Tanzania - Kilombero Sugar Project

.4 CIRCULATING COPy F ILE COj~~~~~~~~~TOREPORTS DESK FILE COP-Y Xt. n_ DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1468-TA REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A SUGAR DEVELOPMENT PROJECT July 31, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS USED IN THIS REPORT Tanzania Sh = US$ 0.14 US$ 1.00 = TShs 7.14 TANZANIA FISCAL YEAR July 1st - June 30th  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A SUGAR DEVELOPMNT PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of Us$9.0 million and a proposed credit for the equivalent of US$9.0 million to the United Republic of Tanzania to help finance a project for the construction of a sugar factory and the developsment of an associated sugar estate and out- grower development. The loan would have a term of 25 years, including five years grace, with interest at 8 percent per annum. About $17.7 million of the proceeds of the loan and credit would be relent to the Kilombero Sugar Company for 25 years, including five years grace, with interest at 9 percent per annum. The Government of the Netherlands and the Kingdom of Denmark are expected to make available US$11.0 million equivalent and US$17.3 million equivalent, respectively, to help finance the factory component of the Project. PART I - THE ECONO14Y General 2. The last full Economic Report on Tanzania (AE-26) was distributed to the Executive Directors on May 22 and June 22, 1972. This was followed by an Economic Updating Report (30-TA) which was distributed on December 11, 1972 and which was especially prepared for the East African Consultative Group meeting on Tanzania of January 1973. An agriculture rural development sector mission visited Tanzania during September/October 1573; its report is expected to be issued by September. A mission to study the industrial and mining sectors is scheduled to visit Tanzania in August 1974. 3. Tanzania celebrated its first decade of independence in December 1971. In the past 11 years gross national product increased in real terms by some 65 percent to the present level of about $1.5 billion. During the same period, life expectancy at birth increased from 35 to 41 years, infant mortality declined fron 250 to 160 per thousand live births, maternal mortality declined from 4.7 to 2.7 per thousand deliveries, and the primary school enrolment rate increased from about 28 to 37 percent of the relevant age group. While this sample of economic and social indicators shows that significant progress has been made, it also gives sorde idea of the magnitude and  -2- difficulty of the development task facing the country. For example, while GNP grew at 4.7 percent per annum in real terms during these years, these gains were to a large extent offset by the growth of population, with the result that per capita income increased at only 2.2 percent per annum. Tanzania is one of the 25 least developed countries. 4. Tanzania has a one-party system which is embodied in the constitution. The party, TANU, is a well-organized mass party and is actively engaged at the grass roots in the promotion of popular involvement in the national development effort, and within the party democratic principles, are being strictly adhered to. In economic policy making, the long-term objective of social equality prevails over economic interests of minority groups; some progress towards reducing inequality of income distribution within the category of eraployed workers has been made, but large gaps continue to exist between urban and rural standards of living. Economic Performance and Resource Mobilization 5. Tanzania's economic performance in recent years has been characterized by high marginal savings, relatively low returns on investment, and rapid institutional change. The growth of production however, has been modest in most sectors, especially in agriculture. The combination of moderate production growth rates and a very ambitious investment program has led to severe pressure on resources. This pressure has been partly alleviated by steadily increasing external capital inflows and, until recently, by an improvement in the country's terms of trade. Although favorable world market prices for several of Tanzania's principal exports and the growing contribution for local project costs by foreign donors, had helped to build up external reserves equivalent to about three months, imports at the beginning of 1974, the recent rise in oil prices has drastically changed the situation. It is estimated that the foreign exchange cost of the oil price increase is in the region of $58 million per year. This compares with a net resource transfer from the World Bank Group of about $15 million per annum and a total net resource transfer of around $90 million per annum. The scope for cutting back on domestic oil consumption without reducing production is very limited. The combined effect of the oil price rise, the expected large food import requirement for the current year (partially due to the drought in the north of the country) and other relative price changes is expected to cause a significant drop in reserves during 1974. 6. It seems likely that special capital assistance will be required to prevent an acute foreign exchange crisis in 1975. At  -3- the invitation of the Government, a Bank mission has recently participated in a Presidential task force which assessed the effects of the oil crisis on Tanzania's balance of payments and which recommended an action program including a shift in investment priorities to more directly productive projects in agriculture and industry. Several bilateral donors, including Sweden, Canada, the Federal Republic of Germany and Yugoslavia, have already responded by increasing their aid commitments to Tanzania, but this may not be enough to meet the expected crisis during the next pew years. So far, Tanzania has not drawn on any of the IMF credit facilities, but this may soon become necessary. On June 27, 1974 the Government approached the Bank Group for a program loan to assist in the financing of a program of structural economic adjustments forming part of the Government's medium and longer term response to the oil crisis and several other significant recent relative price shifts. We are presently considering this application; an appraisal mission is due to leave shortly. 7. Until the recent completion of the Tanzanian portion of the Tan-Zam railway financed by the People's Republic of China, the country had been for a number of years Tanzania's principal source of foreign aid disbursements. A new $75 million bilateral aid agreement with China for the development of a Tanzanian iron and steel industry was signed earlier this year but it is likely to take some years before this major new commitment will begin to be disbursed as the iron and steel project is understood to be still in an early stage of preparation. Meanwhile, Sweden has become Tanzania's principal source of aid disbursements. After a pause of several years, the United Kingdom has recently resumed capital aid to Tanzania with an initial grant and a credit (together about $24 million) for rural development. In terms of outstanding commitments, the Bank Group is Tanzania's largest creditor followed by Sweden, Norway, Canada, Denmark, the Netherlands and the Federal Republic of Germany. Including a notional one-third share of the debt of the East African Community Oorporations, the IBRD is presently holding 14 percent of Tanzania's outstanding external debt and IDA 16 percentk; the IBRD share is expected to rise to about 20 percent in the next five years, and the IDA share to remain about the same. The share of debt service payments to the Bank is at present about 10 percent of total debt service payments; the corresponding share for IDA is about 2 percent. These two figures are projected to rise to about 20 percent and 3 percent, respectively, by 1980. Most capital aid to Tanzania is made availab'le on very favorable terms, and a declining share of the total is tied to procurement in the donor country. Supplier's credits have been kept to the minaimum. In addition to seeking as favorable a blend as poSsiTle and the minimum of tying, the Govern- ment has attempted to secure donors' agreement to simplify the procedures associated wi-c-f the use of cormitted aid. For example, Swedish assistance is now given within the terms of a frame agree- ment, which allows the Ciovernment to set its own priorities in the use  of SIDA funds and allows considerable flexibility in the switching of such finance between the various projects and programs. The overall deot service ratio has declined in recent years owing to buoyant export earnings; it is currently about five or six percent and is not expected to rise signiiicantly in the medium-term. In view of this low debt service ratio there is scope for a modest amount of lending to Tanzania on conventional terms, particularly if such lending is for export promoting or import substituting activities. 8. Tanzania!s high rate of investment during the last five years has not been reflected in high growth in production -- at least not as yet -- partly because there was a heavy bias towards social and economic infrastructure with long gestation periods. A substantial proportion of total investment has been undertaken to provide a viable alternative outlet to the sea to neighboring land- locked Zambia after Southern Rhodesia's ULilateral Declaration of Independence in 1965. Though basically designed to carry Zambian transit traffic, these investments will help to stimulate agricultural and industrial development in southern and western Tanzania. The budgetary position which has been adversely affected by sluggish economic growth in recent years coupled with high levels of development and recurrent expenditure, remains tight. In view of the already high marginal savings rate, the scope for additional taxation is limited. Even with a decline in the rate of investment, in the face of escalating fuel prices Tanzania will still require a continued capital inflow in excess of the foreign exchange component of high priority projects if it is to achieve its development targets. Financing of some local expenditures will therefore be justilied. 9. Financial discipline in the Regions, Central Government Ministries, and many state corporations remains a problem, probably because scarce accounting and auditing skills are now even more thinly spread. There is a general serious shortage of many pro- fessional skills. The situation has been aggravated by the departure of many Asians and the Government's reluctance to recruit abroad. However, this reiuctance is now diminishing as part of an effort to accelerate project preparation and implementation. 10. President Nyerere announced in October 1973 that the Govern- ment had decided to move the capital of Tanzania from Dar es Salaam to Dodoma. By moving tne capital city to the center of the country and so closer to the bulk of the rural population, it is expected that the Government will become more responsive to the needs of the rural sector. The Government presently plans to make the move over a ten- year period. No accurate estimates oI the total costs involved are yet available) but in view of the scarcity of investment resources in Tanzania, it is likely th.at the transfer of the capital wflll take much longer than planned. in addition, the numboer of Government offices  moved may be fewer than is presently envisaged. 11. The administrative structure and many of the functions of Government were decentralized to the Regions in July 1972. This too was done to make the Government more responsive to the needs of rural development. It is still far too early to assess the success of this decentralization. As expected, problems of coordination between the center and the Regions have occurred, and the transfer of high- ranking officials from Dar es Salaam to the rural areas has had its inevitable, but one hopes only short-term, effect on the smooth functioning of Central Government. Some dislocation in project implementation has also been experienced. In some Regions the new Government structure is already showing its potential to be more responsive and relevant to the needs of the rural sector. It has become apparent that the severe shortage of regional technical expertise will inhibit the ability of the new decentralized authorities to plan and execute rural projects; progress in regional development will, therefore, inevitably be patchy, reflecting the local availability of the required expertise. PART II - BANK GROUP OPERATIONS IN TANZANIA 12. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1963, 16 credits and four Bank loans amounting to $206.6 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of nine loans, totalling $229.8 million which have been extended for the development of common services operated regionally by Tanzania, Kenya and Uganda through their association in the East African Community. The only IFC investment in Tanzania to date, totalling $4.7 million, was made in the Kilombero Sugar Company in 1960 and 1964. In 1969, IFC and other investors sold their interest in the Company to the Government (para.35 below). Annex II contains summary statements of Bank loans and IDA credits in Tanzania and the East African Community Organiza- tions as of June 30, 1974 and notes on the execution of ongoing projectso 13. Our lending program, reflecting the emphasis the Tanzanian Government is placing on agricultural development, has increasingly focused on directly productive activities in the rural sector. Up to the end of FY72, 10 out of 14 loans and credits have been made for infrastructure. All but one of the loans to the East African Community Organizations, of wnich Tanzania is a beneficiary and co-guarantor,  -6- have been extended for improvements in transportation and communications. However, the approval by the Executive Directors of the Flue-Cured Tobacco Project (Credit No. 217-TA), in October 1970 opened a new phase in our lending for more directly productive activities. The Smallholder Tea Development Project (Credit No. 287-TA) and a Second Livestock Project (Credit No. 382-TA) were approved in March 1972 and in April 1973, respectively. A Cotton Development Project (Credit No. 454-TA) and a Cashewnut Development Project were approved earlier this year. The Kigoma Integrated Rural Development Project is scheduled for Board consideration on August 6, 1974. Preparation for a proposed dairy project, a second rural development project and a forestry project are underway. Possibilities for developing sisal and soya bean development projects are currently being explored. 14. Tanzania is developing an institutional structure, stressing greater regionalization and development of ujamaa villages, designed to promote and respond to development initiatives. These institutions are still in their formative stages, and related organizational and staffing difficulties have sometimes resulted in the project delays referred to in Annex II. Tanzania's education and training programs are expected to solve the manpower problem in the longer run, but meanwhile there will continue to be a need for technical assistance in planning and implementation if the difficulties in executing projects are to be overcome. The Government has taken steps to speed up recruitment of needed expatriate technical expertise and instituted a high level monthly review for all externally aided projects. In addition, we hope to intensify, through our supervision missions, assistance in project implementation. As a result of these efforts, it is expected that project implementation should now improve. 15. Our Regional Mission in East Africa was involved in the preparation of six projects in the agricultural sector. Our capacity to provide such assistance has proved to be particularly valuable in a country where project preparation capacity is, and for some time will be, limited. We are also exploring with the Government how assistance of this kind can be strengthened and best fitted to Tanzania. Through participation in their projects we have supported Tanzania's new development institutions at an early stage. Our supervision of the projects has resulted in bringing to light, earlier than might have happened otherwise, that some of these institutions are facing significant difficulty in executing the projects they have undertaken. Because of our involvement, we have been able to help the Government in its consideration of how to overcome this problem whose solution is fundamental to rapid development.  -7- 16. The urban Sites and Services Project (Credit No. 495 TA) approved in July 1974 marked the Bank Group's first lending to Tanzania for urban development. The Credit for the Tanzania Investment Bank (Credit No. 460 TA) approved in February 1974 was the Bank Group's first lending in the industrial sector in Tanzania. Proposed projects for textile development and the development of an industrial estate are presently under preparation. Other projects outside the agricultural sector include a proposed highway maintenance project scheduled for Board consideration on August 6, 1974. A water supply project is under preparation. In view of the overall balance of payments and related difficulties presently being faced by Tanzania (paras. 5, 7 and 8 above) consideration is being given to a program loan. 17. Although no projects are planned in the near future for the Common Services Organizations of the East African Community, the Bank, through its supervision of ongoing operations, is continually reviewing possible further assistance to the Community Corporations for the further development of common services. Recently, however, three of the Cammunity Corporations have been delinquent in making debt service payments to the Bank. The East African Harbours Corporation (EAHC) has not met payments amounting to $459,215 due on June 15 under Loan No. 638 EA, the East African Posts and Telecommunications Corporation (EAPTC) payments amounting to $371,250 due on June 15 under Loan No. 675 EA and $260,130 due on July 1 under Loan 914 EA, and the East African Railways Corporation (EARC) payment amounting to $1,037,059 due on July 15 under Loan No. 110 EA. The Railways have for some time now been facing financial and operational problems which include an inadequate tariff structure, inefficient use of rolling stock and differences between the Partner States on how the railways should be managed. In the case of EAPTC and EAHC, the recent delinquency is primarily due to problems between the Partner States which had prevented the two Corporations from transferring surplus funds earned in one country to the corporate headquarters located in another country. Except for this difficulty, both Corporations are financially sound and do not lack the domestic resources to meet their debt service obligations to the Bank. 18. The Bank has pressed all tihree Corporations and the Partner States for payment of their obligations. The Partner States are vevy much alive to these problems and the Finance Ministers of the three Partner States met on July 19, 1974 to discuss these matters. The  -0- Bank has been informed by the Minister of Finance of Kenya that decisions were taken to allow immediate payment of debt service dues under Loans 638 EA, 675 EA and 914 EA, as well as to provide funds to meet the cash requirements of the Railways including its debt service payments. In addition, a high level meeting attended by the Ministers of Finance and Communications of the Partner States and the Community and by senior representatives of the Bank was held in Nairobi on July 29, 1974. At this meeting, the immediate and longer term problems of the Railways and the other Community Corporations was discussed and agreement was reached on a number of important steps towards their resolution. PART III - THE AGRICULTURAL SECTOR General Background 19. Agriculture and related activities constitute the largest single sector in the Tanzanian economy. Roughly 40 percent of GDP is derived from the sectcr of which 50 percent constitutes subsistence production. Agricultural exports, which account for 80 percent of total exports, include mainly sisal, cotton, cashew and coffee. About 9h percent of the population live in rural areas, usually in small isolated communities and 90 percent of the economically active people are engaged in agriculture. 20. Most production is from smallholdings using family labor. Large-scale agriculture is represented by a small number of private estates and some state farms producing sisal, coffee, tea and wheat, and state farms, mainly producing wheat, rice, sisal and livestock. Estate production has diminished in importance and the state farm program remains small. Tanzania's national herd, the second largest in Africa, is grazed extensively over the 40 percent of the country which is free from tsetse fly infestation. It is largely managed along traditional lines. There is limited use of oxen for cultivation, mainly in the western cotton areas. In years of normal rainfall, Tanzania is largely se_f-sufficient in staples, but about 9 percent of total imports in 197, were foods among which maize was a major  -9- item because of a shortfall in local production caused by sub-normal rainfall in the north of the country. Food imports in 1974 are expected to rise to over 20 percent of total imports owing to a continuation of drought conditions during the early part of the year. Agricultural Development Strategy 21. The Government recognizes that agriculture will continue to be the main source of employment for a long time and has been trying to devise a strategy which will bring about improvement in output, incomes, and the living conditions of the agricultural population. The policy for agricultural and rural development which has emerged from these deliberations has been adopted as a central part of Tanzania's second Five-Year Plan. 22. The major aim of the Plan is to make significant progress towards socialist organization of rural activity, based on ujamaa cooperatives and maximization of the use of labor. State farms fill a need for larger scale production units, but the approach to mechaniza- tion is to be cautious and in general based on proven viability. A similar caution is expressed toward irrigation development. Agri- cultural production is to be increased within a framework of crop priorities based on production possibilities, market prospects, and a desire for increased self-sufficiency. High priority is given to raising nutritional standards in the country, and to the expansion of selected export activities including cotton, livestock, flue-cured tobacco, and cashewnuts, all of which are already being assisted by the Bank Group. A vigorous policy for the development of vertically integrated single crop authorities, dealing with all aspects of production, processing and marketing, is being pursued with cooperatives playing a central role. 23. Several other types of farming and commodities also have scope for expansion. These include dairying, horticultural production, pyrethrum, oilseeds and forestry products. Projects designed to develop some of these are in various stages of preparation. 24. Tanzania has had some success in formulating and implementing the single crop development programs mentioned in paragraphs 20 and 21 above. However, they have typically involved relatively high cost per farmer, and have affected only a small proportion of the rural population even when developed along labor intensive lines. Tanzania has recognized these shortcomings and is attempting to design and plan broader based rural development projects. Our Regional Mission in Eastern Africa has been assisting the Government in this effort and helped to design and prepare such a project in Kigoma region in  -10- western Tanzania. This region has considerable potential but has so far been bypassed by more traditional development programs. 25. The Government of Tanzania uses price regulation both as an allocation mechanism and as an instrument to achieve its welfare goals. However, some relative prices, particularly in the agricultural sector have been kept too low and distortions in the market have occurred. In some cases, supply has been depressed and farmers have been reluactant to invest in particular activities. The Government has become increasingly aware of these issues and recently significantly increased some producer prices (on beef, wheat and maize, for example) to stimulate production. 26. As Bank Group involvement in the agricultural sector has grown, Bank staff have participated in a continuing dialogue with the Tanzanian Government over agricultural potentialities, priorities, and policies. As part of this effort, an agriculture sector survey mission visited Tanzania in October 1973 and its report is expected to be finalized next month for distribution in September. Technical Services 27. Research presently being carried out in Tanzania is generally of a good standard although some strengthening in particular areas is needed. However, there is a gap between research and its application at farm level. About 2,500 field staff in Tanzania are engaged in field work associated with crop production. Owing to its inadequate dissemination of new techniques, limited material, poor logistic support and the fact that staff have been spread too thinly, the extension services have been rather ineffective in introducing improved techniques to farmers except when organized along project lines. In designing new programs, care is now being taken that these shortfalls of the past will be avoided. he Sugar Industry General 28 . Tanzania's sugar is grown on four estates which are all small1 by international standards. The estates are located near Moshi in the north of the country, at Kagera which is west of Lake Victoria and at Mtibwa and Kilombero in Morogoro region in east central Tanzania. Production of these estates amounts to nearly 90,000 metric tons per annum which is close to their full capacity.  -11- 29. Up to 1968, Tanzania had bceen self-sufficient in sugar; however, consumption, which is still onily 10 kg per liead a year compared to 16.6 kg for Kenya and ove3r 50 kg for the USA, has increased rapidly in recent ye,trs. As a result of the_e increases in denand, Tanzania is currently importing about 50,000 metr-:.c tons a year or 37 percent of domestic consumption. These deman-d trends, which are in part attributed- to income growth, a more equivable income distribution, urbanization and increased industrial use are expected to continue, althoagh at a reduced rate, for the foreseeable future. Devulopment Strategy 30. In keeping with the country's overall policy of self-re'.iance, Tanzania ains to regain and subsequently maintain self-sufficiency in sugar pro2uction. The Government is planning to reach thi.s target by 1)81 b-y im- ple:.enting expansion plans for Kilombero, Kagera and Y'tibwa sugar estates. While ti-ese prod'uction targets are to be met primarily by the exparnsion of estate production, it is the Covernment's policy to encourage the dsevelopment of outgrowers, usually in the form of ujamaa cooper-atives or District Devl.op- ment Corporations (enterprises owned and operated '-y distr-ict administrations). Howev-r, the policy in this regard is pragmatic. If, in practice, the promo- tion of such small-scaLe ente-rprises wc,uld delay sugar expansion plans for individual estates, and hence prolong the :Leed to '.mport sugar, then greater e.!iphasis is givein to the estates themselves. Sugar Devulopment Corporation (SDC) 31. In order to give added impetus to the Goverrnment's expansion plans for the sector, a Sugar Development Corporation (SDC), wi.th powers to develop the sugar industry, to engage in sugar growing, prDcessing and marketing; and tc manage the affairs of its subsidiar-y sugar companies in which it holds a controlling interest, was established in February 1974. Equity holdings pre- v..ously held by t-e Nati-onal Food and Agriculture Corporation in the :Kiombero Sugar Compaoy (KSC), M4tibwa and :Kager- estates have 'seen transferred to t'ne new Corporation. Initially SDC is expeoted to concentrate its efforts on developing a-nd implementing sugar production devclopmerit plans. It is expected that 6sL will eventually take over the functions of the National Sugar Board which is responsible for controlling and regulating the -rod;3ction and markeilng of sugar in the mainland and for handling imports. Price Policy 32. Sugar price^- are !rontrolled by the Gover.ment at the factory, w'.ole- sale and r-tall levels. Ex-factory prices are assessed for individu-: plants and are ')ased on the need. of each enterprise to cover all operating costs, service a.ll debt and earri a reasonable return on investment. Although the exact deteruination of' the ex-factory iprice h_s caused difficultie: in the past, tho.t overime:t's position in this regard is much more flexible and pragmatic thai it was at the time IFC and other invest<,r. relinquishe_ their holdings in fSC (para. 35 below) . Uniform wholesa.Le a.nd re--tail prices a-re set for '32 depots although the retail selling price may be ad`uste' for transpor, costs 'ro:s the neares;t de,.t. The presen-t reta,sl price of  -12- TSh 3.0/kg (US$0.42) is in line with international prices and involves no element of subsidy. It covers all costs of domestic production, meets the full cost of imports and allows for a reserve for future development to be built up. Sugar Research 33. Sugar research in East Africa is coordinated by the East Africa Agriculture and Forestry Research Organization (EAAFRO). The main EAAFRO sugar research station, responsible for the introduction of foreign varieties and breeding, is at Kibaha in Tanzania. National research is the respon- sibility of the Ministry of Agriculture but only limited selection and variety trial work has been carried out on its research station at Katrin. Most essential research has been carried out on sugar estates. There is a need to improve overall coordination. Kilombero Sugar Company (KSC) 34. The Kilombero Sugar estate is located in the Kilombero Valley, in Kilosa District, Morogoro Region (see map). It is linked to Dar es Salaam by railway and an all weather road. The estate, which is the newest of Tanzania's sugar enterprises, began production in 1962. It is now operating at full capacity and producing about 43,000 metric tons of sugar per year. Some 33 percent (140,000 tons) of the cane is provided by outgrowers. 35. IFC made two investments in KSC which supported the original development of the estate and factory of 20,000 tons and its later expansion to 31,500 tons (subsequent developments have raised its capacity to 43,000 tons). The first investment, approved in February 1960, and the second approved in March 1964 totalled the equivalent of $4.7 million or 36 percent of the Company's capital. IFC's principal investment partners were the Commonwealth Development Corporation (CDC) and the Netherlands Overseas Finance Corporation (NOFC). The principal investors sold their interest in the Company to the Tanzanian Government in early 1969. This development followed a decision by the Government to reduce the assured ex-factory price of sugar from a level which it regarded as including a subsidy to KSC. The investors, however, notified the Government that, in their view, the Company could not be viable at the revised sugar price and felt that the higher price was a fair price for an efficient operation. The Government indicated that it would be receptive to an offer by the investors to sell their interests to the Government and mutually acceptable terms of sale were negotiated and agreements concluded. 36. The Company in fact experienced considerable problems in its development and earned a profit in only two of the first seven years in operation. A previously unknown cane disorder "yellow wilt" had depressed cane yields and was only eradicated after drainage improvements were affected and new cane varieties introduced. On the management side, poor cost control and inadequate tractor maintenance were also problems. However, following the conclusion of a management agency agreement with HVA International (a Netherlands company with considerable experience in sugar production in developing countries) in 1965 these difficulties have been overcome. Except 'or a set-back in 1972, when a newly  -13- installed diffuser in the factory led to excessive down-time, KSC's operations have been reasonably efficient. PART IV - THE PROJECT 37. An Appraisal Report entitled "Kilombero Sugar Project - Tanzania" (No. 466a-TA) is being distributed separately. A Loan/Credit and Project Summary is provided as Annex III to this Report. 38. The project, prepared with the help of HVA International and the Regional Mission in Eastern Africa, was appraised in the field in November/ December 1973. Negotiations for the proposed loan and credit were held in Washington in June 1974. The Tanzanian delegation was headed by Mr. R. Korosso, Director of External Finance, Ministry of Finance. 39. The proposed project would be in two parts. Part I would support the development of a new sugar estate and outgrowers land adjacent to the existing sugar estate (see map), and Part II would support the construction of a new factory and related facilities. The project would, by 1982, in- crease KSC's annual production of refined sugar by 45,000 metric tons. Part I of the project would comprise the development of a partly irrigated 7,300 acres sugar estate, the development of 4,600 acres of rainfed lands for outgrowers, and the provision of staff housing, water supply, power transmission equipment, community facilities including a school and health facilities, a rail link and training and research. In addition, a country- wide sugar survey to identify and prepare future projects would also be supported. Part II of the project would include the erection of a sugar factory and ancillary facilities capable of handling 2,400 metric tons of cane per day and the provision of supervision for its construction. Part I would be financed by the Bank/IDA and Part II by Dutch-Danish bilateral assistance. Costs 40. The total cost of the project, including estimated duties and taxes of less than US$200,000, is estimated at US$55.8 million. Part I of the project is estimated to cost US$23 million; all land development and asso- ciated costs, excluding contingencies, are expected to total $9.l4 million, other civil works, and related equipment excluding contingencies, are expected to total $3.3 million, the sugar survey, research and training are expected to amount to $1.2 million excluding contingencies. Price contin- gencies of $7.5 million and physical contingencies of $1.6 million have been included in the cost estimates. The large component for price escalation is explained by the fact that it is thought prudent to allow for cumulative  -14- price increases averaging about 12 percent per annum over the project period and because project investments for Part I of the project would be phased over the whole development period rather than being concen- trated in the early years. For Part II of the project, costs of the factory and ancillary buildings are expected to total $31.8 million equivalent and the contract for the supervision of construction is expected to be about $1.0 million equivalent. The cost of the factory includes an allowance of US$300,000 for contingencies for freight and insurance; no other contingencies are included as, with the exception of these items, the contract for the factory, which has already been awarded, has a fixed price (para 47 below). Financing Plan 41. External sources would finance the estimated foreign exchange costs of $43.7 million (78 percent) of the project as well as $2.6 million equivalent of local costs (5 percent of total costs). The Government and KSC would contribute an estimated $9.5 million (17 per- cent of total costs) towards the local costs of the project. Bank Group funds would finance only Part I of the project. The proposed IDA credit of $9.0 million and Bank loan of $9.0 million would finance the total estimated foreign exchange costs of $15.4 million (67 percent of the cost of Part I) as well as $2.6 million equivalent of local costs (11 percent of the cost of Part I) of the project. The foreign costs of Part II of the project (83 percent of the cost of Part II) will be supported by a Dutch contribution of f. 31 million ($11.0 million) and a Danish contribution of DKr 103 million ($17.3 million). Receipt by the Bank of official confirmation of these commitments is a condition of loan and credit effectiveness. The Dutch finance is being made available to Tanzania on IDA terms. The Danish contribution represents DKr 25 million of the proceeds of a loan to Tanzania of DKr 40 million made in 1971, a loan of DKr 35 million made in March 1974 and part of the proceeds of a loan of DKr 60 million to be made later. The first loan was made for 25 years including seven years grace and bears no interest; the subsequent loans have been made for 35 years including 10 years grace and likewise bear no interest. 42. Approximately $17.7 million of the proceeds of the proposed loan and credit would be onlent to the Kilombero Sugar Company by the Government of Tanzania at 9 percent per annum for 25 years including a five year grace period. This rate reflects the commercial cost of long-term capital for the agro-industrial sector in Tanzania. The conclusion of a Subsidiary Loan Agreement between the Government and KSC would be a condition of credit and loan effectiveness (Section 6.01 of the draft Loan Agreement and Section 5.01(b) of the draft Credit Agreement). The remaining $300,000 of the loan and credit would be made available by the Government to the Sugar  -15- Development Corporation in the form of a grant for the purposes of conducting the sugar survey (para 39). In order to ensure a sound financial structure for KSC, not less than 30 percent and not more than 50 percent of the total finance provided for the project from all sources would be passed on to KSC in the form of equity (Section 3.04(b) of the draft Development Credit Agreement) to be held by the Sugar Development Corporation. Organization and Execution 43. The Kilombero Sugar Company would be the principal project executing agency. The new factory and estate would be operated as an integral part of KSC with senior administrative factory and agricul- tural posts being common to both factories and estates. The expansion of KSC resulting from the project would require the creation of about 26 new management posts of which 12 are initially expected to be filled by expatriates. The Kilombero Sugar Company is expected to renew its management contract with HVA International in the near future. The conclusion of an agreement with managing agents would be a condition of effectiveness of the proposed loan and credit (Section 6.01 of the draft Loan Agreement and Section 5.01(d) of the draft Develop- ment Credit Agreement). Despite the training programs which will be supported by the project, expatriate assistance to KSC will be required for some considerable time. KSC would therefore seek the agreement of the Bank Group to the terms and conditions of any new managing agency agreement when the agreement currently being negotiated expires (expected to be in 1977) (Section 3.05(c) of the draft Project Agreement). 44. In addition to being responsible for the estate development program, KSC's Agricultural Services Division would also supervise outgrowers' activities. Outgrowers would include the Kilosa District Development Corporation, a commercial enterprise owned and operated by Kilosa District, three ujamaa villages, two estates and about 120 smallholders. Owing to uncertainties concerning the rate of outgrower recruitment, and in order that any such recruitment delays should not adversely affect supplies of cane available to the factory, KSC would be responsible for initial development of all land (estate and outgrowers) at least up to the first planting. KSC would continue to operate the land designated for outgrowers until such outgrowers are ready to take over the land (about 40 percent of the total). The full cost of development, including interest, and subsequent services for outgrowers carried out by KSC would be recovered by the Kilombero Sugar Company (Section 3.06(a) of the draft Project Agreement). The larger outgrowers are expected to operate their own cane transport services; KSC would provide these services at cost to the other outgrowers. In order to assure  adequate production incentives to outgrowers, KSC has agreed to adjust the price paid to outgrowers from time to time to maintain such incentives (Section 3.06(b) of the draft Project Agreement). The survey which would identify possible future sugar development projects and prepare selected feasibility studies would be carried out by consultants employed by the Tanzania Sugar Development Corporation. Training and Research 45. In order to ensure the long-term sound operation of the project and to help provide for the eventual localization of all staff operating in KSC, the present training program would be considerably upgraded under the project. On-the-job training supplemented by compulsory work time classes would be instituted for field and factory staff. In addition, support for training of senior and potential senior staff both in Tanzania and overseas would be provided. A full-time trainer, appointed after consultation with the Bank Group, would be recruited (Section 3.05(b) of the draft Project Agreement). He would prepare training curricula and supervise senior and supervisory staff responsible for training. In order that KSC can continue to improve its agricultural performance, provision for two additional qualified agronomists and supporting staff and equipment has been included in the proposed project. Procurement 46. For Part I of the project, the procurement arrangements would be in accordance with the following procedures. Vehicles and related equipment for KSC to carry out estate development and cons- truction of the estate roads and the railbed, vehicles for cane transport and administrative services, irrigation equipment, water supply equipment and power transmission equipment totalling $7.4 million (excluding contingencies) would be by international competitive bidding in accordance with the Bank's guidelines. In evaluating bids, local manufacturers would be allowed a preferential margin of 15 percent or the existing rate of import duties, whichever is the lower. Construc- tion of offices, staff houses and other civil works totalling $2.3 million, would be carried out by contractors following international competitive bidding. However, in order to avoid unnecessary delays, contracts and items of equipment not suitable for bulk procurement would be purchased in accordance with the Government's normal procure- ment procedures in cases where such contracts or items are worth less than US$30,000 (para A3 of the Schedule to the draft Project Agreement). Water supply and power transmission equipment is expected to be installed by KSCe In evaluating bids, local civil works contractors would be allowed a 7-1/2 percent preference (para Cl of the Schedule to the draft Project Agreement). The railway line would be procured and laid by East  -17- African Railways (EARC). EARC is the only supplier of these services in East Africa and the contract is too small to be attractive to international bidders. Consultants to carry out the sugar development survey (para 39 above) would be appointed in accordance with the Bank's guidelines. 47. Under Part II of the project, the factory and ancillary facilities ($31.8 million) would be provided under a turnkey contract signed on April 5, 1974 between the Kilombero Sugar Company and a consortium of Dutch and Danish manufacturers. Supervision of cons- truction ($1.0 million) would be carried out by HVA International under a separate contract with KSC. Disbursements 48. A schedule of estimated disbursements from the proposed Bank loan and IDA credit is included in Annex III. The IDA credit would be disbursed first. The Bank Group would cover 100 percent of foreign expenditures or 85 percent of local expenditures for land clearing and preparation equipment, other tractors, trailers and vehicles, irrigation, potable water supply equipment, power transmission equipment, furniture and equipment for non-factory buildings. It would cover 75 percent of ex- penditures for the civil works including land preparation and 100 percent of foreign expenditures or 75 percent of local expenditures for research and training personnel, training and consulting services for the sugar survey. In order not to delay the start-up of the factory, preliminary work on land clearing and development, access roads, railbed preparation and site clearing has already begun. To help finance these costs, up to $700,000 of eligible expenditures incurred since May 1974, would be financed retroactively (para 4 of Schedule 1 to the draft Development Credit Agreement). 49. Proceeds of the Dutch and Danish loans for Part II of the project would be disbursed in accordance with the contract signed for the construction of these works (para 47 above). Prices 50. As already mentioned, the present retail price of sugar in Tanzania of $0.42 per kilo is in line with world prices. To ensure that future distortions do not occur and to avoid undue pressure on the balance of payments, the Government has agreed to review retail prices regularly in the light of such factors as production costs and import prices (Section 3.05(b), draft Development Credit Agreement).  -18- To ensure that the Kilombero Sugar Company can continue to operate as a viable entity and along commercial lines, the Government has agreed that it would set the controlled ex-factory price (para. 32 above) at a level sufficient to enable the Company, operating at a reasonable level of efficiency,to earn a return of about 9 percent per annum on all capital employed to reflect the economic cost of that capital (Section 3.05(a), draft Development Credit Agreement). Benefits 51. The project would provide at full development, expected to be in 1980, an additional 45,000 metric tons of refined sugar per year. The project, by substituting for imports, would provide an annual net foreign exchange benefit to Tanzania of almost US$14.0 million. The economic rate of return is estimated at 13 percent over 20 years. Outgrower ujamaa farm families would earn an average annual net farm income, including subsistence, of around US$275 from the second year and around US$725 after about six years when the full development costs are paid off. This compares to the current average agricultural family income, including subsistence, of about US$215 in Tanzania. From 1978/79 on the Government's net cash inflow from the project would amount to over US$5 million per year. The health and educational facilities to be constructed on the estate would provide additional benefits to employees and their families. The results of the sugar survey are expected to establish a sound basis for the further development of Tanzania's sugar industry in the 1980s. PART V - LEGAL INSTRUMENTS AND AUTHORITY 52. The draft Loan Agreement between the United Republic of Tanzania and the Bank, the draft Credit Agreement between the United Republic of Tanzania and the Association, the draft Project Agreement between the Bank, the Association and Kilombero Sugar Company, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, the Report d the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association and the text of a resolution approving the proposed loan and credit are being distributed to the Executive Directors separately.  -19- 53. The conclusion of a Subsidiary Loan Agreement between the Government and KSC, a new managing agency agreement for KSC, and official confirmation of firm Dutch and Danish Government commitments to provide the equivalent of US$11.0 million and US$17.3 million, respectively, for the financing of Part II of the project would be conditions of credit and loan effectiveness (Section 6.01 of the Loan Agreement and Section 5.01(b), (c), and (d) of the Credit Agreement). 54. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and the Association. PART VI - RECCMMENDATION 55. I recommend that the Executive Directors approve the proposed loan and proposed credit. Robert S. McNamara President Attachments Washington, D. C. July 31, 1974   AM=E I Page I of 3 pages COUNTRY DATA - TANZANIA AREA P~~~~~~~~~~OPULATION DENITY 94.5,007 kmn 7 T6 t l;ion (mid-1071) lb Per Ion 14V Per ko,Zof arable land SOCIAL !VDICATORS Reference Countries Tanzania Niqa r1eria [J.K. ON? PER CAPITA US$ (ATLAS BASIS) /I Ih) iSO 120 2,2,0) IENSRAP1IIC Crude biryth rate (per thousand) 46IL 1 85 Crude death rate (per thousand) 25 21 VI 21 33 Infant mortality rate (per thousan.d live births) 225 160-165/. 150-1 75 1) / Life expectancy at birth (years) 38 /a 01 49 37 72 Gross reproduction rate /2 .3.2 3.3 3.3 1.3 Population growth ratea 2.2 2./ 3.3 2.5 O. 6 Population growth rAte - rban ..7 6' /ea-! 5 0.5 Age structure (percenit) 12 ' 0-lb h2//1 ~ '.5 21, 15-61 16 O 53 51 53 6,3 65 and over 27? b 3 2 2 13 De'vendancy ratio /, 0 I7 ~ 1.lL& 1.2/h 1.2 0. 9 Ulrban population as percent of total 1.6 /c 9 /