas beguntraining of fresh graduates on the IFMS, and sponsoredtraining invarious institutions in and outside the country in the areas of information technology, accounting and materials management for several staff members who will be posted in LGAs. Increasedeffort has also been put on strengthening support systems for the implementation of the IFMS. A Systems DevelopmentUnit for LGAs housed inthe Accountant General's Department is now in place -25 specialists are being trained in the EPICOR software and are to be deployedto the zones starting July 01, 2004. Other support includes defining a chart of accounts for LGAs, and supervisionof 5 LGAs support zones. Also, it is expected that EPICORsoftwarewill be installed and training started for the extension of IFMSto another 29 Local Authorities inaccordance with the revised strategic plan of the IFMS Implementation and Coordination Committee (this committee is a new co-operationbetweenMoF andPO-RALG). Procurement. Government will continue the implementation of the CPAR recommendations within the PFMRP framework. A key action is the establishment of a Regulatory Authority for Procurementandthe decentralizationof procurementto procuringentities. 170. Expected results of the program Linkage betweenthe PRSC and PFMRP is achieved by ensuringthat the following proposedPRSC outputs and outcomes are consistentwith the main objectives ofthe PFMRP. Over the course of the PRSC program, Tanzaniaexpects to, inter alia, achieve the following: Improve completenessand quality of financial information,accountingrecords and reporting. Effective cash planning& managementmechanism. Accountability ofAOs andAudit Committeesimproved. Role, responsibilitiesof MOF and accountingfunction inline ministriesprofessionalized. Timely submissionof governmentannualaccountsto parliament. Increase number of clean audit reports. Externalaudit capacity developedto enhance quality andtimeliness ofreporting. Enhancethe independence of the NAO. Financialmanagement capacity at Local Government.level enhancedto sufficiently carry out responsibilities. 44  More efficient procurement of goods, works, and services. Harmonizedprocurement proceduresthroughout all of government. 171. Monitoring indicators. Specific quantitative monitoring indicators under this component include: b NAO issues its report oncentral government for the fiscal year ended30 June 2003 within a periodof 12months subsequentto year end. b Audit reports for central governmentMDAsshows an improvement inPAC recommendations beingfollowed up -fewer cases of audit queries carried forward from year to year. b Audit reports for localgovernment authorities are submitted inatimely manner (within the statutory requirements). b AOs confirm inwritingthat audit committees have beenestablished and are meetingona regular basis in 100percent of MDAs. b 30 percent of all financial managementpositions inMDAsshould be filled with qualified staff. For NAOthe target is proposed at 10percent (up from the present level of about 5 percent). J. ANTI-CORRUPTIONACTIVITIES 172. Issues. The 2002 Report on the State of Corruption in Tanzania, commissioned by the Prevention of Corruption Bureau (PCB) and carried out by ESRFRACEIT, indicates that the level of corruption has declined somewhat between 1996 and 2002 with some variations among sectors. Since 1996, considerable groundwork has been done on the institutional framework (the National Anti-Corruption Strategy and Action Plan--NACSAP, Public Finance Act of 2001 and Public Procurement Act o f 2001) and inraising the awareness o f the public on the need to fight corruption. However, the perception of the public is that the decline inthe level of corruptionhas at best been modest. The report cited the incidence o f experiences with corruption as highest within health services followed by police, business licensing, the judiciary, tax authorities, education and public utilities. From a statistical point of view, the health sector ranked highest, perhaps as a reflection o f providing services to a large population compared to the other sectors. Therefore muchremains to be done to move beyond the plans to actually curb corruption. 173. Reform strutegy. An important element of Tanzania's overall reform agenda is to fight corruption to eliminate resource leakages, ensure equitable access to public services for the poor, and strengthen the business environment. In addition to specific actions related to punish corrupted practices, the NACSAP underlines the need to tackle crosscutting reforms, namely public service, public finance including procurement, and local government reform, in order to put inplace transparent systems of accountability. The NACSAP puts the onus on all MDAs to demonstrate how they intendto improve their performance in the fight against corruption within their own premises. This is also supposedto be cascadeddown to localgovernments so that each level of government is responsible to implement its part of the NACSAP. 174. Progress under PRSCZ. Unfortunately, progress has been rather slow compounded by a lack of institutionalised dialogue on anti-corruption issues, thus making it difficult to have a concerted approach to monitoring performance in this area. At the same time, it is fair to acknowledge that, since the crosscutting reforms mentioned above are underway, it is likely that improvement inthese areas will help strengthenthe accountability framework, hence contributing to implementGOT'Santi-corruption agenda. 45  175. Government has produced quarterly reports depicting progress made in the implementation of the MDAs' anti-corruption action plans. These reports are useful to get an overview of the seriousness o f MDAs in implementingNACSAP. Since there are no obvious sanctions for non-compliance, it is not clear that due attention is paid by all MDAs to fulfilling this requirement. It is envisagedto strengthenthe dialogue betweenGGCU and MDAsto foster greater ownership and also to ensure that the anti-corruption action plans are receiving appropriatefollow-up from the MDAs. 176. GOThas commissionedwork on more quantitative and qualitative data particularly inthe areas of monitoring and controlling public procurement, public finance and legal and judicial processingin future reports, which has now been incorporated in the last two published reports (last two quarters of2003). These indicatorswill provide a more meaningfulmeasureof progress inthe fight against corruptionintwo areaswhere there is great scopefor malpractice. 177. Ithad been anticipatedthat Anti-Corruption Action Plans would have been rolled out to local government authorities by now and would have provided the necessary link to the central government level action plans. This will not be done untilFY05/06. However, sensitisationand training is underway and draft plans shouldbe available by November 2004. Since corruption is widespread at the local level, this is a cause for concern. The contributions of PO-RALG to the Quarterly Monitoring Reports also reflect what seems to be a low level of commitment to the anti-corruption agenda. 178. The capacity to monitor the implementationof NACSAP is rather limited. Nevertheless, through the strategic plan developed for the President's Office in the context of the PSRP, capacity building measures to support the Good Governance Coordination Unit will be concretised. Without additionalsupport it is unclear how GOTintendsto coordinatethe efforts to address the problem and more so to have a comprehensive picture of these efforts. More importantly, there does not appear at this stage to be a clear result-based orientation to this quarterly reporting system although discussions are underway to strengthen the dialogue and ensure greater ownershipby the MDAs. 179. The revision of the code of conduct for the public service has been completed, including comments from three stakeholder workshops. Its implementation will be piloted in several MDAsand will require strong support from senior management. Inaddition, it will be important that the revised code be widely publicised. A mechanism for complaint and grievance to deal with unethicalconduct is expectedto be inplace by November2004. A complaints officer, most likely the same officer dealingwith anti-corruption, will be inplace ineach MDA. 180. Monitorable actions under PRSC3. The NACSAP has been revised and will be launched jointly with the 2002 Annual State of Corruption report, which has already been published. The GOTis considering giving these reports a high visibility launch and indicating how it intends to implement the recommendations of the report and the frequency of future assessments. 181. A draft Anti-Corruption bill to replace the current Public Corruption Act of 1971 was preparedby the Prevention of Corruption Bureau (PCB). The revision widens the definition of corruption, gives greater protection to whistleblowers and places the onus on those being investigatedto provethat assets have not be amassedthrough corrupt or unethicalbehaviour. It is only recently that the Law Reform Commission (LRC) was asked to take this process further. Such a legislation requires broadconsultation with a wide range of stakeholders. Inthat context, it is likely that the process leadingto the preparationof a new Bill will take some times despite the preliminary work that has already been carried out. It is envisaged that this will not be completeduntil2006. 46  182. Expectedresults of theprogram. The programis expectedto yield the following results: 0 MDAs will show improvementintheir fight against corruption. 0 Joint effortsfrom the various partsofthe public service will show positive results. 0 There will be an increasednumberof complaintsadequately addressed. 0 LGAs will improvetheir performanceinthe fight against corruptionat local level. 183. Monitoring indicators. The PRS Second Progress report recommends that governance be given more attention under PRS I1with specific measures and progress indicators. A set of revised indicators is proposedto be mainstreamedinto the PMS system. These indicators will also serve as monitoring indicators for the PRSC. MDAs quarterly reports contain quantitative and qualitative data, particularly in the areas of monitoring and controlling public procurement, public finance and legalandjudicial processing, that will help assess progress. It is also expected that LGAs will have inplaceactionplans and will prepare quarterly reports. K. MANAGEMENT OF DEVELOPMENTRESOURCES AID 184. Issues. Official development assistance finances more than 40 percent of government expenditures in Tanzania and the efficient management of aid resources thus plays an important role in the implementation of the PRS. The management of aid provided by a large number of donors, each with it own procedures and monitoring and reporting requirements, is a formidable task for government, given its very limited and already overstretchedcapacities. Improved aid management and reduced transactions costs in the utilization and delivery of foreign aid are spelled out in the PRS as key elements of creating an enabling environment for its implementation. 185. Reform Strategy. Tanzania has put in place two complementary process to enhance the management of aid resources. The first is the TAS process, which serves as the platform for dialogue between government and donors on enhancing aid effectiveness. The TAS lays out principles for the effectiveprovisionanduse of foreign aid, includinga move towards sector wide approaches and generalbudget support. Under PRSC-1,government finalized a TAS actionplan which sets out concrete steps for improving aid management. The second element of Tanzania's aid reform strategy has the PERprocess at its core. Its objective is to foster more comprehensive integration of donor support into government processes and in particular into the budget. The PRSC program supports this strategy and monitors progress in the development and implementation of the TAS as well as progress in integrating official development assistance in the budget. 186. Progress under PRSC-2. Tanzania issuedthe first annualTAS implementationreport in November 2003. Improvementsinconsolidatingand integratingprojectionsof external resource flows into the budgetpreparationbenefited from the externalfinance data base establishedby the External Finance Department in the Ministry of Finance. However, there is clearly scope for improvement requiring efforts by both government and the donor community. Information on donor disbursements is still not fully captured inthe external finance data base and some donors continue to experience difficulties in routing aid monies through the exchequer system. While previous efforts of integrating aid into the budget focused almost exclusively on the central government budget, under PRSC-2 PO-RALG launched an initiative to improve reporting on donor support to local governments. Initial results of this initiative indicate that although the system has been developed, operationalizing the system so that monies flowing directly to projects are indeed captured and reported remains a key challenge for both PO-RALG and the MoF, particularly for area based programs supported by donors through private agents and NGOs. 47  187. Monitorable actions under PRSC-3. Government attaches highpriority to implementing the TAS and integrating donor assistance into the budget. Actions to be implemented under PRSC-3 include continued efforts to integrate projections o f external resource flows into the budget, to fully operationalize the system for both MDAs and LGAs to report on levels of direct external assistance budgetedand disbursed, to integrate data on levels of direct foreign assistance from MDA quarterly reports to the budget department into the External Finance database, and to issue a 2ndannual TAS implementation report. 188. Expected results. The key result inthis area is the better integration of donor assistance in the budget, which in turn would facilitate the coherence between government and donor financed expenditures and thus enhance the effectiveness and efficiency in the use of domestic and foreign funds. 189. Monitoring indicators. Two indicators will be used to assess progress in this area, namely the share o f official development assistance captured inthe budget estimatesand the ratio between donor assistance shown in the budget estimates and the amount of donor assistance captured in the appropriation accounts. The TAS implementation report and the PER external evaluation monitor these indicators. In recent years, these indicators have shown steady improvement with the first indicator increasing from 57 percent in1999to 58 percent in2002 and the second indicator displayingan increasefrom 42 percent in2000 to 67 percent in2002. L. ENVIRONMENTAL SUSTAINABILITY 190. Issues. The poor inTanzania are heavily dependent on the environment both for income generation and consumption. The primary issues thus relate to Tanzania's high resource dependence, the close linkages between poverty and environment, and government's ability to address these within a modern institutional framework that concurrently promotes environmental protectionand improved livelihoods, especially among the most vulnerable populations. 191. Reform strategy. The PRSC supports government's efforts to address these issues through a three-pronged strategy involving (a) mainstreaming o f environmental concerns into the PRS, the budget process, and sectoral policies; (b) improved understanding of poverty- environment linkages, and options for reducing vulnerability o f the poor; and (c) strengthened institutional capacity to integrate environmental assessment (EA) procedures into sectoral strategies and policies and specific activities at the district and local level. Many of these efforts were spurredby the National EnvironmentalAction Plan (1994) and the National Environmental Policy (NEP) adopted in 1997. The goals of the NEP are to ensure sustainability, security and equitable use o f resources. InDecember 2002, the Cabinet approved an Institutional and Legal Framework for Environmental Management Program (ILFEMP), which provides the basis for Environmental Impact Assessment (EIA), cross-sectoral coordination, and integration of environment management into local government planning processes. The Vice President's Office (VPO) and the National Environmental Management Council (NEMC) within the VPO remain the lead agencies for implementing the EA efforts. The Poverty Eradication Division has also been involved in efforts to help address the poverty-environment linkages. All of these efforts are also complemented by line ministry cooperation. A number o f key sector policies and strategies reflect an increasing focus on environmental sustainability objectives. Poverty- environment linkages are also identified in several sectoral policies including tourism, rural development, agriculture, forestry, fisheries and coastal management. DuringPRSC-1, the VPO developed initialsectoral EA guidelinesfor roads and agriculture activities. 192. Progress under PRSC-2. Following the approval o f appropriate institutional arrangements under PRSC-1, the Cabinet endorsed in April 2004, the draft Environmental Management Act, which is expected to be submitted to Parliament in October 2004. An action 48  plan for implementation of the new institutional framework has also been completed in April 2004. In addition, a study has been completed on the role and applications of strategic environmentalassessments (SEA). Training programs have been initiated to raise awareness of SEA. Advancing the process further, a consultant has been engaged to prepare an SEA of the PRSCDRBS process. Staff from the VPO are serving within "environmental units" within sectoral agencies to develop capacity within these sectors for mainstreamingthe environmental assessmentprocess. 193. Government has completedaction plans for mainstreamingenvironment into the poverty monitoring system as well as plans for building capacity within the VPO. These action plans are already under implementation with a coordinator engaged to integrate environment into PRS; equipment procured and some awareness workshops conducted. A "Sustainable Development" network has been initiated and "Environmental Champions" are in place within the working groups in the poverty monitoring system. In April 2004, the VPO engaged a consultant to undertake a study which will propose an improved set of poverty-environment indicators for inclusion in the poverty monitoring system. Under the guidance of the environment working group, a PER for environment andnaturalresourceshas also beencompleted, providing inputs to the budgetformulation process. 194. Monitorable actions under PRSC-3. Severalactions originally expectedto be completed under PRSC-3 have already beencompletedunder PRSC-2. This includesthe formulation of the framework legislation on environmental management and endorsement of the same by Cabinet. Submission to Parliament of the draft Act is to take place in October 2004. The Public EnvironmentalExpenditureReview has also been completedand reviewed. The process has led to a deeper understanding of priority issues and linkages to other sectors. Government is committedto: (a) formulating the regulationson environmental assessments as well as guidelines for integrating environmental assessments into sectoral and district planning processes, (b) deepening current understanding of the use of economic instruments for environmental management, (c) developing environmental standards for monitoring and compliance; (d) carrying out pilot SEA inpriority areas and training in EA and SEA within sectors and districts and (e) strengthencapacity at the district and local level for environmentalmanagement. While increased capacity is a priority in all districts, emphasis will be given to those districts with the highest poverty levels and environmental vulnerability. The Government is also committed to building capacity within VPO for poverty-environment monitoring. It is hopedthat the ongoing efforts to enhance the information and monitoring systems will provide an important policy guidance tool to inform decision-makers. There is in particular, a need to better monitor and integrate vulnerability indicators relating to environmental risks such as droughts, flooding or fluctuations in renewableresource availability due to global change. Mainstreamingof poverty- environment indicatorswithin the NationalPovertyMonitoring System is expectedto be finalized in 2004. It is expected that environment continues to be mainstreamedwithin the PER process and budget guidelines on the environment submitted to MoF in a routine manner. Sectoral guidelines for mainstreamingenvironmental issues within sector PER studies are expected to be developedand disseminatedduring 2005106. 195. Expected results of theprogram. The actions implementedunder the PRSC program are expectedto leadto five key mediumtermoutcomes, namely: 0 Improved institutional capacity for environmentalassessments (including environmental impact assessments and strategic environmental assessments) and their integration into sector and district plans; 0 Harmonized environmental management and increased compliance with environmental impact assessments; 49  0 Increased environmental information will contribute to the effectiveness o f the poverty monitoring system and strengthen the feedback required for the PRS; 0 Enhanced knowledge and awareness about environment and poverty linkages to ensure the sustainability o f poverty reduction and environmental management efforts; and reduce the vulnerability o fthe poor to environmental risk; and 0 Improved understanding o f the role and use o f economic instruments in environmental management. 196. Monitoring indicators. Specific quantitative targets to be reached by 2005 under this component o fthe PRSC include: 0 90 percent o f sectors with environmental units 0 80 percent o fthe districts have officers with environmental functions 0 60 percent o fthe designated environmental officers at the district levels trained 0 Committees o f environment established in 75 percent o fthe districts inthe country 0 Activities underway to implement 50 percent o f obligations under international environmental conventions and agreements. 197. Poverty-environment indicators monitored under the PMS include (a) the mean distance to firewood and (b) the proportion o f smallholders with a planted area o f less than 2 ha for staple crops (maize, sorghum, rice). However, as part o f the actions under the PRSC these indicators will be further developed and refined. M. MONITORING PROGRESS ONPOVERTY REDUCTION 198. Issues. Results orientation and a focus on outcomes that benefit poor Tanzanians are a key characteristic o f the PRS. To these ends, an elaborate poverty monitoring system (PMS) and a related national level framework is in place in Tanzania. The data and analytics generated are critical to assessing overall progress in the implementation o f government's poverty reduction agenda, gauging the effectiveness o f macroeconomic policies and sectoral and cross-cutting structural and institutional reforms, and shedding light on related cost efficiency and resource allocation questions. This composite set o f results is necessary for informing the policy and financing decisions o f the authorities, and providing assurances to development partners on the efficacy o f public resource utilization and the direction o f reforms. While the institutional design o f the Tanzania PMS is sound, further work is needed to strengthen its operations. A number o f challenges (medium to longer term in nature) affect the optimal functioning o f the poverty monitoring system. The four overarching issues which government is attending to, are as follows: (i)WhileasoundPMSframeisinplace,thecapabilitiesofcorePMSentitiesneedtobe strengthened further; (ii)The linkages and coordination between various PMS components (and particularly, between the local government and central levels) needs to be improved; the interface between the sectors and the PMS also needs to be strengthened significantly; (iii) quality, The timeliness and relevancy o f the data generated through the routineladministrative data system needs to be enhanced; and, 50  (iv) Enhanced use of the PMS' outputs by government (including local government levels) is necessary, to better inform the strategic planning function, and policy and resource allocation decisions. 199. Reform strutegy. The first set of actions relatesto addressingcapacity weaknesses intwo of the PMS linchpin areas, Le., the Poverty Eradication Division in the VPO and the units responsible for coordination and monitoring in PO-RALG. While improving their capabilities will allow these units to operate more effectively inthe context o fthe PMS, it should also leadto overall improved coordination and strengthened interactions among the various PMS components. Secondly, there is a focus on developing and refining sectoral and cross-cutting indicators and related targets in core areas; this effort includes the localization and integration of MDGs. Work is continuing on the development of medium-termtargets, and refinement of the cohort of indicators as well as development of robust annual / intermittentindicators inareas with gaps. As such, set indicators for policy responses in governance, gender, agriculture, vulnerability, roads and the environment need to be developed or refinedfurther. Inthis respect, the PRS review process offers the opportunity to review the PMS including reviewing the manner in which planned survey, census or routine data will supply the information needed to supply indicators. 200. Progress under PRSC-2. The Household Budget Survey and other data sources, as well as specialized studies of vulnerability, urban poverty, and the geographic distribution of poverty have been presented in a comprehensive second Poverty and Human Development Report (PHDR) which was launched during the poverty policy week inNovember 2003. Subsequently, government issued the final version of the thirdPRS ProgressReport end-March 2004 and posted it onthe nationalwebsite. 201. Progress has also been made in strengtheningthe capacity o f VPORED on a sustainable basis. The Action Plan for Building Capacity in Support of the PRS was presented to the PRS Technical Committee and approved in August 2003. A full-time poverty monitoring officer has beenrecruitedinthe PRSRMS secretariatandthe Poverty Monitoring Advisor has beenreplaced. In an effort to improve the management and exchange of poverty related information and data, the local area network has been upgraded. Outsourcing is used to cover internalhuman capacity gaps. In order to ensure the sustainability o f capacity building efforts, a VPO Medium Tem Strategic Plan was developed with external technical support and finalized inFebruary 2004. The plan is expected to enable VPO to access the SASE scheme, in order to provide the minimum incentive package necessaryfor sustainability o f the growing capacity. Inthe meantime, the VPO budget/MTEF will remainthe main instrument for achievingthis. 202. The mainthrust of the action related to strengthening and sustaining the capacity of PO- RALG for collecting, collating and analyzing administrative data, is to promote improved performance o f the routine data system. The long-term aim of government is to establish an overall system for data collection at the local level. This includes further coordination and collaboration between sectors and PO-RALG in synchronizing approaches, developing uniform data collection formats, clear reporting and feedback channels, unified data storage centres, analysis and dissemination. Issues identifiedas influencing the capture of data included multiple and unsynchronized mechanisms, weak technical skills of data collectors, not recognizing existing data already collectedand collection mechanisms and lack o f incentives to collectors. At the same time, it is recognized that there i s a great deal o f current activity aimed at capturing and using routine and administrative data including a variety of Management Information Systems. Progress in this area is evident from the overall robust performance inhealth and education data capture and analysis. At a more specific level, the following action have been taken: a senior programmer was recruited to lead the MIS unit in PO-RALG; two senior PO-RALG staff have been permanently assigned to the Routine Data Systems TWG; a report on the MIS strategy for 51  PO-RALG has beencompleted; the database on LGA socialandeconomic profile is now ready; a Local Area Network was installedand the domain registeredto facilitate e-communicationwith Regional Secretariats and LGAs; and I T equipment has been procured for several Regional Secretariats for storing andmanagingdata. 203. In the area of indicators and analysis, the government has completed comprehensive analytical work on poverty, and developeda more complete set of indicators. Efforts to integrate the MDGs into the PMS beganwith the revision ofthe PRS indicators, which ledto the definition of indicators in several priority areas (and the number of indicators increased from 39 to 60). Beginning in FY04, the Poverty and Human Development Report 2003 and the PRS Progress Report track progress using the revised list of indicators, which include progress towards the MDGs. 204. Monitorable Actions under PRSC-3. With a view to making further progress on the challengesdiscussed earlier, the following PRSC3PRBSsupportedPAF actionsare proposed: Present a new PRS 2004 and issue a Progress Report that includes a review of performanceagainst all monitoring indicators andtargets contained inthe precedingyear PRSProgressReport. e Develop and finalize a set of indicators for policy responses in governance, gender, agriculture, vulnerability, roads and the environment by November 2004. Explicitly link the set indicators to action plans which specify the structure, process, timeline and performancecriteria by which datato inform these sets will be gathered. e The RoutineData Systems Technical Working Group finalizes a position paper detailing key actions taken or plannedto improve the collection of routine and administrative data insupportofthe PovertyMonitoring System. This will requiresubstantialengagementby Ministries responsible for Health, Education, Water, Agriculture and Roads. The implementationof action proposedinthe position paper is expected to allow government to demonstrates improvements from a baseline of November 2003 inthe performance of data collection and analysisof healthand educationdata to inform the PMS. e Approved the Medium Term Strategic Plan for VPO including the structure for VPOIPED, staffing and financing to meet planned requirements anticipated in FY2004105budgetand MTEF. e Conduct a review of the PMS, to include reviewing (a) how survey, census or routine data defines and report indicators, (b) the potential for addressing harmonisation and rationalisation of data systems, and (c) the way in which PMS-related institutions collaborate for most effective working. This review should feed into the revision of the PMS inthe context ofthe preparationofthe new PRSP. 205. Expected Results of Program. The overarching objective is to improve the utility and utilization of the PMS' outputs, such that it leads to strengthening the linkages among cross- cutting and sectoral policies and programs, budgets, and poverty monitoring to enhance the cogency among policies, expenditures, and delivery of services. This in turn translates into the following set of realistic intermediate results to be achievedover the nexttwo years of the PRSC program: e Improved institutional capacity within PO-RALG and VPOPED for better delivering on their roles within the PMS, leading to overall improvements in the collection of administrative data, enhanced monitoring, evaluation and analysis of poverty related information. 52  0 Preparationof an updatedlist o f indicators(including the localizedMDGs) and definition of the process/modalitiesfor annuahtermittent reportingagainst these indicators. 0 Wider disseminationof poverty data and analysis (e.g. via the PHDR) and abroadbased, high quality, discussion of its implications as part of the PRS monitoring process (e.g.,. during PovertyPolicy Week). 206. In the medium term, strengthening of the poverty monitoring system is expected to achieve the following results: 0 Comprehensive, consistent, and upto date administrativedata; 0 Strengthenedcivil society participationinthe PRS monitoring and feedback process; and 0 Enhanced, databased, decisionmakingandresults-orientedgovernance, N. PRIORACTIONSFORPRSC-2 ANDTRIGGERS PRSC-3 FOR 207. Agreed prior actionsfor PRSC-2. The set of prior actions for PRSC-2 is based on the triggers identified under PRSC-I. The prior actions emphasize the strategic focus of the operation on enhancing pro-poor economic growth and public sector financial management. Comparedto the original list of six triggers, sevenprior actionshavebeen addedto strengthenthe focus of the operation and to give more specificity to the triggers. Table 10 shows how the agreed prior actions for PRSC-2 have evolved from the triggers identified under PRSC-1. All 13 prior actions identified during pre-appraisal in November 2003 have been satisfactorily completed. 53  li a i 1 i I  m m   VII, THE PROPOSEDCREDIT AND GRANT A. PRSC-2 Prior Actions andPRSC-3 Triggers 208. PRSC-2 Prior Actions. Beforepresentationto the Board, Tanzaniahas achievedseveral key program benchmarks in the areas of sustaining macro-economic stability, rural and private sector development, governance, environment, andpoverty monitoringand evaluation. As part of the implementation of the PRS supported by the proposed PRSC-2, the United Republic of Tanzania has carried out the following prior actions and provided documentary evidence of the completionof the agreeduponactions to IDA: i. DraftedamendmentstotheLandActandpresentedthemtoparliament. ii.PhaseIlaborlegislation(EmploymentRelations,CollectiveLabourRelations,Dispute Resolutions, andLabor MarketInstitutions)presentedto parliament. iii.Reviewedthebusinesslicensingsystemafterconsultationwithstakeholders,prepareda position paper onbusiness licensingreforms, andsubmittedto Parliamentamendmentsto the Business LicensingAct, 1972, introducingreforms ofthe business licensingsystem. iv. Local governmenttaxes and leviesrationalized. v. Approved budget200314 inline with PRS objectives, delineatingbudgetcodes for priority sectors and items. vi. Budget executionfor 2002103 and 2003104 (FQ1 andFQ2) inline with the approved budget and with PRSpriorities, consistently reportedas per identified expenditurebudget codes for priority sectors, and in2003104 also by identified codes for priority items. vii. Pay enhancement inline with the approvedbudget for FY04. viii.Joint PFMRP SteeringCommittee reviewed(i) the establishmentofamanagement structure and(ii) detailedannualwork plan andbudgetfor the first phaseof the implementationofthe PFMRP. ix. Preparedadraft billamendingthe Public ProcurementAct of 2001reflectingthe CPAR recommendations,and submitteda letter from the Attorney Generalconfirmingthat said billwill bepresentedfor parliamentaryapprovalduring the 2004 budgetsession. x. Local Government Authority Tender Boardsconstitutedandestablishedunder the new Regulations. xi. Preparedannualborrowing andrepaymentplan(both concessionalandnon-concessional loans), inclusive of borrowing limits, andpresenteditto Parliamentas partofthe annual budget. xii. Progressinstrengtheningand sustainingcapacity ofthe VPO secretariat to supportand monitor implementationofthe PRS accordingto anupdatedactionplanto be approved by Government. xiii.Progress instrengtheningand sustaining capacity of PO-RALG for collecting, collating, and analyzing administrativedata accordingto an updatedactionplanto be approvedby Government. 209. Inaddition, the governmenthas made satisfactoryprogress inthe overall implementation of the PRS, as indicatedinthe thirdPRSprogress report. 57  210. PRSC-3 Triggers.8 The decision as to whether IDA will proceedwith the PRSC-3 will be contingent on satisfactory progress in the implementation of the PRS, including progress towards quantitative targets. Progress inthe implementationof the PRS includes implementation and continuation of reforms spelled out in the letter of development policy. In addition, completion of actions satisfactory to IDA in the following areas by March 2005 will serve as triggers for proceedingwith PRSC supportto Tanzania: 1. Finalised and obtained Government approval of the strategic plan for operationalisation ofthe LandandVillage LandActs. 11. *. ... New business licensingframework under implementationina phasedstrategy 111. Building on the results of the Crop Boards review, Governmentapproval of a strategy to reform two crop boards consistentwith ASDS. iv. Approved budget 2004105 in line with PRS objectives, delineating budget codes for priority sectors and items. V. Budget execution for 2003104, and 2004105 (FQ 1 and FQ 2), in line with approved budget and with PRS priorities, consistentlyreportedas per identified expenditure budget codes for priority sectors and items. vi. Pay enhancement consistentwith the approvedbudgetfor 2004105, and the overall thrust of the pay reform strategy. vii. Progress inthe implementationofthe PFMRP. viii. The Government establishes the Regulatory Authority for procurement and decentralises procurementto ProcurementAuthorities. B. IMPLEMENTATIONANDMONITORING 211. Monitoring arrangements. The poverty monitoring master plan and various other processes described in this document provide a robust and highly participatory framework for monitoring, and the PRSC will facilitate the implementationof these monitoring arrangements. The expectedbenefits from using the IDA grant is that it will help to galvanize popular support for difficult reforms through greater impact on the improvement of the social well-being and livelihoods of the poor and maintain debt sustainability achieved after reaching the HIPC completion point. The grant component will also enable stronger collaboration with bilateral donors and the European Union (EU), who-through the PRBS facility-have emphasized protecting and raising budget allocations to such priority sectors as education, health, and water. The effects of IDA grants will be monitored by tracking expenditure allocation to these sectors and assessing the impact of public spendingthrough the annual reviews of PRS progress reports. Regular updates of the debt sustainability analysis will enable monitoring the impact of the grant componentinmaintainingdebt sustainabilitystatus. 212. Supervision and subsequent PRSCs. Supervision and preparation of the subsequent credits and grants will take place in close collaboration with other donors and be consistent with the PRS review mechanism. A joint PRBS-PRSC review will be conducted semiannually to review progress made ineach ofthe programareas. Inaddition, the achievement of PRSC targets will be assessedannually inthe context of the PRS review that will document the progress made in the PRS implementation and analyze the outcomes of reforms. The reform program sets out clear quantitative and qualitative benchmarks for three years. The PRSC targets are filly consistent with the PRS. Given satisfactory progress, Tanzania's reform program will be PRSC-3 triggers are to be reviewedandfinalizedduringthe preparationofPRSC-3. 58  supportedthrough subsequent PRSCs under the programmatic lending framework, subject to the approvalofthe Boardof ExecutiveDirectors. C. PRSC-2 Credit and Grant Administration 213. Borrower and credit amount. The borrower is the United Republic of Tanzania. A single-tranche credit of SDR 41 million (US$90 million equivalent) would be made available upon credit effectiveness, anticipated for August 2004. The closing date of the operation would be June 30, 2005. It is envisaged that there will be another further single-tranche, annual PRSCs to supportthe implementationofthe PRS inFY06. 214. GrantAmount. Additionally, there would be grant of SDR 61.6 million (US$90 million equivalent) that would be made available upon PRSC-2 effectiveness, anticipated for August . 2004. 215. The proposedfinancial structure for the PRSC-2 is as follows: PRSC-2: US$ 60 million equivalent (IDA credit) US$90 million equivalent(IDA grant [debt vulnerability country]) .......................... Total US$150millionequivalent 216. Disbursement, reporting, and auditing arrangements'. The operationwill follow IDA'S simplified disbursement procedures for adjustment operations". Accordingly, the PRSC-2 proceeds will be disbursed in compliance with the stipulated single-tranche release conditions. Disbursement will not be linked to any specific purchases, and no procurementrequirementsare needed. Once the PRSC-2 is approved by the Board, the borrower will open and maintain a dedicateddeposit account inU.S. dollars for the borrower's use. As the singletranche is released on PRSC-2 effectiveness, IDA will disburse the proceeds of the credit and grant into the deposit account. Thereafter, at the request of the Ministry of Finance, the U.S. dollars amount will be convertedto Tanzaniashillings at the Bank of Tanzaniafor the credit of the government account (consolidatedfund account, to be used subsequently for public expenditures. If after deposit in the deposit account, the proceeds of the credit and grant or any parts thereof are used for ineligible purposes, as defined in the development financing agreement, IDA will require the borrower to either (a) returnthat amount to the depositaccount for use for eligible purposes or (b) refundthe amount directly to IDA. 217. Throughthe Ministry of Finance, the borrower will (a) reportthe exact sum received into the deposit account; (b) indicate to IDA details of the consolidated fund account to which the Tanzania shillings equivalent of the PRSC-2 proceeds will be credited; (c) ensure that all withdrawals from the deposit account are for budgetedpublic expenditures, except for purposes such as military expenditures or for other items on IDA's negative list; (d) report to IDA the equivalent in the local currency of the U.S. dollar amount withdrawn from the deposit account, producingevidence that the local currency sum was paid into the ConsolidatedFundAccount and disbursements from that account were for budgeted public expenditures other than those on IDA's negative list; and (e) submit a report on receipts and disbursements for both the deposit account and the consolidated fund account to enable IDA to review the consistency of the withdrawal with the developmentfinancing agreement andthe objectives of operation. The IMF ROSC (August2001) concludedthat, "Tanzania hasmadenotable improvementsinenhancingtransparency ractices inkey areas, especially fiscal andmonetarypolicy and bankingsupervision." Operational Memorandum: Simplifying Disbursementsunder Structuraland SectoralAdjustmentLoans, February 8, 1996. 59  218. These controls are intended to provide assurance that IDA funds have arrived at their intended destination and are being used for their intended purpose of funding budgeted public expenditures, subjectto the borrower's rules andregulations. 219. The following summarizes the externalaudits: Deposit account: At IDA'Srequest and within six months of credit and grant disbursement, the depositaccount will be independentlyauditedonterms ofreference acceptableto IDA. Public (government) accounts: The controller and auditor general (CAG ) is required by law to producehis or her annual report on the public accounts of the central governmentto parliament within nine months of the financial year-end. A copy of these accounts should be submittedto IDA. 0 Bank of Tanzania: The annual entity financial statements of the Bank of Tanzania, audited in accordance with International Auditing Standards promulgated by the International Federationof Accountants, are publicly available. 220. Governance aspects. Aside from the measures supported by the PRSC that aim at the strengtheningof governance, various processes are in place that aim at improved accountability and transparency for the use of public resources. The Preventionof Corruption Bureauand the National Audit Office have been significantly strengthened during recent years, and the Bank is preparing a project that would support further strengthening of accountability mechanisms. The participatory PER-MTEF process provides for an open review of budgetary performance. The CFAA on Tanzania concluded that the central and local government financial management systems represent high fiduciary risk. The major recommendationscontained inthat report have been reflected in the reform program supported by the PRSC. To ensure effective implementationof the reform, the governmenthas developedthe PFMRP, the implementationof which will be monitoredunder the PERprocess. 221. Environmental Sustainability. The proposed PRSC-2 has been classified as structural adjustment credit governed under the Operational Directive 8.60, and does not require an environmental assessment rating. In an effort to mainstream the environmental sustainability dimension into the PRSC process the Bank supported various analyses with the objective to identify linkages betweenkey macro and structural reforms policies and the environment. This analysis, undertaken under PRSC-1, identifies measures at both national and local government levels to reduce poverty and enhance environmental sustainability of policy reforms. The analysis concluded that environment and poverty are linked in three major ways: (a) poverty reduction programs should not irreversibly affect the resource base upon which the poor depend for their livelihoods; (b) improving environmental conditions can help to reduce poverty and promote sustainable pro-poor growth; and (c) mitigating measures may be necessary as part of policy dialogue. 222. The URT has made significant achievements in building and institutionalizing environmental management capacity at the national level during the past year. Accomplishments include formulation of environmentalframework legislation; initiation of strategic environmental assessments; launch of a Public Environmental Expenditure Review and steps to mainstream environmental indicators into the poverty monitoring system. The Bank supported the formulation of the environmental framework legislation through funds from an ongoing credit and the strategic environmental assessment through the PHRD grant to prepare the PRSC2. The environmentalagenda for the PRSC2andPRSC3 focuses onthe following priorities: 60  a) While continuing efforts to strengthen national institutional capacity for environmental management, to focus on capacity enhancement at the district and local level with a priority for those districts with highest poverty levels and environmental vulnerability. b) Improve the understanding o f economic instruments and voluntary methods for environmental management. This is in recognition that while a sound framework is being developed for regulatory management, reliance on economic incentives can decrease compliance costs, improve environmental quality, and reduce social inequities. Strategic environmental assessments can be used to help identify appropriate instruments. c) Continue the support for Public Environmental Expenditure Review to provide environmental sustainability inputto the Budget Guidelines; and d), Support for developing and mainstreaming poverty-environmental indicators within the poverty monitoring system. It is hoped that this work will result in providing an important policy guidance tool to informdecision-makers. D. BENEFITSANDRISKS 223. Benefits. The PRSC-2 is designed to help the government implement its homegrown PRS and reach the goals articulated in the strategy. The reforms supported under the program will helpraise growth and strengthenthe institutionalinfiastructure needed to improve the public sector's capacity to carry out its role more effectively, as envisioned in the PRS. A stable macroeconomic environment, improved budget execution, strong economic governance, an environment conducive to private sector and rural development (especially enhanced agricultural productivity and profitability), and a well-performing public sector offering the improved delivery o f public services are essential if the government is to reach its goals for poverty reduction and improve the quality o f life in Tanzania. A vital related element would be the effective monitoring and assessment o f the progress and pitfalls related to the implementation o f the PRS. 224. Risks and efforts to mitigate them Because the proposed PRSC-2 supports the implementation o f Tanzania's PRS, there are two interrelated and overlapping sets o f risks. The first set covers all risks that may interfere with the achievement ofthe objectives o fthe PRS. The second is narrower and concerns risks to the successful implementation o f actions covered in the PRSC policy matrix. The following risks can be identified at this stage: As the next round o f elections approaches in 2005, concerns about the durability o f commitment to reforms will mount. To mitigate this risk, it will be essential to implement legal and institutional changes to underpin reforms by the current government. This will reduce the risk o f policy reversals and root these reforms more deeply in both attitude and practice. Inspiringinvestors' belief that the changes made are durable is a major challenge in scaling up investor response. An important means to sustain reform and limit the possibility o fpolicy reversals is the buildingo f domestic constituencies for reform. 0 As policymaking has become more inclusive-with a greater role for stakeholders beyond the executive and, in particular, for parliament-decision making processes have tended to become more drawn out. This poses a risk primarily with respect to the speed of implementation of agreed actions, while the risk for significant policy reversals is considered to be reduced. The key mitigating measures contain two elements. The first is dissemination and knowledge sharing with a wide range o f domestic constituencies on the rationale and benefits o f reforms. The second relates to using the process leading to the 61  definition o f the PRSC policy matrix (PAF) to gauge the extent to which there is consensus onreforms among key constituencies andthen sequence reforms accordingly. The utilization o f PRSC resources is determined by the domestic budget process with the possibility that resource allocation is influenced by other factors than pursuit o f the PRS objectives. The principal mitigating measure derives from strengthening the role o f domestic stakeholders in budget formulation and budget review. Government's continued commitment to an open and participatory PER and budget process is an important and well established tool to support and monitor consistency o f budget formulation and execution with the PRS. It is worth notingthat due to fungibility o f resources, the allocative risk also exists for other aid modalities andthe PRSC is explicitly designed to address this risk. Both the CFAA and the CPAR identify significant fiduciary risks. In recent years, government has implemented measures to eliminate fiduciary risks, including the approval and application o f new public finance and procurement acts, the full operationalization o f the Integrated Financial Management System, and strengthening o f the National Audit Office. The PFMRP and actions monitored by the PRSC are designed to address weaknesses in government's financial management and procurement systems. Another risk for the achievement o f PRS objectives arises from the ongoing decentralization process, which shifts responsibility for key poverty reducing programs in education, health, the water sector, and agriculture to the districts. Preliminary assessments indicate great variations inthe quality and capacity o f financial management and reporting systems across districts, in addition to often limited capacities to manage and implement poverty reducing programs. The local government reform program focuses on strengthening the capacity o f local authorities. However, a residual risk remains, especially inthe initial phases o f the PRSC, that capacity-building efforts may lag behindthe scaling up o fprograms. All phases o fthe PRSC support actions to strengthenthe watchdog role of beneficiaries at the community level through disclosure o f the flow o f resources to various activities at the grassroots level and expenditure tracking o f financial flows from the central government throughthe annual PERs. These actions will help to assess and mitigate risk. Although systems and capacities at the central level are generally stronger than at the local level, limited human resources capacity to implement andmanage the PRSC reform agenda at the center represents another risk in the Tanzanian context, especially in the areas o f public expenditure management, procurement, and financial management. To mitigate these risks, the proposed PRSC focuses appropriately on the strengthening o f oversight arrangements. A large number o f capacity-building efforts are in place. Most reform programs have capacity-building components embedded, including the PFMRP, the local government reform program, and the public sector reform programs. Similarly, sector programs and projects typically also contain capacity buildingcomponents. The challenge for Tanzania is to enhance the effectiveness o f capacity-building efforts by shifting from supply-driven to demand-driven efforts and address capacity building in a holistic way, in which the incentive structure, education system, and specific capacity-building efforts are organized in a mutually reinforcing manner. In the medium term, it is expected that the shift from project to budget support by the Bank and other donors will release staff who are currently tied up in project management to play a greater role in overall public sector management. 62  Tanzania Second Poverty Reduction Support Credit and Grant Schedules Schedule 1: Letter o f Development Policy Schedule 2: The Performance Assessment Framework for PRBSPRSC Schedule 3: Proposed Indicator List for PRSPRBSPRSC Performance Assessment 63  Schedule 1: Letter of Development Policy THE UNITED REPUBLICOF TANZANIA MINISTRY OF FINANCIE Telegrams: lRW&Y, Dar es Salaam, Tel: 2111174/6, Fax 2110326. Telex: 41329. P.O. Box 9111, (All Ofiicialcommunlcabonsshould be addressedto the PerinanentSecretaryto OAR ES SALAAM; The Treasury and NOTto indiwduals). TANZANIA. In reply please quote:TYC/ I/2kO/2/01 30thJune, 2004 Mr. James D. Wolfensohn President 1 World Bank 1818H Street, NW WASHINGTON D.C Dear Mr. Wolfensohn, RE: LETTER OF DEVELOPMENTPOLICY 1. On behalf of the Government of the United Republic of Tanzania, Iam writing to request for the approval of the second Poverty Reduction Support Credit (PRSC 2) of US$ 150 million (SDR equivalent). The proposed credit will assist in the implementation of our Poverty Reduction Strategy by supporting Government's own financial resources directed at PRS priority sectors and items, The credit will also support complementary reforms in the PRS including: private sector and rufial development; macroeconomic stability; budget formulation and execution; public service reform, public financial management, anti-corruption and environmental sustainability. I. BACKGROUNDANDRECENTDEVELOPMENTS A. MACRCIECONOMIC PERFORMANCE 2. Overall, Tanzania's macroeconomic performance in 2003 continued to be in line with projections. However, shortfalls in rain adversely affected agricultural production in certain regions and led to localised food shortages with an impact on GDP growth and inflation targets. Preliminary National Accounts 64  for 2003 indicate that GDP grew at 5.6 percent in 2003, and the overall annual inflation rate increased slightly from 4.4 percent in June 2003 to 6.4 percent in May 2004. t h e increase in the inflation rate resulted from pressure on food prices and the sharp increase in oil prices. The increase in prices was moderated by imports of cereals and other foods. Gross official reserves of the Bank of Tanzania at end March 2004, reached USD 1,973.2 million, staying well above projections OF imports of goods and services by 1JSD 39.5 million. Given Tanzania's improved external position, the country is moving towards an exit from the Poverty Reduction and Growth Facility, hence a new low access three- year arrangement at 10 percent of quota was approved by the IMF in July 2003. The first review of the arrangement was concluded successfully in February 2004, while the second review is due for conclusion in July 2004. Government continues its efforts to maintain progress in macroeconomic and financial stability in order that the above achievements can be translated to tangible results in Tanzania's overarching goal of poverty reduction. B. TANZANIA POVERTY REDUCTION STRATEGY AND I MPLEIMENTATION 3. Tanzania remains committed to the goal of eradicating abject poverty set out in the Development Vision 2025, the framework for which is articulated in the National Poverty Eradication Strategy (NPES - 1997), the Poverty Reduction Strategy 2000 (PRS), and the Zanzibar Poverty Reduction Plan (2002). The PRS Progress Reports including updated data from the Poverty Monitoring System are the main tool For evaluating progress in this effort and for guiding policy reform. The third and final Progress Report under the first PRS was published in January 2004. We have embarked on a comprehensive review of the Poverty Reduction Strategy through broad stakeholder consultations, including at grass roots levels. The process will be completed within 2004, and will establish revised areas of focus that have potential tangible links to poverty reduction and pro-poor growth. C. BUDGET SUPPORT AND ASSISTANCE FOR, THE GOVERNMENT'S OWN REFORM PROCESSES 4. Budget support continues to be the preferred and main instrument to channel aid flows in support of implementation of the PFG, primarily as it strengthens the Government's own systems and reform processes and reduces transaction costs related to aid management. I n addition to the IDA, the current budget support facility continues to be supported by Denmark, Finland, Ireland, the Netherlands, Norway, Sweden, Switzerland, Canada, the United Kingdom, 65  Germany, Japan, the European Union and the African Development Bank. The common Policy Assessment Framework (PAF) matrix currently used by all participating development partners' to assess Government's progress remains linked to the objectives in the PRS. The Government would favour further harmonisation of the budget support facility given the upcoming review of the PRS and formulation of monitorable actions, by shifting the focus of the PAF matrix to the action plan contained in the updated PRS itself. 11. REFORM PROGRAMME UNDERTHE PAF 2003/04 -2004/05 A. IMPRCWEDINVESTMENTAND BUSINESSENVIRONMENT 5. Several reforms have continued to take place in the area of private sector development. The promotion of an attractive ijnd supportive business environment, which also encourages members of the informal economy to establish and run small and medium sized enterprises, is seen as a key to long- term growth, on top of boosting employment and income generation. The SME policy was launched in August 2003 and some financing is provided in the 2003/04 and 2004/05 budgets, Implementation is currently underway, through two sets of measures including: working with UNIDO support to develop a document on "Implementation Programmes"; and working with ILO on the aspect of gender mainstreaming into the "Implementation Programmes". The objectives of these Programmesare: a. To improve national performance in the agro industry by improving capacity in policy and governance, with specific focus on strengthening national policy objectives; b. To improve industrial institutions and support systems, with focus on enhancing support to entrepreneurs and SMEs, enhancing technology diffusion as well as quality and standards; c. To promote global linkages in trade and investment. The Government has also developed guidelines and procedures for the SME Credit Guarantee Scheme, and will ensure continued financing for this sector through provision of security in the budget. To streamline the operation of the various guarantee schemes already established, the Government has also sought advice from the Bank, the IMF and UNIDO. 6. Preparation of the Private Sector Developmerit (PSD) Strategy which mainstreams Small and Medium Enterprises (SME) development is currently Except the African DevelopmentBank which to date has used separate performanceassessment criteria. 66  underway. The Government expects to formulate and approve the strategy in consultation with stakeholders by November 2004. 7. Followiiig the approval of the Business Environment Strengthening for Tanzania (BEST) programme in July 2003, a Better Regulation Unit has been established by the coordinating Government institution, the President's Office - Planning and Privatisation. The Unit will serve as a supportive unit for the monitoring of implementation of the BEST programme. It is resourced and operational and the process of recruiting a CEO, expected to be in post from July 2004, is at an advanced stage. 8. Reform in property rights has also been seen as crucial to private sector development, Hence the Government committed to the following PRSC 2 prior action: I Drafted amendments to the Land Act and presented them to Parliament. This has been completed as the Land (Amendment) Act 2003 was first read in Parliament in November 2003 and was approved in February 2004. Following the approval, it is expected that individuals and businesses will now be able to use land as collateral, hence encouragingcapital flows and investment. 9. Recognisingthe importance of flexibility in the labour market and the need to reduce constraints on business operations, the Government is undertaking a review of the labour legislation in two phases. The Government committed to completion of ,thefirst phase as a PRSC 2 prior action a!; follows: PhaseI[legislation (Employment Relations, Collective Labour Relations, Dispute resolutions, and Labour Market Institutions) presentedto Parliament. This was achieved in November 2003 and the legislation has been approved in April 2004. Preparation for Phase I1 of the reform, which includes Occupational Safety and Health, Worker's Compensation/Social Security, and Employment Promotion), is now underway. The task force governing this reform process will ensure that sufficient technical work is carried out in order to guide the preparation. I 67  10. Reform of the business licensing system has been carried out with the aim of reducing the cost of establishment and running of businesses. Two reviews of the current licensing system and its implications were carried out (including: Revenue Implications of Business Licensing and R.egu1atot-y Implications of Business Licensing) in order to inform the policy reform. The objective is to respond to the demand for a system that is transparent and efficient rather than being focused on revenue generation and control. On this basis, a PRSC 2 prior action was agreed as follows: Reviewed the business licensing system (after consultation with stakehiolders, prepared a position paper on business licensing reforms, and submitted to Parliament amendments to the BusinessLicensingAct, 1972, introducingreforms of the business licensingsystem. This had been delayed mainly due to the need to build stakeholder consensus and support given that the new system has revenue losing implications. However, the government has taken measures through Finance bill, 2004 that have least fiscal implication. From July 2004, license fees will be abolished for small businesfjes, health service delivery organisations and those regulated by other laws, and applicable only upon establishment rather than on an annual basis, in order to reduce costs for businesses. Following approval of the proposal by the government in July, 2004, it is expected that further implementation of the proposed business registration system will be carried out through a phased approach, including a pilot phase that is necessary to develop the training manuals and information necessary for a successful shift from licensing to registration. , 11. As part of the BEST programme's Commercial Oispute Resolution (CDR) component, the Government is making efforts to enhance access to commercial courts by SMEs. Work is being carried out to develop detailed work plans for priority issues under the CDR component, which will form the basis for redesigning the civil procedure code. At the same time, Government will continue consulting stakeholders on the best ways for dealing with the two main challenges envisaged in this process: the possibility of separating the commercial component from the entire CDR component, and integration of the civil procedurecode reform into the legal reform process. 68  B. AGRICULTURAL AND RURAL DEVELOPMENT 12. The PRS identifies agriculture as a priority sector due to its role as a lead sector in the economy and its strong contribution to poverty reduction. In order to increase agricultural trade in the medium term, the Government has started a review process of the roles and funding arrangements of Crop Boards in order to limit their functions to regulation and service. The Ministry of Agriculture and Food Security (MAFS) and the Ministry of Cooperatives and Marketing (MCM), in cooperation with the World Bank and the EU, are conducting Crop Boards studies on the rationalisation of roles, functions and management and organisational capacities, as well as the financing of Crop Boards. The review aims to update and empower the Boards so that they live up to stakeholders' expectations under the current market economy. The review has been conducted in phases, beginning in September 2003. The first phase began `with the review of Coffee, Cotton and Tea Boards. The review for Cotton and Coffee is almost complete and recommendqtions of the reviews have been made awaiting the stakeholders' workshop which will be held in August or September 2004. Draft recommendations to be discussed on the design of regulations of cotton and coffee board involvement include the following: a. For the coffee industry: removing controls on the scope of activities of various stakeholders, particularly to permit vertical integration; using compulsory auction to facilitate credit recovery; devoting greater efforts to institution building, particularly enabling producer organisation to make use of auction; and working with the private sector to promote quality coffee in increasingly competitive markets, particularly promoting options for branding and appellations. b. For the cotton industry: developing effective arrangements for seed rriultiplication and developing a viable agenda for research; involving the private sector and stakeholders in the management of input delivery systems; and offering incentives for improving quality and possibly introducing regulations that may facilitate coordination. The data analysis for the Cashewnut and Tea Boards study is underway. Phase two of the review has begun with the institutional mapping for tobacco, sugar, pyrethrum and sisal industries. Analysis of the data will be conducted. In the coming year, the Government expects to build on the results of the Crop Boards review by preparing a strategy to reform two Crop Boards, consistent with the ASDS. 69  13. Following the completion of the Agricultural Sector Development Programme (ASDP) framework and process document in December 2002, monitoring benchmarks for assessing the effectiveness of coordination coordination and monitoring benchmarks which have been developedThe mechanisms for ASDP implementation have been prepared. key include: effective functioning of various coordination fora; timely reporting and monitoring of the sector in accordance with the ASDP monitoring and evaluation framework; and ensuring an increasing share of Agricultural Sector Line Ministries' (ASLMs) budgets and actual expendituresgo to ASDP priorities. In the coming year, the Government will increase the share of ASLMs budget going to ASDP priorities. Other efforts to improve coordination include the establishment of the Inter-Ministerial Coordinating Committee (ICC), the Food and Agricultural Sector Workirig Group (FASWOG) and the National Steering Committee, which are chaired by the Permanent Secretary of the Ministry of Agriculture and Food Security. The monitoring and evaluation officer had been recruited and ASDP Program officers in each of the Agricultural Sector Lead Ministries have been appointed. , 14. In February 2003, the Parliament approved amendments to the law for establishing the legal, regulatory and supervisory framework for micro-finance institutions in order to improve access to essential agricultural and rural financial services. Related regulations have been prepared and reviewed by a Steering Committee. Following Government approval, during 2004/05 the Bank of Tanzania will' put in place the regulatory and Supervisory framework for microfinance institutions. During 2003/04, the Government has initiated a process to introduce, by June 2004, a more diverse range of products available to borrowers by putting in place an enabling environment for the provision of long-term finance to the productivesector. 15. The Government remains committed to improving tenure security in order to promote rural development. While there have been delays in preparing a prioritised strategic plan and a corresponding program to strengthen the administrative capacity for implementation of the Land Act and the Village Land Act, due to funding delays, work is underway to complete this reform. 16. Market accessibility is an important component of agricultural development. Development of rural roads is therefore part of the Government's reform programme, as in the PRS. An element of the reform includes a programme to strengthen institutional arrangements for district road maintenance and rehabilitation, which is currently being developed through a capacity building task team. Government is also aiming to put in place a Road Act by November 2004 in order to ensure clearly defined institutional 70  responsibilities. This will allow the development of modalities for strengthening capacity at district level, as well as indicatorsfor monitoring performance. C. POVERTYMONITORING AND EVALUATION 17. The third annual PRS Progress Report was published in January 2004, including results from Tanzania's second Poverty and Human Development Report (PHDR). The report was discussed by stakeholders during the Poverty Policy Week, held in November 2003. Newly researched areas that were included in the PHDR include urban poverty, vulnerability and the geographic distribution of poverty, which are important in informing Government's policy on poverty reduction. Sustained economic growth remains the underpinning condition for better implementation of the PRS, particularly ensuring that the benefits from growth are realised for the poor in rural areas where the majority of the population live. Some of the main findings in the third PRS Progress Report are that constraints facing agriculture require actions with regard to financing mechanisms, investment and provision of support services; regional diversity and inequality should be addressed through appropriate budgetary allocation mechanisms as well as provision of an enabling environment for domestic and foreign investment; and for sectors like roads, more effective coordination pachinery between the central and local governments in the maintenance of roads needs to be developed with clearly assigned responsibilitied. Sectors like education need a greater focus on quality and public-private partnership in provision of post-basic education and in health, provision of services to the rural population as well as HIV/AIDS need greater focus. Furtheirmore, data on cross-cutting issues such as vulnerable groups of society and the environment need to be further developed. 18. Continued poverty monitoring and data collectioriand analysis is important in guiding future policies. The Government therefore recognises the need to support this function. The following PRSC 2 prior action has been successfully completed during the past year: Progress in strengthening and sustaining capacity of the VPO secretariat to support and monitor implementation of the PRS according to an updated action plan to be approved by Government. The Action Pla for BuildingCapacity in Support of the RRS was presented to the PRS Technical Committee in August 2003. A Medium Term Strategic Plan 2004- r 2007 for VPO has been approved and finalised in February 2004. It includes enabling access of staff to the Selected Accelerated Salary Enhancement(SASE) 71  scheme in order to provide the minimum incentive package necessary for sustainability of the growing capacity. In addition, a full-time Poverty Monitoring Officer has been recruited in the PRS/Poverty Monitoring System (PMS) Secretariat and the Poverty Monitoring Advisor has been replaced. A training programme for members of the Poverty Monitoring Secretariat and for members of the PRS Technical Committee has been initiated. IT systems including the local area network (IAN) have been upgraded in order to facilitate improved organisation of poverty data and information. Outsourcing is also used to cover internal human capacity gaps. 19. Collecting, collating and analysing administrative data is critical in poverty monitoring.The President's Office-RegionalAdministration and Local Government (PO-RALG) i!; therefore an important institution for data management, particularly the Routine Data System (RDS). The Government has successfully completed the following related PRSC 2 prior action: Progressin strengthening and sustaining capacity of PO-RALG for collecting, collating and analysing administrative data according to an updated action planto be approved by government. Achievements in this area include recruitment of a senior programme officer to lead the MIS unit; assignment of two senior staff permanently to the RDS technical working group; completion of a report on MIS strategy for PO-RALG which is now operational; development of a database on the Local Government Authorities' (LGAs) Social Economic Profile; installation of a local area network and registration of the domain to facilitate e-comrnunication with Regional Secretariats and LGAs; and purchase of IT equipment for Regional Secretariats for storing and managing data. In addition, a Medium'Term Strategic Plan 2004- 2007 has beer1prepared which includes plans to establish a Monitoring Unit. 20. The Government is conscious of the need to integrate the international Millennium Development Goals (MDGs) into Tanzania`s Poverty Monitoring framework, which is part of the PRS action plan. This work began with the revision of the PRS indicators, leading to an increase of indicatorsfrom 39 to 60. The PHDR 2003 and the third PRS Progress Report have tracked progress using the revised set of indicatorswhich include progress towards the MDGs. D. MACROECONOMICSTABILITY 21. The Government will continue to maintain arid build on the positive developments in macroeconomicstability. GDP growth in 2004 is projectedat 6.3 percent and at 6.5 percent in 2005, expected to be driven by a revival in the 72  agricultural sector following the drought, as well as in manufactured products and exports. The short term increase in inflation that resulted from drought and related food shortages is expected to be reversed to 4 percentduring 2004/05 as per earlier projections. This remains our medium term target in order to be consistent with our main trading partners and those with whom we compete in exports. Maintaining fiscal and debt sustainability continue to be the key areas of focus for macroeconomic reform. Monitoring of the macroeconomic framework is currently under the IMF Poverty Reduction Growth Facility (PRGF) programme. The first review of the Low Access PRGF was successfully completed by the IMF Board in February 2004, while the second is due for completion in July 2004. i ) Debt Sustainability 22, Public domestic debt developments have been broadly on track. Domestic debt market developments continued to be favourable with the yield curve which spans from 35-day Treasury bills to 10-year Treasury bonds, continuing to serve as a reference rate for lending and deposit rates in the market. The Government continues with its endeavour to convert unsecuritised debt into marketable securities and to streamline the domestic debt maturity profile. With a view to strengthening the legal and institutional framework underpinning debt contraction, the Government Loans, Guarantees and Grants (Amendment) Act 2003, consolidating such powers in the Minister for Finance, became effective on 1 July 2003. A new institutional structure has also been put in place to implement the National Debt Strategy and the Act. In this regard, there have been regular meetings of the National Debt Management Committee and publicationof quarterly debt reports. 23. In light of a large stock of parastatal debt, the Government has prepared an inventory of parastatal debt contingent liabilities and agreed on a strategy for monitoring their migration to actual debt. In addition, the Government has completed the following PRSC 2 prior action in June 2003: Prepared annual borrowing and repayment plan (both concessional and non-concessionalloans), inclusive of borrowing limits, and presented it to Parliament as part of the annual budget. 24. Regarding external debt, the Government has concluded bilateral agreements with all Paris Club VI1 creditors (except Brazil and some Japanese government agencies, with which negotiations are continuing). The Government has continued its efforts to negotiate with Non-Paris Club creditors for debt relief on terms comparable to those under the Enhanced HIPC framework. Recently, 73  Bulgaria has joined Kuwait and Saudi Arabia in providing relief under the HIPC framework, and some debt relief dialogue has been initiated with India, Iran, and the Abu Dhahi Fund. The Government appreciates any assistance that the World Bank can provide in encouraging participation of the Non-Paris Club in the debt relief initiative. ii) Fiscal Policyand Budgetary Reform 25. The Government has achieved encouraging results in its revenue mobilisation effort in order to improve revenue collections and hence sustain financing of the PRS. Government revenue remained consistently above estimates during fiscal year 2002/03, at 12.8 percent of GDP, and while estimated to be 13.3 percent of GDP in 2003/04, it has also remained above estimates to date during this fiscal year. The revenue yield is projected to rise to 13.8 percent of GDP in 2004/05. 26. The results to date have been aided by recent fiscal reforms. The Government introduced new revenue measures in 2003/04 aimed at curbing tax evasion and reducing distortions, such as: administrative measures to reduce smuggling and tax evasion on petroleum products; expansion of the Treasury Voucher system to include religious NGOs, on top of ncm-religious NGOs and civil servants; removal of impediments in the fisheries sub-sedor and problems of smuggling of fish by reducing the withholding tax on sale of fish; and eliminating nuisance taxes, particularly at the local government level, in order to encourage development activities, which Government committed to as a PRSC 2 prior action: I Local government taxes and levies rationalised. Only those levies and fees which can be collected efficiently without causing economic disbxtions and undermining the national policy of reducing poverty have been retained. In addition, to further remove revenue leakages, the Government will revoke all government notices granting tax exemptions issued prior to 1997, and incorporatethe remainingexemptions in the relevant tax laws. Government has engaged development partners on this reform, and intends to continue disciission with them on the possibilities for improving current exemption practices surrounding donor funded projects. 27. Further developments in tax administration include the adoption of the second Corporate Plan for 2003/04 - 2007/08 for the Tanzania Revenue Administration (TRA) in June 2003 and operational since 1July 2003. The plan is the driving force behind the objective of ensuring that TRA becomes an 74  efficient and effective modern tax administration supportive of economic growth, and which promotes voluntary tax compliance by providing high quality, fair customer seniice. 28. The Government is reviewing the Export Processing Zones (EPZs) legislation to limit the scope of exemptions. Amendments to the EPZ Regulations are being prepared, and will be undertaken after a reasonable period of time to avoid discouraging the initial inflow of EPZ operators. ,4 main provision will be to bind EPZs sales into the domestic market to a maximum of 30 percent of turnover. Implementation of the EPZs, which are targeted exclusively to exporting firms with proven markets, is expected to support the development of manufactured exports. A protocol for establishing an East African Community (EAC) Customs Union was signed in March 2004 with agreement on a three tariff bands common external tariff (0,lO and 25 percent) i3nd on amendment of the EPZ (Customs) regulations to be in line with the regional code. E. IMPRCWEMENT I N THE EFFECTIVENESS OF DELIVERY OF PUBLIC SERVICES i) Budgetformulationand execution 29. The Government remains committed to financing and tracking the expenditures for implementation of the Poverty Reduction Strategy. Hence the following PRSC 2 prior action has been completed: Approved budget 2003/04 in line with PRS objectives, delineating budget codesfor priority sectors and items. All PRS sectors have seen absolute increasesin resources. In view of unforeseen developments, particularly the drought, a supplementary budget was approved in February 2004. Emergency expenditure items included: provision of a liquidity constraint enhancementto the Tanzania Electric Supply Company (TANESCO) to avoid a power rationing crisis; replenishment of the Strategic Grain Reserve (SGR) and transportation of relief food; compensation of Local Government Authorities (LGAs) for the revenue lost following the abolition of nuisance taxes; expansion of secondary education; preparations for the permanent voters register for elections in fiscal year 2005/06; and procurement of a replacement Government aircraft. Given limited resources to finance the Supplementary budget, plans were made to make recurrent expenditure cuts in all expenditure votes, particuhrly on items such as workshops, seminars, travel allowances and vehicle purchases. While this initially included PRS sectors, the Government has reinstated the original budgets of the priority sectors in order to protect the sectors and priority items which are critical for implementation of the PW. This 75  is due to savings made in the Consolidated Funds Services budget, particularly lower than estimated payments made to date on foreign amortisation and interest. The PRS sectors have seen a net increase in allocations compared to the approved budget, mainly due to reallocations to the agricultural sector in order to purchase food imports to replenishthe Strategic Grain Reserve. 30. The Bcdget Guidelines for 2004/05 - 2006/07 were published in January 2004 and issued to the Ministries Departments and Agencies (MDAs) and Local Government Authorities (LGAs). The Government has ensured further increases ongoing PRS review will be completed during fiscal year 2004/05Givenprovide a in resources to the priority sectors for the coming fiscal year. that the and new strategic policy framework, the Government iwill continue to use the priorities from the original PRS as guidance on strategic resource allocations until fiscal year 2005/06. 31. At the local government level, the recurrent and development budgets have been prepared using GFS classification. This is a positive move towards using international budgeting standards at all levels of Government. I n addition, a formula-based recurrent expenditure transfer system has been adopted in order to faci itate greater strategic resource allocation of intergovernmental grants to LGA.5. For 2004/05, the formula has been used to make allocations for the health and education sectors. Local development expenditure budgets have also been similarly allocated for all sectors. The formula is expected to be rolled out fully in 2005/06. 32. Budget execution in 2002/03 and the first half of 2003/04 has been broadly in line with estimates. The following PRSC 2 action has therefore been completed successfully: Budget execution for 2002/03 and 2003/04 (FQ 1and FQ 2), in line with the approved budget and with PRS priorities, consistently reported as per identified expenditure budget codes for priority sectors and in 2003/04 also by identified codes for priority,items. The quarterly Budget Execution Reports on fiscal performance continue to be published on the national website in order to ensure transparency on government operations. For 2003/04, reports of priority item expenditure (recurrent and development) are provided based on actual expenditure data from the Integrated Financial ManagementSystem (IFMS). 76  33. The Government has completed an expenditure tracking study on education to1 assess the accountability and efficiency of the infrastructure to deliver funds to councils for the intended purposes. The study had been delayed due to delays in securing a consultant, however a draft report is now available. A tracking study on the roads sector has been completed. 34. Budget:execution reports from Local Government Authorities are currently being improved following the setting up of a software system for expenditure planning and reporting at the Local Government level. The system will allow better generation of performance reports by LGAs and their review at the centre. 35. The Government recognises the need to maintain consistency between different policy commitments and budgetary provisions. The Budget Guidelines, which are the main instrument for translating policies into resource allocation, will be improved in the next MTEF cycle through careful consideration of recommendations from the update of the PRS, the PER sector studies, and the PER external evaluation for 2003/04. The Guidelines will continue to be broadly discussed by stakeholders, including development partners. F. IMPROVED PERFORMANCE OF THE PUBLIC SECTOR AND THE OVERALL INCENTIVEENVIRONMENT 36. The Government remains committed to the Public Service Reform Programme (PSRP) in order that public service delivery is improved and can contribute to economic growth and poverty reduction. The reform strategy involves attracting and retaining better qualified staff and strengthening human resource capacity so that the sustainability of overall Government reform programmes is ensured. This will be achieved through the Government's long- term plan of capacity building as well as pay reform which is performance orientated. The public service reform is thus focusing on efficient and effective utilisation of the limited public resources to improve services. In addition to the 13 percent increase in the budget for public sector wages in 2003/04 from the previous fiscal year, another 19 increase has been approved in the 2004/05 budget. 37. As part of performance monitoring and evaluation, the Government is implementing a range of performance based instruments including annual plans, performance budgets, service delivery surveys (SDSs) and open performance appraisals. The annual operating plans and action plans for 5 ministries and 8 executive agencies are finalized based on self-assessment and service delivery surveys. Twenty one more plans are expected to be approved soon. Self- 77  assessments have been completed for all MDAs and 34 SDSs have also been completed. The results of the surveys are expected to be disseminated to the public, prior to assessing client satisfaction in the future. The Government aims at approving updated annual plans and performance budgets for all MDAs taking into account results of service delivery surveys by March 2005. 38. The Government recognises the importance of having in place a strong ' result-oriented monitoring and evaluation system in assessing the performance of the public :service.The performance monitoring system has been rolled out in 19 MDAs, and is installed and functional in 3 independent departments and 1 ministry. Sobare has been developed and training carried out in MDAs to ensure the quality of information generated. The Government aims at rolling out and ensuring the functioning of the performance monitoring system in all MDAs by March 2005. 39. The pay reform policy entails improving performance of the public sector by enhancing public servants' salaries towards market rates. One key achievement has been the observance of the PRSC 2 prior action: Pay enhancement for civil servants in line with the approved budget for FY04. Salaries have been increased between 6 and 10 percent with the minimum wage rising from 35,000 in 1999 to 55,000 which is up by 57 percent. Furthermore, the Government will maintain the pay enhancement in line with the approved budget for the next fiscal year and following re-evaluation by the Cabinet in January 2004, the mechanism for accelerated salary enhancement has been reinstated in four ministries (Ministry of Health, Ministry of Finance, President's Office - Public Service Management and President's Office - Planning and Privatisation). Other mechanisms for enhancing salaries in the remaining MDAs will be explored so that the medium term objective of enhanced professionalism of the public service through improved motivation and retention of staff can be addressed. 40. Following the approval of the Public Service Ad: No.2 (ZOOZ), work is in progress to harmonise the Act and the Local Government Service Regulations by considering management of staff in the Public Service Regulation (Part X Section C) which stipulates the whole process of appointment of staff in LGAs. By 2005 a study of results and action plans will be available and will indicate how the harmonisation of the PublicService Act and Regulationwill take place. 78  G. MINIMISATION OF RESOURCE LEAKAGES AND THE STRENGTHENING OF ACCOUNTABILITY i) PublicFinancialManagement 41. The Government has continued its efforts to secure effective and sustainable financial management arrangements that support an equitable delivery of public services. Such support is intended to reduce and minimise resource leakages as well as strengthen accountability of public funds. The agreed PRSC 2 prior action has been: Joint PFMRP SteeringCommittee review (I)establishmentof the a man'agementstructureand (2) the detailed annual work pian and budgetfor the first phaseof implementation of the PFMRP. These actions had been delayed, mostly because it took longer than anticipated to prepare plans in some components, but notable reform progress has been achieved in others. The programme's organisation structure has been agreed, a Programme Manager appointed, and a ProgrammeCoordinator identified. These will now work with Component Managers to finalise outstanding work. The plans for the first phase have been reviewed by the Joint PFMRP Steering Committee in lune 2004. 42. The review of the improved security of the IFMS system, including the disaster recovery plan/site, is currently under implementation. An TT consultant under the programme is currently in place, assisting and advising on the implementation. In the short term, it is also planned to pilot changes to the management of the payroll system by enabling at least 3 ministries to enter payroll changes themselves. 43. In order to improve the internal auditing functions in Government, audit committees are in place and operational in all MDAs. Training sessions are being conducted in order to sensitise the MDAs on the effective use of the committees. The Internal Audit Manual has been prepared and circulated to stakeholders for comments. Upon finalisation, the Manual will be issued and followed with training. A draft staffing report on the review of internal audit staffing levels and assessment of skills and other resource requirements has also been prepared. 44, Improvements in the National Audit Office (NAO) have included the equation of pay between audit and accounting staff. A review of organisational and staff strud:ure 79  has also been completed in May 2002. Following a Performance Management Systems exercise which was carried out in all MDAs in 2003, strategic plans with respect to core functions of departments are being prepared. Key positions in the NAO are soon expected to be filled. Access to IFMS and training for the NAO has been delayed but has been addressed through the securing of funding for the project. ~ 45. On procurement reform, following the Country Procurement Assessment Report (CPAR), an action plan for the implementation of its recommendations was prepared in July 2003, As regards the amendmerits to the Procurement Act, the following PRSC 2 prior action was agreed to be completed: Prepared a draft bill amendingthe Public ProcurementAct of 2001reflectingthe CPAR recommendations,and submitted a letter Fromthe Attorney Generalconfirming that said bill will be presentedfor parliamentaryapproval duringthe 2004 budget session. Completion of this action took longer than expected due to human resource capacity constraints experienced in the Central Tender Board in preparing the Bill. However, progress in this area includes the establishment of the Central Tender Board as an executive agency, appointment of the Executive Secretary to the Board, and establishment of the Procurement Appeals Authority. The amendments to the Public Procurement Act, No. 3 of 2001, are now due for consideration in the current June 2004 Parliament session. The main elements of the procurement reforms firstly include capturing all bodies dealing with public finance under the Act, Secondly, the amendments will involve decentralisation of tendering activities to ministerial level in order to reduce the burden on the central authority and to facilitate quicker procurement procedures. Thirdly, the reforms include establishment of a Public Procurement Regulatory Authority (an autonomous body of the Ministry of Finance) which would replace the current Central Tender Board. The Authority would perform only regulatory functions such as: setting standards on procurement systems; providing guidelines on procurement planning and methods; ensuring improvements in publicity of procurement, specifically advertisement of tenders; establishing systems of project monitoring and audit; and building procurement capacity across Government. 46. At the local government level, reforms include the issuance of the Local Government Regulations, 2003, following which Local Government Authority Tender Boards have been established in compliance with the Regulations. Hence the agreed PRSC 2 prior action has been completed: 80  Local Government Authority Tender Boards constituted and establishedunderthe new Regulations. In addition, 21 manual to assist the implementation of the Regulations has been prepared and training in councils carried out. The Government continues to work on identifying legal inconsistencies between the Financial Regulations for the central government and the Local Authorities Finance Memorandum (LAFM). In the effort to roll out IFMS to LGAs, a central support mechanism for those LGAs which are already implementing the Epicor software has been launched and will soon be provided for all other LGAs. ii) Reductionof corruption 47. As part of a strategy to reduce resource leakages, and in line with the Poverty Reduction Strategy, the Government continues with its effort to promote good governance. Since the approval of the National Anti-Corruption Strategy and Action Plan (NACSAP) 2003-2005, the Government has continued to improve transparency in its implementation through the production and publication of quarterly reports depicting progress in the implementation of the MDAs' anti- corruption plms. There has been significant improvement in MDAs' reporting and current gaps are expected to be improved on in future reports. The Good Governance Coordination Unit (GGCU) in the President3Office has commissioned work on including more quantitative and qualitative data in areas of monitoring and controlling public procurement, public finance and legal and judicial processing. This data is expected to provide guidance for future policy reform. 48. Other reforms include the revision of the code of conduct for public servants. The revision took place in consultation with stakeholders and has been published. This has been carried out to ensure that complaints from the public are adequately addressed. The human and financial resources capacity to coordinate and implement the NACSAP is being addressed under the Public Service Reform Programme. Under this, the role of the GGCU is expected to be expanded and strengthened. Proposals for new roles and structures, including staffing are expected to be completed by June 2004 and the restructured unit is expected to be completed by August 2004. In order to improve LGAs' fight against corruption, the Government has ensured that anti-corruption action plans for all LGAs are included in the budget for fiscal year 2004/05. While there have been delays in achieving this to date, it has been due to the difference in fiscal years between central and local governments. Following the harmonisation of fiscal years in June 2003, local governments will complete a six-month budget 81  period from Ianuaty to June 2004. The provisionof funding will be facilitated by the harmonisationof the fiscal years from 2004/05. iii) Improvements indevelopmentaid management 49. Through the Tanzania Assistance Strategy (TAS) which was launched in June 2002, the Government aims at minimising the transactions costs of delivery and utilisatiori of external assistance. Substantialachievements have been made in monitoring implementation, as the first annual TAS implementation report for fiscal year 2002/03 has been issued. The report provides a clear overview of progress made to date by the Government and the local Development Assistance Community (DAC) in implementing the TAS priorities according to an action plan. It also highlights some of the remaining challenges related to achieving the principlesana objectives of "best practices" in aid coordination and efforts. 50. Development aid management includes better integration of projections of external rescurce flows into the budget. This has been facilitated by a comprehensive database on external aid flows established in the Ministry of Finance. The challenge remains to better integrate project funds that are disbursed directly to projects rather than through the Government's Exchequer System, into the systems and to better capture their expenditure. The Government will continue in its efforts to improve the consolidation and integration of flows in order to provide better data for the resource envelope of the Government's budget. The Government will also continue to work on better reporting of disbursements to LGAs so that a comprehensive record of all aid flows is made, H ENVIRONMENTALSUSTAINABILITY . 51. The underlying thrust of the objectives as laid out in the Vision 2025 (1999) is to attain sustainable development of the country's people. The Government therefore recognises that there are important implications for environmental policy, and that natural resource management is also part of the Rural Development Strategy (2001) and the ASDP (2002). The national Environmental Action Plan (1994) and the National Environmental Policy (NEP) (1997) have initiated the mainstreaming of environmental concerns into Government policiesand processessuch as the PRS. 52. In order to provide Government with a framework with which to address environmental issues, a framework legislation on environmental management has been approved by Cabinet and will be presented to Parliament. Preparation 82  of an action plan for implementation of the new institutional framework has also begun in February 2004. 53. A study on the use of strategic environmental assessments and training programmes has been completed, and in order to promote awareness, staff in the Vice President's Office are working within environmental units in sectoral agencies by assisting to develop capacity for mainstreaming the environmental assessmentprocess. 54. In order to mainstream environmental issues into Government processes, it was seen as important to mainstream environment by representation of environmental experts in the technical working groups of the poverty monitoring system. In March 2004, the Government launched a study on proposals for an improved set of poverty-environment indicators to be included in the national Poverty Monitoring System. Furthermore, as an input into the budgeting process, a PER study on environment and natural resources has been completed. $5. In the coming year, the Government will be committed to finalise the regulations on environmental assessments as well as guidelines for (a) integrating environmental assessments into sectoral and district planning processes, (ti) economic instruments, and (c) environmental standards for monitoring arid compliance. Implementation of priority activities in the new institutional framework will begin in fiscal year 2004/05. Government will arrange for training on environmental assessment within sectors and districts and carry out pilot Strategic environmental assessments in priority areas. Implementaticm of the action plan for building capacity within the VPO for poverty-environment monitoring will be initiated and ,the mainstreaming of the poverty-environment indicators within the PMS will be completed. The Government remains committed to encouraging further mainstreaming of environment as a cross-cutting issue into the PER process. CONCLUSION 56. The Government remains committed to the goal of reducing poverty as encompassed in both the current Poverty Reduction Strategy and the upcoming update of the PRS as will be determined by all stakeholders in Tanzania. There have been achievements in reachingthe PRSC 2 prior actions. The agreed policy actions laid out for the coming year in the PRBS/PRSC Performance Assessment Framework will continue to guide Government in policy reforms that complement Tanzania's PFG objectives. The Government's efforts to increase own resources 83  to support our reform path, are improving and evidenced in the continuous better than projected performance of domestic revenue collections in recent years and plans for continued tax policy and administration reforms in the 2004/05 budget. These are encouraging signs of achieving this long term goal. In the meantime, the Government strongly appreciates IDA'S budget support through the second PRSC tranche. This budget support is crucial in order to facilitate the expenditures required in those sectors and items that are deemed to have the strongest links to poverty reduction. Yours Sincerely, / Gray S. Mgonja PERMANENTSECRETARY #F~w.. 84  Schedule2: The PerformanceAssessment Frameworkfor PRBSFRSC TANZANIA The PerformanceAssessment Framework for PRBS/PRSC MIDYEAR REVIEW MARCH - APRIL 2004 28fhJune 2004 MinistryofFinance Dar Es Salaam 85  Notes: For the first annual cycle, all actions in the context of the Performance Assessment Framework (PAF) for PRBS/PRSC 1, includingthe Prior Actions (in bold) for PRSC 1 were to be completed no later than March 2003. The Prior Actions for PRSC 2 (in bold) and the indicative Prior Actions (Triggers) identifiedFor PRSC 3, will have to be filly accomplishedlcompleted by March 2004 and March 2005, respectively, in order for successful negotiations and subsequentpresentation of the relevant PRSC operation to the World Bank's Board of Directors. All other Actions, would have had to be completed by no later than November, 2003 (PRBSPRSC 2) and November, 2004 (PRBSPRSC 3). Substantive progress on the full set of actions is recognized as vital for continuation of the overall program of support to Tanzania. A broad-based review of the PAF Actions will be conducted in November of eachyear. 86   00 00   -32E 2E o I- .".-A e m 0 8 B 3 3 -8 d a 9 Y 5       x   I I I   0 E:   3 d 0 0 hl  M 53     P.c  0 0   E j  3 3 d  Tanzania SecondPovertyReduction Support Credit and Grant Annexes Annex1: Tanzania at a Glance Annex 2: Tanzania Social Indicators Annex 3: Tanzania Key Economic Indicators Annex 4: Tanzania Key Exposure Indicators Annex 5: Tanzania Balance of Payments Annex 6: Status of IBRDand IDA Operations As o f January 2004 Annex 7: PartnershipFramework Memorandum Annex 8: Relationwith the Fund 112  Annex 1: Tanzania at a Glance Tanzania at a glance 7/2/04 Sub- POVERTYand SOCIAL Saharan Low- Tanzania Africa income 2003 Population, mid-year (millions) 36.0 689 2,495 GNI per capita(Atlasmethod, US$) 280 450 430 Life expectancy GNI (Atlasmethod,US$ billions) 10.2 311 1,070 Average annual growth, 1997-03 T Population(56) 2.3 2.4 1.9 Laborform (%) 2.4 2.5 2.3 GNI Gross Most recentestimate(latest year available, 199703) per primary Poverty(% of populationbelownationalpovertyline) 35 capita nrollment Urbanpopulation(% of total population) 36 33 31 Lifeexpectancyat birth(years) 47 46 59 Infantmortality (per 1,000 live births) 99 103 79 Childmalnutrition(% of childrenunder5) 29 42 Access to an improvedwater source (% of population) 56 58 76 Access to imPrOvedwater source Illiteracy(% of populationage 15+) 31 37 37 Gross primaryenrollment (% of school-agepopulation) 105 87 94 - Male 102 94 100 Tanzania Female 109 80 88 Lowmwmegrow KEYECONOMICRATIOS and LONG-TERMTRENDS 1983 1993 2002 2003 Economicratios. GDP (US$ billions) 6.6 4.3 9.4 9.8 I Grossdomestic investmentlGDP 25.1 18.9 18.5 Trade Exportsof goods andservicesIGDP 8.3 18.0 16.7 18.7 Grossdomestic savings/GDP 9.2 -2.1 9.6 10.0 Gross national savings/GDP 11.2 4.9 9.1 9.8 Current account balance/GDP -6.0 -26.2 -7.6 -10.4 lomestic Interestpayments/GDP 0.7 2.4 0.5 0.9 ravings Investment TotaldebtiGDP 104.1 159.3 58.5 62.0 Total debt service/expolts 32.4 34.2 8.7 13.6 Presentvalue of debt/GDP 17.6 19.9 Presentvalue of debtiexports 130.8 109.5 Indebtedness 1983-93 199303 2002 2003 2003-07 (averageannualgrowth) GDP 3.4 4.5 7.2 7.1 6.7 Tanzania GDP per capita 0.3 1.9 4.2 3.1 4.6 Exportsof goods and Services 10.8 6.1 4.6 4.0 1.3 STRUCTUREof the ECONOMY 1983 1993 2002 2003 1 Growthof investmentandGDP (%) (% of GDPJ i Agriculture 51.4 48.1 44.7 44.7 Industn, 12.0 15.6 19.6 16.2 Manufacturing 8.0 7.5 7.8 7.7 Services 36.6 36.3 39.4 39.3 Privateconsumption 77.2 85.2 76.2 77.1 Generalgovemmentconsumption 13.6 19.4 9.6 11.4 imports of goods andservices 16.1 47.7 24.5 27.3 -GDI --O-GDP I I (averageannualgrowth) 1983-93 19g3-03 2o02 2003 [Growth of exportsand Imports(Oh) 1 Agriculture Industry .20r Manufacturing Services 5.0 4.4 6.3 & 01 Privateconsumption 3.4 4.6 4.0 9.6 99 02 03 Generalgovemmentconsumption 2.3 2.6 10.2 28.0 ~ . ~ o Gross domesticinvestment 5.6 2.3 2.3 10.2 -Exports +Imports Importsof goodsand services 3.0 4.2 2.3 12.9 ~~ Note: 2003 data are preliminaryestimates.Groupdata arefor 2002. *The diamondsshowfour keyindicatorsin the country(in bold) comparedwith its income-groupaverage,Ifdata are missing,the diamondwill be incomplete. 113  Tanzania PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Domesticprices (% change) Consumer prices 27.1 25.3 4.6 5.3 ImplicitGDP deflator 24.5 4.1 7.2 Governmentfinance I%ofGDP,includescunentgrantst Currentrevenue 16.4 9.5 11.5 11.9 Currentbudgetbalance -3.5 -4.4 -1.4 -2.6 1 Overallsurplus/deficit -10.3 -6.2 -5.7 -6.3 -GDPdeflator -CPI I I TRADE 1983 I993 2002 2003 (US$ mi//ionsJ Exportandimportlevels(US$ mill.) Total exports (fob) 377 411 903 999 Coffee 130 96 35 40 2'500T Cotton 62 76 29 40 /2.000 t I I Manufactures 44 52 66 72 Total Imports (ci0 957 1,353 1513.7 1919.4 Food 91 56 147 Fuel and energy 241 101 Capital goods 406 628 813 Exportpriceindex(1995=100) 62 73 176 195 87 98 69 00 01 02 Importprice index(1995.100) 77 101 98 124 Exports Imports Terms of trade (19951100) 107 72 180 157 BALANCE of PAYMENTS 1983 1993 2002 2003 1 Currentaccountbalanceto GDP (Oh) (US%mi/flonsJ Exportsof goods and services 509 603 1,566 1690 0 Importsof goodsand services 1,016 2,017 2.226 2681.9 2 Resourcebalance -507 -1,414 -656 -991 4 Net income -73 -164 -52 -54 4 8 Net currenttransfers 353 463 36 29 -10 Currentaccountbalance -393 -1,115 -712 -1,016 -12 -14 Financingitems (net) 407 1,066 1,063 1,447 -1% Changesin net reserves -14 46 -371 -431 1-181 Memo: Reservesincludinggold (US$ millions) 295 1.528 1,976 Conversionrate (DEC, local/US$) 9.8 405.3 963.2 1,047.6 EXTERNAL DEET and RESOURCE FLOWS 1983 1993 2002 2003 (US$ mi//ionsJ Comporltlonof ZOO3 debt (US$ mill.) Totaldebt outstandinganddisbursed 6,667 6,761 5,500 6.067 lBRD 223 140 6 3 IDA 475 1,759 2,869 2,906 1 F 436 I\: 3 Total debt service 165 211 142 242 IBRD 27 45 0 3 IDA 4 23 22 72 Composition of net resourceflows Officialgrants 756.6 633.5 525 561.3 Officialcreditors 313 109 104 351 Privatecreditors 21 31 Foreigndirectinvestment 61.7 63 240 247.6 C 362 World Bankprogram 1 Commitments 61 345 402 250 A IBRD - E. Bilateral Disbursements 90 146 169.9 255 B. IDA D Othermultilateral - F Private Principalrepayments 14 42 5 54 C-IMF G Shohterm -- Netflows 76 104 164.9 201 Interestpayments 17 26 17 21 Nettransfers 59 76 126 DevelopmentEconomics 7/2/04 114  Annex 2: Tanzania Social Indicators Tanzania Social Indicators Latestsingle year Same regionlincome group Sub- Saharan LOW- 1970-75 1980-85 1995-2002 Africa income POPULATION Total population, mid-year (millions) 15.9 21.8 35.2 673.9 2,505.9 Growth rate (% annualaverage for period) 3.0 3.2 2.4 2.5 I .9 Urban population (% of population) 10.1 17.6 33.2 32.3 30.8 Total fertility rate (births perwoman) 6.8 6.5 5.2 5.1 3.5 POVERTY (% ofpopulation) National headcountindex 35.4 Urbanheadcount index 23.5 Rural headcountindex 38.6 INCOME GNI per capita (US$) 280 460 430 Consumer price index (1995-1 00) 1 8 190 Food priceindex (1995=100) 7 200 INCOMElCONSUMPTlONDISTRIBUTION Share of income or consumption Giniindex Lowestquintile (% of income or consumption) 5.0 Highestquintile(% of income or consumption) 53.0 SOCIAL INDICATORS Public expenditure Health (% of GDP) 2.8 2.5 1.1 Education(% of GDP) 2.1 3.4 2.8 Social security and welfare (% of GDP) Net primary school enrollment rate (% of age group) Total 56 89 Male 55 87 Female 56 90 52 Access to an improved water source (% of population) Total 56 58 76 Urban 83 90 Rural 46 70 Immunization rate (% under 12months) MeasIes 66 79 58 60 DPT 79 53 61 Child malnutrition (% under 5 years) 29 Life expectancy at birth (years) Total 48 51 44 46 59 Male 46 49 43 45 58 Female 50 53 44 47 60 Mortality Infant (per 1,000live births) 118 100 99 105 80 Under 5 (per 1,000 live births) 197 160 147 171 121 Adult (15-59) Male (per 1,000 population) 513 451 569 520 312 Female(per 1,000 population) 419 370 520 461 256 Maternal (modeled,per 100,000live births) 370 Births attended bv skilled health Staff (%) . . 58 47 2003 World Development IndicatorsCD-ROM, World Bank 115  Annex 3: Tanzania Key EconomicIndicators Tanzania Key Economic Indicators - Indicator \attonal accounts (as % of GDP) Gross domestic product/a 100 100 100 100 100 100 100 100 100 Agriculture 44.8 45.1 45.0 44.7 44.7 45.0 44.8 44.8 44.7 Industry 15.5 15.7 15.8 19.6 16.2 16.3 16.7 16.9 17.0 Services 39.4 39.2 39.2 39.4 39.3 38.6 38.6 38.4 38.3 Total Consumption 96.6 90.8 89.7 85.7 88.5 92.1 91.9 90.8 90.8 Grossdomestic fixed investment 15.4 17.4 16.8 18.9 18.5 19.0 19.6 20.1 20.6 Government investment 3.1 6.0 5.6 7.6 7.4 7.6 7.8 8.0 8.2 Private investment 12.3 11.4 11.2 11.4 11.1 11.4 11.8 12.0 12.3 Exports (GNFS)b 13.8 14.4 16.2 17.0 18.2 18.5 17.8 17.2 16.8 Imports (GNFS) 26.0 22.7 24.7 24.5 27.3 28.9 27.5 26.2 25.1 Grossdomestic savings 3.4 9.2 8.8 12.9 9.7 7.9 8.1 9.2 9.2 Grossnational savingsIC 2.0 7.6 7.3 9.1 9.8 8.2 8.7 8.9 9.1 Memorandum items Grossdomestic product 8635 9079 9342 9408 10290 10647 12122 13489 14905 (US$millionat currentprices) GNI per capita (US%,Atlas method) 250 270 270 280 280 290 300 330 350 Real annualgrowth rates (%, calculated fiom 1992prices) Grossdomestic productat market prices 3.6 5.1 6.2 7.2 7.1 6.3 6.5 7.0 7.0 Gross Domestic Income 3.9 5.9 11.0 8.2 6.3 7.0 6.2 6.4 7.6 Real annualper capita growth rates("4calculatedfiom 1992prices) Grossdomestic product at market prices 1.1 3.6 3.3 4.2 2.9 2.6 2.7 3.0 3.0 Total consumption 1.3 -1.1 10.7 3.7 5.9 4.2 2.0 3.6 5.0 Private consumption 2.6 -2.0 21.5 2.2 7.8 2.0 0.7 3.3 4.9 Balanceof Payments(US%millions) Exports(GNFS)lb 1189.6 1306.9 1430.7 1568.4 1690.8 1954.7 2108.9 2254.9 2423.2 Merchandise(fob) 543.2 663.1 776.4 902.6 999.1 1206.1 1349.8 1456.7 1592.9 Imports (GNFS)/b 2241.5 2063.9 2232.3 2226.2 2681.9 3038.2 3175.4 3323.2 3488.5 Merchandise (fob) 1368.2 1367.9 1562.7 1513.7 1919.4 2211.2 2274.7 2376.4 2505.4 Resource balance -1051.9 -757.0 -801.6 -657.8 991.1 1083.5 1068.3 1065.3 Net cument transfers -37.8 -38.0 -18.9 -14.0 29.0 11.8 . 1066.5 -5.4 -15.4 -15.4 Current account balance(before grants) -1172.0 -900.1 -905.9 -711.6 .965.6 -1044.7 -1031.2 -1019.0 ,1017.3 Current accountbalance(after grants) -638.7 -366.3 -419.9 -226.9 .327.7 -464.3 -432.0 -394.0 -368.6 Net private foreign direct investment 516.7 463.4 327.2 240.4 247.8 260.2 273.2 286.9 301.2 Long-term loans (net) 170.0 103.0 6.0 167.7 42.2 -34.0 -83.7 -156.2 -167.8 Official 177.0 110.0 307.0 171.7 47.2 -34.0 -89.7 -160.2 -171.8 Private -7.0 -7.0 -301.0 4.0 5.0 0.0 -6.0 -4.0 -4.0 Other capital (net, incl. errors & ommissi -71.0 63.0 315.0 244.0 59.0 Change inreservesi d -124.7 -148.0 -184.0 -371.0 -430.9 -190.5 -126.9 -185.5 -352.8 Memorandum items Resourcebalance(% ofGDP) -12.2 -8.3 -8.6 -7.0 -10.1 -10.4 -11.3 -10.6 -9.9 Real annualgrowth rates ( YR92 prices) Merchandise exports (fob) -2.4 17.8 16.4 16.9 10.7 20.7 11.8 7.8 9.3 Manufactures -27.9 59.1 64.3 17.3 9.3 9.7 8.1 8.5 8.7 Merchandise imports (c19 7.4 -2.4 7.7 -3.3 27.0 15.2 12.4 5.6 5.7 116  Tanzania Key Economic Indicators - (Continued) Indicator ' Public finance (as % of GDP at market prices) /e Current revenues 10.7 10.6 11.4 11.5 12.1 12.9 13.5 13.8 14.0 Current expenditures 10.2 11.1 12.1 12.9 14.8 16.8 18.9 18.7 19.0 Capital expenditure 3.9 5.0 3.5 3.2 5.0 5.7 6.6 6.2 6.4 Current account balabce(before grants) 0.5 -7.8 -5.3 -5.6 -7.8 -9.6 -11.7 -11.0 -11.4 Foreign financing Ig 4.2 5.7 4.6 5.6 8.0 11.0 12.0 11.5 11.9 Monetary indicators MZIGDP 18.9 19.2 20.0 22.6 24.1 26.0 27.7 28.6 28.5 Growth of M2("A) 18.5 14.8 17.1 25.1 19.1 25.0 8.9 10.1 10.2 Price indices( YR92 =loo) Merchandiseexport price index 136.8 167.0 195.6 227.3 251.7 303.8 340.0 366.9 401.2 Merchandiseimport price index 115.2 112.4 125.6 121.6 154.3 177.7 182.9 191.0 201.4 Merchandiseterms oftrade index 118.8 148.6 155.7 186.9 163.1 171.0 185.9 192.1 199.2 Realexchangerate (US%LCU)f 135.5 120.6 121.8 121.8 121.8 0.0 0.0 0.0 0.0 Real interestrates Consumerprice index ("A change) 7.9 5.9 5.1 4.6 4.4 5.0 4.0 4.0 3.7 GDP deflator ("YOchange) 11.4 6.9 6.2 4.1 7.2 3.3 3.6 3.4 3.3 a. GDP at factor cost b. "GNFS" denotes"goods andnonfactor services." c. Includes net unrequitedtransfers excludingofficial capital grants. d. Includes use of IMF resources. e. Consolidated central government. f, "LCU denotes"local currencyunits." An increaseinUSWLCUdenotesappreciation. g. Includes grant andforeign financing net. 117  Annex 4: Tanzania Key ExposureIndicators Tanzania Key ExposureIndicators - indicator 1999 ` 2000 2001 ZOM 2003 72004 2005 2006 2007 Total debtoutstandingand 7493 7654 6881 5500 6067 6348 6651 7100 7274 disbursed(TDO) (vS%m)/a Net disbursements (US$m)/a 217 132 2 137 55 207 144 185 173 Total debt service(TDS) I95 198 464 156 242 266 295 254 267 (vS$m)/a Debt anddebt serviceindicators (%) (Assuming full delivety ofHIPC)/b NPV of DebtiExportsof Goods andServices 100.9 101.6 104.8 105.2 105.3 103.7 DebtGDP 14.8 15.4 17.1 17.7 17.5 17.1 DebtServiceExports ofGoodsandServices 6.1 5.3 6.0 6.5 6.0 5.5 IBRD exposure indicators(%) IBRD DS/publicDS 4.4 2.5 0.0 0.0 1.2 1.1 0.0 0.0 0 PreferredcreditorDSipublic 60.7 53.8 5.2 70.4 65.6 69.1 71.5 69.0 70 DS (%)/c IBRD DSKGS 0.6 0.4 0.0 0.0 0.2 0.2 0.0 0.0 0 IBRD TDO (US$m) id 16 11 8 6 3 0 0 0 0 IDA TDO (US$" id 2594 2593 2588 2869 2906 2963 3019 3048 3027 IFC (USSm) Loans Equity andquasi-equity /c MIGA MIGA guarantees (USSm) a. Includespublic andpublicly guaranteeddebt, privatenonguaranteed,use of IMF credits andnet short- term capital. b. EstimtedinJune 2003 basedon completionpoint debt data, newdisbursement in2002 andother macroeconomicdevelopments in2002. c. Preferredcreditorsare defmedas IBRD, IDA, the regionalmultilateraldevelopmentbanks, the IMF, andthe Bank for InternationalSettlements. d. Includespresent value of guarantees. e. Includesequity andquasi-equity types of bothloan andequity instruments. 118  Annex 5: Tanzania Balance ofPayments Tanzania Balance of Payments - (US$millions at current prices) Total exDons of GUFS 'a 11896 13069 14307 15685 1.6911 1.9551 21083 22517 24194 Merchandise (fob) 543.2 663.1 776.4 902.6 999.1 i206.i 1349.8 1456.7 1592.9 Nonfactor services 646.4 643.8 654.3 665.8 691.7 748.6 759.1 798.2 830.3 Total Imports of GNFS 2241.5 2063.9 2232.3 2226.2 2,682 3,038 3,413 3,605 3,794 Merchandise (fob) 1368.2 1367.9 1562.7 1513.7 1,919 2,211 2274.7 2376.4 2505.4 Nonfactor services 873.3 696.0 669.6 712.5 763 827 900.7 946.8 983.1 Resourcebalance -1051.9 -757.0 -801.6 -657.8 -991 -1,083 -1066.5 ,1068.3 -1065.3 Net factor income -82.3 -105.1 -85.4 -51.7 -54 -53 -50 -36 -71 Factorreceipts 49.0 50.4 55.4 67.7 85 88 77 88 88 Factor payments 131.3 155.5 140.8 119.4 140 138 107 121 120 Interest (scheduled) 131.3 120.8 117.3 96.3 99 96 83 19 77 Other factor payments 0.0 34.1 23.5 23.1 41 42 24 43 43 Net private current transfers -37.8 -38.0 -18.9 -2.1 29 12 -1 -40 -40 Current receipts, o fwhich 34.2 34.9 51.1 50.2 69 67 55 45 45 Workers' remittances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current payments 72.0 72.9 70.0 33.7 69.0 66.6 55.0 45.0 45.0 Current accountbalance(before gants) -1172.0 -900.1 -905.9 -711.6 -1,016 -1,125 -1,356 -1,428 -1,485 Official capital grants 533.3 533.8 486.0 484.7 638 576 593 618 642 Current accountbalance(after grants) -638.7 -366.3 -419.9 -226.9 -378 -549 -763 -810 -843 Private investment (net) 516.7 463.4 327.2 240.4 248 260 273 287 301 Direct foreign investment 516.7 463.4 327.2 240.4 248 260 273 287 301 NetLTc borrowing 25.2 -34.3 -100.9 56.9 66.0 267.0 234.0 235.0 238.0 Disbursementsib 261.0 227.0 295.0 192.0 186.0 380.0 345.0 346.0 348.0 Repayments(scheduled) 235.8 261.3 395.9 135.1 120.0 113.0 111.0 111.0 110.0 Total principal repaid ib 235.8 261.3 324.4 135.1 120.0 113.0 111.0 111.0 110.0 Net adjustmentsto scheduled re 1263.3 10.0 131.0 0.0 0.0 0.0 0.0 0.0 0.0 Adjustments to scheduleddebt service 99.0 54.0 203.0 67.6 68 76 77 83 87 Debt service not paid 1263.0 53.5 203.0 67.6 68 76 71 83 87 Reductioninarreardprepayments(-) 1163.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other capital flows -71.0 63.0 243.0 169.0 59 14 2 17 -1 Net short-term capital -27.0 17.0 -10.0 47.0 -10 14 2 17 -1 Net capital flows n.e.i.d 0.0 0.0 0.0 0.0 0 0 0 0 0 Errorsand omissions -44.0 46.0 253.0 122.0 69 0 0 0 0 Change in net intemational reserves -124.7 -148.0 -184.0 -371.0 -431 -357 -155 -203 -175 (-indicatesincreaseinassets) Memorandumitems Total gross reserves, ofwhich 775.6 974.4 1156.6 1528.0 1,976.1 2,s 85.3 3,067.0 3,572.4 4,097.9 Total grossreserves (inmonths'impa 4.5 5.2 6.2 6.8 7.9 9.8 11.1 12.3 13.2 Exchangerates Annual average (LCUAJS%)/f 745.0 800.4 876.3 963.2 1039 1110 1080 1087.62 1102.96 At endyear (LCU/US%) 797.3 803.3 916.3 976.3 1063.6 1080 1080 1080 1095.2 Index real average exchangerate (YR9; 135.5 120.6 121.8 121.8 121.8 0.0 0.0 0.0 0.0 Current Account Balance as % GDP -13.8 -9.5 -9.5 -7.5 -10.3 -10.7 -11.7 -11.2 -10.6 a. Goods and nonfactor services. b. 'Data-YKtorical data from Debt ReportingSystem(DRS); other data projectedby country operations division staff. c. "LT" denotes "long-term." d. "n.e.i." denotes "not elsewhereincluded." e. " G& S" denotes "goods and services." f "LCU" denotes"local currencyunits." g. The index ofthe real exchangerate reflects US$RCU, so an increaseis an appreciation at the real exchangerate. 119  f - a :: :i 5 6 c 0 c) Ym 3; .. \o 4 B  TANZANIA Annex 7: PartnershipFramework Memorandum TABLE OF CONTENTS MainPrinciples Justification The PerformanceAssessmentFramework ReviewProcess Responsibilitiesofthe GovernmentofTanzania Responsibilitiesofthe Donors Appendix Dates for review meetingsanddetails onthe reviewprocess 121  1. Main principles The Government andthe donors considerthe PartnershipFramework16(PF) for budget support" as the common instrument of support to the Poverty Reduction Strategy (PRS) through the Government's budget. The PF is an integralpart of the Government of Tanzania's public sector budgeting and priority setting process and the PRS. The budget will be usedas a tool to reachthe PRS objectives, and priority sectors as defined in the PRS will be protected in the budget. The agreed priority allocations as well as indicators of achievements will continue to be monitored through joint processes including the Public Expenditure Review (PER) and PRS process and reviews as detailed in this PF. These joint processes will involve the Government and the PF donors. This PF Memorandum describes the common framework for the development grant and loan agreements to fund poverty-oriented programme budget support to Tanzania. Together with the attached Technical Annexes, it replaces the Memorandum of Understanding for the Poverty Reduction Budget Support (PRBS) signed on 27' November 2001 and the Technical Note o f October 2001. This PerformanceFramework Memorandumhas beenreviewed and agreedby the Government and the PF donors during the joint Annual Review/pre-appraisalof general budget support carriedout inNovember2002. The PF Memorandumwill be supplementedby bilateralagreementsbetweeneach individualdonor and the Government of Tanzania, and by a PRSC programme document and related legal documents of the World Bank. The bilateralagreements will have the choice to focus on all or a subset of the actions and targets,in the list of policy actions and targetsjointly agreed on in the PAF. It is understoodby the parties that the contents in the individualfunding agreements take legal precedenceover this Partnership Framework Memorandum. However, it is the intentionof the parties to establish funding agreements that are compatible with the provisions of this PartnershipFrameworkMemorandum. The intention is to manage existing and future budgetary support from donors and financing institutionsthroughthe PF facility. The objectives are to minimizetransactioncosts, to harmonize performancebenchmarksanddialoguebetweenthe partiesandto link fundingcommitments by the donors to achievement o f targets set. The Partnership Framework and the funding Facility is therefore open for contributionfrom and participationby all donors and financial institutionsthat are providingor consideringprovidingsuchbudgetary support. The PF aims at increasing the predictability of donor flows. This will benefit overall economic developments and the implementation and efficiency of programmes in priority sectors. The PF facility will provide general budget support co-ordinated among the participating donors and operated according to established government procedures and reportingrequirements agreed with the partners. 2. Justification Tanzania has implementedan economic reformprogramme that has shown a number of positive results. Significant progress has beenmade in macroeconomic stabilisationand structuralreform of the economy. Inflationhas stabilised below 5 percent and signs are that many of the elements requiredfor a private sector ledgrowthare inplace. In the first years of the reform programme, growth rates in the economy were slow to pick up, however, and this led to lack of progress in poverty reduction and slow development of the l6The PartnershipFrameworkis the namegivento the harmonizedPRBSandPRSCbudget support framework. I'Theterm "Budget Support" as usedto denote bothbudgetandother similar support inthe context ofthe PF Memorandum. 122  economic base neededto support the public sector. Growth rates inthe economy have improved in recent years, but poverty is still prevalent. It has been estimated that about one third of the population cannot afford basic needs for livelihood. As many as 18 percent are living in abject poverty, that is, in a situation where the income is insufficient to buy food to cover minimum nutritional needs. Tanzania needs several years o f high per capita growth rates to reduce poverty levels significantly. Surveys o f poverty and living conditions in Tanzania show that there are important challenges in the priority sectors that are detailed inthe PRS. These priority sectors (and priority items) may be subject to change during the ongoing process o f reviewing and updating the PRS, but they currently include: health (primary); education (basic); water; roads (rural); agriculture (extension services); justice and HTV/ AIDS. There is furthermore a serious concern about the possibility of large segments o f the population being left out o f the economic growth and income generation process. In recognition o f the enormous challenge in combating poverty the Government o f the United Republic o f Tanzania has refocused priorities towards social sectors and primary services within them. Long-term targets for poverty reduction were articulated in the Vision 2025 and elaborated further inNational Poverty Eradication Strategy (NPES) adopted by the Government in November 1997. The Tanzania Assistance Strategy (TAS), which expresses the modalities and coordination requirements for donor support and the PRS focus on how to combat poverty in an effective manner, both in terms o f more effective use o f public resources and in improving the possibilities for economic growth, employment creation and income generation. Domestic revenue to the public sector inTanzania was 12,2 percent o f GDP inthe 2001/02 budget year. The fiscal deficit before grants was 6,6 percent. In addition to the reforms carried out in tax policy and administration, the Government recognizes that more measures are needed to enhance domestic resource mobilization. However, a realistic assessment is that the tax base, which is the monetized, non-governmental part o f the economy, needs to grow faster than overall GDP for a number o f years to yield a significantly higher tax/GDP ratio. While efforts to increase revenue mobilisation are being implemented, the poverty reduction programme is inneed o f external grants or other concessional financing. Direct budget support provides a sustainable route to manage the transition from aid dependency. It strengthens national ownership o f the development process as well as Government institutions, and it facilitates the implementation o f democratically selected sector strategies for growth and poverty reduction. 3. The PerformanceAssessment Framework The PF is linked to a common set o f policy and poverty reduction goals. These goals are agreed between the Government of Tanzania and the participating donors and shall be based on the goals o f the PRS. The goals, including the policies to reachthem and the indicators to monitor them, are described in a Performance Assessment Framework (PAF)18. It is the intention o f the parties to harmonize the PRS action plan and the PAF completely withinthree years. The PAF is a results-oriented matrix o f agreed actions and indicators including timeframe for reaching targets. The PAF sets out agreed key short and medium term actions to reduce poverty such as macroeconomic stability and performance improvements inthe public sector together with specific annual measures to be taken by the Government to achieve the PRS targets. The indicators for the macroeconomic targets o f the PAF will be those elaborated in the IMF programme framework discussions. Dialogue on these issues with a wider groups o f stakeholders will be handled inthe appropriate common forum e.g. the PER macroeconomic group. The PF parties will avoid introducing new targets, indicators or measures that are outside the PAF and the IMF programme macroeconomic framework. The PAF will form apart ofthe loanagreementsunderthe PRSCprogramme with the World Bank and list the actions and prior actions under that programme. 123  The parties will use the PAF and PRS Review process as a tool for dialogue on PRS implementation and progress on PRS implementation and PAF actions will help to determine appropriate levels of future funding for the General Budget. Through a continuous process, it will allow the Government and the Donors to assess progress towards agreed medium term objectives and the implementation status of specific measures. The PAF will be updated annually as part of the Annual Reviewprocess. 4. ReviewProcess The review process for PF will be common for all participating donors and based on the review process for the PRS. The Government of Tanzania and the donors participating will maintain a close dialogue regarding the PF. The parties shall meet on an agreed schedule to review implementation and the attainment of objectives (see Appendix). The PAF matrix and PRS Progress Report will form the basis for discussions on progress between PF donors and the Government. The timing of review meetings through the year will be decided in such a way that the budget process is facilitated and that the PRSC requirements and the bilateral donors' need for inputs to their decision-makingprocesses are accommodated. The table inthe Appendix lists the meetings and actionsneeded. Assessment of performance will be based on progress towards targets and measures identified through the PRS and expressed inthe PAF matrix. Joint reviews of the PF Facility will be carried out by Governmentand all participatingcontributors. These reviews will use information gathered through ongoing processesto ensure that they do not set up a parallel review process. The review processesshouldendeavour to minimize additional technical work. However, shouldthe quality of regular information prove not to be satisfactory, the PF donors andthe Governmentwill agree on a timeframe and on the possible support donors could offer to build the capacity neededto provide this information. The review processeswill draw together summary reports reviewing progress against relevantPAF and PRS targets. Progress against the list of indicatorsof social well-being, derivedfrom the PRS and attachedto the PAF matrix, shouldbe coveredinthe context of the PRS and discussed as part of the Annual Review. The aimwill beto fully harmonisethe Annual ReviewReportwiththe PRS progress report over time. This will ultimately depend on progress with harmonisationof the PAF and PRS Action Plan. At least two weeks prior to the reviews, the Government of Tanzania shall provide the following informationto the donors: 0 For each of the review meetings, statements showing the budget and the budget execution figures including tax revenues and presentationof priority expenditures as defined in the PRS progressreports; 0 For the Annual Review, PRS progress report and a progress report on implementation of PAF actions; 0 For the Mid-term and Annual Review, a statement of inflows and outflows from the PF accounts includinga statement of internalaudit; and 0 As soon as available, the AnnualAudit Reportpreparedby the National Audit Office. 5. Responsibilitiesof the Government of Tanzania The donor support towards the PF is based upon the understanding that the Government of Tanzania will: 0 Implement the key actions identified within the PAF and through the on-going PRS 124  process; Implementthe overalleconomic programme aimedat stabilisationand increasedeconomic growth as has been described in the context of the IMF programme macroeconomic framework. 0 Ensure that total expenditures and sector allocations effectively reflect the poverty reductioncommitment and that extra budgetary expenditure is brought into the budget so that budgetcomprehensivenessis ensured; and 0 Monitor and report on the effective implementation o f the budget and on progress in achievingPRSandPAFtargets. 6. Responsibilitiesofthe donors The development partners are committed to working in Partnership with the Government of Tanzania and facilitating implementation of the PRS boththrough financing governed by this PF and complementary support provided through development partners' wider development cooperation programmes. To the best extent possible within existingadministrative and statutory provisions including individual bilateral funding agreements with Tanzania, which ultimately governdecisions ondisbursementsandcommitments, the donors committhemselves to: 0 provide informationon future disbursements in advance of the budget year in a common financialframework for PF; 0 disburse all of the commitments made within the Tanzanian budget year and attempt, where possible, to front loadtheir disbursements withinthe first quarter; 0 as a general rule, change funding only for the next budget year by reference to the implementationof measuresinthe PAF, the PRSandIMF assessments of macroeconomic performance;and 0 endeavour to co-ordinate their disbursements in line with the Government's budgetary requirementsas presentedby the Government. The donors will endeavour to follow the principlesenshrinedin the PF and assess performanceon the basis ofthe PAF andPRSprogressreport. Referenceto these key processesshouldbe included in individualbilateralfunding agreements to the maximum extent. These agreements will mainly provide further details on the obligations of both parties and the procedures for disbursing funds together with any standard conditions for development cooperation that the individualdonor may have.The parties agree to keepsuchgeneralconditions to a minimum. 7. Appendix Dates for review meetings will be determined by taking into account the preparation of the Tanzanianbudget andby the presentationofthe annual PRS report. The budgetyear is from 1stof July to 30thofJune. The Annual Review process of updating the PAF targets will involve focused technical working groups for each areaof the PAF. Eachof these groups will comprise Government representatives, PRES donor representatives and World Bank representatives. They will jointly review progress andprioritiesfor the future. A finaljoint meetinginvolvingallworkinggroups willthenbe heldto agree on key findings of the reviews and the way forward. The Mid-year Review will involve similar processes,but will be a light review of progressto date. The Ministryof Finance, in close coordinationwith the Vice President's Office will maintain oversight of the Review process and coordinate inputs where necessary from other Government departments. Within the Ministry of Finance, the Technical Committee will act as the main point of contact; they will co-ordinate preparationof the necessary Government assessments of progress and providethe informationas 125  outlined in Paragraph 17; and they will also lead the process of updating the Performance Assessment Framework. Meetingheview GOTCycle PRl3Sactivity PRSC activity linked dates PRS Progress Mainprogrammereview basedon PRSCpre-appraisal Report PRSreport; mission. Settingof Assess progress on implementationof prior actions for the PAF actions for previousyear and next PRSC (to be finalise PAFactions for comingyear completedby March) (November to November); and October/ Reviewprogress on macroeconomic indicativekentative November developmentsdrawingon information prior actions for future fromIMFprogrammereviews. PRSC's. Review 1st quarterbudget implementation; Indicativecontributions from participatingdonorsfor fiscalyear startingnext July. Budget Mid-yearprogrammereview; PRSCnegotiations preparation Assessment o f implementationo f prior and finalisationof actions for PRSC, and progress on agreement remainingannual actions assessed and March updatedaccordingly; Review of 1stand 2nd quarter budget implementation; Communicationof firm financing commitmentsfrom donors. AnnualBudget Reviewimplementationof approved andAccounts for budget and budgetexecution for September previous fiscal previousfiscal year and assess year approvedbudgetfor current fiscal 126  THE UNITED REPUBLIC OF TANZANIA TECHNICAL NOTE ON POVERTY REDUCTION BUDGET SUPPORT FOR BILATERAL DONORSAND THE EUROPEAN COMMISSION NOVEMBER 2002 127  TechnicalArrangements The technical arrangements for the bilateral donors and the European Commission are described below: All donor contributions to the PRBS foreign exchange account and interest accrued, shall be usedto provide budget support to the Government o f Tanzania; The facility shall be managed by the Ministryo f Finance; The interest-bearing PRBS forex account shall be monitored by the Bank o f Tanzania on the authority o fthe Ministryo fFinance, Accountant General's Department; The donors shall provide updates at the mid-term and annual review meetings regarding disbursementsfor the PRBS facility (amounts and timing); The Permanent Secretary, Ministryo f Finance shall issue payment instructions to the BOT authorising the transfer from the PRBS account to the consolidated account; The Ministry o f Finance, Policy Analysis Department will co-ordinate the operations, advising donors when the balance inthe PRBS account is less than anticipated; Deposits inthe PRBS forex account, and transfers to the consolidated fund, will be subject to an annual external audit financed by Government o f Tanzania. (See Audit section below for further details); The Ministryo f Finance and Bank o f Tanzania shall keep detailed records inrespect o f the PRBS foreign exchange account as follows: 9 Disbursements made bydonors; 9 Balances inthe account atthe endofevery quarter; 9 Withdrawalofthe PRBS account for payment intothe Consolidated Account. Audit Arrangements The following audit arrangements shall be established: 1) The National Audit Office (NAO) carries out an independent annual external audit o f the Government Accounts. The annual audit report by the NAO shall be presented to PRBS donors as soon as it becomes available; Given the current considerable time lag between the end o f the fiscal year and the availability o f the annual NAO audit report for that fiscal year, a more timely audit o f selectedflows in the Government Accounts would be undertaken annually. This audit will be carried out by the NAO, which may contract assistance from an internationally recognised audit company. This audit would be financed by the PRBS donors. The terms of reference for this selected external audit and a short list o f audit companies would be jointly prepared and agreed by the Government, the National Audit Office and the PRBS donors. The selection o f auditors and approval o fthe audit contract would be endorsed by the Government andthe PRBS donors; 3) Internal audits of the PRBS account will be undertaken. Contributing donors may undertake an independent external audit o f the PRBS account at any time at their own cost; 4) The internal and external audit reports will be discussed as part o f the reviews (ref.: Appendix o fthe Partnership Framework Memorandum-schedule o f reviews). 128  THE UNITEDREPUBLICOF TANZANIA TECHNICAL NOTE ON POVERTYREDUCTIONSUPPORT CREDIT AND GRANT FORTHE WORLD BANK DRAFT UPDATE FEBRUARY2004 129  PRSC-2 Credit and Grant Administration 1. The technical arrangements and the steps to follow inrespect to the IDA Credit and Grant administration are described below: 2. Borrower and credit amount. The borrower is the United Republic o f Tanzania. A single- tranche credit o f SDR 41 million (US$60 million equivalent) would be made available upon credit effectiveness, anticipated for August 2004. The closing date o f the operation would be June 30, 2005. It is envisaged that there will be another further single-tranche, annual PRSCs to support the implementation o f the PRS inFY06. 3. Grant Amount. Additionally, there would be grant o f SDR 61.6 million (US$ 90 million equivalent) that would be made available uponPRSC-2 effectiveness, anticipated for August 2004. 4. The proposed financial structure for the PRSC-2 is as follows: PRSC-2: US$60 million equivalent (IDA credit) US$90 million equivalent (IDA grant [debt vulnerability country]) _____---_________-________ Total US$l50 million equivalent 5. Disbursement, reporting, and auditing arrangements". The operation will follow IDA's simplified disbursement procedures for adjustment operations.20 Accordingly, the PRSC-2 proceeds will be disbursed in compliance with the stipulated single-tranche release conditions. Disbursement will not be linked to any specific purchases, and no procurement requirements are needed. Once the PRSC-2 is approved by the Board, the borrower will open and maintain a dedicated deposit account in U.S. dollars for the borrower's use. As the single tranche is released on PRSC-2 effectiveness, IDA will disburse the proceeds o f the credit and grant into the deposit account. Thereafter, at the request o f the Ministry o f Finance, the U.S. dollars amount will be converted to Tanzania shillings at the Bank o f Tanzania for the credit o f the government account (consolidated fund account, to be used subsequently for public expenditures. Ifafter deposit inthe deposit account, the proceeds of the credit and grant or any parts thereof are used for ineligible purposes, as defined in the development financing agreement, IDA will require the borrower to either (a) return that amount to the deposit account for use for eligible purposes or (b) refund the amount directly to IDA. 6. Through the Ministry o f Finance, the borrower will (a) report the exact sum received into the deposit account; (b) indicate to IDA details o f the consolidated fund account to which the Tanzania shillings equivalent o f the PRSC-2 proceeds will be credited; (c) ensure that all withdrawals from the deposit account are for budgeted public expenditures, except for purposes such as military expenditures or for other items on IDA's negative list; (d) report to IDA the equivalent in the local currency o f the U.S. dollar amount withdrawn from the deposit account, producing evidence that the local currency sum was paid into the Consolidated Fund Account and disbursementsfrom that account were for budgeted public expenditures other than those on IDA's negative list; and (e) submit a report on receipts and disbursements for boththe deposit account and the consolidated fund account to enable IDA to review the consistency of the withdrawal with the development financing agreement and the objectives o foperation. 7. These controls are intended to provide assurance that IDA funds have arrived at their intended destination and are being used for their intended purpose o f funding budgeted public expenditures, subject to the borrower's rules andregulations. ''The IMF ROSC (August 2001) concludedthat, "Tanzania has madenotableimprovementsinenhancingtransparency racticesinkey areas, especially fiscal andmonetarypolicy andbankingsupervision." Operational Memorandum: Simplifying Disbursementsunder Structuraland Sectoral Adjustment Loans, February 8, 1996. 130  8. The following summarizes the external audits: e Deposit account: At IDA'Srequest and within six months o f credit and grant disbursement, the deposit account will be independently audited on terms o f reference acceptable to IDA. e Public (government) accounts: The controller and auditor general (CAG ) is required by law to produce his or her annual report on the public accounts to parliament within nine months o f the financial year-end. A copy o f these accounts should be submittedto IDA. e Bank of Tanzania: The annual entity financial statements o f the Bank o f Tanzania, audited in accordance with International Auditing Standards promulgated by the International Federationo f Accountants, are publicly available. 9. Governance aspects. Aside from the measures supported by the PRSC that aim at the strengthening o f governance, various processes are in place that aim at improved accountability and transparency for the use o f public resources. The Prevention o f Corruption Bureau and the National Audit Office have been significantly strengthened during recent years, and the Bank is preparing a project that would support further strengthening o f accountability mechanisms. The participatory PER-MTEF process provides for an open review o f budgetary performance. The CFAA on Tanzania concluded that the central and localgovernment financialmanagement systems represent high fiduciary risk. The major recommendations contained in that report have been reflected inthe reform program supported by the PRSC. To ensure effective implementation o f the reform, the government has developed the PFMRP, the implementation o f which will be monitored under the PERprocess. 10. Environmental issues. The proposed PRSC-2 has been classified as structural adjustment credit governed under the Operational Directive 8.60, and does not require an environmental assessment rating. In an effort to mainstream the environmental sustainability dimension into the PRSC process the Bank has undertaken various analyses with the objective to identify linkages between key macro and structural reforms policies andthe environment. This analysis, undertaken under PRSC-1, identifies measures at both national and local government levels to reduce poverty and enhance environmental sustainability o f policy reforms. The analysis concluded that environment and poverty are linked inthree major ways: (a) poverty reduction programs should not damage the resource base and the environment o f which poor depend for their livelihoods (b) improving environmental conditions can help to reduce poverty and promote sustainable pro-poor growth; and (c) mitigatingmeasures may be necessary as part o f policy dialogue. 11. Working with the government and other development partners, the analysis identified a number strategic entry points for mainstreaming key issues of the poverty-environment nexus in Tanzania into PRSC process and ongoing policy reforms in general. This included inter alia. further support for EA activities, a comprehensive environmental review o f all taxes and levies associated with the agricultural sector, and increased attention to removing land tenure uncertainties. Specifically, the Vice President's Office and the National Environmental Management Council (NEMC) have been supporting the development and implementation o f various sector-specific guidelines for EA (initially in roads and agriculture), and have more recently pursued procedures for strategic and sectoral environmental assessment to permit mitigation o f any adverse environmental impacts while taking advantage o f potential synergies between poverty reduction and environmental protection efforts. In this regard the PRSC-2 and PRSC-3 reform agenda has specific actions to be implemented by the Government o f Tanzania as part o f the environmental component. 131  Annex 8: Relation with the Fund Press Release No. 04/37 InternationalMonetaryFund February 25,2004 700 19thStreet, NW Washington, D.C. 20431USA TMF CompletesFirstReview UnderTanzania's PRGFArrangement and Approves US$4.2 Million Disbursement The Executive Board o f the International Monetary Fund(IMF)today completed the first review o f Tanzania's performance under a SDR 19.6 million (about US$29.3 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 031127). The completion o f this review enables the release of a further SDR 2.8 (about US$4.2 million), which will bringthe total amount drawn under the arrangement to SDR 5.6 million (about US$8.3 million). Incompletingthe review, the Boardwaived the nonobservance ofthe performance criterionrelated to the submissionto parliament of the new income tax law, which was delayed to February 2004. The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 %-year period on principal payments. Following the Executive Board's discussion on Tanzania's economic performance, Agustin Carstens, Deputy Managing Director and Acting Chair, made the following statement: "The Tanzanian authorities deserve credit for maintaining macroeconomic stability and making substantial progress with structural reforms, which have paved the way for a steady but modest increase in real per capita income combined with low inflation. Reflecting its good track record in the implementation of its reform program, Tanzania has received steady financial support and technical assistance from the donor community. Inparticular, debt relief under the enhanced HIPC Initiative has helped Tanzania to undertake higher social sector spending and maintain debt sustainability. "Despite these achievements, poverty remains widespread, especially in rural areas, and economic development has been uneven across the country. Thus, the authorities are committed to sustained economic reform efforts inorder to make further progress toward the growth and poverty reduction objectives articulated in the PRSP. The strengthening o f the business environment and o f agricultural performance, as well as measures to manage the macroeconomic impact o f high aid flows, will be key elements o fthese reforms. "Enhancing revenue mobilization and containing aid dependence will be critical to enhance the robustness o f macroeconomic stability. To this end, the authorities plan to achieve a comprehensive reform of tax policy and tax administration. The forthcoming adoption o f a new Income Tax Bill and the Tanzania Revenue Authority (TRAYSimplementationo f a new three-year corporate plan will be crucial measures inthis direction. Furthermore, rationalizing the tax regime for mining companies, while imposing strict controls on tax exemptions, will be important steps to 132  contain revenue leakages. Maintaining a sound fiscal position and debt sustainability will also require firm control over nonpriority expenditure and prudent debt management policies. "Continued reform in the financial sector, consistent with the recommendations o f the recent Financial Sector Assessment Program (FSAP), will be crucial to improve access to bank lending and strengthen the financial sector's contribution to higher economic growth. The newly passed amendments to the Land Act are expected to facilitate bank lendingby permittingthe use o f land as collateral. The privatizationo fthe National Microfinance Bank will also help to broaden access to financial services. "The authorities recognize the seriousness o f the rising fiscal pressures emanating from growing subsidies for the energy sector. They intend to take swift action by formulating and implementing a short-term action plan and a medium-term reform strategy, which will aim at providing reliable power supply, while reducing the electricity utility's dependence on fiscal subsidies. In this context, the authorities intend to hold high level consultations with the World Bank in the near future. "The authorities are committed to pursuing closer regional integration and further trade liberalization, mainly in the framework o f the East African Community (EAC). As part o f these efforts, the authorities are encouraged to work with EAC partner states to further reduce tariffs and remove non-tariff barriers. "Finally, the authorities have underlined their commitment to the full implementation o f their updated national anti-corruption strategy and action plan for 2003-2005, which will be a crucial step for strengthening governance and boosting business confidence," Mr.Carstens said. 133