Tanzania - Sao Hill Forestry Project - Phase Two

Document of The World Bank FILE (COPY FOR OFFICIAL USE ONLY Report No. P-3251-TA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A SAO HILL FORESTRY PROJECT - PHASE II March 24, 1982 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Tanzania Shilling (TSh) TSh 1.00 = US$0.12 US$1.00 - TSh 8.25 US$1.00 = SDR 0.87 (As the Tanzania Shilling is officially valued in relation to a basket of the currencies of Tanzania's trading partners, the US Dollar/Tanzania Shilling exchange rate is subject to change. Conversions in this report were made at US$1.00 to TSh 8.25 which is close to the 1981 average exchange rate. The US$/SDR exchange rate used in this report is that of January 31, 1982.) WEIGHTS AND MEASURES 1 cubic meter (i3) 35.3 cubic feet 1 hectare (ha) = 2.47 acres 1 kilometer (km) 0.62 miles ABBREVIATIONS AND ACRONYMS AFO - Assistant Forest Officer APMFP - Assistant Project Manager (Finance and Planning) APMO - Assistant Project Manager (Operations) FA - Forest Assistant FAO/CP - Food and Agriculture Organization/Cooperative Program FAO/TCP - Food and Agriculture Organization/Technical Cooperative Program m3(r) - cubic meter (roundwood) MNRT - Ministry of Natural Resources and Tourism TWICO - Tanzania Wood Industries Corporation FISCAL YEAR Government - July 1 to June 30  FOR OFFICIAL USE ONLY TANZANIA SAO HILL FORESTRY PROJECT - PHASE II Credit and Project Summary Borrower: United Republic of Tanzania Amount: SDR 10.5 million (US$12 million) equivalent Terms: Standard Project The Project would finance the further development of Description: about 18,000 ha of existing forest plantations and the establishment and development of about 10,000 ha of new plantations. The project would also support the establishment of nurseries; fire control measures; forest research; construction of secondary roads and tracks; construction and maintenance of staff houses; and strengthening of the Forest Division. Benefits: The project would meet growing domestic demand for softwood for sawn timber and pulp and paper production, as well as reduce pressure on environmentally important indigenous forests. Risks: There is a risk that the only pulpmill in Tanzania will be late in starting up and that the major sawmill in the project area will not be expanded promptly enough. Both risks are being reduced under separate projects involving Bank Group and bilateral financing. Estimated Project Costs: Local Foreign Totall US$ Million----- Afforestation 3.5 1.1 4.6 Civil Works 0.7 0.5 1.2 Vehicles, machinery and equipment 0.1 1.4 1.5 Project administration 1.7 0.9 2.6 Technical Assistance & Training 0.1 0.7 0.8 Subtotal 6.1 4.6 10.7 Contingencies: Physical 0.5 0.4 0.9 Price 2.3 1.1 3.4 Total 8.9 6.1 15.0 1The project would be cxempted from identifiable taxes and duties. | 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.  - ii - Financing Plan: Local Foreign Total ---------US$ Million------- IDA 5.8 6.2 12.0 Government 3.0 - 3.0 8.8 6.2 15.0 Estimated Disbursement: ----------------US$ Million----------------- IDA Fiscal Year 1983 1984 1985 1986 1987 1988 Annual 2.3 2.7 2.4 2.4 1.8 - 7 Cumulative 2.3 5.0 7.4 9.8 11.6 12.0 Rate of Return: 30% Staff Appraisal Report: Report No. 3634-TA dated March 18, 1982 Map: IBRD No. 15896  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A SAO HILL FORESTRY PROJECT - PHASE II 1. I submit the following report and recommendation on a proposed credit to the United Republic of Tanzania of SDR 10.5 million (US$12.0 million) equivalent on standard terms to help finance a Sao Hill Forestry Project - Phase II. PART I - THE ECONOMY1 2. An economic mission visited Tanzania in March and June 1980. Its report (3086-TA) dated January 23, 1981, has been distributed to the Executive Directors. A summary of social and economic data is given in Annex I. Background 3. At Independence in 1961, Tanzania (then Tanganyika) was one of the poorest countries in the world. Almost solely dependent on subsistence agriculture and a few estate crops, the country had a very modest indus- trial base (less than 5% of GDP), and a very small number of educated and trained personnel. For the first six years after Independence, the Govern- ment's development objectives resembled those of many other less developed countries, stressing growth in per capita income and national self-suffi- ciency in skilled manpower, based on market forces and capital intensive agricultural projects. This approach had a number of drawbacks, such as high investment costs in the agricultural sector, and led in the Govern- ment's view to unacceptable economic and social conditions, such as widen- ing income differentials and unequal opportunities for advancement in the rural areas. In response to this situation, the national development strategy was reassessed in 1967. The new priorities, enunciated in the Arusha Declaration and related policy statements, were directed towards establishing a socialist society, with greater emphasis on broad-based rural development, self-reliance in development efforts, and the develop- ment of mass education. To accomplish these ends, the State, with guidance 1This section is substantially the same as that in the President's Report on the Third Technical Assistance Project dated January 21, 1982.  - 2 - from the Party2, was expected to play the leading role, especially in the reform and creation of appropriate institutions. This led in the late 1960s to the nationalization of large-scale industry, commerce and finance, the creation of numaerous parastatal bodies, the formation of ujamaa (cooperative) villages, the decentralization of government (1972), and the mass campaign of villagization (1974-76). 4. Despite some disruption arising from these major institutional changes during the period, Tanzania managed to show improvements both in social welfare and in macroeconomic performance. Primary school enroll- ments increased by more than 50%, life expectancy rose by almost 5 years, and access to safe water increased in both the rural and urban areas. GDP grew by 4.4% per annum from 1966 to 1973, investment averaged 24% of GDP from 1970 to 1973, and domestic resource mobilization improved with recur- rent revenues rising from 15% of GDP in 1967/68 to 19% in the mid 1970s. However, the productive sectors grew slowly and the rate of return on new investments (which was centered on the industry and transport sectors) was poor. Perhaps the principal disappointment was in agriculture, the domi- nant sector in the economy, which grew by only 2.3% per annum from 1966 to 1973. This growth was also uneven among regions and precluded any narrow- ing of rural-urban income differentials. Tanzania made rapid progress towards localizing key posts in the economy, but large gaps in manpower requirements remained. Dependence on foreign aid to finance both domestic investment and the widening balance of payments gap also increased. By 1973, the issues which were to be so important for Tanzania throughout the 1970s were becoming clear: How quickly could a country with limited trained personnel develop a strong and efficient centrally administered economy? The Government's emphasis on equity was often at the expense of efficiency and incentives; how long could the country afford these costs? What could be done to improve the growth rate of the monetized, productive sectors? 5. The oil price increases and world recession of 1973-74 coincided with two years of below average rainfall in Tanzania. Agricultural produc- tion also was affected by disruptive changes in the rural areas at this time (decentralization and villagization), and there was a serious short- fall in foodgrain production. The Government was forced into the world market, making large purchases of foodgrain for cash. Food imports rose from US$39 million in 1973 to US$149 million in 1974 and US$136 million in 1975. Export crop production also fell during this period and the barter terms of trade fell by about one-third during these two years. As a result, the current account deficit rose from US$118 million in 1973 to around US$340 million in both 1974 and 1975. Domestically, the recurrent budget fell into deficit and Government bank borrowing rose from TSh.416 million in 1973/74 to TSh.1061 million in 1975/76. 6. The Government prepared a program to deal with at least the short-term effects of the crisis and was able to receive some assistance from the IMF and a program loan from the Bank. Under this program, import levels were tightly restricted, wages were frozen, government development 2The single mainland political party at the time was TANU, but in February 1977, it merged with Zanzibar's Afro-Shirazi Party to form the Revolutionary Party, or Chama Cha Mapinduzi (CCM).  3~ ~ ~~~~ expenditures3 were redirected towards the productive sectors, and the Tanzanian shilling was devalued by 10% against the SDR. Producer prices for food crops were substantially increased and at the same time, the National Milling Corporation (NMC) was instructed to purchase a number of drought-resistant crops such as cassava, sorghum, and pigeon peas in addi- tion to the usual foodgrains like maize. While these steps were taken to increase food production, they also discouraged the production of export crops, weakened the financial position of NMC and required the banking system to extend large amounts of credit to NMC. Aside from the devalua- tion, little scope was given to market forces and Tanzania made no basic changes in its system of administered prices and government controls. The basic weaknesses of the economy persisted: declining export volumes, limited trained manpower, disappointing growth in the monetized and productive sectors, and poor maintenance of existing capital stock and infrastructure, especially in agriculture and transport. 7. Nonetheless, the Government program, boosted greatly by the coffee boom of 1977, increased foreign assistance and reasonable weather for agriculture, was able to keep the economy in balance until 1978. The current account deficit fell to less than US$100 million in 1976 and less than US$175 million in 1977 well below the 1975 deficit of US$340 million. The Government made a net repayment of TSh. 24 million to the banking system in 1976/77. During 1978, the overly stringent import controls were relaxed at the same time as the terms of trade began to deteriorate again. The balance of payments went into deficit and foreign reserves were drawn down. Then, in October 1978, the country was invaded by forces from Uganda. The resulting war, the oil price increases of 1979 and flooding and drought in different parts of Tanzania led to a worsening balance of payments deficit and the Government built up major arrears on its import payments for the first time since Independence. The domestic budget fell heavily into deficit as expenditures (led by defense) rose by 50% from 1977/78 to 1978/79 and revenues improved by only 10%. As a result, Govern- ment borrowing from the banking system increased from TSh. 600 million in 1977/78 to more than TSh. 3,000 million in 1978/79. Such borrowing was the major factor in money supply growth, which exceeded 53% in this period. 8. According to the official National Accounts statistics, GDP in constant prices has risen by 4.7% per annum since 1966, and by a slightly higher rate of 5.1% per annum over the past six years. However, this later trend assumes an 8.6% per annum increase in subsistence agriculture, which seems somewhat overstated in the light of Bank Group project experience and the known marketed surpluses of food. Assuming a more realistic growth rate of 4.0% per annum for subsistence agriculture, overall GDP growth since 1973 would also be reduced to 4.0% per annum. With population growing by around 3.3% per annum, this implies an increase in per capita GDP of only 0.7% per annum. There also has been a change in the structure of the economy over the past six years, away from the productive monetary sector and towards subsistence and service activities. Excluding public administration, commercial services and trade, the monetary sector has 3Government development expenditures account for about two-thirds of public sector investment, which in turn accounts for 50-60% of total investment.  - 4 - grown by only 2.3% per annum over the past six years, well below the population growth rate. This change in the structure of the economy has been a major factor hampering the Government's efforts to mobilize domestic resources. 9. Although Tanzania has sustained a high investment ratio, this has not been matched by a similar success in the mobilization of domestic savings or in the return on investments. Up to the mid-1970s, foreign savings had financed 20%-40% of domestic investment. However, the depend- ence on foreign savings rose sharply to more than 60% of domestic invest- ment during the crisis years of 1974-75 and again from 1978. The major shortfalls in domestic savings have occurred in the Government sector, where they have actually been negative in some years since 1975. The low return on investments is reflected in the incremental capital-output ratio for the monetary sector, which was around 4.5 at the start of the decade and rose to between 6 and 7 by the end of it. 10. Agriculture remains the most important sector in Tanzania, accounting for 90% of total employment, 50% of GDP and 80% of exports. The long-term trend growth rate of agricultural production has hardly kept pace with population growth and if anything has fallen in more recent years as the initial expansion of export crop production (through the mid-1960s) has been reversed. This poor performance cannot be adequately explained by the limitations of the natural environment. Although the importance of rural development has continuously been highlighted in Government statements, including the Arusha Declaration and successive plans, this has not always been reflected in the allocation of resources to the agricultural sector or in policy formulation and implementation. The general direction of the Government's post-Arusha agriculture strategy has also tended to emphasize the transformation of the institutional structure of rural development (through the formation of villages and increasing public involvement in the sector) over measures designed to improve agricultural production direct- ly. Many of these institutional changes were introduced too rapidly, with- out careful planning or sufficient recognition that by themselves they could not compensate for inadequate incentives and shortages of skilled manpower and managers. More recently there has been a greater awareness of the role of incentives, and recent price adjustments attest to the Govern- ment's willingness to use them to influence the pattern of agricultural production. The trend towards greater public involvement in agriculture has also continued and with the resultant proliferation of parastatals and increasingly complex structure of administration, the available manpower has been stretched even more thinly. This has resulted in weakened capaci- ty for policy planning and implementation, especially in the areas of research and extension, and deficient distribution of fertilizers and other on-farm supplies and equipment. Also related to the poor performance of agriculture has been the deterioration of transport services. Roads, railways and water transport have deteriorated owing to a lack of spare parts, poor maintenance and inadequate planning and management. The Current Balance of Payments Crisis and Medium Term Prospects II. The decline in agricultural production, transport bottlenecks and external shocks described above have all contributed to the severe deterio- ration in the balance of payments over the past two to three years. Export  -5- volumes are estimated to have fallen by 7% during 1980, to a level one- third below the peaks of the mid-1960s and early 1970s. Furthermore, the terms of trade have declined by 27% since the coffee boom of 1977, due to a sharp increase in import costs, especially for petroleum, at a time when the overall level of export prices has been rising very slowly. Owing to these adverse developments, the purchasing power of Tanzania's exports in 1980 was one-third lower than in 1977 and only one-half of the 1966 level. Part of this shortfall has been made good by additional external resources, including a sharp increase in commodity and program aid to more than US$200 million in 1980, as well as by drawings under the IMF standby program concluded in September 1980. But Tanzania has also had to utilize large amounts of exceptional financing, including suppliers' credits and an increase in import payment arrears. Despite this, the volume of imports has had to be severely curtailed, and in 1980, was still no higher than in the mid-1970s. 12. Given the recent negative developments on coffee prices and oil supplies, as well as the limited scope for further exceptional financing, there is little prospect for any immediate improvement in the balance of payments, and present indications are that the situation will continue to deteriorate during 1981. This continuing balance of payments constraint is inevitably having a debilitating effect on the economy, with lower imports reducing production and maintenance of existing assets, resulting in further falls in exports and available foreign exchange. This vicious circle will be difficult to break, unless there is a substantial injection of foreign exchange and major changes in domestic policies designed to improve producer incentives, parastatal operations, import allocations, the promotion of non-traditional exports, and overall government planning and budgeting. The Government has recently introduced a number of significant measures--such as higher producer prices for coffee, sisal and tobacco and the establishment of a Special Agricultural Account at the Bank of Tanzania to ensure that a substantial proportion of foreign exchange earnings are returned to the agricultural sector. This Export Rehabilitation Program is being supported by a recently approved credit from IDA (Cr. No. 1133-TA). 13. During negotiations of the Export Rehabilitation Credit in March 1981, agreement was also reached on a Memorandum of Understanding on Follow-Up Measures. These included more restraint and selectiveness in the public investment program, more emphasis in the recurrent budget on the operations and maintenance needs of the economy, improved foreign exchange budgeting, a re-examination of the roles (particularly purchasing mandates) of the State-owned crop authorities, the introduction of more payment-by- results schemes in industry and a review of subsidy and cost recovery arrangements in the public sector. The Government also agreed that an independent Advisory Group would be established to assist the Government in preparing a comprehensive program of economic rehabilitation and recovery. 14. There has been some progress under the Export Rehabilitation Program during the last several months. Cashewnut and coffee marketings are substantially up over 1979-80 levels and the improved foreign exchange allocation system appears to be working well. In its most recent agricul- tural price review (July 1981), the Government has further increased prices for some export crops and departed from the principle of uniform national pricing for some major food crops, as this had led to considerable ineffi- ciency at the marketing parastatals and improper signals to producers. The  - 6 - public investment program has also been reduced for the first time since Independence, and there is more emphasis on rehabilitating or improving the use of existing capital facilities than on initiating new projects. The Advisory Group has been established and has begun its work, which is expected to be completed in April 1982. However, there is still con- siderable progress to be made in further tailoring government plans to resources likely to be available during the next five years, in rationalizing the role of the public sector, in increasing incentives to production and in concentrating resources on improving traditional agricultures. 15. Discussions with the IMF, however, on a possible credit under the Extended Fund Facility have yet to bear fruit. Access to Fund facilities was interrupted in December 1980, when the Government was found to be in violation of important performance targets (on arrears, public spending and domestic credit expansion) established only three months before. Discus- sions of a possible EFF arrangement were started in March 1981 and were meant to be consummated in June 1981, with the completion of a joint IMF- Government study of the exchange rate problem. Instead, no agreement was reached on the need for a devaluation or for other measures such as reduced price controls and higher interest rates. Substantive discussions of these questions are not likely to be resumed until early 1982; however, without an early settlement with the IMF, it is difficult to envisage a viable plan for economic recovery. This is particularly the case because of the very scale of Tanzania's requirements for balance of payments support and a necessary overlap between the IMF's policy concerns (e.g. the exchange rate) and any effective measures for rehabilitating the productive sectors of the economy. 16. Even with a much improved export performance, Tanzania will continue to face a very difficult balance of payments situation, especially over the next two to three years. To sustain an increase in per capita GDP will require increasing amounts of aid in real terms and a careful review of import requirements, especially those for low-priority projects with long gestation periods and high foreign exchange costs. Otherwise the prospects would be for generally stagnant economic activity over the 1980s as a whole, with a substantial decline in per capita incomes. To avoid this, there will need to be continued emphasis on export performance and a concerted effort to improve the level of capacity utilization and effi- ciency in the economy. Furthermore, this must be done without jeopardizing vital food production. 17. Although it may be possible to finance a small portion of the current account gap th'rough commercial borrowings, the scope for this is clearly limited; in addition to the difficulties of raising commercial credit during a period of balance of payments problems, Tanzania simply cannot afford the heavy burden of debt service payments. Therefore, the bulk of the financing requirements will have to be met by additional foreign assistance. Possible sources for this include further drawings from the IM4F (which could add US$100 million per annum), deferred payment arrangements and other concessional financing from oil-supplying countries, additional new commitments from traditional bilateral and multilateral sources, and a continued movement towards non-project assistance.  -7- External Debt 18. Owing to the very concessional terms on which past aid has been given to Tanzania and the Government's previous reluctance to use higher cost commercial loans and suppliers' credits, the country's overall debt service ratio has historically been less than 10%. However, the debt service burden is expected to increase as past loans fall due for repayment and new borrowings, including some on commercial terms, are required to meet the widening balance of payments gap. Such borrowings, together with very poor export prospects, could raise the debt service ratio to 15%-20% during the 1980s. In 1980, it is estimated that the Bank held 14% of Tanzania's external debt outstanding and disbursed (for the Bank Group, it was 28%) and received 25% of Tanzania's debt service (27% for the Bank Group). This relatively high level of Bank exposure reflects in part the impact of recent debt write-offs, totalling US$277 million in 1978 and 1979. We are projecting the Bank Group's share in debt service to fall over the coming decade owing to the reduced IBRD component in the lending program and the continued need for Tanzania to borrow funds on less conces- sional terms from other sources. PART II - BANK GROUP OPERATIONS IN TANZANIA 19. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1963, 51 IDA credits and 19 Bank loans, two of these on Third Window terms, amounting to US$1008.3 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 10 loans totalling US$244.8 million which were extended for the development of the common services and development bank operated regionally by Tanzania, Kenya and Uganda through their association in the East African Community. IFC investments in Tanzania, totalling US$4.7 million, were made to the Kilombero Sugar Company in 1960 and 1964. This Company encountered financial difficulties and in 1969, IFC and other investors sold their interest in the Company to the Government. A new IFC investment ofUS$1.7 million in soap manufacturing in Mbeya was approved by the Executive Directors on June 8, 1978 and an investment of US$1.5 million in metal product manufacturing was approved in May, 1979. Annex II contains summary statements of Bank loans, IDA credits and IFC investments to Tanzania and the East African Community organizations and notes on the execution of ongoing projects. 20. Bank Group lending in Tanzania has been centered on: (i) agriculture; (ii) transport and communications; (iii) industry; and (iv) education and manpower development. As agriculture and related activities constitute the largest single sector in the economy, it has received 30% of the Bank Group's direct lending to Tanzania. The lending program in agriculture has featured three main types of projects: (a) regional rural development projects focusing on production and the development of regional infrastructure, (b) projects centered on specific crops (such as maize, tea, tobacco and pyrethrum) and (c) projects designed to improve general support services (e.g. rural credit, grain storage). However in view of past underfinancing of capital maintenance and replacement in the sector,  - 8 - new Bank Group lending will focus on rehabilitation and use of existing agricultural production and processing capacity, rather than on expansion of such capacity. 21. Alongside agriculture, there has been a major focus in Bank Group work on transport and communications. Transportation difficulties are critical constraints to development in Tanzania. Indeed, the Government's inability to ensure the timely availability of inputs or the regular collection of crops has been a major bottleneck to increased production in the agriculture sector. Furthermore, during the seventies, transport investments were primarily concentrated around the Tanzania-Zambia Corridor and since 1977, no systematic investment program has been prepared for the subsectors which were overseen by EAC Corporations. The major objectives of the proposed Bank Group activities are to develop a more balanced investment program in transport and communications and to strengthen the ministries and newly established national corporations responsible for railways, ports, and telecommunications. In industry, future lending is expected to provide modest support to well developed financial interme- diaries like the Tanzanian Investment Bank (TIB) which are intending to consolidate their portfolio and place stress on capacity utilization and export promotion. Shortages in skilled manpower are also a worsening bottleneck to development. Bank Group involvement in education is expected to continue support for specialized training and the development of the secondary education sector to assist the Government in meeting its manpower needs. 22. In addition to financing specific projects, the Bank Group has on several occasions provided non-project credits in support of the Govern- ment's efforts to deal with its balance of payments difficulties. The first such credit was made in 1974, the second in 1977, and the most recent, an Export Rehabilitation Program Credit (No. 1133-TA), in April 1981 (see paragraph 14 for progress under the latter). Further assistance of this kind would require agreement on an economic reform program as well as renewed access to IMF facilities (see also paragraph 15). 23. Although the comparatively high undisbursed proportion of loans and credits, detailed in Annex II, is to some extent the result of the recent approval of many of these projects, it also reflects problems in project implementation, particularly in agriculture and rural development. The causes of these difficulties are varied. To a large extent they arise from the scarcity of suitably trained and experienced manpower, which call for stepped-up efforts in higher education and specialized training, as well as for sustained high levels of technical assistance in future project design. Other implementation problems reflect the difficulty of identi- fying and disseminating agronomic input packages appropriate to the needs of smallholder farmers or result from administrative overextension in the undertaking of a far-reaching development program. These problems have been compounded by frequent and fundamental administrative changes, which --though potentially the source of long-term benefits--have disrupted orderly execution of some projects and made aspects of other project designs obsolete. The Uganda war had some early impact on project imple- mentation by diverting equipment and manpower away from development purposes; however, by contributing to the current economic crisis, the temporary logistical problems caused by the conflict have been superseded  by deeper and more lasting difficulties arising from a critical shortage of essential goods and services. Most industrial facilities are working at less than thirty percent of their installed capacity and the lack of maintenance and operations funds (particularly for replacement equipment, spare parts, and fuel) is compounding the already serious effects of deferred maintenance of capital stock, especially in the agriculture sector. Until the general economic situation improves, the outlook is for continued difficulties in project implementation and uneven disbursements. 24. Increased attention has been given to measures designed to improve specific aspects of project implementation. Courses on Bank Group procurement have been held in Dar es Salaam for relevant Government officials. A special project implementation unit has been set up in the Ministry of Agriculture and 11 Agricultural Development Services staff have been attached to Bank Group financed projects in agriculture and rural development. The Government has assigned responsibility for the monitoring of project performance to a specialized unit at the Ministry of Planning and Economic Affairs. Since February 1977 there has been a Government/Bank Group review of implementation problems on a project-by-project basis. In October 1980, a major Country Implementation Review was held in Arusha at which all Bank-financed agricultural projects were examined, with a view to discussing sectoral issues in addition to project-related matters. A similar high level meeting to address countrywide issues in other sectors as well, is now scheduled for later this year. Disbursements 25. Despite the difficulties summarized in paragraph 23 above, disbursements of loans and credits in Tanzania have remained relatively steady: disbursements grew from US$58 million in FY78 to US$78 million in FY80 and levelled off at US$81 million in FY81. Intensive supervision and, in the case of the Mufindi Pulp and Paper Project, timely assistance from co-financiers have reduced implementation problems. Even in the agricultural sector, important improvements have been noted recently in some projects such as Dairy Development and Tabora Rural Development. East African Community (EAC) 26. Major developments affecting the East African Community were out- lined in a report to the Executive Directors dated December 29, 1977 (R77-312) and more recent developments were reported in a statement to the Executive Directors during their meeting of May 6, 1980. The three former Partner States have employed Dr. Victor Umbricht as an independent mediator to recommend an appropriate disposition of the assets and liabilities of the Community corporations and the General Fund Services. Dr. Umbricht has visited East Africa on numerous occasions, has employed consultants to assist in the appraisal of Community assets and liabilities, and has in March 1980 made formal recommendations on the allocation of these assets and liabilities. Meetings at ministerial level to discuss the Mediator's proposals were held in Arusha in May 1980, and in Kampala in February 1981. A follow-up meeting was held in Nairobi on August 6 when it was decided to commence formal negotiations in December 1981 on the basis of the Mediator's proposals. Meanwhile, the Mediator's report and recommenda- tions on the future structure of the East African Development Bank (EADB)  - 10 - have been accepted by the Partner States and the revised EADB Charter, along with the Treaty to enact the new Charter, have been ratified by the three Governments. PART III - THE AGRICULTURAL SECTOR AND FORESTRY SUBSECTOR 27. Agriculture and related activities constitute the largest single sector in the Tanzanian economy (para. 10). Most agricultural production is from smallholdings using family labor. Large-scale agriculture is confined to a small number of private estates and state farms producing sisal, coffee, tea, sugar, rice and livestock. Estate production has diminished in importance since Independence in 1961 and the State farm program remains small. Seven agricultural commodities (coffee, cotton, cloves, sisal, cashews, tea and tobacco) account for more than two-thirds of total export earnings. Tanzania's livestock herd, which is the second largest in Africa, is grazed extensively over the 40% of the country which is free from tsetse fly infestation. It is largely managed along traditional lines. 28. The recent performance of the agricultural sector has been disappointing. During the seventies, subsistence production appears to have barely kept pace with population growth. Indeed, early in the decade, food production was very problematical and Tanzania became increasingly dependent on imports of maize, rice and wheat. A severe drought in 1973 and 1974 resulted in poor harvests and large imports of foodgrains. Following this, the Government introduced a number of policies to increase food crop production. Along with favorable weather conditions, these have had some effect in stimulating food production during the last half of the 1970s, but is still below the highest levels achieved earlier in the decade. Some of the reasons for this disappointing level of overall productivity in agriculture are inadequate producer price incentives, shortage of foreign exchange to meet basic import needs of the agricultural sector and of the supporting infrastructure in processing and transport, shortages of basic inputs and spares, and inadequate organization and mana- gement of agricultural extension and research services. 29. In view of these constraints, the issues in Tanzania's agricul- tural development are centered on formulating a program that would improve agricultural productivity at tbh farm level, reverse the decline in the production of both food and export crops, and improve the efficiency of agricultural parastatals and agro-processing industries. These issues are being partly addressed by the Export Rehabilitation Program (paragraphs 12-14) which was introduced in April 1981, and by the Government's Program for Economic Survival launched in July 1981. The Forestry Subsector 30. Within agriculture, the forestry sub-sector plays an important role in providing fuelwood, not only for domestic consumption but also for the processing of tobacco and tea. To the extent that these forestry resources are being rapidly depleted in tobacco and tea growing areas, their inadequate supply is acting as a constraint on the sustenance and expansion of existing levels of production of these crops.  - 1l - 31. About 45% of the total area of Tanzania is classified as forest land, nearly one third of which is protected forest reserves and the remaining two thirds consists of natural woodlands on public land. The latter are completely unprotected and are disappearing fast in areas where population has increased. Apart from about 900,000 ha of closed indigenous forests and 60,000 ha of softwood plantations, most of the forests are dominated by slow-growing and scattered trees which yield limited quanti- ties of commercial timber. Of the softwood plantations, 50% are in the Sao Hill area and the rest are scattered throughout the country. The indige- nous forests provide most of the fuelwood and timber for the population. These are obtained free of charge for domestic use from forests on public land or by license from forest reserves. To conserve and supplement indigenous forest resources, the Government has been implementing a long- term afforestation program which aims at significantly increasing softwood plantations to meet domestic needs for timber. 32. The Government's forestry policy aims at (i) acquiring enough land for afforestation to achieve an appropriate ecological balance and to meet future needs for forest products; (ii) introducing management of forestry resources on public lands and villages and intensifying management in gazetted forest reserves to remedy the decline of indigenous forests; and (iii) promoting a viable forestry sub-sector through appropriate research, extension and pricing of forest products. The proposed project fits well into this strategy. Although the contribution of the forestry sub-sector to Government revenue is small and exports of forestry products are negligible, forest resources play a valuable role in providing fuel- wood, building poles, timber and minor forest products for domestic purposes. Institutions 33. The Forest Division, Tanzania Wood Industries Corporation (TWICO), and the Southern Paper Mills Company are the three main institu- tions directly involved in forestry and forestry products. The Forest Division within the Ministry of Natural Resources and Tourism (MNRT) has overall responsibility for forest development, production and conser- vation. Implementation of all national forest projects, including the Sao Hill Forestry Project, is the responsibility of the Forest Division. This Division is headed by the Director of Forests and has four sections: Management and Development, Survey and Inventory, Manpower and Training, and Research. The Management and Development Section is responsible for the design and implementation of national forestry projects. The Survey and Inventory Section handles all survey, mapping and inventory work and the Manpower and Training Section deals with personnel administration, education and training. Forestry research is done by the Research Section. A Forestry Research Institute has recently been established to specialize in forest management, timber and forest engineering, low-land afforestation, and plantation silviculture. Tanzania Wood Industries Corporation (TWICO) is responsible for sawmilling and wood-based industries and owns the Tanzania Timber Marketing Company (Tantimber) which has a monopoly on the import and export of timber. TWICO also owns a number of sawmills and panel mills, each operated and managed as autonomous subsidia- ries. The Southern Paper Mills Company is a subsidiary of the National  - 12 - Development Corporation and was formed in 1978 to operate the Mufindi pulpmill. Construction of the pulpmill has started and production is scheduled to begin in 1984/85. The pulpmill will have an installed capacity of 60,000 tons of pulp per annum, and is being supported by the Bank and seven other financing agencies. Production and Marketing 34. Reliable data on the production and consumption of wood in Tanzania are difficult to obtain; however, the industrial share of the market accounts for an estimated 10% of total wood production. Ninety percent of national output is used for fuelwood and building poles, mainly for domestic purposes. Average log production in 1978-1980 was about 451,000 m3(r), compared with estimated average demand of 480,000 m3(r) for the same period. The industrial forestry sub-sector has a limited range of products such as sawn timber, plywood, fibreboard and particle board. Sawmilling is carried out by about 100 mills, most of which are privately- owned, small and operating with obsolete equipment. As a result, their efficiency and recovery rates are low. The two plywood mills, one fibrewood factory and one particle board mill in the country are also operating well below capacity as a result of outdated equipment, shortages of spare parts and ineffective management. These facilities are owned and operated by TWICO. 35. Tanzania has been a net importer of most wood panels and of sawn softwood, although it has occasionally exported sawn hardwoods. Log exports are banned. Wood and wood products from non-TWICO mills are sold directly to consumers and sawn timber from TWICO mills is marketed by Tantimber. Import duties range from 30% on sawnwood, plywood and particle- board to 40% on fibreboard. The shortage of sawn timber in recent years has resulted in average annual increases in real prices of 7% for high quality hardwoods and 4.5% for utility timber. Transport costs have had a major influence on the supply and consumption of manufactured wood products in various parts of the country, resulting in shortages of wood panels in remote regions. Demand for timber is expected to increase at an annual average rate of 4.7% between now and the year 2010, and the expected deficit (without further plantings at Sao Hill) would rise from 29,000 m3(r) to 964,000 m3(r) in the same period. Demand for paper and paperboard should rise from about 50,000 tons in 1980 to 130,000 tons in the year 2000. Current domestic production of such items is negligible. The exis- ting price structure for sawlogs and pulpwood for the Sao Hill plantations does not fully reflect the cost of production and results in substantial profit margins for the sawmills. Under the proposed project, national policy on stumpage rates would be re-examined and adjusted (paragraph 49). Previous Bank Group Experience in Forestry Sector 36. A Bank loan of US$7.0 million (Loan No. 1307-TA) was approved in July 1976 for the Sao Hill Forestry Project. This first phase project was completed in December 1981 and was intended to finance the planting and maintenance of about 16,000 ha of forests; the maintenance of about 11,000 ha of existing plantations; the construction and maintenance of forest roads and tracks; construction of staff houses and other buildings; and research, training and studies. Provision was also made for the employment  - 13 - of two internationally recruited specialists, and the employment of local technical, clerical and supporting staff. Implementation of the project's afforestation program has been so successful that targets for nursery production, land preparation, planting, replanting and pruning have been significantly exceeded. About 18,000 ha of plantations have been esta- blished. However, targets for weeding and the construction of firebreaks, roads and staff housing have not been fully met due to delays in procure- ment of machinery and equipment, lack of spares and cement and inadequate maintenance of vehicles and equipment. The post of mechanical engineer was not filled and the financial controller lacked the necessary experience; as a consequence, the project's support services (workshop and finances) suffered from lack of internal control and poor maintenance of project vehicles and equipment. The research trials were carried out satisfacto- rily and a fire protection system has been established. 37. As a result of the first phase, a good project implementation capacity has been established at Sao Hill and there is a need now to consolidate and fully utilize this capacity by: (i) strengthening and streamlining project organization for better implementation of targets; (ii) strengthening and improving project financial management, cost accounting and internal control procedures; (iii) improving silviculture practices; (iv) strengthening the operation of the mechanical workshop and its spares supply system; (v) continuing the long term research program undertaken in phase one as well as widening its scope to cover aspects of agro-forestry; and (vi) improving the existing fire protection system. The second phase project has been designed with these needs in mind. PART IV - THE PROJECT 38. The proposed project was prepared by the FAO/Bank Group Cooperative Program on behalf of the Government of Tanzania as a second phase to the Sao Hill Forestry Project (Loan 1307-TA) and was appraised in April/May 1981. A Staff Appraisal Report entitled "Sao Hill Forestry Project - Phase II" is being circulated to the Executive Directors separately. Negotiations were held in Washington from February 23 to February 26, 1982 and the Tanzanian Delegation was led by Mr. Julius Sepeku, Principal Secretary at the Ministry of Natural Resources and Tourism. A Credit and Project Summary is at the beginning of this report and a Supplementary Project Data Sheet is attached as Annex III. Objectives and Description of the Project 39. The project would provide for the further development of existing forest plantations, over a five-year period (1982/83 - 1986/87), and the establishment of new plantations. It would also support the development of infrastructure and forest services within the project area. Specifically, the project would consist of: (a) further development of about 18,000 ha of Phase I forest plantations;  - 14 - (b) establishment and development of about 10,000 ha of new forest plantations for production of sawlogs and pulpwood; (c) construction of about 160 km of forest secondary roads and 725 km of tracks; upgrading of some 120 km of secondary forest roads to primary standard; and the maintenance of such roads and tracks; (d) construction of 58 staff houses and other buildings and structures and maintenance of such houses and buildings; (e) strengthening of the mechanical engineering services, financial and management information systems of the Project Management and the provision of short study tours for selected project staff; and (f) twelve man months of short-term consultancies and studies to review the project's fire protection system; the die-back problem of pine trees in Sao Hill; stumpage rates and pricing of forestry products in the country; and existing and planned programs for national village afforestation. Detailed Features 40. Further Development of Existing Plantations. The project would provide for the further development of about 18,000 ha of Phase I forest plantations in Sao Hill, consisting of 16,000 ha of pine and about 2,000 ha of eucalyptus of different ages. In order to achieve full development of existing forest resources, project operations would include pruning, marking for thinning, measuring logs (scaling), replanting clearfelled areas and fire protection. To provide a better basis for charging stumpage rates, the volume of felled timber would be determined by timber scaling. The amount of wood to be felled each year would depend upon the require- ments of the Sao Hill sawmill and Mufindi pulpmill. To meet the wood requirements of these mills, about 150 ha/year of clearfelling would be required. Unless more land suitable for eucalyptus can be found in low elevation areas, the clearfelled pine areas would be replanted with eucalyptus, which could be in short supply in the late 1990s especially if the Mufindi mill needs fuelwood as well as pulpwood (which is a suggestion under study). For the most part, integrated harvesting of pine plantations would be practiced throughout the project area so as to ensure more efficient use of smallwood. The Government, in consultation with the Association, would take all measures necessary by June 30, 1983 to coordinate the actual harvesting and logging of forest resources in the plantations by the major users (Section 3.06 of the draft Development Credit Agreement). 41. Establishment and Development of New Plantations. Under the project, 10,000 ha of new plantations would also be developed. The project would support selective surveys of the new areas, establishment of nurse- ries, land preparation, planting, fertilization, weeding and research. To meet the seedling requirements of the project, small temporary nurseries near planting sites would be established to minimize transport require- ments. Seeds would either be locally procured or imported through the  - 15 - Forest Division's research section. The project's research and trial program would also be financed. 42. Because of the marked dry season and the concentration of inflam- mable species in the project area, the existing fire protection system would be improved under the proposed project. It would consist of mainte- nance of fire breaks, towers and control centers, as well as mobile investigation units, patrol and extension work. In addition, the project would provide for the purchase of three four-wheel drive vehicles, an increase in fire towers from 5 to 10, and the construction of additional firebreaks in new areas. Fire protection equipment, which will be proposed by a FA0/TCP-financed Fire Protection Specialist, would be procured. The preparation of detailed proposals satisfactory to the Government and Association would be a condition of disbursement for this equipment (Schedule 1, Paragraph 4 (b) of the draft Development Credit Agreement). 43. To facilitate implementation of the afforestation programs, funds would be provided for the purchase of vehicles and equipment for general plantation operations, workshop and fire protection activities. Vehicles would also be provided for staff transportation. To minimize the problem of shortages of spares for these vehicles and equipment, the project would provide for a reasonable supply of initial spares for new and replacement vehicles, machinery and equipment. 44. Road Construction and Maintenance. About 120 km of secondary roads would be upgraded to primary all-weather standard for all purposes including log transport. In addition, about 160 km of secondary roads (all-weather roads for personnel access) and 725 km of tracks would be constructed. These and existing forests roads and tracks would be maintained. To facilitate the implementation of the road construction and maintenance program, funds would be provided for a small amount of heavy equipment 45. Technical Assistance and Incremental Local Staff. To strengthen the mechanical engineering services, establish a financial management and planning system, and develop improved silvicultural practices and field operations, the proposed project would provide for the employment of a Workshop Manager, an Assistant Project Manager (Finance and Planning) and a Work Study Specialist, respectively. The Work Study Specialist would be employed no later than December 31, 1982 (Section 3.02 (a) of the draft Development Credit Agreement). Suitably qualified local counterpart staff for these three positions would be provided by the Government (Section 3.03 of the draft Development Credit Agreement). The project would also finance the following internationally-recruited consultants or specialists: a Forest Fire Protection Specialist to assist project management in drawing up an implementation plan based on the recommendations of the FAO/TCP- financed fire protection specialist (paragraph 42); a consultant to carry out a comprehensive study on appropriate stumpage rates and the pricing of forestry products; a Forest Physiologist to review the implementation and effectiveness of recommendations made by the FAO-TCP silviculturist/ physiologist team on the die-back problem in the existing Sao Hill planta- tion; and two Village Afforestation Specialists to assist in reviewing existing programs and studies and to formulate a National Village Affores- tation Program. The selection, qualifications, experience and terms and  - 16 - conditions of employment of specialists and consultants would need to be satisfactory to the Association (Section 3.02 (a) and (b) of the draft Development Credit Agreement). 46. Other Components. Because of a shortage of buildings and staff housing at Sao Hill, provision would be made for the construction and maintenance of about 58 houses for senior and junior staff and a divisional headquarters in the lower elevation area. The project would also provide for about US$800,000 in retroactive financing for the further development of existing plantations which would be carried out between the completion date of the first project and the signing date of the proposed second phase. Project Implementation 47. The Forest Division would have overall responsibility for project implementation. Project activities would be carried out by the Project Manager who would be directly responsible to the Director of Forests. The position of Project Manager would be filled at all times with a person whose qualifications and experience are satisfactory to the Association (Section 3.04 of the draft Development Credit Agreement). The Project Manager would be assisted by two Assistant Project Managers, one responsi- ble for plantation operations and the other for finance and planning. The Assistant Project Manager (Operations) (APMO) would be responsible for forest plantation management, survey and work plans, civil works, and research and trial activities. Three Divisional Plantation Officers would assist him in the implementation of the afforestation and fire protection program. In each Division, Forest Officers and Assistant Forest Officers would be in charge of fire protection and afforestation activities; they would be assisted by Forest Assistants (FA) who would supervise the physical implementation of agreed target activities. However, if the afforestation program under the project is to be effectively implemented, additional staff will be required. The Government would hence appoint and assign six FAs with appropriate experience to the project by December 31, 1982 (Section 3.05 of the draft Development Credit Agreement). The APMO would be assisted by a civil engineer in implementing the civil works program and by a Senior Forest Officer in implementing the research activities under the project. A Forest officer responsible to the APMO would be in charge of the Survey and Work Plan Section. This Section would use the recent forestry inventory data to prepare a five-year Working Plan with detailed recommendations for pruning, thinning, clearfelling, replanting and other operations. Such a Working Plan would be prepared by July 31, 1983. Project management would implement the Plan thereafter and subsequent plantation inventories would be undertaken every five years (Section 4.02 of the draft Development Credit Agreement). 48. The Assistant Project Manager (Finance and Planning) (APMFP) would assist the Project Manager in matters relating to finance, accounts, administration, work study and costing, and the workshop. Since it has been impossible to recruit such a person in Tanzania, the APMFP would be recruited internationally under terms and conditions satisfactory to the Association. His recruitment and employment would be a condition of effectiveness of the project (Section 5.01(a) of the draft Development Credit Agreement). To set up an effective costing system for the project,  - 17 - a Work Study and Costing Section would be established and headed by an internationally-recruited Work Study Officer. A Forest Officer, Assistant Forest Assistant and Cost Accountant would assist the Work Study Officer. An internationally-recruited Workshop Manager would assist the APMFP in setting up and supervising a mechanical workshop for servicing and repairing project vehicles, machinery and equipment. Recruitment and appointment of the Workshop Manager would be a condition of project effectiveness (Section 5.01(a) of the draft Development Credit Agreement). Timber Prices 49. Permits are required for wood cutting in forest reserves and on other public land for commercial purposes, and fees are charged. These stumpage fees vary with the species of timber; however, while average fees for softwood were recently raised from TSh 49/m3 to TSh 90/m3 (July 1981), they plainly do not cover the costs of production. Since costs in existing softwood plantations are not known, the Government is uncertain how much further stumpage fees should be raised. In view of the urgency of the matter, the Government would review production during the project as a basis for establishing appropriate stumpage rates. Wood would be valued at its replacement cost rather than at its historical cost of production. The proposed study would assess the impact of higher rates on the major users of softwood with a view to ensuring the financial viability of all levels of the industry. The Government would carry out and furnish this study to the Association for its review and comments not later than June 30, 1983, in accordance with agreed terms of reference, and take promptly thereafter all measures agreed upon with the Association in the light of the study (Section 3.07 of the draft Development Credit Agreement). In following years, the Government and the Association would consult annually on pricing policy in the forestry sub-sector, taking into account the effect of price increases on major users of industrial wood. Project Cost and Financing 50. Total project costs are estimated at TSh 123.6 million (US$15.0 million equivalent); the project would be exempted from identifiable taxes and duties. The foreign exchange component would amount to US$6.1 million or 41% of total cost. Details of the project cost are included in the Credit and Project Summary. Cost estimates are based on prices prevailing at the end of 1981 and include adequate physical and price contingencies. Full costs of technical assistance (including salary, subsistence and international travel) are estimated at about US$5000 per man-month; 132 man-months would be required. Full costs of short-term consultants (including salary, subsistence and international travel) are estimated at US$6,000 per man-month; 12 man-months would be required. The proposed IDA credit of US$12.0 million would finance about 80% of total project costs - 100% (US$6.2 million) of the foreign exchange costs and 66% (US$5.8 million) of local costs. The Government would provide the remaining US$3.0 million. Procurement and Disbursement 51. Orders for new vehicles, tractors, machinery and equipment and initial spare parts (US$1.7 million) would be bulked as far as practi-  - 18 - cable. Orders of US$100,000 and above would be procured through interna- tional competitive bidding (ICB) from suppliers who maintain or agree to introduce adequate after sales services and inventories of spare parts in Tanzania. Orders for vehicles, tractors, machinery and equipment estimated to cost less than US$100,000 equivalent would be procured (up to an aggre- gate of US$300,000) in accordance with the Government's local competitive bidding procedures which are acceptable to the Association. Civil works consisting of the construction and maintenance of roads, housing and build- ings (US$1.3 million) would be too small (less than US$100,000) and too dispersed to attract either international or local competitive bidding. As the project has the capacity to implement such a program with reasonable efficiency, these civil works would be constructed under force account by the project's Civil Works Section. Draft tender documents for all contracts expected to cost in excess of US$150,000 would be submitted to the Association for approval before bid invitations are issued. Bid evaluations and recommendations for award would be submitted to the Association for comments before contracts are awarded. In the evaluation of ICB bids for purchase of vehicles, tractors, machinery and equipment, domestic manufacturers would be allowed a preference of 15% or the existing rate of duty, whichever is lower. 52. Disbursements under the credit would be on the basis of (a) 100% of foreign and 75% of local costs of vehicles, equipment and spare parts; (b) 75% of total cost of civil works; (c) 100% of the cost of consultants' services and study tours; (d) 100% of foreign and 75% of local costs of afforestation; (e) 75% of incremental staff salaries and wages up to a total of US$0.4 million equivalent, 60% up to a total of US$0.6 million; and thereafter 40% up to a total of US$0.8 million; (f) 100% of foreign costs and 75% of local costs of administrative expenses and vehicle operating costs; and (g) an unallocated amount of US$0.5 million representing contingencies on items (a) to (d) and (f), and transferable to them as required. All disbursements would be fully documented except for local expenditures under (d), (e) and (f) which would be made against statements of expenditure signed by the Project Manager and the Ministry of Finance, with the supporting documentation retained by the project team for inspection by IDA supervision missions. Expenditures incurred after December 31, 1981 for the further development of existing plantations would be financed retroactively under the credit up to an amount of US$0.80 million equivalent (Schedule 1, Paragraph 4(a) of the draft Development Credit Agreement). Such expenditures are necessary to prevent an interruption of plantation activities between the first and second phases of the Sao Hill program. Accounts, Auditing and Reporting 53. The project would assist in strengthening financial management and planning, internal controls and cost accounting within the Forest Division. Separate accounts would be maintained on all project-related expenditures and would be audited by the Government's Auditor General. The audited accounts and the auditor's report would be submitted to the Association within six months of the end of each financial year (Section 4.01 (c) of the draft Development Credit Agreement). Detailed reports on physical implementation of the project and proposed expenditures for the following quarter would be prepared every three months and submitted to the Ministry of Natural Resources and Tourism and to the Association, together  - 19 - with annual reports summarizing project activities. The project management would also maintain appropriate records on total and unit costs of affores- tation activities, historical data on the operating costs of vehicles and equipment and unit costs of construction for staff houses and other struc- tures. Benefits and Risks 54. The principal benefit from the project would be the production of wood to meet the increasing domestic demand for sawn timber, panels, and paper and paper products. Considerable domestic supply deficits are projected in the near future and would worsen thereafter without the project. The project would provide permanent direct employment for over 200 skilled persons, and would also have an indirect but important impact on employment in related activities such as logging, transportation and wood processing. A total of about 450,000 man-days of unskilled labor would be required for the various operations and all of this would come from villages and townships near the project area. The project would not only serve to even out Government cash flows, but would also generate substantial cash surplus from net operating revenues of the Sao Hill plantations. Most of this cash would flow into the national Treasury. These benefits do not include the benefits of reducing depletion of indige- nous forests and other non-qualifiable environmental benefits which the project would have. The forest plantations would continue to provide protection of minor catchment areas and the maintenance of soil cover on vulnerable sites. By providing softwood to meet the national demand, the project would reduce pressure on the environmentally important indigenous forests. 55. The major project risk relates to the establishment of the pulpmill at Mufindi since it would be the major consumer of the project's output. Its failure to start operations on schedule or at full capacity would result in considerable waste of forestry resources from early thin- nings. However, while the economic rate of return of the project would be reduced from 30% to 25% without the fuel pulpmill demand, this would still be acceptable. In addition, the Government and the cofinanciers of the pulpmill have made a commitment to implement the project as far as possible on schedule. Another major risk is the scarcity of diesel fuel supplies. Further reduction of fuel stocks could hamper the project's afforestation and roads program. However, the project has been designed to minimize this risk by establishing nurseries near planting sites, limiting the requirement for new vehicles and equipment to replace existing stocks, and reducing vehicle use by almost 20% per annum. In addition, the project derives its diesel fuel supply directly from an oil company and has adequate storage capacity to cope with fluctuating supply of diesel fuel. PART V - LEGAL INSTRUMlENT AND AUTHORITY 56. The draft Development Credit Agreement between the United Republic of Tanzania and the Association and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of  - 20 - Agreement of the Association are being distributed to the Executive Directors separately. Special conditions of the credit are listed in Section III of Annex III. 57. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 58. I recommend that the Executive Directors approve the proposed credit. A.W. Clausen President Attachment M4arch 24, 1982 Washington D.C.  - 21 - ANNEX I TABLE 3A Page 1 of 6 TANZANIA - SOCIAL INDICATORS DATA SHEET TANZANIA REFERENCE GROUPS (WEIGHTED AV'RACES LAND MAA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE.