Tanzania - Mwanza - Shinyanga Rural Development Project

IbflDVtb ts nv Document of FILE COuPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2 312-TA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A RURAL DEVELOPMENT PROJECT (MWANZA AND SHINYANGA) May 1* 1978 This doument baa a restrie distbution and may be used by recipients only In the performance of their officil duties. Its contents may net otherwise be disclosed without World Bfank authorIzation.  CURRENCY EQUIVALENTS Currency Unit Tanzania Shilling (TSh) US$ 1.00 TSh 8.30 TSh 1.0 US$ 0.12 (As Tanzania Shilling is officially valued at a fixed rate of 9.66 TSh to the SDR, the US Dollar/Tanzania Shilling exchange rate is subject to change. Conversions in this Report were made at US$1.00 to TSh 8.30 which is close to the 1977 ave- rage exchange rate.) GLOSSARY OF ABBREVIATIONS CCM - Chama Cha Mapinduzi EAC - East African Community IFAD - International Fund for Agricultural Development KILIMO - Ministry of Agriculture LCs - Livestock Development Centers NADP - National Agricultural Development Program PMO - Prime Minister's Office TANU - Tanganyika African National Union TRDB - Tanzania Rural Development Bank VSHP - Village Self-Help Program FISCAL YEAR Government - July 1st to June 30th  FOR OFFICIAL USE ONLY UJNZANIA: RURAL DEVELOPMENT PROJECT (MWANZA AND SHINYANGA) (REDIT AND PROJECT SUMMARY BORROWER: United Republic of Tanzania BENEFICIARIES: The Borrower and the Tanzania Rural Development Bank (TRDB) AMOUNT: $12 million TERMS: Standard COFINANCING: The International Fund for Agricultural Development (IFAD) will jointly finance all project components except for water supply and road improvement; pro- viding $12 million for 50 years including 10 years of grace with a 1% service charge per annum. RELENDING TERMS': Approximately $0.9 million equivalent (including con- tingencies) of the Credit and IFAD Loan would be relent to TRDB for 25 years including five years of grace at 4% interest per annum. These funds would be onlent to project villages through the Village Self-Help Program (VSHP) on standard TRDB terms. PROJECT DESCRIPTION: The proposed project would constitute the initial five years of a long-term development program to improve the well-being of the rural populations of Mwanza and Shinyanga regions. It will supplement and complement ongoing investment in these two regions, using the recently constituted villages as the basic unit of investment. Specifically, the * project would include agricultural investments in proven agriculture technical packages, research, village verification trials, extension, livestock and forestry; financing for land-use planning; a village self-help program; road improvement invest- ments; a water supply component; and funds for project coordination and monitoring/evaluation. The most significant risk facing the project is whether the projected implementation schedule can be maintained. Efforts have been taken to provide the support needed to execute the project according to schedule and modest assumptions have been made with regard to implementation capacity. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - it - ESTIMATED COST: (US$ million) Local Foreign Total Agricultural Development 1.5 2.1 3.6 Livestock Development .9 1.1 2.0 Forestry Development 1.3 0.7 2.0 Land Use Planning 0.5 0.3 0.8 Village Self-Help Program 2.1 2.3 4.4 Road Improvement 2.0 2.4 4.4 Water Supply 0.9 1.2 2.1 Project Coordination, Monitoring and Evaluation 1.7 1.0 2.7 TOTAL BASELINE COSTS 1n.9 11.1 22.0 Physical Contingencies 0.9 0.9 1.8 Price Contingencies 3.3 3.4 6.7 TOTAL PROJECT COSTS 15.1 15.4 30.5 PROJECT COSTS NET OF TAXES AND DUTIES 14.1 15.4 29.5 FINANCING PLAN: US$ million % IDA 12.0 39 IFAD 12.0 39 Tanzania Government 4.8 16 Village Contributions to VSHP 1.7 6 30.5 100 ESTIMATED DISBURSEMENTS US$ Million (IDA FY) 1980 1981 1982 1983 1984 1985 Annual .5 4.4 2.5 2.0 2.0 .6 Cumulative .5 4.9 7.4 9.4 11.4 12.0 RATE OF RETURN: 21% APPRAISAL REPORT: Report No. 1867a-TA, dated May 1, 1978  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A RURAL DEVELOPMENT PROJECT (MWANZA AND SHINYANGA) 1. I submit the following report and recommendation on a proposed credit to the United Republic of Tanzania for the equivalent of US$12 million on standard IDA terms to help finance a Rural Development Project in the re- gions of Mwanza and Shinyanga. In addition, the International Fund for Agri- cultural Development (IFAD) has committed $12.0 million to the project for 50 years including 10 years of grace with a service charge of 1 percent per annum. About $0.9 million equivalent of the credit and IFAD funds would be relent to the Tanzania Rural Development Bank (TRDB) for 25 years including 5 years of grace at 4 percent per annum. PART I - THE ECONOMY1' Introduction 2. A Basic Economic Mission visited Tanzania in August 1976. The Basic Economic Report was distributed in December 1977 (Report No. 1616-TA). 3. Tanzania has experienced a degree of continuity and stability in political structure, leadership and objectives which is unrivaled in Africa. The TANUY/ party, under the leadership of President Nyerere, has been the unifying force in Tanzania's political evolution since the early 1950s. For the past decade, following the Arusha Declaration in early 1967, Tanzania has pursued the objectives of social equality, self-reliance, the eradication of poverty and economic and social transformation. The Government has empha- sized rural development, social ownership of the principal means of production, and full participation of all regions and population groups in the development process. Economic growth has been an important objective but the leadership has been willing to forego short-term income gains for longer-term structural change and more equitable distribution. In restructuring the political, economic and social life of the country the leadership has introduced a series of far-reaching institutional reforms: most large-scale units in manufacturing, finance and wholesale trade have been nationalized; the Government has sharply increased its share of revenue in GDP through pro- gressive taxation; a significant portion of public sector expenditure control 1/ This section is essentially the same as that of the President's Report on the Tobacco Handling Project dated May 1, 1978. 2/ TANU (the mainland political party) was merged with the Zanzibar political party (the Afro-Shirazi Party) in February 1977. The new party is now called Chama Cha Mapinduzi (CCM).  - 2 - has been delegated to the regions and districts and a massive campaign of villagization has been initiated to join the rural population in viable long-term development units. 4. With an average capita income of $180, Tanzania is classified as one of the least developed countries as defined by the United Nations (country data are provided in Annex I). Between 1967 and 1973 Tanzania's GDP at factor cost was growing at an annual rate of 4.5 percent. With population growing at2.7 percent per year, per capita output was rising at only 1.ts percent per year on average. Domestic savings reached 18 percent of GDP while gross investment was sustained at between 20 to 25 percent of GDP, extremely high rates for a country at Tanzania's low level of per capita income. However, the growth rate in GDP was not commensurate with the magnitude of the investment effort, in part because of the high proportion of investment which was directed into slow-gestation infrastructure and social services projects but also because of sluggish growth in the agri- cultural sector and stagnant or declining productivity in parastatal enter- prises. During this period Tanzania's overall balance of payments situation was generally satisfactory, despite the disappointing performance in the export sector. The rapid growth in imports was more than compensated by increasing capital inflows, largely from bilateral sources on soft terms. The overall balance of payments was in surplus in most years during 1969-73, resulting in a modest buildup in net foreign exchange reserves to slightly over $150 million at the end of 1973, the equivalent of almost four months' imports. The Economic Crisis of 1974 and the Government's Response 5. In 1974 Tanzania was suddenly confronted with a severe economic crisis. Failure of rains in late 1973 and early 1974 caused a massive decline in production and marketing of the major foodgrains and the Govern- ment was compelled to import large quantities of grain. Tanzania's main export crops were also affected by the drought, and the resultant declines in export volumes prevented Tanzania from taking advantage of the commodity price boom of 1974. These agricultural problems were compounded by the disloca- tion resulting from the rapid expansion of the villagization program (para 23). On the import side, total cost of merchandise imports rose by over 50 percent between 1973 and 1974, despite a slight decline in volume. As a result of these factors the trade deficit widened from $158 million in 1973 to $340 million in 1974 while the overall balance of payments moved from a surplus to a deficit of $140 million. This balance of payments gap was financed largely through drawings from the IMF and a rapid depletion of reserves. Net reserves fell to $60 million at the end of 1974, equivalent to only one month's import requirements. Industrial production also stagnated in 1974 due to shortages of imported raw materials and interruptions in power and water supplies. While production declined, domestic demand increased rapidly because of expansionary fiscal, monetary and wage policies. The imbalance between domestic demand and supply, combined with the sharp escalation in import prices, resulted in severe pressure on the domestic price level.  6. Once the extent of the problems facing the country was realized, the Government formulated a comprehensive package of policy actions to bring the balance of payments under control while maintaining Lhe pace of its development effort. The principal elements of the package included a reallocation of investment in favor of directly productive sectors, measures to raise agricultural output, and constraints on wages and on public and private consumption. Government budget allocations to agriculture and industry were substantially increased; significant increases were approved in agricultural producer prices; tight import controls were implemented; indirect taxes on consumer goods increased; user charges for water and electricity were raised and an extremely restrictive wage and salary policy was followed. This package was reviewed with the Bank at the time of appraisal and negotiation of the Program Loan in late 1974, and approval of that Loan was based on the Bank's agreement with and support of the policy package. Approval of the subsequent Program Credit in 1977 was based in part on the Government's overall performance in implementing the agreed upon program. Economic Performance in 1975 and 1976 7. The major macroeconomic indicators have generally improved since 1974, reflecting both improved weather conditions and the effects of the policy measures introduced to deal with the crisis. Agricultural production increased by 6.5 percent in 1975 compared to a decline of 3.3 percent in 1974, while total GDP grew by 4.6 percent compared with only 2.2 percent in 1974. This was despite the fact that during 1975 production of cotton and some other cash crops still suffered from disorganization due to villagization. In 1976 some of the problems of villagization were being rectified through "operation correction," and since rains were once again favorable agricul- tural production was generally good. Agricultural production increased by about 4.5 percent in real terms in 1976, industrial production expanded 6.2 percent and GDP grew 5.2 percent. Preliminary estimates are that agriculture and total production expanded by about 5 percent again in 1977. 8. The goods and services account of the balance of payments continued to deteriorate in 1975 due to continuing production difficulties, declines in some agricultural export prices and the continuing need to import food for part of the year. The trade deficit increased from $340 million in 1974 to $400 million in 1975. Even after allowing for a high level of project-related capital inflows and a huge increase in grant assistance and concessional food aid, there was a residual deficit of almost $75 million. Whereas the 1974 residual deficit was filled almost entirely through a combination of IMF assistance and reserve depletion, the 1975 deficit was met through foreign assistance from a variety of sources, including the $30 million Program Loan from the World Bank (para 6). In 1976 the balance of payments picture improved. The trade deficit declined due to strong export performance, especially for coffee and cotton, and to a slight fall in the value of imports occasioned by a greatly lessened need for foodgrain imports and continuing tight restrictions on all other categories of imports. The overall balance of payments surplus was about $35 million for the year and continued in surplus throughout 1977. Gross foreign exchange reserves at the end  - 4 - of 1977 totalled $280 million, or about four months imports. Because of the very concessional terms on which aid has been given to Tanzania and the Government's refusal to use higher cost commercial loans and suppliers' credits he overall debt service ratio has remained low. Including a notional 40 percent share of the debt of the East African Community Corpo- rations, it was less than 8 percent in 1977. While the favorable terms of much of Tanzania's foreign assistance (particularly the increasing proportion of grants)significantly reduce the debt service burden they also increase Bank Group exposure. Debt service payments to the Bank Group were about 28.6 percent of Tanzaniats total debt service payments in 1977, and are projected to rise to approximately 30 percent in 1980. East African Community (EAC) 9. The recent developments in the East African Community were outlined in a report to the Executive Directors dated December 29, 1977. Dr. Victor Umbricht, the independent mediator recently appointed by the Partner States, visited East Africa in February and has begun work on the questions involved in appraising the assets and liabilities of the EAC Corporations and making recommendations on their allocation. The de facto breakup of the Community is expected to have some impact on Tanzania's budget as new national corpo- rations take over the services formerly provided by the EAC Corporations. While substantial initial investments are required (particularly in the formation of the airways corporation and the rehabilitation of the railways), the burden on the Government budget will hopefully be temporary as the new corporations should become self-financing. A major development related to the EAC difficutlies was the closure of the border with Kenya. Kenya was a major trading partner of Tanzania and in the short run considerable adjust- ments have had to be made in locating new suppliers for some items and developing alternative outlets for some manufactured goods and agricultural products. PART II - BANK GROUP OPERATIONS IN TANZANIA 1/ 10. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1962, 30 IDA credits, 13 Bank loans and two Third Window loans amounting to $506.0 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 10 loans totalling $244.8 million which have been extended for the development of the common serv*es and development bank operated regionally by Tanzania, Kenya and Uganda through their association in the East African Community. The only IFC investments in Tanzania to date, totalling $4.7 million, were made to the Kilombero Sugar Company in 1960 and 1964. This Company encountered financial difficulties and in 1969 IFC and other investors sold their interest in the Company to the Government. A proposal for an IFC invest- ment in soap manufacturing is now under consideration. Annex II contains summary statements of Bank loans and IDA credits to Tanzania and the East African Com- munity organizations as of March 31, 1978 and notes on the execution of ongoing projects. 1/ This section is essentially the same as that of the Tobacco Handling Project dated May 1, 1978.  - 5 - 11. In keeping with Tanzaniats overall development strategy, Bank Group lendin6 operations are increasingly focusing on the rural sector and directly productive projects. Up to the end of FY72, 10 out of 14 loans and credits made individually to Tanzania had been for infrastructure. The overwhelming majority of the operations approved since then have been for directly productive projects. Furthermore, a number of Bank Group supported infrastructure projects have been closely linked with specific productive activities. For example, the Urban Water Supply Project (Loan No. 1354-TA) approved in December 1976, will support the Bank Group financed Industrial Complex in Morogoro (Loan No. 1385-TA and 1385-T-TA). The directly productive projects approved include the Kigoma Rural Develop- ment Project (Credit No. 508-TA), the National Maize Project (Credit No. 606-TA), the Fisheries Development Project (Credit No. 658-TA), three Tanzanian Investment Bank Projects (Credit No. 460-TA and Loan Nos. 1172-TA and 1498-TA), the Mwanza Textile Project (Loan No. 1128-TA), and the Sao Hill Forestry Project (Loan No. 1307-TA). A Trucking Industry Rehabilita- tion and Improvement Project (Credit No. 743-TA) and a Second National Sites and Services Project (Credit No. 732-TA) were also recently approved by the Board. Projects which have been appraised include the Mufindi Pulp and Paper Project, a Tourism Rehabilitation Project, a Second Textile Project, and a Fifth Highway Project. A Rural Development Project in Mara, an Agricultural Services Project, and a line of credit to the Tanzanian Rural Development Bank are under preparation. 12. Although the comparatively high proportion of undisbursed project funds detailed in Annex II, (page 27) is in large part a result of the recent approval of many of these projects, it also reflects the fact that overall project implementation has been slower than was projected. The causes of the difficulties in implementation are varied. Some stem from the scarcity of suitably trained and experienced manpower, some reflect the problems in identifying agronomic input packages appropriate to the needs of smallholder farmers and others result from the strains associated with attempting a "frontal attack" on poverty. These problems have been compounded by frequent and drastic administrative changes, which -- though potentially the source of long-term benefits -- have certainly disrupted orderly execution of projects and made parts of earlier project concepts obsolete. In general, these difficulties have been most severe in agriculture, particularly in areas involving smallholders. As our lending program has increasingly concentrated on this sector, these problems have become correspondingly more apparent and severe. By contrast, the "modern" sector projects have tended to fare better: the Tanzania Investment Bank, Mwanza Textile, and Cashewnut Processing Projects, for example, are proceeding well. 13. As the Bank's lending program has expanded, increasing attention has been given to measures designed to improve project implementation. A course was held in Tanzania in 1973 and again this year on Bank Group procurement  - 6 - policies and procedures with the relevant Government officials. A special project implementation unit was set up in the Ministry of Agriculture and nine ADS staff have been assigned to Bank projects. The need to establish a close and continuous working level dialogue between responsible Tanzanian officials and Bank staff on following-up implementation problems was one of the prime reasons for the expansion of the Resident Mission to two profess- ionals in October 1976. In February 1977 a regular Government/Bank review of project implementation was established. Discussions, chaired by the Ministry of Finance and attended by Bank staff and officials from implementing agencies, were held in Dar es Salaam on the entire Bank Group program. Steps to strengthen this review procedure were taken in August 1977 when review meetings were shifted to a monthly basis and the Government agreed that periodically the reviews would be conducted on an "in-depth" basis to discuss in detail individual problem projects and problems which are affecting project implementation across a number of sectors. As a result of these reviews a number of positive developments have been noted: most of the actions agreed to during the reviews have been completed and the reviews have significantly improved project coordination and communication by providing an opportunity for project agencies to discuss their problems with all ministries involved and with high level officials in Finance. During the two in-depth reviews in October 1977 and January 1978 a series of general implementation issues were discussed with senior Tanzanian officials and follow-up actions or investigations agreed upon. 14. The Government has become increasingly conscious of the need to improve implementation. In addition to fully supporting the project implementation review system, the Ministry of Finance decided to set-up an internal' unit to oversee project performance. Furthermore, there have been more consistent responses to Bank suggestions and a willingness to openly discuss project problems raised by Bank staff. As a consequence, the project disbursement record has improved somewhat over the last two years and a recent analysis indicated that the Tanzanian disbursement performance is about equal to the Bank-wide average. However, a wide range of serious long-term bottlenecks remain. This is particularly true in the agriculture and rural development sector where individual projects face a considerable number of constraints in trying to increase the incomes of smallholders (the lack of proven technical packages, a weak extension system, problems in input distribution and output collection, etc.) PART III - THE AGRICULTURAL SECTOR General Background 15. Agriculture and related activities constitute the largest single sector in the Tanzanian economy. About 94 percent of the population lives in rural areas, and 90 percent of the economically active population is engaged in agriculture. Roughly 40 percent of GDP is derived from the sector, of which about half constitutes subsistence  production. In addition, agricultural exports (processed and unprocessed) account forabout 8Q percent of total exports. The major export commodities are cotton, coffee, sisal, cashewnuts, tea and tobacco. 16. Most agricultural production is from smallholdings using family labor. Large-scale agriculture is confined to a small number of private estates and state farms producing sisal, coffee, tea, sugar, wheat, rice and livestock. Estate production has diminished in importance since independence and the state farm program remains small. Tanzania's national livestock herd, the second largest in Africa, is grazed extensively over the 40 percent of the country which is free from tsetse fly infestation. It is largely managed along traditional lines. 17. Recent performance of the agricultural sector has been disappointing. The long-term growth rate of agricultural output between 1967 and 1976 was only 2.8 percent per annum -- about equal to population growth. Moreover, food crop production has failed to keep pace with the expanding population and Tanzania has become increasingly dependent on imports of maize, rice and wheat. This deteriorating food balance position was seriously aggravated by the poor drought-affected harvests of 1973 and 1974 which necessitated large foodgrain imports. While real agricultural production increased by 6.6 percent in 1975 and by a further 4.7 percent in 1976, these increases represent primarily recovery from the drought and only return agricultural expansion to its long-term growth path. Concern with increasing the historical long-term growth rate remains central to the Bank Group's investment strategy in Tanzania. Agricultural Development Strategy 18. The Government has undertaken a comprehensive program to support the development of productive activities in the agricultural sector in conjunction with efforts to achieve balanced regional growth and more equitable income distribution (para 3). While there has been a major emphasis on improving the availability of social services (particularly in health, water supply and education), in the aftermath of the drought and its balance of payments difficulties the Government has made increasing output the major focus of its investments in rural areas. In particular the Government has given greater emphasis to its program of self-sufficiency in food production, assisted by an IDA Credit of US$18.0 million for a National Maize Project (para. 11 above). 19. Long term Bank Group support for the Government's focus on increasing production was expected to be channeled through the National Agricultural Development Program (NADP), a series of projects identified in the Agricultural Sector Report (No. 541a-TA dated December 10, 1974). These projects were expected to involve the development of nationwide programs designed to concentrate and coordinate development efforts on the 40 or so agro-economic zones of the highest potential. However, recent developments in the sector, particularly in Bank-supported projects, have raised serious questions as to the feasibility of this approach. While nationwide projects oriented toward production were expected to be  consistent with Tanzania's decentralized Government structure (para. 20), this has not been achieved, The regions have not in practice felt res- ponsible for implementing "nationally" conceived and directed programs. At the _.ie time the regions have complained that many of the central services which they require (e.g., research, input delivery and marketing), and clearly accept as national responsibilities, are not being efficiently provided. As a result of these developments, a new Bank strategy in agri- culture has emerged. In order to ensure regional responsibility and the development of locally appropriate technical packages (particularly those required by the more intensive cultivation practices in the new villages), a number of regional projects, of which the proposed project is an example, are being or have been prepared. At the same time, an effort is being made to increase the ability of central ministries to provide essential services to regional "production units" through. agriculture services projects directed at, for example, improving research, marketing, and storage facilities. With this revised and consistent strategy, we expect a basis will be established for improving the disappointing growth rate in agriculture (para. 17). Rural Organization and Services 20. To carry the planning and implementation of its development program to the rural population, the Government moved in 1972 to decentralize its political and administrative structures to the level of the country's 20 regions and 80 districts. Previous to that, the Government retained the system in effect prior to Independence in 1961, where almost all political authority rested at the national level and Government services were provided through technical ministries whose resources and programs were centrally administered. Under the new poli- tical structure, regions and districts are granted primary responsibility for the planning and implementation of development activities within their jurisdictions, and given a high degree of administrative autonomy. In the new administrative framework the Regional Commissioner is the political head of the region and the Area Commissioner heads the district administration. The regional and district civil services are headed respectively by Regional Development Directors and District Development Directors. Both regional and district administrations include functional managers responsible for executing the development program in their respective sectors: agriculture (including land-use planning), natural resources (including fisheries and forestry), health, water, works, education, commerce, culture, and ujamaa and coopera- tive development. All important decisions are made by the Regional Development Committee and District Development and Planning Committee, chaired by the Regional Commissioner and Area Commissioner respectively. 21. Development plans are prepared annually for each district and region for incorporation into the national program approved by the Parliament in July of each year. Regional and district plans, in principle, emanate from consultations at village level and require the approval of  - 9 - regional and district administrations. These administrations are charged with the finarc-ial management and control of all the funds they spend. While the decentralization has improved communication between the Government and the villages (as the civil servants operating at the district and regional levels are directly involved in integrated rural development efforts), problems of manpower and of ill-defined division of responsibility between the regions, central ministries and parastatals persist. 22. Subsequent to the decentralization the two most important ministries in the rural sector are the Prime Minister's Office (PMO) and the Ministry of Agriculture (Kilimo). PMO provides overall policy directions to the regions as well as coordinating regional plans and budgets and assisting the regions (as appropriate) in preparing their development programs. Kilimo is responsible for the overall planning and monitoring of the agriculture sector as well as coordinating agricultural research, formal training of extension staff, pricing policy, seed multiplication and supervision of agricultural parastatals. Other central ministries (Natural Resources, Health, Water, etc.) also formulate overall policy in their sectors and provide technical advice and services to assist the regions in implementing their rural develop- ment programs. The critical financial intermediary in rural Tanzania is the Tanzania Rural Development Bank (TRDB). TRDB was established in 1971 to pro- vide long- and medium-term finance and technical assistance for the promotion of rural development. At its founding, it was stressed that it was intended to be a sound financial institution and therefore would only extend credit to economically viable activities. Because TRDB's largest borrowers were traditionally the cooperative unions, the dissolution of cooperatives in 1975 produced a significant portfolio problem for TRDB. However, the Government and TRDB are addressing this issue and with the villagization program it is expected that TRDB's primary clients will be indiiidual villages. 23. In order to facilitate the provision of infrastructure and services to the rural population and to encourage self-reliance, the grouping of farm families into villages, villagization, has emerged as a key element of the Government's rural development strategy. The acceleration of the Government's villagization program was given high priority in 1973-74 and at present, over three-quarters of Tanzania's rural population are contained in about 7,700 registered villages. In line with the decentralization effort referred to above, considerable local autonomy has been given to individual villages through the Villages and Ujamaa Villages Act of 1975. Under the Act the Reginnal Development Director is empowered to register any village of not less than 250 "kaya" (family units) which has clearly defined boundaries. Each such village is to perform its functions as if it were a multi- purpose cooperative society. Each is required to have a Village Council of not more than 25 people whose principal function is to plan and coordinate the agricultural and other activities of the village operating through five or more committees to which it may delegate responsibilities. The Village Council has power to allocate land and control its use; it owns all heavy agricultural machinery and other capital goods (except for  - 10 - livestock and small farm tools which remain the property of individuals); it can borrow and is required to establish a capital fund, a reserve fund, and a disposable fund; and it may be granted wide judicial and administrative powers for the political, economic or social development of the village. Thus the Village Council is expected to have complete control over the operation of a village. While some of the immediate problems which resulted from the rapid increase in villages have eased, it is too early to judge how effectively the villages will be able to meet their ambitious goals over the long run. Previous Bank Group Projects in the Rural Sector 24. Previous Bank Group assistance to the agricultural sector in Tanzania has included IDA credits totalling US$133.3 million and IBRD loans for US$37 million for thirteen agricultural and two rural develop- ment projects. These projects include one for agricultural credit, three for livestock, two for tobacco and one each for tea, sugar, cotton, cashewnuts, fisheries, maize and forestry. The first rural development project for the Kigoma region became effective in 1974, and a second, for the Tabora region in November 1977. 25. The Kigoma Rural Development Project illustrates well the multiple constraints facing the country's development efforts in the rural sector. The project, amounting to US$13.3 million in total costs, set as its principal objectives the doubling of the per capita income in project villages and the strengthening of the Government's and parastatals' capacity to deliver effective support services to villages. While the project has experienced mixed progress in attaining these objectives, it has provided numerous lessons for Government's rural development program. Physical progress is well behind appraisal estimates, as the project continues to experience delays related to limited implementation capacity and shortages of critical inputs. The agronomic response to the agricultural improvements proposed under the project remains uncertain for much of the project area and verification trials to be introduced in villages and the Agricultural Trials and Training Center financed by the project have not yet established satisfactory alternatives. Progress has been disappointing on the minor project components of feeder roads, fisheries, livestock and tsetse clearance. However substantial advances have been made on many other aspects of the project. Some 57 villages (80% of appraisal estimates) have fulfilled the eligibility criteria for project support. The mobilization of village self-help for brick-making and labor supply has been impressive and a system to service the village infrastructure program has been developed, resulting in construction of an average five structures in each of the 45 participating villages. Among the main lessons from the Kigoma Project are the need for verification trials of technical packages at village level; for training, technical assistarice and institution building to strengthen limited implementation capacity; for modest production targets; and for active village participation and mobilization.  - 11 - 26. The recent approval of the Tabora Project limits any attempt at an overall assessment of its accomplishments. However, to date project implementation is on schedule. Key staff have been assigned t. the project, satisfactory progress is being made on construction of staff housing, pro- curement of vehicles is in an advanced stage and the regional authorities are actively engaged in preparing detailed work programs for each component. It is felt that this performance reflects, to some extent, the incorporation of lessons learned under the Kigoma Project; both the Tabora Project and the proposed project draw heavily on the Kigoma experience. Mwanza and Shinyanga Regions 27. The proposed project encompasses two of the country's twenty admi- nistrative regions at the southern end of Lake Victoria, in northwest Tanzania. The regions cover 70,500 km2, or 7.9 percent of the national territory. The regions' elevation varies from 1,000-1,200 meters, with gentle undulations and flat plains interspersed with granitic outcrops. Low vegetative growth covers much of the eastern half of the project area while woodlands, generally tsetse infested, characterize much of the western areas. Mainly inhabited by the Sukuma tribe (hence the name "Sukumaland"), the rate of population growth in the vroject regions has averaged 2.9 percent since 1946. Population densities in Mwanza and Shinyanga are presently 68 and 23 persons per km2 respectively--both above the national average of 17. As a result, pressures have dramatically increased on available land, leading to a deterioration in both the quantity and quality of cultivable land. 28. The rate of economic development in Mwanza and Shinyanga regions from 1966-74 was below the national average. Depending almost exclusively on agriculture or related activities, the annual GDP growth rate at constant 1966 prices was 1.5 percent for Mwanza and 1.1 percent for Shinyanga, as compared to 2.7 percent for Tanzania as a whole. The contribution to Tanzania's GDP decreased over the period from 7.7 percent to 6.2 percent for Mwanza and 8.9 percent to 7.0 percent for Shinyanga. The productive sectors of agri- culture, livestock and forestry all face important constraints brought on by the deteriorating resource base. Agricultural production is adversely affected by the erratic rainfall, and the population pressures cited above have created a situation where formerly sufficient fallow periods have been reduced or eliminated. This situation is complicated by the fact that no financially viable technical package exists for the key cash crop in Sukumaland--cotton. Land pressure is further exacerbated by the huge livestock herds in the project regions. Livestock production accounts for about one-third of the regions'farm income and approximately 22 percent of the national herd is located in Mwanza and Shinyanga. Both regions contain extensive areas of natural woodlands in the west, but in the central districts these are being rapidly depleted by the local population for house construction and fuelwood needs and in the eastern districts they have virtually disappeared. In other sectors the regions also face significant constraints: there is little industry except for cotton related activities in Mwanza; road coverage is adequate but the quality is very poor because of the lack of maintenance; about 80 percent of the rural popplation in the project areas still rely on  - 12 - unprotected and unreliable sources of drinking water; parasitic and infectious diseases are widespread; and adult literacy remains low in spite of the Government's impressive national literacy program. PART IV - THE PROJECT 29. The Mwanza/Shinyanga Rural Development Project arose from a request by the Government during discussions on the Kigoma Rural Development Project (Credit No. 508-TA). In order to prepare this project a preparation team was established under the Prime Minister's Office; this effort was financed under the Kigoma Project. The appraisal mission for the Mwanza/ Shinyanga Project visited Tanzania in June/July, 1977 and a follow-up mission completed the appraisal in October/November 1977. Negotiations were held in Washington in March 1978 where the Tanzania delegation was led by Ernest Mulokozi, the Principal Secretary in the Ministry of Finance and Planning. A Staff Appraisal Report on the Mwanza/Shinyanga Rural Development Project is being circulated separately. A credit and project summary is attached at the front of this Report and Annex III provides supplementary project data. Project Objectives and Description 30. The proposed project would constitute the initial five years of a long-term development program designed to improve the social and economic well'being of the rural population of Mwanza and Shinyanga regions. The project would augment rural incomes by increasing productivity in agriculture, forestry and livestock; contribute to social welfare by improving health, education and water supply services; and improve supporting infrastructure. It will supplement and complement ongoing investment in these two regions, and use the recently constituted villages (para. 23) as the principal vehicle for development. It would particularly focus on arresting the deterioration of the natural resource base of the two regions (para. 27). Specifically,the project would include: - agricultural investments in proven technical packages, village verification trials, research and extension; livestock and forestry; land-use planning; - a Village Self-Help Program; - road improvements; - water supply; and - project coordination and evaluation. Project Details 31. Agricultural Development ($3.6 million before contingencies). The project would support the widespread dissemination of the few proven technical packages available to improve crop yields in Mwanza and Shinyanga. First, the project would provide for the multiplication, dressing, certification and distribution of improved maize and sorghum seed. This seed would be sold to farmers in the two project regions (Schedule 1, Part A of the draft Joint  - 13 - Project Agreement). Second, it is expected that the project would finance the incremental costs of purchase, distribution and sale of chemical seed dressing to {a mers to enable them to treat homegrown seed. Third, the project would promote the multiplication of improved cassava varieties at the Ukiriguru Agricultural Research Institute and distribute the cuttings through the agricultural extension service. 32. To develop a technical base for longer term agricultural develop- ment, the project would support an extensive program of village verification trials to be carried out on farmers' fields under the close supervision of the agricultural extension service. It would finance the transport, equipment, staff and operating costs of annual trial programs drawn up jointly by national research and regional agricultural staff. These trials would be complemented by selected research activities. First, the project would finance research on root crops, sorghum and millet. Second, it would provide for the estab- lishment of a substation of the existing Ukiriguru Agricultural Research Institute in the continuously cultivated and typically depleted hill-sand zone to undertake work in fertilizer use and new cotton varieties. As a condition of disbursement for this substation a suitable site, selected in agreement with the Associatinn,would have to be acquired (Schedule 2, 4(c) of the draft Joint Project Agreement). Third, funds would be included for a prefeasibility study on the actions necessary to counter the serious erosion affecting soils in Southeast Shinyanga. Fourth, the project would finance testing of oxen farm equipment in order to increase labor pro- ductivity. The project would also support the reorganization of the agri- cultural extension service in both regions so as to enable the service to supervise village trials and disseminate proven technical packages in specific agro-economic zones. The extension agents would be provided with a structured work program supervised and assisted by agricultural staff at the ward, district and regional levels. They would be given regular training and the transport necessary to properly execute their responsibilities. 33. Livestock Development ($2.0 million before contingencies). The project would upgrade on a pilot basis about one-third of the regions' 60 livestock development centers (LCs) to focus on improving production of sheep, goats, cattle and village scavenger poultry. After the upgrading of the LCs their impact on the nearby herds and grazing areas would be closely monitored by the livestock extension staff. If this monitoring indicates that the LCs are having a positive effect on commercial offtake without any deterioration of land resources, this program could be rapidly expanded under subsequent investments. The project would also establish a range and pasture improvement program in the project areas to test the feasibility and cost of the estab- lishment of new fodder species; finance the multiplication of promising species; conduct pilot programs of pasture development under modified communal grazing management; and finance the strengthening of the Veterinary Inves- tigation Center in Mwanza. 34. Forestry Development ($2.0 million before contingencies). The project would finance a program involving development of about 5,400 ha of fuelwood and pole plantations in the two regions. Three types of plantations are envisaged: one or two regional plantations averaging 300 ha  - 14 - in size would be supported in each district; school tree blocks (of 2 ha each) would be financed; and village tree blocks (of 2 ha each) would be estab- lish'ed with the support of the Village Self-Help Program (para. 36). The forestry program would also support the upgrading of district nurseries to supply seedlings; finance the assessment of approximately 700,000 ha of forest reserves and public land forests through categorization and mapping; strengthen the management capabilities of the regional forestry staff; and establish a small research station to identify species and develop tree planting methods appropriate for the drier areas of the two regions. 35. Land Use Planning ($0.8 million before contingencies). The project would finance establishment of a land-use planning unit in each region. Each unit would produce village inventory maps with simple soil classification and land-use overlay for village planning and management. 36. Village Self-Help Program (VSHP - $4.4 million before contingencies). Given the central role of the village in Tanzania's development strategy (para. 23), the project would provide for the establishment of a Village Self-Help Program to support priority village projects in the two regions. A VSHP unit, which would work in close collaboration with the Tanzania Rural Development Bank (TRDB),would be set up in the Regional Planning Office of each region. Self financing projects, e.g. storage and transport, would be eligible for term credit from TRDB and non-self financing projects, e.g. roads, water supplies, would be eligible for financing on a matching grant basis from a special regional VSHP subvote. Through the VSHP the project would attempt to develop mechanisms and procedures for fully involving villages in the identification and execution of village projects; the program would provide (i) the technical inputs needed to prepare and implement individual village investment proposals and (ii) the funds needed to finance the proposals. A primary focus of the VSHP would be the development of an effective "bottom up" planning process: villages would be responsible for identifying their priority needs and approaching TRDB or the regional VSHP unit for the technical assistance and finance needed to bring their ideas to fruition (para. 43). The second important focus would be to mobilize village contributions to meet part of the costs of high priority investments. Financial support from VSHP would be conditional on a specified level of village contribution (either in the form of labor, materials or cash) to the particular village investment being considered: in order to participate in the VSHP, villages would have to contribute a minimum of 25 percent of the initial investment cost of the investment and would have to finance appropriate ongoing operation and maintenance costs (Schedule 1, Part F of the draft Joint Project Agreement). In total it is projected that the VSHP would assist in the preparation and financing of about 600 village projects. 37. Road Improvement ($4.4 million before contingencies). In each region the project would establish a village access roads unit and a regional roads unit under the Regional Road Enginaer, The village access roads units would consist of the light equipment necessary to upgrade bad stretches of village access roads identified by villages for financing under the VSHP. Each village access roads unit would service about 80 villages over a five- year period. The regional roads units would improve approximately 20 segments  - 15 - of regional roads which have already been identified by regional authorities as most critical to the local economy. Each reginnal roads unit would improve approximately 80 km of roads per year, reshaping the road base, graveling and installing culverts and bridges as required. 38. Water Supply ($2.1 million before contingencies). In the Mwanza Region the project would establish three shallow well construction units under the Rural Water Engineer (similar units are already being financed in Shinyanga under bilateral aid). These units would implement village water investments identified and financed under the VSHP, and would develop an eventual capacity of 200 wells per year capable of providing systems to approximately 30 villages each year. The project would also provide for the rehabilitation of existing water supply schemes where required and requested by villages in both regions. It is estimated that about 540 shallow wells would be constructed in Mwanza Region, and 36 existing 7ater supply systems would be rehabilitated in the two regions during the project period. 39. Project Coordination and Evaluation ($2.7 million before contin- gencies). To oversee project implementation a Project Coordinating Section would be established within the Regional Planning Office of each region (para. 45 below). A monitoring and evaluation capacitv would be an important feature of the Project Coordinating Sections (para. 47). The project would also finance establishment of a Central Evaluation Unit within the Prime Minister's Office, to coordinate and assist the evaluation activities in all regions for which IDA is financing (or is expected to finance) rural development projects. This Unit would provide the evaluation and monitoring work of each region with methodological support, quality control, analytical assistance and in-service training. In addition, a Project Special Fund of $180,000 would be established in each region, administered by the Regional Development Director, to finance unforeseen expenses that arise during implementation. Expenditures from the Special Funds in excess of $10,000 would be made in consultation with the Association (Schedule 1, Part D(2) of the draft Joint Project Agreement). Project Costs and Financing 40. The total cost of the project is estimated at US$30.5 million; US$29.5 million net of identifiable taxes. The estimated foreign exchange component is $15.4 million, approximately 50 percent of project costs. Physical contingencies of 5 percent were included on technical assistance costs; physical contingencies of 10 percent have been included on civil works, vehicles and equipment; and physical contingencies of 15 percent were included on materials and vehicle operation and maintenance. Price contingencies totalling 30 percent of baseline costs were included: annual rates of 7.5 percent for 1978-79 and 7 percent from 1980 onward on equipment and foreign salaries; 12 percent in 1978, 11 percent in 1979, 10 percent in 1980, 9 per- cent in 1981 and 8 percent from 1982 onward on civil works, and 5 percent throughout the project period on local staff costs. Project costs are summarized in the credit and project summary at the beginning of this report. 41. The proposed IFAD Loan of US$12 million would be administered by IDA acting as Cooperative Institution under terms of the recently approved Cooperative Agreement between IDA and IFAD. The proposed  - 16 - IDA Credit of US$12 million and the proposed IFAD Loan would together finance about 81 percent of total project costs: 100 percent of foreign exchange expenditures and approximately 60 percent of local expenditures. Local cost financing in Tanzania is justified since the local currency requirement_ of its development program greatly exceed available local resources, in spite of the Government's satisfactory savings performance. The IFAD funds would be lent to the Government for 50 years including 10 years of grace with a service charge of 1 percent per annum and would jointly finance with IDA all components except road improvement and water supply. The IDA funds would finance the entire road improvement and water supply components and jointly finance the remn.ining components on standard IDA terms. The Governmentts contribution to total project costs would be $4.8 million, 16 percent of total project costs ($3.8 million excluding taxes and duties) and the villagers' cash contributions to village investments, within the framework of the VSHP, would total $1.7 million (6 percent of total project costs). Procurement and Disbursements 42. Bank Group procurement procedures would apply to all project components. Contracts of US$100,000 or more for purchase of vehicles and equipment would be awarded on the basis of international competitive bidding in accordance with Bank Guidelines. Contracts of less than US$100,000 for vehicles and equipment purchases would be awarded on the basis of normal government procedures, which are satisfactory; such contracts would be limited to an aggregate of US$1 million equivalent. Domestic manufacturers would be granted a preferential margin in bid eva- lutation equal to the prevailing tariff or 15 percent of the c.i.f. cost of imports, whichever is the lower. Civil works contracts totalling US$100,000 or more would be awarded after international competitive bidding; in eva- luating bids,domestic contractors would be allowed a 7-1/2 percent preference. As most of the project's civil works would involve small structures of varied design which are geographically scattered, it is recommended that, as appro- priate, these be completed by a combination of local competitive bidding, force account and village self-help. These procurement arrangements are set out in Schedule 3 of the draft Joint Project Agreement. Expenditures on components jointly financed by IDA and IFAD would be disbursed at a ratio of 30:70 (Section 2.04(a) of the draft Joint Project Agreement); IDA funds alone would be disbursed on water supply and road improvment expenditures (Section 2.04(b) of the draft Joint Project Agreement). IDA and IFAD funds would be disbursed on the following basis: 100 percent of foreign expenditures and 85 percent of local expenditures for vehicles and equipment (US$3.0 million before contingencies); 75 percent of total expend- itures for operation and maintenance of vehicles and equipment (US$4.1 million before contingencies): 100 Dercent of foreiRn expenditures and 75 percent of local expenditures for technical assistance, project staffing and training (US$5.7 million before contingencies); 100 percent of foreign expend- itures and 75 percent of local expenditures for civil works and materials (US$5.7 million before contingencies); and 100 percent of the amount dis- bursed on TRDB sub-loans (US$0.7 million before contingencies). These percentages are set out in Schedule 2 of the draft Joint Project Agreement.  - 17 - Project Implementation 43. Project implementation would be through the existing Regional administ -,ions with the Regional Development Directors having overall responsibility for the project. The Regional Agricultural Development Officers, the Livestock Development Officers, the Natural Resources Officers (2orest Division), the Regional Road Engineers and the Regional Water Engineers would have responsibility for implementing relevant parts of the project. Regional VSHP Boards, consisting of the appropriate regional party and administrative officials, would be set up by December 31, 1978 to oversee implementation of the VSHP component. In carrying out their responsibilities these Boards would operate in accordance with policies and procedures satisfactory to the Association. Projects identified under the VSHP for financial support would fall into two general categories. Self- financing projects, defined as those which fall within the portfolio of TRDB, would be eligible for TRDB term credit. The regional offices of TRDB would be strengthened to undertake this role and IDA and IFAD funds for this purpose (about $0.9 million including contingencies) would be relent to TRDB at 4 per- cent interest for 25 years including 5 years of grace. These funds would be onlent to project villages at TRDB's standard rate of interest of 8-1/2 percent (Schedule 1, Part F of the draft Joint Project Agreement). Disbursements on the TRDB component would be conditional on the effectiveness of an accept- able subsidiary loan agreement covering relending and onlending arrangements between the Government and TRDB (Schedule 2, 4(b) of the draft Joint Project Agreement). The remaining, non-self financing, investments would be processed by the special VSHP units (para. 36 above). These units would include a Senior Economist and three additional economists and work closely with the relevant regional functional staff in preparing and appraising potential investments. The resulting proposals would then be submitted to the region's VSHP Board for review. If approved, the costs of these projects in excess of village contributions would be financed by a grant from a regional VSIP subvote set-ap in the development budget. The general arrangements for the VSHP are set out in Schedule 1, Part F of the draft Joint Project Agreement. 44. The project would follow the existing organizational structure to the fullest extent possible. It would support the institutional arrange- ments introduced during Government decentralization in 1972, strengthening the regional and district administrations in Mwanza and Shinyanga. Where possible, the project would draw upon existing staff; about 80 percent of the approximately 1,200 staff required by the project would be drawn from the present cadres. Where it is not possible to use existing staff, the project would support the additional staff required to ensure efficient project implementation. Specifically, the project provides for the appoint- ment of 14 internationally recruited specialists and 22 additional Tanzanians for key senior staff positions. International recruitment is recommended only for those specialties where suitably trained Tanzanians are typically not available; the average cost per man-month for this staff is estimated  - 18 - at $3900 and these individuals would be expected to assist in the training of Tanzanian replacements. All senior staff would be appropriately qualified and experienced. Detailed job descriptions have be2. prepared to assist in hiring; internationally recruited staff would be hired on terms and conditions acceptable to the Association; and a timetable for the appoint- ment of key senior staff has been agreed with the Government (Schedule 1, Parts A through H of the draft Joint Project Agreement). 45. The project would be implemented and monitored in each region by the Project Coordination Sections set up in the Regional Planning Office. Close relations would be maintained between these Sections and PMO. The Sections would include a Project Coordinator (who would be responsible for overseeing the day-to-day operations of the project and coordinating the activities of the various functional departments concerned), a Financial Controller (who would manage and control project funds and be responsible for procurement) and a Regional Evaluation Officer (para. 47 below). These individuals are included in the total number of additional senior staff noted above (para. 44). The appointment of qualified individuals, satis- factory to IDA, to the posts of Project Coordinator and Financial Controller in each region is a condition of effectiveness (Section 5.01(iii) of the draft Development Credit Agreement). Project Accounts, Monitoring and Evaluation 46. All project funds, except for TRDB loans would be administered for the Regional Planning Office by the region's Project Coordination Section. Each region's Financial Controller would maintain separate accounts for project funds allocated to his region and would make allocations as necessary to the regional functional managers and District Development Directors. The Financial Controller would also be responsible for all accounting matters related to the investments financed under the VSHP subvote. TRDB would main- tain separate accounts for those funds utilized for self financing VSHP invest- ments approved by TRDB. Both the regional and TRDB accounts of project funds would be audited by independent auditors acceptable to IDA, and the accounts and auditors' reports would be submitted to IDA within six months of the close of each financial year (Section 4.02(b) and (c) of the draft Joint Project Agreement). Because the vehicle capital and recurrent costs repre- sent an important part of total project costs (20 percent), special accounting would be instituted to ensure proper control of operation and maintenance expenditures on project vehicles (Section 4.03 of the draft Joint Project Agreement). 47. Each Regional Evaluation Officer would institute and coordinate an internal reporting system on progress by project component, in\itiate special ad hoc surveys as required to serve the information needs of pro- ject management and establish the mid-term data needed to undertake project evaluation. In addition, the Government would submit a report to the  - 19 - Association within six months of completion of disbursements analyzing the implementation and impact of the project against the targets and objectives set (Section 3.03(c) of the draft Joint Project Agreement). Project Justification 48. The project is designed to support the Government's rural develop- ment strategy. It aims to strengthen the Government's regional and district administrative structures in order to provide effective services to the rural populations of the project area. It sets out to build-up the recently formed villages as the principal vehicles for socio-economic development. It intends to augment the incomes of the two regions' populations by supporting the few proven productive improvements available for dissemination and by fostering reaearch and testing of new improvements for future development. It would improve the nutritional standards of the growing rural poor by increasing the productivity of the regions' basic food crops without leading to a further deterioration of soil resources. It aims to assist the Government' s social programs by supporting health, education and water projects when requested and supported by interested villages. 49. Production benefits generated by the project would be about 75 percent from the agricultural component, 15 percent from livestock and 10 percent from forestry. The target beneficiaries for the agricultural component would be primarily farm families earning per capita incomes of TSh 300 (about US$35) or less, approximately half of the natinnal poverty level and the pro- ject area's average per capita income. This group numbers approximately 540,000, or 25 percent of the two regions' population. The project would aim to increase crops of the target beneficiaries by an average of approximately one-quarter by full development, 6 to 10 years after project initiation. While the livestock component of the project would place some emphasis on improved poultry production (the benefits of which would be shared by small and large farmers alike), the bulk of the benefits of this component would go to the relatively more wealthy cattle owners. The forest component would generate 140,000 m3 of the fuel wood and poles. Through the VSHP the project would support the development of high priority socio-economic infrastructure and services at village level--the projectts target would be to give half the villages within the project area the opportunity to participate in a VSHP- financed project. 50. The economic analysis of the project included the following project components: agriculture, livestock, forestry, roads, land-use planning and project monitoring and coordination. The analysis excludes social service costs and benefits--mainly the health education and water supply investments projected for the VSHP components--for which adequate indicators of project benefits are not available. The components, which were analyzed over a  - 20 - 25-year period, generated the following economic rates of return: 51 percent in agriculture (16% of base costs); 12 percent in livestock (9% of base costs); 18 percent in forestry (9% of base costs); and 15 percent with respect to regional roads (20% of base costs). The overall rate of return based on70 percent of base costs (the components listed above, land-use planning and project coordination and evaluation) is estimated at 21 percent. The high results obtained for the pro- ject's agricultural activities reflect the fact that: (i) they rely heavily on existing resources (particularly agricultural field staff) with small in- cremental investments; and (ii) they lead to important increases in production with only marginal increases in on-farm costs. Cost Recovery and Fiscal Impact 51. The project aims to support development of basic economic and social services in the two regions while minimizing the fiscal burden on the Government. The direct attempt at accomplishing this is the VSHP requirement that vill4gers make a significant contribution to project supported investments. In addition, all productive inputs financed under the project--improved seeds and seed dressing for agriculture, drugs and supplies for livestock and seedlings for forestry--would be sold. 52. The project would, during its five-year life, represent only a modest additional fiscal burden to the Government. The average annual project cost would be approximately 23 percent of the total FY79 budget for the two regions. Since only 25 percent of this incremental cost would be financed by the Government, the average annual incremental fiscal burden to the Government would be only 6 percent of the total FY79 budget. The incremental fiscal burden after completion of the project would be about $3.6 million per year, 13 percent of the total FY79 budget or about $1.50 per beneficiary. Risks 53. The greatest risk facing the project would be the potential inability of the two regional administrations to implement the proposed project in a timely and efficient manner. A number of specific steps have been taken to minimize this risk--significant technical assistance has been provided to support regional implementation capacity; substantial training would be financed to upgrade Tanzanian staff; needed transport would be provided; extension services would be reorganized; and existing equipment and material shortages would be addressed under various project components. In addition, because of the experimental nature of the VSHP the impact of that proposal is difficult to project. However, as the VSHP has the full support of the Government and in view of its potential for significant long-run benefits and broad application, it has been concluded that the level of support proposed is justified.  - 21 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 54. The draft Development Credit Agreement between the United Republic of Tanzania and the Association, the draft Joint Project Agreement among the United Republic of Tanzania, the Association and IFAD, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement are being distributed to the Executive Directors separately. 55. Special features of the draft Credit and Joint Project Agreements are reflected in Annex III. Execution of the Joint Project Agreement, effectiveness of the IFAD Loan Agreement and the appointment of a Project Coordinator and Financial Controller in each region would be conditions of effectiveness of the proposed Credit (Section 5.01(i), (ii) and (iii) of the draft Development Credit Agreement). 56. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 57. I recommend that the Executive Directors approved the proposed Credit. Robert S. McNamara President Washington, DC May 1, 1978  ANNEX I TABLE 3A TANZANIA - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2)