Tanzania - Forestry Development Project

Report No. 1107-TA y Appraisal of the Sao Hill Forestry Project Tanzania June 18, 1976 Eastern Africa Projects Department General Agriculture Projects Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS LI SDR 1,00 - Tanzania Shillings (T Sh) 9,66 SDR 1.00 - US$ 1,20 US$ 1.00 - Tanzania Shillings (T Sh) 8.05 T Sh 1.00 - US$ 0.12 ABBREVIATIONS ADMTA - Air Dry Metric Tons per annum c.i.f. - Cost, Insurance and Freight cm - Centimeter FD - Forest Division (of the Ministry of Natural Resources and Tourism) f.o.b. - Free on board JP - Jaakko Poyry & Co., a firm of 'forestry consultants m3(r) - Solic cubic meter of round wood m3(s) - Solid cubic meter of sawn wood MAI - Mean Annual Increment NDC - National Development Corporation pH - A measure of the degree of acidity or alkalinity (7 being neutral) SIDA - Swedish International Development Agency TANZAM - Tanzania-Zambia Highway TAZARA - Tanzania-Zambia Railway M'TPA - Metric tons per annum TWICO - Tanzania Wood Industries Corporation u.b. - Under bark 4-WD - Four wheel drive GOVERNMENT AND PARASTATALS FISCAL YEAR July 1 - June 30 1/ In October 1975, the three East African Community currencies were pegged to the value of the Special Drawing Rights (SDR) of the International Monetary Fund. An SDR/US dollar conversion rate of 1.2 has been assumed for purposes of this appraisal, although the actual rate is floating.  FOR OFFICIAL USE ONLY TANZANIA SAO HILL FORESTRY PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ... ... ......................... i-iii I. INTRODUCTION ........ 0...... ....... 0............................ II. BACKGROUND .................... O....................... .............. 2 A. General ..................................... 2 B. Forest Resources and Industries .... ......... 3 C. Government Forest Services .................. 5 III. PROJECT AREA .......................................... 7 A* General ............................. 7 B. The Sao Hill Afforestation Program .... ...... 8 IV. THE PROJECT ..9........................ ................. 9 A. General Description . ....................... . 9 B. Detailed Features * .......................... . 9 C. Project Costs ......... . ...*. ....... . 13 D. Financing ...... . . .........* ........ ............ . 14 E. Procurement ................ 15 F. Disbursement ............. 15 G. Accounts and Audit .............. 16 V. ORGANIZATION AND MANAGEMENT ........................... 16 VI. PRODUCTION, MARKETS AND PRICES ................... o. 17 A. Yields and Production ........ ......... 17 Bo Markets and Prices ... o....... ......*.. . 19 VII. BENEFITS AND JUSTIFICATION ......o.................o.. 20 A. Financial Evaluation 0.........0 ..o.......... .. 20 B. Economic Evaluation .... . o ..... . . . . * ...... *..%. . 21 VIII. AGREEMENTS REACHED AND RECOMMENDATION....... o.......... 23 | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -2- ANNEXES 1. Forestry Subsector in Tanzania Table 1 - Distribution of Area by Planting Years and Species in the Existing Forest Reserves Included in the Project Table 2 - Projected Development Expenditures - Forest Division 2. Development of Project Infrastructure Table I - Summarized Implementation Schedule of Afforestation and Industrial Programs Table 2 - Physical Work Schedule Table 3 - Planting Schedule Table 4 - Annual Replanting Schedule Table 5 - Summary of Manpower Requirements Table 6 - Schedule of Building Requirements Table 7 - Summary of Building Costs Table 8 - Equipment and Vehicle Costs Appendix I - Project Area 3. Project Cost Estimates Table 1 - Summary of Project Costs Table 2 - Summary of Assumed Productivity Coefficient and Operation Costs Table 3 - Administration and Overhead Costs Table 4 - Specific Physical Contingencies 4. Estimated Schedule of Disbursements and Project Implementation Schedule Table 1 - Estimated Schedule of Disbursements Table 2 - Project Implementation Schedule Table 3 - Schedule of Monitoring Indices  - 3 - 5. Project Organization, Training and Research Appendix 1 - Draft Terms of Reference for Technical Assistance Specialists Appendix 2 - Research and Trials Tables 1-3 - Areas and Schedules of Project Trials Charts - Organigram of Forest Division - Project Organization Chart 6. Project Studies Appendix 1 - Draft Terms of Reference for the Water Availability Study for the Pulp Mill Table 1 - Estimated Cost of Water Availability Study for Pulp Mill Appendix 2 - Draft Terms of Reference for the Mufundi Escarpment Road Engineering Study Table 1 - Estimated Cost of Mufindi Escarpment Road Study 7. Project Yields and Production Table 1 - Yields and Production - Wood Requirements in Volume and Area for Sawlogs and Pulpwood and Area of Plantations Table 2 - Yields and Production - Wood Availability for Pulp Mill 8. Mufundi Pulp and Paper Mill Table 1 - Pulp and Paper Mill - Financial Rate of Return Table 2 - Pulp and Paper Mill - Economic Rate of Return 9. Markets and Prices Table 1 - Required Annual Planting of Softwood Sawlog Forests During the Period 1975-80 to Meet the Softwood Sawlog Demand in the year 2005 10. Government Cash Flow  -4- 11. Economic Evaluation Table 1 - Cost in the Economic Analysis - Paper and Paperboard Table 2 - Internal Rate of Return - Paper and Paperboard Table 3 - Economic Internal Rate of Return - Sawlogs Table 4 - Foreign Exchange Costs and Import Substitution of Output of Program MAPS Sao Hill Forestry Project - Project Location (IBRD 11934 Sao Hill Forestry Project - Details of Project Area (IBRD 11935)  TANZANIA SAO HILL FORESTRY PROJECT SUMMARY AND CONCLUSIONS i. With its difficult balance of payments problems, Tanzani, is giving high priority to development programs which will increase export earnings and import savings. Among the latter, Tanzania has over the last three years been planning the establishment of a pulp and paper industry, the production from which would substantially meet expected internal consumer demand for paper and paper board and utilize the country's existing and potential forest re- sources. The proposed Project would extend existing and potential forest plantations at Sao Hill in the southern highlands from which most of the pro- duction would be expected eventually to provide the resource for a pulp and paper mill in that area. ii. The proposed Project would comprise part of an overall plan which aims at the establishment and maintenance of about 65,000 ha of pine and eucalyptus plantation. The Project (1976/77 to 1980/81) would provide for the afforestation of a total of 15,750 ha of pulpwood plantations; the annual planting program would increase from 1,500 ha in the year 1 to 4,500 ha in year 5. The Project would include surveying of the area to be planted, the establishment of nurseries, ground preparation, weeding, silvicultural treat- ment and disease control. In addition, some 330 ha within the designated sawlog area would be replanted during the Project following the completion of clear-felling operations. The Project would also provide for: the main- tenance of 8,800 ha of existing pulpwood plantations and of 2,500 ha of sawlog plantations; construction and maintenance of some 164 km of primary and secondary roads and 393 km of tracks; construction of staff housing and 20 administrative and social buildings; as well as for research and training and studies. iii. The Project would be executed by the Forest Division (FD) of the Ministry of Natural Resources and Tourism. Project activities would be directed by a Project Manager who would be responsible to the Director of Forestry. He would be assisted by two internationally-recruited specialists, one a Silviculturalist/Forest Economist and the other a Ro En L ;g_uP and beyaF Ica ontroilgr. The tasks of the Silviculturist/ Forest Economist would include the planning of the planting program, the review of silvicultural methods and the introduction of more efficient opera- ting methods, cost-benefit control, and the monitoring of Project indices, on-the-job training and the review of the labor and staff situation. The Roads/Mechanical Engineer would be responsible for the construction and maintenance of roads and firebreaks, the maintenance of vehicles and equipment and the operation of workshops and stores. In addition of their normal duties, the two internationally recruited officers would train their counter- parts and the Project staff in their respective fields of competence and responsibility.  - ii - iv. A Bank loan of US$7.0 million is proposed which could cover the foreign exchange requirements of the Project (US$2.4 million) and about 80% of local costs (US$4.6 million) over the five year development period. This would represent 86% of total Project costs of T Sh 65.3 million (WS$8.1 million). Government's contribution of US$1.1 million would represent 4% of total Project cost. Procurement of equipment and vehicles (US$700,000 ^- cluding contingencies) in orders exceeding US$80,000 would be by intern.- tional competitive bidding in accordance with Bank guidelines; orders would be bulked whenever possible. Orders less than US$80,000 would be obtained under Government procurement procedures which are satisfactory. The infra- structure work and the afforestation would be established by the Forest Division under force account, as due to the labor intensive nature of the work and the remoteness of the area it would not be likely to attract either local or international competitive bidding. v. The 16,000 ha of Project pine and eucalyptus plantations would provide part of the necessary raw material for the successful operation of the pulp and paper mill to be constructed in the Sao Hill area near Mufindi. The economic justification of the pulp and papers Project is based on the entire Sao Hill afforestation program. This overall program comprises the plantation of a total area of 60,000 ha of pine and eucalyptus; maintenance of existing pulpwood plantations (some 8,800 ha); logging operations over 850 ha of 15 year-old pines and 280 ha of eucalyptus each year (rising ultimately to 2,600 ha of pine and 1,200 ha of eucalyptus p.a.); the establishment of a pulp and paper mill, initially of some 65,000 TPA, and its extension to a capacity of about 180,000 TPA; and the subsequent processing of the wood in the envisaged mill. The major quantifiable benefits would arise from the expected production of paper and paperboard. At full development (after 21 years), the annual value of production is expected to reach T Sh 995 million (US$123,000 million). It is expected that all of the pulpwood production from these plantations would be consumed domestically. The economic justi- fication of the sawwood plantations (330 hectares) is based on a per hec- tare model. vi. The economic internal rate of return is 13.5% based on the entire program including a mill of 180,000 TPA. In the interim, the economic rate of the first phase 65,000 TPA mill would be 12.4%. The rate of return for sawlog production has been estimated at 21.5%. The expected benefits would be widely distributed among those to be employed directly under the planta- tion program (who would fall within the lower rural income bracket) and those employed in related processing industries, as well as among both the rural and urban users of the final product. The Project would result in direct additional employment of about 500 man-years over the Project period. The Project would have various unquantifiable benefits not included in the analysis such as the prevention of erosion and improvement of soil and water conservation, as well as benefits from training and research programs and the upgrading of the rural road system. As the Project is located in a grassy highland, no indigenous forest would have to be felled to implement the plantation scheme. If the timber yields were lower than anticipated, a greater plantation area would be needed to provide the raw material for the mill; such an extension would be feasible, if it should prove necessary. In the unlikely event that neither the proposed pulp and paper mill nor any  - iii - similar type of wood processing plant were built the plantation program could be stopped and the plantation could be allowed to grow on a 25-year rotation to produce sawlogs. Sensitivity tests under various assumptions have shown that the economic internal rate of return is relatively insensitive ' changes in costs (but would be sensitive to changes in prices). With a 10% increase in costs the rate of return for pulp and paper would be about 12%; likewise, a 10% increase in the cost of the sawlogs would reduce the rate of return for this component from 22% to 20%. vii. This would be the first Bank Group financed Project in Tanzania for forestry. Ten IDA credits totaling US$101.1 million and two IBRD loans for US$30 million have been approved thus far for nine agricultural and one rural development projects in Tanzania. They include one for agricultural credit, two for livestock, and one each for tobacco, tea, cotton, sugar, cashew-nuts and dairy production, as well as a regional development project in Kigoma. Financing for agricultural training and for feeder road devel- opment has been also been provided under education and highway projects. Progress under these projects has been slow, although there has recently been some improvement; management and staffing have however been a conti- nuing problem. A US$30 million program loan was also approved in December 1974. viii. The Project is suitable for a Bank loan of US$7.0 million to the Government of Tanzania.   TANZANIA SAO HILL FORESTRY PROJECT I. INTRODUCTION 1.01 With its difficult balance of payments problems, Tanzania is giving high priority to development programs which will increase export earnings and import savings. Among the latter, Tanzania has over the last three years been planning the establishment of a pulp and paper industry, the production from which would substantially meet expected internal consumer demand for paper and paper board and utilize the country's existing and potential forest re- sources. The proposed Project would extend existing and potential forest plantations at Sao Hill in the southern highlands from which most of the pro- duction would be expected eventually to provide the resource for a pulp and paper mill in that area. 1.02 Government has gained considerable experience of establishing for- est plantations which will help compensate for the fast depleting woodlands. This depletion is causing concern about the long-term supply of domestic wood on a national scale (e.g. for fuel, house construction), and the Gov- ernment together with the Bank is actively exploring ways by which this problem may be separately addressed. In reviewing the Project, considera- tion was also given to the possibility of smallholder participation in the Sao Hill area; while a suitable scheme may be worked out later Government con- sidered that this should not be included in the Project. 1.03 Government's proposal for industrial forestry development included a further scheme at Ruvu which it was envisaged might eventually supply a second pulp mill to provide products for export. Experimental trials in this low elevation area have however not yet proved successful and consid- erable losses occurred during the 1974 drought. This component was accord- ingly excluded from the Project. Government is now reconsidering its for- estry program for this area. 1.04 This would be the first Bank Group financed Project in Tanzania for forestry. Ten IDA credits totalling US$101.1 million and two IBRD loans for US$30 million have been approved so far for nine agricultural and one rural development projects in Tanzania. These include one for agricultural credit, two for livestock, and one each for tobacco, tea, cotton, sugar, cashew nuts and dairy production as well as a regional development project in Kigoma. Financing for agricultural training and for feeder road devel- opment has also been provided under education and highway projects. Prog- ress under these projects has been slow, although there has recently been some improvement; management and staffing have, however, been a continuing problem. Under the completed agricultural credit project, a need was found for improved supervision of loan records and input distribution. The first livestock project (also completed) was reasonably successful, but the second project is progressing more slowly than anticipated due to delays in prepara- tion and approval of ranch plans, serious cost overruns in the construction of slaughter houses, and frequent changes in project management. The tea  - 2 - project has encountered difficulties mainly due to management problems, which to a considerable extent have been overcome. In the past recruitment of growers for both the tea and tobacco projects has been slow, although this has recently shown substantial improvement. The Geita cotton project expe- rienced problems due to an acceleration of the villagization program in 1973 and 1974 which necessitated a major redesign of the project and caused sig- nificant delays. The Kilombero sugar project is proceeding well, although some delays have occurred in the housing construction program. The cashew- nut project is now proceeding well, and previous problems with regard to cost overruns have been resolved. The Kigoma rural development project has made some progress but is behind schedule. The dairy development project has only recently become effective. An agricultural and rural development sector study carried out by the Association in December 1974 reviewed the opportunities, constraints and strategy for agriculture and rural develop- ment, and outlined a long term lending program. A US$30 million program loan was also approved in December 1974. 1.05 This Project was prepared by the Government with the assistance of FAO/IBRD Cooperative Program. The report is based on the findings of an appraisal mission which visited Tanzania in September/October 1975 composed of Messrs. W. Stolber, S. Draper and N. Brouard (IBRD). II. BACKGROUND A. General 2 2.01 Tanzania has a total area of about 880,000 km . The population of 15.4 million, which is increasing at the rate of about 3% a year, is concen- trated, with about two-thirds of the population occupying only 10% of the land. Over 90 percent are dependent on agriculture and 40 percent of GNP is derived from this sector. Per capita GNP was estimated at US$130 in 1973, but in many rural areas the per capita income does not exceed US$40 per year. The growth rate of the economy was about 5% per annum from 1964 through 1973; actual growth has lagged behind the Second Five-Year Plan (1969-1974) targets, mainly due to failure of the main agricultural crops to reach plan projections. The 1973 drought and other factors, including the accelerated villagization program, resulted in a serious reduction in agricultural production in 1974, necessitating major imports of food grains and causing severe balance of payments problems. The recent increase in pe- troleum prices and world-wide inflation have also had a severe adverse im- pact on the Tanzanian economy. 2.02 Tanzania aims at reducing inequalities in income distribution through emphasis on smallholder agriculture and rural development, and on state control of important industries, services and large-scale agricultural enterprises. The initiative for planning and implementing many development tasks has devolved to the regional and district administrations. The third five year plan for the period 1975-1979 has been delayed, although it should  - 3 - be ready shortly; it is likely to emphasize development production, particu- larly in the rural sector, in conjunction with efforts to achieve balanced regional growth and a more equitable income distribution. 2.03 The forestry subsector contributed about 3% of GDP and wood prod- ucts, including paper, valued at some T Sh 160 million (US$20 million) ac- counted for about 3% of total imports in 1974. In the same year about T Sh 68 million (US$8.5 million) of the country's exports consisted of timber and sawlogs. Government stumpage revenues in 1973 from the sale of forest products amounted to T Sh 7.8 million. Government's total (development and recurrent) expenditure in 197374 for forestry amounted to T Sh 27 million; out of this total, a substantial portion of the development expenditure was financed by various international development agencies, especially SIDA. This assistance is continuing, and about 95% of the development budget in 1975/76 is being financed by SIDA. B. Forest Resources and Industries (Annex 1) 2.04 About 50% of the total area (about 88.7 million ha) of Tanzania is classified as forest land, the greater part of which is open woodland. There are 540 forest reserves totaling 13 million ha (about 15% of the total land area and about 30% of the forest area). About 1.6 million ha of the forest reserves have been gazetted as catchment protection forests. The natural forests may be divided into the following main categories: (a) Mountain forests, which are dense, high altitude rain forests, not extensive in area, but yielding valuable timber for both the home and export markets, and play- ing an important protective role in water and soil con- servation. (b) Woodlands, which are very extensive in the foothills, along the coast and in the savanna ("miombo"), and which yield some valuable timber. (c) Mangrove forests which occur along parts of the coast and yield mainly timber for building poles. Although hardwood forests have provided most of the country's domestic sawn lumber requirements in the past, Government's present forest policy aims at the development of these resources for the production of valuable veneers and plywood which could be exported. The native forests, particularly the miombo woodlands, have a very low stocking of merchantable timber per hec- tare and are so widely scattered that prospects for their economic utiliza- tion and development are poor, except for small quantities of valuable hard- wood for export and more significantly in meeting the very large domestic demand for fuelwood.  2.05 There are 42,000 ha of softwood exotic plantations and 6,000 ha of hardwood plantations, mainly of native species. The plantations cover a very small area of the country, but in future are expected to supply most of the timber required by forest industries. The main species planted are conifers with Pinus patula representing about half and Cupressus lusitanica about a quarter of the total with the balance of other varieties. Tanzania has ex- tensive tracts of unutilized and sparsely populated land which are well suited to the growing of pine or eucalyptus plantations, but in view of their significantly better wood quality pines are generally preferred for commercial plantations. The growth rates of pine compare favourably with international averages, especially those of Pinus patula (see Annex 5, Ap- pendix 2). Those plantation areas located along the recently built Tazara have come within relatively easy reach of the country's main consumer centers and main port of Dar-es-Salaam. 2.06 Total wood consumption, estimated by the Government at 34 million m in 1973, is expected to rise to 37 million m in 1980 and to about 48 mil- lion m3 by the year 2000. At present almost 98d of total wood consumption comprises fuelwood, wood for charcoal burning and poles; by the year 2000 fuelwood consumption is expected to still comprise some 94% of the total. The demand for industrial wood (mainly sawnwood and paper and paperboard) is currently about 500,000 m3; this will almost double by 1980 and to reach about 3 million mi3 in the year 2000. Specifically, the demand for sawnwood is expected to rise from 160,000 mi3 in 1970 to 280,000 r3 in 1980 and 730,000 m3 in the year 2000, with softwoods increasingly replacing hardwoods in the domestic market, while fine hardwoods will be reserved for exports. The con- sumption of wood-based panels, estimated at 9,000 mi3 in 1970, is expected to rise to 26,000 mi3 in 1980 and 130,000 m3 by the turn of the century. The con- sumption of paper and paperboard, estimated at 27,000 tons in 1973, is esti- mated to rise to 57,000 tons by 1980 and about 300,000 tons in the year 2000 (Annex 9). 2.07 Tanzania has not yet developed a sizeable forest industry. In addi- tion to pit-sawing, 1/ which is still fairly widespread, there are over 150 small and badly-equipped sawmills, about 70% of them registered, producing a total of approximately 160,000 m (s) per annum. The largest mill output is about 5,000 mi3(s), and only about 25 mills produce more than 500 m3(s). The sawmill presently being built by Tanzania Wood Industry Corporation (TWICO) at Sao Hill will have an output of some 12,000 m (s); when in operation in 1976, will be by far the country's most importanZ sawmill. In addition to the sawmills, there are two plywood mills, a particle-board factory and a fiberboard mill in operation, as well as a few small paper conversion plants. No pulp and paper mill has yet been constructed, however and, consequently, the entire demand for paper and paperboard must be imported. 1/ A method of sawing logs into planks or boards by means of a long handsaw operated manually by two men, usually over a pit.  - 5 - 2.08 Government has proposed the early establishment of a pulp and paper mill in Tanzania to produce paper for the domestic market. The mill would be based primarily upon existing and future forest plantations in the Sao Hill area, and eventually would provide Tanzania with its expected requirements of cultural and industrial paper and paperboard (except tissue, cylinder boards, and fluting). Feasibility studies have been carried out over the past decade on various alternative pulp and paper ventures in Tanzania, those for the present venture were begun in late 1974 (under a grant from the Swedish International Development Authority (SIDA)) by Jaakko Poyry & Co. of Helsinki. On the basis of a preliminary report, a pulp mill site has been selected near Mfufindi in the Sao Hill area and is now under review. Out of several mill configurations Government has selected a mill which at full capacity would produce 40,000 TPA of unbleached kraft and 25,000 of bleached printing and writing paper and newsprint. The proposed product mix would be as follows: 14,000 tons of kraftliner, 26,000 tons of sack paper, 7,000 tons of newsprint and 18,000 tons of printing and writing paper. It has been proposed that the mill start operations in 1981, with an expan- sion some 10 years later to an annual capacity of some 180,000 TPA. 2.09 The proposed Project would constitute the first phase of a planta- tion program which is expected over three planting phases to produce most of the wood that will be required for the Sao Hill pulp and paper mill. A total of 60,000 ha of plantations will be required for this purpose. In addition 2,500 ha of the existing pine plantations in the area are being set aside to provide sawlogs for one shift of the new TWICO sawmill; in subsequent phases of the program a further 2,500 ha may be planted and utilized for a second sawmill shift. C. Government Forest Services (Annex 5) 2.10 Overall responsibility for formulating forest policy, forest admin- istration and management rests with the Forest Division (FD) within the Min- istry of Natural Resources and Tourism. As part of the decentralization effort in 1972 a number of forestry responsibilities were delegated to the regions; however, policy, general administration, sectoral planning and na- tional projects remained the responsibility of FD including the industrial plantations. As a result, the FD lost part of its best staff to provide ad- ministrative cadres for the regions and districts. The FD currently employs some 5,000 people, including some 20 professional foresters, 70 technical (diploma) foresters, as well as nearly 500 general technical officers and some 700 field assistants. Although the FD is now understaffed at the tech- nical level, it is expected that by 1980 sufficient trained staff will be available from both the Faculty of Agriculture and Forestry in Morogoro and from other local and foreign training institutes. Silvicultural research is carried out by the FD at the Lushoto station and forest utilization research at the Moshi center. The FD is also responsible for national park and wild- life protection, beekeeping and soil and water conservation. Other forest related programs are being carried out by, among others, TWICO and the NDC;  -6- TWICO is responsible for the development of wood-using industries in general, and NDC is in charge of the planning and development of the pulp and paper industry. 2.11 The Government's forest policy is defined as follows: (a) to demarcate and reserve in perpetuity, for the benefit of present and future inhabitants of the country, sufficient forested land or land capable of afforesta- tion in order to preserve or improve local climates and water supplies and provide a sustained yield of forest produce of all kinds for internal use and also for export; (b) to manage this forest estate and all forest growth on public lands so as to obtain the best financial returns of capital value and the cost of management insofar as such returns are consistent with the primary aims above; (c) to undertake and promote research in all branches of forestry; (d) to undertake and promote education in all branches of forestry and to build up by example and teaching, a real understanding among the people of the country of the value of forests to them and to their descendants; (e) to encourage and assist the practice of forestry by local Government bodies and by private enterprise. 2.12 Over the last few years significant parts of the development budget of the Forest Division has been financed by SIDA (support which is expected to continue) while the Government has financed mainly the recurrent budget. The total financial requirement for the Forestry Five Year Development Plan (1975-80) is estimated at about T Sh 300 million (about US$37 million), mostly earmarked for plantations and silviculture. If the TWICO budget is included, the requirement is estimated at T Sh 500 million (about US$62 million). The development budget in 1975/76 is about T Sh 35 million (US$4.3 million), and the recurrent budget in the same year is approximately T Sh 15 million (US$1.9 million). Revenues are collected by the FD but are paid directly into the Ministry of Finance. Until recently the total revenues of the FD were only about US$1 million a year, but with the recently increased stumpage rates, they are expected to expand substantially. Stumpage rates were very substan- tially increased (some almost trebled) in mid 1975 and thus have moved closer to the Government's objective of ultimately making the forest plantations self-suppSrting (Annex 9). The stumpage fee for pine sawlogs is now about T Sh 49/m , and that for pine pole sizes (equivalent average pulpwood sizes) is somewhat less, on a per running meter basis.  - 7 - III. PROJECT AREA A. General 3.01 Since 1973, Government assisted by Jaakko Poyry & Co. of Helsinki has been planning the establishment of a pulp and paper mill at Sao Hill and has been discussing its proposals with the Bank with a view to possible fi- nancing. As of March 1976, the proposals envisage a new mill coming on stream in the early 1980's with a build up of production to 40,000 TPA of unbleached kraft and 25,000 TPA of bleached printing and writing paper and newsprint by the mid 1980's. Although its size, scope and timing may be sub- ject to some change, a mill of this scale is likely to constitute the first phase development. Government envisages that, in the early 1980's, this mill would be expanded to produce about 180,000 TPA and would represent the expected completion of the program at Sao Hill. A mill of this size would be consistent with the ultimate expected resource availability in the area and its production would be within the estimated domestic demand forecast for that time. 3.02 On the basis of a preliminary soil survey of the Project area car- ried out in 1975, the soils are suitable for plantations. The texture is generally very similar all over the area and most soils can be clasified as sandy clay loams. The color of the soils varies from red to yellowish brown. There is no serious problem of compactness and no iron pans have been found. The pH varies mostly with depth, but is usually between 5.5 and 6. 3.03 Apart from the nearby villages of John's Corner, James' Corner and Mufindi (which are all outside the Project area), and the existing (and fu- ture) forest villages of Sao Hill, there are about 13 Ujamaa villages in the Sao Hill area; these villages have been left out (average 300 households with an average of 5 members) from the Project area.l/ Each of the villages has an area of at least 3,000 ha, which the regional authorities estimate will suffice for all the agricultural land needs of an expanding population for the foreseeable future. The forest villages would also include sufficient land to meet their subsistence needs. Thus, sufficient land would be avail- able to meet the population's farming needs; but should some areas be found to be unsuitable for forestation they may eventually be opened to grazing or cultivation once the surrounding forest plantations are established. The tea estates in the area also have ample land holdings which are sufficient for both tea growing and to meet their firewood requirements. Apart from minor adjustments which may be made in the final allocation of land between the Project and Ujumaa villages, no substantial changes in Project boundaries are expected after gazetting. 1/ The actual forest reserves, old and new, would thus be unoccupied and unencumbered by land claims.  - 8 - 3.04 The labor intensive afforestation program now planned will necessi- tate a sizeable number of workers. For the Project an estimated 500 addition- al staff and workers are required. About 200 people would be recruited from outside the Project area, but the bulk of the labor force would be mobilized from within the area. B. The Sao Hill Afforestation Program 3.05 The Project would be part of the curent Government afforestation program which is designed to develop a total of 65,000 ha of mainly pine plantations in the Sao Hill area. By 1975 some 10,000 ha had already been established, and another 1,500 ha were scheduled for planting during the 1975/76 season. (Annex 1, Table 1 gives the distribution of pre-Project plantations by age and by species.) Some 2,500 ha of the oldest plantations have been set aside for sawlog production at the new Sao Hill sawmill, and a further 2,500 ha might be planted at a later stage to enable the doubling of sawlog production. Under the Project about 16,000 ha of new pulpwood planta- tions would be planted and maintained, and some 11,000 ha of existing planta- tions would be maintained. The gazetting of sufficient land (not less than 60,000 ha gross) made to carry out the scheduled Project plantations has been a condition of loan negotiations (Annex 2, Appendix 1). 3.06 The main species (which has been used successfully at Sao Hill in the past) which would be proposed for Project planting would be Pinus patula. Other species would include Pinus elliottii and possibly some P. kesiya and P. taeda. Eucalyptus grandis/saligna would also be planted to supplement pine wood to produce the desired pulpwood mix. The exact ratio would be determined when the mill requirements are known, it is likely to be of the order of 3-4 to 1. The expected pine pulpwood rotation would be 15 years and that of eucalyptus about 8 iears. For the first ten or so years small amounts of wattle wood (30,000 m p.a.) would be brought in from outside the area to ensure the availability of sufficient wood. The FD has acquired considerable experience in pine plantation techniques at Sao Hill and results achieved todate have generally been good. However, some techniques will be improved over the coming years. Logging within the sawlog area (initially 2,500 ha) would start in 1976 to meet the needs of the new sawmill. 3.07 It is expected that the plantations when fully established would provide the main source of raw material (cellulose) for a pulp and paper mill which would produce 40,000 TPA of unbleached kraft and 25,000 TPA of bleached printing and writing paper and newsprint in the early 1980's (para 2.08), and which would later be expanded to allow a total output of 180,000 TPA by the early 1990's.  - 9 - IV. THE PROJECT A. General Description 4.01 The Project would comprise part of the Government afforestation program now being carried out in the Sao Hill area which aims at the estab- lishment and maintenance of about 65,000 ha of pine and eucalyptus planta- tion. The Project would over five years (1976/77 to 1980/81) provide for the planting and maintenance of about 16,000 ha of this total area, for the maintenance of some 11,000 ha of existing plantations, as well as for the development of infrastructure and forest services within the Project area. The Forest Division of the Ministry of Natural Resources and Tourism would execute the Project and would have overall responsibility for Project admin- istration. Specifically the Project would include: (a) establishment of 15,750 ha of new pulpwood plantations including surveys, the establishment of nurseries, land preparation, and fire control and firebreak maintenance; (b) maintenance of 8,800 ha of existing pulpwood plantations and of 2,500 ha of sawlog plantations; (c) construction of some 164 km of primary and secondary roads and 393 km of tracks and maintenance of some 2,400 km of forest roads; (d) construction of staff housing and 20 administrative and social buildings; and (e) research, training and studies. B. Detailed Feastures (Annex 2) Afforestation 4.02 The Project would provide for the afforestation of a total of 15,750 ha of pulpwood plantations over a 5-year period; the annual plant- ing program would build from 1,500 ha in year I to 4,500 ha in year 5. The program would include surveying the area to be planted, establishment of nurseries, ground preparation, planting and replacing failures, weeding, silvicultural treatment and disease control. In addition, some 330 ha within the designated sawlog area (para 3.05) would be replanted during the Project following the completion of clear-felling operations. 4.03 Surveying. Good maps of the forest reserves in the Sao Hill area, including the new extension areas, are available. A general survey for the  - 10 - gazetting of the total area to be planted would be completed before negotia- tions (para 3.05). Detailed surveys of all plantable areas, including soil surveys, would be undertaken during the Project period by a special survey section; agreement was reached to this effect. The Forest Division has prepared a study on the socio-economic impact of the Project on villages in the surrounding areas. The study indicates that the Project will in no way or at any time be impaired by the action of villagers. Agreement was reached to the effect that there would be encroachment or interference in the planta- tion area. 4.04 Nurseries. On the basis of the 2,000 seedlings per hectare which would be required by the Project, total nursery production requirements would reach 9 million plants by the fifth year. Two nurseries would be de- veloped to meet this demand. The existing nursery at Sao Hill would produce plants for the balance of Sao Hill forest reserve, and the western and low- elevation trials extension areas, while a second nursery would be created to serve mostly the northern and eastern extension areas. The main species would continue to be Pinus patula, and seed of good local strains readily available. Seed of vigorous strains of Pinus elliottii is also available, but seed of good strains of Pinus kesiya would have to be imported (from Zambia, Malawi or Madagascar). No problem is foreseen with the procurement of good Eucalyptus grandis/saligna seed. Polythene tubes would be used for the transplanting of nursery stock and provision would be made for adequate watering facilities, for the standard application of fertilizers, and for suitable transport of planting stock. 4.05 Ground Preparation. The preliminary soil survey indicates that there seems to be very little difference in soils all over the Project area. Only deep and relatively flat and rock free areas would be planted. None of the areas earmarked for planting during the Project carries any tree crop as such, and therefore no special land clearing would be required. However, it has been assumed that some light bush clearing would be required over 10% of the planting area. The method of soil preparation would be the tradi- tional one used at Sao Hill, namely strip ploughing. Fertilization is not considered necessary (it would actually encourage weed growth and necessi- tate more weedings), but trials would be carried out during the Project to confirm this. 4.06 Planting, Weeding, Silvicultural Treatment and Disease Control. Planting would be done by hand during the early part of the rainy season, which extends from December to March. Apart from areas under eucalyptus, about 80% of the area would be planted with Pinus patula and the remainder with either Pinus elliottii or eventually Pinus kesiya. With better planting stock (potted) and methods, the failure rate should not exceed 10%. Replace- ment of failures would take place as soon as possible, but in no case later than the next planting season. Weeds are not a severe problem at Sao Hill, but as they compete with the plants for moisture they must be kept under control. Provision has therefore been made for both mechanical and hand  - 11 - weeding; this weeding would take place during the first two years only. Pruning and thinning would only be done within the small sawlog working circle at such ages provided the operation is economically justified. Pruning would be done in the pulpwood working circle only as a fire protection measure. Regular inspections would be made to identify any signs of insect or fungal attacks and, if necessary, appropriate control action would be taken. 4.07 Fire Protection. A comprehensive system of fire prevention and control would be set up throughout the Project area. Primary firebreaks 40 m wide would be constructed at a density of 7 m/ha around blocks not exceeding 1,000 ha in area. Secondary firebreaks 20 m wide would be con- structed at a density of 23 m/ha along all primary and secondary roads and half the tracks. Cleared strips (3 m wide) would be ploughed along the edge of firebreaks -- on both sides for the primary breaks and on one side only for the others. The unploughed portions of both types of firebreaks would be control-burnt annually. 4.08 During the 4 months of high fire hazard (July to October), look out posts and towers (one for every 6,000-8,000 ha of plantations) would be manned full-time and fire-fighting crews would be on stand-by when weather conditions warrant it; the crews would be employed on average approximately 35 days a year. Provision would be made for vehicles and fire-fighting tools and equipment. Road Construction and Maintenance 4.09 Three types of roads would be built and maintained in the upland Project area; primary access roads (8 m wide, at a density of 3 m/ha), sec- ondary access roads (7 m wide; 7 m/ha) and tracks (4 m wide; 25 m/ha); the overall road density would be 35 m/ha. The primary and secondary access roads would eventually, in subsequent phases, be upgraded into two lane and one lane all-weather roads respectively when logging operations start; the tracks would only be temporary dry season roads. In addition, a primary access road would be built (and partly upgraded) to link the new forest vil- lage and nursery on the Little Ruaha river with the existing headquarters and nursery; a bridge would also be built over the river. Culverts would be built at an average density of 6/km and bridges at a density of one bridge for every 3-6 km of primary and secondary roads, depending on the terrain. Gravelling would be used over 30% of primary and secondary roads. During the Project it is estimated that 48.5 km of primary roads, 115.5 km of sec- ondary roads and 392.5 km of tracks would be built. In addition to these, all the existing roads within the Project area would be maintained. No provision is made for road construction in the low extension areas during the Project period. Project Management 4.10 Provision would be made for the employment of a Project Manager, two internationally recruited specialists (one for plantations and the other for road and mechanical engineering), a Financial Controller, technical, clerical and financial supporting staff, as well as for health personnel,  - 12 - drivers and messengers. As the two internationally recruited officers would provide significant in-service training. Provision would also be made for administrative costs and the running costs of Project vehicles during the 5 year development period. 4.11 Buildings and Housing. Existing buildings in the Sao Hill area are generally substandard. The following additional administrative buildings would be constructed: two new Project forest stations, a divisional office with stores and workshop/garage, 2 forest station offices with garages and stores, 3 dispensaries, 3 cooperative stores, 2 schools, 3 village halls, 1 nursery office and 2 fire look-out towers. New housing would be provided for 3 senior staff members, 40 technical officers and artisans, and 170 la- borers; the balance out of a total estimated labor force of 800 would come from neighboring villages. Assurances were obtained during negotiations that Government would adhere to the agreed housing standards and to the agreed estimates. If cost estimates prove to be insufficient for the hous- ing standards, the matter would be reviewed with the Bank. 4.12 Equipment and Vehicles. The Project would require investment in equipment for afforestation (ground preparation, transport of labor, soil, materials and plants, and fire control), road construction and maintenance, construction of buildings and workshop/garages, and administration (mainly vehicles). This equipment would include graders, tractors, various trucks and trailers, pick-ups, a water tanker, pumps, ploughs, rotary slashers, disc harrows, telephone installations, wireless sets, and field telephones. Provision would also be made for tools, office and workshop equipment, in- cluding an adequate supply of essential spare parts. The Project workshop would be responsible for the repair and maintenance of Project vehicles and equipment. Research, Trials and Training (Annex 5) 4.13 Forest research in the Project area would be carried out by the FD under the direct supervision of the Project Manager. Research and trials for the main species, Pinus patula, would concentrate on species and proven- ance trials at high elevations (mainly to try and identify species which would give better yields than Pinus elliottii), on the improvement of estab- lishment and cultural techniques, and on fertilizer trials. At low eleva- tions provision would be made for small-scale species and provenance trials in order to determine the species, both of pine and eucalyptus, best suited to the site, and for pilot plantations with the best identified species. The two specialist officers (para 4.10) would provide in-service training of Project staff in methods of establishment of large-scale plantations, in forest management and in forest engineering. In view of the extensive effort by Government on training (Annex 5, para 5) no other training is needed.  - 13 - Prolect Studies (Annex 6) 4.14 The Project would include provision for a pulpmill water study, a road engineering study and aerial photography of the Project area. Experts would be recruited to investigate and report on water availability and the most economic solution to effluent disposal for both the 65,000 TPA and the ultimate mill of about 180,000 TPA at the provisionally selected site. Provision would also be made for experts to carry out an engineering study of the best alignment of a road down the escarpment connecting the Sao Hill area with the site selected for the proposed pulp mill; the experts would also prepare preliminary engineering plans and cost estimates. Terms of reference of these studies (Annex 6, Appendix 1 and 2) and selection of these experts would be agreed with the Bank and agreement was reached to that effect. Aerial photographs of the total planted area and areas selected for second phase plantations would be carried out in the fourth year so as to allow checking of plantation boundaries with field data and to permit detailed planning of future plantation layout. C. Po4ject Costs (Annex 3) 4.15 Total Project cost is estimated at T Sh 65.3 million (US$8.1 million). The foreign exchange component is estimated at US$2.4 million. The estimated costs are summarized below:  - 14 - Foreign -----T Sh '000 ------ ----- US$ '0o0 ----- Exchange Local Foreign Total Local Foreign Total % Afforestation (incl. fire protection) Pulpwood Working Circle 13,458 1,619 15,077 1,672 201 1,873 11 Sawlog Working Circle 595 78 673 74 10 84 12 Access and Plantation Roads 1,333 513 1,846 166 64 229 28 Project Management Administration 5,642 1,270 6,912 701 158 859 18 Buildings and Housing 5,341 919 6,260 663 114 777 15 Equipment 901 4,862 5,763 112 604 716 84 Research, Trials and Training 333 3,605 3,938 41 448 489 92 Studies Aerial Photography - 309 309 - 38 38 100 Water Study for Pulp Mill 59 880 939 7 109 117 94 Escarpment Road Study 56 376 432 7 47 54 87 Base line cost 27,718 14,431 42,149 3,443 1,793 5,236 34 Contingencies Physical 1,524 1,142 2,666 189 142 331 43 Price 16,702 3,786 20,488 2,075 470 2,545 18 Total Project Cost 45,944 19,359 65,303 5,707 2,405 8,112 30 Costs have been estimated at prices prevailing in March 1976. The Project would be exempt from sales taxes and custom duties, and other taxes are in- significant. A physical contingency of 10% on equipment, housing, buildings and service road construction has been included, with additional small provi- sions for fire, pest and disease control and soil deficiency in the extension areas (Annex 3, Table 4). Price contingencies have been included for foreign costs in accordance with current estimates while local costs are adjusted to local conditions. Price escalations are equivalent to 49% of baseline cost. D. Financing 4.16 The financing of Project cost would be shared in the following amounts and proportions:  - 15 - US$ '000 % Bank 7,000 86 Government 1,100 14 8,100 100 The proposed Bank loan of US$7 million would be for a period of 25 years in- cluding a five year grace period. This would finance 86% of total Project cost, or all the foreign exchange costs of the Project (US$2.40 million) and about 80% of local costs (US$4.60 million). Government's contribution would total US$1.10 million. The Project would provide up to US$25,000 in retroactive financing to cover Project expenditures for the salary and administrative costs of the silviculturist from June 1, 1976 to permit an early start of the Project. E. Procurement 4.17 Procurement of equipment and vehicles (US$700,000 excluding con- tingencies) in orders exceeding US$80,000 would be by international compe- titive bidding in accordance with Bank guidelines; orders would be bulked whenever possible. Orders less than US$80,000 would be obtained under Gov- ernment procurement procedures, which are satisfactory. The infrastructure work and the afforestation probably would be established by the Forest Divi- sion under force account, as due to the labor intensive nature of the work and the remoteness of the area it would not attract either local or international competitive bidding. Agreement was reached to the effect that that the above procurement procedures would be followed. F. Disbursement (Annex 4) 4.18 The Bank loan would finance 100% of the cif cost of imported equip- ment and vehicles, 100% of the fees and expenses of the internationally re- cruited personnel, 90% of studies and technical assistance, and 70% of other expenditure (plantation establishment, forest roads, and Project management). Disbursement for expenditures in respect of items procured through interna- tional or local competitive bidding and for studies and technical assistance would be subject to Bank standard disbursement procedures requiring full documentation. Operating costs and expenditure by force account would be approved by the Project Manager and by the Ministry of Finance, and the  - 16 - documentation for these would not be submitted, but would be retained by the borrower for review during Project supervision. Any funds remaining in the loan account upon completion of the Project would be available for realloca- tion at the discretion of the Bank. G. Accounts and Audit 4.19 Agreement was reached to the effect that the Forestry Division would set up and maintain records and accounts adequate to reflect its operations, resources and expenditure, and that it would keep separate accounts for the Project. Project accounts would be prepared by the Financial Controller (para. 5.02). Agreement was also reached to the effect that Project accounts would be audited annually by independent auditors acceptable to the Bank, and that these audited accounts, together with the auditor's report, would be forwarded to the Bank within six months of the end of each fiscal year. V. ORGANIZATION AND MANAGEMENT (Annex 5) 5.01 The Project would be executed by the Forest Division (FD) of the Ministry of Natural Resources and Tourism. Project activities would be direc- ted by a Project Manager with headquarters at Sao Hill, who would be responsi- ble to the Director of Forestry. He would be assisted by two internationally recruited specialists, one a Silviculturist/Forest Economist and the other a Roads/Mechanical Engineer, and by a Financial Controller, all stationed at Sao Hill headquarters during the Project period. The tasks of the Silvicul- turist/Forest Economist would include the planning of the planting program, the review of silvicultural methods and the introduction of more efficient operating methods, cost-benefit control, and the monitoring of Project in- dices, on-the-job training and the review of the labor and staff situation. He would also keep close contact with the Government agency in charge of the socio-economic study. The Roads/Mechanical Engineer would be responsible for the construction and maintenance of roads and firebreaks, the maintenance of vehicles and equipment and the operation of workshops and stores; he would be assisted by a M4echanical Assistant to be trained as a counterpart. In addition to their normal duties, the two internationally recruited officers would train their counterparts and the Project staff in their respective fields of competence and responsibility. The terms of reference of the two internationally recruited specialists are given in Annex 5, Appendix 1. 5.02 The Project area now has one main forest station at Sao Hill, and a second main station would be set up in the upland extension areas. Each main station would be subdivided into two substations, which would eventually have plantation areas of some 10,000 ha each. In addition, there would be a Surveys, Planning and Research Section under the Silvi- culturist, a Roads/Workshop Section under the Engineer, and a Finance Sec- tion under the Financial Controller (who would be directly responsible to the Project Manager for all Project accounts, cost control and procurement).  - 17 - 5.03 The Manager responsible for this year's plantation program (who was appointed recently) would remain in post as the Project Manager. Agree- ment was reached to the effect that the appointment of the Project Manager, the Financial Controller and the two internationally recruited specialists would be made in consultation with the Bank as would the appointment of any replacements for these staff members during the Project period. The appoint- ment of the Project Manager and the silviculturist/forest economist would be a condition of loan effectiveness, and the Financial Controller and the roads/ mechanical engineer would be employed by November 15, 1976. Agreement was also reached to the effect that Government would not transfer key local staff under the Project to other Government employment without adequate replacement. VI. PRODUCTION, MARKETS AND PRICES A. Yields and Production (Annex 7) 6.01 The Project plantations would, when fully established, provide the main source of raw materials for the proposed pulp and paper mill. They would thus comprise an integral part of the Government's long term plantation program which is intended to establish a total of some 65,000 ha of plantations in the Sao Hill area by the early 1990's. By the start of Project implementation, some 11,360 ha of pine would have already been planted in the Sao Hill reserve including 1,500 ha planted during the 1975-76 season. Under this Project 15,750 ha (14,250 ha of pine and 1,500 of eucalyptus) would be planted, and during the next phase of the planting program (1981-86) an additional 20,000 ha is envisaged to be planted (comprising 12,500 ha of pine and 5,000 ha of eucalyptus plus 2,500 ha of pine sawlogs). By 1991 a total of 65,000 ha would have been established, which would be divided into a Sawlog Working Circle (5,000 ha) and a Pulpwood Working Circle (60,000 ha for an envisaged 180,000 PTA mill of which 48,000 ha under pine and 12,000 ha under eucalyptus). 6.02 The 60,000 ha required to support a 180,000 TPA mill has been esti- mited using a conservative assumption of a weighted annual growth rave of 15 m /ha/year for pine and eucalyptus and 3a pulpwood requirement of 5 m per ton of pulp. A higher growth rate of 18 m /ha/year for eucalyptus (assumed i the Project yield calculation) and an average wood requirement of 4.34 m per ton of pulp (used by Jaakko Poyry & Co.), if realized, would reduce the area needed for pulpwood plantations to some 52,000 ha (42,000 ha of pine and 10,000 ha of eucalyptus). The total area required will be finally determined both by the rates of growth and pulpwood requirements, and by the the actual product mix of the pulpmill. Any adjustments in the final areas will be ef- fected in subsequent phases of the planting program. Sawlog Production 6.03 At the start of the Project 2,500 ha of the oldest stands at Sao Hill would be set aside for a Sawlog Working Circle to feed the new TWICO sawmill on a one-shift basis from 1976. lhen fully operational (around 1978), the sawmill would require 30,000 m of logs annually for one shift;  - 18 - this Iould represent an annual cut of 100 ha, assuming an average yield of 300 m /ha (most of the stands being over 20 years old). If it is planned to introduce a second mill shift in the next few years the additional wood requirement of 30,000 m p.a. could not be met by the Sao Hill plantations without seriously reducing the pulp mill resources and, accordingly, the additional wood supply for the sawmill would have to come from the Mbeya pine plantations (some 250 km away) for one entire sawlog rotation of 25 years; after this period, the expanded Sawlog Working Circle at Sao Hill (5,000 ha) would be able to meet this wood requirement. In due course it would be the intention that more than 2,500 ha of sawlog plantations would be used for the TWICO sawmill from the Sao Hill area. Pulpwood Production (Annex 8) 6.04 Assuming the 65,000 TPA pulpmill becomes fully Sperational (prob- ably around 1187) it will require approximately 280,000 m of wood annually, some 30,000 m of which would be wattle purchased annually for a few years from the Njombe estates 3(some 100 km) to meet a temporary shortfall, and the remaining 250,000 m rould be produced from Project plantations. It is expected that 20,000 m of this Iood would come from pine thinnings and3 from sawmill residues and 230,000 m from pulpwood clearfelling (190,000 m of pine and 40,000 m of eucalyptus). This would entail the clearfelling of 845 ha of pine annually, assuming a rotation age of 15 years and a mean annual increment under bark of 15 m /ha, and the cutting of 280 ha of eu- calyptuI under a coppice rotation of 8 years and a mean annual increment of 18 m /ha using the Jaakko Poyry conversion factor. 6.05 Assuming the extended pulp and paper mill came on stream in about 1993 and reached maximum production of some 180,000 TPA two years later, the total wood volume requirement of the mill froi 1995 onwards would be 780,000 m , using the conversion figure of 4.34 m of wood per ton of pulp. If 175,000 m of this total were eucalyptus and 20,000 m pine sawmill res- ijues and thinnings, the pine volume from clearfeiling would only be 515,000 m ; this is equivalent to 2,600 ha yielding 225 m per ha (MAI of 15 m /ha and a rotation of 15 ye rs). The eucalyptus clearcut area would be about 1,200 ha yielding 144 m /ha (MAI of 18 m /ha and a coppice rotation of 8 years). 6.06 The proposed planting program of 48,000 ha of pine and 12,000 ha of eucalyptus may have to be revised according to the product mix of the mill and the input conversion ratio (para 6.02). This adjustment could be made during the third phase of the program (1986-1991).  - 19 - B. Markets and Prices (Annex 9) Markets 6.07 A recent survey of the wood demand and supply situation in Tanzania carried out by the Forest Division indicates a steady growth in domestic de- mand for paper and paperboard from about 27,600 metric tons in 1973 to 137,000 tons in 1990 and to nearly 300,000 tons in the year 2000. Industrial paper and paperboard account for over 60% of current total consumption, and this pattern of consumption is expected to continue; by the year 2000 it is esti- mated that industrial paper and paperboard consumption will exceed 200,000 tons a year. Newsprint and other printing and writing paper account for the balance of total paper consumption. 6.08 At present the total requirement for paper and paperboard are im- ported. In 1973 net imports of paper and paperboard reached T Sh 60 million, as compared to T Sh 13 million in 1962. The foreign exchange outflow for paper and paper products, including printed matter, amounted to about T Sh 80 million (US$10 million) in 1973. Unless steps are taken to establish a local pulp and paper industry, the cost of imported paper and paperboard products is likely to rise to an estimated US$18 million by 1980 and could exceed US$90 million by the year 2000. If the growth rates of consumption would be lower than expected the start-up of the mill could be delayed and/or the capacity of the paper mill could be scaled down on a revised configuration. 6.09 However, it is envisaged that at full production, around 1987 1/, the Mufindi pulp and paper mill would produce 65,000 TPA. Given the pro- jected domestic demand (para 6.07), it is therefore expected that all of the proposed Project's pulpwood production would be consumed domestically, and furthermore that the entire production of a possible extension of the mill to around 180,000 TPA (para 6.05) would also be absorbed by the local market. 6.10 The present consumption of sawnwood comprises about 35% softwoods and 65% hardwoods.3 It is estimated that the total annual sawlog demand in 1970 was 406,000 5 (r). Saw wood consumption is pSojected to increase to about 1 million m (r) by 1990 and to 1.5 million m (r) by 2000. Although the country is presently self sufficient in sawnwood, the policy of the Government aims at changing this domestic consumption pattern into a higher use of cheap softwoods, while most of the more valuable hardwoods would be reserved for export. Although no detailed demand estimates for TWICO's sawmill output at Sao Hill have so fai been made, the Government assumes that the output of the mill (12,000 m (s) p.a. per shift) would be utilized 1/ About 95% capacity would be reached by 1984. The remaining 5% of capac- ity (mainly for printing and writing) would be realized by 1987.  - 20 - by Government in Dodoma. There also exists a potential f sr exports of sawn softwoods to Zambia which currently imports some 50,000 m (s) a year. Exist- ing plantations at Sao Hill are geographically well placed to supply the Zambian market and completion of Tazara will improve the relative com- petitiveness of the area. Prices 6.11 Paper and paperboard prices in Tanzania are higher than world mar- ket prices, reflecting the distance of the country from major world trading and consumption centers and the penalty for small orders for many product types which countries with a low consumption are generally called upon to pay. World market prices over the last two decades have been characterized by relatively stagnant real prices. The early 1970's were characterized by a strong upsurge in prices and a widespread shortage of paper and board. However, the recent worldwide recession has changed the market situation and paper prices have basically remained at the 1974 level (i.e. they have fallen in real terms). However, it is expected that this is a temporary weakness of the market and that prices will again stabilize. The Project's economic evaluation is based on the price and cost levels as of March 1976. The long term paper and paperboard mill net price weighted according to the expected output of the mill has been calculated at US$572 per metric ton for the 65,000 ton mill and US$554 for the 180,000 ton mill. These prices are based on cif prices per metric ton of US$375 for kraftliner, US$480 for sackpaper, US$350 for newsprint, and US$730 for printing and writing paper. Present cif prices are somewhat below the above levels. However, a recent FAO market forecast indicates that if the present recession does not worsen, there will be an accurate shortage of paper by as early as 1978. 6.12 Stumpage rates vary according to the species. Stumpage rates for plantation Sawlogs have been increased consideraMly since July 1975 from T Sh 17.5/m for plantations logs to T Sh 49.4/m . However, stumpage rates at present are still not high enough to enable the industrial forest planta- tions to be self-supporting financially (para 7.02 and Annex 9). VII. BENEFITS AND JUSTFICATION A. Financial Evaluation 7.01 The overall planting program has been based on the requirements of a 180,000 ton pulp and paper mill, and the Project economic evaluation is based on this target. Initially the industrial Project would be based on a proposal for a 65,000 ton mill which would be in operation until 1993, and it is this smaller mill which has been tested on a financial as well as on an economic basis. For this mill the financial rate of return at March 1976 prices would be about 11% over a 25-year period. This calculation is based on an assumed weighted mill net price of US$572 per metric ton for paper  - 21 - and on calculated stumpage rates of T Sh 60/mr for pine,3T Sh 32/mr for eucalyptus, T Sh 45/m for pine thinnings, and T Sh 30/mr for wattle. These stumpage rates compa e with T Sh 49.4/m for sawlogs (pine) and an average of about T Sh 35/m for plantation poles now actually charged by Government. In order to make these plantations financially self-supporting, it would be necessary to raise the stumpage rates to these assumed levels by 1981 in real terms. Agreement was reached to that effect that Government would introduce stumpage rates by January 1, 1985, for eucalyptus and January 1, 1992, for pine, which would enable the industrial forest plantations to become self-supporting financially. The calculation would be based on plan- tation cost at 1985 and 1992 prices respectively, applying a discount factor which would be a reasonable measure of the opportunity cost of capital in Tanzania. 7.02 As the amount and sources of the additional financing needed for the later phases of the afforestation program and the pulp and paper mill have not as yet been established, the impact of the Project on Government's cash flow has been confined to the Project cost and stumpage revenue only. Assumed stumpage rates have been used to calculate the revenue at time of harvesting (about 15 years after planting for pine and about 8 years for eucalyptus). Taxes and duties are negligible and have not been included, and stumpage revenues from pre-Project plantations which would be main- tained under the Project have also been excluded. On these assumptions, total Project costs in real terms would be recovered within 20 years at an interest rate of 10% (Annex 10). B. Economic Evaluation (Annex 11) 7.03 The 16,000 hectares of Project pine and eucalyptus plantations would provide part of the necessary raw material for the operation of the pulp and paper mill proposed to be constructed in the Sao Hill area. The economic justification of the Project is based on the entire Sao Hill affor- estation and industrial program. This overall program comprises the planta- tion of a total area of 60,000 ha of pine and eucalyptus; maintenance of existing pulpwood plantations (some 8,800 ha); logging operations over 850 ha of 15 year-old pines and 280 ha of eucalyptus each year (rising ultimately to 2,600 ha of pine and 1,200 ha of eucalyptus p.a.); the establishment of a 65,000 TPA pulp and paper mill and its extension to a capacity of 180,000 TPA; and the subsequent processing of the wood in the envisaged mill. As outlined in Table 1 of Annex 11 the investment and operating cost of the pulpmill are by far the most important cost item of the program followed by the logging and transport costs whilst the afforestion costs are small by comparison. The major quantifiable benefits would arise from the expected production of paper and paperboard. At full development (after 21 years), the annual value of production is expected to reach T Sh 995 million (US$123 million) in constant prices.  - 22 - 7.04 The 330 hectares of sawlog plantations to be planted (replanted) under the Project have been tested on a per hectare model basis. The main- tenance cost of 2,500 ha of existing sawlog plantations is negligible. 7.05 The economic internal rate of return of the pulp and paper pro- gram (based on a 180,000 ton mill) is estimated to be 13.5% over 37 years. The economic rate of return of the pulp and paper program (based on a 65,000 ton mill) is estimated to be 12.4% over 25 years (Annex 8, Table 2). The rate of return for sawlog production has been estimated at 21.5% over 26 years. The average weighted economic rate of return on these components (pulp and sawmill circle) is about 13.5%. In calculating the economic rate of return of pulpwood and sawlog production, import parity prices for paper and sawnwood have been used. Foreign exchange costs and benefits have been shadow priced at a rate of T Sh 10 per US$1.00 1/ to reflect more accurately the value of foreign exchange to Tanzania. Unskilled labor was shadow priced by a factor of 0.45 of the monetary wage rate in view of the significant un- deremployment in the area. The social rate of return has not been calculated but should be close to the economic rate of return as the Project is mainly efficiency rather than redistribution oriented. 7.06 The expected benefits would be distributed among those to be em- ployed directly in the plantation program (who would fall within the lower rural income bracket) and those employed in related processing industries. The Project would result in direct additional employment of about 500 man- years. While direct employment in plantation-related activity would in- crease only slightly in the second phase and then diminish slightly in the third phase, these changes would be more than offset by new employment oppor- tunities in the logging and industrial operations. The foreign exchange sav- ings stemming from the envisaged program would be a major benefit accruing to the country. The Project would have various unquantifiable benefits not included in the analysis such as the prevention of erosion and improvement of soil and water conservation, as well as some benefits from training and research programs and the upgrading of the rural road system. As the Proj- ect is located in a grassy highland, no indigenous forest would have to be felled to implement the plantation scheme. The Project is not expected to have any tangible negative effects on the ecosystem of the area to be planted. 7.07 The principal risk facing the Project would be that the envisaged pulp and paper mill would not be built at any time. In this unlikely event, the plantation program could be scaled down and ultimately stopped after five years and the plantation would be allowed to grow to a 25-year rota- tion to produce sawlogs. Additional sawmills would have to be built to pro- duce sawnwood as the TWICO sawmill in Sao Hill would be too small to process the then existing total wood supply. The production of such sawmills would substantially be devoted to meet local market demand with any balance for export. Specific risks of the program as envisaged would result from a 1/ Subsequent to above calculations being made, increased to T Sh 11 per US$1. This would slightly improve the economic rate of return.  - 23 - drop in world market paper prices, and increasing investment and mill oper- ating costs. Options to reduce those risks stemming from the uncertain- ties of the pulp and paper market could be to delay the start up of the mill operation, scale down the capacity and/or change the output mix of the paper mill. 7.08 Sensitivity tests under various assumptions have shown that the economic internal rate of return is relatively insensitive to changes in costs, but would be sensitive to changes in prices. With a 10% increase in costs the rate of return for pulp and paper would be about 12.0%, and with a 10% increase in benefits the rate of return would be about 15.0%. Sawlog plantations would yield a rate of return of about 21.5%; with a 10% increase in cost the rate would be 20.2%, and a comparable reduction in benefits would also yield a return of 20.1%. A combination of both would give a rate of return of about 18.9% for sawlogs and 10.4% for pulpwood. If neither foreign exchange nor unskilled labor were shadow priced, the rates of return would be 12.6% and 18.0% for the pulpwood and sawlog planta- tions respectively (Annex 11). 7.09 The net foreign exchange impact of the program is detailed in Annex 11, Table 4. Although the program would have a negative foreign ex- change impact from 1976 to 1981 and again in 1991 and 1992, its net annual foreign exchange earnings would be around US$25 million during the 1980's and about US$86 million at full development in the mid-1990's. VIII. AGREEMENTS REACHED AND RECOMMENDATION 8.01 During negotiations agreement was reached on the following points: (a) detailed surveys of all plantable areas, including soil surveys, would be undertaken during the Project period by a special survey section (para 4.03); (b) there would be no encroachment or interference by villagers in the plantation area (para. 4.03); (c) the procurement procedures specified in para 4.17 would be followed; (d) the Forest Division would set up and maintain records and accounts adequate to reflect its operations, resources and expenditure, and separate accounts would be kept for the Project (para. 4.19);  - 24 - (e) Project accounts would be audited annually by the Auditor General. Accounts would be submitted to the Bank not later than six months following the end of the fiscal year (para 4.19); (f) appointments of the Project Manager, the Financial Controller and two internationally recruited specialists would be made in prior consultation with the Bank. The Financial Controller and the Roads/Mechanical Engineer would be employed by November 15, 1976 (para. 5.03); (g) Government would not transfer key local staff under the Project without adequate replacement (para 5.03); (h) terms of reference of the pulpmill water study and of the road engineering study would be prepared and the selection of experts to carry out these studies would be made in prior consultation with the Bank. (para 4.14); (i) Government would introduce stumpage rates by January 1, 1985 for eucalyptus and by January 1, 1992 for pine, which would enable the industrial forest plantations to become self- supporting financially (para 7.01). 8.02 Conditions of loan effectiveness would be: (a) The gazetting of not less than 60,00 ha of additional forest reserves (para 3.05) (b) The appointment of the Project Manager and the Silviculturist/ Forest Economist (para 5.03). 8.03 The Project is suitable for a Bank loan of US$7.0 million to the Government of Tanzania.  ANNEX 1 Page 1 TANZANIA SAO HILL FORESTRY PROJECT Forestry Subsector in Tanzania A. Forest Resources 1. About one half of the total land area of Tanzania (88.7 million ha) is classified as natural forests; these can then be further described as below: Type of Forest Area ('000 ha) Standing Volume (m 3/ha) Gross Net Productive 1/ Closed Forest 936 337 197 Woodland 32,641 25,803 47 Intermediate Woodland 10,794 8,486 15 Total 44,371 34,636 41 The mountain forests are dense, high-altitude rain forests, in which the main species are podo, camphor, cedar, loliondo, mtambara and pillarwood. These forests are not extensive, but in addition to supplying valuable tim- ber for both home and export markets, have the important function of regu- lating water flow and protecting the soil from erosion. The woodlands - Tanzania's most extensive forest type - are found in the foothills, along the coast, and in the savanna (Miombo). The main tree species are mvule, African mahogany, muhuhu and blackwood in the foothills and along the coast; and muninga, mtundu and afzelia in the Miombo. The intermediate woodland is in a transitional stage from bushland to thickets. Some 80,000 ha of mangrove forests have also been included in this type, although the latter are of little interest for industrial development and are regarded mainly as a source of timber for use as building poles for local housing. 2. The total area of gazetted forest reserves is approximately 13 million ha, representing about 15% of the total land area of Tanzania and about 30% of the forest area. There are 540 forest reserves scattered throughout the country, which serve a dual function as a source of wood and wood products and as catchment areas. About 1.6 out of the 13 million ha of forest reserves have been gazetted as catchment areas. These are utilized to store of these areas are found in mountain areas such as Kili- manjaro, Arusha, Tanga, Morogoro, Iringa, Mbeya and Ruvuma. 1/ After deducting catchment areas, parks and inaccessible forests.  ANNEX 1 Page 2 3. In addition to the natural forests, there are 42,000 ha of soft- wood exotic plantations (mainly Pinus patula and Cupressus lusitanica) and 6,000 ha of hardwood plantations, mainly of native species. The main con- centrations of existing softwood plantations are in the Kilimanjaro, Usambara and Sao Hill regions. The past planting program has averaged 4,000 ha a year, and this is envisaged to be increased to 5,600 ha in the present plan period (1975-80). The current Ruvu and Sao Hill annual planting programs represent about 50% of the total softwood planting program for the whole country. 4. Cooperative village plantations for fuelwood, poles, etc., are also becoming significant components of the Government's forest development program. These are of particular interest as village forestry is labor in- tensive and little foreign exchange or foreign technical inputs are required. 5. Although the hardwood forests have provided most of the country's domestic sawn lumber requirements in the past, the low standing volumes, the preponderance of non-merchantable species and the widely scattered distribu- tion of the exploitable trees limit their economic value. However, the natural forests perform an important protective function such as the prevention of soil erosion and water retention, and they provide domestic fuel and timber, as well as some valuable timber for export. Therefore, Government's present forest policy aims at the development of these resources primarily for the production of valuable hardwood species suitable for the manufacture of lum- ber veneer and plywood; the bulk of these goods is expected to be exported. The plantation softwoods are intended to supply most of the country's domes- tic demands for construction lumber. This will represent a more economic use of available resources, as production costs of sawn lumber from concentrated plantation forests are significantly lower than from indigenous forests. B. Forest Development Policy and Strategy 6. In Tanzania forestry development planning is closely linked to the needs of other rural sectors. The following policy targets have been put forward in the Forestry Third Five Year Development Plan of 1975-1980: (a) To set aside as permanent forest reserves a sufficient area of land throughout the country to ensure: (i) That the protective functions of forests in con- serving water supplies, preserving and improving local climates and establishing land liable to deterioration are maintained and improved. (ii) That all types of forest products are available in adequate quantities to the people of Tanzania at all times both now and in the future.  ANNEX 1 Page 3 (b) To manage the forest estate in such a manner as to make it as productive as possible in accordance with the primary objectives stated above. (c) To utilize forest produce on public lands to the best advantage of the community, while recognizing that such assets are dwindling due to increased demand for agricultural land. (d) To foster efficient harvesting and utilization of forest products and to encourage and develop suitable forest industries for the processing of these products and also to build on export trade to include both better known and lesser known timber species. (e) To encourage and assist the practice of forestry in Ujamaa villages. (f) To undertake and promote research with a view to obtaining the most satisfactory protection of water supplies, soils and local climate. (g) To undertake and promote forestry education and training in all branches of forestry and build up by example and appreciation forestry and its inherent benefits to Tanzanians and their des- cendants. While these objectives are basically the same as in the Second Five Year Development Plan, more emphasis has now been put on proper wood utiliza- tion, as well as on soil and water conservation. Government has in this regard directed the Forest Service to pay greater attention to investigating and applying methods of preventing soil erosion, loss of moisture and uncon- trolled fires. 7. Tanzania's goal in the Second Five Year Development Plan was to plant 18,400 ha of softwood species and 2,950 ha of hardwood species from 1969/70 to 1973/74, and Government succeeded in planting 95 percent of its targets over that period. Details of the forestry expenditures over the last five years are given as follows:  ANNEX 1 Page 4 Forestry Expenditures Expenditures, T Sh '000 Year Development /a Recurrent Total 1969/70 11,537 8,000 19,537 1970/71 13,679 9,908 23,587 1971/72 13,727 15,810 29,537 1972/73 20,699 10,748 31,447 1973/74 18,531 8,532 27,063 TOTAL 78,173 52,998 131,171 /a About T Sh 34 million (43%) of the development funds were received by Tanzania mainly as grants from donor countries and UNDP. About 80% of the development funds (T Sh 60 million) were used for esta- blishment and tending of forest plantations. A summary of the financial requirements as outlined in the Forestry Third Five Year Development Plan is given in Table 2. C. Government Revenues from the Forestry Subsector 8. Government derives substantial revenues from log sales, char- coal royalties and pole sales; these are paid directly to the Central Government account. Revenue from the sale of forest products over the years 1969-73 is given below: Revenue From Sale of Forest Products Year Revenue (T Sh) 1969 8,090,900 1970 6,424,000 1971 7,487,200 1972 6,405,700 1973 7,836,700 Total 36,244,500  ANNEX 1 Page 5 Although stumpage rates were increased considerably in 1975, without further increases the stumpage revenues would not cover both Government's investments and maintenance expenditure on forest plantations. D. Foreign Assistance 9. The following agencies have assisted with projects for the develop- ment of forestry and forest industries in Tanzania: (a) The Swedish International Development Authority (SIDA) has pro- vided considerable financial assistance 1/ for the general develop- ment of the forestry sector, and is interested in long term sectoral planning and training in forest industries; it has also provided support for Tanzania Wood Industries Corporation (TWICO), as well as technical assistance for afforestation, a land use survey, improvement of management techniques, and fuelwood production; (b) The Canadian International Development Agency (CIDA) has helped to carry out extensive forest inventories; (c) The Norwegian Assistance Agency (NORAD) has given financial support and provided international staff for the Forest Department of the Faculty of Agriculture and Forestry at Morogoro, and has made provision for post graduate forestry training in Norway; it has also provided equipment for the Sao Hill sawmill and financing for forest industries consultancy services; (d) The Finnish Assistance Program (FINAID) has provided consultancy services and is interested in planning for forest industries development and in promoting forest industries. The Governments of Denmark and Czechoslovakia are also reported to be con- sidering aid for forestry development in Tanzania. 1/ About T Sh 23 million in grants were provided over the second plan period and T Sh 34 million in 1975/76. April 1976  TANZANIA ANNEX 1 Table 1 SAO HILL FORESTRY PROJECT Distribution of Area by Planting Years g1nd Species in the Existing Forest Reserves Included in the Project (ha if) Age Speeies Classes Planting Other SWs Total (years) Year P.patula P.elliott"i & Mixtures Yearly By age classes 1954 363 - 158 521) 20+ ) 568 ^ 5 32 15 47) 8 6 28 7 35) X 1-4 7 22 26 48) u 15-20 8 81 85 166) 488 0 9 63 70 133) -4 60 101 3 2 106) 0 D: 61 76 150 226) - 2 85 219 6 310) c 10-15 3 85 - 288 373) 1444 4 173 186 17 376) I 159) 9 5 293 293 42 628 (46 66 604 391 - 995) 5-10 7 166 227 432 825) 8 395 406 - 801) 2867