Tanzania - Morogoro Textile Project

Document of The World Bank FOR OFFICIAL USE ONLY L L W"'! Report No. 1893b-TA STAFF APPRAISAL REPORT TANZANIA MOROGORO TEXTILE PROJECT May 20, 1978 Industrial Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 = Tanzanian Shillings (T Sh) 8.3 T Sh 1 = US$0.1205 T Sh 1,000 = US$120.5 WEIGHTS AND MEASURES All weights and measures are in metric units. 1 Metric Ton (t) = 1,000 Kilograms (kg) 1 Metric Ton (t) = 2,204.6 Pounds 1 Kilometer (Km) = 0.62 Miles 1 Hectare (ha) = 2.47 Acres 1 Bale = 187 Kg PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AISCO - Agricultural and Industrial Supplies Co. Ltd. CALICO - Calico Textile Mills Ltd. Company - Morogoro Polyester Textiles Limited Gherzi - Gherzi Textil Organisation, Switzerland Government, Borrower - Government of Tanzania ICB - International Competitive Bidding KILTEX - Kilimanjaro Textile Corporation Ltd. Kuwait Fund, KF - Kuwait Fund for Arab Economic Development, Kuwait LM - Linear Meter MWATEX - Mwanza Textiles Limited NATEX - National Textile Trading Company MAF - Management Agency Firm NBC - National Bank of Commerce NPC - National Price Commission PAF - Project Advisory Firm PEF - Project Engineering Firm PIU - Project Implementation Unit NDC - National Development Corporation RTC - Regional Trading Co. SUNGURATEX - Tanganyika Dyeing and Weaving Mills Ltd. TANTEX - Tanganyika Textile Industries Ltd. TANZATEX - Tanzania Textile Trading Co. TAC - Tanzania Audit Corporation TANESCO - Tanzania Electric Supply Co. TEXCO - National Textile Corporation TIB - Tanzania Investment Bank TMF - Technical Management Firm IJRAFIKI - Friendship Textile Mill Ltd. FISCAL YEAR Government: July 1 - June 30 TEXCO and Company: January 1 - December 31 Indust:rial Projects Department May 1978  FOR OFFICIAL USE ONLY TANZANIA APPRAISAL OF MOROGORO TEXTILE PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION ........... 1 II. THE INDUSTRIAL SECTOR. 2 A. Industrial Development . . 2 B. ' Parastatal Organizations .. 3 C. Textile Sub-Sector. 3 III. NATIONAL TEXTILE CORPORATION - THE EXECUTING AGENCY 5 A. Role of TEXCO. 5 B. Operational Results. 6 C. Financial Position of TEXCO Group. 9 D. Operations of MWATEX .10 E. Ongoing MWATEX Expansion .12 F. Other Projects under Implementation or Planning 12 G. Organization and Management of New Project .13 IV. MARKET AND MARKETING .14 A. Past Production and Consumption .14 B. Pattern of Fiber Consumption .15 C. Supply/Demand Forecasts ...18 D. Marketing and Distribution System .21 E. Pricing of Textile Products .24 V. THE PROJECT .25 A. Project Scope, Location and Product Mix .25 B. Project Technology .26 C. Buildings ..27 D. Raw Materials and Utilities .27 E. Housing .28 F. Ecological Considerations and Occupational Hazards . 28 G. Project Implementation .29 H. Staffing and Training .29 I. Quality Control .30 This Report was prepared by Y.T. Shetty, H. Oteifa, W. Wipplinger and S. Greig of the Industrial Projects Department. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (Continued) Page No. VI. PROJECT COST AND FINANCING PLAN ......................... 31 A. Project Cost ....................................... 31 B. Financing Plan ..................................... 33 C. Procurement ........................................ 35 D. Allocation of Bank/IDA Funds ....................... 36 VII. FINANCIAL ANALYSIS AND RISKS ............................ 37 A. Production and Production Costs .................... 37 B. Project Revenue .................................... 38 C. Methodology Used in Financial Projections .... ...... 38 D. Future Profitability ............................... 39 E. Financial Position ................................. 39 F. Financial Covenants ................................ 40 G. Break-Even Point ................................... 40 H. Financial Rate of Return ............................ 40 I. Auditing and Reporting Requirements ................ 41 J. Risks .............................................. 41 VIII. ECONOMIC ANALYSIS ....................................... 42 A. Raw Material and Textile Prices .................... 42 B. Economic Rate of Return ............................ 43 C. Foreign Exchange Effects ........................... 44 D. Economic Importance of Blended Fabrics .... ......... 44 E. Impact on Garment Industry and Employment Generation 45 F. Regional Impact of the Project ..................... 46 G. Transfer of Technology and Skills .................. 46 H. Institution Building ............................... 46 IX. AGREEMENTS .............................................. 47  ANNEXES 3 Main Financial Indicators of TEXCO Units 4-1 Production, Imports, Exports and Apparent Consumption of Woven Textiles 4-2 Per Capita Apparent Consumption of Textile Fibers and Woven Textiles 4-3 Projected Output of TEXCO Mills (Cotton Fabrics Only) 4-4 Projected Demand of Finished Woven Textiles 4-5 Projected Production and Consumption of Woven Textiles 4-6 Elasticities of Demand for Man-Made Fibers in Selected Developing Countries (1965-73) 5-1 Project Technology and Project Size 5-2 Plant Layout 5-3 Implementation Schedule 5-4 Training Schedule 6-1 Capital Cost Estimate 6-2 Projected Disbursement Schedule for Bank Group Funds 7-1 Assumptions for Financial Projections 7-2 Projected Income Statements 7-3 Projected Sources and Applications of Funds 7-4 Projected Balance Sheets 7-5 Inputs for Financial and Economic Rates of Return in 1977 Prices 8 Foreign Exchange and Local Currency Economic Costs and Benefits for DRC Computation MAP IBRD 11282R - Tanzania: Location of Textile Mills   DOCUMENTS CONTAINED IN PROJECT FILE A. Reports and Studies on the Sector Al. Market, Marketing and Feasibility Study, Phase I and Phase II, Gherzi Textil Organisation, 1976/77 A2. Draft Market Report, Preappraisal Mission, March 1977 B. Reports and Studies Relating to the Project B1. Feasibility Study, Phase I and Phase II, Cherzi Textil Organisation, 1976/77 B2. Project Brief, February 1977 B3. Questionnaire prepared by IBRD listing information requirements for appraisal (March 1977) B4. Preappraisal Issues Paper, August 2, 1977 B5. Preappraisal Decision Memorandum, August 26, 1977 B6. Office Memorandum, Comparison of Machinery and Equipment Costs for Proposed Textile Projects in Tanzania and Egypt, by Y.T. Shetty, August 17, 1977 B7. Office Memorandum, Choice of Technology and Related Matters for Textile Project II in Tanzania, by Messrs. A. Sandig and Y.T. Shetty, August 26, 1977 B8. Office Memorandum, Choice of Technology for Textile Project II in Tanzania, by Y.W. Rhee, November 28, 1977, February 15, 1978 and February 27, 1978 B9. Office Memorandum, Choice of Technology for Textile II Project in Tanzania, by Messrs. Y.T. Shetty, H. Oteifa and S. Greig, February 2, 1978 BIO. Preappraisal Report, "Tanzania: Preappraisal of Polyester Textile Project", October 1977 B11. Appraisal Issues Paper, November 30, 1977 B12. Appraisal Decision Memorandum, January 3, 1978 B13. Follow-up Appraisal Mission Back-to-Office Report, March 10, 1978 B14. Terms of Reference for Technical Assistance to Sector and the Project, November 1977 C. Working Papers and Other Data Cl. File containing all statements and tables prepared by TEXCO concerning appraisal of this project C2. Additional information (tables and statements prepared by mission) Industrial Projects Department May 1978   I. INTRODUCTION 1.01 The Government of Tanzania has approached the Bank/IDA to help finance (a) a textile project at Morogoro, an industrial town (pop. 40,000) 200 km west of Dar-es-Salaam, and (b) a technical assistance program to improve capacity utilization in the existing five Government-owned textile mills in Tanzania. The proposed Morogoro Textile Project will have an annual production capacity of about 21.5 million square meters (sq/m), equivalent to 19 million linear meters (lm), of blended fabrics. It will help the country meet the growing demand for such fabrics which has been created by their higher durability, and easy-care properties compared to all-cotton fabrics. This project gill be the second textile project financed by the Bank in Tanzania. The first one (TA-1128), an expansion project to increase the annual capacity of the Mwanza Textiles Ltd. (MWATEX) by 22 million sq/m to 47 million sq/m of cotton fabrics, is being implemented satisfactorily within the budget and is expected to be commissioned in July 1978, about four months behind the original schedule mainly because of delays caused by inland trans- portation of equipment and construction materials. The Mwanza project is being financed jointly by the Kuwait Fund for Arab Economic Development and the Bank, each providing US$15 million in loans. 1.02 The total financing required for the proposed project is estimated at about T Sh 887 million (US$106.9 million equivalent) including T Sh 563 million (US$67.8 million) in foreign exchange. Bank Group financing of US$45 million -- US$20 million from the International Development Association (IDA) and US$25 million from the Bank -- would cover about 42% of the total financ- ing required for the project. The remainder will be met by funds from the Government, Tanzania Investment Bank (TIB), and bilateral credits. 1.03 The types of fabrics that would be produced by the proposed mill are increasingly in demand throughout the country. Already, the demand for blended fabrics, especially polyester/cotton blends, is not limited to higher- paid city dwellers and public servants but embraces urban and rural people alike who prefer blended fabrics in work clothes, school uniforms, etc. This preference is explained by the fact that blended fabrics are two to three times more durable than pure cotton fabrics and have easy care properties. Blended fabrics do not get soiled easily and, if they do, they are easier to wash than pure cotton fabrics. As a result of the above mentioned properties and the lower waste factor of man-made as compared to cotton fibers in textile production, blended fabrics are considered the most economical means of clothing a nation (as detailed in para 8.06). 1.04 The project will be implemented by the National Textile Corporation (TEXCO), a parastatal organization which is fully owned by the Government and is responsible for the development of the textile sector. The project is part of an overall plan of Tanzania to reduce imports by achieving self-sufficiency in essential consumer items like textiles. It was identified by Gherzi Textil Organisation, of Switzerland, in its textile market study which was financed under the Bank loan for the Mwanza project. The market review was followed  - 2 - by a feasibility study for the project which was completed by Gherzi in early June 1977. A preappraisal mission, consisting of Messrs. Y.T. Shetty (Chief), Don Brown, H. Oteifa and W. Wipplinger of the Industrial Projects Department was carried out in June/July 1977. This was followed by an appraisal mission in October 1977; subsequent discussions with TEXCO in Washington in November 1977; and a follow-up mission consisting of Messrs. Y.T. Shetty and S. Greig in February 197.3. II. THE INDUSTRIAL SECTOR A. Industrial Development 2.01 At the time of independence in 1961, Tanzania had a rudimentary inclustrial sector, with total manufacturing value added accounting for less than 5% of Gross Domestic Product (GDP). The industries were largely owned by foreigners and concentrated on processing of export items such as cotton, sisal and coffee, with cotton ginning being the largest single manufacturing activity. 2.02 Post-independence industrial policies have increasingly focussed on import substitution. Perhaps the strongest boost to industrial development came after the Arusha Declaration of 1967 in which the principles of Tanzanian Socialism ("Ujamaa") and self-reliance were set forth. Pursuant to this new orientation, existing major manufacturing plants were brought under newly- established Government holding companies (parastatals) and those companies became the leading investors in medium to larger scale industrial units. In consumer goods industries, which account for over half of Tanzania's in- dustrial output, production priorities were set mainly to meet the basic needs of the population. 2.03 The growth of industry has been quite significant until 1973. Between 1964, the beginning of Tanzania's First Five-Year Plan, and 1973, the manufacturing secztor grew in real terms at an average annual rate of 9.4%, starting from a small base. As a result, the share of the manufacturing sector in GDP at current prices increased from nearly 7% in 1964 to 11.5% in 197.3. Reflecting the Government's concentration on import substitution, nearly half of the total supply of manufactured goods in Tanzania was produced locally in 1973. In consumer goods, which represented about 60% of total output of medium and larger scale manufacturing firms (employing 10 or more workers) in 1973., import substitution has been advancing fast. 2.04 After a decade of significant growth, however, the manufacturing sect-or stagnated during 1974 and 1975 mainly because of steep increases in the price of imported commodities (e.g., oil), an acute balance of payments problem, extended drought, and shortages of water and power. The balance of payments deficit increased from T Sh 942 million (US$113 million) in 1973 to T Sh 1,942 million (US$234 million) in 1974, despite higher world prices for the country's; main export commodities such as cotton, sisal and coffee that year. Faced with this situation, the Government reduced sharply the imports of many products, including textiles, starting in 1975.  - 3 - 2.05 Since 1976, industry has been recovering from the economic crisis period of 1973-75. This was mainly facilitated by increases in agricultural output, and the removal of import restrictions on spare parts and important industrial raw materials. As a result, in 1976, an industrial growth rate of 6.2% in real terms was achieved. Further, the balance of payments deficit eased considerably in 1976 mainly due to the sharp rise in coffee export prices. But this latter situation is probably unsustainable as the world coffee prices have started falling and the full effects of the Government's import liberalization program are being felt. Further, Tanzania's import needs are increasing especially for oil and capital goods with the country's plans for economic development. During 1977-85, GDP is projected to grow at 5.2% and industry by 8-9%; these rates are close to the historical annual growth rates during 1964-1973. The Third Five-Year Plan (1977-1981) has allocated T Sh 1,830 (US$624 million), about 27% of total development funds, for industrial development. B. Parastatal Organizations 2.06 Larger-scale industrial facilities are mostly owned by the "para- statal" organizations -- Government-owned holding companies operating under the overall supervision of the Ministries concerned. Since 1967, nearly all important industrial projects have been undertaken by the parastatals although, in some cases, with minority private foreign investment participation. In 1974, the parastatals accounted for an estimated 50% of manufacturing value added and 50% of new capital formation. There are currently six parastatals under the Ministry of Industry of which the National Textile Corporation (TEXCO) is the second largest next to the National Development Corporation (NDC). 2.07 The growth of public ownership of manufacturing enterprises since 1967 has been accompanied by increasing reliance on direct controls in alloca- tion decisions. Components of the control system include centralized decision-making on investments, detailed allocations of foreign exchange through import licensing, a detailed regime of price controls operated by the National Price Commission, credit allocation according to the annual Finance and Credit Plan, and wage setting by the Permanent Labor Tribunal and the Government. Imports of raw materials are channelled through state trading corporations. Exports are also handled by government agencies. C. Textile Sub-Sector 2.08 As the third largest cotton producer in Africa, after Egypt and the Sudan, Tanzania has a significant raw material base to expand textile production. From about 440,000 ha of land under cotton, Tanzania currently produces about 67,000 tons of cotton per year, of which about 15% is locally processed into textiles, and the rest is exported mainly to Hong Kong, the People's Republic of China and Japan. Tanzanian cotton commands a premium in the export markets because of its superior quality. 2.09 The public sector has assumed the leading role in the development of the textile industry since 1967, setting up some large-scale textile mills  - 4 - and consolidating a few others. As a result, the textile and clothing sector, which was insignificant in the early Sixties, has become the largest individual sub-sector and a major source of employment in the manufacturing field. In 1976, this sector accounted for 15% of total gross output, 20% of value added and 30% of employment in manufacturing firms employing 10 or more workers. The total employment in this sector is expected to increase by 50,000 to 72,000 during 1976-1986. 2.10 The domestic output of woven textiles, which was less than 10 mil- lion sq/m in the early 1960's, expanded to about 91 million sq/m in 1974 but declined in subsequent years because of problems in the existing mills (paras 2.12 and 3.08). In cotton textiles, which represent about 95% of total domestic output of woven textiles, import substitution has progressed signi- ficantly and near self-sufficiency is expected in the early 1980's. However, regarding blended fabrics, import substitution has been slow. 2.11 There are at present seven textile mills in Tanzania: (a) Friend- ship Textile Mills Ltd. (URAFIKI), Dar-es-Salaam; (b) Kilimanjaro Textile Corporation Ltd. (KILTEX) mills -- one located at Arusha and the other in Dar- es-Salaam; (c) Mwanza Textiles Ltd. (MWATEX), Mwanza; (d) Tanganyika Dyeing an,l Weaving Mills Ltd. (SUNGURATEX), Dar-es-Salaam; (e) Calico Textile Mills Ltd, Dar-es-Salaam; and (f) Tanganyika Textile Industries Ltd. (TANTEX), Dar- es-Salaam. Of the seven mills, five are in the public sector and two (CALICO and TANTEX) are in the private sector. The private sector mills, with a pro- duction capacity of 5.5 million sq/m of cloth, account for only 6% of the total production capacity in the country and are operating efficiently. In addition, there are 38 garment manufacturing units each employing 10 people or more. Most of them are private or cooperative enterprises which produce 2.8 million trousers, 2.2 million shirts and children's clothing items, among other things. The Government has recently established a new Government gar- ment factory at Ubungo, near Dar-es-Salaam, as a TEXCO subsidiary with a capacity to produce 500,000 trousers and 1 million pieces of ladies and children's apparel. 2.].2 The textile sub-sector as a whole is experiencing management, tech- nical, financial and manpower problems. These are particularly pronounced in the TEXCO group of companies which accounts for 94% of the total annual textile production capacity. The situation will be rectified under a number of rehabilitaticn programs being carried out or to be carried out by the TEXCO group of companies (paras. 3.09 to 3.14). In the garment industry, the main problems are due to restrictions on imported shirtings and suitings of polyester/cotton and polyester/rayon, forcing garment companies to produce at reduced capacity and reduce the number of employees. Some companies have converted to knitting operations for which the availability of imported raw materials has not been a major constraint, as foreign exchange expenditure on imports of yarn for knitting has been comparatively small and restrictions were not imposed on such imports. The situation in the labor-intensive garment industry is expected to improve with the local production of blended fabrics under the proposed textile project.  - 5 - 2.13 The Agricultural and Industrial Supplies Company Ltd. (AISCO), a state trading company, is in charge of the import of items such as dyestuffs, chemicals, and fiber materials for the textile sub-sector. AISCO charges 10% commission on the c.i.f. value of such imports to meet its overhead costs, including inland transportation and storage charges. Effective July 1, 1978, companies in Tanzania, including those in the textile sector, will be allowed to import their raw material requirements directly (where these are in excess of T Sh 100,000 annually). The Government has agreed that in order to ensure the efficient operation of the new company at Morogoro it would continue to provide satisfactory arrangements for the timely procurement of imported raw materials. III. NATIONAL TEXTILE CORPORATION - THE EXECUTING AGENCY A. Role of TEXCO 3.01 In accordance with the general Government policy, major textile companies have been gradually transferred to partial or full state ownership since 1967. Most of them were first incorporated into the National Develop- ment Corporation (NDC) as subsidiary or associate companies and, subsequently, in January 1974, entrusted to the newly-established National Textile Corpora- tion (TEXCO) which has its headquarters in Dar-es-Salaam. TEXCO is fully- owned by the Government, and is the principal agency for the developmennt of the textile industry in Tanzania. It was created as a separate parastatal organization in view of the importance given by the Government to the textile industry. Initially for slightly more than two years TEXCO was responsible for both production and marketing of textiles. The marketing function, how- ever, was transferred in February 1976 to the Tanzania Textile Trading Company (TANZATEX), a separate parastatal organization. 3.02 Currently, TEXCO is the holding company for eight companies and focusses its attention on general aspects of textile production, expansion and pricing, as well as on the arrangement of funds and technical know-how for new textile projects for which it acts as the executing agency. Its authorized share capital is T Sh 500 million (US$60.2 million), of which T Sh 176 million (US$21.2 million) is paid in. 3.03 TEXCO's nine-member Board of Directors functions as a policy making and controlling body. The Board consists of an Executive Chairman, a Managing Director, and seven directors. Mr. C. A. Kallaghe, formerly Ambassador to Moscow, was appointed as Executive Chairman in February 1976. Mr. N. A. Rweyemamu, 36, an experienced administrator, has been Managing Director since the inception of TEXCO in 1974, and he was reappointed for a second three-year term in 1976. Of the seven directors who were also re-appointed in 1976, three have a three-year term and the rest have a two-year term. Among the directors are: the Chairman and Managing Director of the Tanzania Investment Bank (TIB); the Commissioner of Trade, Ministry of Trade; the Director of Industrial Operations, Ministry of Industries; and the General Manager of Friendship Textile Mill. Three other directors are members of Parliament.  3.04 Mr. Rweyemamu is responsible for the day-to-day operations of TEXCO. He is supported by a professional staff of 20 (including one ex- patriate) serving in four departments: Planning and Finance; Operations; Development and Research; and Administration and Manpower. Because of acute shortage of trained manpower in Tanzania, TEXCO has not been able to have adequate professional staff to cope with its increasing responsibilities for the development of the textile sub-sector. To overcome this constraint, as discussed in more detail in para. 3.12, TEXCO has agreed to appoint a Tech- nical Management Firm (TMF) to assist it in carrying out a study on measures to improve sector performance and to employ additional qualified staff to implement the recommendations of the study. 3.05 The Government influence on financial and investment planning by TEXCO is strong, although there is little interference in day-to-day oper- ational matters. Further, TEXCO companies operate as autonomous units and are individually responsible for all financial obligations. However, TEXCO supervises the operations of the existing mills and is also responsible for the implementation of new textile projects. B. Operational Results 3.06 Main sources of income for TEXCO are the following received from the group companies: (a) dividends; (b) development fees 1/; (c) managerial, directors' and secretarial fees; and (d) commission on guarantees for bank overdrafts. In the first year of operation (1974), TEXCO showed a loss of T Sh 1.1 million (US$0.13 million) because of establishment charges. In 1975, however, it showed a profit of T Sh 7.1 million (US$0.9 million). But the profit declined to T Sh 3.3 million (US$0.4 million) the following year because of reduced dividends from the group companies. In 1977, TEXCO's earnings rose to T Sh 7.0 million (US$0.8 million), largely as a result of increased development fees on ongoing projects. 3.07 The Government channels its equity investment in the textile sector through TEXCO. TEXCO shares in the individual companies range from 51% to 100%. The following table shows the holdings of TEXCO and the main highlights of TEXCO's operating companies: 1/ TEXCO charges 1% of the annual investment on a new textile project as development fees to cover preoperating costs.  TEXCO Subsidiary and Associate Companies Share % of Shares Type of Volume of Net Profit Capital Owned by Products Produc- 1976 /a Companies (T Sh M) TEXCO Produced tion, 1977 (T Sh M) Kilimanjaro Textile cotton & 16.4 M sq/m 27.2 Corp. Ltd. (KILTEX) 26.4 57 blend fabrics Mwanza Textiles Ltd. cotton (MWATEX) 20.0 80 fabrics 16.9 M sq/m (1.5) Tanganyika Dyeing & Weaving Mills Ltd. cotton (SUNGURATEX) 20.0 51 fabrics 9.3 M sq/m 1.9 Friendship Textile cotton Mills Ltd. (URAFIKI) 30.0 100 fabrics 25.8 M sq/m 7.4 Blanket Manufacturers Ltd. 2.0 51 blankets 1,500 (0.1) East African Kenaf Ind. kenaf Ltd. 23.0 100 bags 1.7 M (4.2) Tanzanian Bag Corp. Ltd. 7.5 60 sisal bags 2.0 M (3.9) Ubungo Garments Ltd. 10.0 75 garments /b /b /a Figure for Mwanza is for 1977, other 1977 figures not yet available. /b Started operations in 1977. 3.08 Four TEXCO companies produce textile fabrics, one manufactures garments, one makes blankets, and the remaining two produce kenaf and sisal bags, respectively. The production of textile fabrics by TEXCO companies increased from 61 million sq/m in 1970 to 83.0 million sq/m in 1974 but de- clined to 75.3 million sq/m and 68.4 million sq/m in 1976 and 1977 respec- tively because of: (a) reduction in the number of expatriates in key posi- tions before local staff could be fully prepared to take over; (b) lack of adequate training and maintenance programs; (c) lack of spare parts to keep equipment running at acceptable rates; and (d) power and water shortages, which with the commissioning of new facilities have now largely been re- solved. If all the companies had operated at effective capacity in 1977 (which is achievable under efficient operational conditions), the TEXCO group companies would have produced about 95 million sq/m -- 27 million sq/m above actual 1977 production. 3.09 Management of TEXCO is aware of the need to improve operations at existing mills and a number of steps have been taken in this regard which should have a positive effect on sectoral output in 1978 and beyond. The URAFIKI mill completed a 5 million sq/m expansion program in mid-1977, and, in November 1977, introduced an incentive system to reward workers for each percentage increase in efficiency above a given base. As a result, by February 1978, efficiency had jumped from 70% to 90% in spinning and from  -8- 65% to 85% in weaving. Production for 1978 is well ahead of budget and is expected to reach at least 32 million sq/m, 25% over 1977 levels. With the success of this program, TEXCO plans to introduce similar incentive systems at its other mills once expansion and rehabilitation programs currently underway or planned have been completed. 3.10 At SUNGURATEX, a rehabilitation, balancing and expansion program was completed in October 1977, raising capacity there from 13 million to 22 million sq/m. The mill is now under a management contract with TOOTAL of the U.K. and production, which was adversely affected by disruptions caused by the 1977 expansion, is expected to increase to about 14 million sq/m in 1978, 50% higher than last year's output. At KILTEX, a modernization and expansion program is scheduled to begin implementation in late 1978 (para. 3.25). However, positive results from the reconditioning and replacenient of existing equipment will not be felt until program completion in 1980. 3.11 The situation at MWATEX, whose current expansion program is being financed by the Bank and the Kuwait Fund, is described in detail in paras. 3.17 to 3.21. Operations are expected to improve in 1979 once a rehabili- tation program for existing equipment has been completed; the new plant is fuLly on stream; and as operations are taken over by a management firm which is to be appointed by June 1978 (para. 3.18). 3.12 In addition to the above programs, TEXCO has agreed to appoint a qualified and experienced technical management firm (TMF) to assist TEXCO in carrying out a study by December 31, 1978 to recommend measures to improve the capacity utilization and productivity of the operating textile mills wit:hin the TEXC() Group; modification or termination of the contract with the TMF would be subject to the approval of the Bank. TEXCO has selected TEIICATE of Hollgand as the TMF and signing of a contract, expected in June 1978, is a condition of effectiveness of the Bank/IDA loan/credit. Upon completion of the study, TEXCO, in consultation with the Bank, will review the study's recommendations and take necessary measures to improve the capacity utilization and productivity of the operating mills, including the employment of qualified and experienced technical personnel. 3.13 The first phase of activity i.e., the proposed textile sector study and preparation of an improvement program with the assistance of the TMF, which is expected to take about 6 months, would be financed by the Tanzanian Investment Bank (TIB) using part of the IDA technical assistance funds 1/ provided through TIB for project preparation in general. The second phase (implementation of the study's recommendations) would be coordinated by TEXCO with the assistance or additional technical personnel. The services of such personnel are estimated to involve about 300 man-months over 2-1/2 years costing about US$2.2 million equivalent, including US$2 million in foreign exchange. This amount is included in the Bank Group financing under the proposed project. 1/ P-1692-TA, Technical Assistance Project Credit (601-TA), November 12, 1975.  - 9 - 3.14 As for financing of the improvement program proper, funds are being sought from European sources for the KILTEX mills at Arusha and Dar-es-Salaam. The SUNGURATEX and URAFIKI mills at Dar-es-Salaam have recently completed an investment program for modernizing and balancing their operations. These mills, with guidance from TMF on improved operating procedures and manpower development, are expected to be able to achieve better efficiency and capa- city utilization with minimum additional investment. As a matter of fact, SUNGURATEX, which, as noted above, has a management contract with TOOTAL of the U.K., should be able to show better performance with the increased attention it is paying now to the training of operators. As for the other existing mill (MWATEX), whose expansion is being financed by the Kuwait Fund and the Bank, capital investments of US$3-4 million are needed to rectify some of the deficiencies in the existing operations. C. Financial Position of TEXCO Group 3.15 The historical financial data (Annex 3) show a fairly satisfactory sales and earnings record and reasonable debt/equity ratios for the four TEXCO textile enterprises. SUNGURATEX showed 'a loss in 1975 but its earnings improved in 1976. MWATEX was profitable through 1976, but due to declining production suffered a loss in 1977 (para 3.19). The enterprises producing blankets, and kenaf and sisal bags (para 3.07) continue to be unprofitable, partly because of their low equity base and their heavy reliance on short- term borrowings to service debt, and they have been experiencing working capital problems. 3.16 Consolidated accounts of the TEXCO Group are not audited but are compiled by TEXCO from the audited accounts of individual companies. The following table shows the main highlights of the consolidated accounts: TEXCO Group--Consolidated Account Highlights (T Sh million unless otherwise noted) 1974 1975 1976 Sales Revenue 380.7 484.3 599.4 Profit before Tax 14.7 24.7 39.6 Net Profit 8.1 22.4 19.0 Net Profit as % of Sales 2.1 4.6 3.2 Current Ratio 1.1:1 1.4:1 1.1:1 Debt/Equity Ratio 50/50 56/44 47/53 'The consolidated accounts are not too significant as TEXCO units are auto- nomous and inter-company transfer of funds are not allowed by the Government. Even though the above consolidated figures show a satisfactory situation, it has been noted that, with respect to individual units, the situation varies and some are experiencing financial stringency.  - 10 - D. Operations of MWATEX 3.17 MWATEX (the expansion of which the Bank is helping t:o finance and which is to be completed by mid-1978 as noted earlier) was operating satis- factorily until 1975 when output reached 3,200 tons of yarn and 23.4 million sq/n of fabric. However, production has declined since then. In 1976, the company produced 2,700 tons of yarn and 20.7 million sq/m of fabric. In 1977, production of yarn fell to 2,500 tons, and fabric to 16.9 million sq/m. Because of inadequate management and lack of attention to preventive and operational maintenance efficiency as a percent of effective capacity in the spinning mill was reduced to 59% in 1977 from 82% in 1975, and to 52% from 65% in the weaving mill. At the time of appraisal of the Mwanza project in November 1974, the company was operated with the help of a Swiss company on the basis of a management contract for 26 expatriates. At the end of 1974, the contract was terminated and since then MWATEX has been operated by local management with the help of a reduced number of expatriates based on contracts with individuals, not with any single firm. This arrangement has not been working satisfactorily. The operation of the company has also been affected by technical problems mainly due to lack of preventive maintenance and short- age of spare parts, which have resulted in excessive equipment down-time. 3.18 Under the Bank loan for the MWATEX expansion, TEXCO is obligated to appoint a Management Agency Firm (MAF) before completion of that project for at least three years to help MWATEX operate its expanded complex efficiently. Since the expansion project is now nearing completion, TEXCO has selected Saigol Brothers, of Pakistan, as MAF. A contract is expected to be signed with Saigol in June 1978. TEXCO has also carried out studies for (i) recon- ditioning (overhauling) and repositioning certain equipment in the existing mill in order to attain a smooth flow of operations in MWATEX's existing and expansion facilities; and (ii) carrying out emergency repairs to floor and roc,f. Contracts are expected to be signed by June 1978 to implement the recommendations of the studies. However, due to the lead time required to order spare parts, actual work on equipment reconditioning is not expected to begin until December 1978. Meanwhile, MAF will pay increased attention to preventive maintenance, strengthening of training programs, and introduction of an incentive system for employees. In addition, the general liberalization of imported spares and materials by the Government will help ease the shortage of spares and thereby alleviate maintenance delays in the future. Thus, with the appointment of IAF and the implementation of the above measures, the operations of MWATEX are expected to improve. 3.19 The historical income statements and balance sheets of MWATEX are summarized below:  - 11 - MWATEX--Main Financial Indicators (In T Sb million unless otherwise noted) 1974 1975 1976 1977 ---(Audited) ---- (Unaudited) Sales Volume (million lm) 22.6 22.6 20.2 15.9 Sales Revenue 104.1 11745 114.8 105.4 Net Profit 3.7 9.8 6.9 (1.7) Depreciation 7.3 7.6 7.2 7.4 Cash Flow 11.0 17.4 14.1 5.7 Interest on L/T Debt 2.5 3.5 1.4 0.5 Loan Repayment 11.0 11.0 15.4 8.0 L/T Debt 24.5 11.9 20.5 136.6 Equity 17.0 33.1 55.7 118.0 Current Assets 61.5 88.3 81.2 68.9 Current Liabilities 74.7 98.3 82.4 27.3 of Which: Bank Overdrafts (26.4) (25.2) (40.4) (6.4) Debt Service Coverage (Times) 1.0 1.4 0.9 0.7 Debt/Equity Ratio 59/41 26/74 27/73 54/46 Current Ratio 0.8:1 0.9:1 1:1 2.5:1 Sales and earnings performance through 1976 was acceptable despite moder- ately declining production over the period. In 1977, however, sharply lower production coupled with higher raw material costs (cotton prices rose 23% in 1977 versus only an 8% rise in average fabric prices) resulted in a loss for the year. Debt service coverage dropped to 0.7 times and loan repayments and interest were met largely from bank overdrafts. Loan repayments for 1978, however, amount to only T Sh 2.1 million (the Kuwait Fund and Bank loans are not repayable until 1980) and while interest payments (about T Sb 15 million) on outstanding loans will have to be made, MWATEX should be able to meet its 1978 debt service commitments from internal cash flow together with a moderate amount of overdraft financing. This, however, should not impair the Company's current ratio which reached a very satisfactory 2.5 times in 1977 as a result of a T Sb 39.6 million Government equity contribution which substantially reduced outstanding overdrafts. 3.20 Under the loan, MWATEX is obligated to submit annual audited finan- cial statements within four months of the end of the year. However, MWATEX has not been able to meet this obligation and the audited report for 1976 was not received until February 1978. It is expected that the 1977 audit report will be received by June 1978. This is partly because MWATEX does not have adequately trained accountants to prepare the annual accounts of the company in time and in sufficient detail for the Tanzania Audit Corporation (TAC), which is in charge of auditing parastatal companies, to complete the audit of the company. TEXCO has agreed that it will cause in the future independent accounting firms (which are operating in Tanzania) to be entrusted with the  - 12 - task of closing the account books of MWATEX in case the company is not able to do so within two months of the end of each year. This will facilitate the audit by TAC within the stipulated period. Through this arrangement, it should be possible to get the annual audit report of MWATEX in time. E. Ongoing MWATEX Expansion 3.21 As already noted, the Mwanza project is being implemented satis- factorily within the budget with Gherzi serving as Project Advisor and Saigol Brothers, a textile operating company of Pakistan, serving as Project Engineer. Orders for the equipment and machinery were placed at a time when the market for such items was soft and, as a result, the winning bids were significantly lower than anticipated. Therefore, the foreign exchange cost of the project is at present expected to be lower than the appraisal estimate. The total financing required by the project is likely to be 10-15% lower than thie appraisal estimate of US$44.3 million in spite of a four-month delay in project completion mainly due to equipment transportation problems within Tanzania. These problems have been successfully resolved with: (a) the Rail- ways providing more wagons to transport imported equipment from Dar-es-Salaam Port to the project site; and (b) the granting of a special permission by the Tanzanian Government for the transportation of steel structures for civil works across the border to the project site. Finally, the Government is ex- pedliting the commissioning of four new power turbo-generators by the Tanzania Electric Supply Company (TANESCO) at its power sub-station near Mwanza in a phased manner to meet the power requirements of the project in full by July 1978 when the project is expected to be commissioned. F. Other Projects Under Implementation or Planning 3.22 Three other projects under implementation by TEXCO are the Musoma Textile Mill and the Tabora and Ubungo Spinning Mills. The Musoma project is designed to produce 22 million sq/m of cotton fabrics. The base cost of the: project estimated at US$59 million by TEXCO seems to be on the low side. The project is being financed with French bilateral credit. Work on the project started in July 1976 and is expected to be completed by July 1980. Project design and engineering is being carried out by Messrs. Creusot-Loire Enterprises, of France, and shipments of equipment and machinery are expected to start in 1978. 3.23 Work has also commenced on the Tabora Spinning Mill for completion by the end of 1979. The mill is designed to have 50,160 spindles to produce 5,950 tons of cotton yarn per year (40% in 20's carded, 60% in 40's combed, some doubled). The project cost is estimated at US$30.4 million and the Tanzanian Investment Bank (TIB) is providing US$3 million from a Bank loan (1172-TA) channeled through TIB to meet part of the foreign exchange costs. Suppliers' credit from Toyo Menka Ltd., of Japan, has also been arranged to meet most of the cost of equipment and machinery. Of the total yarn pro- duction, about 50% is intended for export and the rest for meeting the needs of local weaving mills. Tata Consulting Engineers, of India, have been appointed to carry out the project design and engineering work, including  - 13 - project supervision and coordination and commissioning of the mill, and training of personnel. The mill is expected to be managed by an expatriate management team. 3.24 The Ubungo Spinning Mill, on which work began in mid-1977, is scheduled for completion in mid-1980. The mill is designed to produce 3,000 tons of cotton yarn annually (40% in 20's carded, 30% in 40's combed, and 30% in 40's combed and twisted). Project cost is estimated at about US$18.3 mil- lion of which US$8.2 million is being provided by the Industrial Development Bank of India for imported equipment and training of workers. The entire production is intended for export and TEXCO has reportedly entered into a long term marketing,arrangement for the mill's output. Lakshmi Textile Exporters Ltd. of India have been hired as project engineers to carry out engineering design, supervision of project implementation, coordination of training, and project commissioning. 3.25 While plans are not yet finalized, TEXCO expects to begin a balanc- ing, modernization and expansion program at KILTEX's existing Arusha and Dar- es-Salaam mills in September 1978 with completion scheduled for early 1980. Total financing required is estimated at US$25 million with foreign costs likely to be financed by European sources. The program includes the purchase of additional looms, carding, drawing and ring-spinning equipment at Arusha to raise annual capacity there to 4.0 and 11.0 million sq/m of polyester and cotton fabrics respectively from 1.5 and 7.4 million sq/m now. Obsolete looms at the Dar-es-Salaam mill would be replaced so as to improve weaving effi- ciency. Its present capacity of 15 million sq/m of cotton fabric annually, however, would remain unchanged. Saigol Bros. (Pakistan), who are responsible for implementation of the MWATEX expansion, have been appointed project engineers. 3.26 The Government is also considering a textile mill at Mlbeya with an annual production capacity of about 25 million sq/m of cotton fabrics including 7 million sq/m of grey cloth for export under a long-term con- tract with the German Democratic Republic which has reportedly offered to finance the project. Negotiations for financing and technical assistance are still underway. However, TEXCO expects that work on the project will begin in July 1978 with completion targeted for mid-1982. 3.27 It has been agreed that TEXCO will continue to provide information to the Bank on major developments in the textile sector. G. Organization and Management of New Project 3.28 A new company, Morogoro Polyester Textiles Limited, has been estab- lished to own and operate the proposed project. The General Manager of the Company will be appointed for an indefinite period on the recommendation of the Board of Directors of the relevant parastatal organization (in this case TEXCO) in consultation with the Minister of Industries. During the next 12 months or so, a plan covering the organizational structure of the Company when in operation will have to be prepared with the help of the Project Advisory Firm (PAF) to be hired by TEXCO to assist TEXCO's own Project Implementation Unit (PIU) in implementing the project (para 5.13).  - 14 - 3.29 Key personnel to support the General Manager are expected to be trained abroad by the Company during the next four years (para 5.16). Dur- ing the initial years of operation of the project, the Company will have to rely on expatriate assistance for performing key technical and managerial functions. The Company and TEXCO have agreed that a Management Agency Firm (MAF) will be appointed six months before the mechanical completion of the project for at least three years of initial plant operation. More- over, the contract with the MAE may not be modified or terminated without prior Bank consent. The General Manager will be appointed in time to gain practical experience under the MAF, so that he can be groomed to take over management responsibility when the latter complete their assignment. IV. MARKET AND MARKETING A. Past Production and Consumption 4.01 Since 'the mid-1960's, Tanzania's production of woven textiles has increased sharplj, but is still inadequate to meet the local demand as is shown in Annex 4-1 and summarized in the following table: Taaamma - ftoduction. _mports. Kcorts. sad Consumption of WVoven To.zi" Cotton Fabrics Blended Fabrics Total Fabrics Popula- Per Capita v la a. L l a Ex X Ia tion Consumption Year --- in million sm/- million sq/a kg.!/ 1966 8.7 55.2 - 63.9 - 21.3 - 21.3 8.7 76.5 - 85.2 11.3 7.5 1.9 1970 65.9 18.3 3.7 80.5 1.5 8.6 - 10.1 67.4 26.9 3.7 90.6 12.9 7.0 1.4 1971 72.5 7.3 11.0 68.8 1.6 7.0 - 8.6 74.1 14.3 11.0 77.4 13.3 5.8 1.0 1972 77.3 3.3 5.5 75.1 1.7 10.3 - 12.0 79.0 13.6 5.5 87.1 13.6 6.4 1.1 1973 83.7 15.6 3.2 96.1 2.6 19.7 - 22.3 86.3 35.3 3.2 118.4 14.0 8.5 1.7 1974 88.1 15.5 2.5 101.1 2.9 16.1 - 19.0 91.0 31.6 2.5 120.1 14.4 8.4 1.7 1975 84.5 4.7 2.3 86.9 3.7 9.8 - 13.5 88.2 14.5 2.3 100.4 14.8 6.8 1.4 1976 30.2 2.6 0.5 82.3 4;7 5.7 - 10.4 84.9 8.3 0.5 92,7 15.2 ,6.1 1.2 P - Production Ex - Exports IM - Imports C - Apparent consumption a/ Apparent fiber consumption per capita Sourc-,: TFXCO, Uak and FAO.  - 15 - 4.02 As a result of the development of a national textile industry, based on cotton, total production of woven textiles increased from about 9 million sq/m in 1966 to 67 million sq/m in 1970 and rose to a peak of 91 million sq/m in 1974. However, domestic production declined during the following years to 88 million sq/m and 85 million sq/m, respectively, due to the mill problems mentioned earlier (para 3.08). Although the significant growth of domestic textile production contributed to reduce the country's import of cotton fabrics, imports of blended fabrics have on the whole remained significant, though the actual imports have been fluctuating sharply because of varying degrees of import restrictions due to persistent balance of payments problems. In 1974, when import restrictions were relatively relaxed and also domestic textile output reached its peak, Tanzania still imported about 32 million sq/m of textiles (half of which were blended fabrics) valued at T Sh 241 million (US$29 million). Imports in 1974 met about 26% of the total apparent con- sumption of textiles in that year. Also in 1974, unsatisfied demand, that had been building up over previous years, was estimated to have reached about 21 million sq/m 1/. Reflecting the domestic supply constraints in textiles, exports of textiles (cotton fabrics and blankets) to neighboring countries have been small, amounting to 2.5 million sq/m in 1974 and even less in the following years. 4.03 Import restrictions on textiles were intensified in 1975 and 1976 because of the economic crisis, reducing total imports to just 8 million sq/m in 1976. In addition, domestic textile production decreased. As a result, total apparent textile consumption declined from 120 million sq/m in 1974 to about 100 million sq/m in 1975 and 93 million sq/m in 1976. On a per capita basis, the apparent consumption dropped from 8.5 sq/m in 1974 to about 6 sq/m in 1976, which was less than the level reached in the mid-1960's (1966: 7.5 sq/m). With these developments, there has been a further accumulation of unsatisfied demand. Taking into account the unsatisfied demand estimated for 1974 and the actual growth of per capita income in 1975 and 1976 as well as the elasticity of demand for textiles, total consumption in 1976 might have reached 153 million sq/m (10 sq/m per capita) but for supply constraints. B. Pattern of Fiber Consumption 4.04 Total per capita consumption of natural and man-made fibers was only 1.7 kg in Tanzania in 1974 but declined since then to an estimated 1.2 kg in 1976 (Annex 4-2). This compares unfavorably not only with consumption levels reached in the past in Tanzania -- e.g., in 1966 per capita consumption was 1.9 kg -- but also with consumption levels reached in other African countries. In 1974, total fiber consumption was 1.6 kg in Mali 2/ and Niger 2/, 2.2 kg in the Sudan, 2.8 kg in Togo, 3.2 kg in Somalia, 2/ 3.5 kg in Zambia, 4.0 kg in Ghana and 5.0 kg in Egypt, while the average of all developing countries was 2.6 kg. In the US, the comparable figure was 22 kg. 1/ IBRD Appraisal of Mwanza Textile Project dated May 5, 1975 (Report No. 743-TA). 2/ Countries with substantially lower per capita income than Tanzania.  - 16 - 4.05 The consumption of synthetics as a percentage of total fiber consumption is increasing rapidly in developed as well as developing countries due to the popularity of blended fabrics on account of their favorable cost/ benefit aspects (as discussed in detail in para. 8.06). During 1964-76, world consumption of all fibers increased from 17.8 million tons to 26.9 mil- lion tons, with the share of synthetics rising from 9.6% to 32.0% during this period. In line with these worldwide changes in textile fiber con- sumption patterns, textile demand in Tanzania also has been shifting to fabrics with blends of cotton and man-made fibers (e.g. polyester, rayon, etr.) Much of the domestic demand for blended fabrics has, however, remained suppressed in Tanzania for reasons mentioned earlier. The domestic production of such textiles is thus far insignificant, amounting to less than 5 million sq/m in 1976 from two private mills (rayon/cotton fabrics) and TEXCO's KILTEX MiLl at Arusha (polyester/rayon fabrics with the trade name TAKRON). Further, there is so far no local production of polyester/cotton fabrics. Imports of blended fabrics, on the other hand, have been held at very low levels by the Golvernment due to foreign exchange constraints. In 1976, they amounted to on:Ly 6 million sq/m compared to about 20 million sq/m in 1973, when import restrictions were less severe. It should be mentioned that imports of blended fabrics had exceeded 20 million sq/m back in 1966, mostly blends of cotton wi:h synthetic i-ibers. This points to the existence of a substantial demand for blended fabrics as early as a decade ago. 4.06 As a result of the curtailed supply of blended fabrics in Tanzania, the country's consumption of man-made fibers has remained at lower levels than in most other developing countries. As shown in the following table, synthetic fiber consumption as a percentage of total fiber consumption is substantially lower in Tanzania (1974: 11%) than in all developing countries combined (20%) and also lower than in any regional group of developing countries, including that of Africa (16%). In this context, the increased availability of blended fabrics from the proposed project would help meet the existing demand, in- cluLding the unsatisfied latent demand, and bring the pattern of textile con,sumption in Ianzania more in line with that in other developing countries.  - 17 - Worldwide Patterns of Fiber Consumption (in % of total fibers available for home use) /a Cotton ----------Man-made Fibers--------- and Other Natural Cellulosic Synthetic Fibers Fibers Fibers 1967 1971 1974 /b 1967 1971 1974 1967 1971 1974 Developed Countries 58 47 42 19 17 14 23 36 44 Centrally Planned Countries 79 77 72 17 15 15 4 8 13 Developing Countries of which: Africa 79 74 68 15 13 15 5 13 17 Latin America 77 67 61 14 12 8 9 21 31 Near East 79 73 70 16 16 13 5 11 17 Asia and Far East 84 77 77 11 10 8 5 12 15 (Tanzania) (73) (74) (82) (20) (16) (7) (7) (10) (11) /a Totals may not add up due to rounding. /b Excluding flax. Source: FAO, Per Capita Fiber Consumption: Cotton, wool, flax and man-made fibers, 1964-67, 1971-73 and 1973-74 editions. 4.07 An important factor in the increasing consumer preference for blended fabrics, particularly polyester blends, has been the better quality and performance as well as tensile strength of such fabrics as compared to textiles made solely of natural fibers. Polyester blends have become popular in Tanzania despite high sales taxes and customs duties on such fabrics. Yet, given the much greater durability of polyester blends (two to three times that of pure cotton textiles), the changing consumer preference is economically rational as further detailed in Chapter VIII (para. 8.06). 4.08 The point should also be made that the preference for blend fabrics is not limited to the urban population in Tanzania but is prevalent through- out the country and in many segments of the population. Blend fabrics have already found a ready market in work clothes, school uniforms and other institutional clothes. 4.09 Worldwide, polyester has become the most important man-made fiber used in textiles. It is a thermoplastic synthetic polymer of high tensile strength, and, unlike cotton and rayon, it has low affinity to water. In combination with cotton and rayon, polyester gives the blend fabrics the following superior properties over all-cotton fabrics:  - 18 - (a) Improved Wear Life - Blend fabrics (65/35 polyester/ cotton) are two to three times more durable than all- cotton fabrics; (b) Easy Care Properties - Blended fabrics are easy to laundier, retain less water after washing, dry quickier, and need little ironing. This is considered to be the single most important reason for consumer preference for blend fabrics; (c) Crease Resistance - Good crease shedding and crease resistance during wear ensures a high quality appearance for blend fabrics; and (d) Improved Stability - Maximum shrinkage of a blend is usual:Ly 3% compared to 5-8% for a cotton fabric after multiple laundering. 4.10 The b:Lend ratios have been established over the years on the basis of experience wiith respect to optimizing performance of fabrics as far as the above mentioned properties are concerned. The blend ratios vary depending on the types of fabrics and end uses. For conventional trouserings, for example, one of the most important fabric is the blend of polyester with standard or high crimp viscose, usually in a 65/35 ratio, since this provides the handle, warmth and aesthetic characteristics required for everyday use. The polyester/cotton fabrics of 50/50 or 65/35 blends are used for more casual type slacks, where a cleaner, cooler handle and appearance is required. Fur- ther, for workwear and other heavy wear fabrics, the 65/35 blend of polyester/ cot:ton gives the optimum result as to tensile strength. C. Supply/Demand Forecasts 4.1.1 Supply/demand projections for woven textiles are shown in AnrLexes 4-3 to 4-5 and are summarized below:  - 19 - Tanzania-Projected Production and Demand of Woven Textiles (in million square meters) Local Production /a Demand /b Supply Deficit Cotton Textiles of Cotton Textiles of Cotton Textiles of Textiles Man-Made Total Textiles Man-Made Total Textiles Han-Made Total Fibers Fibers Fibers 1974 Actual (Base Yr.) 88 3 91 101 19 120 13 16 29 1977 (est) 74 5 79 123 24 147 49 19 68 1978 87 6 93 127 25 152 40 19 59 1979 107 7 114 132 27 159 25 20 45 1980 127 8 135 137 28 165 10 20 30 1981 138 10 148 144 31 175 6 21 27 1982 143 21 164 150 34 184 7 13 20 1983 153 26 179 157 38 195 4 12 16 1984 159 29 188 164 42 206 5 13 18 1985 163 31 194 172 46 218 9 15 24 /a Production for local supply, including the proposed project. /b Averages of minimum and maximum projected demand levels shown in Annex 4-4. 4.12 The above production forecasts are based on successful implementa- tion of rehabilitation programs at TEXCO mills and expansion projects recently completed and/or currently in progress, plus the new integrated cotton mills at Musoma and Nbeya, and the proposed project. The production forecasts assume attainment of 90% capacity utilization at the existing mills of MWATEX, KILTEX, SUNGURATEX and URAFIKI by 1979-81, following implementation of the rehabilitation programs (para 3.09 to 3.11). On the basis of these assump- tions, total mill output is expected to increase from 85 million sq/m in 1976 to 135 million sq/m in 1980 and 194 million sq/m in 1985. The capacity output of the proposed Morogoro Project would account for about 11% of the total textile production in Tanzania in 1985. 4.13 Since the erratic pattern of past textile consumption and the existence of considerable latent demand do not provide sufficient guidance for estimating future textile demand in Tanzania, minimum and maximum demand projections were prepared and are given in Annex 4-4. These projections provide a realistic range of demand that can be expected under both unfavor- able and favorable conditions, with actual demand likely to be somewhere in between. The low end of the demand projections is based on actual 1974 consumption figures. The high end of the demand projections, on the other hand, takes into account an unsatisfied demand estimated at 21 million sq/m in 1974.  - 20 - 4.L4 The year 1974 was chosen as the base year for demand projections since in more recent years (1975 and 1976) consumption was affected by severe import restrictiLons in Tanzania. Demand projections are based on the assump- tions of an average annual growth of GNP of 4% (Bank projection), a population growth rate of 2.8% per year and a real per capita income growth rate of 1.2% per year during 1975-80. The assumed income elasticity of demand for all woven textiles is conservatively assumed to be 1.0 (0.85 for cotton textiles ancl 1.75 for mart-made textiles), which is lower than the 1.35 average for all. developing countries 1/ but considered more realistic given Tanzania's low per capita income level. 2/ For the period 1981-85, an acceleration of eccinomic growth is anticipated which is likely to lead to a stronger increase in textile demanLd and to changes on the demand pattern. Specifically, it is assumed that the average annual growth rate of GNP would be 5.4% (Bank projection) and that, with a continued population growth of 2.8% per year, an annual increase in the per capita income of 2.6% would be possible. Accord- ingly, the income elasticity of demand for all textiles is assumed to rise to 1.1 during 1981-85, with the elasticity for cotton textiles declining to 0.7 but that for man-made fiber textiles increasing to almost 3. 4.15 These changes in demand pattern are derived from the observed demand behavior in other developing countries with comparable income levels and struc- ture of textile demand in those countries, and are on the conservative side. Annex 4-6 gives historical elasticity of demand data for man-made fibers of selected developing countries ranked by capita income levels. The assumptions for man-made fiber demand in Tanzania take into account the country's compara- tively low consumption of man-made fiber textiles as compared to most other developing countries (para 4.06) and imply some catching up in Tanzania's synthetic fiber consumption in line with the changing consumption patterns in the developing countries in general. Based on these assumptions, the per capita consumption of man-made fiber textiles is projected to grow from 1.3 sq/rm in 1974 to 2.3 sq/m in 1985. Under the assumptions made, the latent demand of woven textiles is estimated to rise from 21 million sq/m in 1974 to around 60 million sq/m in 1978 before declining in the following years as a result of sharply improved supplies in cotton fabrics. By 1982 latent demand may drop to aboult 15-20 million sq/m, at which time it would largely be in blended fabrics assuming restrictions on imports of blended fabrics would conitinue. 4.16 In cotton textiles, a comparison of the projected local supply with the average of the minimum and maximum demand projections indicates that Tanzania would practically achieve self-sufficiency in 1980, but the supply situation is likely to be less comfortable in later years as the population grows and demand increases. As a result, the deficit would again increase substantially in the mid to late 1980's, when TEXCO is likely to vertically integrate one of the new spinning mills with weaving and finishing facilities. 1/ IBRD Appraisal of the Cimpulung-Muscel Polyester Project in Romania dated May 24, 1977 (Report No. 1436-RO). 2/ Also in the IBRD Appraisal of the Mwanza Textile Project in Tanzania an income elasticity of demand for textiles of 1.0 was used.  - 21 - 4.17 For blended fabrics, the median projected demand is expected to increase to 28 million sq/m in 1980 and 46 million sq/m in 1985. The pro- posed project would cover only part of the demand (1985: 41%) leaving a substantial and increasing supply deficit to be met by imports. The output of the project would, on the basis of the assumed product mix (para 5.05) in 1985 probably meet half of the anticipated Tanzanian demand of suiting materials but only about one-third of the demand of shirting materials. In 1985, import requirements of man-made fiber textiles are projected at 18 million sq/m. Therefore, the feasibility of expanding the Morogoro textile mill will be studied by TEXCO in the early 1980's. In the project's plant lay-out, expansion possibilities have been taken into account and adequate space provisions have been made (para 5.01). 4.18 The project is primarily for import substitution and no significant quantities of blend fabrics are expected to be available for exports. Never- theless, there is a potential to sell up to 2 million sq/m of blended fabrics (equivalent to 9% of capacity output) to other East African countries, in- cluding Mozambique, Zambia, Kenya, Rwanda and Burundi. Zambia, the country with the highest per capita income in the East African region, for example, imported in 1974, 38 million sq/m of man-made fiber textiles (including 10 million sq/m of synthetic fabrics). With only one cotton mill in Zambia and no other textile projects currently under consideration, that country could potentially be the best outlet should there be any surplus from the proposed project. D. Marketing and Distribution System 4.19 Marketing and distribution arrangements for textiles in Tanzania have been subjected to several changes in recent years. These changes were made mainly in response to persistent difficulties in ensuring a regionally balanced distribution of textiles under prevailing conditions of supply short- ages and institutional constraints. Between 1970 and February 1976, virtually all marketing and distribution of yarns, fabrics and other textile products whether domestically produced or imported, were handled by the National Textile Trading Company (NATEX). This state trading company, which was part of the National Development Corporation, had gradually built up a network of 35 regional distribution centers for textiles, covering Dar-es-Salaam and the 19 other regions of Tanzania; this network was adequate to meet established allocation and marketing objectives. However, NATEX faced serious managerial problems which gave rise to distribution irregularities and, eventually, public charges of corruption. As a result of these developments, and despite a profitable record of operations, NATEX was finally dissolved in February 1976. 4.20 Following the dissolution of NATEX, the Tanzania Textile Trading Company (TANZATEX) was established under the Ministry of Trade with some important changes in the existing marketing and distribution system. Whereas TANZATEX, as its predecessor, was given the sole operational responsibility for all textile exports and imports, TANZATEX became responsible for marketing  - 22 - and distribution of TEXCO products only to the Regional Trading Companies (RTCs), which have absorbed the former regional organizations of NATEX. Text:iles manufactured by the private sector are now marketed directly through RTCs and other wholesalers. 4.21 Tanzania Textile Trading Company (TANZATEX): As the sole exporter and importer of textiles and the marketing and distribution agent for pro- duct:s of TEXCO companies, TANZATEX has a key role in the supply of textile products and materials to both intermediary traders and consumers, and to the local knitting and garment industry. 1/ TANZATEX (which was established in February 1976) operates its own truck fleet and also relies on trucks hired from other transport companies, and on railway and shipping services. Its total turnover during 1976 (Feb.-Dec.) amounted to T Sh 714 million, of which 83% was accounted for by local sales of domestic products, 14% by imports and 3% by exports. Domestic sales of locally manufactured and imported textiles are concentrated in the Dar-es-Salaam (1976, over 50%) and Mwanza areas (about 20%), reflecting the comparably higher purchasing power in these parts of the country and preferences given in supplies to RTCs located near the existing mills and warehouses. 4.22 TANZATEX's distribution is based on annual sales plans prepared on the basis of past regional sales records and a quota system that reflects anticipated local production and imports. Against these plans, orders from RTCs and other customers are fixed and confirmed for periods of six months, respectively. Despite these provisions, TANZATEX has in the past frequently been unable to comply with approved and confirmed orders and delivery dates, and deliveries of fast-moving items were made contingent on the acceptance of unordered slow-moving items. Because of management and other staff con- straints, TANZATEX is ill-equipped to perform its designated functions effi- ciently. Its activities are too centralized to ensure a balanced distribution of textiles in Tanzania. Of its current local staff of 120 persons, almost 100 are employed at headquarters and its three warehouses in Dar-es-Salaam. Outside the capital, TANZATEX employs only 22 persons, 18 of whom are located at its Mwanza warehouse and 4 are attached to the KILTEX mill in Arusha. There are no other branches elsewhere in the country and essentially all purchasing and sales operations are handled from Dar-es-Salaam with an executive staff of less than 20. Marketing research and export promotion services are vir- tually non-existent. 4.23 The operational and organizational weaknesses of TANZATEX reflected in the unbalanced distributions of fabrics were largely responsible for the growing pile-up at TANZATEX warehouses of certain mill products that required effective promotion and sales strategy. To remedy this situation, the Ministry of Trade authoriz,ed the KILTEX mill at Arusha in June 1977 to commence direct sales of linen, "gingham" and TAKRON (the only polyester/rayon blended fabric manufactured in Tanzania). As a result of this measure, stocks of these 1/ The Government has recently taken measures allowing all mills, by July 1, 1978, to distribute their output directly through Regional Trading Companies (RTC's). TANZATEX from thereafter would be responsible only for distribution of imported textiles and the export of local fabrics.  - 23 - products were reduced rapidly and the mill became directly alerted to several deficiencies and consumer preferences associated with some of its products, e.g. fading and unpopular colors, and designs and weaving defects, all of which had contributed to past slow sales. Direct distribution is also essen- tial for the products of the proposed mill. It would help the new Company to build up an efficient sales organization and would facilitate early adjust- ments in the product mix to changes in market conditions, and consumer tastes and styles, and elimination of slow-moving items from the product mix. Saving on margins for intermediaries (para 4.29) would also help to keep prices to the consumer at more acceptable levels. The change in Government policy to allow all mills to distribute their output directly was confirmed during nego- tiations and the Government agreed that it would continue to make satisfactory arrangements for the sale and distribution of the output from the proposed project. 4.24 Regional Trading Companies (RTCs): The State-owned RTCs are the regional wholesalers for consumer goods and a wide range of producer goods. RTCs entered the textile trade only in February 1976 when they took over the existing godowns and warehouses of NATEX. Most of their textile supplies are obtained from TANZATEX, and their customers are cooperatives and private retailers as well as garment manufacturers. RTCs are represented in the 19 regions of the country but in only about 75% of the 90 districts of Tanzania. Current expansion plans call for the establishment of RTC outlets in every district by 1981. Dar-es-Salaam has its own RTC, the Dar-es-Salaam Textile Company (DARTEX). 4.25 Due to delivery irregularities, RTCs generally suffer from uneven flows of textiles and order variations which compel them to apply rigid dis- tribution criteria for scarce items. In fast-moving items of short supply such as MWATEX "khanga", URAFIKI "kitenge", and checked polyester/rayon fabrics from KILTEX, distribution priorities are given to the cooperative (Ujaama) stores. These retail stores typically account for about 10-15% of the turnover of RTCs. Clothiers and other garment manufacturers, accounting for less than 15% of the turnover of all RTCs usually get a preference in the supply of available suitings, shirtings and similar materials. For the large segment of individual retailers, however, the allocation of items of great demand is generally made contingent on the acceptance of other slow-moving items. 4.26 Because of prevailing serious supply shortages, garment manufac- turers in Tanzania have suffered in recent years from sharply declining capa- city utilization, which forced them to lay off labor and to introduce part- time work schedules. A number of manufacturers also closed down entirely or shifted their activities to the production of knitted goods which had less material constraints than for the manufacture of garments. The proposed project would help to revive the depressed labor-intensive clothing industry. 4.27 Textile sales in Tanzania are made against cash or banker's draft. TANZATEX currently buys mill products against cash payment on delivery and markets those products through sub-wholesalers (RTCs) against cash or banker's draft. This practice was introduced in early 1977 largely in response to previously experienced difficulties in obtaining prompt payments from RTCs. However, these difficulties have been generally overcome.  - 24 - E. Pricing of lTextile Products 4.28 Textile prices in Tanzania are determined by the National Price Commission (NPC) of the Ministry of Trade which periodically sets the ex- factory and retaLil prices for every textile product and also fixes margins or maximum selling prices for each level of distribution. Prices of locally produced textiles are in principle reviewed every six months, those of imported gocods every three months. In practice, however, such periodic reviews have taken place in longer intervals, partly because of manpower constraints at NPC and partly because of the inability of Tanzanian companies to give prompt replies to the very detailed NPC questionnaires used for these reviews. As a result of this, most prices of locally produced textiles remainied unchanged frcm September 1976 to March 1978, when prices were again revised. Price revisions for imported textiles took place in May 1977 and in March 1978. 4.29 Domestic Fabrics. For existing textile mills, ex-factory prices for locally produced fabrics are generally based on total production costs (in- cluding depreciation) at efficient operation, and currently a mill margin of 8% is allowed. The efficiency test is, however, not strictly applied. Consequently, actual costs rather than standard costs are used in the fixation of prices, and little incentive is thus actually given for the individual plant to lower costs and improve productivity. For new textile plants, for which investment costs in real terms have gone up sharply since 1973, NPC is allDwing 30-40% pre-tax return (15-20% after tax) on capital employed on a case-by-case basis. The ex-factory price is the price charged by the mills to the wholesaler, which in most cases is TANZATEX. TANZATEX, in turn, sells fabrics to the so-called sub-wholesalers (RTCs) at a price that contains a 3% mar'k-up on the price paid to the mills plus an average margin of about 1% for the purpose of price equalization. The sub-wholesaler (RTC) price to garment manufacturers and retailers is usually set to include a profit margin of 7% for the RTC plus an additional 1% for price equalization. Retail prices, finally, include a general mark-up of 10% over the sub-wholesale price and are uniform throughout the country. Therefore, the consumer price is about 23% higher than the exfactory price of fabrics. This mark-up compares favorably with that in some other developing countries (e.g. about 25% in Egypt). 4.30 Other Domestic Textile Products: The present price system for locally produced make-up and clothing articles is different from that applied to fabrics. This is mainly because of the different and more variable cost structure of the different manufacturing plants and the absence of TANZATEX as intermediary between local producers and RTC. Established manufacturers' margins range from about 10% in the case of blankets to about 20% in the case of outerwear. RTC mark-ups vary between 5% and 10%, with the average being 8%, and retail margins are generally about 10%. 4.3]. Imported Textiles. The selling prices of TANZATEX, which, as already noted, is the sole importer of textiles in Tanzania, are based on the landed cost of the imports plus a 3% mark-up on such costs. Since imported textiles are predominantly fast-moving items, the RTC margin has been fixed at about 5%, i.e., lower than for domestic textile products. The retailer margin is fixed at 10%.  - 25 - 4.32 Textile imports are carried out on the basis of licensing by the Government and are generally discouraged to conserve scarce foreign exchange. Customs duties on textile imports range from 30% to 60% of the CIF cost, and the sales tax on such imports amounts up to 72-1/4% of the duty-paid costs. Because of these high taxes and duties, the consumer price of a typical imported blend fabric is about 200% higher than the CIF imported price. V. THE PROJECT A. Project Scope, Location and Product Mix 5.01 The project will consist of an integrated textile mill with spinning, weaving and processing facilities to produce about 21.5 million sq/m (19 mil- lion Im equivalent) of blended fabrics of medium to fine quality for shirtings and suitings. The mill will produce for the first time in the country about 14 million sq/m of polyester/cotton blended fabrics and will help expand the country's limited capacity to produce polyester/rayon blended fabrics from 1.8 million to 9.3 million sq/m. Project size was decided after studying various alternatives and after taking into account the demand for blended fab- rics, economies of scale, and availability of financing. Details are given in Annex 5-1. As mentioned in the preceding Chapter, the capacity output of the project represents about 11% of Tanzania's projected total fabric pro- duction in mid-1980's. Four preselected locations were considered for the project, namely Tanga, Morogoro, Arusha and Mwanza. After detailed analysis of costs and benefits, Morogoro, a town with a population of some 40,000 located about 200 km west of Dar-es-Salaam, was selected by TEXCO and the Government as the location for the project. Morogoro is well connected by road and rail transportation. Further, it is centrally located with respect to major market areas. The selected site for the project covers an area of 30 acres and is adjacent to the Morogoro Industrial Estate, a project being financed by the Bank (1386-TA). The site includes space for possible future expansion of the project. 5.02 The project will include about 42,000 ring spindles and 664 auto- matic shuttle looms of modern conventional design and finishing facilities with modern devices to ensure product quality. As is normal in the textile mills, the finishing facilities will have a surplus capacity of about 30% to take care of unavoidable production peaks, changes in consumer tastes, reprocessing and sampling needs. 5.03 Assuming 7,728 working hours per annum and at an operating effi- ciency of 85% in the spinning department, the annual manufacturing capacity of blended yarns will be about 4,620 tons, of which 3,970 tons will be con- sumed by the mill's weaving department and the remaining 650 tons will be sold locally to replace the present imports of blended polyester/rayon yarn required for weaving suiting material at the existing KILTEX mill at Arusha. At a conservative operating efficiency of 75% in the weaving depart- ment, the manufacturing capacity is estimated at 21.5 million sq/m per year as noted in para 5.01.  - 26 - 5.04 It is assumed that the project will produce fabrics with a blend rat:io of 65% polyester and 35% cotton for shirtings, and 65% poLyester and 35% rayon for suitings. These blend ratios are commonly used in the world especially for shirtings and suitings to give optimum results regarding durability and fabric stability, with little sacrifice in comfort. However, the project woulcd have considerable flexibility to change the blend ratio, should the market conditions warrant it, with little additional capital investment. For example, the project could produce 100% cotton fabrics with an additional investment of about US$1.3 million. 5.0'i The product mix of the project which is based on data from the market study prepared by Gherzi (para 1.04) and accepted by the Bank, will include the following: Morogoro - Assumed Product Mix at Full Project Capacity Article Material Width Weight2 Production per Year (cm) (gram/m ) '000 sq/m '000 lm Calico bleached Polyester/Cotton 90 138 2,086 2,318 Poplin printed " 90 147 4,205 4,680 Poplin printed " 90 147 2,193 2,436 Shirting bleached " 90 127 695 773 Shirting dyed " 90 127 1,449 1,610 Supertwill bleached " 150 263 386 258 Supertwill dyed " 150 263 2,898 1,930 Poly-suiting yarn dyed Polyester/Rayon 150 199 7,470 4,980 Total Fabric 21,382 18,985 Polyester/Rayon yarn for outside sale 650 tons B. Project Technology 5.06 The technologies presently available for a textile mill can be grouped under three main categories: (a) pre-conventional technology (PCT) based on narrow mechanical looms and direct spinning; (b) conventional technology (CT) based on broad automatic shuttle looms, and ring spindles; and (c) advanced technology (AT) based on labor-saving techniques such as automatic opening of blow rooms, chute-fed high-speed cards, single-process drawing in tandem with carding, open-end spinning, unifils and electronically-operated shuttleless looms which are increasingly introduced in developed countries in the face of sharp increases in labor costs. For most applications, PCT technology has become outdated because of: (a) very slow machine speed; (b) higher capital and operating costs than for CT machines to produce a given quantity of fab- rics per year; and (c) lack of machine versatility to produce finer fabrics. Further, the use of the PCT technology requires highly skilled operators.  - 27 - The various technologies available have been examined in detail with respect to costs and benefits before recommending the appropriate technology for Tanzanian conditions (Annex 5-1). For the proposed project, modern but con- ventional technology (CT) would be used for the spinning and weaving mills -- the main units of the project accounting for about 85% of the project cost. As for the finishing mill, the latest processing technology would be used to ensure high product quality and also to economize on the use of water, fuel, dyestuffs and chemicals. The use of this technology at the finishing mill is not oriented toward saving on labor. Were a less advanced process to be employed, the finishing mill would require hardly any additional employees. C. Buildings 5.07 A covered floor space of about 61,300 m is provided to house the new facilities, including about 16,300 m for offices, stores and social facil- ities. The actual built-up area will be about 71,500 m . Open space between different department buildings is provided for in the plant layout (Annex 5-2) to allow for later expansion of the project. The area of the floor space is in line iith norms accepted in the textile industry i.e., 0.5 m per spindle and 20 m per loom. The main factory buildings would be of structural steel on reinforced concrete foundations. The walls and roof construction would consist of galvanized steelframes cladded with corrugated aluminum sheets. D. Raw Materials and Utilities 5.08 The basic raw materials required by the project are cotton, poly- ester and rayon staple fibers. At maximum output, the project would require about 1,090 tons of cotton, 3,210 tons of polyester, and 830 tons of rayon fibers per year. Cotton is available locally. About 95% of the cotton crop is grown in the Lake Victoria region and the rest on the coastal areas. The coastal cotton is not well suited for blending with polyester as it has a tendency to form neps during processing. The lake region cotton variety (Mwanza AR, Grade No. 1) grown 300-400 km from tMorogoro will, therefore, be used by the project. Polyester and rayon will have to be imported. As men- tioned in para 2.13, effective July 1, 1978, companies in Tanzania will be allowed to import their raw material requirements directly. The Government has agreed to continue to make satisfactory arrangements for the timely procurement of imported raw materials, maintenance materials and spare parts for the project. 5.09 3The water requirement for the project is estimated at 100 cubic meters (m ) per hour to be made available from the municipal water supply system. Morogoro is currently experiencing a water shortage. However, the Mindu Dam Project financed by the Bank (1354-TA), which is now under implemen- tation, is expected to be completed by August 1980 i.e., some 13 months prior to the expected completion of the textile project. The Mindu Dam Project will have a capacity to supply 24,000 m per day of water and will help meet the projected demand for water for domestic and industrial use in the Morogoro region until 1996. The raw water required for the project will be stored in concrete tanks with a capacity for an average consumption of eight hours. Almost 50% of the water used will have to be treated for dyeing, boiler feed, airconditioning and drinking purposes. Steam required for production in the  - 28 - processing department will be generated by two package boilers each with a caopacity of 10 tons per hour. 5.10 Electric power needs of the project are estimated to be about 6 14W/hour and will be met by the Tanzania Electric Supply Company (TANESCO) which is the Government entity responsible for all power supply and distri- bution in the country. No difficulties are foreseen in meeting the project requirements of water and power. However, agreement has been reached with the Government that it will take appropriate measures to ensure adequate supplies of power and water in time for the project. E. Housing 5.[1 Morogoro is being developed as a growth center to relieve congestion in Dar-es-Salaara. With the attraction of industries to the area, the develop- ment of workers" housing in Morogoro needs careful attention. In Tanzania, the National Housing Board has the responsibility for developing such housing facilities in cooperation with the Tanzania Housing Bank. In response to a request by the Government, TEXCO has prepared a workers' housing plan for the proposed textile project. Agreement has been reached with the Government that adequate sites and services for workers' housing will be developed in Morogoro. Workers would build their own houses with loans from the Tanzania Housing Bank and the assistance of the National Housing Board. As for housing facilities for expatriates and top and middle-level executives, a provision of T Sh 7.5 million (US$0.9 million equivalent) has been made in the project cost estimates; these facilities will be built 5 km away from the site in a good residential area on the hills in Morogoro. F. Ecological Considerations and Occupational Hazards 5.12 The air quality of Morogoro is relatively good because there are few industrial units in the area at present. The plant site will be within the area specified for future industrial expansion and is at a distance of 3 km from the existing outskirts of Morogoro city. There are no Tanzanian standards for pollution control. In the project, however, provision has been made to keep within internationally acceptable limits the discharge of solid, liquid and gaseous wastes. The steam boilers will be equipped with automatic regulating devices to ensure maximum combustion so as to control the discharge of CO in the flue gases. The chimneys will be designed to limit the emission of sulfur dioxide to an annual arithmetic mean of not more than 100 micrograms/m . Both spinning and weaving departments will be adiabatically air-conditioned (to achieve better operational efficiency and environmental protection), and the return air will be sucked through grills into the return air duct system constructed underground where it will be filtered. Accordingly, the dust content in both spinning and weaving depart- 3 ments will be kept below the annual geometric mean level of 100 micrograms/m. Full ventilation will be provided in the processing department but without air cycling and all equipment generating steam or heat will have special hoods with forced exhaust systems to improve working conditions. The effluent from the processing department will be treated in an industrial water treatment plant at the plant site before being discharged to the planned main sewer of the Morogoro industrial area to be completed by 1980. The biological oxygen  - 29 - demand (BOD) and the pH values of the treated water will be kept below the levels of 100 ppm and 6-8 respectively. Sanitary sewage will be collected into a septic tank and its overflow will be connected to the main sewer. The design of the buildings will allow the noise level to be kept below 90 deci- bels. Fire protection will consist of a hydrant network, fire extinguishers, fire alarm system, etc. An emergency lighting system will be provided to give minimum lighting in case of power failure. These environmental facilities are judged adequate, but agreement has been reached with TEXCO that they will in fact be installed and properly maintained. G. Project Implementation 5.13 Project implementation covers about 3-1/2 years of construction followed by a 3 year production build-up period. Construction management will be the responsibility of TEXCO's Project Implementation Unit (PIU) which will deal with all matters such as finance, cost accounting, transportation, and storage of equipment. PIU will be assisted by a Project Advisory Firm (PAF) and a Project Engineering Firm (PEF) which will be appointed in con- sultation with the Bank. Under the overall management responsibility of PIU, PAF will be responsible for supervising the project. PAF functions will include: (a) preparation of a project execution plan based on modern critical path concepts; (b) screening, evaluation, and selection of consultants and contractors; (c) coordination and monitoring of the work program of consult- ants and contractors; (d) preparation of periodic progress reports as required by TEXCO and the Bank; (e) review and approval of billing submitted by con- sultants and contractors; and (f) supervision of procurement. PAF will be provided with staff and office facilities required to fulfill its duties and will be assisted as appropriate by TEXCO's corporate staff who will provide necessary engineering, legal and accounting services. PIU will initially be located at TEXCO's headquarters in Dar-es-Salaam, but will be moved to the field location in Morogoro by 1979 when housing for them are completed. 5.14 Project design, engineering, procurement, construction and in- stallation, training of personnel, project start-up, and commissioning will be carried out through a project engineering contract with a firm (PEF) with demonstrated competence in these areas. A project implementation schedule is given in Annex 5-3. TEXCO has selected Toyobo Engineering Co., Ltd. of Japan as PEF and TOOTAL (U.K.) as PAF. Contracts with these firms are ex- pected to be signed in June 1978. Orders for equipment are expected to be placed starting from October 1978. The total implementation period for the project is estimated at 44 months. The project is expected to be mechani- cally complete in September 1981 and to be commissioned by January 1982. Up to US$500,000 will be allowed as retroactive financing for the services of PAF and PEF to help expedite project execution. Agreement was reached that any modification or termination of the contract with PAF and PEF will be decided with prior consent of the Bank. Signing of contracts with the PAF and PEF is a condition of effectiveness of the Bank/IDA loan/credit. H. Staffing and Training 5.15 At full capacity, staff requirement will be: (a) general management and office, 120; (b) production management, 225; (c) factory staff, 2,150;  - 30 - and (d) sales and marketing, 30. Of the total (2,525), no more than 10 are expected to be expatriate management and technical personnel; some middle management, foremen and skilled workers are likely to be drawn from the existing textile mills with supplemental training to be provided under the contract with PEF. 5.16 Recruitment of all management and other staff will take place during construction. It has been agreed that a specific recruitment and training plan will be submitted by TEXCO for Bank approval by December 31, 197B. A tentative training schedule is given in Annex 5-4. A training center to serve ithe project will be established at Morogoro as part of the project to train operators, maintenance personnel, and craftsmen required. Beciause of its specialized nature, the training center would serve primarily the proposed project. About 920 operators will be trained prior to the completion of the project at the training center which will provide short- termn training courses followed by practical training at the new mill before final assignment. In addition, about 8 persons will be selected by June 1978 for long-term training in finance and accounting at the local institutes of finance and development administration. An additional 85 persons for manage- menl-, engineering, supervision and accounting will be trained abroad. About 56 of them will tndergo long-term training. The first group of candidates for tra:Lning abroad will be selected in June 1978 and will commence training this year. The rest will be selected and sent abroad according to the training program to be prepared by December 1978. TEXCO has agreed that the training schedule will be worked out in such a way that the trained personnel will be able to return in time to gain practical experience under the Management Agency Firm (para 3.29). They should be able to take over the key functions of t:he Company once MAF completes its assignment after three years of initial operations of the project. The total cost of training for the proposed mill is estimated at US$1.9 million. I. Quality Control 5.17 Quality control is of crucial importance to ensure higher efficiency and lower overall operating costs of the project. The proposed quality control system for the project will include: (a) setting of standards and tolerances for raw materials, intermediate and finished products; (b) setting of test procedures; (c) elaboration of a control and testing program with details and frequencies of tests; and (d) control and the reporting of results to management. 5.18 In the spinning department, testing will cover all production stages starting from raw materials through to the wound yarn (before it goes to weaving). Raw material testing will cover fiber length, fineness, maturity, strength and the non-lint content. In the weaving department, measures will be taken to detect fabric defects during weaving. Grey fabrics will be inspected and graded according to the specified classification. In the processing department, testing will be made at strategic points to control fabric quality with respect to the required degree of whiteness, uniformity of dye and color  - 31 - fastness. Finished fabrics will be inspected and graded as first and second quality according to the demands of the market and customer. At present the Tanzanian market is not very sensitive to quality standards due to absence of competition and shortages of textiles. However, with the provision of train- ing and testing facilities under the project, the operators of the new mill are expected to meet better standards of quality than their counterparts in other mills. VI. PROJECT COST AND FINANCING PLAN A. Project Cost 6.01 The total financing required for the facilities, i.e., for both the Morogoro Textile Project and the overall technical assistance to TEXCO, is estimated at US$106.9 million equivalent, including US$2.2 million for technical assistance to TEXCO. Details of capital cost estimates given in Annex 6-1 are summarized below:  - 32 - Summary of Capital Cost Estimates Local Foreign- Total Local Foreigr- Total % --(In T Sh million)-- (In US$ million)---- I. Morogoro Textile Project Plant and Machinery /b 10.0 240.7 250.7 1.2 29.0 30.2 46.0 Civil Works /c 110.4 44.0 154.4 13.3 5.3 18.6 28.3 Freight and Insurance - 29.9 29.9 - 3.6 3.6 5.5 Port Handling & Local Freight 16.6 - 16.6 2.0 - 2.0 3.0 Dutijes and Taxes /d 20.8 - 20.8 2.5 - 2.5 3.8 Erection Cost 2.5 15.8 18.3 0.3 1.9 2.2 3.3 EngiJneering & Other Services 11.5 27.5 39.0 1.4 3.3 4.7 7.2 Stucly and Training 3.3 12.4 15.7 0.4 1.5 1.9 2.9 Base Cost Estimate (BCE) 175.1 370.3 545.4 21.1 44.6 65.7 100.0 Contingencies: Physical 13.3 18.2 31.5 1.6 2.2 3.8 Price 30.7 47.3 78.0 3.7 5.7 9.4 Installed Cost 219.1 435.8 654.9 26.4 52.5 78.9 Working Capital 73.0 47.3 120.3 8.8 5.7 14.5 Project Cost 292.1 483.1 775.2 35.2 58.2 93.4 Interest during Construction 30.7 63.1 93.8 3.7 7.6 11.3 Financing Required 322.8 546.2 869.0 38.9 65.8 104.7 II. Technical Assistance to TEXCO 1.7 16.6 18.3 0.2 2.0 2.2 Total of I & II 324.5 562.8 887.3 39.1 67.8 106.9 /a Including US$1 million of indirect foreign exchange cost. lb Including spares. /c Including cost of land improvement and housing for expatriates and top and middle management. Land will be provided by the Government free of cost. /d As in the case of the Mwanza Expansion Project, the current project is expected to be exempt from duties and taxes. Application for exemption and approval thereof, however, can only be made after final costs, based on actual bid quotations, are submitted to the Government. 6.02 The above cost estimates are based on data prepared by TEXCO with the help of Gherzi using 1977 prices, after a detailed assessment of machinery and building needs, local conditions of civil work and erection, and require- ments of technical assistance, training, housing, and transport requirements.  - 33 - The cost estimates for machinery were prepared from indicative quotations provided by various prospective suppliers of modern conventional equipment. The investment cost of this project is somewhat higher than for projects of the same fabric capacity in some other developing countries because of the following major factors: (a) provision for production of 650 additional tons of yarn per year for an existing mill which currently meets its needs from imports; (b) lack of trained manpower in Tanzania, thus necessitating reliance on more expensive expatriate assistance for project implementation 1/; (c) need for training local personnel for positions in production, maintenance, finance and management in Tanzania and abroad; and (d) need to provide as part of the project housing for expatriates and top- and middle management personnel. Physical contingencies of 10% (of the base cost) on civil works and 4% on the rest is provided for and are considered adequate in view of the detailed scope of estimates and considering that the project design is based on standard, readily available textile machinery. Price contingencies are assumed at 7% in 1978, 6.5% in 1979 and 6% from 1980 onwards on foreign expenditures. For local expenditures, annual price increases are assumed at: 8% in 1978, 7.5% in 1979 and 7% in 1980 and thereafter. 6.03 Initial working capital requirements for the project are estimated at T Sh 120.3 million (US$14.5 million equivalent) excluding the cost of spares and initial supply of screens for printing which are included under equipment and material costs. Should initial working capital requirements be higher than anticipated, the Company is expected to be able to meet it with short-term credit from the Government-owned National Bank of Commerce. B. Financing Plan 6.04 The financing plan for the project is based on a 60:40 debt/equity ratio. Funds for technical assistance to TEXCO (US$2.2 million) are expected to be provided as equity to TEXCO and are included under the equity figure shown below. In addition, US$0.7 million in Bank funds will be used to finance foreign expenditures for the MAF (para 3.29). Since these expend- itures will form part of the operating expenses of the new company, Bank financing for such has not been included in the financing plan for the proj- ect. 1/ The cost of expatriate services is estimated at US$6,500 per man-month plus a local living allowance of T Sh 300 (US$36) per day.  - 34 - Financing Plan Local Foreign Total Local Foreign Total % ---(in T Sh million)--- ---(in US$ million)---- Debt ]:BRD - 201.7 201.7 - 24.3 24.3 IDA - 70.6 70.6 - 8.5 8.5 Bilateral Credlit - 166.0 166.0 - 20.0 20.0 TIB - 83.0 83.0 - 10.0 10.0 Sub-total - 521.3 521.3 - 62.8 62.8 58.7 Eq U ity Government (IDA Funds) 78.0 17.5 95.5 9.4 2.1 11.5 Government (Own Funds) 246.5 24.0 270.5 29.7 2.9 32.6 Sub-total 324.5 41.5 366.0 39.1 5.0 44.1 41.3 Total 324.5 562.8 887..3 39.1 67.8 106.9 100.0 6.C05 The proposed financing plan includes an offer of US$20 million in bilateral credit through the Japanese EXIM Bank, with equipment to be pro- vided by Toyo Menka of Japan. Toyo Menka has submitted a priced proposal to TEXCO for the supply of spinning and weaving equipment at prices within the Bank's capital cost estimates. TEXCO is also investigating other possible sources of bilateral or suppliers' credits for spinning and weaving equipment in Europe and the U.S. If other agencies are willing to provide equipment financing (Belgium has already indicated its interest in doing so for weaving equipment), a bidding procedure would be set up so as to ensure that equipment is procured at the most attractive combination of prices and credit terms. It is expected that completion of this process will be achieved in late 1978. Effectiveness of the bilateral financing sources finally arranged for the project is a condition of effectiveness of the Bank/IDA loan/credit. 6.06 For present purposes, the Japanese bilateral credit has been used in preparing the financing plan and financial projections for the project. The bilateral credit amount (US$20 million equivalent) provides for 80% financing on the import of US$22.5 million in equipment, plus financing of interest during construction (US$2 million) on such credit. The credit would carry an annual interest rate of 8%. Interest, however, does not start accruing until the date of the last shipment under the credit and payment of accrued interest is not due until 24 months later. Repayment would be over eight years with the first installment due at the same time as first interest payment, representing an effective grace period of about four years. The grace period thus defers repayment of interest and principal until about July 1982, or six months after scheduled project commissioning. Should the project be delayed, the Company would borrow short-term from the National Bank of Commerce (NBC) to meet the first debt service obligations. No problem is  - 35 - foreseen in obtaining short-term financing from NBC. In fact, the Japanese bilateral credit would require a guarantee from NBC. The annual guarantee fee charged by NBC to the Company would be 2% of the outstanding credit amount. 6.07 The Tanzania Investment Bank (TIB) has agreed in principle to provide US$10 million in foreign exchange for the project. The Government would provide additional funds if TIB were unable to provide the full amount required from it (para 6.08). The TIB loan would be used to finance the downpayment on the bilateral credit, amounting to US$4.5 million, and also to finance most of the foreign component of civil works (US$5.5 million). The TIB loan is expected to be for 15 years, including 4-1/2 years grace (same repayment and grace period as for the Bank loan) with an annual rate of interest of 11% and a 1% commitment fee on the undisbursed amount. Further, TIB charges a 1% commission on the loan, payable at the time of loan signing. Approval of the TIB loan by its Board is expected in June 1978. Effectiveness of the TIB loan is a condition of effectiveness of the Bank/IDA loan/credit. 6.08 The proposed IDA credit of US$20 million would be made to the Gov- ernment on standard IDA terms, and will be channelled to the Company through TEXCO, part in loan (US$8.5 million) and part in equity (US$9.5 million), in order to help satisfy the 60:40 debt/equity ratio prescribed for the project. The remaining US$2 million of the IDA credit will be made available to TEXCO to finance the technical assistance program. Based on country reasons, the proposed Bank loan of US$25 million would be made to the Government for a period of 20 years, including 5 years' grace. All Bank/IDA funds onlent by the Government to the Company would carry an annual interest rate of 10%, with repayment over 15 years including 4-1/2 years' grace. The repayment period is two years longer than that granted under the Mwanza Expansion Project (Loan No. 1128-TA) and reflects the fact that the present project is a completely new venture while the latter was largely an expansion of existing facilities. The foreign exchange risk will be borne by the Company. A portion of the Bank/IDA funds will be used to: (a) finance interest during construction (US$3.6 million) on the amount onlent by the Government to the Company, and (b) to finance part of the local construction costs under ICB (US$9.4 million). All of the Government's own funds for the project (US$32.6 million) will be provided as equity, with installments to be made according to an agreed time schedule. Should there be any need for additional funds to complete the project, the Government has agreed to provide such funds in line with the financial covenants stipulated in para. 7.09. C. Procurement 6.09 Except for interest during construction, goods and services financed by the Bank/IDA will be procured through international competitive bidding (ICB) in accordance with the Bank's guidelines except: (a) items costing less than US$100,000 equivalent but not exceeding the aggregate amount of US$2 million may be purchased through international shopping on the basis of suit- ability, availability and price considerations following approval by the Bank of the proposed list of items involved; and (b) proprietary items and items in limited supply which are critical to the timely completion of the project  - 36 - and whose aggregate cost is estimated not to exceed US$1 million may be procured following bidding from a list of qualified suppliers, with prior Bank approval. 6.10 There are no local companies manufacturing textile machinery and, therefore, no local bids under ICB are expected. The initial imported raw materials, which will be financed by the Bank, will also be procured through ICB in accordance with the Bank's guidelines. Equipment preallocated for the Japanese or other bilateral or suppliers' credits would be procured according to t:he procurement guidelines of the agency or agencies involved. Local procurement and civil works wholly financed by the Government will be carried out according to the guidelines specified by the Government and TIB, which are acceptable to the Bank. However, about 58% of civil works (excluding site development and housing) will be financed with Bank/IDA funds. Contracting for civil works to be financed with Bank/IDA funds will be done under ICB procedures following Bank guidelines, with local contractors being given a 7.5%: preference. D. Allocation of Bank/IDA Funds 6.11 Allocation of Bank/IDA funds is shown below. This schedule is basetd on the allocation of equipment to the Japanese bilateral credit as indicated in para 6.05. Allocation of Bank/IDA Funds (in US$ million) Local Foreign Total Civil Works 7.5 1.0 8.5 Equipment and Spares Weaving - 2.0 2.0 Processing - 5.6 5.6 Other - 5.3 5.3 Total Equipment - 12.9 12.9 Freight and Insurance /a - 1.9 1.9 Erection /a - 0.9 0.9 Engineering Services /b - 3.2 3.2 Study and Training - 1.5 1.5 Start-up Costs /a - 0.3 0.3 Initial Imported Raw Materials - 5.5 5.5 Interest During Construction - 3.6 3.6 Technical Assistance to TEXCO - 2.0 2.0 Unallocated (Contingencies) 1.9 2.8 4.7 Total 9.4 35.6 45.0 /a On Bank/IDA financed equipment. /b Including US$0.7 million to finance foreign expenditures for the MAF during the initial three years of the new plant's operations.  - 37 - 6.12 The Bank/IDA funds would be disbursed as follows: (a) 100% of foreign expenditures for imported equipment and spares, and freight and insurance, erection and start-up costs on imported equipment financed by Bank/IDA funds; (b) 100% of foreign expenditures on engineering services, study and training, and technical assistance to TEXCO; (c) 78% of local and 15% of foreign expenditures for civil works (excluding site development and housing); (d) 100% of foreign expenditures for the importation of raw materials for initial operations; and (e) 100% of foreign expenditures to finance interest during construction on Bank/IDA. 6.13 Based on the table in para. 6.11, about 20% of Bank Group funds would be disbursed against local expenditures (for civil works). Retroactive financing for engineering services, training, and foreign expenditures for bid advertisements would be allowed up to US$500,000 equivalent for project expenditures incurred after March 1, 1978. A disbursement schedule for the Bank Group funds is given in Annex 6-2. VII. FINANCIAL ANALYSIS AND RISKS A. Production and Production Costs 7.01 As mentioned earlier, the project is expected to be commissioned in January 1982 and the production build-up is forecast as follows: 1982 50%; 1983, 75%; 1984, 90%; and 1985 and onwards, 100% of effective capacity. These capacity utilization projections are based on effective capacity which is conservatively assumed at 85% and 75% of the rated capacity of the spinning and weaving mills respectively. As is common in the textile industry, and noted in para 5.02, the processing department will have a higher capacity than the weaving department to take care of seasonal peaks, changes in patterns, colors and styles. Based on the above considerations and the provisions made for training and expatriate operational assistance during the first three years of operation, the capacity utilization projections are considered realistic. At full production in 1985, the project will produce nearly 21.5 million sq/m of blend fabrics (65% polyester/ cotton shirtings, twills and drills; and 35% polyester/rayon suitings) and 650 tons of polyester/rayon yarn for outside sale to the Arusha mill of KILTEX which, as mentioned previously, meets its requirements of such yarn currently from imports. 7.02 Assumptions for financial projections are given in Annex 7-1. Pro- duction costs are based on estimates prepared by consultants (Gherzi) which have been reviewed by the Bank and found realistic. An overall 65/35 blend ratio has been assumed for the fabric production. The cost of cotton to the mill, as is the practice in Tanzania, has been taken to be the same as the  - 38 - f.o.b. export price for cotton. The cost of polyester, rayon and other imported raw materials to the mill are based on c.i.f. prices of such products plus current import duties, and transport handling and inland transportation charges. Labor costs are based on detailed manning schedules, minimum wage rates, and analysis of the payroll costs in other textile companies in the country. Utility costs are based on prevailing unit rates in Tanzania. Maintenance costs are estimated at 1.5% of the installed cost. Depreciation cost is calculated on the assumed 15-year life of the project. Insurance cost is assumed at 0.5% of the installed cost of the project. At full production in 1985, raw material costs would account for about 50% of the total produc- tion costs including depreciation and financial charges which together repre- sent about 25% of the costs. B. Project Revenue 7.03 As noted, prices of textiles, as a basic consumer good, are set by the Government in consultation with TEXCO and are reviewed every six months or so. Under the current practice, the ex-factory realization is generally based on the production costs (including depreciation) plus a profit margin of about 8% at efficient operation (at 90% effective capacity utilization). However, for new projects which involve comparatively high investment, the Government allows a 30-40% pre-tax return (15-20% after tax) on total capital employed (long-term debt plus share capital and retained earnings) on a case-by-case basis. For the project, it is assumed that the Government will allow at least a 30% pre-tax return on capital employed at efficient operation (i.e. at 90% effective capacity utilization). For revenue projections, the price required to ensure a 30% pre-tax return in 1984, the first year of expected 90% effec- tive capacity utilization, is used with the assumption that the price will remain constant in real terms during the life of the project. Agreement has been reached that the Government will ensure that, at efficient opera- tions, the new company will obtain sufficient revenue to cover all its costs, service all its debt and earn a reasonable return on its invested capital. C. Methodology Used in Financial Projections 7.04 In order to reflect a reasonably accurate picture of the Company's financial obligations during the construction phase and cash generation and liquidity situation during the early years of operation, the financial projections are made in current prices through 1985 (the first year of full production) and, thereafter, in constant prices. The fabric prices in cur- rent terms are projected to increase at a rate of 7% a year from the 1977 levels whereas the operating costs are escalated at expected price increases for each item: cotton, 7%; polyester, 5% 1/; rayon, 4%; dyestuffs and sizing materials, 7%; labor and overheads, 7%. Depreciation and financial charges are not escalateid since they relate to capital costs that remain in the Company books at historical values. For the purposes of financial rate of return calculations, the current cost and benefit streams used until 1985 are deflated using a common deflator. 1/ From 1983 onwards. For 1977-1982, a higher rate of increase (10.5% a year) is uased as the present polyester price is depressed and is expected to recover during the next five years.  - 39 - D. Future Profitability 7.05 Detailed income and cash flow projections for the project are given in Annexes 7-2 and 7-3 respectively, and the selected indicators are shown below: Selected Profitability Indicators (in T Sh million) 1982 1983 1984 1985 1988 1990 (full year) Capacity Utilization (% of effective capacity) 50% 75% 90% 100% 100% 100% Net Sales 247.5 397.2 510.0 606.3 606.3 606.3 Net Profit 4.6 51.4 87.0 119.5 122.4 124.9 Net Profit/Net Sales (%) 1.9% 12.9% 17.1% 19.7% 20.2% 20.6% Depreciation 49.9 49.9 49.9 49.9 49.9 49.9 Cash Generation 54.5 101.3 136.9 169.4 172.3 174.8 7.06 The Company will be building up its production during 1982-85 with full production expected to be reached in 1985. The 1985 results, therefore, could be considered typical with respect to the future profitability of the Company. The net profit as a percentage of sales is projected to reach 19.7% in 1985; thereafter, this ratio is expected to increase, since financial charges are expected to decrease. The Company is not expected to declare dividends during the initial phase of production build-up but only in 1984 (and onward), when the net profit as a percentage of sales would be about 17%. Cash generation increases from T Sh 54 million (US$6.6 million equivalent) in 1982 (three months of operation) to T Sh 169 million (US$20.4 million equiva- lent) in 1985. E. Financial Position 7.07 Balance sheet projections for 1982-1990 are contained in Annex 7-4 and significant indicators for selected years are shown below: Selected Indicators of Financial Position 1982 1983 1984 1985 1988 1990 Current Ratio 1.5 1.9 1.7 1.5 1.5 1.8 Debt/Equity Ratio 55/45 49/51 41/59 33/67 12/88 4/96 Debt Service Coverage (Times) 1.3 2.0 2.8 3.6 4.5 7.4 7.08 The debt/equity ratio will steadily decline from 60/40 at project completion in 1981 (i.e. just before commissioning in January 1982) to 4/96 in 1990, reflecting satisfactory cash generation and repayment of debt. The current ratio would not be less than 1.5:1 at any time, showing a satisfactory liquidity position of the Company even during the initial years of operation (1982-1984) when full benefits from the project cannot yet be realized. The  - 40 - project is expected to generate from the beginning enough cash to more than meet its debt service requirements. From an acceptable level of 1.3 times in 1982 (when accrued interest and the first principal repayment on the Japanese bilateral credit fall due), debt service coverage is expected to improve substanltially thereafter. F. Financial Covenants 7.09 In order to ensure a sound financial situation of the project, the following agreements similar to those under the Mwanza Project (1128-TA) have been reached: (a) the Morogoro Company will maintain at all times a current ratio of at least 1.5:1 and a debt/equity ratio not exceeding 60/40; and (b) the Company will not declare or pay any dividends if by so doing the debt service coverage would fall below 1.5 times. In addition, the Company will exchange views with the Bank for three years after the project completion before undertaking any investment not related to the project, involving an expenditure exceeding US$5 million annually. G. Break-Even Point 7.10 In 1985, at full production, the profit break-even point for the Company would be about 40% of the effective capacity. Alternatively, the average sales prices at full capacity could fall by 39% before the Company would show a loss. In 1985, since debt repayment of US$6.4 million is approx- imately equal to the total depreciation charges, the cash break-even point would be close to the profit break-even point. H. Financial Rate of Return 7.11 The cost and benefit streams for the financial (internal) rate of return are expressed in real 1977 prices as shown in Annex 7-5. The return is satisfactory at 18.9% before and 12.8% after income taxes (which are cur- rently 50% of income and are assumed to remain at this level for the life of the project). 7.12 Sensitivity tests have been conducted (Annex 7-5) to determine the financial rate of return under various assumptions and the results are summarized below: Sensitivity Tests on Financial Rate of Return (IRR) Case Before Tax After Tax IRR (%) IRR (%) Base Case 18.9 12.8 Sales Revenue Decrease by 10% 15.6 10.7 Capital Cost Increase by 10% 17.4 11.7 Operating Cost Increase by 10% 17.4 11.4 Six months project delay & 80% Capacity Utilization 17.0 10.8  - 41 - The above sensitivity tests indicate that even under moderately adverse cir- cumstances, the project shows acceptable rates of return. The IRR is more sensitive to changes in sales revenue than in operating and capital costs. It would drop to 15.6 if sales revenue fell by 10%, while it declines to 17.4% if either the operating or capital costs increased by 10%. Further, a six-month delay in project implementation combined with the eventual attain- ment of only 80% capacity utilization, would reduce the return to 17.0%. However, the likelihood of the above occurrences is low because of: (a) the Government's agreed policy to maintain ex-factory prices at remunerative levels at efficient production; (b) the involvement of experienced firms in project implementation and initial operation; and (c) the provision for a comprehensive training program for the local people. I. Auditing and Reporting Requirements 7.13 It is mandatory in Tanzania that the audit of all parastatal compa- nies should eventually be carried out by the Tanzania Audit Corporation (TAC) which was established in 1968. The number of such companies audited by TAC has increased gradually to 270 out of the total of 320 parastatal companies in Tanzania. TAC's audit reports are submitted directly to the Board Chairman of the parastatal company concerned with copies to the parent Ministry and the Treasury. Agreement has been reached that the Company will submit to the Bank audit reports of TAC within four months of the end of the year and give prompt attention to audit recommendations. Further, to facilitate the work of TAC and effective financial management of the project, the Company will train and employ competent accounting personnel to prepare the accounts satisfactorily. In addition to the annual audit reports, the Company will submit quarterly financial statements and project progress and procurement status reports within 45 calendar days after each quarter. Finally, after completion of the project, the Company will prepare and furnish to the Bank a comprehensive report on the project, its implementation, initial operation, and the costs and benefits derived and expected to be derived therefrom. J. Risks 7.14 The project could face some risks because of the tendency in Tanzania to replace expatriates by local people before the latter are ade- quately trained, and also the general shortage of trained manpower in the country. However, the management risk is minimized with the involvement of experienced international firms during implementation and initial operations of the project, and the provision for training potential Tanzanian management personnel abroad in a timely manner. Further, the project is not likely to suffer from lack of operators and craftsmen as a training center to train such personnel has been included as part of the project. The technical risk in the project is minimal since the technology used is a proven one which has been in commercial use since the 1960's. The market risk is also minimal since the project is favorably located with respect to the market area and the project's output is expected to be easily absorbed by the market. Avail- ability of foreign exchange for the import of raw materials and spares is not expected to be a constraint since the Government gives priority in foreign  - 42 - exchange allocation to the import of raw materials and spares and has agreed to make satisfactory arrangements for the timely importation of such (para. 5.08). Further, product pricing is not a serious issue as the Government intends to ensure a reasonable return on capital employed at efficient opera- t ion. VIII. ECONOMIC ANALYSIS A. Raw Material and Textile Prices 8.01 In calculating the economic rate of return, capital costs, operating costs and benefits have been evaluated at long-term prices expressed in con- stant 1977 terms. Taxes have been excluded from all cost and benefit calcu- lations. Tradable items are valued at their c.i.f. border price, expressed in local currency at the official exchange rate; and non-tradable items are valued at local cost excluding taxes and other transfer payments. No shadow rates are used for labor and foreign exchange in the "base case" economic rate of return calculation. Power and water rates have been charged at the prevailing rate. Local raw materials like cotton are valued at their f.o.b. exporting prices (Dar-es-Salaam). Imported raw materials (e.g. polyester, rayon, etc.) are valued at their delivered prices at Morogoro. Cotton price assumptions are based on the Bank price forecasts 1/ for the Mexican SM 1-1/16" cotton. As the Tanzanian variety, Mwanza No. 1, which will be used by the project commands a premium of 15% over the Mexican variety, this adjustment has been made in projecting the price of Mwanza No. 1 cotton. The following table shows the price assumptions for the project's main raw materials: Economic Prices of Main Raw Materials (US cents/lb) In Current Prices In Constant 1977 Prices 1977 1980 1985 1977 1980 1985 Cotton /a 83.0 90.5 131.3 83.0 75.4 75.5 Polyester /b 54.0 91.1 140.4 54.0 73.3 80.6 Rayan /c 58.0 74.5 104.5 58.0 60.0 60.0 /a f.o.b., Dar-es-Salaam. 7U c.i.f., Morogoro. Based on polyester prices projected in "Romania: Appraisal oE the Cimpulung-Muscel Polyester Project," Report No. 1436-RO, May 24, 1977. /c c.i.f., Morogoro. I/ Annual Review of Commodity Price Forecasts, Bank Commodities Division, October 1977.  - 43 - 8.02 Because of the recent tight world cotton supply situation, the cot- ton prices have been above the long-run level since mid-1975. However, by the early 1980's, more adequate supplies relative to demand are expected to bring the price of cotton to its long-run level of about 60 US cents/lb. at 1977 constant prices for Mexican SM 1-1/16" cotton (f.o.b., exporting coun- try) and 75.5 US cents/lb for the Tanzanian Mwanza No. 1 variety. On the other hand, the current world price of polyester (54 US cents/lb, c.i.f. Northern Europe) is below the long-run price because of temporary oversupply. This situation is expected to change in the future as demand for polyester is increasing and polyester's share in the world consumption of fibers continues rising. As a result, polyester prices are expected to rise to the long-term level of about 81 US cents/lb (c.i.f., importing countries) or 70-75 US cents/lb (f.o.b., exporting countries) by 1983 in constant 1977 prices. As for rayon, it is facing keen competition from stronger fibers like polyester and its price is not likely to show any significant increase in 1977 constant prices. 8.03 The final products of the project are based on long-term c.i.f. prices (in Northern Europe) expressed in real 1977 terms. The prices are based on recent (1977) forecasts by consultants; they were reviewed by the Bank and found realistic. The economic product prices assumed are given below: Economic Product Prices (at 1977 constant prices) Product Specifications C.I.F. Prices Warp & Weft September Warp & Weft Fabric Count Width Long-Term 1977 Yarn Count (Nm) (Cm) (Cm) (US$/lm) (US$/Um) Calico (Bleached) 40/1 - 40/1 24 - 24 90 0.70 0.65 Poplin I (Printed) 48/1 - 48/1 40 - 22 90 1.10 0.95 Poplin II (Printed) 56/1 - 56/1 44 - 24 90 1.25 1.00 Shirtings (Bleached) 68/1 - 68/1 48 - 28 90 1.15 1.05 Shirtings (Dyed) 68/1 - 68/1 48 - 28 90 1.35 1.10 Supertwill (Bleached) 56/2 - 56/2 44 - 24 150 3.05 3.10 Supertwill (Dyed) 56/2 - 56/2 44 - 24 150 3.35 3.40 Polysuiting (Yarn Dyed) 48/2 - 48/2 24 - 18 150 3.50 3.70 Yarn (65/35 polyester/rayon) 3.80/kg B. Economic Rate of Return 8.04 Based on the price assumptions outlined above and assuming a 15- year life for the project, the economic rate of return of the project is estimated at 19.2%. Annex 7-5 shows the investment cost, operating cost and benefit streams used for the economic rate of return calculation. Sen- sitivity tests carried out on the economic rate of return show the following results:  - 44 - Sensitivity Tests on Economic Rates of Return ROR (%) Base Case 19.2 Sales Revenue Decrease by 10% 16.1 Capital Cost Increase by 10% 17.7 Operating Cost Increase by 10% 18.0 6-months Project Delay and 80% Capacity Utilization 16.0 At Shadow Exchange Rate of US$1 = T Sh 12 21.1 At Shadow Wage Rate of 0.45% for Unskillecd Labor 19.7 The rate of return is more sensitive to changes in revenue than in operating and investment costs. However, under all moderately adverse circumstances, the rate of return does not fall to an unacceptably low level. Further, the economic rate of return for a hypothetical all-cotton fabric project of production capacity comparable to that of the proposed project would be lower by 4 percentage points because the operating costs would be at least 10%' higher and revenue would be 10% lower while there would be no significant difference in caLpital costs for the hypothetical all-cotton project. C. Foreign Exchange Effects 8.05 The foreign exchange effects of the project are very favorable. Considering the financing obtained from international sources, there will be no net foreign exchange outflow due to the project during its implemen- tation. Following the plant's commissioning, the foreign investment costs will be recovered rapidly. By 1985, four years after commissioning of the prcject, accumulated net foreign exchange savings from import substitution to the Tanzanian economy are expected to exceed the net foreign investment costs in real 1977 prices. After reaching full capacity in 1985, the project is forecast to generate at 1977 prices, net foreign exchange savings of over US$20 million per year. An analysis of the domestic resource cost of the foreign exchange savings is presented in Annex 8. Assuming that the oppor- tunity cost of capital in Tanzania is 10% and the shadow rate of exchange is T Sh 12 = US$1, the efficiency of import substitution works out to 0.35. In other words, the domestic resource cost for every dollar of foreign exchange saved is US$0.35 equivalent. Thus, the project represents a good scheme to transform domestic resources into foreign exchange savings. Further, the net annual foreign exchange savings from a hypothetical all-cotton fabric project of comparable capacity to that of the proposed project would be about US$4 million lower. D. Economic Importance of Blended Fabrics 8.06 There is a growing realization in the world that the most economic way of clothing a nation is with blended fabrics. The reasons are: (a) lower waste factor in the use of man-made fibers in fabric production; (b)  - 45 - two to three times more durability of blended fabrics; and (c) easy care and anti-crease properties of dresses made from blended fabrics which could be "drip-dried" soon after washing even in countries which do not have tumble drying facilities, and worn immediately afterwards without need for ironing. The advantages of blended fabric production over all-cotton fabric production even in a country which produces cotton but not man-made fibers could be sig- nificant as reflected in the following table which compares the raw material costs at long-term border prices expressed in 1977 constant prices for the proposed project to produce blended fabrics with those for a hypothetical all-cotton mill in Tanzania: Comparative Raw Material Costs of Blend Fabric Vs. All-Cotton Fabric Project Blend Fabric All-Cotton Fabric Project Project Fabric Production (million sq/m) 21.5 21.5 Cotton (tons) 1,090 5,680 Polyester (tons) 3,210 - Rayon (tons) 830 - f.o.b. Cotton Price (US$/ton) a/ 1,664 1,664 c.i.f. Polyester Price (US$/ton) a/ 1,777 _ c.i.f. Rayon Price (US$/ton) a/ 1,323 - Total Cotton Cost (US$ m.) 1.81 9.45 Total Polyester Cost (US$ m.) 5.70 - Total Rayon Cost (US$ m.) 1.10 _ Total Raw Material Cost (US$ m.) 8.61 9.45 a/ Based on prices as explained in paras 8.01 and 8.02. The above table shows that to produce 21.5 million sq/m, the raw material cost in Tanzania would be nearly 10% lower in the blended fabric project than in the hypothetical all-cotton fabric project, even if we assume that all- cotton and blended fabrics were of comparable properties in all respects. However, as explained above, these fabrics differ in their main properties. For example, even if the blended fabric is conservatively considered to be only twice as durable as the cotton fabric, the production of 21.5 million sq/m of blended fabric is equivalent to 43 million sq/m of all-cotton fab- rics. In other words, the establishment of one blended fabric project to pro- duce 21.5 million sq/m is comparable to the establishment of an all-cotton fabric project to produce 43 million sq/m for which the capital cost as well as the raw material costs required would be substantially higher than for the blended fabric project. E. Impact on Garment Industry and Employment Generation 8.07 The direct employment generated by the project would be about 2,525. In addition, the project is expected to create significant employment indi- rectly, and help utilize more fully the existing idle capacity in the garment  - 46 - industry. As noted before, this is due to the fact that, because of serious foreign exchange difficulties, the Government of Tanzania has reduced drasti- cally the import: of blended fabrics as well as ready-made garments. With the project helping to overcome this supply constraint, a number of small-scale unilts (employing less than 10 persons) and tailoring shops are expected to spring up in different parts of the country. As a result, at least 1,500 jobs are expected to be created in the garment sector which should resume its position as one of the fastgrowing sectors in Tanzania to keep up with the expansion of textile production. The additional investments required in the garment sector on account of the textile production from the new project is not: likely to exceed US$5-10 million. Considering the total investment and the total employment generation -- direct and indirect -- in the textile and garment sectors, the investment per worker would be about US$27,700. In this corLtext, it is to be noted that the project will also stimulate indirect employment in wholesale and retail trade, transport and distribution, but this has not been considered here. F. Regional Impact of the Project 8.08 Morogoro is one of the nine towns selected by the Government for development as "'growth centers" to relieve the population pressure on major urban areas, especially Dar-es-Salaam, and ensure balanced regional develop- ment. Because of its proximity to the capital city and major ports, and its location along the major road and rail transport routes linking it to most parts of the country, Morogoro has the potential for becoming a new indus- trial and commercial center. The proposed project as well as the Morogoro Industrial Estate project previously financed by the Bank (1386-TA) will help realize this potential, and stimulate the growth of an underdeveloped region which in 1969 had a per capita income of T Sh 567 (US$68) compared to T Sh 4,268 (US$514) in Dar-es-Salaam. G. Transfer of Technology and Skills 8.C9 The proposed project will be producing polyester/cotton fabrics for the first time in the country and will be the first major producer of polyester/rayon fabrics. The project will help transfer modern but con- ventional technology and skills to Tanzania, through training and technical assistance. H. Institution Building 8.10 A training center will be established as part of the project to train about 920 operators, maintenance workers, and craftsmen per year. This center would be geared to meet the trained personnel needs of the new project. Furthermore, the project would have an impact on the sector by providing TEXCO with technical assistance to recommend and implement a rehabilitation program for existing mills and to strengthen TEXCO management.  - 47 - IX. AGREEMENTS 9.01 The following agreements were reached: A. With TEXCO and the Company that they will: (i) appoint a Management Agency Firm (MAF) at least six months before mechanical completion of the project, continue their services for at least three years of plant operation, and not modify or terminate the contract with the MAF without prior Bank consent (para 3.29); (ii) install and maintain adequate environmental protection facilities (para 5.12); (iii) appoint Project Advisory Firm (PAF) and Project Engineer- ing Firm (PEF), and not modify or terminate the contracts with such without prior Bank consent (para 5.14); (iv) submit a training plan by December 31, 1978 and subse- quently carry out the training program (para 5.16); (v) ensure that the Company will maintain at all times a current ratio of at least 1.5:1; a debt/equity ratio not exceeding 60/40; and not pay dividends unless the debt service coverage is at least 1.5 times (para 7.09); (vi) ensure that the Company will, for three years from project completion, exchange views with the Bank on any investment not related to the project, involving an expenditure exceeding US$5 million per year (para 7.09); and (vii) ensure that the Company: (a) submits in time the annual audit reports, and quarterly financial and project progress reports; (b) gives prompt attention to audit recommendations; (c) trains and employs competent accounting personnel to prepare the accounts satisfac- torily; and (d) prepares a comprehensive completion report after completion of the project (para 7.13). B. With the Government that it will: (i) ensure efficient operation of the Company, including satisfactory arrangements for timely procurement of imported raw materials, maintenance materials and spare parts (paras 2.13 and 5.08);  - 48 - (ii) continue to make satisfactory arrangements for dis- tribution of products of the Company (para 4.23); (iii) take appropriate measures to ensure adequate supplies of water and power in time for the project (para 5.10); (iv) develop adequate sites and services for workers' housing in Morogoro (para 5.11); (v) providie equity funds according to an agreed time schedule (para 6.08); (vi) provicle any additional funds required to complete the project (para 6.08); and (vii) ensure at efficient production a reasonable return on invested capital (para 7.03). C. With Government/TEXCO that they will: (i) appoint a technical management firm (TMF) to assist TEXCO in carrying out a study for sector improvement by December 31, 1978 (para 3.12); (ii) take necessary measures in consultation with the Bank to improve the operation of existing mills, including the employment of experienced technical personnel (para 3.12); and (iii) provide information to the Bank on major developments in the textile sector (para 3.27). 9.02 Conditions of effectiveness of the Bank/IDA loan/Credit will be: the signing of contracts with the TMF, PEF and PAF (paras 3.12 and 5.14), the effectiveness of bilateral/suppliers' credits arranged for the project (para 6.05), and the effectiveness of the TIB loan (para 6.07). 9.03 Based on the above mentioned agreements, the project provides a sound basis for Bank Group lending of US$45 million to the Government to be onlent to the Company for 15 years, including 4-1/2 years of grace, at an interest rate of 10%. Industrial Projects Department May 1978  TANZANIA: MOROGORO TEXTILE PROJECT MAIN FINANCIAL INDICATORS OF TEXCO UNITS (in Tsh million unless otherwise noted) Debt/ /3 Current Current Equity Current Years Sales Net Profit Depreciation Cash Flow Fixed Assets Debt EquitJr Assets Liabilities Ratio Ratio 1. MWATEX 1974 104.1 3.7 7.3 11.0 51.7 24.5 17.0 61.5 74.8 59/41 0.8 1975 117.5 9.8 7.6 17.4 50.3 11.9 33.1 88.3 98.3 26/74 0.9 1976 1-14.8 6.9 7.2 14.1 70.8 20.5 55.7 81.2 82.4 27/73 1.0 1977 103.2 (6.1) 7.4 1.3 232.2 153.2 116.9 68.8 30.9 56/44 2.2 2. URAFIKI 1974 130.3 3.7 7.9 11.6 27.3 39.1 43.0 89.8 35.0 48/52 2.6 1975 137.6 8.1 2.4 10.5 26.5 39.1 46.2 104.6 45.6 46/54 2.3 1976 299.9 7.4 2.3 9.7 26.5 39.6 48.6 145.1 83.4 45/55 1.7 3. KILTEX 1974 83.3 6.8 4.7 11.5 57.7 25.0 24.2 51.0 51.6 51/49 1.0 1975 110.2 16.2 5.7 21.9 53.4 22.7 41.9 87.8 76.6 35/65 1.1 1976 159.9 27.2 6.0 33.2 50.7 19.4 55.5 123.2 99.0 26/74 1.2 4. SUNGUIRATEX 1974 29.3 0.3 2.8 3.1 41.5 28.5 27.9 25.2 30.3 51/49 0.8 1975 51.0 (2.4) 5.4 3.0 57.7 23.4 25.5 28.1 36.9 48/52 0.8 1976 63.3 1.9 4.9 6.8 81.8 41.4 27.4 36.0 49.0 60/40 0.7 5. BLANKETS MANUFACTURERS LTD. 1974 21.2 (1.3) 0.8 (0.5) 7.9 4.8 3.2 9.4 9.3 60/40 1.0 1975 22.4 (1.1) 0.7 (0.4) 7.1 4.8 2.1 11.4 11.7 70/30 1.0 1976 24.1 (0.1) 0.6 0.5 6.5 4.8 2.0 9.0 8.7 71/29 1.0 /1 6. KENAF INDUSTRIES 1974 7.9 (11.0) 2.6 (8.4) 42.9 46.9 0.2 5.8 8.5 99/ 1 0.7 1975 9.9 (3.4) 1.4 (2.0) 15.3 43.0 (28.4) 4.8 7.9 - 0.6 1976 10.1 (4.2) 1.4 (2.8) 14.0 27.6 (32.6) 5.1 6.5 _ 0.8 7. TANzANIA BAG CORP. LTD. 1974 12.0 (1.1) 1.9 0.8 14.2 7.5 2.1 5.3 9.8 - 0.5 1975 17.6 (1.1) 1.9 0.8 12.5 7.4 1.3 4.6 8.6 85/15 0.5 1976 12.3 (3.9) 1.8 (2.1) 10.6 6.0 (1.7) 4.3 10.6 - 0.4 /2 8. UBUNGO GARMENTS 1977 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A a Excluding marketing. g Started production in October- 1977. L3 Including reserves. Industrial Projects Department March 1978  ANNEX 4-1 TANZANIA: MOROGORO TEXTILE PROJECT PRODUCTION, IMPORTS, EXPORTS AND APPARENT CONSUMPTION OF WOVEN TEXTILES - in million square meters - 1970 1971 1972 1973 1974 1975 1976 I. COTTON FABRICS, INCL. KHANGAS Domestic Production 1/ 61.7 68.4 72.8 78.2 84.3 80.2 75.9 + *:mports 15.1 4.6 2.1 10.3 11.9 3.3 2.2 of which: Fabrics (SITC 6521-2) (10.9) (3.8) (1.1) (8.7) (7.0) (3.0) (1.6) Khangas, etc,. (SITC 84115) (4.2) (0.8) (1.0) (1.6) (4.9) (0.3) (0.6) - Exports 3.1 10.4 5.0 2.8 2.2 2.1 0.5 of which: Fabrics (SITC 6521-2) (2.9) (10.4) (4.2) (1.9) (0.9) (0.9) ( O ) Khangas, etc. (SITC 84115) (0.2) (0) (0.8) (0.9) (1.3) (1.2) (0.5) = Apparent Consumiption 73.7 62.6 69.9 85.7 94.0 81.4 77.6 II. FABRICS OF MAN-MADE FIBERS Domestic Production 1.5 1.6 1.7 2.6 2.9 3.7 4.7 + Imports (SITC 6535-6) 4.4 3.4 8.2 12.0 12.6 7.9 5.1 Apparent Consumiption 5.9 5.0 9.9 14.6 15.5 11.6 9.8 III. MAKE-UP ARTICLES Domestic Production 51 4.2 4.1 4.5 5.5 3.8 4.3 4.3 + Imtports (SITC 65693-5) - 2.3 1.9 0.6 3.0 3.2 1.0 0.2 - Exports (SITC 6_5693-5) 0.6 0.6 0.5 0.4 0.3 0.2 0 = Apparent Consumption 5.9 5.4 4.6 8.1 6.7 5.1 4.5 IV. CLOTEING Imports Outer Garmients ME.n and Boys 2! 4.4 3.3 2.1 7.0 2.7 1.5 0.4 + Irrmports Outer Ga.rments Women and Girls 3/ 0.6 1.0 0.5 2.9 1.2 0.8 + Imports of Shirt.s, T-Shirts, 0.4 Vests, etc. 4/ 5 0.1 0.1 0.1 0.1 0 0 = Apparent Consumption 5.1 4.4 2.7 10.0 3.9 2.3 0.8 TOTAL APPARENT CONSUTTION OF WOVEN TEXTILES 90.6 77.4 87.1 118.4 120.1 100.4 92.7 Sources: TEXCO, East African Community, Annual Trade Reports, Bank of Tanzania and information gathered by the Appraisal Team. 1/ Contains the following quantities in million sq.m. of imported & domestically processed grey fabrics (deducted from import volume): 1970 - 0.4, 1971 - 1.2, 1972 - 0, 1973 - 2.0, 1974 - 5.8, 1975 - 1.1, 1976 - 0.2. 2/ Comprises mainly wool and rayon/polyester blends . Converted from EAC foreign trade data by using the following ratios: 1.2 kg per unit, 0.33 kg per sq.m. 3/ Converted from EAC foreign trade data by the following ratios: 0.5 kg per unit, 0.25 kg per sq.m. 4/ Converted frcm EAC foreign trade data by the following ratios: 0.25 kg per unit, 7 sq.m. per kg. 5j The estiimate fabric composition of make-up articles is 755 cotton fabrics and 25% rayort,acrrJlcs -nd polyester blends; in clothing it is 3o0 cotLon fabrics and 7o5 blenced fabrics. Tndustrial Projects Department August 1977  ANNEX 4-2 TANZANIA: MOROGORO TEXTILE PROJECT PER CAPITA APPARENT CONSUMPTION OF TEXTILE FIBERS AND WOVEN TEXTILFZ 1966 197o 1971 1972 1973 1974 1975 1976 Total Fibers (kg) 1.9 1.4 1.0 1.1 1.7 1.7 1.4 1.2 of which : Cotton 1.2 1.0 0.6 0.7 1.2 1.3 1.1 1.0 Wool and other natural fibers 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Man-made fibers 0.6 0.3 0.3 0.3 0.4 0.3 0.2 0.1 Woven Textiles (sq/m) 7.5 7.0 5.8 6.4 8.5 8.4 6.8 6.1 of which : Cotton fabrics 5.6 6.2 5.2 5.5 6.9 7.1 5.9 5.4 Blended fabrics 1.9 0.8 0.6 o.9 1.6 1.3 0.9 0.7 Industrial Projects Department January 1978  ANNEX 4-3 TANZANIA: MOROGORO TEXTILE PROJECT PROJECTED OUTPUT OF TEXCO MILLS (Cotton Fabrics Only) (in million sq/m) SUNGURA- URAFIKI KILTEX MWATEX TEX MUSOMA MBEYA TOTAL 1976-Actual 28.4 16.3 20.7 8.9 - - 74.3 1977-Actual 25.8 15.4 16.9 9.3 - - 67.4 1978 32.3 15.4 18.4 14.2 - - 80.3 1979 33.3 15.4 34.4 17.7 - - 100.8 1980 33.3 18.2 42.0 20.5 5.5 - 119.5 1981 33.3 23.4 42.0 20.5 11.0 - 130.2 1982 33.3 23.4 42.0 20.5 16.5 - 135.7 1983 33.3 23.4 42.0 20.5 19.8 5.5 144.5 1984 33.3 23.4 42.0 20.5 19.8 11.8 150.8 1985 33.3 23.4 42.0 20.5 19.8 15.5 154.5 Assumptions Used: Projections for URAFIKI are based on capacity utilization of 90% and the addition of 216 to the existing 978 looms in mid-1977. Capacity build up of the additional looms: 70%-1978, 90%-1979 and thereafter. Prcjections for KILTEX are based on the planned implementation of a balancing, modernization and expansion program in late 1978 and 1979. Prc'duction, therefore, is not expected to show significant improvement until 1980. Capacity utilization of the expanded facilities are assumed as follows: 70%-1980, 90%-1981 and thereafter, MWATEX projections assume Droduction from existing facilities at about 2 million sq/m below 1977 levels until completion of the rehabilitation program in the first quarter of 1977. Capacity utilization is forecast as follows: 75% in 1979,and 90% in 1980 and thereafter. For the MWATEX expansion, commissioning is scheduled for July 1978. The expansion plant is estimated to produce at 50% in 1978, 75% in 1979, and 90% in 1980 and following years. SUNGURATEX increased its capacity in October 1977 by 8.4 million sq/m. Additional capacity is assumed to be utilized 50% in 1978, 75% in 1979, and 90% in 1980 and thereafter. For the existing capacity, which ran at 57% utilization in 1977, improvement is assumed as follows: 70%-1978, 80%-1979, 90%-1980 and following years. MUSOMA, a new plant of 22 million sq/m capacity, is expected to be ready for commissioning in mid-1980. The assumed capacity build-up is: 50% through 1981, 75% in 1982, and 90% from 1983 onwards. MBEYA, plans for which are still being finalized, is expected to be commissioned in mid-1982. Capacity of 25 million sq//m is assumed to be utilized at the following rates: 50% through 1983, 75% in 1984, and 90% in 1985 and thereafter. Only a portion of the output will be sold domestically since 7 million sq/m annually is to be exported to the German Democratic Republic under long term contract. Exports are deducted in the above table to arrive at production available for the local market. Industrial Projects Department May 1978  TANZAIiIA - MOROGORO TEXTILE PROJECT PROJECTED DEMAND OF FINISBED WOVEN TEXTILES 1/ (in million square meters) TEXTILES OF OR PER CAPITA CONSUMPTION IN SQ.M. BLENDED TEXTILES OF COTTON WUMAN-MADE MAINILAND COTTON MAN-MADE TOTAL TEXTILES FIBERS POPULATION TOTAL TEXTILES FIBERS Kin. Hax. Min. Max. Kin. Max. -ESTIMATE Min. Max. Min. Max. Kin. Max. Proj. Pro]. Proi. Prol. Proj. Prol. (tmillion) Proj. Proj. Proj. Proj. Proj. Pro]. 1974 Actuals 120.1 141.0 101.1 118.0 19.0 23.0 14.37 8.4 9.8 7.1 8.2 1.3 1.6 1976 129.9 152.5 109.0 127.2 20.9 1s.3 15.20 8.5 10.0 7.2 8.4 1.3 1.6 1977 135.1 158.6 113.2 132.0 21.9 26.6 15.6 8.7 10.2 7.3 8.5 1.4 1.7 1978 140.5 164.9 117.5 137.1 23.0 27.8 16.0 8.8 10.3 7.3 8.6 1.5 1.7 1979 146.1 171.5 121.9 142.3 24.2 29.2 16.5 8.9 10.4 7.4 8.6 1.5 1.8 1980 152.0 178.4 126.6 147.8 25.4 30.6 17.0 8.9 10.5 7.4 8.7 1.5 1.8 1981 160.6 188.5 132.4 154.6 28.2 33.9 17.4 9.2 10.8 7.6 8.9 1.6 1.9 1982 169.7 199.2 138.6 161.8 31.1 37.4 17.9 9.5 11.1 7.7 9.0 1.8 2.1 1983 179.3 210.5 145.0 169.2 34.3 41.3 18.4 9.7 11.4 7.8 9.2 1.9 2.2 1984 189.5 222.4 151.7 177.1 37.8 45.3 18.9 10.0 11.8 8.0 9.4 2.0 2.4 1985 200.2 235.0 158.7 185.2 41.5 49.8 19.5 10.2 12.1 8.1 9.5 2.1 2.6 1975-80 Increment of Demand 31.9 37.4 25.5 29.8 6.4 7.6 of whicih- due to: Population Growth 22.3 26.2 18.7 21.8 3.6 4,4 Per Capita Income Growth 9.6 11.2 6.8 8.0 2.8 3.2 1981-85 Increment of Demand 48.2 56.6 32.1 37.4 16.1 19.2 of which due to: Population Growth 23.9 28.0 19.4 22.7 4.5 5.3 Per Capita Income Growth 24.3 28.6 12.7 14.7 11.6 13.9 1/ Projections are based on 1974 data and the following assumptions: For the period 1975-80, average annual growth of GNP of 4% (compounded from an estimated growth rate of 1.2X in 1975 and a Bank projected annual growth rate of 4.6% during 1976 -80); population growth rate 2.8% p.a., per capita income growth rate 1.2% p.a. Assumed Income elasticities of demand: 1.0 for all woven textiles, 0.85 for cotton textiles, 1.75 for textiles of or blended with man-made fibers. For the period 1981-85, average annual growth rate of GNP 5.4% (Bank pKojection), population growth rate 2.8% p.a., per capita in- come growt rate 2.6% p.a. Astsumed income elasticities of demand: 1.1 for all woven textiles, 0.7. for cotton textiles, 2.9 for textiles of or blended with man-made fibers. For the minimum projections no allowance has been made for unsatis- fied demand; maximum projections, however, include an allowance for unsatisfied demand estimated at 20.9 million sq.m. (19 x million linear meters) in 1974 for all woven textiles, 16.9 million sq.m. for cotton textiles and 4 million sq.m. for tex- tiles of man-made fibers. Industrial Projects Department August 1977  TANZANIA: MOROGORO TEXTILE PROJECT PROJECTED PRODUCTION AND CONSOMPTION OF WOVEN TEXTIES (in million square meters) Local Production_ Demand/Apparent Consumption Supply Deficit Cotton Textiles Cotton Textiles Cotton Textiles Cotton Textiles Cotton Textiles Textiles of Textiles of Textiles of Textiles of Textiles of Man-Made F, Total Man-Made F. Total Man-Made F, Total Man-Made F. Total Man-Made F. Total I/ 2/ - Minimum Projection - - Maximum Projection - - Minimum Projection - - Maximum Frojection - 1976 80 5 85 109 21 130 127 25 152 29 16 45 47 20 67 1977 74 5 79 113 22 135 132 27 159 39 17 56 58 22 80 1978 87 6 93 118 23 141 137 28 165 31 17 48 50 22 72 1979 107 7 114 122 24 146 142 29 171 15 17 32 35 22 57 1980 127 8 135 127 25 152 148 31 179 - 17 17. 21 23 44 1981 138 10 148 132 28 160 155 34 189 - 6 18 12, 17 24 4i 1982 143 21 164 139 31 170 162 37 199 - 4 10 6 19 16 35 1983 t5,3 26 179 145 34 179 169 41 210 -8 8 - 16 15 ,31 1984 159 29 188 152 38 190 177 45 222 9 2 18 16 34 1985 163 31 194 159 42 201 185 50 235 - 4 11 7 22 19 41 1/ Based on projected output of TEXCO mills (see Table 4-3 1) and an assumed moderate increase in produttion at the other mills and blanket factories from a combined 5.9 million sq/m in 1976 to 8.0 million sq/m in 1980 and thereafter. 2/ Assumed production increase takes into account planned expansion of KILTEX's Arusha mill to increase polyester fabric production from 1.5 to 4.0 million sq/m by 1981, and only an insignificant expansion of output at the two private mills. The projection also assumes that the proposed project would start production in 1982 at 50% of its capacity of 21.Fmillion sq/m. The production of the proposed project would subsequently increase to reach full capacity utilization with 21.5 million sq/m by 1985. Industrial Projqcts Department May 1978  ANNEX 4-6 TANZANIA: MOROGORO TEXTILE PROJECT ELASTICITIES OF DEMAND FOR MAN-MADE FIBERS IN SELECTED DEVELOPING COUNTRIES (1965-73) Average Annual Growth Rate (%) Per Capita Per Capita Consumption GNP Elasticity GNP Consumption Per Capita Per Capita of In 1973 in kg 1966 - 73 1966 - 73 Demand (US$) 1965 1973 Country. Upper Volta 70 - 0.2 inf. -1.1 * Rwanda 70 0.2 0.8 18.9 3.2 5.9 Somalia 80 0.3 0.7 11.2 1.1 7.0 Afghanistan 90 0.3 0.4 3.7 0.9 4.1 Sri Lanka 120 0.2 0.4 9.1 2.0 4.55 Tanzania 130 0.4 0.4 0 2.6 Sierra Leone 160 0.2 0.5 12.1 1.5 8.0 Central African Emp. 160 0.1 0.2 9.1 1.0 9.1 Togo 180 - 0.1 inf. 2.5 * Mauritania 200 - 0.2 inf. 1.2 * Cameroon 250 0.4 0.5 2.8 4.9 0.6 Thailand 270 0.5 1.3 12.7 4.5 2.8 Philippines 280 0.7 1.4 9.1 2.6 3.5 Honduras 320 1.0 1.4 4.3 1.1 3.9 El Salvador 350 0.5 1.9 18.2 0.8 22.7 Ivory Coast 380 0.3 0.6 9.1 3.0 3.0 Mozambique 380 0.2 0.3 5.2 4.1 1.3 Syria 400 1.5 2.4 6.1 3.6 1.7 Guyana 410 - 2.7 inf. 1.1 * Zambia 430 0.6 1.6 13.1 -0.2 12.9 Colombia 440 0.6 1.3 10.2 3.1 3.3 Turkey 600 0.6 1.8 14.7 4.4 3.3 Mexico 890 1.0 2.3 11.0 2.8 3.9 Gabon 1,310 0.2 0.6 14.7 6.1 2.4 Sources: FAO and World Bank Atlas 1975 Industrial Projects Department January 1978  ANNEX 5-1 TANZANIA: MOROGORO TEXTILE PROJECT PROJECT TECHNOLOGY AND SIZE I. PROJECT TECHNOLOGY A. Background 1. Basically, the technologies available for a textile mill can be grouped under three main categories: (a) pre-conventional technology (PCT) based on narrow mechanical (semi-automatic) looms and direct spinning; (b) conventional technology (CT) based on broad automatic looms and ring spinning; and (2) advance technology (AT) based on devices like automatic opening of blow rooms, chute-fed high speed carding machines, open spinning, unifils and electronically-operated shuttleless looms which are being used in the developed countries to economize on labor in the face of rapidly rising labor costs. 2. For th,e Morogoro Textile Project, the above technology alterna- tiv,es were considered and the CT alternative has been found the most economical for Tanzanian conditions with respect to spinning and weaving facilities, which account for about 85% of the total investment cost of the project. For the converting (finishing) facility which accounts for 15% of the total project cost, the AT alternative is considered most economic as the rationale for using it is not to save on labor but to achieve better efficiency in the processing of fabrics while, at the same time, reduce water, fuel,dyestuff and chemicals consumption. The savings in material cosi:s (about 20%) possible from the use of AT at only marginal increase in cap:ital costs, has made such technology standard in new textile plants for the converting operation. There is virtually no saving on labor regardless of whether AT or older technology is used for such operation. 3. For spinning and weaving operations, the main aim of the use of AT is to save on labor, such technology was not considered for the Morogoro Project. After detailed analysis of PCT and CT alternatives, CT technol- ogy is recommended as it showed definite advantages over PCT with respect to: (i) capital costs; (ii) operating costs; (iii) training costs; (iv) produc- tioin of wider, finer, high-density fabrics of uniform quality; and (v) raw material consumption per unit of production. Further, it should be noted thal: PCT technology is in use in some countries mostly in smaller textile units organized under single proprietors or partnerships. But in larger firms, CT techno:Logy is predominantly used. Some countries, especially India, which has a long tradition of textile production, have been slow in the switchover from PCT to CT technology in spite of economic advantages of doing so, because of the Government policy of protecting employment in mills which were established decades ago based on PCT technology. However, in larger textile mills established in the recent past, CT technology is used even in India. B. Weaving 4. The economic superiority of CT over PCT technology comes out clearly from the following analysis of CT and PCT looms.  ANNEX 5-1 Page 2 5. Loom Speed: A CT loom operates 35-45% faster than a PCT loom of the same width. Using this factor alone, approximately 1.4 PCT looms would be required to produce the same amount of fabric as a single CT loom in a given period of time. 6. Loom Efficiency: Loom efficiency is defined as "the percentage of time a loom is actually weaving as opposed to being idle for resupplying yarn or repairing yarn breakage." In the use of PCT loom, it has to be stopped 12 to 30 times per loom hour for manually replenishing weft yarn alone by changing bobbins, whereas, in the CT loom bobbins are changed automatically without any stoppages for replenishing weft yarn. It is esti- mated that the time taken by a weaver on a PCT loom to feed it with a fresh supply of weft yarn is 4 to 10 minutes per loom hour (for average counts usually woven on PCT looms) which is not required on the CT loom. In addi- tion, loom interference on the PCT loom is at least 3 minutes per loom hour. Considering these factors, at least 7 minutes are lost per loom hour in the PCT loom resulting in a relative disadvantage in efficiency of 12%. Using efficiency factors of about 82.5% and 70.5% for CT and PCT looms respectively, the CT loom would have an advantage over the PCT loom of about 1.17 times. Like loom speed, this must be taken into account when comparing the number of PCT looms required to match the output of a single CT loom. 7. Fabric Rejection Rate: The fabric rejection rate is the proportion of fabric production that does not pass the quality control inspection. In the PCT loom, when it has to be stopped 12 to 30 times per loom hour for reasons explained earlier, marks on the fabric are left by the PCT loom because of the relaxation of the warp yarn during the loom stoppages. As a result, the fabric rejection rate is higher in the use of the PCT loom than in the case of the CT loom. For medium to fine quality fabric, under good quality control supervision, the fabric rejection rate would be about 2.5% and 8% for the CT and PCT looms respectively when both are operated by highly skilled labor. In a country like Tanzania, where skilled labor is scarce and no long tradition of weaving exists, the fabric rejection rate would be at least 5% and 25% respectively for the CT and PCT looms. Assum- ing that the rejected fabric could be sold at one-half the value of the standard quality fabric, in order to obtain the same value output as from a single CT loom, 1.11 PCT looms would be required. 8. Investment Cost: Considering the above factors, about 1.79 PCT loom would be required to get comparable operational results from one CT loom. Using US$6,50011 and US$2,530 as the approximate purchase prices for CT and PCT looms, about US$4,530 has to be invested in PCT looms to get comparable results from one CT loom costing US$6,500. However, the invest- ment in looms is not the only investment in the weaving mill. The investment cost per loom should also include the cost of buildings, technical installa- tions, freight and handling, erection, training, etc. 1/ It was US$3,430 per CT loom for the NWATEX Expansion Project being financed by the Bank in Tanzania.  ANNEX 5-1 Page 3 9. For the proposed mill in Tanzania, the number of CT looms required is estimated at 664. If PCT looms were to be used in that mill, the number of such looms would be about 1,188 (1.79 times the CT looms) to produce the given quantity of fabrics, i.e., 21.5 million sq/m per year. Because of the need for higher number of PCT looms required, the built-area required for the mill would be larger, involving higher civil works cost. It is estimated that the civil works and technical installations cost per loom is about US$7,350 in Tanzania. In addition, the importation of 1,188 PCT looms as against 664 CT looms involves higher freight and erection costs. Further, the number of weavers required for 1,188 PCT looms would be about 1,3061/ compared to 182-2'for 664 CT looms. Therefore, the training cost for weavers for a PCT-based mill would be about 7 times higher in Tanzania as trained weavers are in short supply. Considering all these factors, the investment cost on tbe weaving mill for the proposed project would be about US$19 million if it were based on PCT looms compared to US$15 million for the CT loom-based mill. 10. Operating Costs: Operating costs would also be higher in the PCT loom-based mill as the yarn consumption rate, total labor, utility and maintenance costs would be higher in such a mill than in a CT loom-based mill. C. Spinning 11. Yarn for weaving is produced by spinning mills. The established CT method for spinning is ring spinning which has been widely used in the world because of its definite advantages (e.g., higher speed, lower down- time, higher production efficiency and better yarn quality) over the PCT method of direct spinning. As a result, the PCT method of spinning has been found uneconomic and has been phased out in many developed as well as developing countries. 12. Under the older methods of spinning (using flyer, mule, cap, etc.) the bobbin (package of yarn) is used directly in the weaving shuttle. This practice limits the size of the bobbin and causes problems with respect to quality and efficiency in weaving due to variation in yarn tension and yarn quality. Under the CT method (i.e., ring spinning), the bobbins are of larger size and are wound into pirns and are set into the battery of the CT loom to be carried by the shuttle while weaving. 13. Because of the above reasons, ring spinning has been recommended for the Morogoro Project. 1/ Assuming one weaver per 4 PCT loom, 4 shifts of operation and 10% absenteeism. 2/ Assuming one weaver per 16 CT loom, 4 shifts of operation and 10% absenteeism.  ANNEX 5-1 Page 4 II. PROJECT SIZE 14. The size of the project, which is designed to produce 21.5 million sq/m (19 million lm) of blended fabrics, has been carefully considered in relation to market needs, economies of scale, and availability of financing. 15. Market Needs: The market demand for blended fabrics in Tanzania is estimated at 24 million sq/m in 1977, and is expected to rise to 46 million sq/m by 1985. The proposed project would meet only part of this demand (46% in 1985). Any reduction in scale would aggrevate the already severe supply deficit which,if demand were to be satisfied, would have to be met by costly imports. Assuming a plant size of only 10 million lm, net foreign exchange savings in 1985 (the first year of full production) would be only US$10.4 million in 1977 prices, compared to US$25.4 million with the plant size as proposed. 16. Economies of Scale: A smaller plant would substantially reduce the economic and financial rate of return for the project. Because costs of technical services are largely fixed and much of the preparatory and processing equipment and associated civil works cannot be sized-down to match the reduced scale of a smaller plant, capital costs for a mill producing 10 million lm annually would drop by only 32% compared to those for the proposed 19.5 million lm facility. Moreover, operating costs would decrease by only about 42% since labor, overhead and maintenance costs would not decline in proportion to the decrease in plant capacity. As a result, the economic rate of return for the smaller plant (which would produce 48% less revenue) would be only 13% versus 19% for the plant size proposed. 17. Elimination of Spinning: The possibility of reducing project costs (while maintaining overall scale at 19.5 million lm annually) by eliminating a component such as spinning was also examined and found to be uneconomic. The elimination of the spinning mill would reduce project cost by about US$25 million, or 24% of the total cost estimate. On the other hand, importing yarn would increase annual operating costs by US$6.0 million (in 1977 terms) over the cost of producing the yarn internally. This would reduce the economic rate of return on the project from 19% to 17%. Moreover, imported yarn would lead to an additional net outflow of scarce foreign exchange of US$7.6 million annually over the foreign exchange cost of producing the yarn internally. Reliance on imported yarn would also reduce the project's flexibility to vary its product mix in response to changing market demands for different blend ratios, types and styles of fabric. This is especially so under currently tight world supply conditions for the polyester blend yarns with the range of counts required for the project. Industrial Projects Department March 1978  TANZANIA: MOROCORO TEXTILE PROJECT PLANT LAYOUT 1 42 iiT t I Tank F Sm *2 Area to( Wmast Water Treatiment Plant JI I @ 3 Yarn OyelngB 34 Pera 0 YeiAS !, Printing 6 at Boiler Houste 7 Watelr Tratment Plant I Generasl lant Sar-ires tens9 ittnion 10 Chtemica store S Spa's Peris Store 12 Garaes 13 Extrension i14 Pt6,stintg ol ' l (i) | & 1 15 Ariminlstration I I t tO Ex3tension Gt ,7in3 mrl1 7Store 1 1i Wea8i14 19 Parkint 20 Bus Trrrmint7at 21 factorV Store K ~ ~~~~~~~~~~~~~~~~22 Gate H-ouae 23 Medical Center 24 TrainIng Center 25 Reocreation Area 26 StOre 27 Social Atee 03- ~~~~~~~~~~~~~26 Air biurtidlllcstion Unit. 29 Social Area 30 Spinning 31 Exteansion 32 Extension 1 34 1 ~~~~~~~~~~~~~~~~~~~~~33 Proposed No. Rtoad Reserve L - - ~~34 Prop6oed Access Road 35 Fence -ine 36 Bounadary ~~~~',I\I~~~~~~~~~~~~~~~~\ ~~~~~~~~ ~~World Bank -18424 Industrlal Projects Department D)ecemiber A977 t  TANZANIA: MOROGORO TEXTILE PROJECT Implementation Schedule Years 1978 1979 [ 1980 1981 Items I i I F - . I I I I I ] l l I I Months 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 Detailed Engineering and Design Construction Work I _ ___ Procurement _ _ - _ _ Equipment Delivery (F.O.B.) * Preshipment Inspection _ Period of Shipment on Seas _ _ * Unloading and Internal Transportation _ _ Machinery Erection _ - _ _ Trial Production Commercial Production Industrial Projects Department May 1978 World Benk-17900  TANZANIA: MOROGORO TEXTILE PROJECT TRAINING SCHEDULE Years 1978 1979 1980 1981 1982 Itern-1 1----T-F- F- V T F-T-FT I F17T~ 1- Months 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 I. Study and Training of 56 Managers _ _ _ _ _ _ __ __ (3-4 yr. Study Abroad) II. Training of 10 Production Supervisors E - (6 mo. local training + one yr. mill training abroad) 111. Training of 19 Foremen - - - 16 mo. local training + 6 mo. training at plants of machine manufacturers) IV. Local Training of Labor (6 mo. training for 920 employees) Industrial Projects Department March 1978 World Bank - 17901 '11  ANNEX 6-1 TANZANIA: MOROGORO TEXTILE PROJECT CAPITAL COST ESTIMATE (US$ n'illion) Local Foreign Total I. 1. Land and Site Improvement 2.9 0.2 3.1 2. Civil Works 9.6 5.0 14.6 3. Housing /1 0.8 0.1 0.9 4. Equipment and Materials:- a.Spinning - 10.2 10.2 b.Weaving 7.9 7.9 c.Processing /2- 5.6 5.6 d.Other Facilities - 1.2 5.3 6.5 Sub-total 1.2 29.0 30.2 5. Ocean Freight and Insurance - 3.6 3.6 6. Custom Duties 2.5 - 2.5 7. Porthandling and Local Freight 2.0 - 2.0 8. Erection 0.3 1.9 2.2 9. Engineering Services 0.6 2.5 3.1 10. Pre-operating Expenses 0.7 0.2 0.9 11. Study and Training 0.4 1.5 1.9 12. Start-up Costs 0.1 0.6 0.7 Base Cost Estimate 21.1 44.6 65.7 13. Contingenci.: - Physical- -1.6 2.2 3.8 - Price 3.7 5.7 9.4 Sub-total 5.3 7.9 13.2 14. Working Capital 8.8 5.7 14.5 15. Interest During Construction 3.7 7.6 11.3 Total Financing Required 38.9 65.8 104.7 II. Technical Assistance to TEXCO 0.2 2.0 2.2 Grand Total Financing Required 39.1 67.8 106.9 /1 Including spares. /2 Including equipment for utilities, air-conditioning, water supply, effluent treatment, central workshop, transport facilities. /3 Including 4% on equipment and 10% on local civil works. /4 Including indirect foreign exchange cost of US$1 million. Industrial Projects Department March 1978  ANNEX 6-2 TANZANIA: MOROGORO TEXTILE PROJECT PROJECTED DISBURSEMENT SCHEDULE FOR BANK GROUP FUNDS (US$ million) Calendar Year Amount Undisbursed and Quarter Disbursement Outstanding Amount 1978 IV 2.3 2.3 42.7 1979 I 3.0 5.3 39.7 II 3.0 8.3 36.7 III 2.0 10.3 34.7 IV 4.0 14.3 30.7 1980 I 4.0 18.3 26,7 11 6.3 24.6 20.4 III 6.0 30.6 14.4 IV 2.0 32.6 12.4 1981 I 3.0 15.6 9.4 II 3.7 39Q3 5.7 III 4.0 43.3 1.7 IV 1.0 44.3 0.7 1982 I 0.1 44.4 0.6 II - 44.4 0.6 III 0.1 44.5 0.5 IV - 44.5 0.5 1983 I 0.1 44.6 0.4 II - 44.6 0.4 III 0.1 44.7 0.3 IV 44.7 0.3 1984 I 0.1 44.8 0.2 II - 44.8 0.2 III 0.1 44.9 0.1 IV 0.1 45.0 Industrial Projects Department May 1978  ANNEX 7-1 TANZANIA: MOROGORO TEXTILE PROJECT ASSUMPTIONS FOR FINANCIAL PROJECTIONS A. Price Bases Used In order to reflect a reasonably accurate picture of the Company's financial flows during the early years of operation, projections of both revenues and production costs are made in current prices through 1985 (the first year of full production) and, thereafter in constant prices. B. Production Build-up 1. The project is expected to be commissioned in January 1982 and the production build-up is forecast as follows: 1982, 50%; 1983, 75%; 1984, 90%; and 1985 and onwards, 100% of effective capacity. These capacity utilization projections are based on effective capacity which is conservatively assumed at 85% and 75% of the rated capacity of the spinning and weaving mills respectively. C. Revenue 2. Revenue calculations are based on the average price per linear meter (lm) required to ensure a 15% after-tax return on total capital employed (long-term debt plus share capital and retained earnings) at efficient operation (i.e. 90% capacity utilization). Further, it is assumed that the average price per lm calculated for the expected first year of 90% capacity utilization (i.e. 1984) would remain constant in real terms during the life of the project. D. Variable Production Costs 3. The following table shows the basis for variable production cost calculations:  ANNEX 7-1 Page 2 Items 1977-/ Annual Price Escalation Unit 1982 1983 1984 1985 (T Sh) (%) Cotton 13,811 7.0 tons 543 815 977 1,086 Polyester 18,011 10.5 tons 1,606 2,409 2,891 3,212 Rayon 14,276 4.0 tons 413 620 743 826 Dyestuffs 525 7.0 d/ 10,650 15,981 19,177 21,300 Chemicals 427 7.0 d? 10,650 15,981 19,177 21,300 Sizing materials 9,196 7.0 tons 134 201 241 268 Power .26 0.0 c/ Mwh3 222180 33,269 39,923 44,359 Water 2.19 0.0 cm 3 373,519 560,278 672,334 747,038 Heavy Fuel oil 871.50 5.0 'OOOltr.3,7Q3 5,555 6,665 7,406 Light Fuel oil 1,842.60 5.0 " 928 1,391 1,670 1,855 Packing materials - - 0.2% of sales - - - - - - - - Other -- - - - - - - - - - - - - - - 1% of sales