Tanzania - Second Investment Bank Project

CIRCULATING COPY 0 P p Y , 1R: RETURND TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No.P-1696-TA REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE TANZANIA INVESTMENT BANK WITH THE GUARANTEE OF THE UNITED REPUBLIC OF TANZANIA October 15, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quote or cited without Bank Group authorization. The Bank Group does not accept responsibility fol the accuracy or completeness of the report.  CURRENCY EQUIVALENTS USED IN THIS REPORT Tanzania Sh 1 = US$ 0.14 US$ 1.00 = T Shs 7.14 TANZANIA FISCAL YEAR July 1st - June 30th  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE TANZANIA INVESTMENT BANK WITH THE GURANTEE OF THE UNITED REPUBLIC OF TANZANIA 1. I submit the following report and recommendation on a proposed loan to the Tanzania Investment Bank with the guarantee of the United Republic of Tanzania for the equivalent of US$15 million to help ifinance the foreign exchange component of investments of this development finance company in Tanzania. The interest on the loan would be 8-1/2% per annum. Amortization will conform substantially to the aggregate of the amaortization schedules applicable to the specific investment projects financed out of the proceeds of the loan. PART I - THE ECONOMY 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 Govern- ment were distributed in April 1975. The Consultative Group for East Africa met in April 1975 to discuss the progress and prospects of the Tanzanian economy and the need for additional resources to support the Government's development program. Country data are provided in Annex 1. 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 docu- ments, most central of which is the Arusha Declaration of 1967. Ln restruc- turing 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 paticipatory, decen- tralized socialist economic order; (b) the eradication of absolut,e 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.  -2- 4. Tanzania is one of the three Partner States belonging to the East African Community. The 1]967 Treaty for East African Cooperation is one of the most far-reaching and comprehensive economic cooperation agree- ments in existence among sovereign states. However, in practice the degree of economic 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 interstate 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 stag- nation 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 concessionary 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 subs- tantial 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  - 3 - 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 plan- ning. 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 subject 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 trance (paragraph 6 above) has been made. In this connection, a proposed second Bank program loan is under active consideration. In addition, a continued capital inflow in excess of the foreign exchange c6m- ponent of high priority projects will also be required if Tanzania is to achieve its development targets. FirLancing of some local expenditures will, therefore, be justified.  - 4 - 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 about 9% by 1980 and remain at about that level throughout the 1980's. Including a notional one-third share of the debt of the East African Community Corporations, the IBRD is pre- sently 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 the 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 manage- ment 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. PART II - BANK GROUP OPERATIONS IN TANZANIA 11. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1963, 20 credits and eight Bank loans amounting to $299.8 million have so far been approved for Tanzania. In addition, Tanzania 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 August 31, 1975 and notes on the execution of on-going projects. 12. 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 V (Credit No. 371 TA), were for directly productive projects. These projects are supporting both the agricultural and industrial sectors including an integrated Rural Development project (Credit No. 508 TA) and our first direct lending for an industrial project, Mwanza Textile (Loan No. 1128 TA).  - 5 - In addition, projects to support fisheries development, maize production and a proposed technical assistance credit are expected to be ready for consideration by the Executive Directors in the near futute. A forestry project and a project to support selected industries and a related estate development at Morogoro are currently being appraised and a second rural development project is expected to be appraised in the field shortly. As far as infrastructure development is concerned, a third power project and a fifth education project are expected to be presented to the Exe- cutive Directors for their consideration in the near future and a proposed water supply project will be ready shortly for field appraisal. 13. While 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 apprehensions of an essential:ly con- servative traditional sector to adopt the new "technology" and others are undoubtedly a reflection of the strains created in a society which is attempting a unique traverse from one set of economic, institutional and political rules to another. The Government has become extremely conscious of these implementation 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 whenever it is demonstrably necessary. At the request of the Government about 15 technical staff have been supplied by ADS(Agricultural Development Services) 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 em?hasize formal and non-formal training. Furthermore, a conscious attempt is being made to develop less complex projects. 14. The difficulties facing the East African Community Corporations referred to in paragraph 4 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 inter- state 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 interstate 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 (Third East African Railways Project) were suspended in February 1975.  15. A Bank mission whic:h 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 t:o complete. It 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 agreement on the long-range form of the CoTa- munity, 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 ensurce a workable plan for railway detcentralization, 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 appointment 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 decent:rali- zation of the Corporations and is expected to be financed by the UK. 16. 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. While further problems can be anticipated, it is expected that they can be solved through the joint efforts of the Bank and the Partner States. The dangers implicit ia the possibility of operating difficulties growing in all the Corporatioas is fully recognized and a strong desire to control this situation is evident. In addition, a general but consistent commitment to the Community has been noted in the discussions with the Parnter States. The Bank's role as an "honest broker" has been fully 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 - INDUSTRIAL AND FINANCIAL EN?VIRONMENT Ividustrial Sector 17. The manufacturing sector in Tanzania accounts for only 10% of GNP but is increasing in importance. The average growth rate of value added by the sector fron 1964-72 was 9.8%. The share of manufacturing employment in total non-agricultural wage employment increased from 12.5% in 1964 to about 19% in 1971 and the total number of jobs in registered manufacturing enterprises employing 10 or more was about  55,000 in 1971. Industrial investment increased from T Sh 150 million in 1966 to T Sh 157.2 million in 1971. The contribution of the mining sector to gross national product, exports and wage employment is at present small and measures approximately 2%, 8% and 1%, respectively. 18, Since independence in 1962, 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 54% of total commodity imports in 1961 to 27% by 1971. As the opportunities for import substitution have become exhausted, the Government has been reviewing its industrial development objectives and has now chosen the so-called "basic industrial strategy." 19. In essence, the basic strategy aims at a gradual structural transformation 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 newly manufactured exports is seen as a logical extension of production for the home market. The strategy also emphasizes the development of domestic machine tool manufacturing and maintenance capacity. Hence, the promotion of metal engineering industries and the training of industrial engineers will receive special attention. A key component of the strategy will be the establishment of an integrated steel mill of as yet an undetermined size based on domestic coal and iron ore. 20. In the Industry and Mining Sector Mission Report, which was distributed to the Executive Directors in April 1975, the Bank has raised issues concerning the improvements required in the productivity of existing state manufacturing enterprises and the need for increasing the efficiency of the public sector. There is also the need for the Government to specify the exact role of the private sector. Since the Arusha Declaration (1967) and the acquisition by the Government of a majority interest in all important manufacturing enterprises, mining and financial institutions,most industrial and mining activity is now in the public sector. All major projects started after 1967 have been in the public sector. Nevertheless the contribution of private firms is appreciable and accounts for about 25% of the value added and 50% of the employment in the sector. There is need, therefore, for the removal of uncertainties to the future role of private investment so that this sector, which has considerable potential, can also assist in industrial development. This is particularly important in the mining sector where cooperative ventures between the Government and private mining companies could be mutually 'beneficial. The Government has adopted this approach in one or two cases but the principles have not been embodied in legislation and thus the rules of the game are not known to potential participants.  After the Arusha Declaration, nationalized industrial ent:er- prises were regrouped in the National Development Corporation (NI)C). Subsequent to 1970 the Government split several state corporations from NDC including those dealing with agricultural processing, tourism, forestry and textiles. These have been grouped into holding companies which manage existing enterprises and promote new projects through equity investments in their respective sectors. This step towards decentralization has helped in reducing delays and in developing responsible management at the parastatal level but further steps need to be taken to strengthen. management at the firm level to bring about the further devolution of responsiblity to this level. The critical shortage of competent and experienced middle-level Tanzanian managers is a perennial problem and a large number of enterprises are still dependent on expatriate personnel. This dependence is expected to continue beyond 1980 which was originally the target year for national self-sufficiency in technical manpower. However, with the intensive programs under way in the different parastatals as well as the seven management training institutions for different levels of skills, effective steps have been taken to train sufficient Tanzanians to reduce the present dependence on expatriate management. Financial Insitutions 22. Tanzania has several financial institutions. At the apex of the financial system is the Bank of Tanzania which is the central. bank. In addition to the Tanzania Investment Bank (TIB), there are six Govern- ment owned specialized institutions. The National Bank of Commerce (NBC) in the only commercial bank and was established in 1967 when eight private commercial banks were nationalized and merged into the NBC. Until 1970, NBC also provided medium- and long-term financing to industry, but after TIB was established in 1970, NBC discontinued this activity and trans- ferred its entire term portfolio to TIB. NBC now provides only short- term financing and working capital on a roll-over basis. The Tanzania Rural Development Bank (TRDB) provides the bulk of the credit for the agri- cultural sector and has been the channel for onlending for all the Bank Group projects for agriculture. TRDB has also financed some small-scale industries including saw mills and grain mills but does not finance medium and large industries. In addition there are the following four specialized institutions: the National Insurance Corporation, the Tanzania Housing Bank, the National Provident Fund and the Tanganyika Post Office Savings Bank. These institutions have few activities in the industrial sector. 23. There are two other development banks which operate in Tanzania: the East African Development Bank (EADB) which was established in 1967 by the three member Governments of the East African Community and the Tanganyika Development Finance Company Limited (TDFL) which is owned in equal shares by the Tanzania Government and three bilateral aid agencies. EADB finances only industrial projects but no tourism or agricultural projects. Until a few years ago EADB was the more important source of industrial investment but TIB has now  -9- surpassed EADB's operations in Tanzania. EADB however continues to play an important role in Tanzania by financing projects designed to make the economies of the Partner States increasingly complementary and also by financing jointly with TIB projects which are too large for TIB to handle alone. The Bank had provided an $8 million line of credit to EADB in 1972 and is presently considering a second loan. The Tanganyika Development Finance Company Limited (TDFL) established in 1962 is smaller than TIB and is the principal banking source for private investment. In 1973, TDFL approved 10 projects for T Sh 18.5 million. TDFL's financing is limited to T Sh 6 million per project. In spite of its modest size, TDFL has played an important role in the Tanzanian manufacturing sector. A recent change in its policy now enables TDFL to also finance parastatals and TDFL is expected to finance several projects jointly with TIB. Small-Scale Industries 24. The overall responsibility for small-scale industry development has been entrusted to the Small Industries Development Organization (SIDO) which was especially created in 1973 for this purpose. SIDO's activities include providing technical and managerial consultancy services, establishing industrial estates, conducting training programs, providing marketing services and supplying machinery on a hire- purchase basis. During its first year of operations SIDO made available machinery worth T Sh 1 million. Because it is not in a position to give substantial financial assistance its impact on the development of new small-scale industries has been very limited so far. rhe Government has still under study proper arrangements for financial support to small-scale industries and in the meanwhile TRDB has been extending credit for small agro-based industries (grain milling, saw mills). The Government has recently established a special fund of T Sh 5 million in TIB for financing small industries. TIB intends to concentrate initially on small-cale industry activities in industrial estates and areas where it already has other operations. PART IV - THE PROJECT 25. A report entitled "Tanzania - Appraisal of the Tanzania Invest- ment Bank" (No. 849-TA, dated October 6, 1975 ) is being distributed separately to the Executive Directors. The project was appraised in June 1975. A loan and project summary is provided in Annex III. Negotiations were held in Washington D.C. on September 11 - 12, ]q75. The Tanzanian delegation was led by Mr. George Mbowe, TIB's Chairman and Managing Director.  - 10 - Background 26. The Tanzanian Investment Bank was established in November 1970, to provide medium- and long-term financing for inclustrial development, including agricultural processing and tourism. By statute, TIB's share capital must be owned proportionately by the Government (60%), the National Bank of Commerce (30%), and the National Insurance Company (10%):, both institutions are wholly owned by the Government. TIB's authorized capital is T Sh 200 million and T Sh 70 million has been paid-in. TIB's paid-in share capital will be increased to T Sh 100 million by December 31, 1975. Five years after its establishment, TIB has emerged as an important institution. Its operations have increased sharply and its financing now accounts for about 20% of new investments in the manufacturing sector of Tanzania. The Bank has hadl a continuing dialogue with TIB since its inception. In February 1974, IDA granted a credit: of $6 million for TIB which has now been fully committed. 27. The objectives of theproposed loan for TIB are twofold. First, in line with the Government's plan to reduce Tanzania's economic depend- ence by increasing productive investments, the loan will provide resources for investment in medium and large scale industries, agro-business and tourism. Second, the loan will make it possible for the Bank to support TIB in further improving its procedures and project selection. Board of Directors, Manaeement and Organization 28. TIB's Board is chaired by the Managing Director, who is appointed by the President, and has eight other members. They include the Principal Secretaries of Finance, Economic Affairs and Development Planning, and Commerce and Industry. TIB's Board is active and has the sole power in approving loans and equity investments. TIB's senior managers are all Tanzanians. Its top management consists of a Managing Director and a General Manager. TIB's Managing Director is a Director of several important parastatals. TIB has no General Manager at present but the Government plans to nominate one in due course. TIB is organized along functional lines and has four departments: Operations, Planning and Development, Finance and Administration. Tanzanians head alL these departments. As of June 1975, TIB's total professional staff numnbered 31, of which nine were expatriates. TIB is keen to reduce its reliance on expatriates and has developed an excellent training program for its staff and is also making active use of overseas training programs. Ten of its staff have already completed overseas training and five more are enrolled in training programs abroad. 29. TIB's project appraisal work is good and includes comprehensive financial and economic analyses. Recently, TIB has also commenced systematic follow-up activities on all its portfolio. Its management has recognized the paramount importance of this function in view of problems with TIB's increasing portfolio and plans to further strengthen the follow-up staff. TIB's FY1975 audit is technically satisfactory.  Compared to earlier audits, the FY1975 audit improved markedly because of improvement in TIB's accounting system and the reorganizatLon of the Tanzania Audit Corporation. TIB's financial management has improved recently but needs to be strengthened and in this connection a financial adviser is to be recruited. The Bank is helping TIB in findi:ng a suitable candidate. Operating Policies 30. According to TIB's Act, it can make medium- and long-term loans, underwrite securities, guarantee debts, and invest in equity of enter- prises. TIB's financing so far, however, has consisted mostly of loans. Under Tanzania's centrally planned economy, parastatals are primarily responsible for project promotion, implementation and management, while TIB is expected to provide an independent check on these invest- ments through loan financing. TIB's Act requires that it must follow sound banking policies and finance only projects which are technically feasible, and financially and economically viable. But in Tanzania's centrally planned economy, TIB may be asked to finance projects that do not meet its normal lending criteria. TIB has agreed to finance them with the "agency funds" which TIB administers on behalf of t'he Govern- ment; the Government takes the risk for these operations and rIB receives an unconditional management fee of 3/4% per quarter on the outstanding balance. 31. TIB's maximum commitment in any single project or enterprise is limited to 20% of its own net worth (T Sh 127 million at present) and as long as it does not exceed 75% of the total fixed investment costs of the project. TIB is required to follow a prudent policy in debt acquisition and will not incur debt in excess of three times its net worth. It is TIB's policy to charge a minimum lending rate which will substantially reflect the cost of capital in Tanzania. Recently, TIB has raised its minimum lending rate from 9% to 10% per year. This rate normally applies to all of its operations. TIB also charges an appraisal fee of 1% (for projects which are ultimately approved) and a zommitment fee of 1% per year. TIB can lend up to a maximum of 15 years. This lending rate is in line with other lending rates in Tanzania. For instance, the Tanganyika Development Finance Company charges 10-10.5% for medium- and long-term loans and the National Bank of Commerce charges between 8% and 10% on most overdrafts. Operations and Portfolio 32. TIB's operations have increased rapidly, As of June 30, 1975, TIB had approved 79 loans for a total of T Sh 318 million and seven equity investments for a total of T Sh 9 million. All approvals, except for T Sh 20 million of cancellations, have been committed. The time lag between approval and commitment has declined to an average of two months and is satisfactory. As of June 30, 1975, TIB had disbursed r Sh 135 million. By improving its follow-up during project implementation TIB  - 12 - would be able to increase t:he disbursements rate appreciably. The average size of TIB's loans approved in FY1975 is $629,000. Most TIB assisted projects, use domestic raw materials. The three mosi: important sub-sectors are food and food processing 30%; wood and wood processing 13%; and tanneries and leather processing 10%. Projects approved in FY1975 are expected to create 2,400 new direct jobs al: an investment cost per job of $11,000 which is low. The projects approved during FY1975 have an average estimated financial rate of return of 19% and an economic rate of return of 31%. 33. TIB's major problem is its portfolio. As of June 30, 1975, TIB's loan portfolio (those loans on which disbursements have coimenced) consisted of 37 projects for a total of T Sh 122 million out of which T Sh 65 million (53%) was affected by arrears over three months. Two projects, accounting for 11% of the portfolio have settled tlleir arrears since. Five projec:ts accounting for 19% of the portfolio, are in serious difficulty. They have generally technical as well as market problems, are overburdened with short-term debt and have very poor short-term prospects but may be salvaged if appropriate action is taken. Most of these projects were approved shortly after TIB's establishment and do not reflect TIB's present appraisal standards. TIB has analyzed each problem project and satisfactory actions to solve their problems are being undertaken. Financial Condition 34. As of June 30, 1975, TIB's total assets amounted to T Sh 265 million, including a loan portfolio (60%), an equity portfolio (9%), and current assets (30%). TIB is relatively liquid. TIB's financing consists of T Sh 125 million of long-term debt and a net worth of T Sh 127 million. Its long-term debt equity ratio was 1.1:1. Although TIB's auditors considered TIB's total provisions of T Sh 1.2 million adequate, they appear low in relation to the size and condition of TIB's portfolio. However, TIB does not plan to distribute dividends and its general reserves together with provisions are considered adequate to cover potential losses. TIB is, therefore, creditworthy. In FY1975 T[B earned T Sh 3.0 million, or 3.4% on its average net worth. TIB's admi- nistrative expenses were 1.6% of total assets on an annual basis and are reasonable. TIB's Operational Strategy 35. In line with Government's intention to increase investment in the productive sectors, TIB plans to continue expanding its lending operations. Through further improvement of its relations with parastatals, TIB expects to become involved earlier in parastatal investments and enhance its role in developing projects. By strengthening portfolio supervision, TIB plans to play a constructive role in improving 1:he problem projects in its portfolio. TIB intends to gain experience in financing small scale industries by financing industrial estates in selected areas in cooperation with Small Scale Industries Development Corporation (SIDO).  - 13 - Business Outlook 36. TIB's business prospects are good as many promising investment opportunities in the industrial sector exist. The 1974 Bank industrial sector mission identified a large number of projects with a tDtal investment cost of T Sh 7 billion ($1 billion) in various sub-sectors in which Tanzania can be competitive. The parastatal capacity to prepare and implement projects has improved substantially and, in the future, project development will also be aided by a proposed IDA credit to finance feasibility and engineering studies of industrial projects by consultants. In FY1976, new investments of manufacturing, mining and agricultural parastatals are estimated at $134 million. TIB is expected to finance between 15%-20% of these new investments. As of June 30, 1975, TIB's project pipeline consisted of 20 projects with total financing requirements of $76 million, out of which TIB is expected to provide about $22 million. These projects appear well conceived and cover various sub-sectors. TIB expects to apprDve-T Sh 160 million in FY1976, T Sh 200 million in FY1977 and T Sh 200 million in FY1978. Given TIB's pipeline and the Government's emphasis on ex- pansion of the industrial sector, the projected operations are reasonable. Projected Resource Requirements 37. As of June 30, 1975, TIB's domestic resources consisted of its net worth of T Sh 127 million. Foreign resources consisted of T Sh 212 million ($29.7 million) in untied foreign funds from a number of bilateral and multilateral aid agencies. In addition, TIB had committed T Sh 20 million ($2.8 million) of tied foreign funds from CIDA, the Netherlands and Finland. As of June 30, 1975, TIB had T Sh 58 million ($8.1 million) available in total resources for new commitments. To cover its projected commitments until December 31, 1977, TIB would need T Sh 475 million ($66.5 million) in new resources in- cluding T Sh 272 million ($38 million) in foreign exchange. Taking into account likely contributions from other sources, TIB has a foreign re- source gap of T Sh 107 million ($15 million) to cover the import com- ponent of its projected commitments until December 31, 1977. A loan of $15 million is proposed therefore filling TIB's remaining foreign resource needs and covering 20% of TIB's overall resources requirements until December 31, 1977. Given share capital increase of T Sh 30 million in FY1976, TIB's local resources are adequate. Projected Financial Results 38. TIB's net profit as a percentage of average net worth is estimated to increase from 3.4% in FY1975 to 8.4% in FY1980. The projected improvement in TIB's profitability is due to: (1) a subs- tantial increase in TIB's portfolio and leverage; (2) an increase in spread between the cost of borrowed funds and the yield on loans; and (3) economies of scale reflected in lower administrative costs which are expected to decline from 1.6% of total assets in FY1975 to 1.0% in FY1980. TIB's long-term debt/equity ratio is expected to remain below  - 14 - 3:1 until FY1980 when it will climb to 3.2:1. TIB's debt service coverage is estimated to remain above three throughout the period, which is adequate. Terms of Proposed Loan 39. The proposed loan would be disbursed against foreign excbange requirements, i.e. the foreign cost of imported goods, 65% of the invoice price of goods purchased in Tanzania but previously imported into Tan- zania and 40% of the cost of civil works (Loan Agreement Section 2.02(b). It would be repaid according to a flexible amortization schedule, con- forming to the aggregate amortization schedules of TIB's subloans, which have a maximum maturity of 15 years (Loan Agreement Section 2.08(b). TIB will need the Bank's prior approval of each project using more than $400,000 equivalent of the proposed loan and will not be able to use more than $3 million equivalent in total without the Bank's approval (Loan Agreement Section 2.02(c). The foreign exchange risk of TIE's loans will be borne by the sub-borrower. PART V - LEGAL INSTRUMENTS AND AUTHORITY 40. The draft Loan Agreement between the Bank and the Tanzania Investment Bank, the draft Guarantee Agreement between the United Republic of Tanzania and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. 41. Features of the Loan Agreement of special interest are referred to in paragraph 39 of this report. There are no special conditiorns of effectiveness. 42. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 43. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Washington, DC 1975  ANNEX I Page 1 of 3 Paes O0IUITY DATA - TANZANIA AMIA POPULAT2IO INSNIfT 9L5,087 ha m2~ii~ (eld-1973) 147 / Per Waof ..rable laod SOCIAL D5DICATCRS Reference Countries Tanzaenia o .,oa ON? PE CAPITA US$ (ATL.&S BASIS) /I 120 /b 170A ~ 310 /b 430 Lb DEMOGRAPHIC Cr.Ude-MIth rate (per thousand) 46 Is 7 k 4S1 28 31 4&-i Crude death rate (per thounand) 25 ~ 227 18 f 8 ,Infat oort:lity.rreto (per thousand live births) 22 6-65 5535L. Lieapeetancy at birth (yearn) 38 L 3 h91 65 6- Lao. (Dress reprouto ae/ .3.2 LM.s324 L2. 2. Ppulaio grontinrate 2.2 3.03. ~ L 2.22. Population growth rate 7 urban 5 d7 Age st-utore (percent) 0-14 42 /c.d 1 440 8I 01 15-6L 56 e~ 53 Z-4 77 Age dependency ratio .00 L 0 .9 1.1 /o 0. /b E-onomic dependency raTio . 1.2 1.2 1.1 7S.u.y 1.1 Urban yprnulation an percent of total /..d.p 7 Ay 10 Lae hi A 2e. Family plancing: No. of ..cceptoro cumultive (thou..) .2. Mo. of uoor, (9 of married omnen) .., Total labor force (thousends) 4,900 44 5,600 A, 5,400) /0 12,1000 i 2,90f Percentage employed in agriculture 89 zz 91 /dTo8 L 6" : Pecetage unemployed . ...1 '7 LA INCOMEg DISTRIBUJTION P.-nt f ntioalincme received by highest 5% .. e3L 4,j 2~ Perceent of national iec... rece.i-ed by bighsot 20% . 60 .375 Percent cf national incom re-nived by lowest 20% ..5/ . 10t Peoerce of natiional moose r-i-lnd by loaset 40% 14 .21 MSTIROUTION CF LAND OWN1RRSHP N owned by top 10% of eowern 20~ % owned by smallest 10% of owners . .. 2 IMALTK AND NUJTRIS'1ON Population per phynliac. 20,000 /dAA 77,940 dO 6,5!'/c 1,8702t I j~ PopulaItion per -sceing person 8,77.. 6,53C 3 7, i, 360 ~ 11 is Ppulation per hospital bed 530 700 Lq- 810 b,~ 29 /o Per capJt: calorie s-pply an % of reqireemete/ 69 /p: 73 101 103 9 Per capita protein supply, itel. (grustv P.r dey& 42 /4 4 71 65 h Of ehich, nemal end pulse 22 . 23 29 19 2o.z Death rate 1-4 years a 7 EDLUCATICON Adjusted /8 pri.ary .choe1 onrollosnt ratio 25 37 / 67 98 /b a0 1k Adjunted 7R encnd.ry nebh- enrufloset rotlo 3 ~ 9/.L, 41 3:L Tearn of schooling provided, first and -eond le-e 13 13 13 12 1 Vocational enrollment as 9 of .ec. n,,hool enrollment 23 L/. /o 2 /o b6 15o Adult literacy rote % .. 9 7b7ad..d 35 12L2ed 92 s.2. 8 Aeoag Mo. ef Per"o" Per room (u"rbn 1. aO ... 2.7 i/a. a Percetc ocuidunt without piped eatr * 30 /ea .k0 o 6%; Auceento e.lec triIy (a % of tota populution).....00/ 43. Porcoct of 0-1a populatio- conneted to electricity LO . .4 Tb j0- CONSUMPTION pe'-r t r. p,1000 population 16 /h Ll/ 127 /k Paonengee cure per 100 population ..3 ~ l ~24 zlectric peme conre-ption (kwh p.o. 15 /d 71i00/ 321 Mew.print consumption p.c. kg per year LL 0.l -.T 3.t29 & Notes-:.Figures refer either to the latent periodo or to acount of.e-ioreealte-eatre body weigbt., and the.l.t.ni years . Latot periodo refer in principle to ditributon by g andse of national poPulation. the yeor 1956-60 or 1966-70; the latest ye"rn in pa-n- /6 Pretein standards (requtroneet) for ali oeentrles as estab- ciple to 1960 end 1970. limbed by USDA Fo.oonomc Raoearcb Service provIde for a ainimum aI The Per Coplit GOP entiente io at ma~rk.t pa-tore for allowancue of 60 grosse of total protein per day, and 20 gpsae of y-ar oiler then 1960, ca1culted by the anne on-vrelon animal and pulse protein, of chiub 10 graae should. be anloal techn1ql:e an the 1972 world Bank Atlen. protein. Thens standad. are somehat losr tha those of 75 12 A-erage nuber of deughtrer per cenan of reproductive gra- of total protein an 23 ga-am of animal Protein as..5 age. ar.rag. for the s,rld, proposed by FLO in the Third World Food la Jbpn.iotln gronetl rates ar for the de-dee ending in Surrey. 1960 end! 1970. a7 Sons st.dien bhss suggested that cu.de death rates of children A helio of popclation under 15 end 65 end over to pepula- ages 1 throgh 4 may be .sed an a first approntimation ind.a of tion of agen 15-64 f'or age dependency reti end to labor eale-trition . fore of agee 15-64 for e-onenc dependency ratio. /8 Paroentags enrolfled of oorrep.ndlng population of school age FAO reference tetndards represntn physiological re- an defined for seat, 0entry. cquiraaentu for --Ia activity end health, taking E. icluding forente end psaturen; lb 1972; /c 19517; /d Manland Tnaa; 1967; If UN estieate, 1965-';O, Went &..lysia; /h 1960-72; /i 15 ga...ited to-sohips, 1957-67; 4(T ~2,000a or sre Inhabitants; Ai Seoul City and -n ,,icpalities of 5,1000 or sor inhabitents; /I ifricen population; /- 19,69; Ai 1973; /. 1971; Li 33 gattid toenships; ~j 16 gazetted to-sehips - / Gzeetted areas of 10,000 or core inhabitants; /a 1970-75 SN estia:te; /t Hauneholds; /u Fkio of population under: 15 add 65 and ever to to tal labor force; Number en the register, not all corking in the country; Ls. 1976; /x 1961-63; IZ Eatimate; 1g 196L-66; 1N 968, /ab Secondary schooling includes teacher-treining at the thIrd level; /a Definition unknown ; /ad41 yare ndscotvr; 4Te1966; la.f 1958, Zannlbar; ILM 1962-69; 51h ncludIng -ehicles operated by polica and othar g-eesrnntal oscuaty i;an1ta!n; mi Regietered only; /pi 1963; /5k Water piped inside; /. 10 yearn and ove r; /m 1962; /an 1W1; /o 1.idi._orRoutside; /-P UN estimate; 7&- Muster of rooe includes rooa used only for professiona r boniness pcrp...o;lar Inc.ding light commeerial vehicles. Maa l 0set.le.tsd as n .. oij-ct1v country becauds it. population in coaprable in else and its ecenonic d-valopmert 15evee otps alad. R7 September 16, 1975  AhNNE I ECONOMIC DEVELOPMENT DATA ~~Page 2 of 3 Pages (Amounts in miLllions of 0.5. dollars) Actual Prjeted 19 67- 19 73 - 19 75 - 1981 - 17 95 18 1973 1974 19~~_75 1976 19 80 1972 1974 1980 1985 L - NATIONAkL ACCOWJN __ At 1973 Prices asd hae aes Average Annual Growth Rates As Percent of GDT Gross Domestic Product 1819.2 1863.9 1952.4 2035.2 2450.1 4.9 2.5 4.6 5.4 100.0 104.1 104.0 Gains from Terms of Trade(+ - -29,1 77.6 470.1 -95.0 - -4.1 -4.0 Gross Domestic Income 1919.2 17W.s fX74_. 8 2T3l 733.2 4.5 0.9 4.7 5.4 000 ffT Import (incl. NF'S) 519.8 517.4 419.1 424.3 527.4 6.8 -0.5 4.7 6.5 28.6 22.4 22.4 Exuorts 1 (import capacty 412.0 309.5 276.9 314.1 384.5 2.6 -25.6 4.4 7.1 22.9 14.8 16.3 Resource Gap 102.8 T07. 9 -142-.1I TIt -T43.i 37.7 -776 T2 Consumption Excpenditures 1538.6 1635.4 1597.1 1637.6 1941.2 4.8 6.3 4.0 5.3 84.6 85.2 82.4 Investment 1 (incl. stocks) 406.6 407.3 419.8 437.6 557.1 8.4 0.2 5.8 5.6 22.4 22.4 23.7 Domestic Savings 280.6 199.4 277.6 327.5 414.0 2.7 -28.9 8.3 4.3 15.4 14.9 17.6 National. Savings 286.8 207 .L 270.3 323.9 374.1 3.4 ~-27.8 6.7 3.9 15.8 14.4 15.9 MERCHAN4DISE TRADE Annual Data at Current Prices As Percent of Total .132.2. 9 I.