Tanzania - An agenda for industrial recovery (Vol. 3 of 3) : Annexes and statistical appendix

Report No. 6357-TA Tanzania: An Agenda for Industrial Recovery (In Two Volumes) Volume II: Annexes and Statistical Appendix June 30,1987 Africa Region Industrial Development and Finance Division FOR OFFICIAL USE ONLY Doeument of the Worid Blank Tihis report has a restricted distribution and may be used by recipients only iWrfhe perform-ance of their official duties. its contents may not otherwise be discdosed without World Bank authorization. _  FOR OFFCAL US ONLY PREFACE The subsectoral and firm-specific reviews presented in these annexes are the integrated result of: i) generally available information; ii) the mission members' own visits and analyses; and, in some cases, iii) the results of the DRC efficiency review perfonmed with the MIES data. These complementary efforts to the general overview provided in the Main Report (Volume I) should be seen as an important step in the analysis of the major problems affecting the various subsectors and many inditstrial firms. These annexes do not purport, however, to provide a definitive blueprint for the subsectoral and firm-specific measures required in industry. The information and DRC results contained here provide a preliminary indication of the main issues which ought to be addressed and reviewed in more depth at the subsectoral and firm level. Consequently, the next stage in the collaboration between the World Bank and the Government would envisage carrying odt action oriented studies for important industrial enterprises and subsectors. This document has a restricted distribution and may be used by recipients only in the performance of their off0cial duties Its contents may not otherwise be disclosed without World Bank authorization.  TAINA: M ARN FOR INDUSTRJAL RECOVERY ANNEXES AND STATISTICAL APPENDIX Table of Contents Page No. ANNEX 1: SUBSECTORAL REVIEWS ... .........................*...... 1 A. Textiles, Cement and Leather ......I.. ................... . 1 a. The Textile Industry ................................... 1 b. Cement Manufacture ...*........**........*.*.***. 7 C. Leather and Leather Products ........................... 11 B. Food, Beverage and Tobacco Subsector ........................ 14 C. The Metal Products and Engineering Sector ................... 17 D. The Chemical and Rubber Industries .......................... 28 ANNEX 2: PUBLIC ENTERPRISE MANAGEMENT - ISSUES AND NEED FOR REFORM ............................ 36 A. Evolution of Public Sector Enterprises (PSE) ............ 36 B. Organisational Structure and Control Mechanism .......... 42 C. Issues Related to PSE Performance ....................... 46 D. Evaluation of Institutional Framework ................... 54 ANNEX 3: THE MISSION'S INDUSTRIAL EFFICIENCY SURVEY (MIES): DATA AND METHODOLOGY .................................. 68 STATISTICAL APPENDIX ........*...* ............ ................ 83 Part I: Based on Official Statistics ...................... 87 Part Ils Based on Mission Industrial Efficiency Survey ..... 123  ANN E X 1 SUBSECTORAL REVIEWS A - TEXTILES, CEMENT AND LEATHER A. The Textile Industry B. Cement Manufacture C. Leather and Leather Products B - FOOD, BEVERAGE AND TOBACCO SUBSECTOR C - THE METAL PRODUCTDS AND ENGINEERING SECTOR D - CHEMICAL AND RUBBER INDUSTRIES ANNE X 2 PUBLIC ENTERPRISE MANAGEMENT A N N E X 3 THE MISSION'S INDUSTRIAL EFFICIENCY SURVEY: DATA AND METHODOLOGY  - 1 ANN= I A. TEXTILES. CM=T ADD LEATHER Introduction 1. This abbreviated section discusses the present status, constraints and potential for rehabilitation of the textile, leather and cement industries. Many of the difficulties being faced by these subsectors are common to all three of them and indeed to most of the country's industrial activities. In addition to the macroeconomic, exchange rate and trade policy factors discussed in the Main Report, the major constraints affecting these sub2ectors are the following: (a) Excessive and inadequately managed centralized planning, which has resulted in many oversized investments which have remained unproductive for long periods of time. Furthermore, cumbersome and slow bureaucratic procedures hamper the ability of industrial enterprises to react efficiently to changing market and production conditions. (b) Short:age of managerial and technical staff with a broad knowledge of project preparation, evaluation and implementation, and of the technical, organizational and financial aFpects of industrial management. While there is a small core of competent staff, there are no adequate professional cadres capable of providing an in- depth managerial structure in most of the public enterprises. (c) Inadequate intersectoral allocation of investment and recurrent resources have resulted in many projects and firms having difficulties operating due to inadequate provision of infrastructure and utilities. (d) The existing shortage of foreign exchange, largely the result of policies that have fostered economic inefficiency throughout the economy and have discouraged exports. a. THE TEXTILE INDUSTRY Structure 2. The textile subsector (including factory-made garments) is the largest in manufacturing in terms of total employment (24 percent of manufacturing) and the second largest by gross value of production and value added (21 percent and 19 percent, respectively), after the food, beverages and tobacco subsector.  -2- 3. There are 87 establishments engaged in the production of textiles (and 104 in making footwear and garments), but the number of important firms in spinning and weaving number only 16, of which 9 operate integrated mills, and 6 of the latter are in the public sector and they account for 71.9 percent of the spindles and 77.6 percent of the looms installed in Tanzania. Total productive capacity for woven fabrics is about 200 million square meters. Due to the numerous problems discussed below (para. 6), capacity utilization dropped from 61 percent in 1976 (and 47 percent in 1980) to only 32 percent in 1984. Most of the production is based on locally produced cotton lint. 4. Production of knitted goods is in the hands of the private sector: there are about 25 plants making knitted fabrics and hosiery but they are part of the garment-making industry. However, there are four garment plants in the public sector. There are also two public sector plants producing bags and sacks and one making blankets; and, in the private sector, one firm spins sisal twine, one makes blankets, four small plants make kenafe and jute bags, and there are small manufacturers of carpets, fishing nets, upholstery and special fabrics. One of the public-sector textile mills (the Morogoro Canvas mill) is included in the Tanzania Leather Associated Industries (TLAI); four others are part of Texco, a holding company formed in 1974, and one, the Kilimanjaro Textile Corp. (Kiltex) is 51 percent owned by Texco. Markets 5. The large majority of Tanzanian textiles are sold in the domestic market. Of the total value of sales of about T Sh 2.8 billion in 1984, exports accounted for only 7.1 percent, although these exports were second only to petroleum products among manufactured products exported in that year. In 1975, the Bank had projected 1982 production to be 122 m.m. and consumption 171 m.m. But actual production in 1982 was only 61 percent of the forecast and both production and consumption continued to drop in the following years. Total consumption of fabrics in 1984 is estimated at about 81 m.m, i.e., less than 4 meters per capita. Specific Problems 6. The most common specific problems found in the subsector arus (a) Frequent Power Interruptions and Lack of Power. Power interruptions is a recurrent problem in all the plants but it has been particularly acute in the Kiltex (Arusha) and Sunflag plants. Power generation problems are particularly acute in some regions and for some firms, and result in severe production losses, as in the case of the MwLaex and Mutex plants. Overall losses in production due to power cuts are estimated at 122 in spinning and 161 in weaving. (b) Inadequate Water SupPly. Mainly as a consequence of lack of power, water shortages have been serious problems in Mwanza and Mwatex but, in 1984, they also accounted for 25 percent of the downtime in the Friendship mill in DSM.  -3- (c) Shortages and Delays in Local Material Deliveries. Mainly because of transportation difficulties (lack of trucks and railway wagons, breakdown of equipment and lack of diesel oil and gasoline) but also due to poor logistics, shortages of locally produced materials have at one time or another caused problems in the normal operation of most factories, i.e.s cotton in Friendship and Kiltex (Arusha); cotton yarn in J.V. Industries and Calico: fuel oil in Kiltex, Mwatex, Mutex and Sunflag; and nitrogen (for spinning PES yarn) in Sunflag. (d) Shortages of Imported Materials. Lack of imported spares and dyes and chemicals is a constant problem for all plants, such as at Friendship (about 5 percent loss of production), Kiltex (both plants), Mwatex, Mutex, J.V. Industries, Cotex and Sunflag. Shortages of some accessories - particularly shuttles for looms and cones for yarn - have also been a serious handicap in the operation of Cotex and Kiltex (Arusha). Cotex (Zanzibar) has difficulties in obtaining PES yarn and as a result is operating at only 25 perceut capacity. Furthermore, the cardboard boxes locally made by KIBO for Cotex are t4low international standards and thus are generally unacceptable for exports. (e) Technology and Staff Capabilities. The technology used in Taizania is of the conventional type. The mills use ring spinning and shuttle power looms. There are no open-end spinning frames or shuttleless looms. Operating staff and labor, however, lack formal training and incentives for improving performance are generally absent. (f) Plant Location. Serious infrastructure-related difficulties have arisen from selection of some plants' sites on the basis of non- economic considerations. For instance, Cotex installed its spinning mill at Iringa, far from the cotton-growing area. Texco's Mutex plant was located in Musoma, in a region where cotton is grown, but where the provision of power is inadequate. (g) Financial Difficulties. The financial situation for many textile enterprises appear to be deteriorating rapidly, partly due to the inefficiencies and bottlenecks mentioned previously, and (as of late) partly due to declining levels of effective protection. (h) Labor and Incentives. Many textile firms, particularly in the public sector, are significantly overstaffed for the present levels of production. There is little difference between the remuneration of efficient and inefficient management and workers. The rigidities in hiring and firing procedures applica_ble to all enterprises and the unrealistic limitations on wages and salaries imposed on public sector enterprises by the Standing Committee on Parastatal Organizations (SCOPO) discourage improvements in labor productivity and managerial accomplishments.  -4- Proiects Under Imlementation and New Proiects 7. In addition to the Morogoro Canvas Mill which started operations in 1984, there are five public sector projects, of which, one (Polytex) has started commercial production at about 50? of capacity, two spinning mills (Ta.bora snd Ubungo) are approaching commissioning, one (Mbeya), although 80- 90 percent advanced, is still not operative and construction of two (sewing thread and terry towels) has been stopped. 8. Texco has other projects for which studies have been made but have not yet been started: a central plant to make ipares (costing about US$3.0 million), a project to manufacture shuttlet for looms and the Kibo Fabric Project. In addition, it is implementing or has proposed rehabilitation projects for a total cost of US$43.3 million. 9. Total proposed investments in the private sector amount to about US$10 million. The largest project ready for implementation is the J.V. Industries' 15,000 spind'i, 1,500 tuns-per-year (tpy) capacity spinning mill which would supply the company with yarn for its weaving operations and eliminate frequent shutdowns due to the irregular supplies from the Friendship mill. (The Friendship and Kiltex spinning mills in DSM are encountering great production diffici?lties and their output is not sufficient to meet their own demand for weaving). Five other proposed investments in the private sector. total US$7.7 million. Status of Existing Overations. Rehabilitation and Investments (a) Friendship. Texco estimated that US$7.0 million would be needed for rehabilitation but this would entail major investments whose justification at this stage is unclear. At a later stage, this rehabilitation would have to be reviewed in the context of a broader assessment of the needs and constraints of the textile subsector. Improvements in the finishing section and in the purchase of spares in good-sized orders may be justified. The investment required for this short-term rehabilitation program is estimated at USS2-3 million. (b) Kiltex. This company's rate of capacity utilization was only 26 percent in 1984. The DSM spinning plant is now inoperative but under present market conditions and the existing country-wide low capacity utilization, the proposal to install a new spinning mill (at an estimated cost of US$6.8 million) cannot be justified. The same applies to the proposed construction of a new weaving shed in Arusha, which was to be built with EEC financing at a cost of 6.5 million, but which is now--and should continue to be--in abeyance until market and production conditions prove it to be economically and financially viable. Consideration should be given to transferring the garment-making section of Kiltex to the private sector. Also, the benefits from rehabilitating existing facilities in Arusha at a cost of about US$2.7 million should be demonstrated before the company makes any additional expenditures. (c) Sunguratex. Capacity utilization was 43 percent in 1984 (and only 40 percent in 1983) due to problems in the carding section, power and water shortages and lack of spares. Rehabilitation has been estimated by Texco to cost about US$6 million with possible  -5- financing to be obtained from the East Africa Development Bank (the project is not included '.n the CG document or in the 1985186 budgetary allocation). The economic and financial viability of this relatively high-cost rehabilitation proposal is doubtful and the alternative possibility of merging some of its operations with those of Kiltex should be studied. Any decision shouald await a sound financial and economic appraisal. (d) Mwatex. The equipment in Mill No. 2 financed by the Bank Loan 1128-TA) is in good condition but Mill No. 1 needs extensive rehabilitation and there is the continuing problem of lack of power and difficulties in the supply of fuel oil and consequent scarcity of water and steam. The rehabilitation of Mill No. 1 is under way with financing from the Kuwait Arab Development Fund; contingency funds provided for in the Bank Loan were also used for improvements in Mill No. 1, but no serious plan has been followed in the distribution of the production load between the two mills and no thought has been given to improving capacity utilization by installing about 1,000 RVA in stand-by generating capacity. However, the serious infrastructural problems have also resulted in the qualified managerial and technical staff leaving Mwatex. Channeling additional resources may not be warranted at this stage, unless there are assurances that the infrastructural and the human capital problems will be resolved in the near future. (e) Mutex. This plant can produce yarn numbers 20 to 60 and wide (more than 1.40 m) fabrics acceptable in the EEC markets. Ezcept for urgently needed spares and the acquisition of stand-by Diesel generators (1,000 RVA--costing about US$0.9 million), major rehabilitation work should, however, be postponed since present financial and infrastructural shortages will not, in all likelihood, be fundamentally corrected until nearly 1990. (f) Mbeva Textile Mill. This plant is not needed under present demand levels and thus consideration may be given to mothballing its equipment in order to avoid incurring additional losses. At a later date, when the market justifies it, the plant could be reopened. (g) Ubungo Garments Limited. This parastatal firm has been operating very poorly. Because of the need to react rapidly to market conditions, garment-making could be best left to private entrepre- neurs. At this stage, it is unadvisable to incur new expenses in a plant manned by staff inexperienced in the design and marketing of clothing. (h) Tabora and Ubunxo Spinning Mills. Since country-wide yarn demand may remain below the existing supply for some time to come, it might be advisable to consider minimizing additional expenditures in at least one of these spinning mills. Since the potential productivity of Ubungo appears to be higher, the feesibility of transferring part of the equipment installed at Tabora to Friendship should be weighed against operating it to supply the latter's weaving requirement.  6 (i) Tanzanian Bag Corp. Ltd. (TBCL). The company has two mills located at Moshi. Although installed capacity envisaged production of 10 million bags annually, attainable caracity is currently estimated at 6.5 million. Budgeted rehabilitation cost for 1984/85 and 1985/86 was T Sh 24.9 million but virtually no expenditures were actually incurred in this project. The viability of any expenditures should be carefully appraised since this project may be uneconomic for the country. (j) Polysacks. This plant makes woven polypropylene bags mainly for the Tanzanian Fertilizer Corp., National Hilling Co., SUDECO and the Urinza Salt Co. Its production and past investments have been very unproductive. The film tape extruder is in poor condition because of voltage fluctuations and lack of technical know-how. Several weaving machines are also inoperative due to the lack of spare parts. Rehabilitation is estimated to cost about US$0.4 million, yet its economic benefits for the country appear dubious, warranting postponement until an assessment can be made. (k) Other Texco Projects. Othe-; Texco projects - the Klbo Fabrics, Sewing Thread, Terry Towels, Shuttle Manufacturing and Blanket Manufacturing Rehabilitation - should be shelved for the time being. When marketing, financial and economic studies prove their viability, serious consideration could be given to joint financing arrangements which would permit larger participation from the private sector. Issues and Potential for Rehabilitation 10. The per capita consumption of textiles in Tanzania (less than 4 m/yr) is low even for the country's per capita income of US$240. Consumption of textiles are unlikely, however, to catch up with existing capacity for many years and, therefore, investment proposals for capacity expansion should be strongly discouraged. The focus of expenditures will have to be concentrated on selected rehabilitation needs and on the provi- sion of spare parts and raw materials for productive firms. The first task of a rehabilitation program will be to improve capacity utilization through small investments (totalling about US$10-15 million) for the replacement of some equipment, the balancing of different mill sections and improved maintenance in potentially viable enterprises in the subsector. Such a program will be fully beneficial only if it is selective and it is accompanied by policy changes and organizational and staffing modifications which fully recognize the importance of the financial and marketing functions of each viable firm. 11. In view of the problems being faced by the Tanzanian economy, in general, and by the textile industry, in particular, the program to improve the operations of the subsector could comprise the following elementst (a) establishment of the macroeconomic and sectoral policy (such as improved cotton pricing and marketing; reformed wage structure and incentives, etc.) conditions necessary to avoid the distortion of cost and prices which creates wrong decision-making signals, causes scarcity of needed inputs and spares, and induces malaise among staff in the industries;  - 7 - (b) preparation of a restructuring/rehabilitation program aimed at improving the operation of the viable facilities after their economic and financial analysis are critically examined; (c) in the context of this program, review whether a phase-out of the Kiltex DSM plant may be warranted, and study the possible mothballing of the Mbeya plant and one of the Tabora/Ubunpo spinning mills, or the transfer of equipment from Tabora to Friendship. Furthermore, divestiture of Texco's garment-making facilities should be explored; and (d) avoidance oZ piecemeal work that does not take into account the needs of the subsector as a whole, and relatedly, the postponement or cancellation of investments which do not respond to high priority rehabilitation needs and are economically justified. 12. The scope of the Rehabilitation Program for the textile subse.2tor could be defined by independent consultants in close coordination wit} Government officials and industry representatives, and its implementation monitored by a task group formed by Government officials and executives of Texco and private firms. Successful implementation of such a program requires the commitment of highly qualified staff with experience in project executior. and a broad understanding of the technical, financial and marketing problems of the subsector. 13. The textile firms' performance can be improved by the use of expatriate staff but this participation must be carefully planned end closely monitored. Many of the firms now facing operational difficulties have been managed or assisted by foreign companio's or experts. This is largely due to the limitation to management possibilities imposed by macro- economic conditions and government policies as well as to the limited preparation and experience of the counterpart staff assigned to work alongside expatriates. Since foreign expertise is expensive, careful preparation of local staff to take over their functions is indispensable. b. CEMENT MANUFACTURE Structure 14. The non-metal mineral industry subsector comprises mainly the manufacture of cement and cement products, glass and glass products, pottery, and bricks and other construction materials. The cement industry is in the public sector. The Tanzania Saruji Corp. was established in 1976 as a holding company and it owns and operates three cement plants, one ceramics plant, a gypsum mining company, a trucking company and a training institute. Two new plants are being commissioned (the Mbagala Sheet Glass and the Morogoro Ceramic Wares project), two glass container projects and the Arusha Brick and Tile project are under construction and a plant to make concrete railroad ties (PCM) is scheduled for recommissioning. Five other brick plants and a cement project in the Lake zone are being studied. There are also small private firms manufacturing glass bottles and ceramic products.  - 8 - 15. The installed cement production capacity in 1976 was 268,000 tpy, at which time the two kilns then operating at Wazo Hill, near Dar-es-Salaam, were unable to meet demand and part of the supply/demand deficit had to be covered bv imports. In 1979, a third kiln was installed at Wazo Hill, bringing total capacity to 520,000 tpy. Two new cement plants were physically completed by 1980: one at Tanga, 300 km north of DSM (450,000 tpy capacity) and another at Mbeya (250,000 tpy), bringing total capacity to 1.22 miJllion tpy. Production has not, however, followed the growing trend of capacity, and utilization, which was almost 100 percent in 1975, dropped to about 27 percent in the last three years. Markets 16. The drop in production of cement in latter years is primarily due to problems in the operation of the plants and secondarily to a drop in demand which is related to the general slump in the country's economic situation. There are also regional imbalances: the Dar-es-Salaam plant is often besieged by eager buyers, who have to wait to have their orders filled. At the same time the Tanga mill's output cannot be shipped mainly due to transportation difficulties. Saruji executives and Ministry officials express great optimism about the potential for exports to neighboring countries. The fact is, however, that there is cement plant overcapacity in the region. Relatively small volumes of cement can be sold in Burundi and Rwanda, and these countries have plans to build their own plants. Resources and Advantages. Constraints and Problems 17. Tanzania has limestone deposits but those most suitable for cement production are not located near important consumption center.s. The Wazo Hill plant, located 26 kms from Dar-es-Salaam, mines a quarry of limestone mixed with clay topsoil; this is in part an advantage because it is possible to obtain the required mixture of calcium, alumina and silica from one single deposit. However, the material is very heterogenous and, to obtain a uniform feed, the deposits must be mined from several fronts and their material has to be continuously analyzed in order to adjust the proportions received from each face. 18. The main constraints faced by this industry are similar to those already mentioned for the textile subsector in paras. 6 and 7. Because of the low value of cement per unit of weight or volume, transportation cost must be minimized for its country-wide distribution. Unfortunately, the lack of appropriate port facilities outside Dar-es-Salaam, different gauges used by the railway systems and poor condition of the roads make transportation of this product excessively costly. Even the Wazo Hill plant, in spite of being so near Dar-es-Salaam, faces serious transportation difficulties. The Tanga company has serious problems lack of railway wagons even when it operates at 30 percent or less of capacity. The Mbeya plant is located near the Tazara Railway, but also due to the great scarcity of railway wagons, it could not transport more than a small fraction of its potential output. 19. Fuel oil supplies are also affected by deficient transportation facilities. Power supply deficiencies are another serious constraint in  - 9 - cement production. The Mbeya mill could not be commissioned for three years after being physically completed because of lack of power and there are frequent interruptions of service in the other plants. Power failures not only lower output but also can cause serious damage to the kilns. Lack of efficient communication systems also constitute a serious problem. For instance, if it Is known in DSM that power is going to be cut or if minor spares have to be bought, The DSM office and the Wazo Hill mill office can communicate only by sending a messenger by car (and this is a two-hour operation) from one place to the other. 20. Other problems faced by the cement companies, in common with other subsectors, are the lack of foraign exchange for spares, the need for better operators' training (a centralized training institution has been established near the Wazo Hill plant), and the overall lack of adequate incentives for the companies' staff and labor. Projects Under Way and New Projects 21. As mentioned above, there are five projects under way: (a) The Moroaoro Ceramic Wares company (with an investment of about T Sh 60 million, financed 66.4 percent by Saruji) is virtually ready for operations, and may prove to be economically viable. (b) Most of the Mbagala Sheet Glass Co.'s equipment has been tested without load following an estimated investment of T Sh 180 million. This project appears to have been implemented on the basis of over optimistic assumptions regarding demand prospects. Furthermore, high transport costs are foreseen. In light of possible market constraints and high costs, a positive cash flow should--at a minimum--be ascertained before start-up. (c) Almost all the equipment for the Mwanza Container Glass project (costing T Sh 463 million according to the CG Document) has been delivered since 1982 by Technip (of France) but some may be damaged by now because of the long storage time. More importantly, the market does not seem to justify the start-up of this plantt a brewery was to be built in the area but the project fell through. Additional expenditures in this venture should be avoided at all costs. (d) The Arusha Bricks and Tiles project was begun in 1978 with equipment supplied and financed by the D.R. of Korea; civil works have been practically completed and most needed equipment to manufac:ure bricks has been installed but there are some items not manufactured in Korea which are still lacking; and it is planned to add tile-making equipment supplied by Bulgaria. According to the CG Document, the proposed investment is T Sh 181 million, of which T Sh 104 million would be spent in 1985-86. Preliminary indications suggest that this project may not be economically viable, and that additional expenditures should not be incurred. (e) The HanAula PCM project for railroad tiles would consist of ta.a rehabilitation of a plant used by the Chinese during the  -10 - construction of the Tazara Railway. The cost is small and the venture appears reasonable. However, the plant should be transferred back to Tazara railways. (f) Coal Conversion. A long-term project for the conversion of Saruji's kilns from oil to coal is being prepared. In light of the current prospects for relatively low oil prices, consideration should be given to shelve this project. 22. Saruji has a number of proposals to improve the operation of the existing cement plants. The main ones are the following: (a) Tanzania Portland Cement Co. (TPC). The management of this mill, located in Wazo Hill, about 30 km from DSH, has been taken over by Cementa International (of Sweden), financed by SIDA, which has also approved a program of SK 3.5 million for equipment and SR 15 million annually during five years for spares. The funds assigned to purchase equipment are obviously insufficient for major rehabilitation work. The newest mill was seriously damaged in 1984 when the kiln's wall broke near one end of the revolving drum due to lack of refractory bricks to replace worn bricks; a new section of the kiln drum had to be imported and is being installed. Additional investments needed for normal operation of two of the three Wazo Sill kilns are estimated at T Sh 300 million. (b) Tanpa Cement Co. Ltd. This plant has a 1,600-tpd kiln (the largest in Tanzania) and a 100-tph cement mill, but it lacks sufficient quarrying equipment. Management of this company has been taken over by DANIDA. A realistic rehabilitation estimate for spares, refractories and laboratory supplies would be likely to exceed TSh 50 million (US$3 million). Any sustained program for exports to Burundi would necessitate an improvement of port facilities at Kigoma, while shipments to Zanzibar, Mtwara and Lindi would require improvements in the Tanga port. But these investments could be justified only after a detailed market survey. Trade and investment agreements with neighboring countries (and the local government of Zanzibar) would first be required in any case. (c) Mbeva Cement Co. Ltd. This plant has the only kiln in Tanzania that can be fired by heavy fuel oil, coal or a mixture of both, and the existence of limestone deposits nearby is also an advantage in the long term. However, the plant is located far from demand centers. Market prospects do not seem to warrant implementing additional investments in this plant, particularly if transportation costs from large demand centers continue to be high, and the country-wide demand for cement is likely to fall below existing capacity for some time to come (see below). Issues and Potential for Rehabilitation 23. The main issue for the cement subsector--other than the overall policy changes discussed in the Main Report--is the recognition that there is excess capacity at present abd therefore that no new plant capacity  - 11 - should be considered for a long period of time. Furthermore, given the present level of cement consumption in Tanzania, operation of the Mbeya plant would only result in making all three plants operate at a very low level of capacity utilization. Assuming a 7 percent annual increase in cement consumption in the next decade, total consumption by 1995 would be about 650,000 tons. Even if the Mbeya plant is mothballed, the Wazo Hill and Tanga mills, operating at 75 percent capacity, would exceed such local demand forecast by 100 percent. 24. In principle, production of only one of the plants would suffice to meet current and prospective demand for cement during the next few years. In practice, however, the significant transportation difficulties faced by Tanzania, which are unlikely to be alleviated in the short term, indicate that keeping both the Wazo Hill and Tanga plants open may be justified. If further study of the situation confirms the viability of keeping both plants running, it will then be necessary to coordinate carefully the production programs of the two mills, since their combined capacity will exceed demand in the future. 25. Any new investments in the subsector should be minimal in the short run and critically evaluated in all cases. In particular, the installation of the tile-making section of the Arusha Bricks and Tiles project should not be undertaken unless it is fully justifipd; expenditures in the Mwanza Container Glass plant should be stopped unless a market develops in the surrounding area and the economics of operating the Mbagala Sheet Glass Co. must be demonstrated, at least on a sunk cost basis. c. LEATHER AND LEATHER PRODUCTS Structure 26. Except for very small or artisanal skin tanning operations, all leather production is carried out by public sector enterprises under the Tanzania Leather Associated Tndustries (TLAI) which also owns a canvas mill, two shoe factories, one leatherboard plant, one unit to make leather goods and the Tanzania Institute for Leather Technology. The private sector operates 11 small shoe and 2 leather goods factories in addition to many cottage enterprises. 27. The Tanzania Tanneries Ltd. plant at Moshi started operations in 1969 and the two other tanneries, located in Mwanza and Morogoro, in 1977 and 1978, respectively. Total attainable capacity is estimated at 2.47 m.m2 of finished and semi-processed (wet-blue and crust) leather and 340 tons of vegetable tanned sole leather. Actual capacity utilizatior has been low: 48 percent in the 1979-82 period and 37 percent in the last two years. 28. Total installed capacity of the footwear industry is estimated at about 8.6 million pairs annually. The two largest enterprises, the Tanzania Shoe Co. Ltd. (Bora) and the Morogoro Shoe Co. (MSC), are owned by TLAI and have a capacity of 7.3 million pairs annually. Capacity utilization of the MSC plant has been negligible (2 to 4 percent), while the Bora plant has operated at about 50 percent capacity.  - 12 - 29. Leather goods have been traditionally produced in small shops. The Morogoro Leather Goods Co. Ltd. was incorporated as a saparate company owned by TLAI in June 1982 as a part of the Morogoro Industrial Complex financed by the Bank and TLAI has also established a leather goods producing unit in the Moshi Tarnery. There are also several small plants in the private sector. Markets 30. In 1S.82, Tanzania exported 1.28 m.m2 of leather for US$3.2 million and although the volume exported dropped in 1983 it has begun to pick up again due to a financial and marketing contract under the Swedish-sponsored Seed Capital Program. The domestic market is well covered by the extensive network of Bora outlets. Bora is the trademark that was inherited by the Tanzania Shoe Co. when it was formed after nationalization of the Bata company which had a long experience in local marketing. Resources and Advantages. Constraints and Problems 31. Tanzania has the second largest livestock population in East Africa and this resource constitutes a suitable base for significant development of the leather and leather products industry in that country. However, there are significant constraints and problems for the efficient utilization of this resourcet (i) the Tanzanian off-take rate or ratio of cattle slaughtered to cattle population (10.6 percent) is below the African rate and about half of the worldwide rate; this is partly due to the social status value attached to cattle herds; (ii) the quality of the hides is low due to insect bites, to the large proportion of cattle not killed in slaughterhouses and the resulting inappropriate skinning, flaying and conservation of the hides, and to the high humidity and temperature that make conservation, even in the slaughterhouses, difficult; (iii) inadequate pricing policies that do not allow for an attractive mark-up for higher quality hides and encourage smuggling to neighboring countries; and (iv) poorly organized collection and distribution cf hides and skins due to inefficiencies in the parastatal company (Tanzania Hides and Skins, THS). 32. In addition to the hide and skin quality and distribution problems and to the macroeconomic conditions, the leather and leather product industries are facing the following problems: (i) an acute shortage of hides and skins. Even assuming that all other constraints were removed, lack of hides and skins would limit production of the Horogoro Tannery to 40 percent of capacity. In the case of the Moshi Tannery, it resulted in the loss of 117,400 man-hours in 1983; (ii) high absenteeism because of illness and obligatory people's militia drillings; (iii) water shortages, particularly in Moshi; (iv) power shortagess at the Mwanza Tannery electricity is available only between 10 pm and 2 am and limited to 50 percent of the design load; and (v) most enterprises are overstaff, as is the case with most industries in Tanzania. 33. The Morogoro Shoe Co. is a particularly distressful case. This World Bank sponsored project was badly designed for the country conditions: it is a large plant which was based on an unduly optimistic assessment of the export possibilities (80 percent of its output was assumed to be exported). The company has not had competent management and did not secure  - 13- either a suitable engineering firm during implementation or an adequate marketing partner for its operations. Pronosed Investments 34. At the request of the Government and financed by the Bank, UNIDO carried out a study on the Rehabilitation of the Leather, Footwear and Leather Products Industry. The resulting report, submitted in October 1984, contains a number of policy proposals and a rehabilitation program estimated to cost approximately US$15.0 million. These projects are not included in the CO Document, which has no investments listed for TLAI enterprises. However, budgetary allocations totalling T Sh 97.7 million have been made for the Morogoro Effluent Treatment Plant (part of the Bank financed Morogoro Industrial Complex project), for the Morogoro Leather Board Plant (which is not completed), and for the Tanzanian Industrial Boots Co. Both of the latter should be postponed at least until an action plan is implemented for the Morc-oro Tannery and shoe factories. In addition, a small allocation (T Sh 18 million) for working capital for the efficiently run Horogoro Canvas Mill and T Sh 9 million for other minor capital expenditures have been made. lesues and Potential for Rehabilitation 35. Host of the issues discussed in the textile and cement subsectors are also applicable to this subsector. The options of closing down the Morogoro Shoe plant or of selling or assigning part of its equipment to other manufacturers should be seriously considered in the context of a restructuring of the subsector, which ought to concentrate on rehabilitation of the viable activities. 36. The rehabilitation of the tanneries can be justified independently from the decisions to be made for the footwear plants. The volume of processed hides and skins should be increased and the quality improved. The UNIDO Report makes a strong case for the rehabilitation of the Tanzania Tannerias Ltd. at Moshi and the Morogoro Tanneries. The Moshi tannery has already been able to secure a barter arrangement that has allowed it to purchase some of the most urgently needed chemicals and spares. However, the rehabilitation of the Mwanza tannery should be postponed in view of the serious shortages of power in the area and the difficulties in securing sufficient hides and skins of adequate quality. World Bank LendinA 37.In retrospect, it is apparent that Bank Group lending to industry in Tanzania has been flawed by some serious shortcomings. For instance; (a) The Horogoro Industrial Complex's main component, the Morogoro Shoe Co., as discussed, is an extremely unproductive venture. The project was poorly conceived, designed and implemented, and the Bank did not adequately assess the difficulties associated with large-scale manufacturing of shoes in a developing country, and accepted extremely optimistic export projections put forward by the project's consultants.  - 14 - (b) The Hwanza textile mill was well built technically speaking. However, the Bank did not resist the tendency in Tanzania of building new textile mills. In addition, the Bank did not adequately monitor the installation of power to the mill. (c) The Mufindi Pulp project is facing serious infrastructural, marketing and institutional problems and is unlikely to reach even modest financial and economic rates of return. The risks involved in the huge investment required, the complex financing plan and the lack of infrastructure should have been reflected more fully in the project appraisal and design. Accounting for these difficulties at the design stage may have made it advisable not to undertake this project. (d) Bank-financed indirect lending through DFCs has not been based on subsectoral strategies or even coordinated with other lending operations. For example, the Bank has financed additional spinning equipment in spite of the existing overcapacity shoe- making equipment of a similar type to those lying idle in Morogoro. Relatedly, the economic assessment of Bank-financed subproject has been inadequate at best, and often lacking altogether. GENERAL CONCLUSIONS AND RECOMMENDATIONS: TEXTILES, CEMENT AND LEATHER 38. The largely unproductive investments made by the Government in the industrial sector and the low efficiency of industrial operations in general, require that the viability of each individual enterprise and project be reappraised and, in light of this assessment, a restructuring and rehabilitation program be prepared. The restructuring program for each sector will have to take a subsector-wide approach as well as designing an in-depth action plan for particular enterprises. The success of such a program is contingent on policy changes that will minimize price distortions and protective measures in order to increase the efficiency in operations and in investment decision-making. At the same time, planning by public and private sector officials and executives should be anchored in a more realistic appraisal of the market and production conditions and in a thorough assessment of the existing and potential bottlenecks affecting the relevant activities. Economic considerations ought to play a more prominent role in production and investment decision-making. Specialized consultants would be needed for the preparation of the rehabilitation program for the textile, cement and leather industries. B. FOOD, BEVERAGE AND TOBACCO SUBSECTOR Structure 39. The food, beverage and tobacco (FBT), which constitutes 23 percent of all manufacturing firms (and 30 percent of value added) is the largest in the manufacturing sector. FBT firms, in the aggregate, were more labor intensive than the other subsectors. The subsector is dominated by large  - 15 - publicly owned enterprises. Of the 161 firms in this subsector (69 are publicly owned, and 13 employed over 500 workers. The large scale public enterprises contributed 54 percent to its value added and 61 percent to its employment, while public enterprises as a whole contributed 81 percent to value added and 85 percent to employment. In spite of being more capital intensive, large and publicly owned enterprises had a lower value added per employee than other firms in the subsector, indicating lower levels of efficiency in their use of capital and labor. 40. Food industries are the largest of the three in the FBT subsector. These industries process meat, fish, fruits and vegetables and dairy products, produce oils and fats and animal feed stuff, mill grains and refined sugar. The major activities are sugar refining and production of animal feeds; these also constitute the main food exports, together with canned beef and fish. There are 145 firms in food industries which constitute 90 percent of the subsector's establishments. The beverage industry is the next largest in the FBT subsector. These industries produce distilled alcoholic drinks, beer, juices and carbonated soft drinks. The major activity is production of beer. The tobacco industry is the smallest in the FBT subsector. There are three large public enterprises that cure tobacco and produce cigarettes, some of it for export to neighboring countries--Rwanda, Burundi and Uganda. PERFORMANCE 41. The FBT subsector's performance between 1977 and 1983 was about the same as that of the manufacturing sector. Value added, in real terms, declined by 45 percent and employment also increased significantly in both. Value added per employee has declined by over 40 percent in the FBT subsector and exports have declined from US$40 million to US$ 20 million, between 1981 and 1984. The average subsectoral performance masks variations in the performance of food, beverage and tobacco industries since beverages registered an increase in value added of 65 percent between 1977 and 1983 while food and tobacco value added decreased by about 60 percent. 42. The performance problems of the food processing industry are mostly caused by supply problems because food products are relatively price and income inelastic. There have been shortages of domestic raw materials, the main inputs for these industries, and in some cases imported inputs, for instance tallow, caustic soda and chemicals for oil production, have not been available due to a lack of foreign exchange. Domestic Resource Cost (DRC) ratios for three companies in the food industry suggest that on the average the food subsector is relatively efficient (low DRCs) and that the (potential) efficiency at higher capacity utilization would be even higher. However, there is some variation in the economic efficiency of different products. Simple items like bread have very low DRC ratios of about .15 whereas more complicated and more import dependent items like cooking oil, are being produced at negative value added. 43. The beverage industry has fared well between 1977 and 1983 in spite of the general decline of the economy and the manufacturing sector. Output increased by 29 percent, value added by 65 percent and employment by  - 16 - 46 percent resulting in a 12 percent increase in value added per employee. Production of beer, the main industry, was maintained, although capacity utilization of the breweries declined from 85 percent to 50 percent following a 70 percent expansion in installed capacity. Beer is an extremely important source of revenue for Government, so imports of malts, chemicals and corks are permitted to ensure production of about 5 million cases per annum. Tanzania Breweries Ltd. is an old company, incorporated in 1960, taken over by the Tanzanian Government after independence. The plant is efficiently run by well-trained and experienced technicians and managers who have long years of service with the company. The economic efficiency of the plant is satisfactory. 44. The good performance of the beverage industry in general is the result of (i) good management; (ii) natural advantages in domestic production; and (iii) adequate provision of foreign exchange for import of concentrates and chemicals. However, some companies, have fared poorly. Tangold Ltd., a parastatal which is the largest producer of fruit juices, is working at 20 percent capacity and seems to be poorly managed. Tropical Fruits, a private company which is also working at low levels of capacity utilization, appears to be better managed and relatively efficient in producing fruit juices. 45. The tobacco industry experienced a 64 percent decline in value added during the 1977-83 period. Cigarette production, the major item, was, however, maintained but capacity utilization declined from 77 percent to 61 percent following a 23 percent increase in capacity. Cigarettes, like beer, contribute significantly to Government revenues and so were allowed to import their packing material needs. Tanzania Cigarette Company is an old company bought by the Tanzania Government from British American Tobacco after independence. It has experienced technicians and management who have longevity with the company. The Dar-es-Salaam plant is efficiently run and has very low DRC ratios (of less than 0.5). This is the only industry in the manufacturing sector that experienced a significant decline in employ- ment during this period suggesting that an effort was made to adjust to the decline in production. PROSPECTS 46. Prospects for the FBT subsector in Tanzania are intrinsically good. The demand for FBT products is income inelastic, the technology is labor intensive, domestic resources are the main inputs, and many products enjoy natural protection. The DRC analysis corroborates this view in showing that many PBT activities are economically efficient. These include very important items like beer and cigarettes which are a significant source of revenue for Government. Other items in the food industry are also likely to have DRC ratios less than one because they are based on domestic resources and labor intensive. However, there are some economically inefficient items in the PBT subsector that are import intensive like cooking oil. 47. The present incentive structure of protection through quota restrictions and foreign exchange allocation favors capital and import  - 17 - intensive industries and is biased against the FBT subsector. Any policy change in incentives towards market forces will therefore ameliorate the anti-FBT bias and elicit a production response. This may only be possible if several factories are rehabilitated. The brewery, cigarette factory and several carbonated drink bottling companies are in need of rehabilitation, rvinly replacement of worn out and obsolete machinery. Tanzania Breweries, i,cd. and Tanzania Cigarette Company have received allocations for rehabili- tation in 1985-86 budget and appear in the Consultative Group document. Since these companies are well managed, economically efficient and major revenue earners for Government, the appropriations are reasonable. However, allocations for expansion of the brewery are premature in view of the present low capacity utilization and stagnation of the economy. C. THE METAL PRODUCTS AND ENGINEERING SECTOR Structure 48. Metal products and engineering comprise five distinct industries: iron and steel and non-ferrous metals; metal products; non-electrical machinery; electrical machinery; and transport equipment. These industries, in turn, comprise several activities with different technical characte- ristics. This grouip of industries has 97 establishments, 23 in the public sector and 74 in the private. By size, 55 are small (10 to 49 employees), 39 are medium (50-499 employees) and 3 are large (500 or more employees). By far the largest single activity of the group is motor vehicles and parts, with 3.3 thousand employees. Only two more activities, fabricated metal products and 'other machinery and equipment', have more than one thousand employees. In 1981, the subsector as a whole accounted for 11 percent of total employment in Tanzanian manufacturing industry and 15.5 percent of its value added. The public sector accounts for 44 percent of subsector's employment and 47 percent of its value added. The public sector is prominent in iron and steel, non-electrical machinery, and basic metals, cutlery and hand tools, 'other' non-electrical machinery, and all transport equipment activities with the exception of motor vehicles. By size, small firms account for 11 percent of employment and 10 percent of value added, medium-size firms for 69 percent and 74 percent, and large firms for 20 percent and 16 percent, respectively. Two of the three large firms in the subsect-r (in cutlery and hand tools and railroad equipment) are parastatals; the remaining one, in 'other' electrical apparatus, is private. Productivity 49. The subsector's average value added per employee in 1981, T Sh 44 thousand, was higher than that of Tanzanian manufacturing industry as a whole, (T Sh 32 thousand) as a result of skill and capital intensive activities in the sector. There is, however, considerable variation in productivity levels among different activities. 50. The Tanzanian metal products and engineering industry is at a very low level of development. While simple metal products have been manufactured in the country for over two decades, and the major basic metals plant has been in operation since 1963, the activities are still based primarily on imported materials and are confined to relatively simple  - 18 - finishing or assembly operations. The relative lack of backward linkages applies even more to new and more complex activities (in capital goods and transport equipment). In addition, the economy lacks a natural resource advantage in the production of basic metals (though there are some, as yet unexploited, reserves of iron ore). The domestic market is too small to support many engineering activities which are highly capital intensive (iron and steel) or require long production runs (vehicle assembly). 51. Most conditions for efficient production are absent in Tanzanian metals and engineering industry. Labor ii now not expensive by LDC standards, but neither is it well-trained or efficient, it lacks motivation. Foreign investments have been absent for several years, the result of Tanzania's unfavorable location, poor infrastructure, bureaucratic obstacles and the high efficiency cost of labor. More importantly, there is a very small base of technological and managerial skills. Local capabilities to select and engineer new plants, to operate them at high levels of efficiency, and to undertake the constant process of productivity-raising improvements which are essential for international competitiveness are extremely meagre. There are exceptions, but the general picture is one of facilities which are often toolsmall-scale to be competitive, equipment and technologies which are sometimes obsolete and at other times too complex for existing skills, and plants which are poorly maintained and not subject to continuous productivity enhancement. The result is high cost, poor quality, technological obsolescence and rising levels of uncompetitiveness. 52. The highly protective trade regime has worsened the problems. Competitive pressures to improve efficiency and to learn the necessary technological and managerial skills have been absent. The normal presumption of protective industrialization policy, that infant industries gain in productivity over time is often negated: many activities get progressively less efficient relative to world standards as foreign techno- logies move ahead and local technologies have deteriorated behind increasing barriers. In the parastatal sector the problems have been accentuated, since in many cases they are also sheltered from domestic competition from the private sector have tended to take on more difficult and capital- intensive industries and have an even smaller base of technological/ managerial experience than private firms. In addition, they often are not subject to normal commercial discipline. 53. Manufacturing activities in the metal products and engineering sector remain at the simplest, final stage level of finishing or assembling imported intermediates and components. At this level, economies of scale and skill requirements are generally not very high relative to those at more advanced levels of production. However, in many instances they are beyond the market size and human capital base of Tanzania. For instance, economies of scale dictate that the assembly of trucks be at a minimum of three to five thousand units per annum, and much higher if backward integration into component manufacture is envisaged. Tanzania today assembles around 150-200 vehicles. Machinery manufacture is not very scale intensive, but is highly demanding of production and mechanical engineering skills, and beyond the simple assembly stage it also needs product design skills. Basic metal production can be very scale intensive, and also demanding of production engineering capabilities to keep large, complex equipment in good order). In sum, even the first stages of many of the activities in the subsector may be inappropriate to Tanzania's endowments and capabilities.  - 19 - 54. It follows that the activities in the subsector in which Tanzania could develop a competitive advantage are relatively small scale, use relatively simple equipment and draw on available or easily transferable skills. To implant the activity firmly in Tanzania, to enable nationals to operate it and build upon it, and (over time) to move from low to high productivity techniques or activities must require the continuous develop- ment of indigenous managerial and technological capabilities. Firm Level Performance 55. Iron and Steel. Tanzania has no integrated iron and steel production plant, nor does it produce any non-ferrous metals from first stages. The operations included under the activity comprise one steel smelting facility (a small electric arc furnace using scrap metal, most of which is imported) and several facilities for ferrous and non-ferrous metal finishing (rolling, shaping and so on). Two of the main enterprises, both parastatal, are considered here. 56. Aluminum Africa: A profitable parastatal, which is being adequately run and has good technological capability, yet is very inefficient for the country as 93 percent of the firm's output is produced at negative value added (particularly corrugated iron sheet and steel billets), and would not become efficient if capacity utilization was increased. The structural inefficiency of this industry appears to be the result of the inherent technological features of this capital intensive and complex industry, where the small scale of operations, use of outmoded technologies and reliance on expensive foreign personnel account for the high economic costs of production. 57. Tanga Steel Rolling Mills: The profitability of TSRM has been steadily declining (net financial return of capital estimated to be 3 percent) in spite of very significant effective protection (608 percent). The firm produces steel products very inefficiently (economic rate of return at actual capacity is -25 percent, at attainable capacity it would be -18 percent), the result of the lack of technological competence, maintenance and operations within the enterprise and the small scale of production. Yet TSRM has been engaged in setting up another wire rod and drawn wire plant, a misplaced priority, particularly when considering the importance of improving the performance and providing inputs and spare parts for the existing plant (before channeling resources to expansion). Metal Products 58. This set of activities mainly comprises relatively simple and small-scale operations to shape and fabricate metals, using largely inexpensive general purpose machine tools, sometimes with a few specialized machines. In spite of the relative simplicity of the activity, considerable skills, experience and effort are involved in achieving production efficiency. 59. There are 43 metal products manufacturers in Tanzania, the largest group in the engineering subsector. Most of the units (31) are small (under 50 employees), and privately owned. Domestic production of fabricated metal products is inadequate to meet the country's requirements. There is an  - 20 - urgent need (and an apparent economic justification) for much more manufacturing activity of this sort to provide Tanzanian industry with spares and components which are presently imported, and which constitute one of the tightest bottlenecks on its capacity utilization. 60. As opposed to more industrialized economies, it appears that Tanzania's large engineering companies do not have close links with local metal products manufacturers which could supply them with spares and components. Large manufacturers generally lack the technological capability to foster subcontractors, since the process of setting up a new supply network demands considerable technical and managerial effort. The potential or actual subcontractors are scarce, and generally lack the mechanical engineering skills and entrepreneurial abilities needed to become reliable, cost-efficient suppliers. The firms provided some, relatively minor, suggestions for increasing the value of components they could make in-house, and a few ideas for using local raw materials as import substitutes. There were, however, practically no proposals to increase local subcontracting by sponsoring or assisting independent firms: even the awareness of this route seemed to be absent. Some firms, like the truck assembler Scania, have made some efforts to increase local subcontracting, but this vital ingredient of enginenring-sector development is missing in the country. 61. ITbonso Farm Implements ( tI): There are two main production lines in UFI, both designed and supplied by the Chinese, who also provided the manufacturing know-how. The old production line (1970) makes hoes, ploughs and shares, while the new one (1978) makes only hoes. Until 1982-83, UFI has serious technical problems in operating its plant, especially the original production line. Output declined over time; by 1982, capacity utilization was down to 46 percent. After 1983, UFI underwent an impressive transformation. Its management was completely changed, and an infusion of technically trained personnel and of foreign exchange for imports was provided. Capacity utilization went up dramatically, and for two products exceeded rated capacity (104 percent for hoes and 140 percent for shares). The main product, hoes (72 percent of total output) is produced very efficiently (ERC of 19 percent, LRDRC of 0.66), while effective protection is non-existent (-1 percent). In the engineering subsector, these are the best efficiency results from the MIES sample. 62. UFI's competitive performance is the result of a technology which is simple and not scale-intensive and of the managerial and technical skill transformation in 1983. Relatively old-fashioned equipment of the type supplied by the Chinebe does not constitute a disadvantage if its mainte- nance and operation is successfully implemented. The enterprise has no foreign technicians or technology payments, thus saving on foreign exchange: however, the 'learning' of the simple technology is very recent. 63. Mbeva Farm ImPlements: This enterprise, also a parastatal under NDC, is not. yet in full operation, but it illustrates some problems with project implementation and operation. Construction of the plant, to make hand tools and animal/tractor-drawn implements, started in 1977. Equipment installation began in 1979 but was not completed in 1982 (when the SAP secretariat study was conducted). Some components had not been received, while installed equipment had been cannibalized to keep a few machines running. Management was reportedly weak, and technological capabilities inadequate to the task of revitalizing the plant.  - 21 - 64. Metal Box is one of the oldest engineering manufacturers in Tanzania, and is still using some of its original (30 year old) machinery. Careful maintenance and nursing of the equipment has kept it operative, though its protuctivity is low and could be greatly improved by new equipment. Unlike many newer plants, however, Metal Box does not need reha- bilitation. It has a small tool room to make the simple spares, and a well- trained work force. The factory manager, the factory engineer and the production engineer are expatriates. The technology agreement with MB (UK) seems unfavorable to Tanzania: the technology is very stable and little new know-how is being transferred. The charging of royalty (of 0.5 to 2.5 percent on total sales) seems unnecessary especially since there is a separate, T Sh 300,000 per annum management contract. 65. These heavy foreign exchange costs, added to the high (and necessary) import dependence for current inputs, makes the enterprise inefficient in economic terms. Value added at international prices is negative, and Tanzania would do better to import the finished cans than to make them domestically. The very small scale of operation and the old tech- nologies in place are also likely contributors to its poor result. Clearly, even simple metal forming operations, with low capital costs and small scale operation, well managed and technically competent, can be economically undesirable if the technology is inherently unsuitable for this type of activity. In addition, heavy technology and expatriate management costs worsen the cost benefit balance. 66. The firm which Metal Box acquired in 1985, Tanzania Crown Corks, also shows negative value-added at international prices. However, its past performance has been far less creditable: it suffered losses steadily from 1979 onwards despite a local monopoly, and the original production line was badly run down and ceased working totally by i982. The enterprise did not have a workshop to carry out even minor repairs; it had no trained engineers to undertake preventive maintenance, and had been operating without a production manager since its inception. The quality of its products was poor, and customers complained constantly. It was extremely weak in financial management and planning, and the management made no effort to ensure proper operation of the plant. 67. Jele Industries: Jeje Industries is a small private company started in 1978 to draw rods into wire (for making nails) and to make nails and barbed wire. It is entirely import dependent (98-99 percent), using rods purchased from Belgium. The equipment is well maintained and in good working order, but imbalances in the facilities which leads to attainable capacity being 30 percent lower than installed capacity. The constrained import situation has prevented its correction forced Jeje to work at 11 percent of installed capacity in 1984. The firm is producing very inefficiently yet, at attainable capacity, it could become marginally efficient, according to the DRC calculations from the MIES. 68. Vire Industries: Another private enterprise making wire nails, mesh, netting and barbed wire, as well as welding electrodes. It belongs to the Chandaria (Comcraft) Group which started ALAP (see above). The shortage of imported inputs brought 1982 capacity utilization down to about 20-30 percent of attainable capacity, and employment declined from 275 in 1978 to 43 in 1982. As with other Chandaria enterprises, there is ample and good  - 22 v technical management. The equipment is in good running order, and there is a well-equipped workshop with facilities to make dies, cutters, shafts etc. for the firm's needs. The firm has positive value added at international prices (however, DRC figures were not calculated) and has exported in the past to Zambia. 69. Palray Groupt The group started in 1955 with the Mohinder Sinrh Palray Engineering Works for collapsible doors. By 1982 it had 8 manufac- turing units, making furniture, beds, plastic (melamite) ware, steel wool, artificial leather (PVC) and parquet flooring. The group also sold tech- nical services for the design and manufacturing of tools, dies and spares. In Tanzania the group has a monopoly on hospital furniture, steel wool and PVC. It won the International Africa Award in 1981. The group uses local wood for its furniture but is import dependent for other inputs. According to the SAP Secretariat study, it was an efficient user of foreign exchange (i.e. it saved more in direct terms than it consumed) in 3 products (furni- ture, steel wool and melanite ware), but was inefficient in making PVC, parquet flooring and beds. It was not able to export any of its products. DRC calculations were not made for this group. 70. Cotex Metals and Machinerys This private firm was launched in 1980 to make screws, rivets, pressure-cast aluminum parts, metal fabrica- tions, tools and dies, spares for automobiles and industrial plant and plastic (melanite) ware. The SAP Secretariat study found this to be the only firm in Tanzania with pressure-casting facilities (which were being grossly underutilized). It also had sophisticated toolroom facilities, a press shop and a fabrication shop and it had shown ingenuity in developing new products, in contrast to many other local firms. 71. Cotex had modern equipment, kept in good working order and deployed to make good quality products. It had exported its melamite ware to neighboring countries. It was developing battery boxes and fuel tanks as well as other simple components for the local Scania truck assembly plant. Though DRC rates were not calculated for Cotex, it appears to be a capable and dynamic firm which could provide a base for indigenous technological development. 72. National Engineering Company (NECO)s This parastatal makes steel structures, tanks, containers and casting, and sells engineering services. It has 4 main shops: foundry, machinery, steel tanks and steel fabrication. NECO receives extensive technical assistance from West Germany. It employed 7 German expatriates in 1983 (including 5 engineers), and imported inputs from Germany under a commodity aid scheme. The German government has been eager to take back its expatriates (for whom it pays directly), but local engineers with the necessary skills have not been found. In the several years that NECO has been in operation, indigenous capabilities have not been built, the firm has adhered rigidly to a given product line, and has not innovated new products to respond to evolving local needs. 73. Casting and machining technology is very skill intensive, and casting also enjoys economies of scale. NECO's small foundry is thus uncompetitive, and suffers negative value-added at world prices. However, this accounts for only 5 percent of its activity, and its steel fabrication (82 percent) appears to be fairly efficient, with a long run DRC (under  - 23 - attainable capacity) of 1.0, while its sale of enigineering services is cheaper than the cost of comparable imports (DRC of 0.55). However, these ratios understate the true cost to Tanzania, since the seven expatriates are funded out of aid and are free to the firm; however, once the aid program ends and if expatriates are still needed, the foreign costs would shoot up. NECO is thus economically for much of its range of output, despite a retarded development of local capabilities, because of the presence of several free expatriate technicians. Its long-run efficiency depends crucially on its ability to speed up local learning to the levels required, and in phasing out its inherently uneconomical casting facilities. Non-Electrical Machinery 74. Of the 15 firms in Tanzania making non-electrical machinery, only five are medium size (50 to 499 employees); the rest are small. The medium size enterprises all make 'other' machinery, mainly for the agricultural sector. The entire metal-working machinery industry is inhabited by small, privately owned firms that have simple workshop equipment that generally cannot make sinple general purpose machine tools. Firm-level information is only available on one firm in the 'other' machinery sector. 75. Mana'ula Mechanical Machine Tool Co. (MMZTC): This parastatal, set up in 1970 by the Chinese to make spares for the construction equipment used in the TAZARA railway was handed over to the NDC in 1977, when it was upgraded for the production of rice hullers, maize mills, coffee pulpers and spares, as well as industrial oxygen, wood furniture and steel structures. MHMTC has become one of the largest mechanical engineering facility in the country, with 4 shops: foundry and forge; fabrication; oxygen plant; and wooden furniture. It also has auxiliary facilities for inspection and testing, tool regrinding, heat treatment and so on. In 1982, it had 336 employees, of which 9 were technically qualified. 76. A TISCO study of MMMTC in 1982 indicates that although the equip- ment was in reasonable working order, it was obsolete and incapable of making high-tolerance products. The plant was located in a remote area and faced a scarcity of skilled labor. Weak preventive maintenance and shortage of spares had affected rated capacity and output quality. Marketing skills were lacking (there was no commercial manager) and product designs were obsolete. (Some products were not saleable but were kept in production.) 77. There are serious weaknesses in both technical and commercial management. Given high costs and poor quality of output, export potential was nil. TISCO estimated that value added at international prices was negative, i.e. the firm was extremely inefficient. Electrical Machinery 78. Of the eight firms making electrical machinery, one (TANALEC) is a parastatal and the rest are private. There is one large firm (over 500 employees), Matsushita, a private enterprise with foreign equity. These are the two firms reviewed here, plus one which makes electrical-related products (cables) but not, strictly speaking, electrical equipment.  - 24 - 79. Tanzania Electrical Goods Manufacturina Company (TANALEC). This firm is joint venture between Norway and Tanzania, with equity divided 20-80 between the two. The firm, started production in 1982 and makes fairly complex products - transformers and switchgear - with import support provided by the Norwegian aid agency NORAD. Its transformers go from 50 to 750 KVA, with components and know-how provided by National Industries of Norway, who has a separate technical contract (3 percent of sales) and a management agreement (4.5 percent of sales), which add significantly to the foreign exchange costs of the operation. Although TANALEC's products are well designed and conform to international quality standards, they are expensive because of the small scale of local operations and the high technology and management fees. According to the SAP study, value added is negative for all transformers below 500 KVA, i.e. the bulk of TANALEC's production. Because the plant is new and managed by expatriates, technical problems have not arisen, but its high cost and the complexities of the product technology do not bode well for efficiency in the long term. 80. Matsushita Electric Company: This large firm (858 employees) makes dry batteries, radios, torches and fans in a plant in Dar es Salaam. It essentially assembles Japanese components supplied in CKD form. In the Japanese tradition, this well-maintained plant lays strong emphasis on local training. Its batteries are economical, and exported to Rwanda, Burundi and Zaire, and also smuggled in substantial numbers to various countries. The firm is making efforts to develop new models of radios for export markets. In the absence of quantitative data, it is not possible to give a clear indication on its economic efficiency. 81. Tanzania Cables (TLC): It was set up in 1978 as a parastatal, with 29 percent local private equity and a management contract with Comcraft (Chandarias), to make aluminum conductors, power cables, PVC wires and enamelled wires. It proved to be highly profitable and by 1982 had repaid the whole value of the investment in terms of dividends. However, the shortage of imported inputs caused profitability to decline sharply by 1982. TCL pays heavy management fees of 1 percent of net sales and 6 percent of pretax profits. 82. Nearly half of TLC's production has negative value added in international prices and its PVC cables although having positive value added, have unacceptably high long-run DRC of 2.74 at attainable capacity (7.71 at actual capacity), the result of the nature of the technology and the burden of management fees. Transport Eguilment 83. The transport equipment sector contains a variety of activities, information on which is fairly limited. Only four firms can be covered here, two parastatal and two private. The parastatals provide instances of errors of industrial strategy and deficiencies in management, while the private firms are models of efficient operation in the Tanzanian context. 84. Tanzanian Automobile Manufacturing Company (TAMCO): TAMCO started operations in 1982 as an assembler of Scania trucks. The firm was a joint venture between the parastatal State Motor Company (90 percent of equity) and the Swedish firm Saab-Scania (10 percent), with financial support  - 25 - provided by the Swedish aid agency SIDA. The operation is very small-scale, consisting of assembling CKD packs of four models of Scania trucks and bus/ chassis. Installed capacity is 1200 per annum, actual production was around 200 in 1985 and import content was around 90 percent. The plant has also taken up the assembly of Valmet tractors (of Finland). There was supposed to be a separate Valmet assembly plant with a capacity of 1500 per annum, but the project was delayed and TAMCO's facilities are being used to assemble 50-80 tractors per annum. 85. The truck assembly operation was envisaged by the Tanzanian government as the first step in a long-term program of the development of automotive manufacturing in the country. The program was as ambitious as it was unrealistic and uneconomical. (The explicit long-term strategy was to 'establish a miniature version of Detroit at Kibaba' to assemble a wide variety of vehicles.) Scale considerations mAake truck assembly unviable in Tanzania, even at the preliminary level of assemblinl CKD packs. Further backward integration would only make matters worse. 86. The mission's efficiency analysis indicates that the truck and bus assembly operation are very uneconomic: all four production lines have negative value added. At high capacity utilization the firm could produce at positive value added, yet its economic efficiency would still be very low. 87. National Bicycle Corsan? (NABICO): NABICO, a parastatal under NDC, has been closed since 1982, although it was one of Tanzania's major efforts in the transport equipment area. It was launched in 1974 under a licensing agreement with Atlas Cycles of India to manufacture 150 thousand cycles per annum. The cycles were the sturdy, heavy products used in India and other developing countries. The management lay entirely with the parastatal, and, according to the SAP study, the firm was "one of the worst managed' in the parastatal sector. Despite being a local monopoly, NABICO made large losses. The domestic cost of NABICO's cycles was 3 times that of the CIF price of Atlas cycles. There was no effort at cost reduction in plant; in fact, the management had instituted no cost control procedures at all. The top managerial and technical personnel were changed often, and several critical positions remained vacant for long periods. The firm was 1/ As shown in case after case of import substitution in the automotive sector in developing countries, raising local content at small scales of production, and with inadequate technological capabilities, raised costs enormously and led to declines in the quality of output. Only a handful of developing countries, with large domestic markets, advanced mechanical engineering skills, diversified industrial structures and usually substantial multinational participation, have been able to emerge as efficient automotive producers. None of these basic conditions obtained in Tanzania, yet 'one of the NDC's arguments in the early stages of the negotiation was that Scania's daughter company in Brazil had managed to reach a productivity level of over 90 percent in the manufacture of components locally' (Broden, p. 106). Despite Scania's reservations, it was forced into an agreement to help start local manufacture of engines, gearboxes and drivetrains (the most complex and scale-intensive parts of the truck). Few tangible results can be expected, however.  - 26 - unable to generate a minimum critical mass of experience and know-how to achieve a modicum of efficiency, even though the activity was not technolo- gically demanding. In theory bicycle assembly is an activity ideally suited to Tanzanian conditions. The product is an important 'incentive good', in enormous demand throughout the country and has no unnecessary frills. The technology is relatively easy as far as engineering products go; the more difficult items like hubs and tubes are imported from India while spokes, rims, etc. are made locally. The equipment and know-how was provided ready- adapted to Third World conditions, and could be assimilated with a modest amount of training and technical effort. Yet, the venture failed entirely because of mismanagement and the absence of conditions for even this modest amount of learning. 88. Afro Cooling Systems Ltd.: Afro Cooling is a local private firm engaged in the manufacture of car radiators. Its capacity was 15,000 radiators, and it achieved 70 percent capacity utilization in 1984. Its import needs (88 percent) were met by foreign exchange earned from its export activity. The firm's main advantage was that it could make over 500 varieties of radiators to good quality standards. It used very labor- intensive techniques, based on simple equipment but with an emphasis on strict quality control. It substituted local brass and bronze fittings for imports and made all its own toolings in-house. The firm had three graduate engineers, four-five diploma holders and 60 skilled workers, and used them flexibly to produce almost tailor-made products. Apart from the huge variety of radiators, it produced spares for various industries and sold tools designs etc. in order to drum up business. It imported a design engineer from India to standardize the design for radiator tubes and structures. This standardization was a major technological improvement; it resulted in significant economies and turned out to be crucial to the firm's commercial success. 89. Afro Cooling won an order to supply radiators to the TAMCO truck assembly plant, after its product was approved by Scania in Sweden. It started exporting radiators in 1983, first to Sudan, then to the U.K., Egypt, Kenya and the Gulf States. In 1984, 11 percent of output was exported. Valmet approved its radiators for use as original equipment in its local tractors, and was considering them for use in its tractor plant in Brazil. For its export effort, Afro Cooling has used innovative marketing strategies. 90. The competitive edge of Afro Cooling lies in its dynamic, quality- conscious and outward-looking management, which has been able to assimilate and standardize the technology of a labor intensive engineering product, adapt it, train local workers and market its products aggressively at home and overseas. The learning-based competitive advantage more than compensates for its small scale of operations and the simple facilities it operates. Facilities and equipment are used flexible, under rigorous quality control, and the firm is constantly seeking to upgrade its product -nd process technologies. The firm would benefit from more modern equip- &ent. The HIES analysis results indicate that it is an (economically) efficient operation, with low DRCs. 91. Auto Mech Ltd.: This firm was set up by the same people who run Afro Cooling, and shares some of the top management. Operations started in  _ 27 - mid-1984, and consist of the rehabilitation of automotive engines, gearboxes, differentials and electricals, as well as the sale of recondi- tioned engines. The plant employs several expatriate Indian engineers, many experienced in similar rehabilitation work. It searched out and procured equipment from a variety of suppliers, in Italy, U.K., Australia, Japan, India and elsewhere, showing the pre-investment capability, rare in Tanzania, to specify its technological needs and fulfill them economically (rather than getting an expensive turnkey plant from one supplier). Thereafter its operations have been very efficient, and it was expecting to declare profits by end-1985. 92. According to the firm the cost of a reclaimed engine is 25-30 percent of the cost of a new imported one. Before the firm started operations, most of the damaged or worn-out engines in Tanzania were scrapped, so that its activities are likely to be highly cost-effective to the country. The firm is innovative on the shop-floor, modifying process to achieve better results, copying processes from developed countries and seeking to take on new activities. A large presence of expatriate technicians is the base for its learning and growth. CONCLUSIONS 93. The few examples of efficient production in the metals and engineering subsector only serve to highlight the vast majority of firms which have not attained efficiency. The sample of firms surveyed above in addition to the policy environment, suggests a variety of factors underlying uncompetitiveness: (i) lack of economies of scale; (ii) poor product design or obsolete, inefficient facilities; (iii) lack of technological capability, leading to poor maintenance and operation, insufficient training and inadequate learning over time; (iv) poor organization and management (inclu- ding poor marketing); and (v) a shallow industrial base, with few backward linkages to local suppliers, equipment makers or engineering consultants. 94. The engineering sector has traditionally provided the main learning base in industrial development. The grounding in mechanical skills it provides feeds into a very diverse set of manufacturing activities. Simple engineering products are not only suitable candidates for early, efficient import substitution, they also provide the vital spares and compo- nents to keep industry running in a foreign exchange constrained economy. At a later stage, capital goods production becomes a hub for the generation and transmission of new technolcgy across the economy. However, as shown, even 'simple' engineering activxties are demanding of scarce skills, and the sector contains some very scale and technology-intensive activities which are costly or difficult to undertake. Yet Tanzania has chosen to launch into many unsuitable investments without adequate preparation. Project selection (as in the automotive sector) has often been irrational, but even rational choices (as with bicycles) have been poorly implemented because the necessary capabilities have been deficient. The economic costs engendered by many existing engineering firms are a reflection of the inadequacies at various levels of project planning, implementation and operation.  - 28 - D. THE CEEMICAL AND RUBBE INDWSTRIES Structure 95. This subsector includes three industries: chemicals, rubber and plastics. Chemicals comprises seven different industrial activities and rubber two. In 1981, the subsector contained 56 establishments, 8 in the public sector and 48 in the private sector. By size, 30 were small, 2! medium and 3 large. Of the three large establishments two were parastatals. The public sector accounted for 39.7 percent of employment, and 26.7 percent of the value-added in the subsector. 96. In 1983, the subsector accounted for 8 percent of total manufactu- ring employment, compared to 2.9 percent in 1965. It had 810 employees in 1965, 6971 in 1977 and 8251 in 1983. Its large fall in value-added had been accompanied by increases in employment, with consequent sharp declines in labor productivity (see below). The increase in employment since 1977 was concentrated in the chemical industry, where the number of employees rose by a third during 1977-83. In rubber employment declined by 8.4 percent and in plastics by 15.7 percent in this period. 97. At the level of specific activities, wide dispersions in capacity utilization make it difficult to rank industries by size. Employment figures indicate that the largest activities are basic industrial chemicals, fertilizers and pesticides, tires and tubes and soaps and cosmetics. Value-added figures show that the most important activities in 1981 are tires and tubes (but note the apparent error in the value-added figure for small tire producers), other chemicals, soaps and cosmetics and plastic products. Productivity 98. The subsector contains a large number of capital-intensive, high- skill activities which yield relatively high values of 7alue-added per employee. Average wages are also higher than for all manufacturing, a result of the high skill requirements. However, value-added per worker in the industry has declined dramatically in recent years. The fall was 59 percent in chemicals, 67 percent in rubber and 36 percent in plastics. Shortage of imported inputs, and spares and poor maintenance of equipment, infrastructural deficiencies and inadequate management have contributed tO this decline. 99. The public sector has lower average productivity than the private sector, although both sectors have productive as well as unproductive firms. Smaller and medium-sized establishments appear to be more productive than large enterprises (basic chemicals and fertilizers have extremely low productivity). Some medium-size firms are capable of reaping scale economies while larger firms appear to be much more affected by technolo- gical and management problems associated with large size and technical complexity.  - 29 - Performance and Constraints General Evaluation 100. The chemical industry is technologically complex and capital intensive at all stages of production exmept for the final formulation of end products like pharmaceuticals, paints or pesticides. The sophistication and continuous-process nature of the 'heavier' manufacturing processes place great demands on achieving high capacity utilization, stringent quality control, adequate maintenance, 'good housekeeping' to keep down operating costs and a range of chemical disciplines to optimize production in any given set of conditions. 101. In addition, the initial engineering of a plant crucially affects its efficiency: unlike engineering products, where there are series of 'shops' which can be adapted to use varieties of equipment or processes, a chemical plant, once designed and erected, has fixed production parameters. A design which uses inefficient processes, or processes which are not suited to local raw materials, output mix or scales, can be very expensive to operate. Even an ideally designed plant needs constant technical monitoring and nursing to realize its full productive potential. 102. These characteristics make heavy chemicals a relatively difficult activity for a developing country starting to industrialize. The costs of learning can be very high where it is done in large expensive plants. The under-utilization of process industries creates greater wastage than in engineering-type industries. There is relatively little transferability of skills from one process industry to another. The minimum scale requirements of many 'heavy' chemical plants exceed the absorptive capacities of many developing countries, and exports are difficult unless there is a natural resource or locational advantage. In recent years, the chemical and petro- chemical industries of developed countries have suffered excess capacities, so that world prices of their output are very low, and may stay low for some years to come. This makes international competitiveness that much more difficult to achieve. 103. The 'easier' activities in this sector do, however, lend themselves to efficient implementation in developing countries. The formu- lation of chemicals into some final products can be relatively small-scale and technologically uncomplicated. The manufacture of simple rubber products and plastic extrusions is similarly 'easy'. However, an activity which is 'easy', in this relative sense,may still require skills which are scarce and production capabilities which have to be assiduously cultivated - -their absence may lead to gross inefficiencies comparable to those observed in the engineering sector. 104. The subsector in Tanzania contains a broad array of chemical acti- vities, from the simple to the very complex. At the simple end there are pharmaceutical, agrochemicals, cosmetics and plastic-extrusion plants. At the complex end there are basic industrial chemicals, fertilizers, petroleum refining and tyre plants. The simpler activities were launched around the early 1960's, the complex ones in the early 1970's. Tanzania practically has no domestic resource base for chemical, petrochemical or rubber activi- ties. Thus, all these industries are highly import dependent. Tanzania is also very short of the specialized chemical engineering skills required to operate the more complex of these activities: in some cases this leads to  _30 _ heavy foreign exchange costs for expatriate personnel, in others to gross inefficiency because plants are operated without critical technical personnel. Since the domestic market is very small, many of the 'heavy' activities have been set up at uneconomic scales. 105. All these factors, added to the relatively short period of learning for which the complex technologies have been operated in Tanzania, combine to create widespread inefficiency in the chemical and related industries. Of the 25 product lines analysed in the MIES (for 10 enter- prises) in this subsector, 14 have negative value-added at international prices at actual capacity utilization (8 at attainable capacities), 10 more have long-term DRCs of over 2 (10 at attainable capacities), and only 1 has an acceptable DRC of below 2 (7 at attainable capacities). 106. The uneconomic operations exist in 'light' and 'heavy' activities, both new and old. Even at attainable capacities, only some plastic and soaps show acceptable efficiency levels, while pharmaceutical and fertili- zers, as well as other plastics and soaps, remain inefficient. Clearly, firm level factors also determine the degree to which existing resources have been deployed economically (as well as industry-wide factor) technolo- gical competence has played a predominant role among these firm-level factors. Let us now review the experience of some selected firms. Pharma- ceutical and fertilizers, as well as other plastics and soaps, remain inefficient. Clearly, firm level (other than general industry level) factors determined the degree to which existing resources have been deployed economically. Among these firm-level factors, technological competence has played a predominant role. Let us now review the experience of some selected firms. Firm Level Performance chemicals 107. Tanzania Fertilizer Companv (TFC): TFC started operations in 1972 and was originally designed to produce 105 thousand tons of fertilizers per annum, consisting of 25,000 tons of ammonium sulphate, 25,000 tons of TSP (triple super phosphate) granules, 45,000 tons of NPK (compound fertilizers) in 3 forms, and 15,000 tons of DAP (diammonium phosphate). Capacity was later expandad to 135 thousand tor.nes, but actual production peaked at 70 thousand tonnes. Fertilizer production is heavily import dependent. TSP monopolizes the entire fertilizer trade in Tanzania, including imports, production and distribution. The plwat is very small by international standards, 2 which raises production costs greatly, inducing the government to give substantial subsidies to TFC. 3 In 1982, subsidies accounted for 60 percent of the firm's total sales revenue. According to the MIES all of TFC products had negative value-added at international prices. 21 A minimum economic size for a fertilizer plant would be 500,000 tons per annum, compared to TFC's 135,000 (and actual production of 70,000 tons or less). 31 In 1982, subsidies accounted for 60 percent of the firm's total sales revenue.  - 31 - 108. Keko Pharmaceutical Industry: Keko is a parastatal set up in 1976 by the Chinese to produce tablets, infusions, ampoules and eyedrops. The equipment provided was slightly used, and the transfer of technology ineffective, which resulted in eye drops never being produced, the ampoule line being closed in 1979, and the tabletting line having to be rehabili- tated with Danish assistance by 1982. In addition, Keko had staffing and training problems. 4 Despite all these problems, Keko was planning (in 1983) an expansion with Danish assistance, although there was considerable excess capacity in the private sector for tablets and infusions. 109. At actual capacity, Keko had negative value-added at shadow prices for both its products. At attainable capacities, its long run DRCs came to 8.08 for tablets and 38.82 for infusions. The firm was thus clearly uneconomic. 110. Tanzania Pharmaceutical Industry (TPI): TPI received technical assistance from a Finnish company, Orion, which also took a management contract for 5 years. Production started in 1980; output included tablets, capsules, vials, syrups and suspensions. TPI pays higher prices than Keko for its imported intermediates (from Orion). The Finnish collaborator appears to charge high price4 for the active ingredients it supplies, although it is not a world class pharmaceutical company and has no technolo- gical monopoly on these ingredients. In addition, of TPI's technology contract stipulates a management fee which is fixed irrespective of output, and in 1982 worked out at 16 percent of sales. The firm's production is very inefficient for the country: at actual capacity, it produces at negative value added, while at attainable capacity DRCs are 7.67 and 3.10, for tablets and capsules respectively. 111. Nansoor Daya Chemicals (MDC): This private sector firm pioneered pharmaceutical production in Tanzania in 1965, and has engaged itself in simple formulation and tabletting operations and it has also produced other consumer goods, like toothpaste, aerosol insecticides, perfumes and toiletriee. MDC have better market acceptance than Keko's and TPI as a result of the higher quality of its pharmaceuticals. Before the breakup of the Community, it used to export to Kenya. Although MDC was well estab- lished, the government set up TPI foreign to produce almost exactly the same range of drugs with expensive collaboration. MDC was deprived for foreign exchange allocations, resulting in severe underutilization of capacity. 112. Price comparisons by the SAP study showed MDC had much lower prices on the average about 50 percent lower than TP.I and Keko. However, even MDC's prices were higher than the lowest quotations received for bulk drug imports from India or Europe. In some products, MDC achieved positive value-added at international prices, but in other (some drugs, toothpaste and aerosol insecticides) this was negative. In general, MDC seems to be well run and managed, but its small size and the international structure of 4/ In 1982, the positions of technical manager, commercial manager, production manager, chief engireer and development and research chemist were vacant. An annual training budget of T Sh 720,000 was used essentially as a 'holiday for the staff' (accord.sng to the SAP study). Tanzania as a whole had a shortage of qualified pharmacists and chemists.  - 32 - output -input prices makes it largely uneconomical for Tanzania. Of the three drug firms, it is by far the most efficient. Agrochemicals 113. Three Airochemical Producers: There are three major private sector producers of pesticides, insecticides, fungicides and the like in Tanzania: TwiRa Chemicals (subsidiary of ICI, U.K.), Hoechst Tanzania (subsidiary of Hoechst AG of W. Germany) and Sana Chemicals (set up by local Greeks). Twiga is the larges in terms of capacity to make liquid products, while Sapa is the largest in capacity for powdered agrochemicals. 114. All three companies simply formulate imported chemicals, obtaining only fillers and packaging locally. Together they can meet about half of total local demand for agrochemicals. According to the SAP study, Hoechst is the most efficient in terms of direct foreign exchange savings Twiga follows with some direct savings and Sapa is worst (foreign exchange losses from -26 percent to -68 percent). No further information is available on the causes for these differences in performance. 115. Soans; There is no firm-level information at hand from the SAP studies on Tanzanian soap and detergent manufacturers, but the Mission conducted DRC analysis into 2 producers of soap (EMCO and Tip) and I of detergents (Sabuni). The first 2 are private, the last is a parastatal. The manufacture of soap can be reasonably efficient at small-medium scales of operation, and a variety of traditional to modern technologies is available to suit different conditions. By contrast, the manufacture of synthetic detergents is a scale and skill-intensive process, using complex modern chemical technologies. Accordingly, although they are also economi- cally inefficient, (due to high import dependency) the soap producers show much better DRCs than the detergents manufacturer. EMCO has laundry and toilet soap long-run DRCs (at attainable capacity) of 1.7 and 1.5 respectively, while Tip has similar DRCs of 3.75 and 1.27. Sabuni, on the other hand, has 20.53 at attainable capacity and negative value added at actual capacity. Rubber 116. eneral Tires (East Africa) Ltd (GTEA)s Negotiations between NDC and General Tire International of the U.S. were finalized in 1969 to set up a tire plant in Arusha. Production started in 1971; GT holds technical and management contracts, currently valid till 1987. The overall quality of GT's management was rated to be 'very high' by TISCO. The firm is involved in setting up a rubber plantation to reduce its high import dependence. 117. The manufacture of tires and tubes is demanding of various operating and technical skills. GTEA was able to overcome the scarcity of such skills by its expatriate personnel and emphasis on training. Thus, its long-run DRC (at attainable capacity) showed very efficient operation: 1.11 for tires, 0.78 for tubes and 0.69 for related rubber products. Of all the more advanced industrial activities surveyed by the Mission, this is one of the most efficient results, particularly in the parastatal sectors. In fact, although its current export activity is very low, the prices of its exports have been among the lowest in East Africa.  - 33 - Plastics 118. Tanaanvika Tear, Plastics (TTP)s This parastatal started production in 1963. ln 1984, the main products were UPVC pipes (30 percent), RDPE pipes (22 percent), polythene film (28 percent) and G.H. pipe (11 percent). Attainable capacity is much below rated capacity partly because of past shortages of spares and partly because of poor maintenance. The operation is almost entirely based on imported materials, and by 1984 capacity utilization had fallen to between 4 - 16 percent of rated capacity, and between 27-50 percent of attainable capacity. TTP has no preventive maintenance program, so suffers frequently from breakdowns. Production technology is deficient; wastage rates are double acceptable limits. There is a shortage of qualified managerial/technical staff, as well as skilled operatives like fitters, turners or mould-makers. Despite abysmal levels of capacity utilization TTP's employment kept increasing: from 250 in 1979 to 337 in 1982. 119. The Mission's DRC analysis shows that TTP achieves near-competi- tiveness (at attainable capacity) in only one of its products, polythene film (long-run DRC of 1.29). Other products have extremely high DRCs (i.e. inefficient) with UPVC pipes, its main product, reaching 46.82. At actual capacities, two products have negative value-added at world prices, and its best product has a long-run DRC of 5.50. Since the firm has little or no foreign payments for personnel, the low economic efficiency of the firm appears to be the result of its small scale of operations, poor main- tenance, high wastage and the use of obsolete technologies. 120. Polysacks Limited: Polysacks is another plastics products firm under NCI, which started production in 1981, making polythene and polypropylene bags. The equipment came from Austria, but there was no foreign equity or technical/ management contract. Installed capacity was 6 million bags p.a., but attainable capacity in 1984 was only 73 percent of installed capacity. Although Polysacks' equipment is fairly new, its personnel have not been adequately trained to service and maintain much of it. The technology is fairly sophisticated, but the firm's engineering and production departments are extremely weak in terms of qualified manpower. The activity is producing at negative value added at international prices, largely the result of weak technological capabilities and the small scale of operations. CONCLUSIONS 121. The findings for the Tanzanian chemical firms echo many of the results obtained for the engineering sector. In chemicals, economies of scales, process design and operating/ maintenance skills are perhaps even more important than in engineering. Backward linkages are, however, of far less significance, since process industries do not lend themselves to efficient subcontracting of component parts or process. However, the need for efficient production facilities and for the capabilities to utilize them effectively is equally critical. Only a few firms in the industry achieve this combination. Most are either crippled by uneconomic size or obsolete technologies, or saddled with manpower which is not capable of extracting  - 34 - tihe potential efficiency of existing plants. As with engineering, there is a dismal lack of technological development over time, reflecting the small human capital base, the absence of a proper 'learning' environment and the significant distortions introduced by the Government's economic policies.  - 35 - ANNEX 2 PUBLIC ENTERPRISE MANAGEMENT - ISSUES AND NEED FOR REFORM A. Evolution of Public Sector Enterprises (PSE) B. Organizational Structure and Control Mechanism C. Issues Related to PSE Performance D, Evaluation of Institutional Framework  - 36 - PUBLIC ENTERPRISE MANAGEMENT - ISSUES AND NEED FOR REFORM A. EVOLUTION OF PUBLIC SECTOR ENTERPRISES (PSE) 1. At independence in December 1961, Tanzania had only a rudimentary industrial structure relying on a few medium- to large-size enterprises. Their production emphasized consumer goods for the domestic market with very little outward orientation. The manufacturing sector contributed about 5S of GDP and employed about 20,000 people or close to 8? of total wage earners. Not surprisingly, private sector was the major economic force witA a public sector involvement largely limited to providing administrative services and infrastructure facilities. Initially, the Government based its development program on an industrial organization and structure inherited from the colonial powers. The industrial strategy focused on import substi- tution. At its initial stage encompassing mainly consumables but gradually to be supplemented by manufacturing goods. In the longer term, the Govern- ment envisaged production of capital goods and the processing of local mate- rials for export. To overcome the lack of capital the Government tried to encourage private investments, in particular foreign, by way of introducing various incentives, such as accelerated depreciation allowances, tariff protections and guarantees for profit repatriation. The Government had indeed hoped that the private sector would play a major role in the develop- ment of Tanzania's economy and assumed a private investment share of 752 in the industrial sector of its first Five-Year Plan (FYP) 1964-69. 2. In the mid 1960s, however, it became evident that private invest- ments were falling far behind Government expectations. Where investments took place they had often undesirable structural results in as far as they tended to foster traditional manufacturing sectors rather than broadening and diversifying the industrial base. The main reasons for Government concern were the following: (i) insufficient inflow of private capital from abroad as Tanzania began to lean ideologically towards Eastern Block countries; (ii) inadequate growth of capital goods sector, since most of the local investments took place in the sector of consumer gooAs permitting shorter pFyback periods; (iii) increasing dependence on foreign technology due to both capital and import intensive investments. The Government's disillusion with the above developments led to a reassessment of its indust- rial strategy and resulted in the Arusha Declaration (AD) of February 1967. The Government decided that dependency on foreign investment as an instru- ient of industrial development was not consistent with its principles of political independence, self-reliance and socialism. Consequently, the focus of Government attention shifted to more socially oriented objectives such as employment generation and development of people hoping that growing inequality between urban and rural population could be reversed. It was felt that the public sector offered a more suitable environment for the implementation of a development strategy reflecting the concept of equality and self-reliance for the people of Tanzania. Only if ownership of major means of production and distribution were placed in the hands of the people, on whose behalf the Government would act, it was felt that the development of a socialistic society could succeed. As a consequence, the Government nationalized a large number of strategic firms either outright or acquired  - 37 - majority shares in them. In addition, the Government embarked on a program of promoting major new investments and the formation of new industrial enterprises in the public sector. In a complete reversal from the first FYP, the second FYP (1969-74) envisaged that 882 of new investments would take place in the public sector which would generate 84? of total output and employment. As a result,the share of value added of public enterprises in the manufacturing sector increased from 5? in 1966 to 39? in 1977. During the same period the number of parastatal companies expanded from 17 to 43 in the manufacturing sector alone. 3. In 1974 the Government adopted the "Basic Industry Strategy* (BIS) with the dual purpose to: (i) reinforce industrial growth by means of giving industry priority over other sectors and by maximizing the use of domestic resources; and (ii) initiate changes in the structure of production by stressing the need for development of a wider range of capital and consumer goods industries. The Government hoped that such reorientation of the industrial strategy would provide a better link between the desired production structure and its development concept adhering to seven principle goals: industrial growth, structural change, employment generation, income and regional distribution, workers' participation and self-reliance. 4. Tanzania's rapid growth of public sector companies was accompanied by the introduction of a host of regulations and procedures leading to a complex mechanism of indirect controls and quantitative restrictions often characteristic for centrally planned economies. The most important were the following: centrally controlled investment planning, selective allocation of foreign exchange through import licensing, price control exercised through the National Price Commission, credit allocation according to the Annual Finance and Credit Plan and wdge regulations introduced by the Permanent Labor Tribunal. Proliferation of direct controls and confinement policies has, no doubt, cast uncertainties on the role and future of the private sector. Faced with the potential risk of being nationalized, private enterprises were reluctant to increase their investment exposure and hence adopted a defensive rather than an expansive strategy. Furthermore, it appears that large scale and capital intensive public sector projects have, to a certain degree, pre-empted private sector initiatives in cases where small scale manufacturing alternatives had been more opportune. 5. Knowing the present state of Tanzania's economy, it is not diffi- cult to conclude that over-reliance on public sector resources and a centrally regulated economy has failed to overcome most of its development problems during a time span of nearly two decades. It is probably prudent to say that both ineffective public sector management and the emerging inefficiencies of many PSEs have been the most important factors contribu- ting to the deterioration of the countries overall economic conditions. Instead of promoting and encouraging development they have been a retarding element leading to economic st.gnation and becoming an increasing financial burden to any economic revival efforts. Nevertheless, between different sectors there is a fairly wide variance in role and performance of PSEs. In order to reach a better understanding to which extend PSEs in the manu- facturing sector were able to make a development contribution the following paragraphs review their performance against the explicit objectives originally conceived by the Government.  - 38 - Growth of Output 6. During the initial "post Arusha' period (1967 to 1973) the new Government concept seemed to succeed in as far as growth of value added was concerned. Manufacturing output grew by 7.8Z p.a. and the sector's share of GDP contribution went up from 8Z to about llZ. During the same time span, the share of output by PSEs in the manufacturing sector increased from 5X to about 32Z and continued to rise to 39? until 1977. This remarkable increase in public sector contribution was essentially due to transfer of production assets from the private sector as well as the implementation of large-scale industrial projects in the public sector. Following the first oil crisis in 1973, industrial growth slowed down to 6?, approximately in line with the average GDP growth rate from 1973 through 1977. During the subsequent 1978-1984 period, however, industrial value added declined rapidly by 16X p.a. and caused a decline of the manufacturing share in GDP to about 5? by 1984. Manufacturing output dropped to about 40? of its value in 1977 in real terms as a result of very low capacity utilization. For the PSEs, the average decrease in output was steeper than for the private sector companies which demonstrated more resilience and were even able to realize some temporary output gains at the turn of the decade. By 1984 PSE share in manufacturing added value had shrunk to about 251. Capital Formation 7. Investments in manufacturing were relatively large (about 7? of GDP) throughout the 1970s in spite of the sector's declining productivity. This trend reversed only in the early 1980s when the private sector began to reduce its capital spending in a significant way. During the 19708 the investment share of PSEs in the manufacturing sector was on average slightly above their share of output. It was not until the early 1980s that this relatively steady investment/output relationship changed substantially in as far capital expenditures of PSEs increased by about 35? thanks to the continuing in-flow of ODA while at the same time output fell drastically. Although availability of consistent data is scarce, evidence suggests that during the 1970s approximately two-thirds of the parastatal investments were financed through internal resource mobilization while the remainder was provided through external sources. In light of continued in flow of foreign assistance and declining "surplus" generation of PSEs, it is more than likely that since then the funding structure of fixed investments in the manufacturing sector has changed significantly and that the sector's dependence on foreign resource financing has re-emerged. Employment Generation 8. Industrial employment in the formal sector grew by 7? p.a. over 1979-82 and reached at the end of the period 16? of total employment, more than three times its share of industrial output. By 1982 value added per employee was probably only half of what it was in 1966 in real terms. PSEs employ about 55Z of total employment in the formal manufacturing sector against their share of output of aboVt 25Z in 1984. 9. As a result of new acquisitions and expansion, public sector employment quintupled in the manufacturing sector from 1967 to 1972 from 5,300 to 25,400. In subsequent years emplo ment by PSEs continued to grow  - 39 - at about 11? p.a. until 1979 when public sector employment reached a plateau of about 53,000 and average growth rates began to fall to less than 12. Although employment data are not necessarily very reliable nor up-to-date, indications are that during the years of 1977-79 industrial output per person in the public sector was about half of that in private sector while the cost per employee were just about reverse. There is little reason to believe that labor productivity in PSEs has improved over the past years, since capacity utilization continues to remain on very low levels while the employment level has little changed. 1 Export Earnints 10. Exports accounted for about 13Z of the value of manufacturing output in 1977, but declined to 7Z in 1981. The manufacturing sector's share of total export earnings remained, however, at an average level of 16Z since agricultural exports performed equally poorly. Nevertheless, it is important to note that most of the manufacturing companies are unable to earn the foreign exchange requirements of their recurrent costs. In cases where companies manage to earn a substantial part of their foreign exchange needs, it is done either by exporting goods at a price as little as one third of the prevailing domestic market price or through special arrange- ments such as payments in kind or bilateral barter agreements. In addition, foreign exchange components of working capital requirements are increasingly financed--often over several operating years--with the assistance of donor funding programs. Sector Performance 11. The performance of the manufacturing sector in general and the PSEs in particular over the last 20 years is not very encouraging and casts serious doubts about the effectiveness of the two cornerstones of Tanzania's development program, namely, the nationalization of strategic industries as promulgated in the AD and the industrial strategy as advocated in the BIS. After nearly two decades, virtually none of the development objectives outlined in the AD have been achieved to a satisfactory degree. Even a possible claim of successful employment generation must be considered as a double-edged result, since employment policies have engendered and perpetuated over-employment in PSEs in an indiscriminate fashion. Sustained market interference and absence of a self-regulating mechanism prevented a balance sectoral and regional distribution and thus failed to create employ- ment opportunities where labor productivity is highest. Instead of being able to close the wage gap between urban and rural workers by increasing the earnings of the rural population, the average purchasing power of industrial wages deteriorated over time, as a direct consequence of over-employment and declinirg productivity to such an extent that many workers/employees are probably only little better off than subsistence farmers. PSE employees and civil servants are increasingly forced to divert their energies and talents to generate supplementary income in order to be able to support their families. 11 For the entire manufacturing sector 'Labor productivity declined by 55? between 1980 and 1984.  - 40 - 12. The major causes for such dismal manufacturing sector performance can be sought in the following areas: (i) industrial development strategy; (ii) industrial policy framework; and (iii) Public Sector Enterprise performance. Although the two former items are closely linked with the PSE performance, their specific review is given in the report. While it may be true that PSEs have operated in a less efficient manner than the private sector, a large part of the fault must be sought in Tanzania's industrial development and policy environment, often setting the wrong economic signals and not providing adequate reward to entrepreneurial initiatives. Many of the industrial policy features have had an equally negative impact on the operation of both public sector and private enterprises. PSE Performance 13. In assessing more specifically PSE performance, it is necessary to get a good understanding of the Government intention of the role and purpose of PSEs. As stated in the AD, the Government envisaged industrial PSEs as a major vehicle to contribute to the Tanzania's economic development by under- taking manufacturing activities with the objective to (i) provide goods and services in an efficient manner; and (ii) generate surpluses for the purpose of capital formation. 14. PSE concept is the major building-block of a development philo- sophy based on the objective of creating a self-reliant und socialistic society, and as such emphasizing equality of its people and minimizing its dependence on foreign assistance. Ownership control of important and strategic productive assets, was considered to be a relatively simple way for the Government to redirect industry in activities towards its basic social goals. However, little attention was given to institutional impli- cations by not devising an effective planning and monitoring system to address in absence of a market mechanism vital factors such as: (i) linkage effects (complementarity among industrial activities and across sectors);(ii) comparative advantage position (towards external and domestic markets); and (iii) product mix and choice of technology. Although the BIS was supposed to overcome the strategic shortcomings of the AD by stressing the need of adequate linkages between domestic raw materials, sectors, regions as well as the type of products (capital, intermediate and final goods), the Government never seemed to have succeeded in designing and implementing an action oriented plan, apparently due to lack of institu- tional support. Thus, the BIS remained an ideological platform trying to guide industrial production towards what was called a *basic good strategy" (with emphasie on meeting the essential needs of the Tanzanian people through domestic resources), without ever being able to transform its concept into economic realities. 15. PSEs ended up with numerous intervention in day to day operations by means of introducing cumbersome re6ulations and procedures instead of strategic direction towards the need of establishing basic building-blocks in an expanding manufacturing sector. All too often holding companies conceived and planned new industrial projects in an ad hoc manner, depending on the ambitions of empire-building managers in the public sector or the willingness of foreign donors and equipment manufacturer to support various isolated 'pet projects" more suited for publicity exposure than to fit into an integrated development plan (para. 35).  41 * Indicators for Industrial Efficiency 16. It is not surprising that an interventionistic environment with a maze of regulations, little strategic guidance and deteriorating economic conditions due to misguided policies, impeded effective functioning of PSEs. Private enterprises were also affected, though to a lesser degree (showing a decline in output of about 13Z versus 262 of tho PSE during the period of 1978-82). In an environment were state monopolies, supply shortages and cost-plus pricing policies are the norm, traditional indicators, for corpo- rate efficiency, such as profitability and internal resource mobilization or capital structure become rather meaningless. Under these conditions speci- fic ratios relating to factor productivities are a more meaningful way of measuring efficiency. Overall, the manufacturing sector showed rising incremental capital output ratios (ICORs) which turned negative in 1979. In the case of PSEs, which did not suffer from capital shortage, ICORs became negative already in 1977. This trend of deteriorating capital efficiency was exacerbated by a continuing decline of capital and labor productivities. The reascns for the experienced productivity loss, given in greater detail in Section C, are highlighted by a number of internal factors such as absence of an adequate incentive system, lack of setting targets for labor productivity and weak managerial accountability as well as various external constraints such as shortage of basic inputs, raw materials and spare parts, lack of foreign exchange, interruptions of power and water supplies, and general infrastructural problems (conditions of roads and tracks, availabi- lity of trucks, wagons and locomotives, and insufficient communication network). Structural Adiustment Program (SAP) 17. The Government's answer to rapidly declining factor productivity, rising production costs (largely due to a Ocost plus" pricing system)and mounting deficits of PSE (either directly or indirectly through subsidies) was the initiation of a Structural Adjustment Program (SAP) in 1982, planned to last for a three-year period until the end of PY 1984/85. The SAP was an initiative directed towards All sectors of the economy of the country with the ultimate objective to improve the Tanzania's balance of trade. The following synopsis relates primarily to goals and actions as far as they relate to the manufacturing sector or its Ministry concerned. The SAP was based on a two-strand approach to improve efficiency: firstly, on the sectoral level, the intention was to identify priorities for (i) rehabilita- tion on a subsector basis taking into account potential savings in foreign exchange (FE) and/or usage of domestic materials; (ii) allocation of FE by considering factors such as the potential for increase in capacity utiliza- tion and FE earning capacity; and (iii) improvements in product and sector linkages. Secondly, on the enterprise level efforts were to be made to overcome institutional constraints by formulating proposals which could lead to improve productivity of PSE such as payment by results, targeting of labor productivity, increased accountability of managers, improved MIS, etc. In both areas, however, little actual progress was achieved, presumably due to lack of a task force with overall responsibility for carrying out the proposed program. This prompted the Government to appoint two Presidential Commissions (one for Government agencies including Ministries and a second for PSEs) in January 1983 to recommend measures for cost reductions, enhancement of efficiency and revenue generation. The two commissions  - 42 - estimated in mid 1983 that in the entire parastatal area combined savings of approximately T Sh 760 million (US$45 million) or about 3.7? of total recurrent expenditures in FY 1984/85 could be achieved. However, the potential savings related to industry were estimated at not more than T Sh 10 million. Although there are no specific reasons given why this amount is so minute, it can be assumed that less restructuring activities were envisaged in manufacturing than in other sectors such as agriculture or trade. Again, the implementation of the recommended measures was essentially left to the agencies concerned. By mid 1984 it became apparent that ministries as well as parastatals were not particularly enthusiastic about the exercise and no effective cost cutting had been achieved. The Government concerned by lack of progress, assigned the responsibility of the cost reduction program to a Minister of State to be assisted by a Presiden'tial Implementation Team (PIT). The main function of the PIT was to devise implementation procedures, monitor implementation progress and provide overall coordination, while the PSEs were responsible - with guidance from the parent ministry - to formulate and execute a specific action program. 18. Only very few and global data reflecting the achievements of the cost reduction program in FY84/85 were made available to the mission. According to this information, total savings amounted to about T Sh 1.2 billion of which T Sh 0.1 billion were cost savings achieved in the Ministries themselves. About 20X of the savings are claimed to be results of cuts in the payroll, corresponding to a 'national' layoff of nearly 19,000 employees of which about 4,700 were discharged by the Ministries, accounting for most of their cost savings. There are no factual data available with regard to the manufacturing sector. Indications from various discussions with senior PSE managers are, however, that actual cost savings in industry are relatively small when compared to the sector's total expenditures or revenues. In many cases apparent cost savings appeared to be more a matter of window dressing and were achieved by transferring employees and certain expense categories within a group of companies rather than through effective cost cutting measures. 19. Most of the cost reduction measures (maintenance, repairs, stationary, payroll) have a relative small impact on the costs per unit of output. The program has not yet addressed the problem at its roots, namely, to improve the input/output ratios (mainly conversion ratios for raw material and energy) and to raise the absolute output level. The latter option may require to shut down other marginal operations in order to reallocate the limited resources to production activities with higher economic priority. Without a strategy of addressing these basic efficiency issues, the above mentioned cost saving program will only have a minor impact on the existing cost structure in manufacturing. B. ORGANIZATIONAL STRUCTURE AND CONTROL MECHANISM 20. In January 1965 the National Developmcrt Corporation (NDC) was established by absorbing the Tanganyika Development Corporation and the Tanganyika Agricultural Corporation. According to its Corporate Act, NDC was to promote economic development, ensure industrial growth of the public sector and to provide a link between the Government and industrial PSEs. Initially, NDC was the Government's sole vehicle in transferring economic  43 - control from private sector to the public hand and took on the role of a people's institution for economic ownership and expansion. Subsequent years of rapid increase of PSEs under NDCs umbrella made several phases of "restructuring" necessary in order to prune down the diversity of its acquired activities to maintain a more manageable corporate structure. During tne first overhaul in 1969, NDC was split along sectorial lines and retained only its operating subsidies related to the Ministry for Industries and Trade (MIT) while the remaining activities were incorporated into new holding companies reporting to their respective parent ministries. During a second rationalization campaign in 1979 NDC's activities were essentially limited to the subsectors of iron and steel, pulp and paper, electrical equipment and engineering industries. All other manufacturing operations were grouped according subsector lines and assigned to newly formed holding companies with the exception of the cigarette and brewery companies. At present, under the auspices of MIT are seven holding companies which oversee some 70 operating companies in the manufacturing area (Attachment 1). The Tanzania Cigarette Corporation and Tanzania Breweries are the only companies which do not follow a holding company structure and report directly to MIT. In the MIT two departments, headed by a director each, share the responsibi- lity of monitoring the performance of holding as well as operating companies. 21. Both holding and operating companies have their own Board of Directors (BOD) with an average size ranging from 6 to 12 members. The General Manager (GM) of the operating company is normally appointed by the BOD of the holding company, while all other appointments (including hiring and firing of unskilled labor) has to be approved by the BOD of the operating company. The chairman of its Board is in most cases the GM of the holding company. The GM of the holding company and the chairman of the BOD of the holding company are appointed by the President of Tanzania while the other Board members are appointed by the MIT. Normally, the holding company liaises between the operating company and MIT. Nevertheless, in matters which are considered to be important MIT tends to act directly through its representatives in the BOD of the operating company. Also, many of the GMs of operating companies have direct access to the secretary of MCI, which is especially true for GMs appointed through management contracts. 22. The holding companies own the equity of their subsidiary companies on behalf of the Government. They play a dual role: firstly, to provide functional services in areas such as long term planning, financial and operational control and personnel and legal policies coordination; secondly, to encourage industrial development in their respective domain, by designing, preparing, promoting and supervising implementation of new projects. Another less explicitly stated function of the holding companies is to act as a coordinator and filter towards the parent and other central ministries. One has to realize that the intrinsic role of Tanzania's holding companies is more one of an administrative superstructure than an organizational enterprise concept with the objective of facilitating asset management by taking advantage of scales of economy, achieving saving through synergism and redeploying financial and fixed assets to maximize return for the group. The management of holding companies represent more the extended arm of the civil service bureaucracy than a driving entrepre- neurial force. The main reason for establishing holding companies was to relieve the parent ministries from manpower and budgetary constraints  44 - related to the supervision of parastatals. Through the means of creating an additional administrative layer outside of the Government bureaucracy it was possible to attract more qualified personnel at a higher salary scale than the one of civil servants. At the same time the Government resolved its funding problem by allowing the holding companies to charge between 1? and 1.5Z service charge or management fee on the turnover of their operating subsidiaries. 2 23. Although the Government generally succeeded in attracting more capable senior officers and improved the monitoring process of operating parastatals, it extended many inadequacies inherent to government bureau- cracies to the holding companies. Quite often political considerations are more important than professional skills in the appointment process of senior managers. The control function of operating subsidiaries is not so much executed on the professional level of a line manager, but takes place in a more diffused political atmosphere of BOD who convene only once every quarter. This approach works only when subsidiary companies have a strong management team on their own, which is in most cases only true for companies with joint partnerships or management contracts. 3 Many senior holding company officers (e.g., director of operations) have not grown through the ranks of line functions in the operating companies. Instead, they worked their way through staff positions in holding companies after completion of their academic training. Holding companies do not prepare consolidated financial statements. In most cases, the holding company is able to show a profit as a result of (i) dividend payments of subsidiaries and associated companies andlor more importantly (ii) charging "management fees" which are due whether the operating company generates a profit or a loss.4 2/ The size of the fee can vary even more than indicated by the range above since in some cases it relates to gross sales and in others to net sales (free of taxes and duties). Furthermore it does not relate to the value added created by a subsidiary. In many cases the percentage and the basis of the fee depends on an assumed level of profitability. 3/ Although managerial talents and functional expertise are limited in Tanzania, it should be avoided to give the impression that they are not available at all. Effective managers and functional specialists are with few exceptions absorbed by the private sector which has more flexibility to provide unaccounted benefits. The problem of salary structure will be addressed in more detail elsewhere in this chapter. 4/ The ability of generating a profit depends often on factors which are difficult to predetermine or to a large degree beyond the operating company's control, such as foreign exchange allocations by donor countries for working capital needs of a particular company, opening of letter of credit through NBC, approval of a more generous price formulas by the Price Commission or ad hoc bilateral import arrangements which can be channelled through an operating company and thus improve its profitability (e.g., when General Tyre imported 25,000 truck tyres from Japan in 1985)  - 45 - 24. As can be seen from the list of companies given in Annex 1, a substantial number of operating companies have private equity partners (foreign as well as local) and/or management contracts. Except in the few cases where the Government did not fully nationalize privately held companies (e.g., Metal Box), most of the joint ventures and management contracts are concomittant with donor assisted projects. 5 In some cases the Government has succeeded in bringing back previous owners to provide manage- ment assistance (e.g., Comcraft of the UK). The majority of companies with expatriate assistance are relatively well managed, but suffer in general under the same external constraints, particularly under shortage in foreign exchange (except in the few cases where donors finance recurrent costs). With very few exceptions, 6 expatriate management contracts are based on fixed fees and do not include any risk sharing formulas. Joint venture partners and/or management contractors without ties to foreign aid programs are normally unable to repatriate neither dividends nor fees. 7 25. The control system is complex and in many instances not equivocal as a consequence of not very specific company charters, duplications in responsibilities or conflicting roles of supervising agencies. The PSEs in the manufacturing sector have to cope with two basic spheres of control. The first one is given by the formal bureaucratic structure and comprises seven layers while the second one hinges on various government agencies who are given the mandate to monitor specific corporate aspects and can have substantial bearings on the business behavior of PSEs. The following paragraphs sumarize the essential control features while Attachment 2 provides a more comprehensive description. 26. (i) Managers of operating companies are responsible for day-to-day decisions; (ii) BODs represent ownership and advise management on major decisions, review operating results and carry statutory responsibility for parastatal behavior and results; (iii) Holding companies "manage the affairs' of their subsidiary companies and are expected to "take actions to avert and minimize losses" as well as to expand business by new projects; (iv) each holding company has a BOD who is accountable for the management, establishes general policies and approved corporate plants, budgets capital expenditures and annual financial results and distribution of profits; (v) each PSE, both operating and holding companies, is responsible to MIT, the parent Ministry which approves corporate plans, budgets, annual accounts, and investments, supervises performance and requests necessary actions to be taken; (vi) of the central ministries, Development Planning and Treasury exercise considerable control. The former approves investments of new 5/ Due to foreign exchange shortage it is difficult for Tanzania to conclude contracts without foreign aid assistance. 6/ For example, the contracts of General Tyres and Southern Paper Mills are linked to sales volume and staff training. 71 One of the very few exceptions is General Tyre International which was able to earn foreign exchange by selling sisal abroad on behalf of the Tanzanian Government through its marketing network. The receipts from sisal sales were then exchanged against local currency credits.  - 46 - projects and Treasury approves the annual budget plan, supplies funds for capital expenditures, sets financial targets, monitors financial performance, gives advise for improvement and decides on dividend payments; (vii) The ultimate responsibility for the whole system lies with the Cabinet and the National Assembly. 27. Besides the above formal control structure, the Government has over time introduced an array of control measures applied through various agencies. Tax Concession and Foreign Investment Protection Act certificates are issued by the Tanzania Industrial Incentives Promotion Committee. Utilization of foreign aid is under direct control of Treasury. Import licenses are controlled by the Bank of Tanzania; tariffs are administered by Treasury; export rebates are controlled by MIT. Dividends and remittances of foreign profits and capital are scrutinized and controlled by the Bank of Tanzania. Management Agreements are examined by an Inter-Ministerial Committee after being reviewed by the Ministry of Development Planning. Industrial licenses are issued by MIT; work permits and visas for expatriates are administered by the Ministry of Labor. Foreign Exchange transactions of all kinds are controlled by the Bank of Tanzania. Prices are subject to the control of the Price Commission. The Standing Committee on Parastatal Organizations (SCOPO) approves companies' organizations and sets salary levels for employees. In addition, there are some less direct control areas such as credit and investment control through NBC and TIB; scrutiny of employment agreements through the Permanent Labor Tribunal. 28. There are clearly too many hierarchical layers and Government agencies involved in monitoring and controlling of operating companies, with the consequence that no single entity feels fully responsible for their supervision and performance. A heavy bureaucratic superstructure and dispersed control functions prove to be more hindrance than support to entrepreneurial activities. In order to eliminate entrepreneurial lethergy it is paramount to design a control mechanism which depends on fewer but better defined layers of control and at the same time engenders commercial flexibility and most importantly increased accountability. The following section will discuss key issues hampering PSE performance. C. ISSUES RELATED TO PSE PERFORMANCE 29. As stated earlier, the main objective for the creation of PSEs is to accelerate economic development based on the principles of socialism and self-reliance. In addition, industrial PSEs are expected to accomplish a range of other goals including: reinforcizl industrial growth, introducing structural changes, providing sectoral linkages, contributing to regional balances, employment generation, income distribution, and workers' participation. The implementation of a development strategy which down- grades the role of market forces and neglects private sector resource mobilization, faces formidable difficulties in an economic environment affected by major constraints in capital, technology, managerial and technical skills, and infrdstructure to name a few. Performance Indicators 30. An implicit objective of any development strategy is that imple- mentation should take place with a maximum degree of efficiency in order not  - 47 - to waste valuable means such as capital and human resources. The tradi- tional way of measuring efficiency is done by analyzing the profitability of an enterprise or any other corporate venture (para 3.14). However, in a regulated environment like the one in Tanzania where the general pricing policy is based on a 'cost plus" concept, market oriented evaluation criteria based on a profitability concept would result in misleading conclusions. In order to make a fair judgment on the accomplishments of an industrial development strategy under this set of circumstances it is necessary to apply economic indicators as surrogate criteria (e.g., effective rates of protection, domestic resource costs, incremental capital output ratios, etc.) which are described elsewhere in this report. Development Plan 31. One of the most fundamental aspects of formulating a development plan is to establish areas, subsectors and/or product groups where a country has potentially a comparative advantage. Identified sectors or products have to be reviewed and evaluated in light of future market developments, technology, need for foreign assistance, capital requirements, linkage effects and implementation as well as operating risks. This will allow the ranking of development projects according to their relative economic benefit to the country. Such basic and comprehensive approach, flexible enough to allow adjustments with changing economic parameters, would permit a project mix strategy intended to maximize economic welfare and to minimize inherent risks. In a free market economy this planning process is automatically executed by many individual investors in accordance with their willingness to accept risks. It appears that this central planning function has not been adequately performed by the Ministry of Planning in conjunction with the sectoral ministries concerned. 32. Instead, it seems that more an ad hoc approach was followed which was largely guided by advise from individual members of the donor community, equipment suppliers or certain groups with vested interests at the micro- level. The result was a little coordinated and inadequately prepared 'industrialization plan" whose implementation depended largely on project ideas presented by holding companies, donor country assistance, interested equipment suppliers and international development institutions supporting large-scale industrial projects. Rigorous evaluation concerning the impact on the country's foreign exchange position, need for infrastructure develop- ment, technology requirements, international competitiveness and linkage effects was only infrequently performed. For that reason a significant number of "show-case" projects were executed depending heavily on foreign expertise and capital, and optimistic growth of domestic demand. In spite of their relatively large-scale nature, production costs were often above international norms. At the same time, advanced technology projects defied the concept of gradual industrial growth path. Furthermore, these 'model projects" created in many subsectors state monopolies or at least an oligopolistic structure due to their large installed capacity, eliminating sufficient competitive pressure to reduce costs. While ownership changed hands, the Government remained in many cases dependent on the private sector for management assistance. This approach probably impeded rather than improved industrial efficiency since management neither faces capital risk nor finds encouragement through profit incentive. The decision to create PSEs in nearly every sector of Tanzania's economy was probably the result of  - 48 - an over-reaction to the disappointing results of an ill-conceived industrial development strategy in the early 19609. It will be difficult to remedy the present situation without introducing drastic management and policy changes, some of which may politically difficult to make. The remainder of this section addresses a number of selected problem areas which have a signifi- cant bearing on PSE performance and where urgent reforms are needed. Investment Process 33. The investment process can be divided into three basic phases. Firstly, the promotional phase for expansion of existing facilities or design of new grass-root plants is the specific task of holding companies in the context of subsector development. This means essentially identification of investment opportunities and the initiation of feasibility studies. Secondly, the review and evaluation phase falls into the domain of MIT, Ministry of Development Planning (MDP) and the Treasury. If projects are favorably received, it is at this stage that on the initiative of the holding company concerned and/or MIT discussions will be conducted with suppliers of technology/equipment, bilateral agencies, and potential donors and/or joint venture partners concerning financial and implementational aspects. Provided a project appears to be financially viable and has attracted sufficient financial and technical backing-- usually from abroad-- it will normally be supported by MIC, subsequently approved by MDP and finally cleared by Treasury as long as it does not create serious imbalances in resource allocation. The third phase is project implementation which falls under the responsibility of newly formed *operating* companies under the auspices of the sponsoring holding company. The execution of the investment process appears to be affected by the following institutional weaknesses: (i) Holding companies receive too little guidance from the Ministries in terms of direction and emphasis of subsector development, engendering often project proposals which reflect more an attitude of empire building than a rational economic approach; (ii) at the time of ministerial approvals considerations such as donor or expatriate support carry often a more weight than economic aspects such as linkage effect, competitive advantage, product mix and marketing strategy, availability of infrastructure and implementation risk. Since the GovernmRent's development concept is rather vague, it is difficult to establish specific project oriented priorities which are followed through in the context of a develop- ment plan based on increasing scarcity of resources; and (iii) project implementation suffers most frequently from restrictions imposed by an over- regulated economy, resource constraints, over-dependence on expatriate project management and limited supervision capabilities. Choice of Technology 34. As indicated earlier, one of the major problems PSEs are facing is that foreign technology makes them not only dependent on expatriate assistance during the phase of project implementation but also during the operational phase. Many projects have foreign exchange requirements which range from 30Z to 50Z of production costs, not including foreign debt- service requirements. On the other hand, the foreign exchange earning capa- city of most PSEs is not very bright for the following reasons: (i) limited and sporadic export potential to neighboring countries due to their own economic and foreign exchange constraints; donor countries support sometimes  - 49 - similar projects in neighboring countries contributing to excess capacity for the entire region; and neighboring countries often prefer to import from international suppliers to avoid uncertainties in delivery by regional producers; (ii) access to international markets is limited due to high production costs and often unreliable deliveries. In order to generate some foreign exchange, products are frequently sold abroad below cost and several times below domestic market prices. Naturally, ir.Jernationally high production costs are exacerbated by a foreign exche .ge rate which bears no relation to the scarcity of foreign exchange in Tanzania or the exchange rate paid in the unofficial market. Although the Government has made some efforts to improve the operational limitations imposed by foreign exchange shortages through introducing a scheme of foreign exchange retention (ranges between 30? and 100? depending on company and product category) on behalf of the generating company, the pool of foreign exchange is just not large enough to permit all PSEs to operate at reasonable levels. Some PSEs are completely at the mercy of international or bilateral aid organizations. In addition to the costs of expatriate management, they often finance the foreign excharge costs of raw matezrials and spare parts for several years hoping that through the retention system enough foreign exchange can be accumulated over time to allow the establishment of a self-supporting foreign exchange account. The unfortunate effect remains, however, that PSEs charge the local consumer prices substantially above costs to compensate for losses experienced in exports. Hence, the domestic consumer is further penalized by being forced to subsidize exports and the foreign exchange earnings capacity of PSEs. Infrastructure 35. Many parastatals have been established without necessary conside- ration given to the availability of sufficient infrastructure (good examples are Musoma Textile Mills and Mbeya Cement Factory). Without working infrastructure, be it the supply of utilities, transport facilities or tele- communications, efficiency and profitability will suffer in both public and private sectors. PSEs management cannot be held accountable for bad performance caused by insufficient infrastructure, rather responsibility falls on the shoulders of parent and central ministries as well as General Managers and Board of Directors of holding companies. In this respect, future projects will definitely require better coordination between Govern- ment agencies concerned; in the meantime thought should also be given to temporarily shut-down factories which suffer from lack of infrastructure. Maintenance 36. The other problem area in many PSEs is inadequate maintenance. Insufficient maintenance is often a function of age and diversity of equip- ment, required skill level and availability of funds. Many equipment items are so old that is difficult to find the suppliers of spares, especially if respective supply contracts have expired. Spares often have to be retrieved from the second-hand market which can be a time consuming exercise, particu- larly in instances where the equipment is not manufactured anymore and tech- nical judgement is required. Other factors contributing to poor maintenance are lack of operational tools as well as manuals for maintenance and opera- tions. Preventive maintenance poses a special problem due t" foreign exchange shortage and an attitude reflected in the saying 'If it ain't broke, don't fix it'.  - 50 - Training 37. As a consequence of short supply of skilled and experienced personnel, appropriate training programs are crucial in a country like Tanzania at a technical and managerial level. Since PSEs are unable to conmpete directly with private sector for quaalified staff, their performance is more severely affected by lack of competent personnel than private companies. The answer to this problem may be to emphasize more basic educa- tional and operational/practical oriented training versus long-term graduate programs abroad. Also, increased supervision and guidance if necessary by expatriates, or promotion of staff who meet the practical job requirements but lack educational degrees may provide some relief. 38. From its discussion in the field, the mission concludes that acquiring of technical skills is less of a problem given proper training than the development of managerial capabilities. Especially, on the operating side it is difficult to find capable managers as indicated by the existence of long term management contracts in various operating companies. For many Tanzanians it seems to be more desirable to earn an advanced degree abroad, and return to accept an administrative/civil servant position, than to prepare systematically for managerial responsibilities requiring "hands on' work and bearing inherent risks of possible failure. This attitude is also reflected in the hiring practices by holding companies mentioned in para. 2.04. Probably, the only way out is again a more practical exposure to managerial tasks, more supervision and guidance by the GM and BOD and most importantly more attracti"e financial incentives reflecting reward by results. Salary Structure and Incentive System 39. Although gross salaries vary to some degree in the corporate hierarchy, as a result of the progressive tax rate, the net salaries are relatively uniform and do not reflect adequately the differences in academic training, responsibility and most important:ly actual performance. Senior officers just below the GM of a holding company earn approximately T Sh 6,000 (about US$350) per month gross salary. At a tax bracket of 401 the net salary amounts to about US$200 equivalent, not accounting for social security contributions, etc. At this salary level the incremental tax rate is 80Z and increases to 95Z at a monthly gross salary of T Sh 20,000 (US$1,170). At a salary scale like this, it is not surprising, that even senior officials can not depend oi. their official salary as the only source of income considering the little purchasing power of US$200 if converted to T Sh at the official exchange rate. A more realistic idea of the local purchasing power can be given by applying the exchange rate of the parallel market which results in a US$ equivalent of a monthly salary varying between US$25 and US$36. Consequently, most civil servants and managers of PSEs supplement their salaries with income from 'moonlighting' activities such as subsistence farming, animal breeding, leasing of vehicles and renting of houses. Another way of "generatingft additional income is frequent traveling abroad, which permits officials to buy goods otherwise not affordable in the domestic market. A third possibility, though financially somewhat less attractive, is to attend as many board meetings as possible, thus qualifying for an allowance of T Sh 800 for each attendance. Time consuming efforts devoted to generating supplementary income as well as organizing procurement  - 51 - of essential goods for daily life lead to a high rate of absenteeism. Similar effects can be observed with personnel at the operating levels who are often idle due to low capacity utilization. In many instances the rate of theft has gone up substantially. At the same time it is very difficult to take any punitive actions as a result of union and party influer,ces. 40. Although the Government claims that PSEs have introduced various incentive programs to increase the motivation of the work force, discussions with PSE management reveal that most of these so called "productivity programs" are ineffective since they do not address the specific needs of individuals. They usually comprise benefits such as free medical care, transport, uniforms subsidized lunch, housing allowances, etc., which are all uniformly applied. Only in rare instances is a bonus based on achieved target production. In some instances prices are awarded for the "best worker". Apart from the fact that many of these uniform programs provide little incentive to individual performance improvement, they do not always meet the real needs of the recipients. Cases where workers sell their lunch coupons or occupy company housing facilities while renting their own houses out for a higher rent are no exceptions and are an indication that monetary rewards are more appreciated as performance incentive than uniform services. 41. The establishment of an effective compensation and incentive system in PSEs must be considered as an essential issue, though politically highly sensitive, since any program focusing on the motivation of indivi- duals is likely to be interpreted as a contradiction of the principle of equality. Financial Management 42. As mentioned earlier, profitability of PSEs is not necessarily a reflection of their operating efficiency and financial performance in an environment where "cost plus" pricing policies are dominant. Most opera- ting companies in the manufacturing sector show either relatively (Annex 1) small profits or losses. The mission reviewed the 1983 preliminary finan- cial results of the sample of 61 PSEs monitored by the Bureau of Statistics (BOS) which is also used as a data base for the annual publication of the "Economic Survey". Notwithstanding certain inconsistencies, the data compiled by the BOS indicate that 42 parastatal firms made a total pretax profit of T Sh 703m in 1983, while 19 firms made combined losses amounting to T Sh 545m. Most of the financial profits were concentrated in five parastatals (cigarettes, breweries, Portland Cement, Print Pak and AlumAfrica), while three loss-makers (Mwanza and Friendship Textiles, National Milling Corp.) accounted for 82Z of the losses. Subsidies in 1983, amounting to T Sh 400m, were equivalent to the total of taxes collected plus dividends distributed by the manufacturing parastatals. 43. Government officials often mention inadequate capital structure and the subsequent heavy reliance on short and long-term loans as the major cause for dissatisfactory financial performance of PSEs. This may be true for PSEs in general, but little evidence was found in support of the argument for PSEs in the manufacturing sector. To the contrary, many PSEs have relatively little long term debt on their books. In the few cases where capital structure is unfavorable (e.g., Mwanza Tannery, Morojoro Shoe Company or TANELEC), it appears to be more a result of poor operating  - 52 - performance than an overburdening by financial charges. In the past many companies have accumulated substantial reserves as retained earnings resulting quite often in a fairly high "net worth". Most financial problems, if not due to operating losses, are more related to the area of working capital management. Many PSEs have high working capital require- ments when compared to fixed assets or annual revenues, largely due to high inventory levels and/or outstanding receivables. Only relatively few companies in the manufacturing sector maintain a negative net working capital. Though working capital management would clearly deserve some improvement, 8 it is not clear to which extent progress is feasible in the immediate future considering the present constraints of input supply and slacking economy in general. It is unlikely that substantial improvement in working capital management can be achieved without raising capacity utili- zation which depends in turn largely on progress in trade and industrial policy reform and/or resource allocation action (e.g., access to PE). 44. The management information systems (MIS) 9 of operating and holding companies which were reviewed by the mission on a random basis proved to be fairly well designed and functioning. The operational/ financial reporting is often tailored to the specific needs of the operating company based on the experience of the management contractor. Apparently a uniform reporting system applying to the industrial PSE does not exist. Though not a major problem, it makes the preparation of consolidated reports at the level of the parent ministry more difficult. While in general MIS systems at the level of the operating and holding companies appear to be of satisfactory quality in the manufacturing sector,10 there is an institutional problem of not having established a consistent framework and data base for sectorial analysis. Firstly, it is very difficult to find consolidated information at all, neither at the level of the parent Ministry nor in the central Ministries. Secondly, each agency uses its own definition of the manufacturing sector h which makes the comparability of sector data next to impossible. Also, the data being processed by different agencies vary frequently for no obvious reason. 45. In general the parastatal sector has the reputation of applying rather lax accounting practices. 12 Of 205 parastatal organizations whose 8/ TAC mentions in its annual report that at occasion finished goods inventories appear to be overvalued by not properly discounting goods difficult to sell due to quality problems. 9/ Covering normally monthly, quarterly and yearly reporting periods. 10/ Presumably, this could be different in sectors, which depend to lesser extent on expatriate consultants. 11/ The mission noticed at least three different samples, each given by MCI, Bureau of Statistics (BOS) and TAC. In addition, there is no clear differentiation between operating companies and projects under implementation. 12/ Out of approximately 350 parastatal organizations the annual accounts of 170 are in arrear for more than one year. Some as far back as 1974.  - 53 - accounts were audited during the first half of 1985, only 392 were given unqualified auditors opinion, 442 received a qualified opinion and 182 were given disclaimers or adverse opinion. However, only 5 manufacturing PSEs under the auspices of MIT received qualified opinions for relatively minor accounting oversights, and only one company (Tanzania Crown Corks) which had severe operating and management problems was given a disclaimer of opinion. Apparently, many Government agencies do not appreciate fully the need for the usage of proper accounting standards and subsequently do not enforce them vigorously enough in the entities falling under their responsibility. A major portion of 'accounting delinquents, falls under the auspices of the Prime Minister's Office, Ministry of Agriculture and the trade wing of MIT. 46. In summary, accounting practices do not appear to be a major problem in manufacturing PSEs where sufficient supervision and guidance is provided and management takes an active interest. There are, however, two peripheral aspects to be noted. Firstly, access to recent annual accounts of the holding companies is normally difficult since the only copy of the audited annual report is frequently stuck in the printshop for extended periods; apparently for lack of paper. 13 The second aspect is that audited reports are not published in a consolidated form. 14 The format of Annual Reports is normally based on the 'cost method' in which investments (in share capital of subsidiaries) are recorded at cost and income includes only dividends, management fees, development levies and interest received. The impact of financial transactions within the group and income of subsidiaries on the holding company is therefore not fully reflected in the annual report which relates to the question of role a.d functions of holding companies in Tanzania's public sector. Role of Holding Companies 47. In the Tanzanian context the role of holding companies is ambiguous. They are performing a hy'Lrid function which overlaps with both the role of the parent ministry and the functions of operating companies. The former is essentially responsible to ensure that PSEs follow Government directions and operate in the public interest, while the direct responsibi- lity for the productive activities rests with the GMs and BODs of operating companies. Hence, in as far as holding companies monitor sectoral progress and ensure that Government policies are followed, they try to perform a ministerial task without having the full responsibility or authority. On the other hand, where holding companies execute a control function of ongoing operations they are duplicating the role of managements and BODs of operating companies. Though the functional line managers of the holding companies can interfere with the daily operation of the operating companies, there is often neither a clearly delineated responsibility nor authority. It is not clear which of the aforementioned seven control layers decides whether performance is satisfactory and/or in the public interest or not. Nor is it obvious which party should initiate remedial actions. The result 13/ In many instances the 1982 annual report was the latest published document. 141 One apparent exception in the 1986 annual report of NDC.  - 54 - is a lengthy decision making rocess with the tendency for evading responsi- bility by all participants. 5 Therefore, it is doubtful whether the institution of a holding company has provided a satisfactory solution to the problem that the parent ministry is unable to deal with a large number of operating companies directly. P EVALUATION OF INSTITUTIONAL FRAMElWORK 48. While evaluating the institutional framework of parastatals in the manufacturing sector, one has to keep in mind that various resource constraints caused by misguided economic policies are the main factor for the presently dismal performance of industrial PSEs. However, institutional shortcomings and a deteriorating policies, business environment have contributed to the steady decline of industrial competitiveness and efficiency since the mid-1970s. As described above, the Government's objectives dwell very much on social goals and call upon the people's group effort to contribute uniformly to economic growth and improvement of social welfare. The AD contains only a vague indication that the main ingredient to successful industrial performance is efficiency on both the operating and administrative level. Efficiency can only be achieved through adequate motivation of individuals and/or working teams by providing a sufficient reward system. In order to reward efficiency improvements it is necessary to establish a system of performance indicators which permit proper measure- ment of the contribution by individuals and/or work teams to the overall achievements. This intrinsic objective that all industrial operations have to be carried out in the most efficient way has never been given the important focus it really deserves. 49. Also, corporate objectives have not been sufficiently explicit. Open ended objectives such as generation of 'reinvestable surpluses' are not very meaningful in relation to productivity, efficiency or overall performance. Enterprises can operate very efficiently and still produce (for other reasons) losses and vice versa. The need for improving existing efficiency plays often only a subordinate role in corporate plans. Presently the Government tries to improve corporate efficiency by imposing a top-to-bottom type cost reduction program on PSE management without realizing that arbitrary cost cutting measures can lead to even greater inefficiencies as shown by the limited impact of the cost reduction program under SAP (para. 1.18). Considering the very low levels of capacity utili- zation at which many companies operate presently, there are really only two options available which could bring a significant impact on the operating efficiency: (i) increase of capacity utilization and/or (ii) improvement of input/output ratios. Both options are to some degree interrelated and depend to a large extent on the availability of FE. In order to increase efficiency in the economically most viable undertakings the Government may have to consider shutting down operations which yield lower economic benefits. This more fundamental aspect is completely disregarded or ruled out in the current cost cutting exercise. 15/ As a point of case, diffused responsibility and insufficient engagement has greatly contributed to the failure of the Morogoro Shoe Company.  - 55 - 50. In order to provide management with a realistic chance to meet theih targets two conditions are normally essential: (i) availability of agreed resources or inputs and (ii) provision of authority which reflects the assumed responsibility. Both conditions are not adequately met under the present economic circumstances and institutional arrangements. 51. Assuming a clearly defined role, the formation of holding companies responsible for several subsector related companies is a laudable concept. The reason why holding companies have in many cases not kept up with expectations is more a matter of the weakness of the institutional set- up than a shortcoming of the basic idea. The mission concludes from field interviews that well managed operating companies depend very little on the functional services of their holding companies. Although the extent of guidance provided by different holding companies varies to some degree, their main purpose, as perceived by management of operating companies, is a liaison function to canvass support or approvals from the parent ministry or other government agencies. In most cases, support activities by the general manager of the holding company are recognized as most useful, particularly towards influencing the members of the BOD of the operating company. The question which arises is whether these types of service functions require an elaborate superstructure. The number of professional personnel in holding companies ranges from 33 (TKAI) to 204 (NDC), though these figures include staff involved in project development. In their present form it appears that holding companies do not fulfill their apparent role in an economic way. To the contrary, they may contribute not insignificantly to the dilution of responsibility and accountability. Furthermore, it appears that only a relatively small part of ca3h generated by operating subsidiaries is directed toward the support of new projects, while a substantial portion is used to meet operating expenses of the holding company. 16 52. The parent ministry has two basic roles to play; one is the regulatory function for the manufacturing sector and the other is to coordinate and oversee government investments in industry. The first function involves setting up the industrial policy framework, preparation of broad sectoral goals in coordination with the Ministry of Development Planning, and defining the role of public and private sector enterprises. The second function involves (a) review and approval of new projects submitted by holding companies, 17 and (b) monitor and evaluate performance of existing PSEs, e.g., make strategic decisions to reallocate limited resources between PSE, to increase efficiency in priority industries and close down others with lower national priority or lower competitive advantage position (possibly on a temporary basis). MIT does not seem to have succeeded in playing an active leadership role in the development and 161 For example, in 1982 and 1983 NDC had an average gross income equivalent to about 4? of net assets which was applied in the following way: 57X for general overheads of the holding company; 26? covered financial and other provisions; and the balance of only 17? for profit before tax. 17/ With emphasis on economic viability, development priority, linkage with existing programs, availability of infrastructure, utilities and financial resources.  - 56 - implementation of an integrated industrial strategy. Rather it has subsided to a more passive role following the initiatives of holding companies and limited itself to more administrative functions. An impression which is also confirmed by the fact that its participation in discussions with central ministries often carries less weight than that of holding companies. 53. Of the central ministries, the Ministry of Finance or more speci- fically the Treasury Registrar plays the crucial role in supervising the financial performance of PSEs. There are, however, doubts about how effectively this task is performed and how much leverage Treasury has to enforce actions to be taken or retain funds if conditions for their disbursement are not met. Furthermore, it is not clear how actively the Treasury participates in the decision process of distributing and allocating any surplus funds generated by operating companies. 54. The main reasons for a unsatisfactory functioning of the institu- tional framework can be categorized as follows: (i) general economic conditions; (ii) lack of monetary incentives; (iii) little cost consciousness; (iv) too many control levels with inadequately defined res- ponsibility and insufficient authority (para. 26); (v) lack of managerial competence in holding companies, combined with political patronage, nepotism and rapid expansion; (vi) ministries suffer from insufficiently skilled and trained manpower; (vii) absence of uniform reporting requirements and information systems, and (viii) interference from too many regulatory government bodies. E. POSSIBLE STRATEGY FOR PSE REFORM 55. It cannot be overemphasized that any institutional reform process has to be preceded by adequate policy reforms. Secondly, any practical reform process should be guided by the ultimate objective to increase the role of the private sector in the future. However, one has to realize that there are limitations with regard to the speed of broadening private sector involvement for the following reasons: (i) existing political/social struc- ture and future objectives of the country's political leadership; (ii) fear of creating privately held monopolies or oligopolies; (iii) concern that strategic industries could fall under the influence of minorities; (iv) non- existence of a capital market; and (v) hesitation of foreign investors in light of past experience. 56. Judging from the little impact recommendations of various committees, high level task forces and consultant studies have had in the past on the efficiency of the parastatal sectors, it must be deduced that any approach which does not have a strong political bearing is likely to peter out without achieving much change. What is necessary is willingness of the Government to introduce in a phased manner fundamental reforms which will gradually lead to a more self-regulating manufacturing sector. If such long-term strategy were accepted in principle by the Government, a multi- year plan could be prepared, identifying for each phase specific targets and a well defined action program. In regard to the institutional framework such a plan should comprise the following elements: (i) Development of an organizational structure for holding companies which assimilates as much as possible features of the private sector;  - 57 - (ii) introduction of a salary and incentive systems which provide rewards in proper relation to achieved results; (iii) installation of a performance evaluation system vhich encourages efficiency improvements; (iv) reorientation of role and functions carried out by MIT and Treasury with regard to PSE supervision; while MIT may focus on sector/subsector issues and policy framework, Treasury could emphasize monitoring of financial performance of PSEs; (v) streamlining of Government interference by cutting back procedures hampering day to day operations and reducing the number of Govern- ment agencies which currently intervene in management of PSEs outside the functional lines. (vi) clarification of scope of authority and responsibility of each structural control level to stimulate effective decision making; (vi) installation of a uniform and multi-purpose information system. 57. An institutional reform of PSE management would have to address the roles and functions of the major actors in the institutional hierarchy. Without elaborating on details a streamlined system should probably be based on the following basic premisest Xi) Decentralization of overatins companies should be maintained in order to encourage implementation of joint venture and management arrangement where not already in place. It would also facilitate physical restructuring activities, redeployment of assets or possible transfer to private sector. The managerial autonomy of operating companies should, however, be widened. More autonomy should be given in particular in areas such as: budgeting, procurement, personnel and setting of performance targets. At the same time attempt would have to be made to depoliticize the BOD and to improve its professional character. The size of the BOD should be limited to 6 or the most 8 members (mainly professionals from private and public sector), focusing on performance control in general and strategic decision making. (ii) The size of holding companies could be reduced substantially, say, to 10 or 20 professionals who would carry out 4 main functionst (a) ownership control and financial guarantees when necessary; (b) coordinating link with Government agencies, ensuring uniformity of policy application and information systems; (c) monitoring and reviewing the need for improvements in logistics, infrastructure, utility and raw material suppiy on a subsectoral basis; (d) promo- tion of new projects in the context of its subsector and provide guidance and supervision to the implementing project team. The 6- 8 members of the BOD should be composed of both senior government officials and senior managers. (iii) The role of the parent ministry, MIT in the case of manufacturing, would essentially be limited to the formulation of sectoral  - 58 - policies to be carried out within the nationwide framework of development strategy. MIT would be given a seat in the BOD of holding companies. (iv) Treasury would be responsible for monitoring--through the holding companies--the financial performance of PSEs and assessing their impact on the national budget. A institutional structure along those lines--admittedly of very preliminary nature--would reduce the number of control levels to two. This approach would also have the advantage of following subsectoral lines rather than arbitrarily designed areas of responsibilities of parent ministries. Therefore the consolidation of Tanzania's industrial activities could be greatly facilitated on a central ministerial level. 58. The other important factor of a public sector management reform relates to an integrated incentive and performance evaluation system. This complex and politically sensitive question can probably only gradually be resolved. The design of such a system and the kind of rewards for performing to objectives depends very much on the degree of "liberalization" the Government is willing to accept for the manufacturing sector and may require the formation of an independent senior level council with an attached secretariat. The main criteria for designing an incentive system should be to improve efficiency. The use of certain performance indicators may vary with specific nature of subsectors and depend also on the envisaged degree of market orientation. 59. A third crucial aspect is that probably only a major long-term staff training and management development program can mitigate the chronic shortage of skilled and competent personnel, especially at the ministerial level. The solution may be a broad-ranged "on the job" training program, concentrating on various but specific task areas (e.g., financial control, performance evaluation, etc.). Based on past experience it is recommended to use a counterpart system in order to ensure transfer of methodology, technique and know-how. Right from the beginning, local staff would get actively involved in the process of problem solving while closely supervised and guided by functional experts. Depending on training progress opera- tional responsibility of local staff would gradually be increased while at the same time expatriate support can be phased out. This approach may require a long-term consultancy effort. 60. Overall, one can say that the heavy emphasis on PSEs in Tanzania's development concept for the manufacturing sector has not met the high expectations of the Country's leadership. The major reasons for poor performanze of PSEs and their disappointing contribution to Tanzania's industrial development can be designated to four broad areas: (i) political nature of decision-making structures; (ii) political patronage; (iii) shortage of manpower; and (iv) lack of control. All four problem areas are closely linked to the society and political structure of Tanzania. It is doubtful that the above recommendations to increase the effectiveness of the existing institutional framework will accomplish sizeable or sustainable results if they are not accompanied by a gradual return to greater reliance on market mechanisms.  - 59 - 61. Market forces provide a much more effective means to change ingrained behavioral and institutional pattern than Government regulations and controls could possibly achieve. They also are a powerful tool to encourage cost-benefit awareness at Government and enterprise levels. In absence of a sufficiently developed consciousness of cost-benefit principles, it is likely that economic decisions will continue to be made without adequate consideration of their potential impact on the country's welfare or economic development. Efficiency considerations develop best in an environment where market forces determine economic success or failure. Only if the need for efficiency as an economic rational is accepted by indi- viduals, it will be possible to institutionalize efficiency awareness at the macro level. A more market oriented economy will clearly help to pave the way for a future divestitures of at least part of the PSEs which must be considered as an essential measure to complement above institutional recommendations. The extent to which Tanzania's manufacturing sector can be revitalized on a sustained basis will largely depend on the Government's intention to draw on the resourcefulness and ingenuity of private sector entrepreneurs.  Attashut t Page -I-f 3 -' _~~~~~~~~~~~~~~~~~fia opris isf I f X,qb Stft(t t9 Praftt _11i Pnrt1cipttin Private _mast timt E * Beoe Be foe l / IbUtqt OIMies t wertL% 0uq.1et I Sinr Seh91der (batmt wtth Ste (KUf is lw ian lXhD 1Th t. bmtioml tvelomw I 0 9, aDprt.a(NW) 1. Altuim Af rica 38 MAT ft, r t. 66,t78 2. 1bttrml Steel Orporatton 21,40S 1,010 3. bwada tMs (mpoa 40 we 21,401 4. Iitkti l 8Mnwttg Q(paiy 25 Others 6.467 8,45S S. utxl IIx twssia SO MID Mtal SI Orsea, UK 1940 444 6. Thuanlhn Qbask 0tw 13 others 310 7. Utbm Pars lqlAnt , in 10,785 g. FNbyra 8Wtpzt KIWI), I*lt.k 9. %tor mrt 541 1,753 ItO. _ Ihdo & FbsXte Tools Il. Steel l11ta gV1fits S Dntet 4,529 (7,310) 12. Tmlumi Okbtes tO IWL ONiraft, UK 8.689 8,7 13. TAEIMM 20 tbt'l 1m&tstry National tad., bzw 499 (636) 14. Soutlern Pier illls stotlert nternet'l, (mda 15. Ktllbuannj hc-hine Tools 15 AX1W E 6him Hiiot O'learta Ih. Ught Sorce Iasxacturt., 33 MM1D awPr,4 movary 17. bttirk 8tcycle (mqz1 40 M80 H i-lton Id.. Imia ND 18. Air omicatton 'ehdegktqes 10 19. Wkttc A.ably tbpan 20. LtgmrgS Iron & Steel PO 21. t&m Parm Fq4uijt tO 22. befrigeat an Sqaplnt PO 1t. State Ittor (brp. 84 33.449 (SC) 1. Tamnts tbtor Owrpration 2. Pbtor Services 3. Rldab )btor 4. Mma4ht Trator Vehic. 4_s. 1,15 S. FPAt Af ria lbtor Ausae,1l.tq 746 6. tiq,resa Tanta 7. o*ns & Ba S. Trallers & t1i lAnes (Tralico) Vd1a Gortce, tavela 9. Tractor lhiafecturiag (Tram) mlat, Ptard .22,144 10. ThanzLA Auto. lmf. (1hc) 10 Saab Scant Sab Scads, n 20,201 Ill. Seruji Grop (SC) 137 2,A66 1. bazania Portlmat (Otent 0Intv, SedV 19,212 2. Thap a ent Smi4th, Ikwart 11,343 3. mbeya Ont ND 4. Ilae Clans Ibtks 5. lbrmrd; ofpu 6. Tu1arla 8seet Clams braft, tX (15.482) 7. Ibroo (eramirs 30 DHlG) Qaaraft. tll 8. Tawrnla Clay Proucts 9. Ibopla Prefabrctale Cowrete ND 10. Seruji ?ttk1 rg 101  Attachment 1 Page 2 of 3 Private Opera- mbor of 198 Profit(toa) Il94 Profit (jos) Partietpatin Private t10ment tioal a/ b>1oees hfore Thue bfore Toms C/ lbldnen teies Operating O eX in % Shareholder (ntragt with Stag) (1tn5) In 1000 Th in low 'Tn IV. lbttam l Chemical 42 2.703 ImAlstry (MCI) 1. Aeral Tyre 28 On, tUA Gmeral Tre bnternt'l, USO 11,201 60,372 2. Tanzania Pharmaimtical lW. (2,485) 3. Kieo ihr etlcal ld. 4. Polysacks 0a_Y 5. ubbber i strles (5) 6. Tegry Plastics 11,328 7. SbdIn ldustrles 15 TDFL (8.291) 8. T 1sua Perttltzr Q_sy KClodr, F(a9 9. V t T lTazw a Starch lkmjfacturers Ntivba, rbllam V. Nt~tonal Taxtile 118 .5,221 (brporattan (TEWCO)li521 1. Pritenlship Textile fll1s (46,283) 2. towa Texttie ttill Sagpls, Pakistan (107,364) (251,930) 3. lbqg i 1yelug & 1wvtU ?Ills (SUIIM) _ 4.1 Rom Txtile Mills 9Saefer Kag., France 5. Tanzanda Itb Grporatton (1,938) 6. Btm*ets lbalfacturers 9,431 682 7. UhaI Gaan*s 4,154 8. Kittmnaro Textlle MIlts 42 Others Saigols, Pakistan 8,059 (21,641) 9. ibu %,4ptnid M ill N.A. ND 1 10. tMaa Taxtiles Texth, (a ND It. Pnigor Palyester Teaxt tle UODX fllineetg, Belgim 12. Maboa Spimjg N.A. FO 13. l bazania Packages tkzusacturers N.A. PO a! N): &vv- Operative. PI: Pre4)perattonal. If not o*henwse Lnlicated then operational. y 1M83 Profit (Los) figurs ae only given for cosanles whidc are tnclued In survey of the wereas of Statistics. cl Selected 1984 Profit (Lass) f iies eoxuld be extracted froa TAC's Annsl &rWi Seat Repxrts. Al Includtiq Operat [ua. (S-47d)  Attachment 1 Page 3 of 3- Private opera- __Nber of 1983 Proftt(oes) 1984 Proftt (laow) Participation Private t Ugment tinl 8/ afloyees Before Tans Before Tames Cf lbldtrn, rnajiles Operating qanXies in X Sharehlder (bxtract wiith Stage (1985) in 1000 1T in 1000 1m VI. l iuaia KAratast 33 TAC 0.04 & Asxatatei Indastrtes (WAI) 1. Printpk 44,978 2. Kibo Paper lrAxstries to 1WL 57,28 3. East Afrtcan 1'&ttcatton 394 4. Tanz{na Pudbishtng lbuse 6,547 5. ?atiomd Prtnt ng Cqmny 13,115 VIt. Tanrzania Letler 72 Associated Industrles (TlAt) 1. Tbuanla Tnineries 6,739 9,808 2. Ibrogoro Tnatweres 2,164 3. MIma Tanucrtes (3,555) (4,080) 4. lArania .uoe (qpn (4,930) 11,117 5. Ibrogoro Shoe Qsyny (16,601) (33,00) 6. ibrovro Cvas M41l WIK, HlamIta (8,351) 3,675 7. Mbrogoro Leather Goods (2,170) D NOW 2PANIES 1. lmtanla C4garettes 1,756 d/ 156,035 197,774 1 0. 11. lTnzaa Brewries 2,822 d/ 66,961 212.5t 1. llL Fans 2,209 2. 1brew 3. Tania 1bItlng at N): tm Operative. PO: Pre-Operationl. Tf nDt otlerwise indicated then operattonal. b/ 1983 Profit (LEs) figures are only given for canies dhtch are Inclided in survey of the Ibreau of Statistics. c/ Selected 1984 Proftt (los) figures could be extracted fra Wm's Ansl ad Sad It-ports. dI ltnIg Oper itions. 'S47d)  Attachment 2 Page 1 of 5 SUMMARY OF CONTROL MECHANISM FOR PSEs 1. Organizational Layers with General Supervision and Control Functions 1. Workers Council: Approves corporate plan and budget. 2. BOD of Operation Company: Accountable for the management of corporation, establishes general policy of corporation, approves corporate plans, budgets, annual accounting, capital investments and personnel appointments except General Manager (GM). 3. Management of Holding Accountable for management and financial performance of group of Company: companies. 4. BOD of Holding Company: Similar to (2) above, but on company group level, approves appointment of GM of operating company and personnel in Holding Company except GM.  Attachment 2 Pase 2 of 5 5. Parent Ministry: Appoints the members of the BOD except Chairman and General Manager; gives directions of general and specific character; supervises performance and requests necessary actions to be taken; approves the corporate plan, the budget and the annual accounts and capital investments; submits statement of accounts of the corporation to the National Assembly. 6. Central Ministries: (a) Ministry of Planning Approves investments in new projects. (Devplan): (b) Ministry of Finance Approves the annual budget, investment plan; supplies necessary (Treasury): funds; sets financial target; supervises the financial performance and advise on actions to be taken to improve the performance; directs the corporation to pay dividends.  Attachment 2 Page 3 of 5 (c) Ministry of Manpower Monitors education/training programs of companies, labor produc- Development tivity, production targets and decides if employees qualify for bonus payments. (d) Ministry of Labor and Prepares workers' rights legislation, (e.g., security of Social Welfare: employment, severance allowance, national provident fund) and monitors enforcement; issues work permi.'s and visas for expatriates. 7. National Assembly: Establishes statutory corporations, follows all activities of PSEs and bears ultimate responsibility for their performance, seeks resignations of senior officers if necessary. (a) Parastatal Account- Recommends measures to be taken to improve accounting practices; ing Commissions recommends to the National Assembly actions of reprehensions of (PAC) senior officers in case of negligence. (b) Party Standing Follows-up the recommendations made by PAC, advises parent minis- Committee: try on steps to be taken to rehabilitate and/or develop companies. 8. President: Establishes PSEs and appoints Chairman and GM.  Attachment 2 Page 4 of 5 11. Government Agencies with Specific Monitoring and Control Functions 1. SCOPO: Apprroves the corporate structure and sets salary level of employees. 2. Government Party (CCM): Supervises that Party Policy is obeyed. 3. Tanzania Accounting Reviews companies' accounts, issues audit (opinion) reports and 0 Corporation (TAC) submits annual report on PSE to National Assembly after approval by the President. 4. Permanent Labor Tribunal: Monitor-, omp]o;ymek1t agreements. 5. Inter-Ministerial Approves management contracts for expatriate consultants. Committee: 6. Price Commission: Administers price control mechanisms.  Attachment 2 Page 5 of 5 7. Tanzania Investment Control and approve all transactions involving foreign exchange. Bank (TIB) and National Bank of Commerce: (NBC) 0% l4  - 68 - ANNEX 3 THE MISSION'S INDUSTRIAL EFFICIENCY SURVEY (MIES): DATA AND METHODOLOGY  - 69 - THE MISSION'S INDUSTRIAL E1mICIENCY SURVEY (MIES): DATA AND ODOLOGY Introduction 1. The analysis presented throughout the report relies heavily on the data collected by the mission's industrial efficiency survey (MIES). This is because data analysis based on domestic prices is often misleading, when, as in the case of Tanzania, there is an overvalued exchange rate and high (and variable) levels of protection given to domestic industries, which result in large divergences between domestic and international prices. Thus, values of production measured in domestic prices include elements of protection as well as of actual production. To capture actual production trends and structure, it is then preferable to measure production values at international prices since this ignores the artificial price biases induced by domestic protection. Generally, however, it is difficult to measure these economic variables at world prices, since the required data is not available. 2. For this report, the Bank, in collaboration with the Tanzanian authorities, conducted a detailed survey of over 120 industrial activities that account for one-half the output of the sector. As described in detail below, all industrial subsectors and types of firms were represented (public, private, large, medium and small -- excluding non-factory enterprises) in the sample. This comprehensive representation of all segments of industry, in addition to the large share of industrial production captured by the sample (and the knowledge of the weight of each type of firm in the sector as a whole) permitted the simulation of the industrial sector in 1984 to analyze in detail the industrial structure and its performance, efficiency and protection. The calculat'ions presented in this report on economic (and financial) rates of return, Domestic Resource Costs, Rates of Protection (see definitions below in Chapter Three) and values calculated at world prices for 1984 uriginated from tbe mission's industrial efficiency survey (MIES). As expected, the results indicated that there are large discrepancies between values calculated at world prices and values at domestic prices. The Survey 3. A comprehensive questionnaire (see Attachment I) was distributed to 56 firms involved in about 135 productive activities. During the October 1985 mission each firm was visited by at least one mission member and a staff from the Ministry of Commerce and Industry. Each lengthy visit to the firm had the aim of completing the questionnaire with the enterprise's chief accountant and his staff, or when the questionnaire had been substantially completed prior to the visit by the mission, the purpose was to check all the information provided, complete gaps and correct inconsistencies. 4. A preliminary review of the questionnaires was done in the field. When gaps or inconsistencies were detected, the firm was visited again. Upon return to Washington, the data was coded and inputted into the computer and a comprehensive consistency analysis was performed. Gaps and some  - 70 - inconsistencies were detected in about one-half of the questionnaires. The computer analyst responsible for the survey's execution returned to Tanzania in January/February 1986 and visited each firm where data problems has been found. Following these visits, preliminary checks were done again in the field and consistency analyses done in Washington, which indicated that the data collected was complete and satisfactory for 48 firms (118 productive activities) out of the original 56 firms chosen. 5. The data provided by 2 firms vas not fully satisfactory, and the questionnaires for 6 firms were never fully completed. The successful sample of 48 firms, representing 118 activLties became therefore the basis for the efficiency analysis in this report. 6. The eight page long questionnaire asked each firm to provide about 250 pieces of information for 1984 which covered quantity and prices (domestic and international) of the firm's outputs, recurrent inputs (raw materials and spare parts), labor and capital costs, energy use, duties paid, transportation, freight and insurance costs. The questionnaire also requested information on existing capacity utilization, installed capacity, and attainable capacity utilization (defined as the capacity utilization that could be attained if the required recurrent inputs and foreign exchange to purchase them was available under present demand conditions). In addition, some over-time information (from 1982 to 1985) was requested, particularly for capacity utilization, imported inputs, exports and foreign exchange allocation. (see Attachment I for details). 7. Samle Re2resentation and Sample Biases. Firms in all subsectors were represented in the sample. I Within each subsector, public, private, large, medium and smaller activities were represented virtually without exception. The original sample was generated by first stratifying it into public and private and by subsector, and selecting the firms within each cell randomly. It was decided not to generate the sample randomly for the whole industrial sector because three important objectives of the survey were Ci) to cover a significant fraction of industrial production within the constraint of surveying about 120 industrial activities; (ii) to have a particularly comprehensive coverage of the public sector., and (iii) to ensure that all industrial subsectors were represented. Consequently, public sector activities, which tend to be larger, were significantly overrepresented in the sample. Thirty out of the forty eight enterprises in the sample were parastatals. Smaller firms, which are largely private and more labor intensive, were underrepresented. Non-factory small scale enterprises were not included in the sample. These biases were carefully taken into account in the sectoral efficiency assessment by constructing activity-specific weights. The sample biases towards public sector and larger activities resulted in the sample collected comprising over one-half (53 percent) the outDut nroduced by the industrial sector in Tanzania. 1/ Food processing, beverages, tobacco, textiles, leather and tanneries, rubber, glass, wood and paper, cement, plastics, pharmaceuticals, chemicals, fertilizer, iron, steel and metal products, machinery and transport equipment.  - 71 - Border and Shadow Prices 8. The conversion from financial values to economic values (for Domestic Resource Cost and Economic Return on Capital Calculations) required the use of shadow conversion factors and border prices. 9. Border Prices for OutRuts and InRuts. In order to evaluate systematically both revenues and intermediate input c6sts at financial and economic prices, it was necessary to obtain the volumes and prices, domestic and international, of outputs and inputs. Information on volumes and domestic prices were available at the firm level. For the final goods, respective unit average ex-factory prices were applied, and for inputs average unit landed costs incurred by the firm up to the gate of the factory. Conversely, the information on international prices was often unavailable at the firm level, particularly for output border prices. 10. All directly imported inputs and other tradeable inputs which were not directly imported by the survey firms, and the final goods manufactured by the import-substitution activities were valued at their respective c.i.f. prices in order to arrive at their economic opportunity cost. All locally procured inputs which are also exported and export final goods, were valued at their respective export f.o.b. prices. International prices for directly traded inputs were sought at the firm level. For all remaining locally procured inputs which are internationally traded, and import-substitution outputs their c.i.f. prices were identified from (i) import invoices of the major importers in Tanzania; (ii) bills of entry held with the Customs Office in Dar-Es-Salaam; (iii) quality and price certificates for imports issued by the representative office of the Societd Gen4rale de Surveillance located in Dar-Es-Salaam; and as the last resort, (iv) c.i.f. prices for Zambia, Uganda, Madagascar and Mauritius obtained through similar surveys carried out in 1984 and early 1985. 11. In the price selection, the quality of imported inputs was carefully assessed in each case by comparisons with other Eastern African countries. In case of multiple price choice for the same item, the selection was always made in favor of the one with the lower price, consistent with the approach taken throughout the industrial efficiency survey and the calculations, which was to always make 'lower bound" assumptions to ensure that any resulting biases would be in the conservative direction. The number of items which could not be assigned an international price was very minimal. For these items, the economic value was approximated by its domestic market price. 12. Importance was given to the issue of quality assessment in the selection of international prices for the outputs. Consistent with the conservative approach menitioned above, whenever fairly acceptable substitution was encountered, the obtained c.i.f. import price was selected as the reference international price, without any adjustments. In the situation of evidently pronounced quality differences, however, the c.i.f. import prices were subject to a moderate downward adjustment (ranging between 5 and 20 percent) if similar product quality was not internationally traded. When it was possible to identify the imports of the competing final goods coming from similar Eastern African countries the international prices vould be selected among those.  - 72 - 13. Conversely, international prices of the iron and steel products were adjusted upwards to account for the presumption that current international prices of the iron and steel products have been temporarily depressed. International output prices (c.i.f.) of the all iron and steel products were thus increased on average by about 15 percent. Shadow Price of Foreitn Exchan&e 14.. During the first half of 1984 the official exchange rate was US$1 - T Sh 12.5, while the official exchange rate stood at US$1 = T Sh 17 during the second half of the year. Thus, the average official exchange rate for 1984 was US$1 = T Sh 15.3. Throughout 1984, however, the exchange rate was significantly overvalued. Data and analysis stemming from IMF R.E.D. reports, from a Bank paper on exchange rate overvaluation in Tanzania, and our own analysis indicated that a reasonable range for the average shadow exchange rate throughout the year was T Sh 35-45 for the dollar, i.e. over twice, and up to three times, the official exchange rate at the time. The mid-point US$1 - T Sh 40 was selected for all the economic calculations. Sensitivity analysis suggested that the results would not vary significantly if either an exchange rate of T Sh 35 or T Sh 45 was chosen instead. The assessment of sectoral efficiency would change only if for 1984 the shadow exchange rate was to be assumed to be below T Sh 30 (sectoral inefficiencies would be larger), or above T Sh 55 (sectoral inefficiencies would be smaller). 15. The adjustment factor for converting the official exchange rate for shadow exchange rate therefore was 2.61. All outputs and tradeable inputs were subject to this conversion factor. Shadow Price of Labor 16. The shadow price of labor was indirectly subject to a significant downward adjustment from market prices measured in (official) foreign exchange terms. This was the outcome of the substantial adjustment of the shadow price of foreign exchange. Thus, the marginal productivity of labor of a worker earning a market wage of US$100 was assessed to be only US$53, i.e. the overall conversion factor -- accounting for the exchange rate conversion factor -- was 0.53. 17. The real wage deterioration in Tanzania's labor market over the past eight years has been extremely severe for all categories of workers: in constant T Sh, or dollar terms, workers in industry earn today only a fraction (less than one-seventh in most cases) of what they earned in the late seventies. The magnitude of the real wage drop suggests that the market wage does not diverge very significantly from the opportunity cost of labor. Consequently, applying the implied conversion factor of 0.53 was, again, regarded as a conservative assumption, (aiming at minimizing the possibility of understating the true value of any output produced in Tanzania and of overstating the true opportunity cost of any input or factor of production). 18. An additional adjustment was made on the quantity axis of the employment sector. As suggested above, wages have adjusted dramatically in Tanzania to approximate its opportunity cost. However, restrictions on  - 73 - employment mobility has resulted in virtually no adjustment on industrial employment. Most industries carry large numbers of excess workers for its present levels of capacity utilization. Thus, particular care was exercised in determining whether the activity would require any additional labor to produce at attainable capacity utilization levels. In most cases the firms indeed responded that they would either need no additional labor, or at most a less-than-proportional increase in employment. An adjustment of labor costs at attainable capacity utilization was thus done for each activity, where in many cases no nominal increase in labor costs was imputed when increasing output to reach attainable capacity. Consequently, the resulting opportunity cost of labor as a fraction of output was substantially lower for the attainable capacity utilization calculation. Shadow Price of CaDital 19. An effort was made to capture the market value of the various capital assets for each firm. Such information was not always available, so adjustments were made (with the input of the firm's chief accountant) to the book value or replacement value estimates. As in most other instances of capital asset measurement, a margin of error always remains, suggesting that the capital costs estimates ought to be treated with caution. At any rate, whenever in doubt, the approach was to accept a lower bound estimate. 20. Estimates were calculated for the import content of the capital equipment in each firm (which generally ranged between 70 and 80 percent). The market value of the imported capital component was adjusted by the shadow exchange rate conversion factor, while the domestic component was left unadjusted. The resulting total shadow value of capital was then annualized by utilizing rent-equivalent (finite) annuity formulaes. The real opportunity cost of capital was assumed to be 10 percent. 21. The most important objective of the data collection and analysis was to assess the efficiency of industry in Tanzania, for which the main criteria indicator utilized was the Domestic Resource Cost (DRC) methodology. A simplified presentation of the rationale behind the DRC methodology and its interpretation is provided in Chapter Three of the Main Report. A sample questionnaire utilized in the MIES survey is attached to this annex.  - 74 - Attachment I of Annex III CONFI1)DNTIAL TANZA Page I WDRLD DANK INDUSTRIAL. SECTORK MISSION QUESTIONNAIR FOR INDUSTRIAL ENTERPRISES a. Ge:al Iformation X. Enterprise Name, Maling Address and Telephone Numbers: COMPANY LMITED 2. Holding Corporation to which Enterprise is Affiliated: N/A 3. Year of Incorporation: N/A 4. Year production began: 5. )Eai Activities: .NNUVACTURERS ANO ISTRIBUTION OF CIGARETTES/PIP TOWACCOS 6e Type of Oinrship: Private (X) Public (X) 100 7. The Oivership by Local (X) 100 Foreign (Z) Nationality  .~ 2t It. INFORftAtION ON PRtOUUC?W Year 1953/4 (PFV4) 1. Plenne identify, at mat, the firm's three leading pro4cets vt term of Total Produettoa nwTICs -A ExSugLF.$ . nc. CC" o Total StIC Wtomn- Production Value ex-factory Value UVtt prtee etf clatuare Prod.wt Unit Quattty Quantity in TS%.('OwO) Uitt Priee mtttt in tSbt.('OUO) t_mrt .or "a I . 2 3 4 5 6 7 8 9 esrt. (to for- (if await-