Tanzania - Investment Bank Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 283a-TA APPRAISAL OF THE TANZANIA INVESTMENT BANK January 14, 1974 Development Finance Companies Department 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 It may not be published, quoted or cited without Bank Group authorization.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.  CIMRUCY EQTTIVALENTS Currency Unit = Tanzania Shilling (Tsh) S$ 1 -Th 6.90 Tsh 1 = - S$ 0.145 FISCAL YEFR July 1 - June 30  TANZANIA INVESTMENT BANK Table of Contents Page No. i BASIC DATA .............. i I. INTRODUCTION o........................ 1 II. ENVIRONMENT .......... . . . ... ..... . .... . o.. . 1 The Manufacturing Sector. 1 Government Industrial Policy.......... 2 Institutions Involved in Industrial Management and Investment.. 3 Institutions for Financing of Industryu... ..........5 National Investment Targets.................. 6 sIII. THE INSTITIJ'rION ............................ oo.....* 6 Charter,.*.*.... ............. ....,,, , ....... . 6 1policies ......o....... , ........., ... 8 Interest Rates and Foreign Exchange Risk s . 8 Umbrella Agreement ..................8 IV. ORGANIZATION, STAFFING AND PROCEDURES ........... o........ 8 Board ......... . 8 Ma nagementr.... *9 ...................... *..- ...... 9 Organization and Staffing. ............. ........... . .. 9 Procedures.....o........ ............ 11 V. RESOURCES, OPERATIONS, PORTFOLIO AND FINANCIAL CONDITION 11 Resourcea s........ .*.*......*...** ... 0 ............. 11 Opertiosoi..... 12 NBC Portfolio ..................... o .. 12 Financial Reesults.......... ..... ......O..*... -... 13 Financial Position ............... .3 ......... . 13 VI. PROSPECTS eee..ee ..... .... o.*....o........ o............... 14 TIB's Projections ... ....*..... $...0........ ..O*............... 14 Foreign Resources ........ ...... ......... ........ 14 Domestic Resources ..... . . ...... .. ............ 15 Projected Income and Profiiability . ....... 16 Projected Balance Sheets.. ........... ... .. 16 VII. CONCLUSIONS AND RECOMMENDATIONS..o ........ ....... 16 This report was prepared by Messrs. Andre Nespoulous-Neuville and Pieter Bulters on the basis of their mission to Tanzania in May 1973,   LIST OF ANNEXES 1. TIBts Investment and Financial Policies 2. Board of Directors 3. Organization Chart 4. Schedule of Foreign Resources as of June 30, 1973 5. Summary of Operations 1971-1973 6. List of Loans Approved as of June 30, 1973 7. Analysis of Loans Approved as of June 30, 1973 8. List of Equity Investments Approved as of June 30, 1973 9. Analysis of NBC Portfolio 10. Income Statements 1971-1973 11. Balance Sheets 1971-1973 12. Operational and Financial Forecasts (1974-1978) 12-1. Projection Assumptions 12-2. Forecast of Operations 1974-1978 12-3. Projected Income Statements 1974-1978 12-4. Projected Balance Sheets 1974-1978 12-5. Projected Cash Flow Statements 1974-1978 13. List of Selected Projects Requiring TIB Financing 14. Actual and Projected Financial Ratios 1971-1978 15. Estimated Disbursement Schedule for Proposed Credit   - i - TANZANIA INVESTMENT BANK BASIC DATA Exchange Rate: US$1 = Tsh 6.9 Date of Establishment: November 1970 Ownership (as of June 30, 1273): (Tsh million) Amount Percentage Government of Tanzania 30 60 National Bank of Commerce 15 30 National Insurance Corporation 5 10 50 100 Resources Position (as of June 30, 1973): Domestic Currency Foreign Currency Amounts in Tsh million Equity 1/ 53.2 Foreign lines of credit-, - 76.6 Total resources 53.2 77.7 Net fixed assets 1.5 Loans outstanding 6.9 11.1 Equity investments 1.2 .6 Undisbursed loan commitmont 11.4 19.7 Undisbursed equity commitment - 1.9 Total commitments 21.0 33.3 Resources available for commitment 32.2 4,.3 TJncommitted approvals 12.7 31.4 1/ cxcludes tied and partly-tied foreign credits unless allocated to approved projects.  Approvals (Tsh million): /1 Year ending June 30 1971 1972 1973 Loans 7.5 34.6 52.9 Equity investments - 1.2 3.4 7.5 35.8 56.3 Commitments (Tsh million): Loans - 16.6 33.3 Equity investments - 1.0 1.7 - 17.6 35.0 Disbursements (Tsh million): Loans - 9.1 9.6 Equity investments - 1.0 0.8 - 10.1 10.4 Operating Results (Tsh '000) Profit before taxes 1,385 2,083 1,893 Profit after taxes 839 1,223 1,136 Profit after taxes as percentage 2.7 2.4 2.2 of average net worth (annual basis) Financial Position (Tsh million): Net worth 50.8 52.0 53.2 Total assets 145.4 134.4 129.0 Debt/equity ratio 1.9:1 1.6:1 1.4:1 Interest fates and Other Charges Interest rates on loans: Normally 8-1/2%; maximum 9-1/2%; the lowest rate charged on any loan to date is 7%. Commitment charges : 1% Guarantee fee : 1/2% - 2-1/2% /1 7-1/2 months only  - iii - SUMMARY i. The Government established the Tanzanian Investment Bank (TIB) in 1970 to finance public and private productive enterprises. TIB's operations have increased rapidly and TIB is now the major medium and long term financing institution in Tanzania. ii. * -The manufacturing sector still accounts for only 10% of GNP but is increasing in importance. Most of the industrial capacity and new industrial investments are in the public sector and TIB has extended its assistance mainly to parastatal enterprises. iii. Most of TIB's assistance is in the form of loans but the Associa- tion has recommended that TIB should be allowed to invest more in equity investments. The Government and TIB have agreed that they will seek an in- crease in the limit on TIB's total equity investments, which is 10% of TIB's net worth at present. Besides TIB, two other institutions provide medium- and long-term financing for productive enterprises in Tanzania. The East African Development Bank (EADB), which has a World Bank loan, can lend 38.75% of its funds to industrial projects in Tanzania, buit is excluded by its charter from financing tourism, transportation and commercial agriculture. The Tanganyika Development Finance Company (TDFL), which is owned in equal parts by TIB and three foreign agencies, has been active in project promo- tion as well as financing. In the past TDFL has limited its activities to private projects but in the future it can and will also finance parastatal projects. The Government restricted TDFL recently to the financing of projects with total assets of less than Tsh 4 million. iv. TIB's Board, which is nominated entirely by the Government, includes many high ranking Government officials. TIB's Chairman and Man- aging Director is the Chief Execuitive. TIB has a good staff at present and TIB's appraisals are comprehensive. The quality of TIB's future staff will depend to a large extent on the way TIB will replace the senior staff leaving during the next half year. Adequate replacement of the Director of Opera- tions is especially important. TIB has organized training programs for its Tanzanian staff. They have good potential and as they gain experience they should provide a good base for the future. For some time TIB must continue to rely on expatriate assistance. TIB's staff is large and should, as they gain experience, be able to handle an increase in operations. V. TIB's approvals have increased to Tsh 56 million ($8 million) in the year ended June 30, 1973, bringing total approvals since inception to Tsh 99 million. As of June 30, 1973, disbursements totalled Tsh 20 million and repayments had started on only a few projects. It is thus too early to make post facto judgements on the quality of its portfolio.  - iv - vi. TIB's profits have been modest which is normal for a new insti- tution. TIB derives most of its income from the term loan portfolio that the National Bank of Commerce transferred to TIB shortly after TIB's establishment. TIB's financial condition is sound. Projections indi- cate that TIB's profits will remain modest. vii. TIB has obtained foreign resources, including untied foreign funds, from several sources. An IDA credit of $6 million is expected to cover TIB's foreign exchange gap through June 1976. viii. The Government will on-lend the proposed credit to TIB on terms normally applied to development finance campanies. During negotiations, TIB agreed to increase its minimum lending rate to 9% for TIB's ordinary opera- tions. An appropriate free limit would be $100,000 with an aggregate free limit of $1 million.  I. INTRODTJCTION 1.01 The Tanzania Investment Bank (TIB) was established in November 1970. The Government holds, directly and indirectly, the entire share capital of Tsh 50 million. The Tanzanian Government requested Bank Group assistance for TIB soon after its establishment. A mission which visited TIB in December 1971 made a number of recommendations to improve TIB's organization and operations but concluded that TIB did not need additional resources at that time. After a short updating visit in February 1973, the Bank concluded that TIB needed additional foreign resources and sent an appraisal mission in May 1973; this report is based on its findings. II. ENVIRONKENT The Manufacturing Sector 2.01 The manufacturing sector still accounts for only 10% of GDP but is increasing in importance. Industrial output increased by only 8% per annum during 1968-1970, but will probably grow more rapidly in the future because of increased investments in the recent past. Industrial invest- ments increased from Tsh 150 million (15% of total investments) in 1966 to Tsh 314 million (18% of total investments) in 1970, an average growth rate of 20% per annum. 2.02 Following the Arusha Declaration, the Government nationalized a great number of industrial enterprises. Most industrial capacity is now in the public sector, but the contribution of private firms remains sig- nificant. Accurate figures are not available, but according to rough estimates,the private sector still accounts for one third of industrial investment and output. The Dividends and Surpluses Act (see para. 2.10) has probably given a new impetus to investments by existing private enter- prises but will tend to discourage new foreign investors. 2.03 Although many of the nationalized enterprises have retained for- mer management, several companies experienced financial difficulties. For instance, in 1971, 15 of the 33 subsidiary and associated companies of the National Development Corporation, whose subsidiaries dominate the industrial sector (see para. 2.12),incurred losses and several others made only marginal profits. However, most of the larger ones made substantial profits (see para. 2.0h). Many industries suffered from disruptions in their markets or in the supply of raw materials and spare parts, due to import difficulties. Some of these disruptions have been attributed to operational problems within the State Trading Corporation (STC) which is directly responsible for a large portion of commodity imports and wholesale trade, and until 1972 was in charge of licensing private imports. Most of these problems are gradually being resolved, and the recent specialization and decentralization of STC and other state trading organizations should improve the efficiency of the trade sector.  - 2 - T } he manufacturing sector is dominated by a few large firms. In 1971, more than two-thirds of the total assets of NDC's subsidiary and associated companies in this sector belonged to only seven firms: a fertilizer plant, two textile factories, a tyre factory, a cement factory, a cigarette factory and a brewery. These large firms are quite capital intensive. Most of them are well organized and profitable, and several export part of their production. 2.05 About 5% of manufactured goods produced in Tanzania are exported and about 60% of these exports go to the two other countries of the East African Community. Major exports are cotton textiles, aluminum products, radio receivers, steel tubes and pipes, wood manufactures, ready-made clothing and dry-cell batteries. 2.06 Tanzania has already exhausted most of the easy investment oppor- tunities, such as those for import substitution. About three-fifths of all consumer demand for manufactured goods is now met by goods made in Tanzania as opposed to about one-fifth at independence (1961). 2.07 Manufacturing activity in Tanzania is concentrated in the north- eastern seaboard, consisting of the Dar es Salaam and Tanga regions, in the north of the country around Arusha and Moshi, and on the shore of Lake Victoria. Dar es Salaam is by far the most important manufacturing center. Government Industrial Policy 2.08 The Arusha Declaration rejected undue reliance on large-scale industrialization as a major answer to the problem of underdevelopment. The 1973-74 development budget reflects the intended emphasis on promo- tion of small industries, agriculture and rural development. Most indus- trial projects provided for in the 1973-74 budget are either ongoing pro- jects or relatively small projects. However, at the East African Con- sultative Group for Tanzaria last January, the Tanzania Government emphasized that it did not see rural and industrial development as alternative priorities but as integrally-related parts of the development process and thus TIB continues to have an important role and strong government backing. 2.09 As a consequence of the overall policy to stimulate public sector investments, governmental encouragement to private foreign investors is limited. There are, however, a number of incentives to industrial in- vestment, such as an investment credit of 20%, allowing 120% depreciation on investments, the rebate of sales tax paid on exported goods, refunds or remission of duties on imported goods, and protection. Protection re,sults from the East African Community's external tariff which can be complemented by transfer taxes on imports from the Partner States, import  -3 - licensing and moratoria on licensing competitive production. Due to foreign exchange constraints, the Central Bank has, for most goods which are pro- duiced in Tanzania, refused import licenses which has, therefore, become an effective means of protection. 2.10 An Act of August 18, 1972, gives the Minister of Finance the power to control the distribution of profits and the use of cash flow surpluses of a number of specified companies and statutory corporations. The Act limits the dividends of these companies and corporations, and transfers abroad of profits made locally, according to some automatic rules, and gives discretionary powers to the Minister of Finance to im- pose further limitations or to impose minimum dividends. The Act also gives the Minister of Finance discretionary powers to require the speci- fied companies or corporations to invest in Government securities or in other investments a certain part of their forecast liquid assets during each fiscal year. It is not yet known how the Act will be applied. It will probably tend to increase investments by existing private companies in expansion projects, but to discourage new foreign investors. A new system is being developed for the pooling and distribution of surpluses generated by State enterprises. No details on this plan are yet available. 2.11 The Government's strategy for industrial development during the next five to ten years aims at maximizing local processing of agri- cultural products for both export and domestic consumption. Substantial additional investment is envisaged for textile and garment industries, tanneries, a shoe factory (processing both leather and canvas), breweries, cashew processing, wood processing, rope and twine factories, fish pro- cessing, etc. It is also the Government's intention to promote small village industries wherever this is practicable. An ambitious nationwide industrial extension service is being established with a view to assist in the planning and management of small industries. Many of these are expected to be cottage industries, processing or milling units, and work- shops manufacturing furniture, other household goods and simple agricultural implements. To set industrial priorities in the next five-year plan and to reduce the reliance on protection, a team of the Harvard Advisory Services is now studying in which industries Tanzania would have a com- parative advantage. The Bank has scheduled an industrial sector mission in early 1974. Institutions Involved in Industrial Management and Investment 2.12 In 1965, the Government established the National Development Corporation (NDC) to promote and implement public investments in industry, agricultural processing and tourim. Following the Arusha Declaration, all nationalized industrial enterprises were transferred to the National  - 4 - Oevelopment Corporation (NDC). In 1970 and 1971 the Goverment trans- ferred agricultural processing industries, tourism projects and woodwork- n- indust-ries to three newly established parastatal holding companies, namely, the National Agricultu-re and Food Corporation (NAFCO), the Tan- zania Tourismm Corporation (TTC) and the Tanzania Woodworking Industries Compa,iy (ThICO). Each parastatal is responsible to a Government ministry, NDC being under the control of the Ministry of Commerce and Industry, NAFCO under the Ministry of Agriculture, and TTC and TWICO under the Min- istry of Natural Resources and Tourism. The main functions of each of these organizations are the management of existing enterprises and the promotion and implementation of new projects. A shortage of internally generated funds has made them critically dependent on budget allocations for equity investments in new projects. Their implementation of new pro- jects also suffers from a shortage of qualified people to study, implement and manage projects. 2.13 The Industrial Development Center (Indcenter) is a TJNIDO-spon- sored institution to promote private and public inuistries. It started operations in 1966 and is now staffed by five UNIDO experts and five Tanzanians. Indcenter mainly makes feasibility studies but can also advise on project implementation and management. It has mainly served the private sector. It has had little success in getting projects implemented and during the last two years it was responsible for helping start only two rather small private projects. 2.1. All projects, private or public, must he approved by the Govern- ment. Parastatals must submit their entire annual investment plan to the relevant ministry. After scrutiny by the ministry, an interministerial conumittee, on which the relevant ministry, the Ministry of Economic Devel- opment and Planning, and the Treasury are represented, reviewsthe program and submit it in its final form to the Economic Committee of the Cabinet. Projects for which the parastatals seek equity funds during the budget period must be approved on an individual basis by the same authorities. None of the entities involved at this stage, including the relevarit min- istry, has a proper project evaluation unit and the basis on which projects are approved is unclear. The Government recognizes this lack of exper- tise and lately TIB has been invited to participate in the discussions of the interminiFterial committee. So far, TI3 has been familiar with only a few of the projects discussed and has acted merely as an observer to learn about forthcoming projects. The Government intends to involve TIB earlier and to rely more on its judgment before approving projects. 2.15 Foreign investors can apply to the Tanzanian Investment Promo- tion Comittee (TIPCO) for fiscal incentives, such as duty exemptions and protection, and a guarantee against expropriation. TIPCO is an inter- ministerial committee which is dominated by the Treasury and the Ministry of Commerce and Industry. It has only a mnall staff and depends heavily on Indoenter for technical assistance.  - 5 - 2.16 Most parastatal enterprises still rely heavily on foreign tech- nical and managerial personnel especially after last year's decentraliza- tion of Government which reduced, at least temporarily, the administrative capacity at the center. To reduce the need for costly expatriate assist- ance, the Government has intensified its efforts to train Tanzanians at home and abroad. The Institute for Finance Management (IFM) was estab- lished in July 1972 and has already undertaken a variety of urgently needed training programs including, at the request of NDC, an accelerated training program for managers of all the parastatal institutions. Institutions for Financing of Industry 2.17 Following the Arusha Declaration, the Government nationalized all commercial banks and merged them into a single bank, the National Bank of Commerce (NBC). In 1969, NBC set up a special department for medium- and long-term lending. At the creation of TIB, NBC discontinued its term lending and transferred its entire term loan portfolio to TIB (see para. 5.o6). NBC is the only institutional source of short-term credit. Its interest rates vary between 634 and 10%. Most overdrafts are at 81V; lower rates apply to exporting industries (734) and small industries (6W). 2.18 The Tanganyika Development Company Limited (TDFL) was established in 1962. Its capital of Tsh 40 million is equally owned by TIB, the Commonwealth Development Corporation (CDC) from the TJnited Kingdom, the Deutsche Gesellschaft fur Wirtschaftliche Zusammenarbeit (DEG) from Ger- many and the Nederlandse Financierings Maatschappij voor Ontwikkelings- landen (FMO) from the Netherlands. Like TIB, TDFL provides loans and equiity for projects in industry, commercial agriculture and tourism. It has been active in project promotion and, while it normally is a minority partner, in a few cases it is the majority owner. Recently, TDFL changed its policy of only financing private enterprise and now also finances publicly-owned projects. The Government has now limited TDFL' s activities to projects with total assets of less than Tsh 4 million. TDFL's opera- tions amount to about Tsh 10 million per year. It usually charges an interest rate of 9% on its loans. 2.19 Industrial investments can also be financed by the East African Development Bank (EADB) which was created in 1967, and has a loan from the World Bank. FADB's main objective is to correct industrial imbalances between the three countries of the East African Community, and its charter requires it to make 38.75% of its investments each in Uganda and Tanzania and only 22.5% in Kenya. EADB's charter excludes it from financing tour- ism, transportation and commercial agriculture. In Tanzania, EADB has normally financed projects jointly with TIB. Approvals for projects in Tanzania, amounting to Tsh 40 million in 1972, have been inhibited to some extent by the shortage of equity funds in the parastatal sector. EADB's interest rate is 9%.  2.20 In view of the availability of foreign resources to TIB, the Government recently directed that no new suppliers' credits for industry be approved unless TIB cannot finance the project. This will probably considerably reduce suppliers' credits and increase the use of foreign aid funds, which are normally on much softer terms. This development will further enhance TIB's role. National Investment Targets 2.21 Tanzania's objective is to raise the investment ratio during the Second Plan period (1970-1974) to about 28% of monetary GDP, which implies a 10% annual growth rate of investment. The overall investment planned for this period was Tsh 8,0o5 million ($1,151 million). Although the target investment ratio will probably not be realized in the Second Plan period, the percentage has already risen to about 25%, compared with 14.5% at the beginning of the first Five Year Development Plan (the figures exclude the TanZam railway). Parastatals are rapidly becoming the major vehicle for public-sector investment, as intended. They increased their share in gross fixed capital formation from about 12% in 1966 to nearly 50% in 1971. The share of Central Government ministries, by contrast, is falling, which is also by design. Private investment was expected to contribute about 27% of the total during the Second Plan. Although after several years of decline and stagnation private investment appears to have risen recently, the targeted figure will probably not be achieved. III. THE INSTITUTION Charter 3.01 The Government established TIB in 1970 for the financing of industrial, agricultural processing, tourism and transportation projects in the private and public sectors. TIB's authorized share capital is Tsh 100 million of which Tsh 50 million is paid-in. According to TIB's Act, the Goverrment owns 60% of the share capital directly, 30% through the National Bank of Commerce (NBC) and 10% through the Government-owned National Insurance Corporation (NIC). The Chairman of TIB's Board is appolnted by the President of Tanzania. Of the six members, three are appointed by the Minrister of Finance and the other three by the two minority shareholders. 3.02 TIB can make loans, provide guarantees and invest up to 10% of its own net worth in equity, provided it does not take a controlling interest in any of its clients. The severe restriction on TIB's total equity investments reflects the Government's conception of the respective roles of the parastatal organizations and TIB in which the parastatal  - 7 - organizations have the primary role in promoting and managing investments through equity financing, while TIB is expected to provide an indepen- dent check on these investments through loan financing. In practice, the parastatals depend largely on the Government for their equity investments. The Government usually approves an equity investment before a request for loan financing is submitted to TIB, which severely limits TIB's ability to modify decisions or to turn down the project. If TIB had more leeway in its equity investments, it would be involved earlier in projects and likely to perform its role better. During negotiations the Tanzanian delegation recognized the desirability of raising the limit on TIB's equity investments substantially above the present limit of 10% of TIB's net worth. The limit is to be increased in the near future. 3.03 TIB's Act permits it to promote projects and TIB recently decided to become more active in this field. The exact nature of TIB's promotional activities is not yet clear. Initially TIB will limit itself to preparing sector and regional studies and assisting parastatals to find appropriate resources by involving itself at an early stage of project preparation. Since the Act prevents TIB from taking a controlling interest in its clients, TIB will not be able to implement projects on its own and will need to work Jointly with parastatal organizations or private sponsors. The success of TIB's project promotion will, therefore, to a great extent depend on the readiness and capacity of the parastatals to implement projects promoted by TIB. 3.o4 The Act requires that TIB follow sound banking principles, and that all projects financed must be technically feasible and economically sound. While most of the projects financed by TIB meet these criteria, there have been a few cases, such as a large fireboard project, in which the Government made TIB finance, at TIB's risk, projects of questionable fin- ancial merit. There may again be projects that TIB, after thorough analysis, does not judge viable but that the Government strongly wants to implement for social reasons. The Government can take the risk for such projects by providing Special Funds. TIB's Act distinguishes "Special Funds" (to finance special operations) from "ordinary resources" (to finance ordinary operations). Because TIB cannot use its ordinary resources (which include its entire equity) to cover losses on special operations. Special Funds are in essence managed funds at the risk of the entity that provides them. TIB has agreed to fin- ance from its ordinary resources only financially viable projects and to state this explicitly in its policies (see paragraph 3.06). 3.05 TIB intends to establish a Special Fund for small scale industry financing. The Government will guarantee the entire program because of the risk involved in this type of operations but expects TIB to finance only projects that are judged to be sound. Although TIB bears no risk on opera- tions financed from Special Funds, such operations are not necessarily fin- ancially unviable, but rather do not meet the tests and conditions normally applied by TIB. TIB can use Special Funds, for instance, to lend at lower interest rates for special projects (TIB's interest rate limits only apply to ordinary operations), or to finance non-revenue-producing projects, such as feasibility studies and other technical assistance arrangements.  -8- Policies 3.06 TIB's investment and financial policies are set forth in the "TIB Handbook" which replaces TIB's original statement of General Policies and subsequently adopted policies. Annex 1 shows the relevant chapter of the Handbook including amendments which were agreed upon during negotiations and which have been approved by TIB's Board. TIB can make or guarantee medium- and long-term loans and invest in equity but will not seek a controlling interest through its equity investments. For ordinary operations, TIB's con- tribultion to an individual enterprise shall not exceed 75% of the enterprise's total fixed assets and will normally be less than 60% of total fixed assets. TIB's total investment in anv enterprise is limited to 20% of its own net worth. During negotiations TIB agreed to limit its own debt to three timeq its net worth. Interest Rates and foreign exchange risk 3.07 In the past, TIB had a variable lending rate with a normal rate of 81A and a minimum of 6