Tanzania - Programmatic Structural Adjustment Credit Project : release of the privatization and regulation floating tranche - full compliance

Tanzania-ProgrammaticStructuralAdiustment Credit (Cr. No. 3379-TA) Release of the Privatizationand RegulationFloatingTranche - Full Compliance I.Background 1. Since 1995, the Borrower has shown sustained commitment to macroeconomic and structural reforms. Moreover, reversals inpolicy actions have beenavoidedprimarily through buildingup-front consensus onkeyactions, evenifthis has resultedinsome delay intaking actions. The Borrower underscored its resolve bythe successful completiono f IDA'SSAC 1 (Cr. No. 2967-TA), for which the ImplementationCompletion Report was completed inJune, 2001; andprogress to date under the PSACl. Ithas continued to meet program benchmarks underthe InternationalMonetaryFund(IMF) supportedEnhanced StructuralAdjustment Facility (ESAF)/Poverty Reductionand Growth Facility (PRGF). After successfully implementing reforms supported by the last PRGF arrangement, a new three year PRGF arrangementwas approved by the IMFBoard inJuly 2003. ReflectingTanzania's improved external position and to highlight the authorities' progress toward an exit from the PRGF, access under the new arrangement i s only 10 percent o fquota. The new PRGF-supported program focuses on a three- pronged strategy aimed at mobilizing revenue, inorder to strengthendomestic savings and reduce aid dependency; continuing trade liberalization inorder to enhance efficiency and strengthen the tradables sector; and improvingthe economy's supply response byremoving impedimentsto growth, includingmeasuresto improvethe efficiency o fthe financial sector and promoteprivate sector development. The first review o f Tanzania's new PRGF arrangement was completed inFebruary 2004, with a positive assessmento fthe macroeconomic and structural benchmarks and approval o f SDR 2.8 million for disbursement. 2. The commitment was further underscored bythe agreement with the Bank and the IMFto implement the requirementsstipulated under the Enhanced H P C program. The Borrower presentedits InterimPovertyReduction Strategy Paper (I-PRSP) inMarch2000; the full PRSP in November 2000; and Progress Reports on the implementationo f the PRSP inOctober 2001, May 2003, and April 2004, respectively. InNovember 2001 Tanzania became the fourth country to reach the completionpoint under the enhanced framework o f the Heavily IndebtedPoor Countries (HIPC) initiative. The first PovertyReduction Support Credit (PRSC 1) for Tanzania was approved by the IDA Board on May 29,2003 andthe second PRSC i s expected to be presentedto the Board duringthe first quarter ofFY05, following the completiono f all prior actions. 3. Based on the analysis inthe last Country Economic Memorandumfor Tanzania, Tanzania at the Turn of the Century: From Reforms to Sustained Growth and Poverty Reduction, a wide range o f studies andinvestor roadmaps, and interviews with awide range o f stakeholders, a robust consensus exists on the key constraints limitingthe expansion and efficiency o f Tanzania's private sector. The policy priorities to address these constraints can be organized under the following headings, corresponding to the mainthematic areas covered under the PSAC program. These are: 4. Economic Governance: The focus i s to sustain macroeconomic stability, improve public services delivery through improvedmanagement o f the,budget,and lower business costs and 1  risks associated with corruption and excessive bureaucracy. The actions focus primarily on reestablishing a credible budget process, inwhich overall fiscal discipline i s accompanied by allocative and operational efficiency, and raising the Borrower's efforts to promote growth and support private sector development. 5. Business Environment: The main target i s to remove policy-related and institutional impediments to private investment and efficient business operations. K e y among such impediments are tariff barriers to smooth foreign trade, nuisance taxes at various levels o f government, obstacles to new investment and expansion o f old business, nontax barriersto the intemal and external flow o f goods, bureaucratic red tape faced by investors and exporters, nontransparent policies and laws goveming property ownership, constraints to expanding and improving access to financial services, andthe lack o f mechanisms for expeditious settlement o f commercial disputes ina fair and transparent way. 6. Privatization and Regulation: Having effectively launchedthe privatization o f its commercial, agricultural, and industrial public enterprises (PES)during 1994-98, Tanzania has now embarked on an ambitious and far-reaching program to divest all its major infrastructure PESduring2000-04. To provide an effective enabling environment for attracting increased private participation inthese key sectors inthe medium-to-long run, Tanzania has embarked on the creation o f new sector regulatory laws and independent, cross-sectoral regulatory institutions for a competitive regulatory environment. The PSAC program is supporting the establishment o f effective infrastructure regulatory capacity and preparation and implementation o f Tanzania's privatization program inkey infrastructure, bankingand insurance, and agriculture. Regulatory reforms will be sequenced to create procompetitive regulatory environments prior to the divestiture o fPESinthe sectors concerned. 7. The PSAC has been structured to help the Borrower address the constraints identified above. It i s based on the Policy Framework Paper, distributed to the Board inJanuary 1999, and the Letter o f Development Policy, dated M a y 8, 2000 (LDP), o f the Borrower, which sets out its medium term strategy for policy and institutional reforms aimed at supporting private sector development inTanzania. This strategy seeks to reduce poverty through accelerating economic growth more generally and private sector development more specifically. The principal objectives o f the Credit are to encourage increasedprivate investment; induce greater efficiency o f the private sector byreducing the cost of doingbusiness and enhanced competition; increase private sector participation inthe economy through further divestiture o f keypublic enterprises, particularly ininfrastructure services; and improve the effectiveness inthe delivery o f supportive public services. 8. The Credit i s currently supporting the Borrower's efforts to sustain macroeconomic stability and improve public service delivery, deepen the implementation o f the privatization program, improve competitiveness and the transparency o f key markets, strengthen the state legal and commercial apparatus for a more efficient and transparent business environment, and further reduce the barriers to intemational and domestic trade. The impact from these actions will support accelerated growth inthe medium term by creating conditions conducive to sustained private sector development, and spur faster poverty reduction. 2  9. This Credit is to be succeededby a series o fPRSCs for Tanzania, andPRSC-1 was approved by the IDA Board on M a y 29,2003. The objectives o f the PRSC are accelerating and broadening the impact o f growth, aligning public investment with the poverty reduction strategy goals andincreasing the efficiency o fpublic service delivery. It i s based on the PRSP and subsequent Progress Reports on the implementation o f the PRSP, and the Letter o f Development Policy, dated April 10,2003 (LDP), o f the Borrower, which sets out its medium term strategy for policy and institutional reforms aimed at supporting growth and poverty reduction inTanzania. This strategy i s inline with the principal objective o f the World Bank Group's Country Assistance Strategy FYO1-03 for Tanzania (CAS), approved by the Board on June 15,2000. Tanzania i s currently preparing a new PRSP which i s expected to be presented duringthe second quarter o f FY05. A new CAS for Tanzania will be preparedjointly with other donors based on the new PRSP and is expected to be presented to the Board duringthe second half o f FY05. 11. RecentEconomicDevelopments 10. Since the mid-l990s, Tanzania has made substantialprogress inmacroeconomic stabilization and structural reforms o f the economy. At the beginning o f the reformprocess, economic growth was slow to pick up, but over the last five years or so it has averaged more than five percent. The positive development continued into 2002 when real GDP grew by about 6.3 percent. As a result o f the impact o f the drought on agriculture, real growth in2003 may, however, fall short o f the initiallyprojected 5.5 percent. 11. Inflation remainedbelow five percent in2003. Annual inflation declined to 4.4 percent at end-2002 (from 4.9 percent in2001), but increased slightly to 4.8 percent by February 2004, on account o f food shortages. Non-foodprice inflation declined rapidly from a peak o f 9.6 percent inJanuary 2003 to 0.6 percent byDecember 2003, as thepass-through ofutilityprice increases byparastatals andhigher fuel prices inMay andOctober 2002 evaporated. 12. Higher real growth inthe agricultural sector (which accounts for almost half o f GDP) has been accomplished through the liberalization o f marketing structures, as well as o f agricultural prices and the foreign exchange regime. Fiscal consolidation has been central to the success in macroeconomic stabilization. Insupport o f Tanzania's reformprogram, donors have provided sizable financial assistance and this has almost eliminated the government's domestic financing needs. This has again led to lower interest rates and stimulated private sector growth. 13. Fiscal developments inFY 2002/03 were characterizedbybetter than projected revenue performance, as well as higher-than-expected expenditure. Revenue exceededprojections by 0.3 percent o f GDP on account o f buoyant revenue from VAT, import duties andnon-tax revenue. Total expenditure exceeded projections by 1.2 percent o f GDP, due to higher thanprojected end- of-year catch up inrecurrent expenditures and the upward revision o f development expenditures financed with foreign grants. Through January o fFY 2003/04, revenue exceeded projections by 0.2 percent o f GDP, as tax revenue continued to be strong, partlyas a result o f the implementation o f measures to curtail smuggling o fpetroleum imports, and the impact o f strong collections o f income tax. Duringthe same period, actual expenditure was 0.9 percent o f GDP below projections, reflecting lower-than-programmed interest payments, as well as lower-than- projected foreign and domestically-financed development expenditure. InFebruary 2004, 3  Parliament passed a supplementary budgetwhich covers additional drought related expenditures inthe power sector andfor restockingthe strategic grainreserve, butalso for the replacement of a govemment aircraft. The additional expenditure o f about TSH 187billionis to be financed through a combination o f higher than budgeted program support inflows, lower than budgeted debt service payments, as well as additional domestic borrowing from the Bank o f Tanzania. 14. The discussion o f the macroeconomic framework inthe last PRS Progress Report points out that the continued low revenue yield i s a major challenge for Tanzania. The projected medium-term revenue targets are achievable, with the implementation o f a comprehensive strategy for the reform o f tax administration and policy. Inthis respect, the report notes appropriately the importance o f eliminating exemptions, as well as o f a review o f tax laws. In addition, the organization o f the national tax administration, the strengthening o f the Large Taxpayer Department, and the integration o f the VAT and income tax departments will be o f particular importance. 15. Through December 2003, the Bank o f Tanzania (BOT)maintained a tight stance o f monetary policy with a view to meeting the established reserve money targets. Reserve money and net domestic assets o f the BOTremained significantly below the December targets, as the BOTmore stringently enforced a standing requirement for commercial banks to transfer to the BOTtax revenue heldbythe TRA inbank accounts, and, inaddition, actively engaged inopen market operations. As a result o f these actions, money supply growth at end-December remained below projections bymore than 4 percentage point. The liquiditysqueeze inSeptember resulted insome commercial banks being unableto meet reserve requirements, andledto temporarily highinterest rates onthe interbankmarket. InOctober 2003, the liquiditysituation loosenedas a result o f the BOT'Sinjection o f liquidity and a drawdown o f deposits bythe government. Through December 2003, credit to the private sector increasedby 43 percent, which was significantly above projections, fueled inpart byincreasedcompetition inthe bankingsystem, and the reduction ininterest rate spreads. 16. Tanzania's overall balance o f payments position improved in2002/2003 because of larger inflows o f donor assistance and the impact o f debt relief under the HlPC Initiative. However, the current account deficit, excluding official transfers, widened slightly. There was a strong increase innon-traditional exports, mainly gold, combined wjth a moderate improvement in traditional exports, reversing a declining trend. Through the first half o f 2003104, balance o f payments developments remained inline with projections, as imports, notably petroleum imports, accelerated and export growth was inline with expectations. International reserves substantially exceeded projections, as scheduled debt-service payments to Japan and Brazil were not made and the BOTsold less foreign exchange than anticipated. The exchange rate against the U.S.dollar depreciated to T Sh 1110per dollar byend-January, andsince hasremained stable. In real effective terms, it depreciated by about 2 percent, which combined with a modest recovery o f the terms o f trade, improvedthe environment for exports. The exchange rate is now close to what the IMFhas estimated as an equilibrium real exchange. 4  Table 1: SelectedEconomic Indicators Indicator 2000 2001 2002 2003 2004 2005 Actual Projection Annual Average Inflation 5.9 5.2 4.6 4.4 4.6 3.8 (percent) Nationalaccounts, percentgrowthrates Agriculture 3.4 5.5 5.0 3.5 5.5 6.3 Industry 6.7 6.4 8.5 8.7 1.4 7.1 Services 7.8 6.8 6.8 6.3 6.7 6.5 GDP at market prices 5.6 6.1 6.3 5.5 6.3 6.5 Real per capita GDP 3.6 3.3 4.2 4.1 3.4 3.7 Nationalaccounts (percentof GDP at market price) Gross domestic investment 17.6 17 16.0 18.2 18.9 18.4 Public investment 3.4 3.5 3.3 3.9 4.8 4.8 Private investment 14.1 13.3 13.2 13.1 13.5 13.5 Gross domestic savings 9.2 8.4 9.6 10 8.6 9.1 Balanceof payments (percentof GDP at market price) Current Acct Balance (excluding grants) -9.9 -9.1 -7.6 -10.4 -10.8 -11.8 Current Acct Balance (including grants) -4.0 -4.4 -2.5 -3.6 -4.8 -6.1 ExternalIndicators Debt ServiceBxports of Goods and Services 6.6 6.7 6.7 8.1 8.6 (After rescheduling) Reservesinmonths o f imports 5.7 5.3 5.9 6.7 7 7 Government Finance(percent of GDP at marketprice)/1 Domestic Revenue 11.3 12.0 12.1 12.8 13.2 13.4 Public Expenditure 17.1 16.5 17 20.8 24.6 24.9 Overall Deficit (excluding grants) -7.8 -5.3 -5.6 -8.2 -9.3 -8.4 Overall Deficit (including grants) -3.3 -1.6 -1.1 -1.7 -4 -3.8 External borrowing(net) 1.5 1.2 1.4 2.1 3.4 3 Domestic borrowing (net) 0.1 0 -0.3 -0.4 0.6 0.8 PrirortySector Expenditures/1 1999/00 200o/o1 2001/02 2002/03 2003/04 2004/05 (as a percent o f GDP) Education 3.2 3.3 4.0 4.6 4.6 4.8 Health 1.2 1.3 1.6 2.0 1.8 2.4 Water 0.2 0.2 0.4 0.5 0.6 0.7 Agriculture (Research and Extension) 0.3 0.2 0.4 0.6 0.8 1.o Lands 0.0 0.1 0.1 0.2 0.1 0.0 Roads 1.o 1.2 2.1 2.0 2.0 2.5 Judiciary 0.1 0.1 0.2 0.2 0.3 0.2 rACAIDS 21 0.0 0.0 0.0 0.1 0.1 0.5 source: WB and IMFdatabase Note : 11Government finance andprirority sector expenditures are calculated in fiscal year. 17. The government has made furtherprogress inimplementingreforms inthe public enterprise sector. At end 2002, a concession for the Dar es Salaam Water and Sewerage Authority (DAWASA) was granted to a British-Germanconsortium. Meanwhile, the financial position andmanagerial capacity o f the Tanzania Electricity Supply Company (TANESCO) have continued to improve following the introductiono f a new management team inmid-2002. The sale o f 49 percent o fAir Tanzania to South African Airways was completed inNovember 2002. 5  InDecember 2003, government offered49 percent ofthe shares oftheNationalMicrofinance Bank (NMB) for sale to a strategic investor. This will be followedby the sale o f a further 21 percent o f shares to domestic investors. 18. Having made significant strides inmacro stability, fiscal sustainability and debt management, the Borrower's efforts have refocused on poverty alleviation. A series o f three annual PRS Progress Reports outlines the progress made inimplementingTanzania's poverty reduction strategy duringFYO1, FY02, and FY03. The implementationo f the poverty reduction program focused on initiatives to strengthengrowthprospects, especially inthe pro-poor sectors; develop an effective framework for monitoringpoverty; and elaborate strategies and cost interventions for the key sectors. A comprehensive HouseholdBudget Survey (HBS) was carried out inFYOl and the results were released inApril 2002. Results o f the poverty analysis reflect the decline inbasic needspovertyfrom 38.6 percent inFY92 to 35.4 percent inFYOl. The improvements have beenregistered inthe access to drinkingwater inrural areas, a relatively sharp rise inthe use o fmodem construction materials for housing(urban andrural), and increased access to electricity, market and public transport. The Borrower has set up an institutional framework for povertymonitoring, consistent with the PovertyMonitoring Master Plan. 19. The budget for FY04 i s inline with commitments made inthe fullPRSP. The budget emphasizes Wher increases inpublic spendinginthe priority sectors such as basic health, primary education, rural roads, water, agricultural extension and HIV/AIDS. Tanzania has made significant progress inthe priority sectors. Ineducation, a basic education sector strategy has beenadopted, school fees at the primary levelhave beenabolished and the EducationFundto support childrenfrom very poor families has been established. Inhealth, primary health services andimmunization coverage have beenexpanded andpublic spendingon healthhas increased from US$ 5.50 to US$ 6 per capita. Taxes for drugs to combat HIV/AIDS, tuberculosis and malaria have beenabolished. Another significant achievement i s the immunization o f 78 percent o f children under two years against measles and DPTswith a target to increase and maintain the immunization rate at 85 percent. A roads programhas been formulated that gives priority to selected areas o fhighpotentialfor poverty impact and to upgradingrural roads inthe 12poorest areas. A new agriculture strategy as well as a rural development strategy have beenformulated to address complementary problems o f on- and off-farm activities, infrastructure and diversification. Inaddition, the borrower has created and made operational the Tanzania Social Action Fund(TASAF) aimed at directly boostingcash incomes o fvulnerable groups that are involved incarrying out projects chosen and managed by communities. 111. ProgressAgainst TrancheReleaseCriteria 20. As described inthe previous sections, Tanzania hasmade satisfactory progress in implementingthe program andmaintaineda satisfactory macro-economic framework. 21. The specific conditions o freleasereferredinparagraph (d) of Section 2.02, andlistedin Part 4 o f Schedule 2 o f the Development Credit Agreement between the Borrower and IDA dated 6  *July21,2000 (DCA), state that for the release o f the Privatization and Regulationfloating tranche the following conditions inthe areas o fprivatization andregulation must be fulfilled: 22. "The Borrower has: (a) presented to Parliamentfor approval the necessary enabling legislation for the establishment of independent cross-sectoral regulatory institutions covering telecommunication, broadcasting, electricity, water, railways, aviation andportdmaritime sectors, with the objective of establishing a coherent, modern and pro-competition market structures and regulatoryframeworks; and (b) presented to Parliamentfor approval the necessary amendments to current legislation related to the sectors referred to in (a) above with the objective of making such legislation consistent with the enabling legislation referred to in (a) above, asprovidedfor inparagraphs 35, 36 and 37 of the LDP." 23. The Borrower has met this condition. The GOT decidedto have four regulatory agencies inthe utility and transport sectors, and enactedtheir respective laws by 2002: the EnergyandWater UtilityRegulatoryAuthority (EWURA),the Surface andMaritime Transport RegulatoryAuthority (SUMATRA), the Communications and Transport RegulatoryAuthority (TCRA), and the Tanzania Civil Aviation Authority (TCAA). The GOT also decided to have Fair Competition Commission (FCC) andFair CompetitionTribunal (FCT), and enactedthe Fair Competition Act inApril 2003. The legislationfor the establishment o f the regulatoryagencies also contains provisions which ensure that current legislationrelated to the respective sectors i s consistent with the enabling legislation. 24. "The Borrower has issued technical regulations under the Petroleum Conservation Act of 1981 ensuring the quality and safety ofpetroleum products, in accordance withparagraph 38 of the LDP." 25. The Borrower has met this condition. The legislation empoweringthe Minister responsible for the Energysector to issue technical regulations for a liberalizedpetroleum sector was passedbyParliament inApril, 2003; and the Technical Regulations for the sector have prepared andprinted. Paragraphs 23 -26 o fthe regulations contain provisions to ensure the quality and safety o fpetroleum products. These regulations can only be gazetted to become operational once EWURA has beenestablished. Therefore, currently InterimTechnical Regulations are inuse. 26. "The Borrower has approveda strategyfor theprivatization of all Tanzania Harbors Authority (THA)services and the sale of non-core assets, with the exception of the Dar es Salaam Container Terminal, in accordance withparagraph 40 of the LDP." 27. The Borrower has met this condition. In1997, the Government approved aport reform strategy under which it would retain ownership o f the major port assets through THA acting as a landlord, and would involve the private sector inport operations through long term agreements such as lease or concession contracts. Inthis context, the Government approved a 10-year lease grantedby THA to aprivate sector operator, Tanzania International Container Terminal Services (TICTS), to runthe container terminal from September 2000. In2002, PSRC contracted an international consultant, RotterdamMaritimeGroup (RMG) o fNetherlands, to assist inassessing these privatizationoptions (phase I) for the remainingactivities, consisting o f four business units: 7  (i) Cargounit;(ii) Terminalunit;(iii) Servicesunit;and(iv)Singlepoint Bulk Oil Marine mooring (SBM)unit,and inimplementingthe approved strategy (phase 11). The consultant issuedits final report inJuly 2002, recommending a landlord modelwith concession as the preferreddivestiture option for the first three business units (cargo, oil terminal, marine services), andnegotiations with the current sole user ofthe SBM, i.e. the ZambianRefineryCompany, to manage it. This approach was submitted to Government for approval inSeptember 2002, and Government decided to adopt the proposed landlordmodel inNovember 2003. 28. "The Borrower has approved a strategyfor reorganizing TANESCO and restructuring the electricity sector with the objective of introducing competition in the generation and distribution of electricpower, in accordance withparagraph 42 of the LDP." 29. The Borrowerhas met this condition. The Government approved the strategy for re- organizing TANESCO and restructuring the electricity sector in 1999 and subsequently consultants were engaged for Restructuring and Trade Arrangements Options studies for TANESCO. The Restructuringand Trade arrangementsreports were completed and submittedin July and April, 2003, respectively. Government has approved a strategy for the restructuring of TANESCO and the reorganization o fthe power sector as follows: 0 Distribution activities to be split into two areas, one for the northem part o f Tanzania and the other covering the southempart with Dar es Salaam beingdividedbetweenthe two; 0 Generation activities to be split into two hydrogeneration entities and one thermal with the latter beinghanded over to Songas or decommissioned as appropriate; 0 Transmission activities to cover the entire mainland as a single entityneutralto the trading arrangements; 0 One systems operator and market operator to be established at least initially within the nationaltransmission entity but independent interms o f operational decisions and financial issues; 0 A purchasing agency to beestablished at least initiallyto provide load aggregation service by assisting inthe tendering o f supplyelectricity contract between distributors and generators including imports. 30. The firmNETGroup Solutions (Pty) from SouthAfrica was recruitedby Government through a transparent and competitive process, andtook over the management o f TANESCO operations inMay 2002. The Board o f Directors o f TANESCO appointed a monitoring consultant to monitor the contract. The management contractor has issued quarterly reports which indicatedthat TANESCO continuedto make significant turnaround both financially and technically. Since May 2002, collections increased from 76% to 93%, system losses decreased from 27% to 24%, administrationand overhead costs were cut down by about 20%, and staff numberswere reduced by 1,428 to 4,991 employees. Inview o f intemationalmarket conditions, however, and the need for further improvements inTANESCO's operational performance and its financial situationbefore successful privatizationwould be feasible, the Govemment has decided 8  to extend the performance-based Management Contract for around 3-5 years. The new contract would bebasedon revisedperformance incentives aimed at reducing losses, increasing connections (after the emergencyperiod), investinginsystemrehabilitation, andthe functional unbundling(ring fencing) ofgeneration, transmission anddistribution. A decision onthe timing for launchingprivate participationfor the concessioning o f TANESCO would bebasedon future internationalmarket conditions and completiono fnecessaryreforms. 31. "The Borrower has brought TRC's rail services to apoint of concessionAease,in accordance withparagraph 45 of the LDP." 32. The Borrowerhas met this condition. The Government of Tanzania advertised the intentionto concession TRC's rail services inDecember 2001 and January 2002 and short listed four rail operators who were issuedwith the biddingdocuments. However, the first tender was unsuccessful, attracting only one qualified bidder who failed to submit a bid. As a result, the Government directed PSRC to restart the process. PSRC selectedatransaction adviser (CPCS Transcom o f Canada) through competitionin2003. The pre-qualificationprocess involvedtwo rounds o f advertising and resulted inseven applications to pre-qualify inAugust 2003, including Canac, Dynamic Rail, East Afnca Rail Consortium, Great Lakes Railway Company Consortium, NPLUSpoomet Consortium, RITES Consortium, Sheltam/ Mvela Consortium. This process i s still underway, including the due diligence o fpre-qualifiedbidders 33. "The Borrower has: (a) carried out an audit,property valuation, and actuarial study of NIC, and (b) approved a strategyfor the divestiture of NIC, in accordance withparagraph 47 of the LDP.'' 34. The Borrowerhas met this condition. (a) The following studiedtasks havebeen completed: (i) Audit & Operations Review, which was completed inOctober 2002; (ii) NIC NIC Market Review & Privatization Options Study which was completed inJune 2002, (iii) Fixed Assets verification and valuation; (iv) Accounting Support to NIC management to reflect the true financial positiono fNIC; and (v) the actuarial valuation o fNIC was completed inNovember 2003, (b) InMarch2004, the Cabinet approved the recommendedprivatization strategy, notably to sell life and non-life businesses o f NIC with specific assets and liabilities attached to them separately (or together) and to sell the remaining assets to pay old claims as a preferred divestitureoption for the NIC. Government will sell the majority of capitalto a strategic investor/partner, preferably inconsortium with Tanzanian investors. The Government will retain 30% interest inthe business to be sold, that will be offeredto the public at a later stage. 35. "The Borrower has developed and approved optionsfor divesting or liquidating: (a) the remaining cashew nutprocessing plants, (b) NARCO ranches, and (c) NAFCO wheat, rice and maizefarms, in accordance withparagraph 49 of the LDP." 36. The Borrowerhas met this condition. The strategy for divestingCashew nut processing factories was approved inApril, 2002, and the facilities were advertised inMay, 2002. As these efforts to divest the cashew nut processing factories were not successful, a revisedstrategy was approved inearly 2004 andPSRC re-advertised the cashew nutprocessing plants for sale inMarch2004. The strategy for divestingNARCO ranches, DAFCO andNAFCO 9  farms was also approved by Government at the same time, April, 2002. The Government reached a decision to keep farms as single units except for rice farms, which have already been partitioned. Subsequently, in2003 a Cabinet paper was prepared which further refined the approved strategy. The process for divesting the NAFCO rice farms ( Rum, Dakawa, Kapunga and Mbarali) is still under way and i s expected to be completed at the latest only bymid2004. Similarly, the NAFCO maize farms (Mbozi and Namtumbo) although initially transferred to the Tanzania Investment Center, have been placed under PSRC for divestiture bymid-2004. IV. Conclusion 37. Inview ofthe overall performanceandprogress withthe implementation ofthe program supported bythe Credit, and incompliance with the specific conditions o f release referred in paragraph (d) o f Section 2.02 and listed inPart 4 o f Schedule 2 o f the Credit Agreement, the Association has informed the Borrower o f the availability o f the Privatization and Regulation floating tranche inthe equivalent o f SDR 29.85 million. 10  Annex 1 ImplementationStatus of FloatingTrancheon PrivatizationandRegulation PSAC 1 ~ ~~ Agreed Actions Status Remarkson Steps Taken ~ 1. The Borrower has: (a) presented to The GOT decided to have four regulatory Parliament for approval the necessary agencies in the utility and transport sectors, enabling legislation for the establishment of and enacted their respective laws by 2002: the independent cross-sectoral regulatory Energy and Water Utility Regulatory institutions covering telecommunication, Authority (EWURA), the Surface and broadcasting, electricity, water, railways, Maritime Transport Regulatory Authority aviation and ports/maritime sectors, with the (SUMATRA), the Telephone and objective o f establishing a coherent, modern Communications Regulatory Authority and pro-competition market structures and Implemented (TCRA), and the Tanzania Civil Aviation regulatory frameworks; and (b) presented to Authority (TCAA). The GOT also decided to Parliament for approval the necessary have Fair Competition Commission (FCC) amendments to current legislation related to and Fair Competition Tribunal (FCT), and the sectors referred to in (a) above with the enacted the Fair Competition Act in April objective o f making such legislation 2003. The legislation for the establishment o f consistent with the enabling legislation the regulatory agencies also contains referred to in (a) above, as provided for in provisions which ensures that current paragraphs 35, 36 and 37 o f the LDP. legislation related to the respective sectors is consistent withthe enabling legislation. 2. The Borrower has issued technical The legislation empowering the Minister regulations under the Petroleum responsible for the Energy sector to issue Conservation Act o f 1981 ensuring the Implemented technical regulations for a liberalized quality and safety o f petroleum products, in petroleum sector was passed by Parliament in accordance with paragraph 38 o f the LDP. April, 2003; and the Technical Regulations for the sector have beenprepared andprinted. THA's Container Terminal was leased for 10 years with effect from September, 2000. 3. The Borrower has approved a strategy Consultant Advisors, M/s. RMG o f for the privatization o f all Tanzania Harbors Netherlands already submitted a final report Authority (THA) services and the sale o f 3n the privatization options study for the rest non-core assets, with the exception o f the [mplemented 3 f the ports' assets and services. Dar es Salaam Container Terminal, in Subsequently a strategy has been submittedto iccordance with paragraph40 o f the LDP. 2nd approved by the Inter-Ministerial Zommittee. Cabinet approved the strategy on Vov. 8,2003. The Government approved the strategy for re- 1. The Borrower has approved a strategy xganizing TANESCO and restructuring the 'or reorganizing TANESCO and :lectricity sector in 1999 and subsequently .estructuring the electricity sector with the :onsultants were engaged for Restructuring Ibjective o f introducing competition in the :mplemented md Trade Arrangements Options studies for ;eneration and distribution o f electric TANESCO. The Restructuring and Trade lower, in accordance with paragraph 42 o f mangements reports were completed and heLDP. ubmitted in July and April, 2003, ,espectively. At a PSRC meeting in September 2002, the Commissioners adopted 11  AgreedActions Status Remarkson Steps Taken the recommendations o f the restructuring consultants to unbundle TANESCO into two hydro Gencos, two Distcos, and one Transco, and one systemoperator/market administrator. In a letter to IDA dated December 15, 2003, Government confumed its approval o f the recommendations adopted by the PRSC Commissioners. The Government o f Tanzania advertised the intention to concession TRC's rail services in December 2001 and January 2002 and short 5. The Borrower has brought TRC's rail listed four rail operators who were issuedwith services to a point o f concessiodlease, in Implemented the bidding documents. However for various accordance with paragraph 45 o f the LDP. reasons no bids were received on the bid submission deadline in March 2003. The Government has therefore decided to restart the transaction process. (a) The following studiedtasks have been completed: (i) N I C Audit & Operations Review, which was completed inOctober 2002; (ii)N I C Market Review & Privatization 6. The Borrower has: (a) carried out an Options Study which was completed inJune audit, property valuation, and actuarial study 2002, (iii)FixedAssets verification and o f NIC, and (b) approved a strategy for the Implemented valuation; (iv) Accounting Support to N I C divestiture o f NIC, in accordance with management to reflect the true financial paragraph 47 of the LDP. positiono fNIC; and (v) the actuarial valuation o fN I C was completed inNovember 2004. (b) Based on this work, inMarch2004 Cabinet approved the sale o fNIC's life and non-life business A strategy for divesting the cashew nut processing plants was approved inApril 2002 and the facilities were advertised in May 7. The Borrower has developed and 2002. As these efforts were not successful, a approved options for divesting or revised strategy was approved in early 2004, liquidating: (a) the remaining cashew nut and the facilities were re-advertised inMarch, ?recessing plants, (b) NARCO ranches, and implemented 2004. The strategy for divesting NARCO :c) NAFCO wheat, rice and maize farms, in ranches, DAFCO and NAFCO farms was also accordance with paragraph 49 o f the LDP. approved by Government at the same time, April, 2002. The strategies for divesting the agricultural farms was further refined in a Cabinet Paper prepared in2004. 12