Tanzania - Technical Assistance Project

CAC-JLATING COPY 1TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1692a-TA CIRCULATtNG COPY TO BE RETURNED TO REPORTS DESK REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A TECHNICAL ASSISTANCE PROJECT November 12, 1975 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 It may not be published, quoted or cited without Bank Group authorization.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 (as at November 1, 1975) Tanzania Sh US$0.12 US$1.00 T Sh 8.05 (The Tanzania Shilling is officially valued at a fixed rate of 9.66 T Sh to the SDR. The US Dollar/Tanzania Shilling exchange rate is therefore subject to change. Conversions in this report were made at US$1.00 to T Sh 8.05, which is close to the short-term average exchange rate.) TANZANIA FISCAL YEAR July 1st - June 30th  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed development credit to the United Republic of Tanzania for the equivalent of US$6.0 million on standard IDA terms to help finance a Technical Assist- ance project. The proceeds of the Credit would be made available by the Borrower to the Tanzania Investment Bank as a grant. PART I - THE ECONOMY 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) distributed on December 11, 1972. A basic economic mission is scheduled for 1976. An agricultural sector report was issued on December 10, 1974. An industry and mining sector report and a report on the fiscal aspects of Tanzania's recent decentralization of Government were distributed in April 1975. The Consultative Group for East Africa met in April 1975 to discuss the progress and prospects of the Tan- zanian economy and the need for additional resources to support the Govern- ment's development program. Country data are provided in Annex I, Tanzania is one of the 25 least developed countries as defined by the United Nations. 3. The TANU Party, under the leadership of President Nyerere, has been the guiding force in Tanzania's political evolution since the 1950's. Over the years following independence the political leadership has developed a philosophy of egalitarian socialism which has been articulated in many documents, most central of which is the Arusha Declaration of 1967. In restructuring the political, economic and social life of the country the leadership has introduced an impressive series of far-reaching institutional reforms. For the past decade Tanzania's social and economic policy has been guided by three fundamental objectives: (a) the achievement of a participatory, decentralized socialist economic order; (b) the eradication of absolute poverty and progress toward greater income equality; and (c) more rapid long-term economic growth with full participation of all regions and population groups in the development process. Some of the Government's most significant decisions have been in the area of incomes policy; however, while considerable progress has been made toward reducing inequality within the category of employed workers, large gaps still exist between urban and rural standards of living. 4. Tanzania is one of the three Partner States belonging to the East African Community. The 1967 Treaty for East African Cooperation is one of the most far-reaching and comprehensive economic cooperation agreements in existence among sovereign states. However, in practice the degree of economic  - 2 - integration and cooperation among the Partner States is much less than what was envisaged in the Treaty. Political developments in the Partner States have created tensions within the Community and impaired the growth of inter- state trade. These difficulties have been compounded by the balance of payments crisis which currently faces all three Partner States. 5. Between 1968 and 1973, Tanzania's GDP increased 4.6% per year in real terms. Exports of goods and services in constant prices grew 2.8% per year during the same period. Domestic savings were maintained at about 18% of GDP. Investment increased from 19% of GDP to 23% with public sector investment rising to 80% of the total investment in 1973. Annual price increases were moderate to low. Current Government receipts more than doubled, but current expenditures increased at similar rates so that budgetary savings stagnated. Although the level of domestic savings and investment were substantial, the growth of GDP was probably not commensurate with the investment effort. This was largely due to the high proportion of investment that went into slow gestation infrastructure and social services, and to the difficulties encountered in expanding production in agriculture. The stagnation of agricultural export volumes and very slow growth in food production were the most worrisome problems. However, prudent domestic financial management, and an increasing inflow of external aid on conces- sionary terms, together with a rather sharp terms of trade improvement in 1973, made it possible to maintain a high investment rate. Reserves at the end of 1973 stood at a healthy $145 million which was then the equivalent of four months' imports. Indeed, the economy appeared in relatively good shape before the events of the winter of 1973-74. 6. Events occurred then which resulted in a drastic change in the overall balance of payments of Tanzania. Import prices rose sharply and in 1973 and 1974 rains failed in many parts of the country necessitating substantial increases in imports of basic food :items. As a result, Tanzania's foreign exchange reserves declined by about $90 million in 1974 to a level representing about three weeks' imports and have remained at about the same level since. Tanzania has been able to cover the 1975 foreign exchange gap by curtailing imports to the bare minimum and by securing substantial program-type assistance including a $30 million Program Loan (No. 1063 TA) from the Bank and drawings on the second IMF credit tranche and the IMF special oil facility approved in August 1975. 7. In order to close the gap in the longer term the Government has begun a program of investment restructuring, improvements in the incentive framework, administrative changes, and reduction in the rate of growth of consumption. Under this program, the Government is reallocating public investment from infrastructure development to the directly productive sectors of agriculture, industry and mining. Actual public investment for directly productive sectors is estimated at 41% of the total in 1974-75 and it is planned to rise to 48% in 1975-76. Although the Government has made subs- tantial progress in this endeavor, high level manpower constraints have inhibited both project preparation and execution. The single largest economic weakness is the slow growth of agricultural production. Several  steps have been taken to increase output. The Government has raised producer prices to levels approaching world parity so as to provide greater incentive. The steeply progressive export tax on coffee, which had an average rate of 30%, has been reduced to an ad valorem rate of 12-1/2% to provide further incentives to farmers. The overall planning capability of the Ministry of Agriculture is being improved and a project coordination unit to improve implementation has been established in the Ministry. The negative impact of villagization on output is being reduced through more careful planning. The Government is reducing unnecessary non-development related recurrent expenditure and is using taxation and wage/price controls to reduce the rate of growth of private consumption. The Government's progress in implementing policies and programs designed to close the balance of payments gap in accordance with understandings relating to the program loan was the subj'ect of a memorandum (see M75-687) from the Secretary to the Executive Directors dated September 25, 1975. 8. The program of economic restructuring initiated by the Tanzanian Government to cope with the economic crisis will generate benefits which will be spread out in time. Viewed negatively this means that the immediate barometers of economic health, such as the balance of payments, will remain weak in the short run. The positive corollary is that Tanzania will have a basically stronger economy at the end of the restructuring process. The crisis acted as a catalyst in inducing significant policy shifts which were diagnosed as necessary beforehand but which did not command urgency until it struck. Not only did this hasten reallocation in the current Development Budget and Annual Plan, but it is also likely to have a substantial impact on the forthcoming Third Five-Year Plan. For the long run the most encouraging aspect of the Government's response was the demonstration that Tanzania re- tains the ability to push through necessary but unpopular policy measures over a wide front. It is this characteristic of a "hard state", together with the basically sound program of economic restructuring, which holds promise for the future. 9. The Tanzanian balance of payments will remain under severe pressure until more of the favorable balance of payments effects of recent policy changes can make an impact. Accordingly, Tanzania will require additional balance of payments assistance in 1976 and 1977. A gap of about $100 million is anticipated in 1976 after allowance for the balance of the IMF second credit tranche (paragraph 6 above) has been made. In this connection, a mission to appraise a proposed second Bank Program Loan is currently in Tanzania. In addition, a continued'capital inflow in excess of the foreign exchange component of high priority projects will also be required if Tanzania is to achieve its development targets. Financing of some local expenditures will, therefore, be justified. 10. In terms of debt outstanding and disbursed, the Bank Group is Tanzania's second largest creditor after the People's Republic of China. Other major lenders are Sweden, Canada, Denmark, the Netherlands and the Federal Republic of Germany. The current low overall debt service ratio of about 7% is expected to rise to aboutll% "y 1980 and remain at about that  - 4 - level throughout the 1980's. Includinga notional one-third share of the debt of the East African Community Corporations, the IBRD is presently holding 13% of Tanzania's outstanding external debt and IDA 10%; the IBRD share is expected to rise to about 23% in the next five years, and IDA share to rise to about 13%. Debt service payments to the Bank are about 13% of total debt service payments; the corresponding share for IDA is about 3%. These two figures are projected to rise to about 25% and 3%, respectively, by 1980. The debt service ratio of Bank loans to exports is expected to rise to about 2% by 1980. The Bank's exposure is high because several major donors are now making their aid available either on grant basis or very concessional terms and because as a result of prudent debt management suppliers' credits have been kept to a minimum. The average interest rate on loans to Tanzania outstanding at December 31, 1974 amounted to only 2.4% and the average term was 22 years. Planning and Implementation 11. The Ministry of Economic Affairs and Development Planning (Devplan) is the agency in Tanzania with overall responsibility for planning and moni- toring implementation of the development program. Devplan's role has changed significantly in recent years particularly following decisions in 1972 to decentralize the primary responsibility for preparing and implementing devel- opment plans to the regions, strengthen the capacity of the sectoral minis- tries to plan and monitor the overall development in the sectors, establish a Planning Commission to formulate long-term and five-year development plans and to take steps to improve control of implementation. Devplan's primary role is one of performing general economic analysis, providing a coordinated framework within which the regional and sectoral plans can be prepared, pro- viding support functions and coordinating implementation. Devplan's organi- zation has recently been changed to strengthen its capacity to carry out these functions. Emphasis is being given to strengthening its ability to monitor economic trends and initiate appropriate policies and to coordinate the translation of the overall five-year plan into annual plans. Devplan has also established a Programming and Budgeting Control Division to monitor plan implementation on a much more rigorous basis than has hitherto been the case. To help the Government in these endeavors, UNDP has recently approved a project to provide Devplan with one adviser in macro planning, one in programming and budget control, and two in sectoral planning. 12. Within the overall framework established by Devplan the sectoral ministries and the regions have primary responsibility formulating and implementing the country's development program. The ministries and regions assume direct responsibility for infrastructure-type projects which do not earn a commercial return, e.g. roads, and education facilities whereas com- mercial investments are undertaken by parastatal (nationalized) enterprises and regional and district development corporations. With the guidance of their parent ministries and regions these public enterprises have responsi- bility for drawing up detailed investment proposals and securing financing for implementation. 13. The planning and implementation process is carried out within the framework of five-year and. annual plans. The third five-year plan was due to commence in July 1975 but in view of the current economic difficulties  -5- facing the country finalization of the plan has been postponed until the resource picture becomes clearer. It is not considered that the delay in the publication of the plan will undermine the planning process. Tanzania's overall development priorities are clearly defined and are not expected to change in the foreseeable future. Meanwhile the annual plan for 1975/76 is now in the process of implementation. 14. In an attempt to ensure that, within the framework of the planning process, public enterprises adhere to sound economic and financial invest- ment criteria, the Government established the Tanzania Investment Bank (TIB) in 1970 and the Tanzania Rural Development Bank (TRDB) in 1971 for the indus- trial and rural sector, respectively. TIB was the recipient of an IDA Credit of $6 million in 1974 and more recently of a Bank Loan of $15 million approved in October 1975. Both TIB and TRDB have good senior management and their staff capacity to review and evaluate projects has grown as a result of training and as experience has been accumulated. TIB now accounts for about 25% of total industrial investment; virtually all rural credit is channeled through TRDB. Both TIB and TRDB have experienced problems with their port- folios. TIB is currently reviewing its problem clients with the intention of instigating necessary remedial actions. TRDB is improving supervision and mounting a more intensive loan recovery effort in an attempt to improve its portfolio. 15. TIB's Board of Directors includes the principal secretaries to the Treasury, Devplan and the Ministry of Commerce and Industries as well as the Chairman of the National Bank of Commerce (Tanzania's nationalized commercial bank) and the General Manager of the National Insurance Corporation. All investment proposals must be approved by the Board which among other things helps to ensure consistency of TIB's portfolio with the country's overall development priorities. In addition to appraising financing and supervising investment projects, TIB has established a department with responsibility for promoting and developing bankable projects. To date this department has assisted client parastatals in preparing a number of projects, for which TIB has subsequently extended loan finance. In a further attempt to improve indigenous project preparation capacity, the Government has also recently established the Tanzanian Industrial Consultants Organization (TICO). Over time it is expected that this organization will increasingly assume res- ponsibility for preparing investment projects in the industrial sector as it acquires the necessary expertise and gains relevant experience. 16. As the planning and implementatinn structure described above has evolved increasing emphasis has been given to plan implementation including project formulation as well as project execution. Tanzania has consistently suffered from shortfalls in meeting plan targets especially in the directly productive sectors (paragraph 5 above); the present planning structure is an attempt to deal with these issues. In addition to the recently strengthened Devplan role in plan implementation (paragraph 11 above) and the responsibi- lities of the TIB and TRDB in this area, the Government has recently announced the establishment of two additional units designed to help improve plan and project execution. One unit will be set up in the Treasury Registration Division to closely monitor parastatal performance which has hitherto been disappointing in a number of important instauces (paragraph 20 below). In addition, a Disbursement Unit is being formed in the External Finance Division  - 6 - of the Treasury to help expedite implementation and disbursements of foreign aided projects. Although Tanzania has now established a coherent and rational structure of planning project formulation and implementation, critical manpower constraints, particularly in the area of project evaluation and implementation, will continue to limit its overall effectiveness. While training will provide the solution to these difficulties in the long-term there will be a continuing need for technical assistance in these areas. Industry and Mining 17. The manufacturing sector in Tanzania accounts for only 10% of GNP but is increasing in importance since independence in 1962, the average growth rate of value added by the sector has been about 10% per year. Tanzania has followed a pattern of industrial development concentrating on establishing or expanding industries for import substitution. Examples include textile, beer, cigarettes, radios, glass, cement and metal products. As a consequence of this strategy, imports of consumer goods, in particular, had been reduced from about 55% of total commodity imports at independence to a current figure of less that 25%. As the opportunities for import subs- titution have become exhausted, the Government has been reviewing its indus- trial development objectives and has now chosen the so-called "basic industrial strategy". 18. In essence, the basic strategy aims at a gradual structural trans- formation of the economy by giving priority to industries that process domestic raw materials for consumption in the home market and by requiring that traditional exports are locally processed as far as can be economically justified. The strategy aims at promoting harmony between the pattern of production and the pattern of domestic consumption, while the promotion of new manufactured exports is seen as a logical extension of production for the home market. The basic industry strategy does not automatically exclude any project but it does mean that projects that do not fit the underlying philos- ophy will be expected to earn a higher return than projects that do fit the philosophy to be eligible for approval by the central planning authorities. 19. During the past decade new investment in mining has been negligible but this is rapidly changing. The State Mining Corporation is now beginning to identify and develop pro:jects for the exploitation of beach sands, phos- phate, soda ash, gold, and other minerals. Much preparatory work remains to be done, however. The manpower resources of the Corporation are presently spread so thinly that it is feared that further progress may be slow unless there is a significant increase in the level of technical assistance. 20. The Bank's Industry and Mining Sector mission report, which was distributed to the Executive Directors in April 1975, raised issues con- cerning the improvements required in the productivity of existing state manufacturing enterprises and the need for increasing the efficiency of the public sector. Rewards for efficiency and penalties for inefficiency within the parastatal system are at present weak and this is probably one of the  -7- main reasons for a relatively low level of productivity in many such enter- prises. The absence of clear and unequivocal performance yardsticks, together with the introduction of many direct economic controls on the activities of public and private sector enterprises alike, appears to have had an adverse effect on the motivation of firm level management in many industries. At the same time, the Government's task of identifying inefficient operations has become more complicated as poor economic performance is not necessarily reflected in a company's profit and loss account or in any other obvious way. The sector mission recommended thata move away from more comprehensive controls towards a judicious and selective use of indirect controls, material incentives and decentralized decision making on the firm level, might well be compatible with Tanzania's development objectives and at the same time conducive to greater efficiency and industrial development. As a result of its concerns relating to these issues, the Government is initiating studies at both the sector and firm level with a view to formulating detailed recom- mendations leading to improvements in public and private sector performance. However, in view of technically complex and unique nature of the issues involved, the Government will necessarily have to obtain specialist technical expertise if these tasks are to be satisfactorily accomplished. 21. There is also the need for the Government to determine the exact role of the private sector. Since the Arusha Declaration (1967) and the acquisition by the Government of majority interest in all important manu- facturing enterprises, mining and financial institutions, most industrial and mining activity is now in the public sector and all major projects started after 1967 have been in the public sector. Nevertheless, the con- tribution of private firms is appreciable and accounts for about 25% of the value added and 50% of the employment in the sector. At the April 1975 meeting of the Consultative Group on Tanzania, the Government declared its willingness to participate in joint ventures with foreign private parties particularly when such cooperative endeavours could give Tanzania access to needed technical expertise. This could be particularly important in the mining sector. Other Sectors 22. The problems of industrial productivity and efficiency referred to above apply with equal validity to other sectors. The Government has initiated studies and actions in these areas with a view to improving per- formance. Examples include the recent reorganization of the State Trading Corporation into several smaller units under the Board of Internal Trade and a study which is currently being instigated to review the problems of the cons- truction sector and to recommend appropriate policy and institutional changes and to prepare investment proposals. In the tourism sector there is also a need to improve the utilization of current facilities before proceeding to any major investment program. Examples of priority investment programs in various stages of preparation and implementation in other sectors include projects in transport and storage to alleviate marketing and distribution constraints and selected investments in large scale agriculture (e.g. wheat) to help attain self-sufficiency in food grain production.  - 8 - PART II - BAkNK GROUP OPERATIONS IN TANZANIA 23. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1963, 20 credits and nine Bank loans amounting to $314.8 million have so ifar been approved for Tanzania. In addition, Tan- zania has been a beneficiary of nine loans, totaling $229.8 million, which have been extended for the development of common services operated regionally by Tanzania, Kenya and Uganda through their associations in the East African Community. The only IFC investments in Tanzania to date, totaling $4.7 million, were made in the Kilombero Sugar Company in 1960 and 1964. This Company encountered financial difficulties and in 1969 IFC and other investors sold their interest in the Company to the Government. Annex II contains summary statements of Bank loans and IDA credits to Tanzania and the East African Community organizations as of September 30, 1975 and notes on the execution of on-going projects. 24. In keeping with Tanzania's overall development strategy our lending operations are increasingly focusing on the rural sector and directly pro- ductive projects. Up to the end of FY72 10 out of 14 loans and credits made directly to Tanzania had been for infrastructure. Of the 11 Tanzania operations approved since then all but three, Urban Sites and Services (Credit No. 495 TA), Highway Maintenance (Credit No. 507 TA) and Education IV (Credit No. 371 TA), were for directly productive projects. These projects are supporting both the agriculture and industrial sectors including an Integrated Rural Development Project (Credit No. 508 TA) and our first direct lending for an industrial project (Mwanza Textiles Loan No.1128 TA). In addition, a $15 million loan to the Tanzania Investment Bank (paragraphs 14 and 15 above) was recent:Ly approved by the Executive Directors. Projects to support fisheries development and maize production are expected to be ready for consideration by the Executive Directors in the near future. A proposed forestry project and a project to support selected industries and related estate development at Morogoro have recently been appraised in the field and a mission appraising a proposed second rural development project is currently in the field. A third power project and a fifth education project are expected to presented to the Executive Directors for their consideration in the near future and a proposed water supply project will shortly be ready for field appraisal. In view of Tanzania's continuing balance of payments difficulties a mission appraising a possible second Program Loan is currently in the field (paragraph 9 above). 25. WThile it should be borne in mind that over one half of total Bank Group lending to Tanzania has been approved in the last two fiscal years and that initial start-up difficulties are perhaps inevitable, the project implementation difficulties referred to in Annex II of this report have been greater than anticipated. Some of these problems stem from the scarcity of suitably trained and qualified manpower, some reflect the understandable reluctance and apprehension of an essentially conservative traditional sector to adopt the new "technology" and others are undoubtedly a reflection of the strains created in a society which is attempting a  - 9- unique traverse from one set of economic, institutional and political rules to another. The Government has become extremely conscious of these imple- mentation issues and is taking steps to resolve these problems. An earlier reluctance to recruit technical assistance for planning and implementation has been replaced by a greater willingness to utilize such assistance when- ever it is demonstrably necessary. At the request of the Government about 10 technical staff have been supplied by ADS and a Bank staff member has recently been seconded to the newly established Project Implementation Unit in the Ministry of Agriculture. In a longer term attempt to alleviate the human resource constraints our lending is expected to increasingly emphasize formal and non-formal training. Furthermore, a conscious attempt is being made to develop more simple and less complex projects. 26. The difficulties facing the East African Community Corporations referred to in paragraph 3 above have affected the Bank's lending program for the Community. The East African Railways Corporation (EARC) has been the most severely affected. As a result of long delays by the Partner States in approving increases in tariffs and restrictions on the interstate transfer of corporate funds, EARC was unable to order essential spare parts and supplies with the result that its operational capacity has deteriorated considerably. In July 1974 the Partner States agreed, with Bank assistance, on a package of financial measures to rehabilitate the EARC including inter- state transfer of funds and injection of additional capital. However, this agreement was never fully implemented and as a result disbursements under Loan No. 674 EA (East African Railways III) were suspended in February 1975. 27. A Bank mission which visited East Africa in July 1975 was able, after meeting the Heads of State and other important officials in the three countries, to bring about an understanding on both the short-and long-term problems of the East African Community. On the general question of the future of the EAC, a decision was made to review various aspects of regional cooperation as now incorporated in the 1967 Treaty. It is anticipated that this review would begin before the end of the year and take 18-24 months to complete and would be undertaken by a commission consisting of nominated representatives from each member country. To address the immediate financial and managerial problems, that will remain pending the agreement on a long range reform of the Treaty, the Partner States reached three major accords. To deal with the transfer problem, an agreement was reached on the mechanism for the transfer of funds from the regions to the Corporation headquarters. To ensure a workable plan for railway decentralization, a draft Consultancy Services Agreement on studying decentralization was adopted and will be financed under Loan No. 674 EA (the suspension of which has been lifted). Finally, the Partner States approved the appointement of financial consultants who will undertake a study of the assets, liabilities, debts and financial condition of each of the three Corporations on a regional basis. This is viewed as a necessary step in providing the basis for the decentralization of the Corporations and is expected to be financed by the UK.  - 10 - 28. It is expected that this broad agreement between the Partner States will provide a basis on which the Community can efficiently operate. Payment for past due loans has been received and all the actions reviewed above have been initiated. It would, however, be unrealistic to expect that decentralization of the Community structures will now proceed smoothly and without difficulties. There are fundamental differences in political outlook and development strategies between the Partner States and mutual suspicions of intent will undoubtedly continue. The newly agreed transfer formula (paragraph 27 above) is inevitably open to misinterpretation and goodwill will be required on all sides if it is to be successfully im- plemented. The dangers implicit in the possibility of operating diffi- culties growing in other Corporations is also recognized. However, a strong desire to retain control of the situation is also evident. In addition, a general but genuine commitment to the Community has been noted in the discussions with the Partner States. The Bank's role as an "honest broker" has been accepted and endorsed by the Partner States and this role could be used effectively to help in the smooth transition in the Community's structure. PART III - THE NEED FOR TECHNICAL ASSISTANCE 29. Since independence Tanzania has made impressive efforts to expand and develop its high level manpower but the country's unique commitment to development has meant that its scarce human resources have been spread very thinly. The shortage of experienced people who can formulate and super- vise the implementation of productive projects, particularly in some of the highly specialized areas of industry and mining, is critical and has resulted in the implementation delays referred to in Parts I and II of this report. These constraints have become particularly acute in light of the current economic difficulties facing Tanzania and the Government's attempt to shift the focus of investment to, and increase the efficiency of, directly pro- ductive programs. The Government has recognized these problems and has been actively exploring ways in which to increase the level of technical assistance and to make it more effective in practice. 30. External financing for technical assistance has grown rapidly during the last several years in support of the expanding requirements of the Tan- zanian economy. In calendar 1974 (the last year for which UNDP data are available) it is estimated that about 750 higher level foreign personnel were being supported under various assistance programs. About 120 of these experts were being provided through UNDP and other UN organizations. Sweden, USAID, Canada, Norway, Denmark, the Netherlands and the Federal Republic of Germany were among the most important bilateral donors. 31. Despite the large amounts of technical assistance which have been made available,the need for technical assistance for the implementation of on-going and the preparation of new progr4-s is likely to exceed the amounts  - 11 - available for at least the next few years. The overall shortage of technical skills in Tanzania has meant that much of available bilateral and multi- lateral assistance is being utilized for high priority needs such as broad based institutional support rather than for the preparation of new investment programs and studies designed to improve productive efficiency. For example, much of available bilateral technical assistance is providing needed medical personnel in the health sector, teachers and professors in the education sector and high priority general support for national and regional develop- ment planning. Even in the directly productive sectors of agriculture and industry a large proportion of bilateral and multilateral assistance is being utilized for managerial support for the day to day running of paras- tatal enterprises, such as finance and accounting, rather than for the pre- paration and implementation of new investments. Even when bilateral assistance is being used for these purposes much of it is closely related to on-going bilateral capital'assistance projects. The fact that this aid tends to be tied and involves complex and time consuming recruitment procedures, also tends to limit its usefulness. In a number of cases the Government is left with little discretion as to the choice of appropriate or suitably qualified personnel. 32. Although the available UNDP resources for Tanzania are expected to increase fairly significantly, the UNDP program is nearly fully com- mitted for the next few years for on-going or already selected future projects. It is expected that the Bank Group will continue to provide subs- tantial amounts of technical assistance on matters closely related to the projects financed. Such project related Bank assistance has been parti- cularly important as far as our rural projects are concerned both in terms of help in project preparation from the Regional Mission in East Africa and ADS assistance in implementation (paragraph 25 above). However, such assistance is by its very nature inappropriate for support outside the framework of project related agencies. In view of the need, discussed in Part I of this report, to strengthen Tanzania's project preparation capacity and to identify actions designed to improve the utilization of current invest- ments coupled with the limited availability, and to some extent ability, of bilateral assistance to meet these needs, it is thought essential that the Government have accesses to discretionary and flexible resources to meet these requirements. PART IV - THE PROJECT 33. A Credit and Project Summary is provided in Annex III. Negotiations were held in Dar es Salaam in late October 1975. The Tanzanian delegation was led by Mr. George Mbowe, Chairman and Managing Director, Tanzania Invest- ment Bank. The project would comprise: (a) About 80 manyears of consulting services to: (i) prepare pre-investment studies and feasibility studies for high priority productive investments mainly, but not exclusively, in the industrial, mining, transport and communications sectors; and  - 12 - (ii) conduct special studies at the sector and firm level. (b) Overseas training for Tanzanians in project preparation, evaluation, implementation and related techniques; and (c) A project unit and related supporting services. It is expected that the project would be completed in about four years. The Studies 34. Given the Government's priorities and the need to improve the performance of public enterprises in Tanzania, the uses of the proposed Technical Assistance Credit are expected to be as listed below. The Bank's Industrial and Mining Sector Survey identified a number of potential invest- ment projects in the industry and mining sector many of which require further study. These are summarized in more detail in Annex IV to this report. (a) Industry (i) A large number of studies are expected for consumer industries. The Bank's Industrial and Mining Sector Survey concluded that perhaps the most pressing need for production expansion is in the category of con- sumer goods. Many ordinary manufactured consumer goods including clothing, cooking oil, sugar, salt, beer, etc., are frequently in short supply especially in rural areas. These shortages are of particular conseciuence since they reduce the incentive value of higher agricultural producer prices and other measures the Government is adopting to encourage rural production. (ii) Pre-investment studies for intermediate industries are also expected to be supported under the project. These will likely include sub-projects in such areas as tanning, wood processing, textiles, cement, farm implements and other metal welding industries, pyrethrum processing, glass holloware and plate glass, ceramics, electrical products, truck and bus body manufacturing, tires and tubes, plastics, and chemicals including industrial alcohol. (b) Mining Several sub--projects are expected to concentrate on the mining sector. Mining currently contributes only about two percent of GNP; however, the recent establishment of the State Mining Corporation, the completion of the TanZam Railway giving access to important coal and iron reserves  - 13 - in the south west, the discovery of natural gas off the coast near Kilwa, and the current emphasis on developing directly productive projects with positive balance of payments effects, have combined to result in an increased emphasis on this hitherto relatively neglected sector (paragraph 19 above). Rapid development of this sector will require an especially heavy reliance on technical assistance. Assistance will be required for the development of such possible projects as the exploitation of soda ash, beach sands, gypsum, gemstones, salt and for the preparation of directly productive investments. (c) Other Sectors A number of studies leading to investment projects in other sectors including transport, communications, construction, large scale agricultural enterprise, and tourism are also expected (paragraph 22 above). (d) Special Studies A number of special studies at the sectoral and firm level designed to generate specific recommendations for improve- ments in efficiency and the utilization of existing invest- ments are expected. The need for such studies was identified by the Industrial and Mining Sector mission and is diseussed in paragraphs 20 to 22 above. Training 35. In a long-term attempt to strengthen Tanzania's newly established plan implementation institutions and structures (paragraphs 11 to 16 above), provision would be made for about 20 manyears of overseas fellowships for training in project preparation, evaluation, implementation, management and related techniques. These fellowships would be made available to suitably qualified candidates from the national development banks, parastatals and government agencies. Candidates will likely include employees of the Tan- zania Industrial Consultants Organization (paragraph 15 above) which is expected to be able to carry out some of the studies financed under the project, possibly on a joint venture basis with suitably qualified foreign consulting firms. The project unit (paragraph 36 below) would prepare a proposed training program for submission to the Association for review and comment by June 1976 (Section 2.07(f) draft Project Agreement). It is expected that the Bank Group's Training Adviser would visit Tanzania prior to June 30, 1976 to assist in the preparation of the proposed training program. Project Organization 36. In view of the high level manpower constraints in Tanzania and the lack of experience in executing studies of the type expected to be supported under the proposed Credit, it is considered essential that adequate  - 14 - provision be made to both supervise the selection, preparation and implementation of the studies and to ensure that suitable arrangements to implement viable projects emerging from the studies are made. In view of the Tanzania Investment Bank's relevant experience in supporting projects in the areas in which the studies are expected to concentrate, and the Government's policy of looking to TIB for guidance in these matters, TIB would assume overall responsibility for the project (paragraph 14 above). TIB has been administering a technical assistance fund, now virtually exhausted, provided by Sweden for similar purposes. TIB's guidelines for administering this fund are attached as Annex V to this report. These guidelines would be followed in administering the proposed project. 37. A project unit would be established as part of TIB's Planning and Development Department (which is responsible for TIB's current technical assistance fund) and report to TIB's Director of Planning. The establish- ment of such a unit is considered necessary in view of the greatly increased demands which will be placed on the Planning Department by the project. The unit would be expected to play a major role in identifying high priority studies, in drafting terms of reference, evaluating proposals by consultants, negotiating contracts and supervising the studies during implementation. The unit would be responsible for initiating steps designed to secure finan- cing for viable projects emerging from the pre-investment and for follow-up action on recommendations identified in special studies. In general, attempts would be made to identify potential financiers prior to the com- mencement of the studies to ensure that any important decisions would be taken in consultation with the potential financing agencies. 38. The project unit would comprise an economist/financial analyst, an engineer, one of whom would be designated as head of the unit, and a lawyer (part-time) all of whom would be appointed in consultation with the Asso- ciation (paragraph 1 to Schedule 1 of the draft Project Agreement). Although the lawyer would perform a crucial role in drawing up consultants' contracts, he would not be fully employed on project related work. He would, therefore, be attached to the Tanzania Legal Corporation, which performs all legal services for parastatals in Tanzania, including TIB, and be available to the unit when his services were required (paragraph 2 to Schedule 1 of draft Project Agreement). The Legal Corporation is currently seriously under- staffed particularly in the area of contract law. Since the role of the unit is considered crucial to the success of the proposed project it would be a condition of effectiveness of the Credit that the head of the unit had been employed (Section 5.01(c) draft Development Credit Agreement). In view of the broad range of sub-projects expected to be financed by the proposed project and because the staff of the unit cannot be expected to possess spe- cialist expertise in all these areas, provision would be made for the project unit to recruit specific short term technical expertise to help review terms of reference, preliminary drafts and other documents related to individual studies. Support services for the project unit including necessary vehicles and office equipment would be provided.  - 15 - Procedures for Approval of Studies 39. Applications for project studies would be submitted by the parastatals and government departments concerned to TIB. The project unit would review each proposal which would then be. submitted along with the Unit's recommendations to TIB's Loan Committee and Board for consideration. In conducting its review the project unit would assure itself that suitable and timely finance could not be secured from other multilateral and bilateral agencies including UNDP. The presence of representatives from the Ministries of Planning and Finance on TIB's Board (paragraph 15 above) would ensure consistency with Tanzania's overall development priorities. Any sub-project expected to cost over $50,000 would be approved by the Association (Section 2.07(e) of the draft Project Agreement). Channeling of Funds 40. The proceeds of the Credit would be channeled as a grant by the Government to TIB under a subsidiary agreement whose terms and conditions would be acceptable to the Association (Section 3.01(b) of the draft Develop- ment Credit Agreement). Funds for the studies would be passed on as grants by TIB to the individual parastatals and government agencies, who would actually commission the studies and employ the consultants. It is expected that if and when bankable projects emerged, TIB would, in accordance with the usual procedures of its technical assistance fund, convert these grants into loans. Costs and Financing 41. The total project cost of $7.5 million (net of taxes), of which $5.9 million or nearly 80% is expected to be foreign exchange, is made up as follows: $ million Consulting services 6.2 Overseas fellowships 0.2 Project unit expenses (including short-term consulting services, vehicles and equipment) 1.1 7.5 Further details are given in Annex III. The proposed Credit would finance $6 million or 80% of total project costs; the Government, implementing agencies and TIB would contribute the remaining $1.5 million or 20%. This local con- tribution, part of which is expected to be in kind, is considered essential to ensure and evidence the commitment of the commissioning agencies to the studies supported under the project. Procurement and Disbursement 42. In the case of any consultants contract expected to cost in excess of $50,000 equivalent the selection of consultants and the contracts  - 16 - to be concluded with them woluld be subject to approval by the Association (paragraph 6 of Schedule I oE the draft Project Agreement). Contracts for vehicles and equipment ($100,000) are not expected to attract international interest and would be placed on the basis of competitive bidding in accord- ance with the Borrower's usual procurement procedures which are satisfactory to the Association. 43. The Association would disburse 100% of the foreign costs or 80% of the total costs of consultancy contracts (including contracts with project unit experts), 100% cf the foreign costs and 75% of local expend- itures for overseas training and 100% of the foreign and 75% of local expenditures for vehicles and equipment. Benefits and Risks 44. The technical expertise to be provided under the proposed project will help alleviate critical manpower bottlenecks. The project will assist the Government in implementing its program of economic restructuring and in its efforts to shift the emphasis of the country's investment programs from infrastructure to more directly productive projects. The special studies designed to improve the utilization of existing production facilities could result in significant short- and long-term increases in output. The pro- posed project is not, however, without risks. Some inappropriate sub-projects could be selected, others could be poorly executed and supervised and viable projects emerging from the studies could go unfinanced. The project has been deliberately designed to be flexible so as to meet Tanzania's changing needs for pre-investment and special studies; however, this in turn places considerable responsibility on the Project Implementation Unit. The calibre of project unit staff will in large part determine the success of the pro- ject. Their role in identifying and preparing suitable sub-projects and in following up financing for viable projects which emerge from the studies will be crucial. In order to minimize the risks senior project unit staff would be appointed in consultation with the Association and it would be a condition of effectiveness of the proposed Credit that the head of the unit had been employed (paragraph 38 above). Furthermore, in an attempt to closely supervise implementation, all studies expected to cost in excess of $50,000 would be approved by t:he Association (paragraph 39 above). PART V - LEGAL INSTRUMENTS AND AUTHORITY 45. The draft Development Credit Agreement between the United Republic of Tanzania and the Association and draft Project Agreement between the Association and the Tanzania Investment Bank, the recommendation of the Committee referred to in Article V, Section l(d) of the Articles of Agree- ment of the Association and the draft resolution approving the proposed Credit are being distributed to the Executive Directors separately. The draft Development Credit and Project Agreements follow the form previously used for this type of project. 46. Features of the draft Development Credit and draft Project Agree- ments of special interest are referred to in paragraphs 35, 38, 39 and 40 of this report. Conditions of Credit effectiveness include (a) that a subsidiary agreement between the Borrower and TIB, acceptable to the  - 17 - Association, had been executed (Section 5.01(b), draft Development Credit Agreement) and (b) that the head of the project unit had been employed (Section 5.01(c), draft Development Credit Agreement). 47. I am satisfied that the Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 48. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments Washington DC November 12, 1975  co C4 I4- 0 FI- x NU~~~~~~~~~~ I~~~~~ it h s Q~~~~~~~~~~~~~~~~~~s N - ~ u -U - LE t 3 < - m ' I II -- - g - C~~~~~~~~~~~~~~~~~~~~~~~1 -- -5 - i z t >Z>oV ESx o@^H~~~~~~~~~~~~~~~~~~~A g xa aZ -i 2 'A^ |aa&X a) "