Tanzania - Programmatic Structural Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-7376-TA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 141.8 MILLION (US$ 190 MILLION EQUIVALENT) TO THE UNITED REPUBLIC OF TANZANIA FOR THE FIRST PHASE OF A PROGRAMMATIC STRUCTURAL ADJUSTMENT CREDIT JUNE 8, 2000 Country Departnent for Tanzania Macroeconomics 2, AFTM2 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  GOVERNMENT FISCAL YEAR July 1 -, June 30 CURRENCY EQUIVALENTS Currency Unit: Tanzania Shilling (TSh) Official Rate: US$ 1.0 = TSh 800.2 (February, 2000) ACRONYMS AND ABBREVIATIONS CAG Controller and Auditor General CAS Country Assistance Strategy CSD Civil Service Department DAWASA Dar es Salaam Water Supply GDP Gross Domestic Product GFS Government Finance Statistics GOT Government of Tanzania HIPC Heavily Indebted Poor Countries IDA International Development Association IFMS Integrated Financial Management Systems IMF International Monetary Fund IRP Integrated Roads Project MTEF Medium-Term Expenditure Framework NAFCO National Food Corporation NARCO National Ranching Corporation NIC National Insurance Corporation NMB National Microfinance Bank PER Public Expenditure Review PE Public Enterprise PIS Performance Improvement System PPSD Privatization and Private Sector Development PSAC Programmatic Structural Adjustment Credit PSRC Parastatal Sector Reform Commission PSRP Public Sector Reform Project SAC Structural Adjustment Credit SDR Special Drawing Rights TANESCO Tanzania Electric Supply Corporation TANROADS Tanzania Roads Agency THA Tanzania Harbors Authority TIC Tanzania Investment Center TRA Tanzania Revenue Authority TRC Tanzania Railways Corporation TTCL Tanzania Telecommunications Company Ltd. VAT Value Added Tax Vice President: Callisto Madavo Director: James W. Adams Sector Manager: Frederick Kilby Task Team Leader: Benno Ndulu  FOR OFFICLAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 141.8 MILLION TO THE UNITED REPUBLIC OF TANZANIA FOR THE FIRST PHASE OF A PROGRAMMATIC STRUCTURAL ADJUSTMENT CREDIT CONTENTS L INTRODUCTION ............................................................... IL RECENT ECONOMIC DEVELOPMENTS ..............................................................2 m. MEDIuM-TERM FRAMEWORK FOR PRIVATE SECTOR DEVELOPMENT .....................................3 POLICY PRIORITIES ..............................................................8 IV. PROPOSED PSAC I PROGRAM ............................................................. 11 OBjECrIvEs AND LINK WITH FY00 COUNTRY ASSISTANCE STRATEGY .......................................................... 11 SCOPE AND DESIGN OF THE PSAC I ............................................................. 11 Process ...................................................................... I Tranches ...... .11 GOVERNANCE ........................................... , 12 BUSINESS ENVIRONMENT ........................................... 14 REGULATION AND PRIVATIZATION ........................................... 17 Regulation ........................................... 17 Prinvatization ........................................... 19 V. DISBURSEMENT, REPORTING, AND AUDIT ....................................... 23 VI. COFINANCING ....................................... 23 VII. PSAC BOARD AND TRANCHE CONDITIONS ...................................... 23 TRANCHE CONDITIONS ...................................... 24 Effectiveness (none) ........................................... 24 Short Term ........................................... 25 Governance ........................................... 25 Business Enviromnent ........................................... 25 Regulation and Privatization .................... 26 VIMI BENEFITS AND RISKS ..................... 26 XL RECOMMENDATION ........................ 28 Tables: Tanzania PSAC Sunnary Tanzania PSAC Financing Plan Annex A: Tanzania PSAC I Policy Matrix Annex B: Letter of Development Policy Annex C Tanzania - Social Indicators Annex D: Tanzania at a Glance Annex E: Tanzania - Key Economic Indicators Annex F: Tanzania - Key Exposure Indicators Annex G: Tanzania - Balance of Payments Annex H: Tanzania - Status of Bank Group Operations This operation was prepared by a team led by Benno J..Ndulu (AFMTZ AFM2) and includes Herve Assah, Onno Ruhl, Paul Ballard (AFTPS); Luke Haggarty (DECRG) Michael Warlters (PSDPP); Olivier P. Fremond (PSDCRY, Said Al Habsy (LEGAF); Robert Johann Utz, Alema E. Siddiky, Swiana Dhar (AFTM2); Ben Tarimo, Donald Sungusia, Philip Isdor N- Mpango, Vedasto Rwechungua (AFMTZ), and Rakesh Nangia (AFMTZ, AFTQK). Mhis document has a restricted distibution and may be used by recipients only in the performance of thei official dudes. Its cotents may not otherwise be disclosed without World Bank auithorizaion.   UNITED REPUBLIC OF TANZANIA PROGRAMMATIC STRUCTURAL ADJUSTMENT CREDIT I CREDIT SUMMARY Beneficiary: United Republic of Tanzania Project Task ID: TZ-PE-2822 Implementing Ministry of Finance Agency: IDA Amount: SDR 141.8 million (US$ 190 million equivalent) Terms: Standard IDA terms: 40 years maturity with a 10-year grace period Parallel Financing: AfDB SAL (US$ 55 million) Disbursement: The proposed Credit will be disbursed through the Bank of Tanzania. The initial tranche of SDR 22.4 million (US$ 30 million equivalent) will be available upon effectiveness of the credit instrument. Background: The Programmatic Structural Adjustment Credit (PSAC) is based on the Government Policy Framework Paper, distributed to the Board in January 1999, and the Letter of Development Policy attached to this Memorandum of the President, which sets out the Government's medium term strategy for policy and institutional reforms aimed at supporting private sector development in Tanzania. This strategy seeks to reduce poverty through accelerating economic growth more generally and private sector development more specifically. The principal objectives of the PSAC are to encourage increased private investment; induce greater efficiency of the private sector by reducing the cost of doing business and enhanced competition; increase private sector participation in the economy through further divestiture of key public enterprises, particularly in infrastructure services; and improve the effectiveness in the delivery of supportive public services. This strategy is in line with the principal objective of the 2000 Country Assistance Strategy (CAS), to support poverty reduction through accelerated growth and more effective public service delivery. Increased private sector investment and business efficiency is a pivotal part of scaling up growth of the Tanzania economy. The CAS is being submitted to the Board together with this proposed operation. Description: PSAC I, the first phase of the PSAC, will support the Government's efforts to sustain macroeconomic stability and improve public service delivery, deepen the implementation of the privatization program, improve competitiveness and the transparency of key markets, strengthen the state legal and commercial apparatus for a more efficient and transparent business environment, and further reduce the barriers to international and domestic trade. It is the first of a two-phase overall reform program to create conditions conducive to sustained private sector development in Tanzania. Once fully  ii implemented, these actions will result in greater efficiency in business operations, higher private investment, reduced business risk, and more effective public service delivery. The impact from these actions will support accelerated growth in the medium term, raising it from the recent average of 4 percent to a range between 6 and 7 percent, and spur faster poverty reduction. Rationale for IDA The proposed PSAC I addresses policy issues building on the achievements of Involvement: Structural Adjustment Credit(SAC) I, such as the divestiture of key public enterprises, a sustained improvement in macroeconomic stability, a strengthened foundation for more effective public service delivery, and the more efficient operation of key product and factor markets. The Credit will galvanize the policy framework for actions to be taken under the recently approved International Development Association (IDA) projects, including the Privatization and Private Sector Development Project (PPSD), the Public Sector Reform Project (PSRP), the Tax Administration Project, the Financial Institutions Development Project II, the Microfinance Project (a Learning and Innovation Loan), and the older Integrated Roads Project II (IRP). Tfhe project will also be directly responsive to the recommendations from the Operations Evaluation Departnent Country Assistance Review and Operations Evaluation Group's Country Impact Review for Tanzania conducted in 1999. Learning from the experience of SAC I, conditionality under the structural adjustment credit facility has strengthened the hand of the cDre policy institutions within the Government of Tanzania (GOT) over vested interests of sectors and institutions in making the necessary policy changes to realize the benefits from IDA-supported projects. The extra effort has made the difference in realizing the benefits from these projects. Furthermore, actions under PSAC I will help to underpin support for poverty reduction provided under the enhanced Heavily Indebted Poor Countries (IPC) operation. With higher projected deficits resulting from more aggressive and cost-effective poverty-reduction expenditure programs, support from PSAC I will help fill financing gaps. Furthermore, as this is being done by promoting growth, it offers a sustainable exit from the debt trap, raising the likelihood of achieving the objectives of the HIPC initiative. Government Over the past five years the Government has shown persistent comrnitment to Commitment: macroeconomic and structural reforms. Moreover, reversals in policy actions have been avoided primarily through building up-front consensus on key actions, even if this has resulted in some delay in taking actions. The Government underscored its resolve by not seeking waivers in three out of the four tranches released so far under SAC I and by the successful comrpletion of an International Monetary Fund (IMF)-supported three-year Enhanced Structural Adjustment Facility program, as well as by reaching an agreement with the IMF on a Poverty Reduction and Growth Facility program for the next three years. The commitment is further vindicated by the agreement with the Bank and the IMF to implement the requirements stipulated under the Enhanced HIPC program. Benefits: Implementation of the policy and institutional reforms under PSAC I will permit an increase in real growth from 4 to 6-7 percent a year in the medium term by improving the sustainability of macro-stability, higher private investment, lowering the cost and risks of business operations, and delivering  iii public services more effectively. Higher growth with accompanying wider spread of benefits and more effective public service delivery will, in turn, accelerate the pace of poverty reduction. Risks: The chief risk the operation faces is a weakening of Government commitment to reforms, particularly with a change in the top leadership of the Government. The more open and inclusive governance system now being developed may also delay decisive action through the increased time required to build reform consensus. The payoff, however, is avoidance of possible reversals as difficult issues are discussed prior to implementation, thereby avoiding back-loaded dialogue. Although many of the proposed actions in this operation will benefit from technical assistance provided under IDA- supported projects, the overall capacity weaknesses for implementation remain a concern to be closely watched. The operation may face further risks if changes occur in the international environment or the global market, as was the case with the East Asian crisis, or in the case of privatization if no suitable buyers or investors are available.   REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 141.8 MILLION TO THE UNITED REPUBLIC OF TANZANIA FOR A PROGRAMMATIC STRUCTURAL ADJUSTMENT CREDIT I. INTRODUCTION 1. This memorandum seeks approval to extend an SDR 141.8 million (US$ 190 million equivalent) Programmatic Structural Adjustment Credit (PSAC I) to Tanzania. PSAC I supports implementing the first phase of a medium-term program of policy and institutional reforms laid out in the attached Letter of Development Policy. The 2000 Country Assistance Strategy (CAS) submitted with this proposed operation has provided for financing the second phase of the program, approximately US$ 120 million (SDR equivalent). Specifically, this PSAC supports the Government's efforts to sustain macroeconomic stability, deepen the implementation of the privatization program, improve competitiveness and transparency of markets, strengthen the state legal and commercial apparatus needed for a more transparent and efficient business environment, and further reduce barriers to internal and external trade. These actions will result in increased growth of more than 6 percent per annum over the next five years from sustained macroeconomic stability, higher private investment, lower costs of doing business, and a broader revenue base for financing larger and more effective public expenditure programs. Faster growth and improved delivery of essential services will, in turn, bring about a substantial decline in the incidence and depth of poverty. By helping to diversify sector investment destinations, particularly through those sectors that benefit the poor more directly (e.g., agriculture), it will also directly improve the situation of the disadvantaged. While the greater dynamism of the private sector will help to expand income eaming opportunities for the poor, this initiative supplements the Government's efforts to address poverty concerns more directly through more effective public expenditure programs and social sector development programs aimed at improving human capabilities and the welfare of the poor. 2. Proceeds from the Credit help to finance the additional permanent costs associated with establishing and operating the required apparatus for implementing proposed policy changes. They also defray transitional adverse effects on the budget from some of the proposed measures, prior to realizing the beneficial impacts on the revenue base from these same measures. Together with the enhanced HIPC relief, the proceeds will also relieve budgetary pressures and help lower inflation close to a par with trading partners, relieving the instability of the value of the local currency. Based on projections of the budgetary requirements for raising the effectiveness of public service delivery to accord with poverty reduction objectives, the projections of available finance (domestic and foreign) fall short by 40 percent of estimated requirements. To increase public sector service delivery in critical areas, immediate additional funding becomes necessary to bolster operations and maintain and implement pay reforms, which are necessary complements to Government retrenchment measures undertaken in recent years. Concrete plans for the absorption of additional resources are contained in the Government's Medium-Term Expenditure Framework (MTEF), which includes well-defined priority areas, including basic education, primary health, water, rural roads, judiciary strengthening, and agricultural research and extension. 3. PSAC I follows SAC I for Tanzania. Drawing lessons from SAC I, the proposed design for PSAC I focuses on policy action in one important thematic area: improvement of the environment  2 Tanzania PSAC I for increased private investment response and more efficient business operations. All proposed actions will focus on this single, broad area of policy and institutional reforms. Previous and ongoing reform programs focused mainly on reforming the public sector, including divesting public enterprises. Extending this effort to improve the business environment, support transparent regulatory arrangements for key newly liberalized sectors, and reinforce financial markets is essential for more robust and efficient private sector involvement in the economy. The operation thus aims at comprehensive actions to address the balance of reforms needed to create an environment conducive to robust development of the private sector. 4. In the past three years, significant achievement has been made, particularly with the- support of SAC I and Privatization and Parastatal Reform Project (PPRP) in the divestiture of public enterprises, liberalization of the remaining controlled sectors, and establishment of a base for more effective and sustainable public service delivery through decentralization and users' contributions to the cost of service provision. Of the 400 public enterprises, more than half have been privatized, including some seven large parastatals. The banking system has been further opened up to private sector participation, which now accounts for nearly 80 percent of the banking sector's business. The petroleum and shipping sectors have been liberalized, setting up the basis for greater competition and efficiency. The Local Government Act was amended in 1999, resulting in devolution of responsibility for the delivery of key social services to local governments and greater inclusiveness in the management of the development process. Land legislation has been amended to begin strengthening transparency in ownership and facilitating its administration. Recent reforms in budget management have focused on four areas. Adopting a participatory Public Expenditure Review (PER) process has enabled continuous monitoring of expenditures and their effectiveness. The introduction of a rolling, three-year MTEF ensures the establishment of strategic priorities in the budget. The adherence to a strict cash budget management system constrains spending to available resources, and the establishment of an Integrated Financial Management System (IFMS) provides both for better expenditure control and real-time financial reports. Audit reports by the Controller and Auditor General are now current, facilitating timely identification of problem areas. II. RECENT ECONOMIC DEVELOPMENTS 5. Over the past four years, the Government of Tanzania (GOT) intensified macroeconomic policy reforms with the aim of creating a more stable macroeconomic environment. Tanzania has successfully completed implementing actions agreed to under the three-year Enhanced Structural Adjustment Facility prograrr. The macroeconomic reforms were pursued with the understanding that such stability was necessary to achieve sustained growth, which is required to reduce the pervasive poverty in the country. As a result, Tanzania has progressed significantly in reestablishing macroeconomic stability. Inflation has fallen from levels in excess of 30 percent in 1995 to the current 6.6 percent; the exchange rate remained reasonably stable for the 18 months prior to the recent 15-percent depreciation; the foreign exchange reserves position has climbed from about six weeks of merchandise imports in 1995 to the current level of 18 weeks; and the- overall fiscal balance, including grants, has had a surplus of between 0.8 percent and 1.2 percent of gross domestic product (GDP) over the past three years. Excluding grants, the fiscal balance has had a low deficit, ranging between I and 2 percent of GDP. In the medium term, however, this improvement will need to be grounded in a strong fiscal system to ensure sustained macro- stability. 6. In parallel with the macroeconomic reforms, the GOT also carried out structural reforms focusing on realigning the incentive structure toward increased exports, using scarce foreign  Tanzania PSAC I 3 exchange more efficiently, liberalizing markets for goods and services, and reducing the involvement of the public sector in commercial activities. A large part of gross economic distortions has been dealt with effectively. Although still fragile and shallow, markets are relatively free, the parastatal sector and the civil service are considerably smaller, and a significant improvement in fiscal discipline has taken place, particularly in enforcing cash budgets. While such improvement must be sustained to instill confidence in investors and other economic agents, more effort is needed to bolster complementary structural policies and institutional structures for sustained growth and broad sharing of the benefits from growth. Based on a variety of institutional investor surveys, Tanzania scores lowest in the areas of structural policies and institutional quality. If the reforms proposed under the PSAC I are implemented as intended, the openness and liberal character of the economy will be on a solid base. 7. Notwithstanding the above progress, growth remains low by the standards of strong African performers and is fragile because of high dependence on foreign aid. Although the growth rate for the past three years has averaged nearly 4 percent, for the decade and a half since reforms, it has averaged about 3.2 percent per year, or approximately 0.5 percent growth in per capita terms. With 51 percent of Tanzanians still living below the international poverty line of one US$ a day, such low growth performance will not enable reduction of poverty by any significant margin in the foreseeable future. The continued pervasiveness of poverty is not only unacceptable from a welfare perspective, but it also undermines reforms as impatience with the lack of tangible results mounts. The Government is embarking on an aggressive poverty- reduction strategy, emphasizing both higher growth and more effective public service delivery. The partial implication of this initiative is pressure from the resultant financing gap. On a longer termn basis, the solution lies in higher domestic revenue generation. In the meantime, external financing would play an important role in realizing the objectives of the poverty-reduction program. Continued diversification of sources of external finance is also necessary to reduce dependence on official development assistance in the medium to long term. The trend response of foreign direct investment is encouraging, having risen sharply from US$ 20 million in 1995 to US$ 170 million in 1998. The need to sustain this positive response and broaden the destination sectors beyond mining and tourism cannot be overemphasized. Because more than 95 percent of Tanzania's agriculture is privately managed, and this sector accounts for about half of the country's GDP and contributes (directly and indirectly) to up to 70 percent of foreign exchange earnings, a major part of the effort to enhance private sector contributions must also target this sector. III. MEDIUM-TERM FRAMEWORK FOR PRIVATE SECTOR DEVELOPMENT 8. To increase Tanzania's growth performance, it is necessary to raise private investment response and allow efficient business operations. Macro-stability, reduced cost of doing business, fair competition, and privatization constitute the main criteria for achieving these results. The overall reform program aims at removing the main impediments to private sector development in a coherent and transparent manner. The program targets policy and institutional improvements as well as the synergetic effects of their components. It builds on the ongoing reform process. The programmatic approach encourages the GOT to commit to some of the key final outcomes, which are: possible only beyond the traditional two-year period for a SAC, albeit with reasonably good foresight of the needed actions. At the same time, the program provides enough time for the short-term processes to culminate in decisions or strategies for implementation. 9. The proposed overall program integrates and leverages the variety of reforms currently being pursued with significant consequences for the development of the private sector in  4 Tanzania PSAC I Tanzania. Significant success in establishing macroeconomic stability has been achieved, especially in regard to fiscal balance and reduction in high inflation. This proposed program seeks to support the GOT's measures to ground these achievements in a viable fiscal system. Reduction, of the pressures on the fiscal system through more effective expenditure managemenl: complements the continuing drive toward higher revenue efforts. For this reason, the programn aims at strengthening the use of the MTEF for strategic expenditure allocation, implementing the IFMS to strengthen financial controls, and introducing the Performance Improvement System (PIS) to foster improved effectiveness in the delivery of public services. The Government-led PER process and the Public Service Reform Program provide vehicles for supporting and monitoring these reforms. 10. The process of divestiture is half complete, but the difficult task of divesting large- infrastructure public enterprises (PEs) has just begun with efforts to concession water supply in Dar es Salaam and the container terminal to private operators and to privatize Tanzania Telecommunications Company, Ltd. (TTCL). The major pending divestitures in infrastructure are railways, power, and the remaining port services. These are included in the GOT's privatization program and benefit from technical assistance under Bank projects. The other areas for divestiture with good prospective interest from potential investors are the National Microfinance Bank (NMB), the National Insurance Company (NIC), cashew nut factories, and some important ranches and state farms. The PSAC targets the divestiture of these assets by sale, concession, or strategic investor participation. 11. The GOT has dealt with major price distortions and liberalized all key markets, with the focus now turning toward enhancing their efficiency through ensuring competition and fair play. Where they exist, regulatory functions currently control the economy by constraining public monopolies from stifling competition and fair play. Therefore, erecting transparent regulatory frameworks is the next goal. Initial work has commenced to set up both the national and sector regulatory frameworks. Such work encompasses proposals for establishing national regulatory frameworks for utilities and transport, which pull together sector-specific arrangements. The proposed PSAC leverages decisions for setting up and operating such frameworks for the infrastructure sectors . 12. Despite good progress in lowering trade barriers and exchange controls, a cohesive strategy to improve the business environment has not been provided. The Government is pursuing a wide range of disjointed initiatives. There are ongoing initiatives to develop a more transparent tax regime; a new law governing proprietary rights to land has been enacted, but regulations for administering it have not yet been issued; and based on the results of an investor road map, key bureaucratic impediments and legal reforms are currently on the agenda. The PSAC will support and ensure a cohesive approach to carrying out these changes. The prioritization of actions is based on private sector assessments, investor road maps, and a variety of dialogues and studies. There are other important areas such as labor laws and some aspects of financial sector efficiency that will need further attention in the future, but only after analytical work has been completed. These areas may be considered subsequently in the second phase of the PSAC. 13. Learning from the SAC I and informed by Government plans, actions under each thematic area are grouped into two phases. Phase I is projected for completion by June 2002 and Phase II by June 2004. Through the Letter of Development Policy, the Government has committed to carry out the whole four-year program. The phasing, supported by separate Credits, permits accommodation of a sequence of actions, affords greater flexibility in the design of the second phase Credit based on experience from Phase I, and allows a smoother disbursement plan over the four years to match the four fiscal years. The programmatic design permits implementation of a  Tanzania PSA C I 5 comprehensive set of actions with strong interlinkages and synergies to realize a single goal of improved business environment, allowing continuity of implementation. As the overall program contains details of actions and monitoring indicators for both phases, it also significantly reduces the burden of designing the Phase II operation. Output from the Phase I process actions entail approved options or strategies for implementing outcome actions in Phase II. Table 1 presents a snapshot of the overall program, and the details are contained in the policy matrix (Annex A for Phase I; for the full program, it is appended to the Letter of Development Policy. The thematic details of the overall program are presented below. 14. For all the proposed actions, there is clear understanding of what is desired and, in most cases, analytical work has been completed. The process phase for specific actions allows for the GOT's additional preparatory work, consultation process, and decisions on the best strategy. In all but one case (and there is indication of support for it from bilateral sources), the processes are backed up by technical assistance support from Bank projects, which also provides an instrument for monitoring acceptability of strategies and developed options. During preappraisal the team had several discussions with the implementing agencies to assess the capacity constraints to carry out the overall program within the envisaged four years, the most worrisome among these being the processing capacity for changes to law. The relevant institutions confirmed that such constraints will not hold back implementation. Assistance is also provided for the required technical analysis. Moreover, the starting point for the PSAC I benefits significantly from the experience and apparatus for carrying out divestiture, as well as institutional reforms under SAC I and other projects, thereby raising the level of proficiency for handling the required reforms.  Tanzania Programmatic Structural Adjustment Credit Summary Thematic Area I Phase I (PSACI) Indicative Phase II Expected completion [ June 2001 June 2002 June 2004 Public Finance Prepare MTEF for FY0 1-03 * Roll out use of IFMS to all ministries and subtreasuries * Integrate all votes, TRA revenue accounts, and debt Management and approve budget for FY01, for all recurrent expenditure commitments and classify monitoring modules into the IFMS for budgeting reflecting increase in share of development expenditures based on the GFS and accounting. discretionary recurrent budget * Extend the IFMS to at least 50 districts. for seven priority areasa Anticorruption * Approve operational strategies based on corruption * Implement operational strategies based on Measures and diagnostic surveys in four ministries,b the judiciary, corruption diagnostic surveys in four ministries,b Accountability Attorney General's office, and TRA. the Judiciary, Attorney General's office, and the TRA. Permit greater transparency and integrity in procurement through publicizing tender results and approving new Pprocurement RLaw and rRegulations Efficiency in Public * Approve strategic plans and performance budgets for 4 * Implement strategic plans and performance budgets Service Delivery ministriesb and the CSD. in four mniustrics and the CSD. * Transfer mnanagement and operation of trunk and * Disseminate information on intergovernmental regional roads network to TANROADS. transfers at the district level monthly. * Institute output accountability in service delivery in four ministries" and the CSD. ~usiness Evirom t Legal Framework Issue Ministerial Regulations * Approve Commercial Court Project Plan, taking into * Establish monitoring system on volume of cases to make the Land Act effective. account relations with the existing court system adjudicated by the Dar es Salaalm Commercial Court. * Establish automatic filing and registry system in the * Adopt a system of issuance of land titles within the Commercial Court. target period of 180 days. * Approve a new company legislation. * Enact bankruptcy laws. Investment Facilitation * Implement new organization structure based on a new and Promotion corporate strategy for TIC. Agricultural Crop * Abolish controls constraining crop movements. Movement Tax Regime * Operationalize unified tax appeal system. * Minimize surcharges and consolidate them into tariff bands. * Eliminate 46 out of 52 items subject to excise tax. * Review tax policy to lower trade taxes. * Expedite the payments of VAi refunds. j l * Rationalize ~~~~~~~~~~~~~~the differential rates of withholding taxes in sectors.|  Tanzania Programmatic Structural Adjustment Credit Summary Thematic Area Phase I (PSACI) Indicative Phase II * Enforce limit on crop/livestock cess and the exemption __________________ of stamp duty for agricultural. Capital Markets * Implement a proposal to relax restrictions on foreign portfolio investment. Regu ti ad POrivatizatio : . ; .. .. . To enac comptt iv . ands;:ir Qtream t in bsns erations; t mIet divestite ofkey ublic entes-::::-r: - -- :-----: For keymai1~ets ?~t setolce sectors to enhatncet transparency tnd con! ? t: "t'i''n; ii . . . . . . . ____________. Infrastructure and * Approve an enabling (overarching) law to establish cross- * Adopt National Regulatory Framework for private utilities sectoral regulatory institution(s) covering utilities and sector participation in telecom, railways, electricity, transport sectors based on pro-competition principle. water, ports and shipping, and aviation and establish * Within the framework of the enabling law, establish pro- and staff the regulatory institution(s) . competitive regulatory framneworks in telecoms, water, electricity, ports/maritime, railways, broadcasting, and aviation. * Adopt regulation and establish institutional arrangement to liberalize the petroleum sector. ~~~~~~~~~.. .. . .. . .. ... .. .-.::. -.. .:. i:..-:. . .-. .:-.-. , jrivaliv e cgiestr? g public e. netptis?S; d eloQp dtisfuctor. a.tion lan . . . .........or......bin . t ' o i.1. iat,i i - - lacross viitll. g. pdg c 5 x.; ; . . A > . Infrastructure * Approve policies for * Approve plans for further concessioning of port services. * Bring remaining port services in Dar es Salaamn to a public enterprise point of concession. employee retrenchment and treatment of public enterprise debt. * Approve strategy for reorganizing TANESCO and * Bring the first corporatized distribution system restructuring the electricity sector. formed from TANESCO to a point of sale/concession. * Bring rail services to a point of concession. Financial Sector * Approve MOU for NMB Approve strategy for the divestiture of NIC. * Bring NMB to a point of sale/divestiture. based on business plan; * Bring NIC to a point of sale/ divestiture. * Approve a strategy for divestiture of NMB Agriculture * Approve options for divesting cashew nut processing * Divest or liquidate cashew nut processing plants, plants, NARCO ranches, and NAFCO farns. NARCO ranches, and NAFCO farms. a. Priority areas: basic education, primary health, water, rural roads, agricultural research and extension, judiciary, actions to combat HIV/AIDS. b. Ministries: Health, Water, Education and Culture, Agriculture and Cooperatives.  8 Tanzania PSAC I TANZANIA PSAC FINANCING PLAN Amount (US$ Tranche Tranche Condition million) PHASE I - PSAC I Effectiveness None 30 Floating Tranches Short Term Upon fulfillment of agreed conditions 40 Governance Upon fulfillment of agreed conditions 40 Business Enviromnent Upon fulfillment of agreed conditions 40 Regulation and Privatization Upon fulfillment of agreed conditions 40 Subtotal: Phase I 190 INDICATIVE PHASE II Governance Upon fulfillment of agreed conditions 40 Business Environment Upon fulfillment of agreed conditions 40 Regulation and Privatization Upon fulfillment of agreed conditions 40 Sub-total: Phase II 120 Grand Total: 310 Policy Priorities 15. Based on analysis in the recently finalized Country Economic Memorandum for Tanzania, a wide range of studies and Investor Road Maps, and interviews with a wide range of stakeholders, a remarkable consensus exists on the key constraints limiting the expansion and efficiency of Tanzania's private sector. The proposed operation's focus on supporting private sector development-beyond privatization-was seen as long overdue by everyone encountered. It was noted by the PSAC team that previous and ongoing reform programs focused on reforming the public sector, including divesting public enterprises. Extending this effort to support improvement in the business environment, transparent regulatory arrangements for key newl.y liberalized sectors, and financial market deepening is therefore considered essential for a moire robust and efficient involvement of the private sector in the economy. The immediate objective's of these measures are primarily to induce higher private sector investment and reduce the cost of doing business in Tanzania. 16. The following key constraints to private sector development were identified as the most important: (i) The more expensive, unreliable, and often inaccessible infrastructure and financial services lead to an unsustainable cost of doing business and puts Tanzanian firms at a competitilve disadvantage. The poor services most frequently mentioned were electricity, reliable water supply, transportation, telecommunications, and credit. (ii) Unpredictable and nontransparent tax administration and policy undermines the credibility of the Government and investor confidence. The main concerns here include the instability of the tax policy pursued and uncoordinated application of tax laws at the various levels of government.  Tanzania PSA CI 9 (iii) The absence of a well-defined regulatory framework is seen as limiting transparency and faimess in business operations and stifling competition and efficiency. (iv) Weaknesses in the legal framework and processes cause long delays in settling commercial disputes, creating risks in business operations and uncertainties in property rights. (v) Corruption is seen as a major business cost. The malaise is particularly acute in tax administration, municipal authorities, procurement systems, and judiciary, confirming the observations made in the Warioba Report. (vi) Among the bureaucratic impediments to business, the most severe were identified to be entry barriers into business, particularly licensing, and barriers to exit from business due to an outdated bankruptcy law, as well as delays in the acquisition of land titles. The policy priorities to address the above constraints are organized under four headings, corresponding to the main thematic areas covered under this proposed program. These are govemance, the business environment, and privatization and regulatory framework. 17. Economic Governance: The focus under this thematic area will be to sustain macroeconomic stability, improve public services delivery through improved management of the budget, and lower business costs and risks associated with corruption and excessive bureaucracy. Reestablishing a credible budget process, in which overall fiscal discipline is accompanied by allocative and operational efficiency, is key to sustained macroeconomic stability. It becomes important in raising the Government's efforts to promote growth and support private sector development as well. The effort to improve effectiveness in the delivery of public services in Tanzania has three pillars. The first is extending the coverage of public institutions in the sole use of the IFMS for control of all votes and real-time reports of the budget status. This has so far covered all ministries and half of the subtreasuries in the regions. The PLATINUM, a computerized accounting package that is the core of the IFMS, is also currently being piloted in 28 districts. The second pillar is the adoption of the MTEF as the fulcrum for strategic expenditure allocation and the key instrument for ensuring that overall expenditure (including projected recurrent cost implications of public investment) fall within the resource envelope (domestic and external). Sector Development Programs, currently for the road and health sectors and soon for education, will serve as important instruments for enforcing the use of strategic framework in the specific sectors. The third pillar is raising effectiveness in the delivery of public services. This undertaking includes extending performance budgeting from the current pilot to ensure value for money; introducing performance improvement modules, rationalizing government functions, improving civil service pay under the PSRP; and implementing the national anticorruption strategy approved in 1999. 18. Business Environment: The main target here will be to remove policy-related and institutional impediments to private investment and efficient business operations. Key among such impediments are tariff barriers to smooth foreign trade, nuisance taxes at various levels of government, obstacles to new investment and expansion of old business, nontax barriers to the internal and external flow of goods, bureaucratic red tape faced by investors and exporters, nontransparent policies and laws governing property ownership, constraints to expanding and improving access to financial services, and the lack of mechanisms for expeditious settlement of commercial disputes in a fair and transparent way. The specific measures include reforming trade and nontax policies to remove barriers to the free flow of goods and services (in pre-agreed phasing and in consultation with the IMF), improve tax administration to enhance transparency, lower compliance costs, and contain tax evasion; implementing institutional reforms that would convert the TIC into an effective investment facilitation center following the decision already made to this effect; issuing ministerial regulations to implement the new land law; reviewing the licensing system and bankruptcy law to facilitate business entry and exit; and ensuring effective  10 Tanzania PSAC I operation of the Commercial Court and reduced leakage from tax evasion so as to ensure iair competition. 19. Regulation and Privatization: Having effectively launched the privatization of its commercial, agricultural, and industrial PEs during 1994-98, Tanzania has now embarked on an ambitious and far-reaching program to divest all its major infrastructure PEs during 2000-04. To provide an effective enabling environment for attracting increased private participation in these key sectors in the medium-to-long run, Tanzania has embarked on the creation of new sector regulatory laws and independent, cross-sectoral regulatory institutions to progressively build the needed modern economic regulatory capacity. The PSAC program over its two phases (2000-04), under PSAC I, to be followed by PSAC II, will support the establishment of effective infrastructure regulatory capacity and preparation and implementation of Tanzania's privatization program in key infrastructure, banking and insurance, and agriculture. Regulatory reforms will be sequenced to create procompetitive regulatory environments prior to the divestiture of PEs in the sectors concerned. This will be accomplished by creating clear, transparent, regulatory rules built into concession contracts and building up regulatory capacity. 20. Regulatory Framework: The regulatory frameworks for industries such as telecommunications, energy, water, ports, and railways will play a critical role in successful privatization. Where possible, Tanzania will focus reform efforts on encouraging competitiorn to minimize the need for regulatory intervention. Where market power remains and regulation is required to provide the necessary investor confidence, most of the rules regulating price and service conditions will provide little regulatory discretion and be embodied in contracts backed up by international arbitration. In this environment, effective regulatory institutions will be required to monitor and enforce these rules, so that in the longer term, once investor confidence has been established in the institutions, sectoral rules can be developed to provide more flexibility to adjust to changing economic circumstances and offer stronger incentives for efficiency. During the period of the current operation, attention will focus on developing sector-specific rules sufficient for privatization to proceed and establishing the basic institutional arrangements. Beyond the current operation, a period of consolidation and harmonization will be required. The regulatory institutions will be fully staffed, and detailed regulations for each sector will be completed. Relevant legislation will be reviewed and refined to (i) provide for increased competition and private sector participation, (ii) ensure a clear and consistent cross-sectoral approach to the allocation of regulatory responsibilities, and (iii) formulate consistent approaches to regulation across sectors and issues of common interest. Principal issues of common interest include accounting principles, decision making processes of regulators, appeals mechanismns, resolutions of disputes among competing operators seeking access to shared facilities, and processes for dealing with unsolicited investment proposals requiring concessions from the Government. 21. Privatization: The overall PSAC program (2000-04) will support completion of the privatization of the main strategic public enterprises, particularly in infrastructure services, whtich have significant bearing on the cost of doing business. The main actions entail unbundling the power company, TANESCO, and bringing its distribution system to the point of sale; concessioning the railways for private operation; leasing Dar es Salaam Water Supply (DAWASA) to private operator(s); divesting the NMB and the NIC; and implementing the strategy for further concessioning of port services. Out of the remaining public enterprises in agriculture, the PSAC program will support divestiture (sale or liquidation) of the cashew nut processing factories, NARCO ranches, and NAFCO farms. The operation will also support removing crop boards from involvement in the predominantly private sector activities in agriculture.  Tanzania PSAC I 11 IV. PROPOSED PSAC I PROGRAM Objectives and Link with FY00 Country Assistance Strategy 22. The proposed PSAC is based on the Government's Policy Framework Paper, distributed to the Board in January 1999, which sets out the Government's medium-term strategy to reduce poverty through sustained macroeconomic stability, acceleration of economic growth, structural reforms, and private sector development. More specifically, the proposed actions are underpinned by the Government's commitment to implement the reform program undertaken through its Letter of Development Policy (Annex B). This strategy is in line with IDA's CAS, to be submitted to the Board with this operation. The main objective of the FY00 CAS is to support poverty reduction through accelerated growth and more effective public service delivery. The FY00 Operations Evaluation Department Country Assistance Review for Tanzania identified support for private sector development as one of the top priorities for the Bank. A key contributor to the accelerated growth will be a more dynamic private sector. The principal objectives of the PSAC I include support of this strategy by inducing greater efficiency in the use of private sector resources, encouraging increased private investment, expanding the role of the private sector in the economy, and enhancing competition in the continuing process of market liberalization. Scope and Design of the PSAC I Process 23. The Ministry of Finance, together with the Planning Commission, the Prime Minister's Office, relevant sector ministries, and the Parastatal Sector Reform Commission (PSRC), convened meetings to discuss three drafts of the operation's concept for the proposed Credit. During the pre-appraisal mission, interviews were conducted with a wide range of private sector entities and other stakeholders to determine the key constraints to private sector development in Tanzania and priority areas for action. The results from these interviews were subsequently discussed with the Government and were taken into account in the proposed actions for the operation. The mission was also assured by the Attorney General's and the Parliamentary Draftsman's offices that the legal changes envisaged under the operation could be handled with existing capacity and in the proposed timeframe. The team has taken into account the fact that the present Parliament will be dissolved in mid-2000 before the general elections at the end of 2000, thereby temporarily halting the flow of legislation. Tranches 24. The proposed PSAC I will support the development of the private sector in Tanzania by concentrating on three areas of action. These are the following: (a) Improved economic governance; (b) Improved business environment; (c) Divestiture of key parastatals, primarily in infrastructure, finance, and agriculture, and establishment of regulatory frameworks for key markets. 25. The tranche plan combines flexibility in disbursement to more easily incorporate the budget support from the PSAC I under the MTEF, realize the synergies across privatization and regulation, and maintain continuity with the envisaged subsequent operation. In total, there will  12 Tanzania PSAC I be four floating tranches to be released upon fulfilling agreed on conditions, in addition to US$ 30 million made available on effectiveness (based on up-front actions). A short-term tranche worth US$ 40 million will target the completion of ongoing activities (quick wins) and entail agreed on actions across all three thematic areas. The timelines for activities targeted under the short-term tranche show a reasonable expectation for completion by June 2001. Three other floating tranches, each worth US$ 40 million, will target specific actions under the three thematic areas scheduled for completion by June 2002. These include the privatization of enterprises currently well under way, improvement in the tax regime, strengthening of public financial management and public service delivery, as well as institutional (governance) reforms to be implemented prior to June 2002. This approach to tranching allows smoother disbursements over the two fiscal years. The thematic organization of the tranches distinguishes the responsibilities of the main implementing agencies, with each tranche constituting a cohesive set of actions on their own. The main agencies to oversee the implementation of agreed on actions are the PSRC for the Regulation and Privatization tranche, and the Ministry of Finance and the CSD for the Governance and the Business Environment tranches. GOVERNANCE 26. Good govemance is a key determinant of economic growth and a precondition for sustainable private sector development. Under the structural adjustment program, the Government will undertake measures to strengthen economic governance and enhance the effectiveness, efficiency, and quality of public service delivery, to provide a solid foundation for sustainable private sector development and poverty reduction. The proposed measures include actions in the following areas: (i) improved management of public finances, (ii) anticorruption measures and enhanced financial accountability, and (iii) increased efficiency and effectiveness in the delivery of public services. 27. To promote growth and fight poverty, the Government must establish a credible budget process in which overall fiscal discipline accompanies allocative and operational efficiency. The Credit will support the improvement and extension of systems for improved budget management at all levels, focusing on the priority sectors central to poverty reduction. Measurable indicators include the continuation and deepening of the PER/MTEF process, leading to enhanced allocative and operational efficiency. Indicators also involve rolling out the computerized IFMS to all ministries and regions, introducing and applying performance improvement systems across all priority areas, and finalizing and implementing a strategy for reducing corruption in all key sectors (tax, law and order, public works, judiciary, the CSD, and social sectors). Public Finance Management 28. Since the introduction of the cash budget system, the GOT's budget management has had the objective of achieving fiscal discipline and macroeconomic stability. While this objective remains extremely important in providing an enabling environment for private sector activities, the Government urgently needs to give similar weight to strategic prioritization of expenditures and improvement of public expenditure programs. More specifically, prioritizing and targeting expenditures with the aim of reducing poverty is also a critical element for obtaining debt relief under the HIPC initiative. As a condition for the Short-Term tranche release, the Government will prepare an MTEF for 2000/01-2002103 and approve a budget for 2000/01 with priority allocation to basic education, primary health, water, rural roads, judiciary, and agricultural research and extension, as well as activities to combat HIV/AID'. Furthermore, in the budget for 2000/01 the Government will (i) increase the share of the total allocation to the priority areas in total discretionary recurrent expenditures by at least  Tanzania PSAC I 13 two percentage points over the 1999/00 budget, and (ii) increase the share of the allocation to "Other Charges" for the priority areas in total discretionary recurrent expenditures by at least two percentage points over the 1999/00 budget. 29. To improve financial control and management, the GOT is currently implementing a Government Accounts Development project, which encompasses (i) the introduction of a computerized IFMS - PLATINUM and (ii) the reclassification of the government chart of accounts. The IFMS has been introduced to all central vote holders, except Defense and the Office of the President, as well as to a number of sub-treasuries in the regions. As part of the Local Government Reform Program, the IFMS will also be introduced to 28 of the 35 Phase I local authorities. To ensure the effectiveness of the IFMS, it is crucial that the system cover all votes, and that key financial information is published in a timely and accessible manner. As a condition of the floating Governance tranche release, the Government will roll out the IFMS to all ministries and at least 10 sub-treasuries, ensure that all budgetary votes at the central and sub-treasury levels are managed through the IFMS, record all recurrent expenditure commitments through the IFMS, and classify the development budget according to the Government Finance Statistics (GFS). Anticorruption Measures and Accountability 30. One of the main constraints to effective resource mobilization and utilization in the public sector is widespread corruption, which has led to substantial economic losses in terms of reduced income from taxes, revenues, and other fiscal charges, as well as loss of income from natural resources and losses through misappropriation of government income. To curb corruption, the GOT has developed a National Anticorruption Strategy and Action Plan for Tanzania, which was published in 1999. The Action Plan proposes measures that cut across all levels of government as well as ministries and specific public agencies. As a condition of the release of the Governance tranche, the GOT will carry out corruption diagnostic surveys to determine the most problematic areas of concern in the ministries of Works, Education and Culture, Health, and Home Affairs, as well as the Judiciary, the Attorney General's office, and the TRA. These diagnostic surveys will consist of studies that identify systemic weaknesses in the above-listed institutions that may be conducive to corrupt practices, and identify means and procedures through which such weaknesses can be reduced. In addition, the GOT will present for approval a new procurement law and regulations that permit greater transparency and integrity, and ensure that the Central Tender Board has made tender results public through press releases. Effectiveness and Efficiency of Public Sector Service Delivery 31. Improving service delivery in the public sector plays an important role in providing an enabling environment for the private sector. Physical infrastructure and basic social and regulatory services constitute key inputs into the production process. Because of externalities, the Government must play an important role in providing or financing these services. In the case of the roads improvement program, previous interventions were carved out in the context of an investment program without adequate attention to a policy and institutional framework for protecting such investments and ensuring durable improvement. This operation seeks to support greater efficiency in the roads investment and maintenance programs through the establishment and operation of an appropriate institutional framework. 32. While the Government has made significant progress in enhancing fiscal discipline and strategic resource allocation through the introduction of the MTEF, much less has been done to  14 Tanzania PSAC I enhance efficiency in the use of public resources. The proposed adjustment program thus includes various measures that aim to enhance the efficiency and quality of public service provision directly. Central to these efforts is the introduction of the Performance Improvement System (PIS) in key areas of public service delivery, as well as the establishment of an executive agency for the roads sector. The main elements of the PIS include strategic planning; annual planning and performance budgeting; systematic execution of plans and budgets with a focus on service improvements; and monitoring, evaluation, and reporting performance. Although the performance budgeting initiative was started in 1998, it is now important to (i) extend coverage and quality of the initiative, and (ii) ensure that performance budgeting and the MT]_F approaches are integrated to streamline the budgeting system and make the best use of scarce human resources in both the Ministry of Finance and the spending units. As a condition for the release of the Governance tranche, the Government will (i) develop and approve strategic and annual plans and performance budgets in the ministries of Agriculture anld Cooperatives, Education and Culture, Health, and Water and the CSD; and (ii) transfer the management and operation of trunk and regional roads network to TANROADS. BUSINESS ENVIRONMENT Investment Regime Tanzania Investment Center 33. In 1997, the GOT enacted a new investment law, the Tanzania Investment Act, which replaced the 1990 Investment Law. The new legislation unified all investment incentives in the country. The legislation provides the basis for a dynamic investment-promotion agency to help achieve the Government's goal of increased private investment. Furthermore, in response to the persistent criticism of the country's investment environment, the Government also converted the old investment agency, the Investment Promotion Center, into the TIC. The TIC was expected to be the primary agency of the Government to coordinate, encourage, promote, and facilitate investment in Tanzania and to advise the Government on investment policy and related matters. Given the initial steps undertaken, much more remains to be undertaken. There is, therefore, a need to reform the TIC's role C and convert it into a professionally run center for facilitating and promoting private investment. In 1998, the TIC's Board commissioned a study to the Forei[gn Investment Advisory Service to guide such a shift. The objective of the study was to recommend a strategy and a specific action plan to implement the changes envisaged under the new act. T'he study addressed immediate functional and organizational changes for the TIC and recommended a series of steps to enable it to become a truly client-oriented and effective promotion agency. The TIC management has now prepared its business plan. With support from the World Bank's Foreign Investment Advisory Services and the British Department for International Development it is now preparing a short-term implementation plan with clear, monitorable indicators. 34. To transform the TIC, the GOT must completely overhaul the organization. The Government has experience with strengthenig ineffective organizations (e.g., converting the former tax departments into the TRA), and given the relatively smaller size of the TIC, this could be achieved fairly quickly. However, the recruitment of staff must be based on qualifications, experience, and integrity. Furthermore, the corporate strategy should be based on the shift of the TIC's current role to investment facilitation and promotion. This would perhaps be the best way to ensure that the TIC makes progress on promotion and facilitation, as opposed to regulation. As a condition for release of the Business Environment tranche, the Government will restructure and restaff TIC to serve as an investment-promotion agency in accord with ithe  Tanzania PSAC I 15 mission of the new corporate strategy and the 1997 Investment Act. Such staff will be recruited competitively based on qualification, experience, and integrity. Settlement of Commercial Disputes 35. In an attempt to speed up the settlement of commercial disputes, the Government has established a Commercial Court in Dar es Salaam as a Division of the High Court. The newly established Commercial Court has the jurisdiction of adjudicating "commercial cases" as defined in the High Court Regulations. The Danish International Development Agency has provided financial assistance to establish the court in Dar es Salaam. At the moment, three judges have been assigned to the court. The court needs, however, to open commercial courts in five regional centers, in addition to expanding the court in Dar es Salaam. The court also needs to computerize its activities, including its registries. Establishing a monitoring system for the volume of cases adjudicated by the court in a given period is also necessary. . The Government has, therefore, prepared a Commercial Court project plan. As a condition for release of the Business Environment tranche, the Government will prepare the Commercial Court project plan and establish an automatic filing and registry system through computerization. Companies Legislation 36. The Government has carried out an extensive review of the legal regime on companies and has decided to introduce completely new legislation. The preparation of the new legislation is being funded under the Financial and Legal Management Upgrading Project. As a condition for release of the Business Environment tranche, the Government will submit the new companies legislation to Parliament for approval. Land Law and Administration 37. A new Land Act enacted in February 1999 records a major improvement in the area of land law. It has, in particular, codified, unified, and simplified the law relating to mortgages that, in this case, is paramount to private sector growth. Land mortgages are the most preferred and effective form of security. By virtue of sections 3(1)f and 112(1) of the Land Act, land can be used as collateral to borrow from financial institutions. 38. However, there are worries regarding procedural matters and regulations, particularly on foreign acquisition of use-rights and the recent concerns on the use of land as collateral for bank credit. Although the act provides for the use of land as collateral, it gives the Commissioner discretion to require more information before he or she or an authorized officer approves the registration. Section 36(2) reads: "Unless otherwise provided for by this Act, a disposition of a right of occupancy shall not require the consent of the commissioner or an authorized officer." Similarly Section 20(1) of the Land Act extends a right of occupancy to non-citizens for the purpose of investment. This is aimed at attracting investors. More important, a serious disincentive stems from the problem of land titling. The process is long, cumbersome, and involves a wide range of approving authorities. However, the Government is optimistic that the timeframe of issuing titles will be reduced to 180 days, and this will be provided for in the Regulations. As a condition for release of the Short-term tranche, the Government will issue regulations to put into effect the new Land Act, ensure that these regulations facilitate the use of land as collateral for purposes of commercial transactions, and disseminate such regulations widely.  16 Tanzania PSAC I Capital Markets 39. Tanzania's capital markets remain at a very early stage of their development. The Dar es Salaam Stock Exchange started business in April 1998, allowing only participation by domestic investors in portfolio equity investment. A secondary market for Government debt, in particular treasury bills, is practically nonexistent. To promote foreign participation in the capital market, under the HIPC completion point conditions, the GOT has committed to (:) developing and approving a policy on capital account liberalization, (ii) developing and implementing a comprehensive capital flows monitoring system, and (iii) assessing tthe capacity of the financial system to manage capital flows. As a condition for release of the Business Environment tranche, the Government will approve and implement, with appropriate safeguards, a proposal to relax restrictions on foreign portfolio investment in equity. Control of Crop Movement 40. In principle, the law allows for the free movement of crops within the country, but the bylaws under the Local Government Act provide for restrictions that have given rise to roadblocks and permits required for transporting food from one point to another within the country. Cross-border movements have also occasionally been imposed, impinging on profitability and limiting access to closer and more lucrative markets. Given the ongoing decentralization process and inadequate share of revenue sources going to local govemments, districts and local authorities are likely to intensify these controls for revenue-generation purposes. As a condition of release of the Business Environment tranche, the Government will rationalize physical controls constraining crop movements within and across international borders to periods of national emergency only, and subject such movements to the existing trade procedures. Tax Regime Central Government Taxes 41. Following the passage of legislation by Parliament in April 1995 and Presidential assent in July 1995, the GOT established the TRA as an independent corporate body under the Ministry of Finance, responsible for, among other things, administering the revenue laws as well as assessing, collecting, and accounting for revenues. The Government also undertook other important measures, such as the introduction of value added tax (VAT) in July 1998. The Government appointed a task force to identify, rationalize, and harmonize taxes. Consequently the current personal income tax structure has been reduced from 11 to 4 tax bands. This has lowered concerns with respect to equity and monitoring. Maximum rates for corporate and income tax have been reduced from 35 to 30 percent, and import duty has been reduced from 30 to 25 percent, with four nonnegative rates. 42. Despite these improvements, further measures are necessary, especially simplifying and rationalizing certain aspects of direct and indirect taxes. In addition, with the ongoing devolution, the collection by the center and the local governments will need to be harmonized and nuisance taxes eliminated. These will provide the private sector with the appropriate growth environment while simultaneously broadening the tax base for the Government to ameliorate the disproportionate burden on the narrow base of taxpayers, thereby increasing revenues. Apart from its commitments under the HIPC completion point conditions and the IMF's PRGF program, the  Tanzania PSAC I 17 Government needs to implement the broad areas of improvements in the tax regime, as identified in the 1998 TRA proposal for rolling out the tax reform program and the IMF's Fiscal Affairs Department study. As a condition for release of the Business Environment tranche, the Government will (i) eliminate 46 out of the 52 items subject to excise tax, (ii) expedite the payments of VAT refunds to the statutory period, and (iii) rationalize the differential rates of withholding taxes in sectors, excluding mining, infrastructure, and the stock exchange. Harmonization of Tax Regimes 43. As the Government Task Force that looked into the issue of local and central tax regimes pointed out, there is no clear jurisdiction between the two agencies. This leads to both agencies targeting the same sources for revenue, which results in double taxation in some cases. Revenue considerations lead local authorities to impose a variety of levies that are also questionable. This is especially complicated by the fact that most, if not all, local governments have a weak tax administrative infrastructure. As noted in the report of the task force, the vision of the local governments calls for a reconsideration of, among other things, the delegation of functions and responsibilities on the one hand, and the fiscal relations between the central and local governments on the other hand. This is particularly important in enforcing various measures promulgated via the Finance Acts. 44. Once implemented, the recommendations of the task force will address many of the identified shortcomings between the local and central govemments. However, there is no clear mechanism for minimizing the ill effects of the cascading system of taxes, which creates disincentives to growth and investment. As a condition for release of the Business Environment tranche, the Government will (i) implement the operation of a unified tax appeals system, (ii) enforce the limit for crop/livestock cess to those established under the Finance Bill for 1999/00, and (iii) enforce the exemptions from stamp duty on proceeds from transactions on agricultural trade. REGULATION AND PRIVATIZATION Regulation New Infrastrcture Regulators 45. Tanzania has conducted a wide-ranging review and debate concerning institutional options for regulation of utilities and transport. The Planning Commission is now drafting proposals for the creation of a multisectoral regulatory institution or institutions that will be considered by Government for approval. Multisectoral regulatory bodies have the advantages of economizing on scarce regulatory skills, as well as mitigating risks of capture by powerful enterprises that can dominate individual sectors. 46. Once a decision is made, legislation will be drafted immediately so that it can be presented to Parliament soon after the forthcoming elections. Provision has been made in the PPSD project for technical assistance for the planned regulatory institution(s), once they have been legislatively created. Considerable work will also need to be undertaken to ensure a smooth transition from the existing institutional arrangements: a Regulatory Coordinator, reporting to the Minister of Planning and working closely with the PSRC, is envisaged to coordinate this work. The creation of the regulatory bodies would be a key first step in a medium- to long-term process aimed at building modem economic regulatory capacity in Tanzania, while also building broad-based public understanding of the benefits and importance of transparent and effective regulation. As a  18 Tanzania PSAC I condition for release of the Regulatory and Privatization tranche, the Government shall adopt mutually acceptable, overarching, enabling legislation for the utilities and transport sectors for creation of an independent, cross-sectoral regulatory institution or institutions to establish procompetitive market structures and regulatory frameworks. Sectoral Legislative Frameworks for Infrastructure 47. Each of the infrastructure sectors-railways, electricity, ports/maritime, water, telecommunications, broadcasting, and aviation-is preparing to reexamine and arnend the relevant sectoral legislation so as to ensure a coherent, modem, procompetitive legislative framework. For privatization to proceed in each of the utility and transport industries, it is important that the market structures and regulatory arrangements be determined by ihe Government. Investors require certainty about such fundamental issues as the extent of competition they will face, the duration of their property rights, and the extent and duration of regulatory intervention in their sectors. Much work has already been undertaken in this respect, and in some instances this work was a condition of the preceding SAC 1. Many critical decisions in most infrastructure sectors will need to be finalized during the current phase (2000-02), so that related privatization transactions can be finalized during current phase or the anticipated next phase (2002-04). 48. Railways: As soon as the divestiture strategy has been agreed on by Government, legislative changes will be proposed to Parliament (expected by April 2001). The new legislation will amend the Tanzania Railways Corporation (TRC) Act, establishing a procompetitive market structure in the railways sector. 49. Electricity: Three related pieces of work will be undertaken to finalize the policy framework for electricity privatization. Studies will be undertaken on (i) the extent and form of unbundling of TANESCO and arrangements for new entry, (ii) the trading arrangements by which unbundled entities and new entrants exchange electricity and finances, and (iii) a policy f.or increasing access to electricity. At least the first two of these studies is expected to be completed by March 2001. This would allow legislation governing the unbundled operation of TANESCO and the framework to allow new entry to be introduced into Parliament in June 2002. Legislation required for the current operation should establish a procompetitive framnework for a restructured power sector. 50. Ports and Maritime: Privatization of the Dar es Salaam container terminal was a condition of SAC I. The terminal has now been leased to a private operator. The next step in the privatization process will be the development of market structure (e.g., extent of unbundlirng, conditions for entry into the sector) and regulatory arrangements for other elements of the sector, including the remaining operations of Dar es Salaam and other ports. The studies for the development of these strategies are expected to be completed by April 2001, with legislation implementing the chosen strategies and establishing the regulatory frameworks being considered by Parliament by the end of 2001. Establishment of the legislative framework would then allow privatization to proceed during 2002. Legislation required for the current operation should establish the market structure and regulatory arrangements governing the maritime and po:rts sectors. 51. Water: The Ministry has been reviewing current water legislation and has identified a number of major policy gaps, notably the lack of a unified and consistent national water policy providing, among other things, a framework for private entry on a procompetitive basis. The Ministry plans to finalize proposals for wider discussion by June 2000 and expects that the  Tanzania PSAC I 19 changes could be submitted to Parliament by October 2001. The new legislation will be required for release of the regulation and privatization tranche of the current operation. 52. Telecommunications: Minimal regulatory requirements to allow privatization of the TTCL to proceed will be established through the license conditions given to the new private operator. Further development is required to modernize the sector's legislation, establishing a procompetitive instrument for future sector expansion. Legislation required for the current operation should revise the legislative and regulatory framework for the telecommunications sector to encourage competition, develop transparent and objective criteria for the issuance of licenses, ensure effective spectrum management, establish procompetitive numbering arrangements, and implement an effective and modern interconnection regime. 53. As a condition for release of the Regulatory and Privatization tranche, the Government will establish procompetitive regulatory frameworks in the telecommunications, broadcasting, water, electricity, ports/marine, railways, and aviation sectors, within the framework of the overall enabling legislation, adopting subsidiary sector al legislation where necessary. Petroleum Sector 54. Following a study to determine the appropriate regulatory framework for the petroleum sector, a draft legislation amending the Petroleum Conservation Act of 1981 has been prepared, and will be submitted to the Parliament for approval. The amendment provides for overseeing fair play in the market, in addition to quality, safety, and health standards. The proposed framework (with the exception of market cornpetition issues) is suited to a small regulatory monitoring unit within the Ministry. During this transition period, the Government prepared an interim regulatory arrangement to govern the sector. It is on the basis of this interim arrangement that the Government liberalized the petroleum sector. As a condition for the release of the Regulatory and Privatization tranche, the Government will issue technical regulations for a liberalized petroleum sector, ensuring the quality and safety of petroleum products. Privatization 55. In the area of privatization, the PSAC I will support the already ongoing efforts toward the privatization of the Tanzania Harbors Authority (THA), TTCL, the Tanzania Electricity Company, the water utility (DAWASA), TRC, NMB, NIC, and public enterprises in the agriculture sector. It is necessary, however, to ensure that the major infrastructure transactions are not held back by a lack of clear guidance on the treatmnent of public enterprise debt and retrenchment. As a condition for release of the Short-term tranche, the Government will approve consistent policies for the treatment of PE employee retrenchment and debt acceptable to IDA. Tanzania Harbors Authority 56. The first portion of the THA to be divested is the Container Terminal in Dar es Salaam. This transaction is now finalized following an award of a 10-year lease to a private operator. The lease contract has been signed and the operator will soon take over operations. 57. The next step in the divestiture process is to agree on a strategy for the rest of the assets and operations of the THA. A study will be carried out to review options and recommend a strategy to the Cabinet for approval. The study will begin by June 2000, and the strategy paper  20 Tanzania PSAC I should be presented to the Cabinet by December 2000. After the Cabinet approves the strategy, the necessary legal changes will be drafted and presented to Parliament, a process that is expecl:ed to be accomplished by December 2001. On this basis, the divestiture of the THA's remaining port assets in Dar es Salaam is expected to be completed in 2003. As a condition for the release of the Regulatory and Privatization tranche, the Government will approve a strategy iFor privatizing the remaining port assets and services. Tanzania Telecommunications Company. Ltd. 58. The TTCL's privatization is at an advanced stage. The information memorandum was sent out to potential investors, and the prequalification was completed. The prequalified telecommunications companies have been invited to carry out their prebidding due diligence. Due to unforeseen technical hitches, the prequalification period may have to be extended to allow the completion of due diligence by potential investors before submitting financial bids, which are expected by July 2000. In the LDP, the Govermnent has committed to completing this process in accordance with its privatization guidelines. TANESCO 59. A Cabinet paper was submitted to the Government in October 1999. The Government endorsed the general strategy of vertical and horizontal separation of TANESCO and the principle of privatization of the resulting parts. The Divestiture Technical Team (DTT) has already been formed and has had its first meeting. 60. The next step is to draft the terms of reference to recruit consultants who will be mandated to prepare a detailed strategy and help implement the restructuring and privatization of TANESCO. The strategy and other critical decisions will be prepared by the DTT, under the PSRC's leadership, and submitted to the PSRC Commission for approval and submission to the Ministry of Energy and Minerals, which will submit these to the Government for approval. Four consulting firms are needed for this exercise: one for unbundling TANESCO and corporatizing its parts, one for suggesting trading arrangements, one for upgrading the existing system-control center to facilitate its use by the Independent System Operator that will conduct electricity trade in the reformed sector, and one for divesting the corporatized parts of TANESCO. The first two consultants are expected to be recruited by October 2000. 61. The strategy should be submitted to Government by September 2001, with the corresponding legislation submitted to Parliament for approval by June 2002. The strategy vvill include (i) setting up the trading arrangements, the governance structure of the Pool, and the role and functions of the transmission operator; (ii) developing the detailed structure of the unbundled system, the number of generating companies and capacity of each generating company, the number of distribution companies and the physical boundaries of distribution companies, the approximate size of distribution companies, and the number of connected customers, as well as the separation of social electricity from commercial electricity; and (iii) determining the capital requirements to carry out the engineering aspects of the restructuring, the cost of setting up metering at the boundaries, and the cost of establishing a Load Dispatch Center. Once Parliament has passed the legislation, the divestiture will begin. The overall project of restructuring the power sector is expected to be completed by September 2005. As a condition for release of ithe Regulatory and Privatization tranche, the Government will approve a mutually accepta'ble strategy for reorganizing TANESCO and for restructuring the electricity sector.  Tanzania PSAC I 21 DAWASA 62. Bids for a private operator to take over the operations of DAWASA on a lease contract were submitted at the end of January 2000. The technical bids were opened and evaluated in early February 2000, and the evaluation report of the technical bids has been submitted to IDA and to the cofinanciers, who have given their authorization to open the financial bids. The financial bids were opened in February 2000, and following a review they were found to be non-compliant to. the bid document. The Govemment has proposed a partial re-bidding for a 10-year lease. As a condition for the Short-term tranche, the Government will bring DAWASA to a point of concession/lease. Tanzania Railways Corporation 63. Consultants have been retained, and through the PSRC are assisting the GOT in preparing a transaction strategy. The option that has been proposed is an exclusive concession of 25 years of a vertically integrated TRC, where infrastructure is separated from operations and placed into an asset holding company. Against this must be weighed the importance of keeping open future possibilities for competitive provision of rail services and permitting access to the TRC's tracks to take advantage of prospects for cross-border traffic growth with neighboring countries in the Southem Africa subregion. 64. Following preparatory work, the PSRC will prepare a strategy paper and submit for the Cabinet's approval. It is expected that this could take place by the end of April 2000. In the meantime, the information memorandum will be prepared, as well as a data room, and bids invited for the divestiture of the TRC's noncore assets. The draft bill amending the TRC Act, including specific legislation goveming private provision of rail services, would be submitted for approval to Parliament. The call for expressions of interest from qualified rail system operators would be issued in June 2001. Following prequalification, and final bid preparation, the winning bidder would be determined, based upon the GOT's privatization guidelines, and the concessionaire selection process given final Government approval. As a condition for release of the Regulatory and Privatization tranche, the Government will bring the rail services to a point of concession/lease. National Microfinance Bank 65. The NMB's Board of Directors has endorsed the NMB business plan. The Government has established a task force-including members from Bank of Tanzania (BOT) under the stewardship of the PSRC-to agree on a provisional strategy and explore the options for privatization. The Government will embark on a process of bringing the NMB to the point of sale upon the completion of the mandate of this task force and the adoption (expected in 2001) by the GOT of a strategy for privatizing the NMB, which would be brought to a point of sale under Phase II of the PSAC. As a condition for release of the short-term tranche, the Government will (i) revise and approve the memorandum of understanding between the NMB and the Ministry of Finance, based on the business plan adopted by the NMB Board; and (ii) approve a strategy for divestiture of the NMB. National Insurance Corporation of Tanzania. Ltd. 66. The terms of reference for two studies to review the strategy to privatize the NIC are currently being prepared on (i) the audit, property valuation, and actuarial valuation analyses; and (ii) on the market and business operations. The Government's privatization program for the NIC  22 Tanzania PSA C I 'iIi carefully develop the options for handling outstanding claims in relation to existing assets, for retrenching excess staff, for closing nonviable branches, and for preparing the criteria for selection of a strategic partner for the NIC. As a condition for release of the Regulatory and Privatization tranche, the Government will approve a divestiture strategy for the NIC. Pursuant to this goal, it will begin to implement the initial steps, such as downsizing, and conduct the audit, property valuation, and actuarial studies. Agriculture Sector 67. Prior to launching its privatization program in 1993, Tanzania had 130 public enterprises in the agriculture sector; accounting for 33 percent of the total number of PEs in the country. By June 1999, 45 of them had been divested, accounting for 35 percent of the agricultural units, oI 11 percent of the total number of PEs in the country. During the first phase of privatization, the focus was on large agricultural PEs. 68. Most of the large-scale and, therefore, economically significant assets have been divested (tea, sisal, and sugar estates; NMC's grain mills, etc.). The only remaining activities of any size are the ranches, rice and dairy farms and seven very large wheat farms. In addition, 12 cashew nut processing plants (all currently closed) need to be divested or liquidated. The privatization of farms and ranches is extremely time consuming, because it involves clearing land titles aMd requires careful negotiations to ensure viable relationships between investors and the local population. Their remote locations and heavy debt burdens make privatization of a good number of farms and ranches unattractive. These transactions are frequently complicated by polit:ical considerations, because they deal with sensitive issues such as land use and ownership (often including dealing with squatters), and are therefore extremely complex, protracted, and subject to political interference. 69. While the PSRC continues to pursue this portfolio and is working on strengthening ties with the line Ministry to ensure smooth processing of transactions, it is important to be realistic about the expected outcomes over the next few years. From the perspective of the PSAC I, based on assessments by the PSRC and the Ministry of Agriculture and Cooperatives, the cashew nut factories; 10 ranches; and the rice, wheat, and maize farms are likely to (i) raise significant interest among credible investors, and (ii) feasibly be divested within the PSAC I timeframe. As a condition of release of the Regulatory and Privatization tranche, the Government lvill approve options for divesting or liquidating the remaining cashew nut processing plants; the NARCO ranches; and the NAFCO wheat, rice, and maize farms. Crop Marketing Boards 70. Following the liberalization of the crop marketing system in Tanzania, the Crop BoaLrds now appear to be redundant. Indeed, their continuing operation as both regulatory bodies ;and marketing and production agents competing with the private sector operators, whom they regulate, distorts the markets for their respective crops and creates uncertainties for private farmers. A number of measures are now being taken to assess the crop boards' efficacy and the role, if any, they should play in the future. The various crop boards are at the moment consull:ing with the Government and stakeholders in an endeavor to define their future roles. In view of these developments, no firm action will be specified on the Crop Boards until the consultation exercise, which they themselves are undertaking, is completed.  Tanzania PSAC I 23 V. DISBURSEMENT, REPORTING, AND AUDIT 71. Disbursement: Disbursement arrangements will follow the Bank Operational Directive of February 8, 1996, on the Simplification of Disbursement Rules under Structural Adjustment and Sectoral Adjustment Loans. The Borrower shall open, prior to furnishing to the IDA the first request for withdrawal from the Credit Account, and thereafter maintain in the BOT a deposit account in U.S. dollars on terms and conditions satisfactory to the Association. All withdrawals from the Credit Account shall be deposited by the Association into the Deposit Account. If, after deposit in this account, the proceeds of the Credit are used for ineligible purposes (i.e., to finance items imported from nonmember countries or goods in the standard negative list), IDA will require the Borrower to either (i) return that amount to the account for use for eligible purposes; or (ii) refund the amount directly to IDA, in which case IDA will cancel an equivalent undisbursed amount of the Credit. Funds disbursed under the proposed Credit will be released against satisfactory implementation of the program set forth in the Credit. This includes compliance with stipulated floating tranche conditions, and progress shown in carrying out the program set forth in the LDP from the Government. (Annex B). 72. Reports: The Borrower will (i) furnish to IDA semiannual reports on the exact amounts received into the Deposit Account; (ii) furnish to IDA the details of the Pay Master General Account into which the local currency equivalent of the Credit proceeds will be credited; (iii) furnish to IDA a report of the equivalent in local currency of withdrawals from the Deposit Account, showing that the PMG Account has been credited accordingly; and (iv) furnish to IDA semiannual reports on receipts and disbursements from the Deposit Account. 73. Audit: The Ministry of Finance will arrange for the audit of the Deposit Account, upon request by IDA in accordance with auditing standards and terms of reference acceptable to IDA, and by auditors acceptable to IDA. The Ministry of Finance will make the report on the audit of such records available to IDA within four months of the close of the Government's fiscal year. VI. COFINANCING 74. The Government of Switzerland has indicated preliminary interest in cofinancing the PSAC I in the area of strengthening the efficiency of the financial market. The African Development Bank has indicated interest in providing parallel support through a Structural Adjustment Loan worth US$ 55 million in relation to actions under the proposed operation pertaining to strengthening economic governance and the regulatory framework and improving the business environment. VII. PSAC BOARD AND TRANCHE CONDITIONS Overview 75. The PSAC I follows SAC I for Tanzania and covers the actions agreed on under Phase I of the PSAC elaborated earlier. Drawing lessons from SAC I, the proposed design for the PSAC I purports to be more focused by targeting policy action in one important area: improvement of the environment for increased private investment response and more efficient business operations. While the proposed Credit retains the use of floating tranches as in SAC I, all proposed actions will focus on this single, broad area of policy and institutional reforms so as to maximize the synergy of the various proposed activities. Furthermore, to exploit the results of the ongoing SAC  24 Tanzania PSACI I and related IDA-supported projects, the proposed operation will pursue further measures to complete the privatization and liberalization process, particularly in infrastructure, finance, and agriculture. The attached policy matrix (Annex A) contains the details of the objectives, actions taken to date in each area, measures to be taken, and the proposed indicators for monitoring progress with implementation. 76. Over the past four years, the GOT intensified macroeconomic policy reforms with the aim of creating a more stable macroeconomic environment. This was pursued with the understanding that such stability was a necessary condition for achieving sustained growth, itself a necessary condition for reducing the pervasive poverty in the country. As a result, Tanzania has made significant progress toward reestablishing macroeconomic stability. A continuous undertaking throughout the duration of the PSAC I is that the Government sustain the macroeconomic stability achieved to date and protect budget allocation to priority sectors as determined in the MTEF on an ongoing basis. 77. More specifically the proposed PSAC I will support the Government's efforts to sustain macroeconomic stability, continue the implementation of the privatization program, improve the contestability of markets, strengthen the state legal and commercial apparatus needed for more transparent and efficient business environment; and further reduce the barriers to internal and external trade. These actions will result in increased growth through higher private investment, lower costs of doing business, and an increased revenue base for larger and more effective public expenditure programs. The operation aims at a comprehensive set of actions to address the balance of reforms needed to set in place an environment conducive to robust development of the private sector. The difficulty in implementing the second-generation reforms is partly recognized by the size of the support being proposed (SDR 141.8 million). In addition to the effectiveness tranche of SDR 22.4 million (US$ 30 million equivalent), a short-term tranche, planned for the end of FY01 (June 2001), and three other floating tranches, are proposed. The short-term tranche, and each of the other three floating tranches, will be of SDR 29.85 million (US$ 40 million equivalent). T'he proposed closing date for the planned Credit is June 2002. 78. A tranche worth SDR 22.4 million (US$ 30 million equivalent) will be available immediately after effectiveness. The short term tranche will target completion of ongoing activities prior to June 2001. The floating tranches will target actions, which can be completed quickly, involving the privatization of enterprises well under way, improvement in the tax regirne, strengthening of public financial management and public service delivery to be implemented prior to the completion point of the enhanced HIPC program, and institutional (govemance) reforms to be implemented prior to June 2002. The second adjustment Credit under this PSAC is likely to cover the period June 2002-04. Tranche Conditions Effectiveness (none) 79. The four floating tranches will be predicated on IDA receiving evidence of fulfillment of the specified monitorable conditions. These include governance, the business environment, ithe regulatory framework, and privatization. 80. Short Term (i) The Government prepared an MTEF for 2000/01-2002/03 and approved a budget for 2000/01 with priority allocation to basic education, primary health, water, rural roads,  Tanzania PSA C I 25 judiciary, and agricultural research and extension, in addition to activities to combat HIV/AIDS. Furthermore, in the budget for 2000/01, the Government has increased (i) the share of the total allocation to the priority areas in total discretionary recurrent expenditures by at least two percentage points over the 1999/00 budget, and (ii) the share of the allocation to "Other Charges" for the priority areas in total discretionary recurrent expenditures by at least two percentage points over the 1999/00 budget. (ii) The Government has revised and approved the memorandum of understanding between the NMB and the Ministry of Finance, based on the business plan adopted by the NMB Board, and has approved a strategy for divestiture of the NMB. (iii) The Government has issued regulations to put into effect the new Land Act, ensured that these regulations facilitate the use of land as collateral for purposes of commercial transactions, and disseminated such regulations widely. (iv) The Government has adopted mutually acceptable, consistent policies for the treatment of PE employee retrenchment and debt. (v) The Government has brought DAWASA to a point of concession/lease. 8 1. Governance Public Finance Management (i) Only IFMS used as central government budgeting, accounting, and financial information systems for the recurrent expenditure and reclassified the development budget according to the GFS. Anticorruption and Accountability (ii) Carried out corruption diagnostic surveys in the ministries of Works, Education, Health, and Home Affairs; the Judiciary, Attorney General's office; and the TRA and approved operational strategies for these areas. (iii) Approved new procurement law and regulations that permit greater transparency and integrity in procurement, and the Central Tender Board has adopted a decision to announce tender results through press releases. Effectiveness and Efficiency in Public Service Delivery (iv) Developed and approved strategic and annual plans and Performance Budgets in the ministries of Agriculture, Education, Health, Water, and in the CSD. (v) Transferred management and operation of trunk and regional roads network to TANROADS. 82. Business Environment Investment Facilitation and Promotion (i) Restructured and restaffed the TIC to serve as an investment-promotion agency in line with the mission of the new corporate strategy and the 1997 Investment Act. Legal Framework (ii) Approved the Commercial Court project plan, taking into account relations with the existing court system.  26 Tanzania PSAC I (iii) Submitted the new companies legislation to Parliament for approval. Crop Movement (iv) Rationalized physical controls constraining crop movements within and across international borders to periods of national emergency only, and subjected such movements to the existing trade procedures. Tax Regime (v) Unified tax appeal system has become operational. (vi) Simplified the application of excise and withholding taxes and expedited the payments of VAT refunds. Capital Markets (vii) Approved and implemented a proposal to relax restrictions on foreign portfolio investment in equity instrument with appropriate safeguards. Regulation and Privatization 83. Regulatory Framework for Infrastructure Services (i) Adopted mutually acceptable overarching enabling legislation for the utilities and transport sectors for creation of independent, cross-sectoral regulatory institution(s) for establishment of procompetitive market structures and regulatory frameworks. (ii) Established procompetitive regulatory frameworks in the telecommunications, broadcasting, water, electricity, ports/marine, railways, and aviation sectors, within the framework of lthe overall enabling legislation, adopting where necessary subsidiary sectoral legislation. (iii) Issued technical regulations for a liberalized petroleum sector, ensuring quality and safety of petroleum products. 84. Privatization (i) Approved plans for concessioning of remaining port assets and services. (ii) Approved a strategy for reorganizing TANESCO and restructuring the electricity sector. (iii) Brought rail services to a point of concession/lease. (iv) Approved a strategy for the divestiture/sale of the NIC. (v) Developed and approved options for divesting the remaining cashew nut processing plants; NARCO ranches; and NAFCO wheat, rice, and maize farms. VIII. BENEFITS AND RISKS 85. Sustained reduction in poverty requires both higher growth and improved access to lower cost services by the public. This is particularly so given the extent of poverty in Tanzania, with nearly half the population being poor by international poverty standards. The benefits from this operation, therefore, will stem from increased and sustained growth, as well as greater cost- effectiveness in the delivery of services to the public. The projected impact on growth will be to raise it from the current average of 4 percent to a range between 6 and 7 percent (more than doubling the growth rate of income per capita) in the medium term. Based on estimates of the  Tanzania PSAC 1 27 impact of growth on poverty reduction for Tanzania (elasticity of 0.81), the effect of this increased growth will be to double the speed of poverty reduction on an annual basis, from the current 1 percent rate of reduction to 2 percent. 86. The main impact from this operation on higher growth entails higher private investment, which will help to raise Tanzania's investment rate to 24 percent of its national income from the current 18 percent; increased productivity of investment, raising returns from the current 20 percent to 25 percent; and greater efficiency in the utilization of existing capacity as the cost of doing business declines. The estimates are based on the analytical work carried out under the FY00 Country Economic Memorandum for Tanzania. The sharp rise in foreign direct investment in the past five years (from US$ 20 to US$ 170 million annually) can be attributed largely to the improved macroeconomic environment and to the removal of gross policy and market distortions. The additional investment response and greater efficiency will be enabled by lowering infrastructure costs, underpinning the credibility of the Government in sustaining macroeconomic stability, and removing institutional bottlenecks to private enterprise. 87. The chief risks the operation faces are a weakening of Government commitment to reforms, particularly if there is a change in the top leadership of the Government during the national elections later this year. The more open and inclusive governance system now being developed may also slow down decisive action because of the longer time it takes to build reform consensus. The payoff in this regard is the avoidance of possible reversals as difficult issues are discussed up front prior to implementation, avoiding back-loaded dialogue. For the privatization program, there are also risks associated with the Government's ability to implement public enterprise debt restructuring and the massive retrenchment in the divestiture of large parastatals. The issues relate to financial constraints for carrying out expensive retrenchment schemes, and the political sensitivity of such actions. Expeditious legislation may also face capacity constraints, given that the operation requires significant changes in law to buttress new institutional arrangements and policies. This is despite the confirmation by the concerned institutions that there are no serious bottlenecks to processing the required changes once clear decisions are made. Furthermore, the operation may face risks if there are no suitable candidates for buying assets offered for sale or, worse, if those offered become subject to candidates' change of mind. The international environment, mainly changes in the global market, may also affect the profitability of enterprises or discourage prospective investors, as was the case for some divestiture transactions under SAC I during the East Asian crisis. 88. These risks are assessed against Tanzania's track record in the past five years and the fact that there is already a provision for technical assistance under IDA projects in most of the areas of action. Examples here include persistence in improving macroeconomic stability, meeting most of conditions for tranche release under SAC I without waivers, and, perhaps more important, no reversal of decisions or transactions to date. On balance, the prospects for carrying out the actions proposed under the PSAC I are positive.  28 Tanzania PSA ( I IX. RECOMMENDATION 89. Recommendation. I am satisfied that the proposed Credit would satisfy the Articles of Agreement of the Association and recommend that the Executive Directors approve it. James D. Wolfensohn President By: Shengman Zhang Managing Director Attachments Washington, D.C. June 8, 2000  TANZANIA PROGRAMMATIC STRUCTURAL ADJUSTMENT CREDIT I POLICY MATRIX OBJECTWVES& ACTIONS TAKEFN MEASURES! PERFORMANCE INDICATORS MEEANS OF TIMING/ POLICIES VERIFCATION TRANCBLE _eveniance Improve strategic budget * PER introduced with a * Prepared an MTEF for 2000/01-2002/03 and approved a budget * PER reports Short Term allocation to reflect poverty focus on strenigthening for 2000/01 with priority allocation to basic education, primary * MTEF document (Prior to tranche reduction priorities, budget management. health, water, rural roads, judiciary, agricultural research and * Budget for 2000/0 1 as release) The budget guidelines extension, and activities to combat HlV/AlDS. approved by for 2000/01 and a . In the budget for 2000/0 1, increased the share of the total Parliament MT'EF for 2000/0 1 - allocation to the pr-iority areas in total discretionary recurrent 2002/03 have been expenditures by at least two percentage points over the 1999/00 issued and reflect budget. poverty reduction * In the budget for 2000/0 1, increased the share of the allocation to priorities. "Other Charges" for the priority areas in total discretionary recurrent expenditures by at least two percentage points over the 1999/00 budget. Roll out the IFMS to all * The IFMS has been * Only IFMS used as central government budgeting, accounting, * Commitment Control Govemnance Floating ministries and subtreasuries; rolled out to all and financial information systems for the recurrent expenditure, Reports for all (Prior to tranche ensure that all budgetary budgetary units and and reclassified the development budget according to the GFS. ministries release) votes at the central and accounts, apart from the subtreasury levels are subtreasuries. managed through IFMS; and record all expenditure commitments and arrears through the IFMS. Operationalize and * National Anticorruption * Carried out diagnostic surveys on the Judiciary; ministries of Works, * Submission of Giovernance Floating implement key elements of Strategy has been Education and Culture, Health, and Home Affairs; the Attorney documents and (Prior to tranche the recently approved approved, published, and General's office; and the TRA and approved operational strategies relevant legislation to release) National Anticorruption disseminated at national for these areas. IDA Strategy. forum. * Presented for approval new procurement law and regulations. * Satisfactory reports of * Sector-specific * The Central Tender Board made tender results public through press implementation to IDA anticorruption action plans releases. are in preparation. . . ........~ ~ ~ ~ ~~~~~~~ >~  OBJECTIVES & ACTIONS TAKEN MEASURES/ PERFORMANCE INDICATORS | MEANS OF TIMING/ > POLICIES VERIFICATION TRANCHE E'W' ' 1n'',,$fffectiv,e00000 ..........nd................. E;Jflcient,lt,, P ,ub :fTtyt40 : ;.0 0000000.fft, . l , ic _ , Serv-i:SicetS'':00"'tS'' v......... Implement the Performance * Under the PSRP, the * Developed and approved strategic and annual plans and * Supervision reports of Governance Floating Management System. GOT has committed to performance budgets in the ministries of Agriculture and PSRP (Prior to tranche prepare frameworks for Cooperatives, Education and Culture, Health, and Water and the release) the Perfornance CSD. Improvement System in ministries and departments. Establish Roads Agency, * TANROADS * Transferred management and operation of trunk and regional * Supervision report of TANROADS. legislation has been roads network to TANROADS. the Integrated Roads approved and its Chief Program 11 Executive hired. Improved legal framework * The new Land Act was * Issued regulations to put into effect the new Land Act. * Copies of regulations Short Term for acquisition of land and passed in February * Ensured these regulations facilitate the use of land as collateral for (Prior to tranche exit from business. 1999. purposes of commercial transactions. * The law and release) * Disseminated such regulations widely. regulations translated into Kiswahili and distributed to all districts. Strengthen operation of the . Commercial Court has * Approved the Commercial Court Project Plan, taking into account * Submission of the Business Commercial Court been established and is relations with existing court system. project plan to IDA Environment operational. * Established automatic filing and registry system through * Supervision reports of Floating * Preparation of the computerization. PSAC I (Prior to tranche Commercial Court release) project has begun. Restructure the TIC as a * Enacted new Investment * Restructured and restaffed the TIC to serve as an investment- . Supervision reports, Business service-oriented investment Law. promotion agency in line with the mission of the new corporate new organizational Environment promotion agency. * Converted the IPC to strategy and the 1997 Investment Act. structure and corporate Floating promotion agency. the TIC. strategy, and number (Prior to tranche * Completed study (by and qualification of release) FIAS ) to develop staff recruited strategy and action plan for implementing changes envisaged under Investment Law. Improve transparency of * Preparation of the new * Subtmitted the new Company lcgislation for approval to * New legislation Business business conduct and reduce Companies Act was Parliament. Environment funded under FILMUP. Floafinr' business risk. (Prior to tranche I release  OBJECTIVES & ACTIONS TAKEN MEASURES/ PERFORMANCE INDICATORS MEANS OF TIMING/ POLICIES VERIFICATION TRANCBIE Promote foreign * DSE started business in * Approved and implemented a proposal to relax restrictions on * Government approval Business participation in the capital April 1998, allowing foreign portfolio investment in equity instrument with appropriate of foreign portfolio Environment only participation of safeguards. investment in equities FZoating market. domestic investors in (Prior to tranche portfolio equity release) investment. Under the enhanced HIPC conditions, the GOT has committed to undertake preparatory work toward relaxing restrictions on foreign portfolio investment. Abolish nontax barriers to * Rationalized physical controls constraining crop movements within * Government order Business trade. and across international borders to periods of national emergency Environment only; and subjected such movements to the existing trade Floating procedures. (Prior to tranche __________________________________________________________ ___________________ relereesse ~Ta Reie. .. Harmonize and streamline * The Government Task * Enforced the limit for crop/livestock cess in accordance with the * Finance Bill and Business tax regimes and Force on Harmonization Finance Bill of 1999. supervision reports of Environment administration. of Local and Central * Implemented exemptions from stamp duty on proceeds from PSAC I Floating Remove nuisance taxes at Govemment tax transactions on agricultural trade. (Prior to tranche the local government level regimes noted that there release) is no clear jurisdiction in rural and urban areas. between the two Rationalize tax regime to agencies, leading into * Operationalized unified tax appeal system. * Finance Bill promote private sector double taxation and too * Eliminated 46 out of the 52 items subject to excise tax. * Supervision reports for growth. many taxes and levies. * Expedited the payments of VAT refunds to the statutory period. TAP and PSAC I The task force * Rationalized the differential rates of withholding taxes in sectors recommended measures excluding mining, infrastructure, and the stock exchange. for rationalization of the tax regime and administration, and the GOT has undertaken the measures under the HIPC completion point conditions. . .......... ............. .. ......... ............ .......... ............................... .. . ............. . .. ... ... .................... -k la Pd-tatEi- . ---- : Enhance regulatory * Adopted mutually acceptable (between the GOT and IDA), * Copy of the strategy/ Regulation and framework for key sectors, overarching, enabling legislation for the utilities and transport policy framework Privatization improving transparency and sectors to create independent, cross-sectoral regulatory Floating competition institution(s) for establishment of procompetitive market * Copy of official (Prior to tranche o >  OBJECTIVES & ACTIONS TAKEN MEASURES/ PERFORMANCE INDICATORS MEANS OF TIMING! > POLICIES VERIFCATION TRANCBE structures and regulatory frameworks. gazette, approved Act, release) * Within the framework of the overall enabling legislation, and PSAC I established procompetitive regulatory frameworks in the supervision mission telecommunication sector, broadcasting, water, electricity, report ports/marine, railways, and aviation sectors, adopting subsidiary sectoral legislation where necessary. * Issued technical regulations for a liberalized petroleum sector, ,___________ _ ensuring the quality and safety of petroleum products. . ... . Approved mutually acceptable consistent policies for the Government policy Short Terni treatment of PE employee retrenchment and debt. document (Prior to tranche release) Privatize infrastructure * Call for bids and short * Approved mutually acceptable plans for concessioning of * Supervision reports Regulation and service provision. listing of Container remaining port assets and services. from ports and PPSD Pnvatization Terminal concessionaire Floating have been made, and (Prior to tranche candidates selected for release) negotiation after the GOT gave approval. * Brought DAWASA to a point of concession/lease, consistent with Short Term the GOT's privatization guidelines. (Prior to tranche release) Privatize infrastructure * Options Paper for the * Brought rail services (TRC) to a point of concession/lease. * Issuance of the Regulation and service provision. privatization strategy of Information Privatization TRC prepared and Memorandum to Floating discussed by investors and call for (Prior to tranche stakeholders in a bids: Supervision release) workshop held in Dec. Reports of the 1999. Revised Options Railways Restructuring Paper prepared and Project circulated for comments before finalization for the GOT's approval. * Agreement has been * Approved mutually acceptable strategy for reorganization of * Strategy document, reached on the TANESCO and restructuring of the electricity sector. letter from MPs office timetable, stating granting of implementation, and approval, and project components for Supervision reports the restructuring process of power sector.  OBJECTIVES & ACTIONS TAKEN MEASURES/ PERFORMANCE INDICATORS MEANS OF TIMING/ POLICIES .. VERIFICATION TRANCIIE Divest key financial . Revised and approved MOU between NMB and MOF, based on * Supervision reports of Short Term services and agricultural the business plan adopted by the NMB Board. Approved strategy the Financial (Prior to tranche enterprises. for the divestiture of the NMB. Institutions release) Development Project 11 * Approved options for divesting or liquidating the remaining * Govemment approval Regulation and cashew nut processing plants; NARCO ranches; and NAFCO of options Privatization wheat, rice, and maize farms. * Govemment approval Floating * Approved strategy and taken initial steps, such as downsizing, for * Strategy document, (Prior to tranche divestiture of the NIC. letter from the release) Planning Commission granting approval, and Supervision reports > o   Tanzania PSAC I Annex B I of 23 THE UNiTED REPUBLIC OF TANZANIA THE MINISTER FOR FINANCE Telephone: 112854 The Treasury, Fax: 117790 P.O. Box 9111, In reply please quote: Dar Es Salaam Ref No TYC/I1210/2/01 8- May, 2000 ................................................ Mr. James D. Wolfensohn President The World Bank Washington, D.C. Dear Mr. Wolfensohn: Subject: LETTER OF DEVELOPMENT POLICY 1. I am writing to request, on behalf of the Government of the United Republic of Tanzania, a Credit of US$190 million (SDR equivalent) from the International Development Association (IDA) in support of our structural adjustment programme. The proposed Credit will reinforce our efforts to reduce poverty through accelerating economic growth more generally and private sector development more specifically. Increased private sector investment and business efficiency is a pivotal part of scaling up growth of the Tanzania economy. The principal objectives of our programme are to encourage increased private investment; induce greater efficiency of the private sector by reducing the cost of doing business and enhanced competition; increase private sector participation in the economy through further divestiture of key public enterprises, particularly in infrastructure services; and improve the effectiveness in the delivery of supportive public services. This strategy is in line with the principal objective of the Tanzania Assistance Strategy (TAS), to support poverty reduction through accelerated growth and more effective public service delivery. The programme is consistent with the Poverty Reduction Strategy Paper (PRSP) to be presented to the World Bank and the IRF in August 2000. Proceeds from the Credit would go towards filling Tanzania's external financing gaps and would support our budgetary needs through 2001/02.  Tanzania PSAC I Annex B 2 of 23 BACKGROUND AND RECENT DEVELOPMENTS MACROECONOMIC PERFORMANCE 2. Over the past four years, the Govemment of Tanzania has intensified macroeconomic policy reforms with the aim of creating a more stable macroeconomic environment. During the period, we have also embarked upon a number of measures in an attempt to reduce poverty, especially under the National Poverty Eradication Strategy. Tanzania has now successfully completed implementing actions agreed under the three-year ESAF programme. As a result, significant ground has been gained towards achieving sustained macroeconom:ic stability. Inflation has come down from more than 35 percent in 1994 to 6.3 percent in February 2000; the exchange rate remained reasonably stable for the 18 months prior to the recent 15 percent depreciation; the foreign exchange reserve position has climbed from 9.5 weeks of imports of goods and non-factor services in 1994, to 16.7 weeks in February; and the overall fiscal balance including grants has been in surplus of between 0.8 percent and 1.2 percent of GDP in the past three fiscal years. The fiscal balance excluding grants has been a low deficit ranging between 1 and 3 percent of GDP. The annual money supply (M2) growth rate remained stable at around 11.2 percent between 1996 and 1998, rising to 15.1 percent in 1999. 3. Although the balance of payments is registering inflows of capital, the performance of the trade account has been less than satisfactory. The inflows are predominantly financing, the gestation stage for new investments. The trade deficit has contributed to the deterioration of the current account balance (excluding current official transfers) from 12.5 percent of GDP in 1996/97, to 14.6 percent of GDP in 1998/99. The current account deficit including current official transfers deteriorated from 8.8 percent in 1996/97 to 10.9 percent of GDP in 1997/98, improving slightly to 8.5 percent in 1998/99. The prospects are for narrowing this gap as exports rise when production from investment in mining comes on stream. GROWTH AND POVERTY REDUCTION 4. Although the growth rate for the past three years has averaged nearly 4 percent, it has averaged about 3.2 percent per year or approximately 0.5 percent growth in per capita terms for the decade and a half since reforms began. With 51 percent of Tanzanians still living below the international poverty line of a US Dollar a day, such growth performance will not enable reduction of poverty by any significant margins in the foreseeable future. Continued pervasiveness of poverty undermines the sustenance of the very reforms we are implementing. To address this problem, we are embarking on a more aggressive poverty reduction strategy, which emphasises both higher growth and more effective public service delivery. This will result in an initial financing gap. However, in the long-term we foresee the gap being closed through higher revenue generation. In the meantime, external financing would play an important role in realising the objectives of the poverty reduction programme. Proceeds from the Credit and the enhanced HIPC relief will relieve pressure on budgetary requirements, as they are projected to supplement resource availability, and will help lower inflation closer to a par with our trading partners, as well as relieving instability of the value  Tanzania PSAC I Annex B 3 of 23 of the Tanzanian Shilling. Continued diversification of sources of external finance on our part is necessary in the medium to long term. 5. The Government recognises the central role of the private sector in scaling up Tanzania's growth and in engendering greater efficiency in the use of the country's limited resources. To this end the Government embarked on a programme to divest public enterprises and liberalise the remaining controlled sectors with significant success. To date, more than half of the 400 public enterprises have been privatised, including some seven large parastatals. The regime for foreign investment has been simplified and attractive terms offered to potential investors. Partly as a result of these endeavours, the trend response of foreign direct investment has been encouraging, rising sharply from US$ 20 million in 1995, to US$ 170 million in 1998. There is a need to sustain this positive response and broaden the destination sectors beyond mining and tourism. The Government plans to further remove the impediments to private sector development and provide appropriate incentives to spur higher investment. STRUCTURAL REFORMS 6. Structural reforms carried out by the Government of Tanzania have focused on realigning the incentive structure towards more efficient use of scarce foreign exchange, liberalising markets for goods and services, and reducing the involvement of the public sector in commercial activities. A large part of gross economic distortions has been dealt with effectively. Markets, though still fragile and shallow, are relatively freer, the parastatal sector and the civil service are considerably smaller, and significant improvement in fiscal discipline has been registered particularly through enforcing cash budgets. 7. The banking system has been further opened to private sector participation, which now accounts for nearly 80 percent of the banking sector's business. The liberalisation of the petroleum and shipping sectors have completed the process of freeing up markets, setting up the basis for greater competition and efficiency. The Local Government Act was amended in 1999, to allow devolution of responsibility for the delivery of key social services to local governments and set up a basis for greater inclusiveness in the management of the development process. The land legislation has also been amended to pave the way for strengthening transparency in land use transactions and greater fairness in treatment. More effort now needs to be directed at deepening complementary structural policies and institutional structures for sustained growth and broad sharing of benefits from growth. The reforms to be pursued under Progranmmatic Structural Adjustment Credit will greatly enhance the openness and liberal character of our economy paving the way for higher growth and significant poverty reduction as envisioned under the Tanzania Vision 2025. PUBLIC SERVICE DELIVERY 8. In 1998/99, the Government adopted the Medium Term Expenditure Frame (MTEF) as the fulcrum for strategic public expenditure allocation and the key instrument for ensuring that overall expenditure (including projected recurrent cost implications of public investment) are within the resource envelope. Sector Development Programmes (SDPs) currently for the  Tanzania PSAC I Annex B 4 of 23 road and health sectors, and soon for education will serve as important instruments for enforcing the use of strategic framework in the specific sectors. 9. Efforts have also been pursued to strengthen budget management and financial controls so as to raise the cost effectiveness of public service delivery. To this end the Government has introduced a computerised Integrated Financial Management System (IFMS) and is now in the process of rolling it out to all key institutions. The adherence to the strict cash budget management system constrains spending to available resources and the establishment of an IFMS provide both for better expenditure control and real time financial reports. Three laws governing public financial management, procurement and audit are in the process of being reviewed to adapt the system to these changes. Audit reports by the Controller and Auditor General are now current, facilitating timely identification of problem areas. To strengthen the base for more effective and sustainable public service delivery, the primary responsibility for delivery of basic services is in the process of being decentralised and users now make contributions towards meeting the costs of public service provision. 10. The adoption of a Government-led participatory public expenditure review (PER) process has enabled continuous and more open monitoring of expenditures and their effectiveness. In 1999 the Government approved a national anti-corruption strategy and preparations are under way for its implementation. A programme to rationalise the functions of the public sector and enhance the professionalism of public service has been adopted for implementation in the medium term. The continued plans to broaden the coverage of these changes and strengthen institutional capacities for their application form an important part of our future endeavours. THE MEDIUM TERM POLICY FRAMEWORK FOR PRIVATE SECTOR DEVELOPMENT 11. The Government's medium-term objective is to create the conditions favourable to higher growth, with a particular focus on poverty reduction, while maintaining macroeconomic stability. Until recently the main focus of reforms was on reducing government involvement in the economy. This was driven by the Government's desire to disengage from activities where there is no clear justification for public sector involvement, including privatisation and market liberalisation, but also by the need for fiscal stabilisation which led to a diminishing Government capacity to deliver basic services such as infrastructure or primary education in sufficient quantities and quality. Macroeconomic stabilisation and economic liberalisation which were achieved in recent years provide a solid foundation for private sector driven economic growth. 12. The overall macroeconomic objectives for 2000/01 - 2001/02 are: (i) a real GDPI growth rate of 5.6 percent in 2001, rising to 6 percent or more by 2002; (ii) a reduction in the average rate of inflation to 4.5 percent in 2001, and 4 percent in 2002; (iii) central government deficit of not more than 0.4 percent of GDP in 2000/01, and 0.2 percent of GDP in 2001/02; and (iv) a fall in the current account deficit (excluding grants) to 15.0 percent of GDP in 2000/01 and 14.1 percent of GDP in 2001/02, while maintaining gross official foreign exchange reserves to the equivalent of at least four months of imports  Tanzania PSAC I Annex B 5 of 23 13. Increased private sector investment and productivity are key to the achievement of these objectives. Macro stability, reduced cost of doing business, fair competition, and privatisation are the main instruments for achieving these results. The Government's medium term reform agenda in this area consists of three principal elements. The first one is to consolidate gains from past reforns and complete the process of disengagement from directly productive economic activities. The second element consists of measures to remove the main impediments to private sector development in a coherent and frontal way. Parallel to this, Government will undertake reforms to strengthen its own capacity to deliver a narrow set of well defined services to its citizens in support of poverty reduction and private sector driven economic growth. 14. The process of divestiture is more than half way through but the tough agenda of divesting large infrastructure PEs has just begun, with efforts to concession water supply in Dar es Salaam and the container terminal to private operators and privatising telecommunications. The major pending divestitures in infrastructure are railways, power, and the rest of port services. The other areas for divestiture with good prospective interests by potential investors are the National Microfinance Bank, the National Insurance Company, cashew nut factories, some important ranches and state farms. 15. Government is pursuing a wide range of initiatives to improve the business environment. There are ongoing initiatives to develop a more transparent tax regime and a new law governing proprietary rights to land has been enacted. Further measures to remove key bureaucratic impediments, and legal reforms are on the agenda. Major price distortions have been dealt with and all key markets have been liberalised. Our focus is now turning towards enhancing the efficiency of these, through competition and ensuring fair play. The setting up of transparent regulatory frameworks is the next target. Initial work has commenced to set up both the national and sector regulatory frameworks for utilities ahd transport. Government also recognises the need to enhance the functioning of labour markets. Reforms in this area will be initiated once the necessary analytical work has been completed. 16. A viable fiscal system is the prerequisite to allow Government to fulfil its role as the provider of public goods in support of economic growth and poverty reduction. Reduction of the pressures on the fiscal system through more effective expenditure management complements the continuing drive towards higher revenue efforts. While fiscal stability at the aggregate level has been achieved, the focus is now on matching improvements in the areas of strategic prioritisation and technical efficiency of public expenditures. Measures in support of these objectives include the continued use of the Medium Term Expenditure Frame for strategic expenditure allocation, implementing the Integrated Financial Management Systems to strengthen financial controls and the introduction of the Performance Improvement Systems to foster improved effectiveness in the delivery of public services. The Public Expenditure Review process and the Public Service Reform Programme provide vehicles for supporting and monitoring these reforms. 17. Economic growth in conjunction with publicly financed services in the areas of primary education, primary health, rural roads, water and sanitation, and agricultural extension and research are key elements of the Government's strategy to achieve poverty  Tanzaniia PSAC I Annex B 6 of 23 reduction targets. Poverty reduction objectives and strategies are spelled out in more detail in the Government's Poverty Reduction Strategy Paper, which is being finalised using a process of broad participation, encompassing civil society and other stakeholders. THE ECONOMIC REFORM PROGRAMME 1 8. Tanzania has recorded a significant improvement in overall macroeconomic performance notably in the second half of the 1990s and maintained a modest but robust average growth rate of 4 percent over this period. This turn around has been driven by economic reforms implemented by the Government and aimed at achieving more benign macroeconomic and structural fundamentals. However, this achievement remains fragile and thie realised GDP growth remains inadequate to have any significant impact on reducinlg poverty in the country. In a bid to enable greater and more robust contribution by the private sector to economic growth, Government is determined to sustain macro-economic stability, improve public services delivery through improved management of the budget, and lower business costs and risks associated with corruption and bureaucracy. A strengthened budget process, in which overall fiscal discipline is accompanied by allocative and operational efficiency, is key to sustained macroeconomic stability, highier growthi and robust private sector development. The economic reform programme to be supported by the Programmatic Structural Adjustment Credit will focus on three main areas, namely: (a) economic governance; (b) business environmnent; and (c) regulation and privatisation. These are detailed in the appended matrix and summarised below: A. EcoNoMIc GOVERNANCE 19. Good govemance is a key determinant of economic growth and a precondition for sustainable private sector development. The Govemnment wi'll undertake measures to strengthen economic governance and enhance the effectiveness, efficiency and quality of public service delivery in order to provide a solid foundation for sustainable private secto.r development and poverty reduction. The proposed measures include actions in the followingy areas: (a) improved management of public finances; (b) anti-corruption measures andi enhanced financial accountability; and (c) increased efficiency and effectiveness in the .delivery of public services. (a) Public Finance Management 20. Since the introducfion of the cash budget system, budget management has been. dominated by the objective of achieving fiscal discipline and macro-economic stability. While this objective remains extremely important in providing an enabling environment for, private sector activities, there is also an urgent need to give similar weight to strategic prioritisation of expenditures and improving the efficiency of implementing public expenditure programmes. More specifically, prioritising and targeting expenditures with the aim to reduce poverty is also a critical element of our poverty reduction strategy. To this end, Government will continue and deepen the PERIMTEF process to further enhance allocative and operational efficiency; roll out the computerised IFMS to all ministries and regions; introduce performance budgeting across all priority areas; and sustain the improved  Tanzania PSAC I Annex B 7 of 23 performance of the audit process, particularly issuing reports in a credible and timely manner, respecting the time table stipulated by law for the performance of audits and the publication thereof, and finalise and implement a strategy for reducing corruption in all key sectors (tax, law and order, public works, judiciary and social sectors). Government will prepare an MTEF for 2000/01-2002/03 and approve a budget for 2000/01 with priority allocation to basic education, primary health, water, rural roads, judiciary, and agricultural research and extension, and activities to combat HIV/AIDS. The budget for 2000/01 will (i) increase the share of the total allocation to the priority areas in total discretionary recurrent expenditures by at least two percentage points over the 1999/00 budget; and (ii) increase the share of the allocation to "Other Charges" for the priority areas in total discretionary recurrent expenditures by at least two percentage points over the 1999/00 budget. 21. In order to improve financial control and management, Government is currently implementing a Government Accounts Development project, which encompasses (i) the introduction of a computerised Integrated Financial Management System (IFMS) and (ii) the reclassification of the govemment chart of accounts. The IFMS has been introduced to all central vote-holders, as well as to a number of sub-Treasuries in the regions. As part of the Local Government Reform Programme, the IFMS will also be introduced to 28 among the 35 Phase I local authorities. To ensure the effectiveness of the IFMS, it is crucial that the system covers all votes and that key financial information is published in a timely and accessible manner. To this end, Government will roll out IFMS to all ministries and sub- Treasuries and use the IFMS for central govermnent budgeting, accounting, and financial information management covering all recurrent expenditure; and re-classify the development budget according to the Government Finance Statistics (GFS) classification. (b) Anti-Corruption Measures and Accountability 22. One of the main constraints for effective resource mobilisation and utilisation in the public sector is widespread corruption, which has led to substantial economic losses in terms of reduced tax revenues and other fiscal charges, loss of income from natural resources and losses through misappropriation of government revenue. In order to curb corruption, Government has developed a National Anti-Corruption Strategy and Action Plan for Tanzania, which was published in 1999. The Action Plan proposes measures that cut across all levels of government including ministries and specific public agencies. Government will carry out corruption diagnostic surveys to determine the most problematic areas of concern starting with the Ministries of Works, Education and Culture, Health, and Home Affairs, as well as the Judiciary, the Attorney General's office, and Tanzania Revenue Authority. These diagnostic surveys will consist of studies that identify systemic weaknesses in the above listed institutions that may be conducive to corrupt practices, and identify means and procedures through which such weaknesses can be reduced. In addition, Government will present to Parliament a new procurement law and regulations that permit greater transparency and integrity; and ensure that the Central Tender Board makes tender results public through press releases.  Tanzania PSAC I Annex B 8 of23 23. (c) Effectiveness and Efficiency of Public Sector Service Delivery 24. While significant progress has been made in enhancing fiscal discipline and strategic resource allocation through the introduction of the MTEF, more is to be done to enhance the efficiency in the use of public resources. Central to these efforts is the introduction of the performance improvement system (PIS) in key areas of public service delivery, as well as the establishment of an executive agency for the roads sector. The main elements of the PIS include: strategic planning; annual planning and performance budgeting; systemat ic execution of plans and budgets with focus on service improvements; and monitoring, evaluation and reporting performance. Although the performance budgeting initiative was started in 1998, it is now important to (i) extend coverage and quality of the initiative; aind (ii) ensure that performance budgeting and the MTEF approaches are integrated to streamline the budgeting system and make the best use of scarce human resources in both MoF and the spending units. To this end, Government will (i) develop and approve strategic and annual plans, and performance budgets in the ministries of Agriculture and Co-operatives, Education and Culture, Health, Water and the Civil Service Department; and (ii) transfer the management and operation of the trunk and regional roads network to TANROADS. B. BusINESS ENVIRONMENT 25. In spite of the recent significant improvements at the macro level, and several policy and institutional reforms undertaken, the response of private sector investment to the reform drive has been rather weak. This cautious response of the private sector to a large extent stems from high costs of doing business, weak framework for regulating business, and poor quality of supportive infrastructure, which render Tanzania's firms less competitive. It is now imperative to take measures to complete the privatisation process and encourage a more robust response of private investment in Tanzania particularly by removing policy-relatecd and institutional impediments to private investment and efficient business operations. Key among such impediments are tariff barriers to smooth foreign trade; low yielding multiple taxes at various levels of government, hampering new investment and expansion of old. business; non-tax barriers to the internal and extemal flow of goods; bureaucratic red tape faced by investors and exporters; non-transparent policies and laws governing property ownership; constraints faced in expanding and improving access to financial services; and the lack of mechanisms for expeditious settlement of commercial disputes in a fair and transparent way. The specific measures include reform of trade and non-tax policies to remove barriers to the free flow of goods and services, improvements in tax administration to enhance transparency, lower compliance costs, contain tax evasion; put into action institutional reforms which would convert the Tanzania Investment Centre into an effective investment facilitation centre; issue ministerial regulations to implement the new land law; review licensing system and bankruptcy law to facilitate business entry and exit; and ensure effective operation of the commercial court.  Tanzania PSAC I Annex B 9 of 23 (a) Investment Regime Tanzania Investment Centre 26. In 1997, Government enacted a new investment law (Tanzania Investment Act) which replaced the previous investment law of 1990. The thrust of the new legislation was to unify all investment incentives in the country. The legislation provides the basis for a dynamic investment promotion agency to help achieve our goal of increased private investment. Furthermore, Government converted the old investment agency (Investment Promotion Centre) into the Tanzania Investment Centre (TIC). The new TIC is expected to be the primary agency of the Government to co-ordinate, encourage, promote and facilitate investment in Tanzania and to advise the Government on investment policy and related matters. In this regard, there will be a need to shift away from emphasis on granting of investment certificates and tax relief. Furthermore, TIC is to be converted to a professionally run centre for facilitating and promoting private investment. In 1998 the Board of the TIC commissioned a study by the Foreign Investment Advisory Service to guide such a shift. The objective of the study was to recommend a strategy and a specific action plan to implement the changes envisaged under the new act. The study addressed immediate functional and organisational changes for TIC and recommended a series of steps to enable it to become a truly client oriented and effective promotion agency. The TIC management has now prepared its business plan. The Government will restructure TIC consistent with the revised Investment Act 1997, and implement the new organisation structure with the new corporate strategy, including competitive recruitment of TIC staff based on qualification, experience and integrity. Settlement of Commercial Disputes 27. In an attempt to speed up the settlement of commercial disputes, Government has established a Commercial Court in Dar es Salaam as a Division of the High Court. The newly established Commercial Court has the jurisdiction of adjudicating "commercial cases" as defined in the High Court Regulations. At the moment, three judges have been assigned to the Court. The court needs, however, to open commercial courts in five regional centres, in addition to expanding the court in Dar es Salaam. The court also needs to computerise its activities, including the court's registries. There is also a need to establish a monitoring system of the volume of cases adjudicated by the court in a given period. To this effect, Government is preparing a commercial court project plan and will establish an automatic filing and registry system through computerisation. Companies Legislation 28. Government has carried out an extensive review of the legal regime on companies and has decided to introduce a completely new legislation and submit the new companies legislation to Parliament for approval. Land Law and Administration 29. A new Land Act which was enacted in February, 1999 represents a major improvement in the area of land law. It has particularly codified, unified and simplified the law relating to mortgages which is, in this case, paramount to private sector growth. Since mortgage of land is the most preferred and effective form of security by lending institutions, one of the major innovations contained in the Land Act is the recognition that land has value  Tanzania PSAC I Annex B 10 of23 and can be used as collateral for purposes of borrowing from the financial institutions. The Land Act also extends a right of occupancy to non-citizens for the purpose of investment. This is aimed at attracting foreign investors. For the last one year the Government has been preparing the necessary regulations for the implementation of the Land Act. It is the intention of the Government to issue the Land Regulations and to disseminate them widely to the public through the local press. Capital Markets 30. Capital markets in Tanzania are at a very early stage of their development. The Dar es Salaan Stock Exchange (DSE) started business in April 1998, allowing only participation of domestic investors in portfolio equity investment. A secondary market for government debt, in particular treasury bills, is practically non-existent. In order to promote foreign participation in the capital market, Govermnent intends to (i) develop and approve a policy on capital account liberalisation, (ii) develop and implement a comprehensive capital flows monitoring system, and (iii) assess the capacity of the financial system to manage capital flows. These actions pave the way to adopting and implementing a proposal to relax restrictions on foreign portfolio investment in equity instrument with appropriate safeguards. Control of Crop Movement 31. Although in principle the law allows for free movement of crops within the country, there are provisions under the Local Govermnent Act that allow for restrictions. These restrictions are also often used for controlling cross-border movements, thus impinging on profitability and limiting access to closer and more lucrative markets. The Govemment will limit the use of such restrictions to nationally determined emergencies. (b) Tax Regime Central Govermnent Taxes 32. Following the passage of legislation by Parliament in April 1995, Government established the Tanzania Revenue Authority (TRA) as an independent corporate body undex' the Ministry of Finance, responsible for, inter alia, administering the revenue laws, assessing, collecting and accounting for revenues. The Government also undertook other important measures, such as the introduction of VAT in July 1998. The Government appointed a task force to identify, rationalise and harmonise taxes. Consequently the current personal income tax structure has been reduced from 11 to 4 tax bands. This has lowered concerns with respect to equity and monitoring. Maximum rates for corporate and income tax have been reduced from 35 percent to 30 percent and import duty reduced from 30 percent to 25 percent with four non-zero rates. 33. Notwithstanding these improvements, further measures especially with respect to simplifying and rationalising certain aspects of the direct and indirect taxes are necessary. In addition, with the on-going devolution, the collection by the centre and the local governments will need to be harmonised and nuisance taxes eliminated. These will provide the private sector with the appropriate growth environment while simultaneously broadening the tax base for the Government to ameliorate the disproportionate burden falling on the narrow base  Tanzania PSAC I Annex B 11 of 23 of taxpayers and increase revenues. Govemment has undertaken to complete improvements in the tax regime, as identified in the 1998 TRA proposal for rolling out of the tax reform programme and the FAD (IMF) study. Government will (i) eliminate 46 out of the 52 items that are subject to excise tax; (ii) expedite the payments of VAT refunds to the statutory period; (iii) rationalise the differential rates of withholding taxes in sectors, other than mining, infrastructure and stock exchange. Harmonisation of Tax Regimes 34. A Government Task Force reviewed the issue of harmonisation of taxation across local and central governments. The main problem was double taxation resulting from targeting the same sources of revenue. In the 1999 Finance Act Government took measures aimed at harmonising taxation across the two levels of government and improved revenue sharing to reduce pressures on ad-hoc taxation. The recommendations made by the task force, once implemented, will address many of the identified shortcomings between the local and central governments. However, there is no clear mechanism for ensuring that the cascading system of taxes does not crash or, at least, provide disincentives to growth and investment. Consequently, Government will (i) implement the operation of a unified tax appeals system; (ii) enforce the limit for crop/livestock cess; and (iii) implement the exemption of stamp duty on proceeds from agricultural trade transactions. C. REGULATiON AND PRIVATISATION 35. Having effectively launched the privatisation of commercial, agricultural and industrial public enterprises (PEs) during 1994-98, Government has now embarked upon a far-reaching programme to divest all its major infrastructure PEs during 2000-04. In order to provide an effective enabling environment for attracting increased private participation in these key sectors in the medium to longer run, Government is committed to creating new sector regulatory laws and independent cross-sectoral regulatory institutions to progressively build the needed modern economic regulatory capacity. Government intends to establish an effective infrastructure regulatory capacity and prepare and implement its privatisation programme in key infrastructure, banking and insurance, and agriculture. Regulatory reforms will be sequenced to create pro-competitive regulatory environments prior to divestiture of PEs in the sectors concerned - through creation of clear, transparent regulatory rules built into concession contracts, and the build up of regulatory capacity. (a) Regulatory Framework 36. During the period 2000-02, the Government's attention will be focused on developing sector-specific rules sufficient for privatisation to proceed and establishing the basic institutional arrangements. Beyond 2002, a period of consolidation and harmonisation will be required. The regulatory institutions will be fully staffed and detailed regulations for each sector will be completed. Relevant legislation will be reviewed and refined to (i) provide for increased competition and private sector participation; (ii) ensure a clear and consistent cross-sectoral approach to the allocation of regulatory responsibilities; and (iii) ensure consistent approaches to regulation across sectors and issues of common interest. Principal issues will include accounting principles, decision-making processes of regulators,  Tanzania PSAC I Annex B 12 of 23 appeals mechanisms, resolutions of disputes among competing operators seeking access to shared facilities, and processes for dealing with unsolicited investment proposals requiring concessions from Government. New Infrastructure Regulators 37. Tanzania has conducted a wide-ranging review and debate concerning institutional options for regulation of utilities and transport. Proposals for the creation of multi-sectoral regulatory institutions are being considered. It is planned to begin drafting legislation immediately in order that the legislation can be presented to Parliament. Considerable work will need to be undertaken to ensure a smooth transition from the existing institutional arrangements. The creation of the two regulatory bodies would be key first steps in a medium to long term process aimed at building modern economic regulatory capacity in Tanzania, while also building broad-based public understanding of the benefits and importance of transparent and effective regulation. Government will present to Parliament for approval the necessary enabling legislation for the establishment of independent cross- sectoral regulatory institution(s) covering telecommunication, broadcasting, electricity, water, railways, aviation and ports/maritime sectors, with the objective of establishing a coherent, modern and pro-competition market structures and regulatory frameworks. Sectoral Legislative Frameworks for Infrastructure 38. Each of the infrastructure sectors-railways, electricity, ports/maritime, water and. telecommunications-is preparing to re-examine and amend the relevant sectoral legislation. so as to ensure a coherent, modern, pro-competitive legislative framework. In order for privatisation,to proceed in each of the utility and transport industries it is important that the market structures and regulatory arrangements are determined. Much work has already been undertaken in this respect. Many critical decisions in most infrastructure sectors will need to be finalised during the next two years, in order that related privatisation transactions can be finalised subsequently. Government will present to Parliament for approval the necessary amendments to current legislation related to the regulation of the telecommunication, broadcasting, electricity, water, railways, aviation and ports/maritime sectors with the objective of making such legislation consistent with the enabling legislation. Petroleum Sector 39. Following a study to determine the appropriate regulatory framework for the petroleum sector a draft legislation amending the Petroleum Conservation Act (1981) has been prepared, and will be submitted to the Parliament for approval. The amendment provides for overseeing fair play in the market, quality, safety and health standards. The proposed framework (with the exception of market competition issues) is suited to a small regulatory monitoring unit within the ministry. During this transition period, the Govenmment prepared an interim regulatory arrangement to govem the sector. It is on the basis of this interim arrangement that the Government liberalised the petroleum sector. To this end, Govemment will issue technical regulations for a liberalised petroleum sector ensuring quality and safety of petroleum products.  Tanzania PSAC I Annex B 13 of 23 (b) Privatisation 40. During 2000-04, Government will focus on the completion of the privatisation of the main strategic public enterprises, particularly in infrastructure services, which have significant bearing on the cost of doing business. The main actions entail unbundling the power company, TANESCO, and bringing its distribution system to the point of sale; concessioning of railways for private operation; leasing Dar es Salaam Water Supply (DAWASA) to private operator(s); divesting the National Microfinance Bank (NMB) and the National Insurance Corporation (NIC); and implementing the strategy for further concessioning of port services. Out of the remaining public enterprises in agriculture, the Government will divest (sale or liquidate) the cashew nut processing factories, ranches under the National Ranching Corporation (NARCO) farms under the National Food Corporation (NAFCO). The major infrastructural transactions will be facilitated by consistent policies for the treatment of PE employee retrenchment and debt. Tanzania Harbours Authority (THA) 41. The first portion of THA to be divested is the Container Terminal in Dar es Salaam This transaction is now at an advanced stage with bidding completed. The recommendation for award of a ten-year lease has now been approved by Government. The next step in the divestiture process is to agree on a strategy for the rest of the assets and operations of THA. In this regard a study will be carried out to review options and recommend a strategy for Government approval. This strategy will guide the privatisation of the remaining port assets and services. Tanzania Telecommunications Company Ltd. (TTCL) 42. The privatisation of TTCL is at an advanced stage. The information memorandum was sent out to potential investors, and the pre-qualification was completed. The pre- qualified telecommunication companies have been invited to carry out their pre-bidding due diligence. Due to unforeseen technical hitches, the pre-qualification period has been extended to allow completion of due diligence by potential investors before submitting financial bids, expected by July 2000. Govemment will complete this process in accordance with the privatisation guidelines. TANESCO 43. In October 1999, Government endorsed a broad strategy of vertical and horizontal separation of TANESCO and the principle of privatisation of the resulting parts. The Divestiture Technical Team (DTT) has already been formed and has had its first meeting. The next step is to draft the terms of reference to recruit consultants who will be mandated to prepare a detailed strategy and help implement the restructuring and privatisation of TANESCO. The strategy and other critical decisions will be prepared by the DTT, under PSRC's leadership and submitted for approval. The strategy will set out the broad time table for phasing competition and moving from monopoly to retail competition and cover, inter alia, the following elements: the trading arrangements, the govemance structure of the Pool, the role and functions of the transmission operator;  Tanzania PSAC I Annex B 14 of 23 * the detailed structure of the unbundled system, the number of generating companies and capacity of each generating company, the number of distribution companies and the physical boundaries of distribution companies, the approximate size of distribution companies, and the number of connected customers and the separation of social electricity from commercial electricity; * the capital requirements to carry out the engineering aspects of the restructuring, the cost of setting up metering at the boundaries, and the cost of establishing a Load Dispatch Centre. Government will approve a strategy incorporating the elements mentioned above for reorganising TANESCO and for restructuring the electricity sector by December 2001. The TANESCO legislative framework will be drafted and presented to Parliament by June 2002. DAWASA 44. Bids for a private operator to take over the operations of DAWASA on a lease contract were submitted at the end of January 2000. The technical bids were opened and evaluated in early February, 2000 and the evaluation report of the technical bids has been submitted to IDA and to the co-financiers, who in turn have given their authorisation to open the financial bids. The Financial bids were opened in February 2000 and the compliance of the submissions to the bid document is being reviewed. The bid outcome will then be submitted to Government for approval. Subsequently, Government will bring DAWASA to a, point of concession/lease. Tanzania Railways Corporation (TRC) 45. Consultants have been retained and are assisting Government through PSRC in preparing a transaction strategy. The option that has been proposed is an exclusive concession of 25 years of a vertically integrated TRC, where infrastructure is separated from operations and placed into an asset holding company. Against this must be weighed the importance of keeping open future possibilities for competitive provision of rail services and permitting access to TRC's tracks to take advantage of prospects for cross-border traffic growth with neighbouring countries in the Southem Africa sub-region. 46. Following preparatory work, a strategy paper will be prepared by PSRC and submitted to Government for approval. It is expected that this could take place by end of April 2000. The draft bill amending the TRC Act, including specific legislation goveming private provision of rail services, would be submitted for approval to Parliament. This will be followed by a call for expressions of interest from qualified rail system operators in June 2001. Following pre-qualification, and final bid preparation, the winning bidder would be determined, based upon Govemment's privatisation guidelines. National Microfinance Bank 47. NMB's Board of Directors has endorsed the NMB business plan. Govemment has established a task force - including members from BOT, under stewardship of PSRC - to agree on a provisional strategy and explore the options for privatisation. Subsequently,  Tanzania PSAC I Annex B 15 of 23 Government will embark on a process of bringing NMB to the point of sale. To underpin this process, Government will revise and approve the memorandum of understanding between NMB and the Ministry of Finance, based on the business plan adopted by the NMB Board. National Insurance Corporation of Tanzania Ltd. 48. The terms of reference for two studies to review the strategy to privatise NIC are currently being prepared on (i) the audit, property valuation, and actuarial valuation analyses; and (ii) the market and business operations. The Government's privatisation programme for NIC will carefully develop the options for handling outstanding claims vis-a-vis existing assets, for the retrenchment of excess staff, for the closure of non-viable branches, and for the criteria for selection of a strategic partner for NIC. Consequently, Government will approve a divestiture strategy for NIC. Pursuant to this goal, it will begin to implement the initial steps, such as downsizing of staff; and conduct the audit, property valuation and actuarial studies. Agriculture Sector 49. Prior to launching its privatisation programme in 1993, Tanzania had 130 public enterprises in the agricultural sector; accounting for 33 per cent of the total number of public enterprises in the country. By June 1999 45 of them had been divested accounting for 3 5 per cent of the agricultural units or 11 per cent of the total number of public enterprises in the country. During the first phase of privatisation the focus was on large agricultural public enterprises. 50. Most of the large scale and economically significant assets have been divested (tea, sisal, and sugar estates, NMC's grain mills, etc). The only remaining activities of any size are the ranches, rice and dairy farms and seven very large wheat farms. In addition there are 12 cashew nut processing factories (all currently closed) which need to be divested or liquidated. Based on assessments by PSRC and the Ministry of Agriculture and Co- operatives, the cashew nut factories, 10 ranches and the rice, wheat and maize farms are likely to: (i) raise a significant interest of credible investors and (ii) feasibly be divested within the PSAC I timeframe. Government will consider and approve options for divesting or liquidating the remaining cashew nut processing plants, the NARCO ranches, and the NAFCO wheat, rice and maize farms. 51. Following the liberalisation of the crop marketing system in Tanzania, the Crop Boards now appear to be redundant. Indeed, their continuing operation as both regulatory bodies and marketing and production agents competing with the private sector operators, whom they regulate, distorts the markets for their respective crops and creates uncertainties for private farmers. A number of measures are now being taken to assess the crop boards' efficacy and the role, if any, they should play in the future. The various crop boards are at the moment consulting with Government and stakeholders in an endeavour to define their future roles. Once this consultation exercise is completed, Govemment will decide on specific actions to be taken.  Tanzania PSAC I Annex B 16 of 23 CONCLUSION 52. Since the inception of the Third Phase Government, efforts have been directed towards rapidly reducing the levels of poverty of Tanzanian citizens through the pursuil; of broad-based and sustainable growth policies. The Government believes this growth can only come through the unleashing of the motivations and incentives possible only in a marlcet- based economy led by private sector initiative. The Government's role would be oneL of supporting this effort by creating and maintaining the economic, physical and social infrastructures, a business environment and regulatory framework conducive to robust development of the private sector, and maintaining a stable macroeconomic environment conducive to these activities by private agents. 53. The Government is committed to strengthening and accelerating these processes of change under the structural adjustment programme. The Government views the partnership with IDA, particularly through the proposed Structural Adjustment Credit, as a continualtion of your institution's support in this effort. Yours sincerely, DanielN Yona ) MINISTER FOR FINANCE  TANZANIA MEDIUM TERM FRAME FOR PRIVATE SECTOR DEVELOPMENT PHASE I POLICY MATRIX (1999/2000 - 2001/02) OBJECTIVES & ACTIONS TAKEN MEASURES! PERFORMANCE INDICATORS MEANS OF POLICIES VERIFICATION Continuous: Sustained macro stability and protection of budget allocation to priority sectors consistent with the Budget A. Governance (a) Public Finance Management Improve strategic budget * PER introduced with a focus on * Prepared an MTEF for 2000/01-2002/03 and approved a budget for * Public Expenditure allocation to reflect strengthening budget 2000/01 with priority allocation to basic education, primary health, water, Review reports. poverty reduction management. rural roads, judiciary, and agricultural research and extension, and priorities. activities to combat HIV/AIDS. The budget for 2000/01 (i) increased the * MTEF document * The budget guidelines for share of the total allocation to the priority areas in total discretionary Budget for 2000/01 as 2000/01 and a MTEF for recurrent expenditures by at least two percentage points over the 1999/00 approved by Parliament issued and reflect poverty budget; and (ii) increased the share of the allocation to "Other Charges" reduction priorities. for the priority areas in total discretionary recurrent expenditures by at least two percentage points over the 1999/00 budget. Roll out IFMS to all * IFMS has been rolled-out to all * Only IFMS used as central govemment budgeting, accounting, and financial * Commitment Control ministries and sub- budgetary units and accounts, information systems for the recurrent expenditure and re-classified the Reports for all Treasuries; ensure that all apart from the sub-treasuries. development budget according to the GFS. Ministries. budgetary votes at the central and sub-treasury levels are managed through IFMS; and record all expenditure commitments and arrears through the IFMS. I (b) Anti Corruption Measures and Accountability Operationalise and * National Anti-Corruption Strategy * Carried out diagnostic surveys on the Judiciary, Ministries of Works, Education and * Submission of implement key elements of has been approved, published and culture, Health, and Home Affairs; the A. G.'s office, TRA; and approved documents and relevant the recently approved disseminated at national forum. operational strategies for these areas. legislation to IDA. National Anti Corruption Strategy. * Sector-specific anti-corruption * Presented for approval new procurement law and regulations. * Satisfactory reports of action plans are under preparation. implementation to IDA * The Central Tender Board made tender results public through press release. -1 o a 2,W  oo~ B (c) Effective and Efficient Public Service Delivery Implement Performance * Under the PSRP the GOT has . Developed and approved strategic and annual plans, and performance budgets * Supervision reports of Management System. committed to prepare in the Ministries of Agriculture and Co-operatives, Education and Culture, PSRP frameworks for Performance Health, Water, and the Civil Service Department. Improvement system in ministries and departments. Establish Roads Agency * TANROADS legislation has * Management and operation of trunk and regional roads network is transferred * Supervision report of IRP TANROADS. been approved and its Chief to TANROADS. 11 Executive hired. B. Business Environment (a) Investment Regime Improved Legal * The new Land Act was passed in * Issued regulations to make the new Land Act effective * Copies of regulations Framework for acquisition February 1999. of land and exit from * Disseminated the land law and regulations widely. * The law and regulations business. translated into Kiswahili and distributed to all districts. Strengthen operation of the * Commercial court has been * Approved the Commercial Court Project Plan taking into account relations with * Submission of the project commercial court established and is operational. existing court system. plan to IDA. * Established automatic filing and registry system through computerisation. * Supervision reports of * Preparation of the commercial PSAC I. court project has begun. Restructure TIC as a * Enacted new Investment Law * Restructured and re-staffed TIC to serve as an investment promotion agency in * Supervision reports; New service-oriented line with the mission of the new corporate strategy and the 1997 Investment organisation structure and * Converted IPC to TIC Act. corporate strategy; and investment promotion Number and qualification agency. * Completed study (by FIAS) to of staff recruited. develop strategy and action plan for implementing changes envisaged under Investment Law. Improve transparency of * Preparation of new Companies * Submitted for approval to Parliament, the new Company legislation * New legislation business conduct and Act was funded under FILMUP reduce business risk  Promote foreign * DSE started business April 1998, * Approved and implemented a proposal to relax restrictions on foreign * Government participation in the capital allowing only participation of portfolio investment in equity instrument with appropriate safeguards. approval of foreign domestic investors in portfolio portfolio market. equity investment. Under the investment in enhanced HIPC conditions, the equities. GOT has committed to undertake preparatory work towards relaxing restrictions on foreign portfolio investment. Abolish non-tax barriers to . Abolished controls constraining crop movements within and across borders * Government order trade. and subjected such movements to the existing trade procedures. (b) Tax Regime Ilarmonise and streamline * The Government Task Force on * Enforce the limit for crop/livestock cess to 5 percent of farm gate price . Finance Bill and tax regimes and Harmonisation of Local and Central supervision reports administration. Government tax regimes noted that * Implement exemptions from stamp duty on procceds from transactions on of PSAC I. there is no clear jurisdiction agricultural trade. Remove nuisance taxes at between the two agencies, leading the local government level into double taxation and too many taxes/levies. Task Force in rural and urban areas. recommended measures for Rationalise tax regime to rationalisation of the tax regime and a Operationalised unified tax appeal system. * Finance Bill promote private sector administration and GOT has * Eliminated 46 out of the 52 items subject to excise tax. growth. undertaken the measures under the * Expedited the payments of VAT refunds to the statutory period. * Supervision reports HIPC completion point conditions. * Rationalised the differential rates of withholding taxes in sectors, other than for TAP and PSAC mining, infrastructure and stock exchange. I Regulation and Privatisation (a) Regulatory Framework Enhance regulatory . Adopted mutually acceptable (between GOT and IDA) over-arching * Copy of the framework for key sectors enabling legislation for the utilities and transport sectors for creation of strategy /policy improving transparency independent, cross-sectoral regulatory institution(s) for establishment of pro- framework. and competition competitive market structures and regulatory frameworks. * Within the framework of the overall enabling legislation, established pro- * Copy of official competitive regulatory frameworks in the telecoms, broadcasting, water, gazette, approved electricity, ports/marine, railways, and aviation sectors - adopting where Act and PSAC I necessary subsidiary sectoral legislation. supervision * Issued technical regulations for a liberalised petroleum sector ensuring mission report. quality and safety of petroleum products. rs t ( H  > (O) Privafisation * Approved consistent policies for the treatment of public enterprise employee Govemment policy retrenchment and debt, that are mutually acceptable document Privatise infrastructure * Call for bids and short listing of * Approved plans for concessioniig of remaining port assets and services that * Supervision reports from service provision. Container Terminal concessionaire are mutually acceptable. Ports and PPSD. have been made, and candidates selected for negotiation after GOT approval. * Brought DAWASA to a point of concession/lease, consistent with GOT's privatisation guidelines Privatise infrastructure * Options Paper for the privatisation * Brought rail services (TRC) to a point of concession/lease. * Issuance of IM to service provision. strategy of TRC prepared and investors and call for discussed by stakeholders in a bids: Supervision reports workshop held Dec'99. Revised of the Railways Options Paper prepared and Restructuring Project. circulated for comments before finalisation for GOT approval. Agreement has been reached on * Approved strategy for reorganisation of TANESCO and restructuring of the * Strategy document, letter timetable, implementation and electricity sector that is mutually acceptable. from MPs office stating project components for the granting of approval, and restructuring process of power Supervision reports. sector. Divest key financial * Revised and approved MOU between NMB and MOF, based on the business * Supervision reports of services and agricultural plan adopted by the NMB Board FIDP 11 enterprises. * Approved strategy for divestiture of NMB. * Approved options for divesting or liquidating the remaining cashew nut * Govemment approval of processing plants, NARCO ranches and NAFCO wheat, rice and maize options. farms. * Govemment approval. * Approved strategy and taken initial steps, such as downsizing, for * Strategy document, letter divestiture of NIC. from PLANCOM granting approval, and Supervision reports.  TANZANIA MEDIUM TERM FRAME FOR PRIVATE SECTOR DEVELOPMENT PHASE II INDICATIVE POLICY MATRIX (2001/02-2003/04) Objectives & Policies Actions Taken I Policy Commitments / Measures to be Taken Means of Verification Continuous: Sustained macro stability and protection of budget allocation to priority sectors consistent with the MTEF. Governance Public Finance Management Integrate Performance * Social sectors prepared performance budgets but * Develop and approve Performance Budgets for all * Public Expenditure Budgeting and MTEF. MOF could not guarantee resource allocation. Ministries in the context of MTEF for 2003/04-2005/06. Reviews. * Supervision reports of Public Sector Reform ______ _____ _____ _____ _____ _____ _____ _____ _____ Project (PSR P). Integrate all budgetary votes, * IFMS has been rolled-out to all central * Use only IFMS as government budgeting, accounting, and * Commitment Control TRA revenue accounts, and Government spending units. financial information system. Reports for all debt monitoring modules into * Pilot implementation of the PLATINUM * Prepare and disseminate quarterly statements of budget Ministries, and districts the Integrated Financial operations covered. Management System (IFMS) software, an important part of IFMS, * Introduce IFMS to at least 50 districts by 2003. * Quarterly Operations and roll out IFMS to districts. initiated in 28 districts. rerlpt Anti Corruption Measures andAccountability Operationalize and implement * National Anti-Corruption Strategy has been . Implement the sector-specific anti-corruption plans in the * Satisfactory reports of key elements of the recently approved, published and disseminated at national Judiciary, Ministries of Works, Education, Health, and implementation to IDA approved National Anti forum. Home Affairs; A.G.'s office, and TRA. Corruption Strategy. * Sector-specific anti-corruption action plans are under preparation. Enhance accountability and * Inter-governmental transfers on road fund * Disseminate publicly intergovernmental transfers at the * Monthly inter- transparency through bringing allocation reports are submitted to Parliament. district level, including transfers from TANROADS. governmental transfer audit and other reports into the disclosure reports. public domain. >b Cj"<  Effective and Efficient Public Service Delivery Implemcnt Performance _ Under the PSRP the GOT las committed to Implement Performance Improvement Modules in the * P'ublic Expenditure Management System. prepare frameworks for Plerformance Ministries of Agriculture and Co-operatives, Education and Review reports. Improvement system in ministries and Culture, Health, Water, and the Civil Service Department * Supervision reports of departments. and introduce output accountability in service delivery for PSRP. * Performance Improvement Module (PIM) has these priority areas. been prepared and Performance Improvement Fund set up to finance the implementation of the module. Business Environment Investment Reginw Improved Legal Framework * The new Land Act was passed February 1999. * Institute a monitoring system on volume of cases * Supervision reports for acquisition of land and exit * Technical review of the new Company adjudicated by the Dar es Salaam court in a given period. from business. Ordinance has been completed. * Develop a system to speed up issuance of land titles within * Average time taken the aspired 180 days. from application to * Enact bankruptcy law issuance of land title. * Copy of official gazette . ~~~~~~~~~~~~~~~~~~~~~~~~showing approved Act. Tax Regimne_ Rationalise tax regime to * The Govemment Task Force on Harmonisation * Minimise surcharges and consolidate them into tariff bands * Finance Bill promote private sector growth. of Local and Central Govensment tax regimes for enhanced transparency of tariff regime. * Supervision reports for has recommended measures for rationalisation of * Review tax policy to lower trade taxes. TAP and PSAC I. the tax regime and administration and GOT has undertaken the measures under the Interim PRSP. Regulation and Privatisation Regulatory Framework Enhance regulatory framework * Studies on the regulatory framework completed * Pass laws governing the national regulatory * Copies of official for key sectors improving (Petroleum, Electricity, Telecom). framework, acceptable to IDA which generally provide gazette showing transparency and conipetition for the possibility of private sector participation for approved lawsi competition in Electricity, Water, Ports & Shipping, * Supervision reports for Railway and Telecommunication sectors. PPSD and PSAC 1. * Staff Regulatory Institution(s) fully and ensure the regulator prepares detailed sectoral regulations.  Privatisation Privatise infrastructure * Bring to point of concession the remaining port services in services DSM * Agreement has been reached on timetable, * Bring to point of sale/concession the first corporatized * Strategy document; implementation and project components for the distribution system formed from TANESCO. letter from MPs office restructuring process of power sector, stating granting of approval; Supervision reports. Divest key financial services * Bring NMB to point of sale. * FIDP and PSAC I and agricultural enterprises supervision reports. * Bring NIC to point of sale. * FIDP and PSAC I supervision reports. * Divest or liquidate the remaining cashew nut factories, * Sales agreements or ranches, and NAFCO wheat, rice and maize farms. liquidated through LART. DOx > W   Tanzania PSAC I Annex C I of 1 Tanzania Social Indicators Latest single year Same region/income group Sub- Saharan Low- 1970-75 1980485 1993-98 Africa income POPULATION Total population, mid-year (millions) 15.9 21.8 32.1 627.3 3,536.4 Growth rate (% annual average) 3.0 3.2 2.3 2.2 1.4 Urban population (% of population) 10.1 17.6 30.5 33.3 30.5 Total fertility rate (births per woman) 6.8 6.7 5.4 5.4 3.1 POVERTY (% of population) National headcount index .. .. INCOME GNP per capita (US$) .. .. 220 510 520 Consumer price index (1995=100) 1 8 158 128 136 Food price index (1995=100) .. 10 162 INCOME/CONSUMPTION DISTRIBUTION Gini index .. .. 38.2 Lowest quintile (% of income or consumption) 5.0 .. 6.8 Highest quintile (% of income or consumption) 53.0 .. 45.5 SOCIAL INDICATORS Public expenditure Health (%of GDP) .. .. 1.3 1.5 1.3 Education (% of GNP) .. .. .. 4.1 3.2 Net primary school enrollment rate (% of age group) Total .. 56 48 .. 86 Male .. 55 48 .. 89 Female .. 56 49 .. 82 Access to safe water (% of population) Total .. 52 49 Urban .. 85 65 Rural 47 45 Immunization rate (% under 12 months) Measles .. 66 69 58 80 DPT .. 67 74 53 82 Child malnutrition (% under 5 years) .. .. 31 Life expectancy at birth (years) Total 46 51 47 50 63 Male 45 49 46 49 62 Female 48 53 48 52 64 Mortality Infant (per thousand live births) 125 102 85 92 68 Under 5 (per thousand live births) 218 166 136 151 92 Adult (15-59) Male (per 1,000 population) 513 451 521 432 235 Female (per 1,000 population) 419 370 482 383 208 Matemal (per 100,000 live births) .. .. 530 2000 World Development Indicators CD-ROM, World Bank   Tanzania PSAC I Annex D Tanzania at a glance 1 of2 Sub- POVERTY and SOCIAL Saharan Low- Tanzania Africa Income Development diamond 1998 Population, mid-year (nillions) 32.1 627 3,536 Life expectancy GNP per capita (Atlas meethOd US$) 210 510 520 GNP (A/las method USS billions) 6.7 323 1,842 Average annual growth, 1993-99 Population (%) 2.7 2.6 1.7 GN E Labor force (%) 2.7 2.6 1.9 GNP pGross per primary Most recent estimate (latest year available, 1993-99) capita 'enrollment Poverty (% of population below national poverty line) Urban population (% of total population) 27 33 30 Life expectancy at birth (years) 48 50 63 Infant mortality (per 1,000 fIve births) 85 92 68 Child malnutrition (% of children under 5) 31 33 36 Access to safe water Access to safe water (X of populatIon) 49 43 73 Illiteracy (96 of population age 15+) 28 40 31 Gross primary enrollment (% ofschool-age populaffon) 66 78 107 Tan2ania Male 67 85 112 Low-income group Female 66 71 102 1 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1979 1989 1998 1999 Economic ratios GDP (US$ billions) 4.8 8.0 9.0 Gross domestic investment/GDP 17.4 14.9 14.3 Trde Exports of goods and services/GDP 10.6 18.2 21.8 ra Gross domestic savings/GDP -2.7 3.1 2.6 Gross national savings/GDP 17.5 2.9 3.1 Current account balance/GDP -4.7 -14.4 -14.4 Domestic An t Interest payments/GDP 1.0 0.5 0.4 S-ng Investment Total debt/GDP 122.6 88.0 80.5 anngs Total debt servicelexports 14.4 32.5 13.4 11.8 Present value of debtVGDP Present value of debtVexports Indebtedness 1979-89 1989-99 1998 1999 1999-03 (average annual growth) GDP 3.1 3.8 4.3 5.4 Tanzania GNP per capita 0.6 0.7 3.2 3.0 Low-Income group Exports of goods and services 9.5 -10.0 7.3 5.9 STRUCTURE of the ECONOMY 1979 1989 1998 1999 Growth of Investment and GDP (%) (96 of GDP) is Agriculture 52.4 45.7 44.4 10 Industry 14.4 14.9 15.3 S Manufacturing 8.1 7.2 7.2 s Services 33.1 39.4 40.3 05 98 99 Private consumption 86.4 82.4 81.9 .10 General government consumption 16.3 8.2 10.6 GDI * GDP Imports of goods and services 30.7 24.7 30.9 (average annual growth) 1979-89 1989-99 1998 1999 Growth of exports and Imports (% Agriculture 3.5 2.2 4.2 so- 401 Industry 2.6 8.5 7.6 30 Manufacturing 2.1 6.5 5.3 20 Services 2.5 3.6 2.4 la 0 Private consumption 2.8 0.9 2,5 -10 j 94 9s 99 General govemment consumption -6.5 -13.3 0.2 -20 Gross domestic investment -0.3 4.3 4.5 -30 Imports of goods and services -1.2 -16.6 2.4 Exports -l Imports Gross national product 3.6 3.4 5.8 Note: 1999 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average, If data are missing, the diamond will be incomplete.  Tanzania PSAC I Annex D 2 of 2 Tanzania PRICES and GOVERNMENT FINANCE Domestic prices 1979 1989 1998 1999 Inflation (%) (% change) 40 Consumer prices 12.9 25.8 12.8 7.8 30 Implicit GDP deflator .. 31.3 18.3 13.7 20 Govemment finance 10 I% of GDP, includes current grants) o, Current revenue .. 12.6 12.0 12.4 94 95 96 97 98 99 Current budget balance .. -1.1 1.0 0.5 - GDP deflator e CPI Overall surplus/deficit .. -3.9 -2.8 -4.5 __ TRADE 1979 1989 1998 1999 Export and import levels (USS mill.) (US$ mill/ons) Total exports (fob) ,. 415 613 541 2.000 Commodity1 .. 103 111 98 Commodity 2 70 91 90 11o 00 Manufactures 89 68 84 Total imports (cif) .. 1,211 1,445 1,631 1,00- Food .. 81 84 89 soo J Fuel and energy 150 138 134 Capital goods .. 443 551 629 a 93 94 95 96 97 99 99 Export price index (1995=100) ., 93 110 113 Import price index (1995=100) .. 200 56 46 ER Exports UImports Terms of trade (1995=100) .. 46 197 247 I_____ BALANCE of PAYMENTS (US$ m,ilions) 1979 1989 1998 1999 Current account balance to GDP (%) Exports of goods and services Imports of goods and services 1,198 1,566 2,177 2,454 sl Resource balance -513 -1,027 -1,045 -1,291 Net income -9 -179 -140 -39 Net current transfers 61 66 -15 Current account balance -521 -223 -1,155 -1,296 -20 Financing items (net) 464 223 1,185 1,410 -25 Changes in net reserves 57 0 -30 -114 -30 Memo: Reserves including gold (US$ millions) . .. 503 776 Conversion rate (DEC, loca/US$) . 119.4 642.5 683.1 EXTERNAL DEBT and RESOURCE FLOWS 1979 1989 1998 1999 (US$ millions) Composition of 1999 debt (USS mill.) Total debt outstanding and disbursed 4,269 5,854 7,077 7,221 IBRO 168 252 21 18 | A la IDA 208 1,016 2,451 2,453 Total debtservice 100 177 158 144 F:144 IBRD 1 2 2 1:.5 IDA 2 12 32 39 Composition of net resource flows Official grants .. Official creditors 139 97 189 459 Private creditors 71 26 -15 0 E: 2,858 Foreign direct investment .27 Portfolio equity .. .. .. .. D: 633 World Bank program Commitments 143 73 150 .. A - IBRD E - Bilateral Disbursements 72 115 183 459 B- IDA D-Othermultilateral F- Private Principal repayments 4 28 36 30 C- IMF G - Short-term Net flows 68 87 147 430 _ J Interest payments 15 26 20 20 Net transfers 54 61 127 410 Development Economics 5/3/00  Tanzania PSAC I Annex E I of 2 Tanzania - Key Economic Indicators e j :: " ' : ' .-~~~~~~~~~~~~~~~~~5 5 ' ' .' '"'''t";.5. .;3;.. 5> .... .... . ... . . . ....' , ,~~~~~~~~~~~~~~~~~~~~~. , .. 5. ::. ..,, :55i.5 1. 5,X''5'' ''Km. : s e - : -: .. ; , - > . . . :.'- >. : : : : 5 5 ', . .. ', ..:: ','j'. .."., National accounts (as % of GDP) (Fiscal Year) Gross domestic producta 100 100 100 100 100 100 100 100 Agriculture 46 48 47 46 44 43 43 42 Industry 15 14 14 15 15 16 16 16 Services 39 38 38 39 40 41 41 42 Total Consumption 98 96 95 91 93 94 95 95 Gross domestic fixed investment 22 18 15 15 14 17 19 21 Government investment 3.2 3.6 2.6 3.6 3 4.1 4.3 4.4 Private investment 19 14 13 11 12 13 14 15 (includes increase in stocks) Exports (GNFS)b 23 22 18 18 22 25 27 28 Imports (GNFS) 42 36 28 25 31 36 39 42 Gross domestic savings 2.0 3.6 5.4 3.1 2.6 3.1 4.6 5.8 Gross national savingsc -0.3 2.0 4.3 2.9 3.1 3.3 5.0 6.1 Memorandum items Gross domestic product 4627 5852 6920 7775 8228 8816 9732 10642 (US$ million at current prices) GNP per capita (US$, Atlas method) 160 160 190 210 240 270 280 300 Real annual growth rates (/4, calculated from 1992 prices) Gross domestic product at market p 2.6 4.3 4.0 3.8 4.3 5 5.4 6 Gross Domestic Income 3.2 4.0 3.0 5.4 3.1 4.5 5.2 5.6 Real annual per capita growth rates (%, calculated from 1992 prices) Gross domestic product at market p -0.4 1.4 1.2 0.9 1.8 2.5 3.1 3.6 Total consumption * -2.2 -0.1 -2.1 -3.1 -0.2 2.4 3.0 3.5 Private consumption -0.6 2.4 0.5 -1.6 0.0 2.4 2.9 3.5 Balance of Payments (US$ Mil ) (Fiscal Year) Exports (GNFS)b 1089 1142 1274 1132 1163 1213 1377 1602 Merchandise FOB 593 696 794 613 541 552 652 814 Imports (GNFS)b 2029 1986 2040 2177 2454 2617 2850 3141 Merchandise FOB 1510 1370 1388 1445 1631 1748 1907 2121 Resource balance -940 -844 -767 -1045 -1291 -1404 -1474 -1539 Current account balance (before gra -1047 -942 -842 -1155 -1296 -1400 -1463 -1523 Current account balance (after gran -522 -361 -152 -486 -559 -604 -685 -737 Net private foreign direct investmen 104 134 150 165 183 201 221 244 Change in reservesd -46 -81 -208 -30 -114 -49 -18 -73 Memorandum items Resource balance (% of GDP) -20% -14% -11% -13% -12% -13% -13% -12%  Tanzania PSAC I Annex E 2 of 2 Tanzania - Key Economic Indicators (Continued) r---19 5-i ja 0--- l - -- - -- W - Thdcto 199 0 - 0. 9-t 5 a - 199a7....... . ................. - a9~ a a O0 2gr 2002aaa- . (Fiscal Year) Public finance (as % of GDP at market prices)e Current revenues 12.5 13.2 13.5 12.0 12.4 12.6 12.8 13.0 Current expenditur 15.1 14.0 12.5 11.0 13.1 13.4 13.5 13.5 Capital expenditure 3.2 3.6 2.6 3.8 3.8 4.6 4.5 4.5 Balance (before gra -5.8 -4.4 -1.6 -2.8 -4.5 -5.4 -5.3 -5.0 Balance (after gran -2.7 -0.8 1.0 1.0 -0.3 -0.7 -0.5 -0.2 Monetary indicators M2/GDP 24.3 24.1 21.9 19.9 19.9 18.7 16.0 16.4 Growth of M2 (%) 37.7 26.4 13.3 10.8 18.5 8.4 9.2 14.0 Private sector credi 0.6 -205.3 224.9 244.8 155.4 271.1 40.4 180.1 total credit growth (%/6) Price indices( YR92 =100) Merchandiseexpor 110 113 116 120 124 108 108 110 Merchandise impor 56 46 38 31 25 106 107 110 Merchandise terms 197 247 310 388 486 101 101 100 Realexchangerate 97.7 118.3 125.6 135.5 135.5 120.6 121.8 121.8 Real interest rates Consumerpriceind 28.0 21.0 16.1 12.8 7.8 5.2 4.1 4.0 GDP deflator (% ch 28.9 22.3 20.0 17.8 13.7 9.0 6.6 5.1 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. * Total Consumption (Govt+ Private) where the share of Government Consumption is about 10%-8% average. from 1995-2002.  Tanzania PSAC I Annex F I of I Tanzania - Key Exposure Indicators : - ?:cato:r . .,95 :99 I9. ::.: ::9 95. : : :::: , 200 -2002a Total debt outstanding and 7446.3 7412.0 7177.1 7077.0 7220.8 disbursed (TDO) (US$m)a Net disbursements (US$m)a 95 149 239 192 439 Total debt service (TDS) 232 269 158 158 144 (US$m)a * Debt and debt service indicators (O) TDO/XGSb 674.4 634.6 546.5 734.9 598.8 TDO/GDP 160.9 126.7 103.7 111.3 88.3 TDS/XGS 21.0 23.0 12.0 13.4 11.9 IBRD exposure indicators (%) IBRD DS/public DS 18.9 12.4 16.4 16.4 7.8 Preferred creditor DS/public 69.9 55.0 87.9 87.9 97.7 DS (%) c IBRD TDO (US$m)d 87 56 34 21 18 IDA TDO (US$m)d 2182 2242 2306 2451 2453 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IX credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.  'Ianzania PSAC. I Annex G Tanzania - Balance of Payments 1 of 2 (US$ at current prices) Base-case (nost likely) projection S L ; s< ~~~~~~~~~S. g.....-..s..- Total exports ofGNFSa 1089.4 1142.1 1273.6 1132.4 1162.9 1213.1 1376.5 1602.0 1808.0 Merchandise (FOB) 592.9 695.9 793.6 612.6 541.0 552.1 651.5 814.0 940.0 Nonfactor services 496.5 446.2 480.0 519.8 621.9 661.0 725.0 788.0 868.0 Total Imports ofGNFS 2029.1 1986.0 2040.2 2177.1 2453.5 2617.0 2850.0 3141.0 3388.0 Merchandise (FOB) 1509.7 1370.3 1387.8 1444.5 1630.6 1748.0 1907.0 2121.0 2301.0 Nonfactor services 519.4 615.7 652.4 732.6 822.9 869.0 943.0 1020.0 1087.0 Resource balance -939.8 -843.9 -766.6 -1044.7 -1290.6 -1403.9 -1473.5 -1539.0 -1580.0 Net factor income -124.7 -117.8 -101.1 -140.4 -39.0 -32.0 -28.0 -24.0 -25.0 Factor receipts 14.8 25.8 39.7 45.0 50.0 52.0 55.0 59.0 59.0 Factor payments 139.4 143.6 140.8 185.4 89.0 84.0 83.0 83.0 84.0 Interest (scheduled) 139.4 143.6 140.8 185.4 85.0 84.0 83.0 83.0 84.0 Total interest paid b .. .. .. .. .. .. Net adjustments to scheduled interest .. .. .. .. .. .. Other factor payments 0.0 0.0 0.0 0.0 4.0 0.0 0.0 0.0 0.0 Net private current transfers 17.5 19.9 25.7 31.0 33.9 36.0 38.1 40.4 0.0 Current receipts, of which 37.5 39.9 45.7 50.0 53.9 56.0 59.1 61.4 61.4 Workers' remittances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current payments 20.0 20.0 20.0 19.0 20.0 20.0 21.0 21.0 61.4 Net official current transfers 17.5 19.9 25.0 30.0 32.0 33.9 36.0 38.1 0.0 Current account balance -1046.9 -941.8 -842.0 -1155.1 -1295.7 -1399.9 -1463.4 -1522.6 -1562.0 Official capital grants 525.0 581.3 689.9 668.7 737.0 796.0 778.0 786.0 794.0 Privateinvestment(net) 104.1 134.1 150.0 165.0 183.0 201.3 221.0 244.0 263.0 Direct foreign investment 104.1 134.1 150.0 165.0 183.0 201.3 221.0 244.0 263.0 Portfolio investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net LTc borrowing Disbursementsb 262.0 208.7 251.4 251.4 459.3 470.6 481.6 504.7 Repayments (scheduled) 322.3 354.4 317.0 274.7 223.1 225.5 207.0 200.8 152.0 a. Goods and nonfactor services. b. 'Data-YR'torical data from Debt Reporting System (DRS); other data projected by country operations division staff. c. LT ' denotes "iong-term."  Tanzania PSAC I Annex G 2 of 2 Tanzania - Balance of Payments (continued) (US$ at current prices) Base-case (most likely) pro]ection 1995 @; ;;9....9... 02 20_ = ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. .. .... .. , ,,,,.. , ..> , . . ........... ...... .... .. . ..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . ..... .... ?: .. ... .. .. ... . ..: .. , , , >'''? : ''..... : ?" :-::-::::-,,:?::??;'':'';:'.??'?;:',' ... ... ... .... ... .... ....... .. . .. ............. ' - Change in net international re 46.3 -80.7 -207.7 -29.5 -114.0 49.1 -18.0 -73.0 -87.0 (- indicates increase in assets) Memorandum items Total gross reserves, ofw 255.1 240.1 460.5 502.5 775.6 853.7 904.3 1010.0 0.0 Total reserves minus 168.4 158.5 303.9 331.6 546.5 658.9 736.0 809.2 0.0 Gold(atyear-endLo 86.7 81.6 156.6 170.8 170.8 0.0 0.0 0.0 0.0 Total gross reserves (inm 1.4 1.4 2.5 2.6 3.7 3.8 3.7 3.8 0.0 Exchange rates Annual average (LCU/US$) 574.8 583.0 612.1 664.7 744.8 798.9 818.0 834.9 851.3 At end year(LCU/US$) 550.4 595.6 624.6 681.0 797.3 800.4 826.8 843.1 859.6 Indexreal average exchange 97.7 118.3 125.6 135.5 135.5 120.6 121.8 121.8 121.8 Current Account Balance as % -22.6 -16.1 -12.2 -14.8 -15.7 -15.8 -15.0 -14.3 d. "n.e.i." denotes "not elsewhere included." e. "G & S" denotes "goods and services." f "LCU" denotes "local currency units." g. The index of the real exchange rate reflects US$/LCU, so an increase is an appreciation at the real exchange rate.  Tanzania PSAC I Annex H Tanzania 1 of I Status of Bank Group Operations (Operations Portfolio) Closed Projects 117 Difference Between Board Last PSR Expected and Actual Date Supervision Rating Original Amount In US$ Millions Disbursements a/ Active Projects Development lmplementatio IBRD IDA Cancel. Undisb. Orig. Frm Rev d Oblectives n Progress 1990 P002784 PORTS MODERNIZATION S S 0 37 0 5.84 2.41 0 1991 P002786 PETROL REHAB S S 0 44 0 6.69 4.33 4.02 1991 P002757 RAILWAYS RESTRUCTURI S S 0 76 11.26 15.82 24.24 3.54 1993 P002817 FIN.& LEGAL MGT PROJ S S 0 20 0.71 1.16 1.3 0.49 1993 P002756 POWER VI S S 0 200 0 23.11 11.53 0 1993 P002788 PRIV. PUB. SECT. MGT S S 0 34.9 0 1,14 0.47 0 1993 P002780 TELECOM III U S 0 74.45 0 6.93 7.26 7.18 1994 P002801 ASMP S S 0 24.5 2.35 3.78 5.85 0 1994 P002770 ROADS II S S 0 170.2 0 137.74 138.06 155.2 1995 P002812 MINERALSECTOR DEV. S S 0 12.5 0 2.38 1.73 0 1996 P002758 URBAN SECTOR REHAB S S 0 105 0 51.33 5.76 0 1997 P046837 LAKE VICTORIA ENV. S S 0 10.1 0 5.55 1.79 0 1997 P002753 NATEXTPROJPH.II U U 0 31.1 0 15.46 8 0 1997 P038570 RIVER BASIN MGM.SMAL S S 0 26.3 0 16.27 5.72 0 1997 P002821 SAC I S S 0 134.1 0 15.67 13.59 16.07 1998 P002804 AGRIC RESEARCH S S 0 21.8 0 16.71 1.3 0 1998 P002789 HUMAN RESOURCE DEV I S U 0 20.9 0 11.68 1.99 0 1999 P047761 TAX ADMINISTRATION S S 0 40 0 35.48 2.82 0 2000 P057187 FIDP II S S 0 27.5 0 27.7 5.5 0 2000 P049838 PRIVATIZATION 0 45.9 0 0 0 0 2000 P060833 PUBLIC SERV REF PROG 0 41.2 0 37.97 0 0 2000 P050441 RURAL& MICRO FIN SVC S S 0 2 0 2.02 0.45 0 Grand Total 1199.45 14.32 440.43 244.1 186.5 IBRD IDA TOTAL Orginal Principal: 361,030,400 3,302,156,395 3,663,186,795 Cancellations: 5,477,943 141,463,032 146,940,975 Disbursed: 355,552,457 2,740,559,746 3,096,112,203 Undisbursed: 0 484,645,525 484,645,525 Repaid: 342,233,982 154,616,532 496,850,514 Due: 13,228,474 2,563,804,226 2,577,032,700 Exchange Adjustment: 441,526 0 441,526 Borrowers Obligation: 13,670,000 2,563,804,226 2,577,474,226 Sold 3rd Party: 90,000 6,200,000 6,290,000 Repaid 3rd Party: 90,000 6,200,000 6,290,000