Tanzania - Second Investment Bank Project

Report No. 849-TA FILE COPY Appraisal Report Tanzania Investment Bank (TIB) October 6, 1975 Development Finance Companies Department Not for Public Use Document of the World Bank This document has a restricted distribution and may be ubed hy recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents Currency Unit Tsh Tsh 1 = US $0.}4 US $1 = Tsh 7.14 A,bbreviations ADB African Development Bank CIDA Canadian International Development Authority LAOB East African Development 3ank KfVI Kreditanstalt fur Wiederaufbau NBC National Bank of Commerce NDC National Development Corporation NIC National Insurance Corporation NUTA National Association of Tanganyika ;*rkers SIDA Swedish International Development Authority TANJ Tanganyika African National Union TDFL Tanganyika Development Finance Compatiy, Ltd. TIB Tanzania Investment Bank TRDB Tanzania Raral Development Bank TIBts Fiscal Year: July 1 - June 30  Table of Contents Pag~ e ob I. DA T ION . . . . . . I O CI. . . . . . . . . . . . . . . . . II. THE, ECONOMIC ENVIRONNENT . . . . . . . . . . . . . . . . . . 1 Economy of Tanzania ..... ... . . . . . Recent Economic Developments. . . . . . . . . . . . . L The Manufacturing Sector. . . . . . . . . . . . . . . Financial Institutions . . . . .. . . * . . . . . . Other Institutions for Industrial Promotion . . . . . . . 8 III. TILE INSTITUTION . . . . . . . . . . . . . . . . . ... Ownership and tEnctions... .............. 8 Type of Activities. . . . . . . . . . . ... Administration of Agency Funds. . . . . . . . . . . . . 9 Assistance to Small-Scale Industry. . . . . . . . . . . . 9 Investment and Financial Policies . . . . . . . . . . . . 9 Interest Rate and Foreign Exchange Risk . . . . . . . . . 10 Board of Directors. .90 . . .. . . . . . . . . . . .9 . . 11 Tianagement. . . . . . . . . . . . . . . . . *. . 11 Organization and Staff. . . . . . . . . . . . . . . . . 12 Procedures. . . . . . . . . . . . . . * . . . . . . 13 IV. RESOURCES, OPERATIONS, PORTFOLIO AND FINANCIAL CONDITION. . 14 Resources ... .. * . . . . . *. ..... - .. .. . . . 14 Operations . . . . . . . . . . . . . . .......... 14 TIB's Loan Portfolio. . . . . . . . . . . . . . . . . . 16 NBC Portfolio . . . . . . . . . . . . . . . . . . . . . . 17 Financial Position. . . . . . * 17 Financial Results . ... . .. .. . t. * 17 V. PROSPECTS . . . . . . *. . . . . . . . . . . . . . . 18 TIBIs Operational Strategy. . . . . . . . . . . . . . . . 11 Business Outlook. . . . . . . . . . . . . . . . . Resource Requirements . . . . . . . . . . . . . . . . . . 19 Projected Financial Results . . . . . . . . . . . . . . . 20 VI. CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . 21 This report was prepared by Messrs. Pieter J. M. Balters, Ismail Dalla and Javier Nogales on the basis of their mission to Tanzania in May/June 1975.  1. Survey of Parastatal Organizations in Industry 2. Interest Rate Structure in Tanzania 3. TIB's Statement of Investment and Financial Policy. . Board of Directors 5. Organization Chart 6. Summary of Foreign Lines of Credit 7. Summary of Operations (1971-1975) 8. Analysis of Loans approved as of June 30, 1975. 9. List of Equity Investments approved as of June 30, 1975 10. Economic Indicators of Projects approved during FY 1975 11. Summary Description of Loan Portfolio 12. Balance Sheets (1971-1975) 13. Income Statements (1971-1975) 14. Actual and Projected Financial Ratios (1972-1980) 15. Pipeline of Projects as of June 30, 1975 16. Projection Assumptions 17. Forecast of Operations (1976-1980) 18. Projected Balances Sheets (1976-1980) 19. Projected Income Statements (1976-1980) 20. Projected Changes in Financial Position (1976-1980) 21. Estimated Disbursement Schedule for Proposed Loan  Exchange Rate: US$1 = Tsh 7.14 Date of Establishment: November 1970 Ownership (as of June 30, 1975): (Tsh million) Amount Percentage Govermnent of Tanzania 42 60 National Bank of Commerce 21 30 National Insurance Corp. 7 10 70 100 Resources Position (as of June 30, 1975; Amounts in Tsh million): Domestic Funds Foreign Funcls Sources Sources Untied Share capital 70.0 SIDA grants 64.5 Retained earnings 7.9i/ SIDA loan 8.5 Grant 49.4- ADB 12.5 IDA 42.6 127.3 KfW 30.0 Uses CIDA 18E.3 NORAD 35.8 Net fixed assets 2.2 212.2 Equity investments 24.3 Domestic currency loans 40.4 Tied & Allocated Undisbursed conmitments Loans 43.2 CIDA 9.0 Equity investments 2.5 Dutch Governmnent 7.0 Finnish Government 4.0 Total domestic commitments 112.6 20.0 Total foreign resources 232.2 Available for new comnitments Uses 14.7 Loans 81.8 Uncommitted approvals 8.9 Equity investments 1.5 Undisbursed F.E. commitments 63.7 147.0 Used for local ex- penditures 41.71' Total Available for new F.E. commitments 43.5 Unconrriitted approvals 51.3 1/ TIB used Tsh 41.7 million of foreign grants for local expenditures, including the purchase of TDFL shares and income notes.  Year Ending June 30 1972 1973 l9 74 1)75 pprovals (Tsh million): Loans 34.6 52.9 9iF-L 1128.5 Equity investments 1.2 3.4 5.X Total 35.0 56.3 )0.0 t77 Commitments (Tsh million): Loans - 54.9 53.3 16o01 Equity investments 1.0 1.7 5.9 - Total 1.0 7Z 59.2 Th Disbursements (Tsh million): Loans 9.1 9.6 39.0 70.3 Equity investments 1.0 0.8 4.7 - Total 10.1 10.4 43.7 70l3 Operating Results (Tsh '000) Profit before taxes 2,082 1,936 2,000 6,5o4 Profit after taxes 1,222 1,135 1,166 3,523 Profit after taxes as % of average net worth 2.4 1.9 1.7 3.4 Financial Position (Tsh million): Net worth 52.1 65.2 78.0 127.3 Total assets 134.5 142.2 155.9 265.1 Debt/equity ratio based on out- standing debt 1.6 1.2 1.3 1.1 Debt/equity ratio based on out- standing debt (excluding NBC loan) - - 0.4 0.7 Interest Rates and Other Charges Interest rates on loans: Minimum lending rate is 10% p.a. Commitment charges: 1% p.a. Commission fee: 1  iii Status of IDA-Credit 460-TA (as of -Autus.. 31, 197';) Date of effectiveness: April 18, 1974 Amount of Credit: $6 million Authorized: $6 million Disbursed and outstanding: '.4 s.iilior! Foreign exchange risk: Borne by the sub-borrower Terminal date for project submissions: June 30, 1976 Closing date for disbursements: June 30, 1978 Free limit: $100, 000 Aggregate free limit: $1 million   SUNMARY i. The Government established the Tanzania Investment Bank (TIB) in 1970 to finance public and private enterprises in industry, agriculture and tourism. In February 1974, IDA granted a $6 million credit for TIB. TIB has now almost fully committed the IDA credit and other foreign resources and has requested a Bank loan. ii. Due to drought, increases in petroleum prices and inefficient utili- zation of industrial capacity, Tanzania is experiencing severe economic prob- lems. To alleviate the problems, the Government has decided to increase investment in productive enterprises. Priority has been given to increasing industrial capacity utilization and expanding industries whose capacity is fully utilized. iii. Five years after its establishement, TIB has emerged as an important institution. Its operations have increased sharply and its financing now accounts for about twenty percent of new industrial investment. Its involve- ment in shaping projects has improved and its appraisal capacity has been strengthened. TIB makes a comprehensive economic evaluation of projects, thereby helping the Government in its drive to improve the efficiency of the industrial sector. As a result of an increase in TIB's net worth, its financing limit per enterprise will increase to Tsh 27 million by the end of 1975. TIB, if necessary jointly with EADB or TDFL, can now finance almost any size of project in Tanzania. iv. TIB has good management and its Tanzanian staff has improved as a result of participation in training programs abroad. All of TIB's departments are now managed by Tanzanians. v. TIB's major problem is its portfolio. About half of the portfolio is in arrears of more than three months. Most of the problem projects were approved shortly after TIB's establishment. Most of them can still be salvaged, if appropriate action is taken. TIB has analyzed the problems of these clients and, where necessary, taken the lead in restructuring the companies. TIB has proposed a satisfactory plan of action during negotiations. vi. TIB's profitability is modest but is expected to increase according to TIB's projections. TIB's debt/equity ratio is 1.1:1 and TIB's financial condition is sound. vii. Given the availability of potential projects and the improved capacity of parastatals to develop and implement projects, TIB's business prospects are good and its forecasted operations reasonable. To finance its projected commitments until the end of 1977, TIB needs Tsh 475 million inclu- ding lsh 160 million for domestic expenditures and Tsh 315 million for imports. TIB expects to cover its local resource requirements by cash genera- tion from operations, foreign borrowings and an increase in the paid-in share capital. Taking into account likely contributions from foreign sources other  than the World Bank Group, TIB's foreign resource gap remains at Tsh 107 million. It is recommended that the Bank fill the entire gap by a $15 million loan. The loan would cover 23% of TIB's resources requirements until December 31, 1977. viii. The loan would finance the CIF cost of imported goods, including permanent working capital, and the estimated import component of civil works and imported goods purchased in Tanzania. It would be repaid according to a flexible amortization schedule, conforming to the aggregate amortization schedules of TIB's subloans, which have a maximum maturity of 15 years. TIB will need the Bank's prior approval of each project using $400,000 or more of the proposed loan and will not,be able to use more than $3 million in total without the Bank's approval. TIB will on-lend the proceeds of the loan at a minimum interest rate of 10% with the foreign exchange risk being borne by the subborrower.  1.01 The Tanzania Investment Bank (TIB) was established in 1970. The Government owns 60% of TIB's share capital and two parastatal organizations own the remaining 40%. The Bank has been in dialogue with TIB since its establishment in 1970. In February 1974, IDA granted a credit of $6 million for TIB. TIB has fully committed the IDA credit and has requested further Bank assistance. This report appraises TIB for a $15 million loan. 1.02 The objectives of the proposed loan are twofold. First, in line with the Government's plans to reduce Tanzania's economic dependence by increasing productive investment, the loan will provide resources for invest- ment in industry, agribusiness and tourism. Second, the loan will support TIB which has become an important institution, financing about 20% of new industrial investment. Through its continued association with TIB, the Bank can help TIB further improve its procedures and project selection. II. THE ECONOMIC ENVIRONMENT 2.01 Tanzania has a population of 14 million. With a GDP per capita of $120, it is one of the twenty-five least developed countries. Ninety percent of the population derives its livelihood from peasantry agriculture. The agricultural sector constitutes 40% of GDP and 51% of exports. The industrial sector accounts for 11% of GDP but is increasing in importance. Economy of Tanzania 2.02 Tanzania continues to move towards a comprehensively centrally planned economy. The Arusha Declaration of 1967 empowers the Government to nationalize major economic activities including financial institutions, large manufacturing firms and wholesale trading. Since 1967, the role of the public sector has increased markedly and Tanzania has relied increasingly upon central planning and direct controls to guide investments and to facili- tate income distribution. 2.03 Due to Tanzania's centrally planned economy and its vigorous attempt to mobilize domestic resources, domestic savings increased from 10% of GDP during 1969-1970 to 18% in 1974. The level of investment reached 33% of monetary GDP (23% of total GDP) during the second 5-year plan period (1969- 1974). Unfortunately, the high level of investment has not resulted in a significant growth in GDP. During the second 5-year plan period, GDP increased at an annual rate of 4.8% which was substantially less than the 6.5% envisaged in the plan. The slow growth was due to an orientation of investments towards infrastructure (specifically the investment of about $300 million in the Tan-Zam railway) and social services. The agricultural sector's performance was disappointing due to drought and lack of effective investment programs. Also, the investments in the industrial sector remained underutilized. (See para. 2.14).  Recent Economic Developments - 2.04 Although during the second plan the performance of Tanzania's economy was poor when compared to the magnitude of the investments, its prospects were considered promising. But the events of 1974 reversed the trend. Tanzania's overall balance of payments, which was in surplus in 1972 and 1973, turned into a deficit of Tsh 920 million (US $129 million). Despite higher world prices of its main commodities, for example, cotton, sisal, and coffee, Tanzania reported a trade deficit of about Tsh 2 billion (US $294 million). Consequently, the foreign exchange reserves as of March 31, 1975, were only US$59.2 million, covering less than one month of imports. The turnaround in Tanzania's balance of payments was due to: (i) a threefold increase in petroleum prices which raised the oil bill from Tsh 240 million to Tsh 639 million; (ii) stagnation in agricultural production in 1974 due to the drought and weakness in agricultural development policy (Tanzania's food import bill increased from Tsh 286 million in 1973 to Tsh 739 million in 1974); and (iii) the sale of most export commodities by advanced contracts at low prices. 2.05 Due to strong credit expansion, the money supply (currency in circu- lation and demand deposits) increased by 26.2% in 1974, compared to 19.2% in 1973. The expansion was due to unprecedented increases in borrowings of both the Government and parastatals from the banking system. Government borrowings from the banking system increased by Tsh 305 million, or 31.6%. Other borrow- ings from the commercial bank, mostly by parastatals, increased by Tsh 857 million, or 62%. The rapid increase in money supply, shortage of supplies due to drought, inefficiencies in the industrial sector, and world-wide inflation resulted in sharp domestic price increases. The Retail Price Index for wage earners living in Dar es Salaam rose by 28.1% during the year ended June 30, 1974, compared with an increase of only 6.7 in the previous year. The cost of Living Index for middle-grade civil servants increased by 22.8% against 8.2% in the previous year. Most of the increases were due to rising food costs, which constitute two-thirds of the indices, and the rate of inflation is expected to decrease substantially as a result of increased food production. 2.06 It appears inevitable that Tanzania will continue to face economic difficulties over the next few years. The balance of payments situation is not expected to improve shortly. The trade deficit is expected to decrease only slightly to Tsh 1.9 billion. Prices of most export commodities have fallen rapidly while the costs of imports are estimated to stay the same. 2.07 In view of the economic difficulties which the country went through in the last two consecutive years, the Government decided to postpone the launching of the Third Five Year Plan until next year. This is intended to give the Government ample time to assess the food situation in the country for the current harvesting season and thereby enable the Government to re- arrange its priorities accordingly. In the plan, the Government chose a basic industry strategy which aims at a gradual structural transformation of the 1/ See "Report by the Government of Tanzania for the East African Consul- tation Meeting on Tanzania," Paris, April 22-23, 1975.  - 3 - economy by giving priority to industries that process domestic raw materials for domestic consumption. Exports are seen as a logical extension of produc- tion for the home market. The Government's strategy now aims at increasing agricultural and industrial production for exports through new investments and better utilization of existing capacity. The strategy is translated into the FY 1976 budget which envisages total expenditures of Tsh 6.2 billion out of which Tsh 2.6 billion are for development expenditures. The estimated develop- ment expenditures represent an increase of 10% over 1975 while recurrent expenditures will increase by only 5%. The Government is expecting to finance 45% of the development expenditures from recurrent revenues and local borrowings and the remaining 55% from external sources. 2.08 However, the success of the new intended Government policy of ensur- ing efficient operation of all its parastatals requires detailed clarification and definition of policy objectives of each parastatal and the establishment of clear quantitative as well as qualitative targets by parent Ministries for their parastatals over a given time span. The Government also needs to define the roles of parent Ministries, Board of Directors and Management. A clarity of function of these various bodies which have direct impact on the opera- tions of parastatals is very important for accountability of success and fail- ure of any given parastatal. The Manufacturing Sector -I 2.09 In the Industry and Mining Sector Mission Report, which was distri- buted to the Executive Directors in April, 1975, the Bank has raised a number of issues concerning the productivity of existing manufacturing enterprises and made suggestions for the efficiency of the public sector. The major issues and the Bank's recommendations are summarized in the following para- graphs. Tanzania's manufacturing sector has been the most rapidly growing sector. During 1964-73, the average annual growth rate of value-added in manufacturing was 9.5% in real terms; the sector's contribution to GDP increased from 7% to 10%. Employment (in firms of over 10 employees) rose from 28,100 in 1965 to 59,100 in 1972, an annual increase of 11.2%. In 1973, about 15% of Tanzania's wage earners were employed in the sector. Invest- ment in the sector hovered between Tsh. 100-200 million (US$12-28 million) per year during the 1966-72 period. 2.10 Structure of Industry. Tanzania has thus far followed a typical pattern of industrial development by concentrating on import substitution industries, mainly consumer goods. The share of non-food consumer goods industries in total manufacturing value-added increased from 22% in 1965 to 41% in 1971. Textile and garment industries, breweries, the cigarette factory, and radio assembly recorded the strongest expansion. The share of intermediate goods industries remained stable at around 30%. The principal growth indus- tries in this category were: petroleum refining, printing and publishing, 1/ For a detailed analysis of Tanzania's industrial sector, see the Bank's latest report: "Tanzania: Industrial and Mining Sector Survey," No. 647-TA, March 31, 1975.  glass, cement, and fabricated metals. During the same period, the shiare o. the capital goods industry in manufacturing value-added rose from 2.7,O to 4.4Z'9 while its share in the manufacturing output increased from 1.3% to 7.5%. Al- though the capital goods industry appears to be growing, it is still smalL and consists mostly of commercial vehicle assembly, repair and body construction plants and a few workshops. The food processing industries declined from 36.3% of total gross output in 1965 to 31.4% in 1971. The Government is now committed to increase production in this subsector. 2.11 Public Sector. Since the Arusha Declaration in 1967, Tanzania has developed a unique three-tier system to manage the industrial sector. The system consists of 3 parent ministries, 1/ 11 holding companies 2/ and about 72 operating companies. Annex 1 provides a summary of all parastatal organi- zations involved in Industry as of January 1, 1975. The Government owns 50% or more of the shares in all but 5 of the operating companies. In 1974, parastatals accounted for an estimated 75% of the value-added in the manufac- turing sector and 90% of new capital formation. During the 1967-72 period, total revenue of manufacturing parastatals amounted to Tsh 4,611 million (US$646 million), or 25% of all parastatals' revenue. Manufacturing parasta- tals appear more profitable than other parastatals. Their 7.3% net profit margin as percentage of sales was substantially higher than 5.4% of all paras- tatals. 2.12 Private Sector. Although Tanzania's economy is dominated by the public sector, the share of the private sector is still significant. Current- ly, it accounts for 25% of the value added and almost 50% of employment in the manufacturing sector. Of the total 500 registered manufacturing estab- lishments (employing 10 or more), 430 are privately owned. These include a few relatively large ones, such as a Danish sugar factory (employing about 200), a radio and gramophone assembly plant (employing 140), a glass hollow ware factory (employing 270), and a metal furniture factory (employing 325). 2.13 Lack of adequate policies prevent any significant private invest- ment. Its role is not clearly defined and the last guide to investors, issued in January 1971, has become obsolete because of the number of changes concerning price control, import licensing, dividend transfer control and income taxation. Since Tanzania urgently needs foreign capital and know-how to increase production, it may be timely to consider establishing more joint ventures between parastatals and multinational corporations as the Government has already done in the petroleum and mining sectors. 1/ The Ministries of Commerce and Industry, Agriculture, and National Resources and Tourism. 2/ The Cashewnut Authority, the Livestock Development Authority, the National Agricultural Food Corporation, the National Development Corpora- tion, the Petroleum Development Corporation, the Sisal Authority, the State Mining Corporation, the Sugar Development Corporation, the Tanzania Fisheries Corporation, the Tanzania Tourist Corporation and the Tanzania Wood Industries Corporation.  - 5 - 2.14 Stagnation in 1974. Industry, previously the fastest growing sec- tor, stagnated in 1974. The stagnation was apparently not due to the lack of demand. The demand for simple consumer goods increased rapidly because of the increases in the minimum wage from Tsh 68 a month in 1967 to Tsh 340 in 1974. The Industrial Sector mission estimated that monetary disposable income of the public rose by at least 20% both in 1973 and 1974. While demand increased substantially, supply increased only marginally as a result of: (i) a decline in productive investments by the private sector; and (ii) the low capacity utilization in industry due to a number of factors such as supply disruptions (water and power), shortage of spare parts, lack of skilled manpower, factory layout problems, labor unrest, inadequate management and price controls. 2.15 Price Control. In order to protect consumers against excessive mark-ups, a National Price Commission (NPC) was established in 1973. NPC has a staff of about 18 and is responsible for monitoring the prices of over 1,000 types of goods and commodities. The Industrial Sector Mission observed a conflict between the Government's desire to keep the prices low to the consumer and the need to build up savings (equity) of operating companies for financing expansion. Also, as prices are based on the cost of production plus a certain profit margin, consumers often end up paying more because ex-factory prices are set on the basis of cost of the most inefficient opera- tions plus a fixed margin. This takes away any incentive for management to reduce cost and improve productivity and builds inflationary pressures into the system as profit margins increase with the cost of production. To check the efficiency of domestic production, the Industrial Sector Mission recom- mended that the NPC base ex-factory prices on international prices, possibly plus a margin needed to stimulate domestic industries. The Government is still considering the mission's recommendations. Financial Institutions 2.16 Tanzania's financial system consists of a Central Bank--The Bank of Tanzania--and, in addition to TIB, six Government-owned specialized institutions: the National Bank of Commerce for commercial banking; the National Insurance Corporation; the Tanzania Rural Development Bank; the Tanzania Housing Bank; the National Provident Fund; and the Tanganyika Post Office Savings Bank. Two other development banks operate in Tanzania: the East African Development Bank, which is owned by the Governments of the East African Community countries; and the Tanganyika Development Finance Co., Ltd. (TDFL). TDFL is owned in equal shares by the Tanzanian Government (through the Tanzania Investment Bank), and aid agencies from Germany, the Netherlands and the United Kingdom. The following is a summary describing all of the financial institutions. Annex 2 provides a summary of the interest rates structure in Tanzania.  - 6 - 2.17. The National Bank of Commerce (NBC) is the only commercial baak operating on the Mainland. 1/ NBC was established in 1967 when, following the Arusha Declaration, eight private commercial banks were nationalized and merged into a single bank. Until 1970, NBC also provided medium and long- term financing to industry, but after TIB was established in 1970, NBC dis- continued this activity and transferred its entire term loan portfolio to TIB (see para. 4.09). NBC now only provides short-term financings and some working capital on a roll-over basis. NBC owns 30% of TIB's shares. As of June 30, 1974, NBC's total assets amounted to Tsh 3.1 billion. Despite the stagnation in the economy, NBC's net profit after tax increased in 1974 by 77% to Tsh 52.7 million. Total deposits increased by 27% during the year to Tsh 2.7 billion; 55% of total deposits were from the private sector. During the same year, loans outstanding increased by 62% to Tsh 2.2 billion; 84% of NBC's loans were to the public sector. Parastatals borrowings increased from Tsh 0.9 billion to Tsh 1.6 billion. Loans to the mining and manufacturing sector increased by 110% to Tsh 558 million and accounted for 25% of NBC's loan port- folio as of June 30, 1974. During 1974, NBC opened 15 new branches and 71 agencies (mobile branches) raising the total to 65 branches and 220 agencies. Consequently, the number of savings accounts increased by 66,942 to a record level of 301,539. Savings deposits rose by 19% to Tsh 362 million. The interest rate on savings deposits is 4%. NBC charges 5 to 10% on its loans; most loans are made at 8-10%. 2.18 The National Insurance Corporation (NIC) is the only insurance company in Tanzania. It is primarily a property and casualty company. It owns 10% of TIB's paid-in capital. As of December 31, 1973, NIC's total assets stood at Tsh 196 million and its investments amounted to Tsh 169 mil- lion. NIC had invested most of its funds in Government securities (about 45%), building projects (23%), and short-term deposits (23%). During 1973, investments increased by Tsh 38 million mainly in Government securities. Due to a stop in commercial construction, NIC's opportunities for investment in real estate are limited. However, it can play an active role in industrial development, by providing financing for industrial buildings. 2.19 The Tanzania Rural Development Bank (TRDB) was established in 1971 with an authorized capital of Tsh 300 million, of which Tsh 113 million has been paid-in. TRDB has offices in all except 2 of the country's 18 regions. In 1974, TRDB approved 219 loans amounting to Tsh 161 million, a 49.3% increase over 1973. The bulk of the loans were for seasonal inputs. As of June 30, 1974, its portfolio stood at Tsh 154 million. Cooperative societies, Ujamaa Cooperative Societies and the District Development Corporations accounted for 58% of the loans. TRDB's main sources of funds are bilateral donors and international agencies. IDA has used TRDB for most of its agri- cultural projects. TRDB has financed some small-scale industries, including 1/ Zanzibar has its own commercial bank, the People's Bank of Zanzibar which is not required to surrender its foreign exchange to the Bank of Tanzania.  some sawmills and a number of grain mills. Its lending rate is 8.5% for short-term and 7.5% for long-term loans. 2.20 The Tanzania Housing Bank (THB) is the main source of funds for construction of commercial and residential buildings, including low cost housing. It derives its resources primarily from public deposits on which it pays between 4.5% to 6% interest. IDA has provided $2 million to THB as part of the site and service project. 1/ Total assets as of September 1973, were Tsh 105 million, of which Tsh 77 million were in the forms of commercial loans. Deposits as of the same date were Tsh 71 million. 2.21 The National Provident Fund (NPF) is concerned with pensions and had assets amounting to Tsh 482 million as of September 1973. These were mainly held in the form of Government securities. During the year, these holdings increased by Tsh 86 million to Tsh 416 million. Members' contri- butions as of September 1973, amounted to Tsh 369 million. NPF is the second largest holder of Government securities after the National Bank of Commerce. 2.22 The Tanganyika Post Office Savings Bank (POSB) is used mainly by small urban savers wishing to remit savings to their families in other parts of the country. The number of depositors has been growing rapidly and there are now approximately 330,000 accounts. As of June 30, 1974, total deposits in these accounts amounted to Tsh 69 million. 2.23 The East African Development Bank (EADB) was established in 1967. It finances only industrial projects but no tourism or agricultural projects. The World Bank provided EADB with a first line of credit of US$8.0 million in 1972 and is presently considering a second loan. In 1974, EADB approved 3 projects for a total of Tsh 27.0 million in Tanzania, compared to 27 projects for a total of Tsh 100 million by TIB. As of March 31, 1975, EADB's cumulative disbursements in Tanzania amounted to Tsh 74.4 million, compared to Tsh 99.7 million for TIB. EADB's upper financing limit is Tsh 24.0 million and a large part of its operations in Tanzania consist of large projects jointly financed with TIB (3 of TIB's projects are also financed by EADB). EADB presently charges an interest rate of 10% p.a. plus an appraisal fee of 1% (for projects which are ultimately approved) and a commitment charge of 1% p.a. 2.24 The Tanganyika Development Company Ltd. (TDFL) was established in 1962 with a paid-in capital of Tsh 40 million. TDFL is equally owned by the Government (through TIB) and three bilateral aid agencies (United Kingdom, the Federal Republic of Germany and the Netherlands). TDFL's shareholders have also subscribed Tsh 60 million of income notes. TDFL has played an im- portant role in project promotion and financing of projects in the manufactur- ing sector. In 1973, it approved 10 projects for Tsh 18.5 million. Forty percent of TDFL's commitments are for equity investments. The future growth of TDFL's operations is limited by resources constraints. Until recently TDFL financed only private projects but TDFL has now changed its policies regarding the financing of parastatals and is expected to do a few joint financings with 1/ Credit TA-495  TIB this year. TDFL's maximum commitment to a single enterprise is 10% of its net worth or Tsh 6 million. It currently charges 10-10.5% interest rate plus 1% commission fee and a commitment fee of 1% per year. Institutions for Industrial Promotion 2.25 To promote the development of small-scale industry, the Government established in 1973 the Small Industries Development Organization (SIDO). So far, SIDO has concentrated on extension services. It already has a staff of 150, half of whom are field officers. The other half consists of specialized support staff in Dar es Salaam. SIDO planned 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 for Tsh 1 million. SIDO's plans are ambitious and its success will largely depend on the quality of its staff. The proper arrangements for financial support to small scale industries are still under study. The Government has established a special fund of Tsh 5 million in TIB for financing small scale industries (see para. 3.04). 2.26 The Industrial Development Center (Indcenter) is a UNIDO sponsored institution to promote private and public industries. It started operations in 1966 and has continuously been staffed by five UNIDO experts and five Tanzanians. Indcenter has mainly made feasibility studies but has had little success in getting them implemented. The Government plans to transform Indcenter into a parastatal consultancy organization when the contract with UNIDO expires. III. THE INSTITUTION Ownership and Functions 3.01 The Tanzania Investment Bank was established in November 1970 to provide medium and long-term financing for industrial 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 Corporation (10%); both the National Bank of Commerce and the National Insurance Corporation are wholly owned by the Govern- ment. TIB's authorized capital is Tsh 200 million. The paid-in share capital will be increased from Tsh 70 million to Tsh 100 million before December 31, 1975. Type of Activities 3.02 According to TIB's Act, TIB can make medium- and long-term loans, underwrite securities, guarantee debts, and invest in equity of enterprises. So far TIB's financing has mostly consisted of loans. Under the three-tier system parastatals are primarily responsible for project promotion, implemen- tation and management through equity financing, while TIB is expected to  -9- provide an independent check on these investments through its loan finiancing. Many parastatal projects receive an equity allocation from the Government before they apply for loan financing from TIB. To get TIB involved earlier in projects, the Bank had recommended that TIB get more leeway in making equity investments. The Government has now amended the Act and raised the limit for TIB's aggregate equity investments from 10% to 40% of TIB's net worth. Meanwhile, TIB has been able to work more closely with its borrowers w and get involved in projects earlier than before. TIB's Act also empowers it to promote projects and provide technical assistance to its borrowers. TIB has a special department for the latter functions (see para 3.17). Administration of Agency Funds 3.03 TIB's Act and Statement of Policies require that TIB must follow sound banking policies and finance only projects which are technically feasible, financially viable and economically sound. Therefore, TIB is not expected to finance unviable projects at its own risk. Because TIB operates in a centrally planned economy, it may at times be asked to finance projects that do not meet its normal lending criteria. For such operations, TIB can use agency funds, which TIB administers on behalf of the Government; the Government takes the risk on them and TIB receives an unconditional manage- ment fee of 3/4% per quarter on the outstanding balance which is reasonable in comparison with TIB's expenses. Assistance to Small-Scale Industry 3.04 TIB has recently established a special fund for Small-Scale Indus- tries. The initial contributions to the fund consist of a Tsh 5 million grant from the Treasury and a DM 2 million (Tsh 5.8 million) grant from KfW. To date, the smallest loan made by TIB was Tsh 300,000 (US$42,000) for a wheat production scheme. Because it does not have a branch network, TIB intends, at least initially, to limit its assistance for small enterprises to indus- trial estates and areas where it has larger operations. TIB is also planning to assist the District Development Corporations and Cooperatives in preparing projects on a case-by-case basis. Unless TIB establishes a branch network, it is unlikely to play a major role in the development of small industries. For the time being this assistance can better be provided by TRDB in coopera- tion with SIDO. Investment and Financial Policies 3.05 TIB's statement of Investment and Financial Policy is provided in Annex 3. TIB's minimum commitment for TIB's normal operations is Tsh 100,000 (US$14,000). Its maximum exposure in a single enterprise is 20% of its own net worth (Tsh 127 million at present) as long as it does not exceed 75% of the total fixed investment costs of the project; normally, TIB does not finance more than 60%. 3.06 Although TIB's appraisal includes a thorough analysis of the per- manent working capital requirements of its clients, TIB does not as a practice  finance working capital. According to the institutional set-up in i the NBC is responsible for working capital financing. Especially in view of substantial cost overruns, many projects have run into working capital shortages. While these shortfalls have rarely been the only difficuLty, LIney have added to the problems of many TIB clients. TIB will therefore before committing itself to a project obtain assurances from NBC that working capital financing will be available in appropriate amounts. Interest Rate and Foreign Exchange Risk 3.07 It is TIB's policy to charge a minimum lending rate which will subs- tantially reflect the cost of capital in Tanzania. Recently TIB has raised its minimum lending rate from 9% to 10% per year. This rate applies to all of TIB's operations except for operations financed from special funds, which are for specific purposes, such as small scale industry, and at concessionary terms. TIB also charges an appraisal fee of 1% (for projects which are ultLi- mately approved) and a commitment fee of 1% per year. Despite high inflation in 1974 (28% measured by the Retail Price Index), the mission considers TIB's lending rate adequate for the following reasons: (i) The price increase during 1974, was largely due to the drought which forced Tanzania to import food grains and sugar at very high international prices. The Government has made vigorous attempts to increase food production and inflation is expected to decline to 10-15% in the next year and a lower rate there- after. TIB's lending rate is expected to exceed the inflation rate over the life of the loan; (ii) TIB's lending rate is in line with other lending rates in Tanzania. For instance, the Tanganyika Development Finance Company charges 10-10 1/2% for medium- and long-term loans and the National Bank of Commerce charges between 8 and 10% on most overdrafts; (iii) Tanzania has a high domestic savings rate. In 1973, domestic savings amounted to 18% of GDP; in 1974, savings deposits with the National Bank of Commerce increased by 19%. NBC's branch network rather than the interest rate is considered the major constraint on further increases in savings; (iv) Interest rates play a relatively minor role in resource alloca- tion in Tanzania's centrally planned economy with comprehensive price controls and import licensing. Investment decisions are only partially based on financial returns. Following the Bank's advice, TIB uses the economic rate of return as the primary criterion for project selection and a higher lending rate would probably not change project selection.  3.08 Except for IDA-credit 460-TA and the loan from the African Deveiop- ment Bank, all foreign loans have been passed on to TIB are denominaced in Tanzanian Shillings. TIB will also pass-on the foreign exchange risk on ttPe proposed Bank loan to sub-borrowers. Board of Directors 3.09 TIB's Board is chaired by the Managing Director, who is appointed by the President, and has eight other members. Five of the members are nominated by the Minister of Finance, two by the National Bank of Commerce and one by the National Insurance Corporation. Annex 4 provides a list of current Board members. They include the Principal Secretaries of Finance, Economic Affairs and Development Planning, and Commerce and Industry. TIB's Board meets bi-monthly and holds active discussions on policy matters and all proposed projects. It has the sole power in approving loans and equity investments and authorizing rescheduling. Management 3.10 TIB's management consists of a Managing Director and a General Manager. The Chairman and Managing Director is Mr. Mbowe. He is a Director of several important parastatals, the East African Development Bank and TDFL. He is responsible for policy matters and TIB's external affairs. TIB's General Manager is appointed by the Minister of Finance and is responsible for the day-to-day management of the Bank. Since the former General Manager left last November, Mr. Mbowe has also acted in his capacity. The Government plans to nominate a new General Manager, however. 3.11 TIB's management is assisted by two major committees: a Loan Committee and a Management Committee. The Loan Committee consists of the General Manager, all Department Directors and a Legal Advisor. It meets twice a month and decides on financing proposals submitted by the Ope-rations and Development Planning Departments. No loans can be presented to Lhe Board without clearance of the Committee. The Management Committee is chaired by the General Manager and includes all Department Directors. The committee makes rulings on all internal administrative matters. The same members constitute five other committees: an appointment committee, a housing committee, an education committee, a promotion committee and a committee on the employment of expatriates. Organization and Staff 3.12 TIB is organized along functional lines. Annex 5 provides TIB's Organization Chart, illustrating the Departments and professional staff in each Department. TIB has four departments: Operations, Planning and Development, Finance, and Administration and Legal. Tanzanians head all these departments.  3.13 As of June 1975, TIB's total professional staff numbered 1 's,Cu nine were expatriates. While most of the expatriates are made avail-le. a foreign aid, TIB must pay the Treasury the equivalent local salary. T11hi an excellent training program for its staff (see para. 3.21), and is active use of training program abroad; 3 officers will return from train_` in ' 1975. While TIB has made marked improvement in strengthening its Taizarian staff, it will continue to use expatriates in areas in which it lacks ex- pertise. Several bilateral aid agencies have indicated their interest in continuing such assistance, if requested. 3.14 The Operations Department is responsible for appraisal and follow- up. It has a staff of 12, including 5 expatriates. 3.15 Appraisals. The appraisal division has eight professionals, half of whom are expatriates. The financial and economic analysis of TIB's appraisals are good. TIB has no separate engineering department and engineers form part of the appraisal teams. TIB's technical evaluations are satisfactory. Despite TIB's good appraisals, several of TIB-assisted projects have run into difficulty because the appraisal assumptions proved to be wrong. To avoid similar cases in the future, TIB will more critically review the projection assumptions and test the potential impact of cost overruns, delays in implementation, and different product prices through sensitivity analysis. 3.16 Follow-up Division. TIB has commenced systematic follow-up activi- ties. Management has recognized the paramount importance of this function in view of the problems with TIB's increasing portfolio. The Division is tempo- rarily headed by an expatriate and employs three Tanzanians with overseas training. In view of the serious condition of the portfolio (see para 4.07) TIB intends to further strengthen its follow-up role and to transform the follow-up division into a separate department at an appropriate time in the future. 3.17 The Development and Planning Department, which consists of 9 professional staff, including four expatriates, is primarily involved in promoting projects. TIB has recently financed the first projects promoted by this department and TIB expects that several will follow in the next year. Given the similarity of staff in this department and the Operations Department and in view of the manpower constraints and the shortage of qualified Tanzanian staff in the Operations Department, TIB's management intends to use the staff in this department flexibly. 3.18 Finance Department. TIB's accounting and financial management, which have been weak, have improved recently. TIB plans to further strengthen the Finance Department by recruiting an experienced financial analyst for it. The bank has offered its assistance in finding a suitable candidate. 3.19 Internal Auditing Department. TIB activated its internal auditing function last September in response to the recommendation of the Tanzania Audit Corporation. The department is headed by a qualified accountant, who reports  directly to the Chairman and Managing Director. The main tasks of the Deparc- ment are: (i) to strengthen the accounting system; (ii) to improve TIB's cash flow management; and (iii) to identify and report weaknesses in operations of various departments of TIB. 3.20 Administration Department. This Department is in charge of adminis- tering legal matters, the Board Secretariat, Personnel Management and General Services. 3.21 Staff Development. TIB has an excellent training program. The training is divided into two main phases. The initial training which takes about one year and includes: on-the-job training with all departments in TIB, a project appraisal course at the Institute of Finance Management in Dar-es-Salaam, and on-the-job training with one of the parastatals. Once a new recruit completes this initial training, he will be given professional staff status. After spending a year with TIB, he can qualify for advanced training overseas. TIB's training outlets overseas include: Arthur D. Little (nine months), the Institute of Social Science in The Hague, Netherlands, and other development finance companies, such as, ICICI and PICIC. 1/ Ten of TIB's staff have already completed one or more of these programs and five more are enrolled in them at present. Procedures 3.22 Legal. TIB's legal work is performed satisfactorily by the Tanzania Legal Corporation, a Government legal services agency. Due to implementation of a standard loan agreement and resolution of most issues before loan approval, the time lag between the approvals and commitments has been reduced to an average of 2 months. TIB's Board has also passed a resolution that TIB has the right to cancel the loan if the loan agreements are not signed within six months after the Board's approval. TIB's standard loan documents are satisfactory. 3.23 Procurement and Disbursement. Although TIB normally requires inter- national tendering for all items above Tsh 100,000 (US$14,000), it may waive this requirement if local contractors or suppliers are available. Procurement procedures also require that TIB must be consulted before contracts for goods or services to be financed by TIB are awarded. TIB's disbursement procedures are adequate. 3.24 Audit. By statute, TIB must be audited by the Tanzania Audit Corpo- ration (TAC), which is owned by the Government. TIB's FY 1975 audit is satisfactory. Compared to earlier audits, TIB's FY 1975 audit has improved markedly because of improvement in TIB's accounting system and the re- organization of TAC. TAC's new management has developed a comprehensive 1/ Industrial Credit and Investment Corporation of India Ltd., and Pakistan Industrial Credit and Investment Corporation.  program to strengthen TAC by training its staff in Tanzania, Kenya, and abroad, while employing expatriates in the meantime. UNDP has agreed to finance the program. IV. RESOURCES, OPERATIONS, PORTFOLIO AND FINANCIAL CONDITION Resources 4.01 As of June 30, 1975, TIB's domestic resources consisted of its paid-in share capital accumulated reserves (Tsh. 7.9 million) and grants from the Government (Tsh 7.7 million) 1/. Foreign resources consisted of Tsh. 212.2 million in untied funds from SIDA, ADB, IDA, KfW, CIDA and NORAD. In addition, TIB had committed Tsh. 20.0 million of tied funds from CIDA, the Netherlands and Finland. Annex 6 provides the amount, terms and conditions of each foreign credit line. Except for the ADB loan and the IDA credit, all foreign credit lines have been made to the Government and passed on in local currency to TIB through the Umbrella Agreement. The ADB loan was made directly to TIB; the IDA credit was passed on to TIB through a subsidiary loan agree- ment. Operations 4.02 TIB is now the principal institution for medium- and long-term financing in Tanzania. TIB' s operations have increased rapidly. During FY 1975, TIB approved loans for Tsh. 129 million, almost equalling the total amount approved during the previous four years, and representiug 15% of total parastatal investments of Tsh. 900 million. 4.03 A summary of TIB's operations since its inception is provided in Annex 7. As of June 30, 1975, TIB had approved 79 loans for a total of Tsh. 318 million and 8 equity investments for a total of Tsh. 10.6 million. All approvals, except for Tsh. 19.8 million of cancellations, have been committed. The time lag between approvals and commitments has declined to an average of 2 months and is satisfactory. As of June 30, 1975, TIB's total disbursements amounted to Tsh. 135 million. TIB's disbursement rate has improved marginally. The main causes of the lag in disbursements are: (i) the time lag in obtaining machinery from abroad; (ii) delays in implemen- tation of projects due to building material shortages; and (iii) difficulties in finding qualified management needed to implement the projects. TIB has approved some loans before identifying management; it has now corrected this and usually requires proper management arrangements before approving the project and reserves the right to approve project management prior to dis- bursing funds. TIB plans to further speed-up disbursements by improving its follow-up during project implementation. 1/ In addition, TIB received Tsh. 41.7 million grants from SIDA.  - 15 - 4.04 Annex 8 provides a breakdown of TIB's loan approvals since its inception by size, maturity, interest rates, economic activity and location. The average size of loans has increased from Tsh. 1.7 million ($238,000) in 1971 to Tsh. 4.5 million ($629,000) in 1975; half of all approved loans are for less than Tsh. 3.6 million ($500,000) but one fifth of the loans were over Tsh. 7 million ($1 million) and accounted for half of the amount. The average maturity is 9 years. The average interest rate is 9.2%, TIB charges 10% on new loans. Most TIB assisted projects use domestic raw materials. The three most important subsectors were food and food processing (30%); wood and wood processing (13%); and tanneries and leather processing (10%). Other important subsectors were textile (6%), tourism (6%), and transport (12%). TIB's loans were concentrated in 3 major urban areas: Dar es Salaam (37%); Arusha (18%) and Mwanza (12%). This was mainly due to the pattern of infra- structure development in Tanzania. TIB is making efforts, however, to expand its activities throughout the country. 4.05 Annex 9 provides a list of all equity investments approved as of June 30, 1975. The list includes seven equity investments totalling Tsh. 9.1 million, out of which Tsh. 6.4 million were disbursed. In addition, TIB--with grants from the Treasury--has invested Tsh. 10 million in TDFL's equity and Tsh. 7.9 million in its 8% income notes. Except for the interest income from TDFL's income notes, TIB has to date not received any returns from its equity investments. Three equity investments amounting to Tsh. 4.5 million (67% of equity portfolio excluding TDFL) are in companies with serious problems. These enterprises are: Tanzania Navy Beans, National Engineering Company, and Mtibwa Sugar (see para. 4.07 and Annex 11). Based on TIB's present net worth, the aggregate limit of its equity investments is Tsh. 51.0 million. 4.06 Annex 10 provides a summary of key economic indicators of all projects approved during the first 9 months of FY 1975. During the period, TIB approved 16 loans to 15 enterprises for a total of Tsh. 79 million. Nine loans were for new projects. TIB's loans accounted for 41% of total -project costs of Tsh. 194 million. Based on TIB's appraisals, these invest- ments will create 2,400 direct jobs at an investment cost per job of US$11,000 which is low. Two-thirds of the projects are for import substitution. All except three projects use domestic raw materials. TIB estimated that the export projects will generate annual exports of Tsh. 97 million. The average estimated financial, rate of return is 19% and the economic rate of return 31%. Forty percent of TIB's approvals were in the agro-industry. This was in response to the Government's policy of increasing food production. The other major sectors which received financing from TIB were textiles (13%), tanneries and leather (11%), and wood products (5%). TIB made loans to a few new sectors including metal products and construction.  TIB's Loan Portfolio 1/ 4.07 As of June 30, 1975, TIB's loan portfolio consisted oL 37 proiecii for a total of Tsh. 122 million. Fifteen loans accounting for l'sh. > )i million (53% of the portfolio) were in arrears over 3 moncihs. wo projects accounting for 11% of the portfolio have settled their overdues since. Annex 11 provides a detailed analysis o. TIB's portfolio, and a su=m'ary o, the condition of all problem projects. For the analysis, TIB's portfvliAL. has been divided in the following four categories (amounts in Tsh. million): No. of % of Projects Amount total A. Operating companies in difficulty, with uncertain prospects 5 23.1 18.9 B. Operating companies in difficulty, but with reasonable prospects 4 13.7 11.2 C. Problem free operating companies 13 49.6 40.6 D. Projects under construction 15 35.8 29.' Total 37 122.2 100.) The projects in category A are all in arrears for more than three monoths. They have generally technical as well as market problems, are overburdened with short-term debt and have grim short-term prospects but may be salvaged if appropriate action is taken. When necessary, TIB has taken the lead in analyzing the problems of these clients and steps are being undertaken to solve the problems of these companies. In this regard, it is useful that TIB is represented on the Boards of most of its clients. Most of the projects in Group B are in arrears and face problems in the short run, but h.ve reasonable prospects. Nevertheless, TIB needs to watch them closely. Some of the projects under implementation have potential problems; for Imost it is too early to make a judgment on their prospects. TIB has analysed each problem project and satisfactory actions to solve their problems are being undertaken. 4.0 The problem projects were among the first to be approved by TIB. Although TIB's appraisals have improved considerably since, the condition of the portfolio highlights the need for TIB to review critically the pro- jection assumptions and the technical aspects of the projects. TIB has already started doing sensitivity analysis on the critical project variables. 1/ Paras. 4.07 to 4.08 deal with TIB's portfolio; the NBC portfolio is dealt with in para. 4.09.  - 17 - TIB is aware of the need to realistically assess whether the implementation schedules, the contingency allowances and the capital structure are reasonable in order to avoid shortages in working capital. NBC Portfolio 4.09 In 1971, NBC's term portfolio, consisting of 37 outstanding loans amounting to Tsh. 100.2 million, was transferred to TIB. TIB purchased this portfolio at face value for which it received a loan from NBC in an equal amount. TIB pays NBC 5-1/2% in interest plus a guarantee fee of 3/4 of 1% on the outstanding balance. In addition, NBC charges 1/16 of 1% on any amount which it collects on TIB's behalf. NBC guarantees the outstanding loans unconditionally. The average yield of the portfolio is 7-1/2%. Thus, TIB earns a spread of 1-1/4%. As of June 30, 1975, the NBC portfolio had been reduced to 14 loans amounting to Tsh. 38.1 million. Five loans amounting to Tsh. 24.2 million or 63% of the portfolio were in arrears for more than three months. The loans include a Tsh. 20 million loan to Serengeti Safari Lodge. Financial Position 4.10 TIB's audited balance sheets are shown in Annex 12. As of June 30, 1975, TIB's total assets amounted to Tsh. 265 million, including TIB's loan portfolio (46%), TIB's equity portfolio (9%), current assets (30%) and the NBC portfolio (14%). TIB is relatively liquid; it had Tsh. 74 million in net current assets as of June 30, 1975. TIB's liquidity is due to the fact that many of its creditors disburse to TIB when they approve a subproject but before TIB needs the funds for disbursement to its clients. TIB's financing consists of Tsh. 125 million of long-term debt (including the NBC loan of Tsh. 38 million) and a net worth of Tsh. 127 million. Its long-term debt/equity ratio including the NBC loan was 1.1:1. Since the NBC loan is supported entirely by the unconditionally guaranteed NBC portfolio, it is conservative to include the NBC loan in TIB's long-term debt. Excluding the NBC loan, TIB's long-term debt/equity ratio is only 0.7:1 which is well below the limit agreed with IDA of 3:1. Although the auditors consider TIB's provisions of Tsh. 1.2 million adequate, they appear rather low in relation to the size and condition of TIB's portfolio. However, TIB does not plan to distribute dividends and TIB's general reserves together with provisions are adequate to cover potential losses. TIB is therefore creditworthy. Financial Results 4.11 Annex 13 provides TIB's income statements, and Annex 14 shows some selected financial ratios. In FY 1975, TIB earned Tsh. 3 million, or 3.4% on its average net worth, compared with Tsh. 1.2 million in FY 1974. Interest income from the NBC portfolio, which accounted for 75% of total income in 1971, now accounts for only one fourth of TIB's revenue. Administrative expenses as percentage of average total assets declined from 2.0% in FY 1974 to 1.6% in FY 1975. This is reasonable.  - 18 - V. PROSPECTS TIB's Operational Strategy 5.01 In line with the 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. TIB expects that its promotional efforts, which started a few years ago, will soon bear fruits. By strengthening portfolio supervi- sion, TIB plans to play a constructive role in improving the problem projects in its portfolio. TIB is keen to support the Government's plans for small- scale industry and intends to gain experience in this field by financing small industries in selected areas. To achieve these ambitious objectives, TIB will further strengthen its staff and reduce its dependence on expatriates by continued training. Business Outlook 5.02 Many promising investment opportunities in the industrial sector exist. In 1974, an industrial sector mission of the Bank 1/ identified a large number of projects with a total investment cost of Tsh 7 billion. The projects belonged to various sub-sectors in which Tanzania can be competitive, such as sugar processing, textiles, leather processing, pulp and paper, wood working, cashewnut processing, sisal spinning and cement. In the past, the limited capacity of most parastatals to make detailed feasibility and engineer- ing studies has constrained project development. The parastatal capacity has improved and, in the future, project development will also be aided by the establishment of a parastatal consultancy firm (see para. 2.26) and a pro- posed IDA project to finance feasibility and engineering studies of industrial projects by foreign consultants. 5.03 Given (i) the shift in Government emphasis to the productive sectors, particularly manufacturing, mining and agro-industry; (ii) the availability of potential projects; (iii) the improved capacity of parastatals to develop and implement projects; (iv) the emergence of District Development Corpora- tions 2/ as a new class of borrowers; and (v) TIB's increased ability to appraise projects, TIB's business prospects are good. In June 1975, the Government and TANU 3/ agreed to postpone the third 5-year plan (July 1, 1/ See Tanzania: Industrial and Mining Sector Survey, Report No. 647-TA, March 31, 1975. 2/ In 1974, as a part of its decentralization policy, the Government estab- lished development corporations in each district of the country. 3/ Tanganyika African National Union.  - l9 - 1975 - June 30, 1980) because of financial constraints. In turn, an annual plan aimed at increasing production and improving the efficiency of existing operations has been launched. The 1976 plan envisages total expenditures of Tsh 6.2 billion out of which Tsh 2.7 billion or 44% are developmental expenditures. Parastatal organizations, mainly in the manufacturing, mining and agricultural sectors, would receive Tsh 958 million (US$134 million), or 35X of total developmental expenditures. TIB is expected to finance between 15-20% of these new investments. TIB may also administer a substantial amount of developmental expenditures on behalf of the Government. 5.04 As of June 30, 1975, TIB's project pipeline consisted of 20 projects with total costs amounting to Tsh. 541 million, out of which TIB expected to provide about Tsh. 156 million. Annex 15 provides a list of these projects. TIB approved 3 projects amounting to Tsh. 30 million from this pipeline in August. The projects appear well conceived and cover various sub-sectors including textile, food processing, wood products, chemicals and small-scale industries. All except two of the projects are for import substitution. Nine of the projects are new. Typically, TIB's financing is matched by new equity provided by the Government through budget allocations. One large project (cashewnuts) is co-financed by the Bank and the Government who will provide together Tsh. 208 million. Two other projects are expected to be co-financed by TDFL. Three new projects are private. TIB expects to approve all projects in FY 1976. Resource Requirements 5.05 TIB's projected operations during the next five years and the underlying assumptions are provided in Annexes 16 and 17. TIB expects to approve Tsh. 160 million in FY 1976, Tsh. 200 million in FY 1977, and Tsh. 240 million in FY 1978. For the larger projects TIB's financing will have to be supplemented by financings from EADB and TDFL. Given TIB's pipe- line and the Government's emphasis on expansion of the industrial sector, the projected operations are reasonable, provided TIB has adequate resources. Its resources requirements until December 31, 1977 and the proposed financing plan are as follows (amounts in Tsh. million):  - 20 - Domestic Foreign Total Resources Requirements Loan commitments 146 315 461 Equity commitments 8 - 8 Debt repayment 6 - 6 Total 160 315 475 Financing Plan Existing uncommitted resources 15 43 58 Earnings and depreciation 26 - 26 New equity 30 - 30 Loan collections 50 - 50 Estimated foreign borrowings /1 60 165 225 Total 181 208 389 Resources surplus (gap) 21 (107) (86) /1 Assumes that 25% of new foreign borrowings will be used to finance local expenditures. 5.06 TIB needs Tsh. 475 million (US$66.5 million) to cover its commit- ments until December 31, 1977. Out of this amount, Tsh. 315 million or about 67% would be needed for foreign expenditures. As of July 1, 1975, Tsh. 43 million of foreign resources was still available for new commitments while uncommitted approvals were Tsh. 51 million. TIB's foreign donors and creditors, including CIDA, SIDA, NORAD, KfW, and ADB, have indicated their willingness to provide a total sum of Tsh. 225 million to cover TIB's requirements until 1978. Assuming that TIB can use 25% of new foreign resources for local costs, TIB remaining foreign resource gap would be Tsh 107 million (US$15 million). It is proposed that the Bank cover this gap with a $15 million loan. The Bank loan would meet 23% of TIB total resource requirements. Projected Financial Results 5.08 Annex 18 provides TIB's projected balance sheets. TIB's total assets are expected to increase from Tsh. 265 million at the end of FY 1975 to Tsh. 931 million in FY 1980, reflecting the envisaged growth of TIB's operations. TIB's long-term debt/equity ratio is expected to remain below 3:1 until FY 1980 when it will climb to 3.2:1. Even if forecast collections  - 21 - are reduced to allow for sizeable reschedulings. TIB's debt service coverage is estimated to remain above 3 throughout the projection period. 5.09 TIB's projected income statements and changes in TIB's financial position are shown in Annexes 19 and 2(. Annex 14 shows relevant financial ratios. The projections show that TIB's profits after tax are expected to increase to Tsh. 18.1 million in FY 1980. The figures allow for increases in provisions equal to 3% of new disbursements. Provisions would increase to 2.5% of the outstanding loan and equity portfolio in FY 1980. Net profit as a percentage of average net worth is estimated to increase from 3.4% in FY1975 to 8.7% in FY 1980. The projected improvement in TIB's profitability is due to: (i) a substantial increase in TIB's portfolio and leverage; (ii) an increase in spread between the cost of borrowed funds and the yield on loans; (iii) economies of scale reflected in lower administrative costs as percentage of average total assets. Administrative expenses as percentage of total assets are expected to decline from 1.6% in FY 1975 to 1.0% in FY 1980, which is reasonable. VI. CONCLUSIONS AND RECOMMMNDATIONS 6.01 TIB has become the major institution for medium and long-term financing of industry, large-scale agriculture and tourism. Its top manage- ment is able and influential. Its staff has improved considerably and Tanzanians now occupy all management positions. The quality of its appraisals is good and systematic follow-up activities have started. Its volume of operations has increased sharply and now accounts for about 20% of new indus- trial investments. Because of its improved relations with parastatals and its increased appraisal capacity, TIB is becoming more influential in develop- ing and selecting parastatal investment projects. 6.02 To alleviate Tanzania's severe economic problems, resulting from increases in petroleum prices and stagnation in the agricultural sector, the Government has given priority to industry for future investments. A Bank industrial sector mission has identified a large number of promising invest- ment opportunities. Given the improved capacity of parastatals to develop and implement projects and TIB's increased ability to appraise them, TIB's business prospects are good. 6.03 TIB's major problem is the condition of its portfolio. During negotiations, TIB has outlined a satisfactory plan of actions it intends to take to solve the problems of the most troublesome projects. 6.04 Taking into account expected funds from other creditors, TIB needs Tsh 107 million in foreign resources to cover its projected commitments until the end of 1977. A Bank loan of $15 million is recommended. The loan would fill TIB's remaining foreign resources gap and cover 23% of TIB's commitments until December 31, 1977. TIB's plans to obtain local resources are adequate.  - 22 - 6.n0 The objective of the proposed loan is to support the Government in its plans to increase productive investment, especially in industry. It wi-