Tanzania - Smallholder Tea Consolidation Project

word a FILE CtOP MR oiam ONLY Rqsu N. P-2814-T& OF TE PRESIDT OF TH INT&TIOS&L DISVELOI AS=OCIATIOff ECUMTIWVE DIRECTS PROPOS= CREDIT UNITED EPULIC OF TANZANI POR A SWIMU.)Dl TU& CONSOLIDIRIU PROJECT Nay 14, 1980 T 1 .| m aam = be m , by 1y i d I of OakI Q~&dbm l a- ad be i_i-_b W  CURRENCY EQUIVALENTS Currency Unit = Tanzania Shilling (TSh) US$1.00 = TSh 8.30 TSh 1.0 = US$0.12 (As the Tanzania Shilling is officially valued in relation to a basket of the currencies of Tanzania's trading partners, 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 1979 average exchange rate.) GLOSSARY OF ABBREVIATIONS EAC = East African Community ha = Hectare kg = Kilogram MOA = Ministry of Agriculture MOF = Ministry of Finance MDB = Marketing Development Bureau of MOA NORAD = Norwegian Agency for International Development PMO = Prime Minister's Office PPMB = Project Preparation and Monitoring Bureau of MOA TRDB = Tanzania Rural Development Bank TTA = Tanzania Tea Authority FISCAL YEAR Government: July 1 - June 30 TTA : July 1 - June 30  FOR OFFICIAL USE ONLY TANZANIA SMALLHOLDER TEA CONSOLIDATION PROJECT CREDIT AND PROJECT SUMMARY BORROWER: United Republic of Tanzania BENEFICIARIES: Tanzania Tea Authority (TTA) and the Regional Autho- rities of Iringa and West Lake AMOUNT: US$14 million equivalent TERMS: Standard RELENDING TERMS: About US$12.0 million equivalent in IDA funds would be relent to the Tanzania Tea Authority (TTA) at 10% interest per annum for 28 years including 8 years of grace. The balance of US$2.0 million would be passed on by the Government to the relevant Regional Authorities to implement the roads component. The Government would bear the foreign exchange risk. PROJECT The proposed project would, over a five-year period, DESCRIPTION: consolidate ongoing TTA operations and provide additional processing facilities. It would aim to (i) strengthen TTA's capacity to handle green leaf produced by small- holder tea plantings including those established under the Smallholder Tea Development Project (Credit 287-TA); (ii) maximize the production benefits of smallholders in those areas where an alternative to tea planting is not available; (iii) strengthen TTA's financial viabi.ity; and (iv) increase Government's export earnings from the tea industry. Specifically, the project would finance construction of one new factory; extending and re- equipping of five factories; transport facilities; spare parts; workshop tools; establishment of fuelwood plantations; planting of 200 ha and infilling of the equivalent of 630 ha of tea; construction and main- tenance of 176 km of tea roads; and incremental staff and technical assistance for TTA. The major risk of the project is institutional deficiencies; this risk has been minimized through the provision of technical assistance in the key positions of factory operations. The forecasts of world tea prices have been conservatively projected based on key producing countries' abilities for expansion of tea production. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - ESTIMATED COSTS -------------US$ Million------------- Local Foreign Total Factory Construction and Rehabilitation 2.59 3.66 6.25 Transport Facilities (including operating costs) 0.57 2.24 2.81 Fuelwood Plantations 0.49 0.03 0.52 5 Tea Planting Program 0.88 0.33 1.21 Warehouses 0.30 - 0.30 Road Construction and Maintenance 0.68 2.20 2.88 Staff and Technical Assistance 1.06 0.48 1.54 Sub-Total 6.57 8.94 15.51 Physical Contingencies 0.42 0.85 1.27 Price Contingencies 1.59 1.65 3.24 Total Project Cost 8.58 11.44 20.02 of which taxes and duties 0.26 - 0.26 Project Cost net of taxes and duties 8.32 11.44 19.76 FINANCING PLAN: ------US$ million--------- Local Foreign Total IDA 3.8 10.2 14.0 NORAD (for part of the road component) 0.4 1.2 1.6 Government (including taxes & duties) 4.4 - 4.4 Total Project Cost 8.6 11.4 20.0 DISBURSEMENTS: ---------------US$ million------------- IDA Fiscal year 1981 1982 1983 1984 1985 1986 Annual 2.0 4.9 3.3 1.9 1.4 0.5 Cumulative 2.0 6.9 10.2 12.1 13.5 14.0 RATE OF RETURN: 21% STAFF APPRAISAL REPORT: Report No. 2814-TA dated May 9, 1980.  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 SMALLHOLDER TEA CONSOLIDATION PROJECT 1. I submit the following report and recommendation on a proposed credit to the United Republic of Tanzania of US$14.0 million equivalent on standard terms to help finance a project to improve the tea industry in Tanzania. About US$12.0 million equivalent of the IDA funds would be relent to the Tanzania Tea Authority (TTA) at an interest rate of 10% per annum for 28 years including 8 years of grace for project investments. The balance of US$2.0 million equivalent would be passed on by the Government to the Regional Authorities (Iringa and West Lake) to implement part of the road construction and maintenance component of the proposed project. The Government would bear the foreign exchange risk. PART I - THE ECONOMY 1/ 2. A Basic Economic Mission visited Tanzania in August 1976 and the Basic Economic Report was distributed in December 1977 (Report No. 1616-TA). A new Country Economic Memorandum is expected to be issued later this year. A summary of social and economic data is in Annex I. Profile of the Economy 3. Tanzania is one of the 30 least developed countries in the world with a per capita income in 1978 of US$230. The economy is still heavily dependent on agriculture: 90% of the labor force is engaged in agriculture and approximately 50% of GDP and about 70% of total exports are derived from agricultural production. The industrial sector is still small, producing about 10% of GDP, approximately the same percentage as 11 years ago. The service sector produces about 40% of GDP. Overall population density is low, though a few areas are considered overpopulated. Population growth is estimated at 3.0% per annum with both fertility and mortality at relatively high levels. 4. Since the Arusha Declaration in 1967 Tanzania has pursued a socialist development strategy. Banking, insurance, and most large-scale enterprises in manufacturing, plantation agriculture, transportation, and wholesale trade are under state control. There is extensive state intervention in economic activity, including import licensing, foreign exchange controls, price control, the reservation of some activities to the state or cooperative sector, and 1/ This section is essentially the same as that of the President's Report on the Grain Storage and Milling project dated April 15, 1980.  - 2 - detailed Government investment planning. The second major feature of Tanzania's development strategy is its strong emphasis on rural development and social programs to benefit the poor and reduce inequalities in income distribution. This is reflected in ambitious Government programs for the provision of rural water supplies, health services and universal primary education. Long Term Economic Trends 5. In the decade 1968-78 real GDP at factor cost grew at an annual average rate of 4.8%, or about 1.8% per annum per capita. While economic growth was severely disrupted by the economic crisis following the failure of rains and large increases in import prices in 1973 and 1974, the economy recovered with annual growth of 5 to 6% for 1976 through 1978. During the seventies the service sector was the fastest growing sector - 6.3% per year. 6. The Government has a good record of domestic resource mobilization. Between 1967-68 and 1977-78 the share of recurrent revenues rose from 15.1% to 19.3% of GDP. However, most of this increase occurred before 1975-1976; in 1974/75 revenue peaked at 22% of GDP. The increase was achieved through a combination of highly progressive direct taxes and proportional or moderately progressive indirect taxes. Except during the economic crisis in 1974-75, the rate of national savings has also been high; gross national savings fluctuated at around 16-17% of GNP from the mid-1960s through 1973, fell to half that level during the crisis years and recovered to the pre-crisis level in 1976 and 1977. These are high levels of savings for a country at Tanzania's income level. 7. Some progress has also been made in achieving the Government's objective of more equitable income distribution. Between 1969 and 1975 the average urban rural gap remained approximately constant, halting the trend towards an increasing gap in the early 1960s. Moreover, it is likely that this gap has been slightly reduced since 1976 due to continued recovery of agricultural production and higher producer prices. However, regional income differentials in rural areas have tended to widen slightly. Within the formal urban sector there has been a dramatic narrowing of the post-tax income differential between the highest-paid government officials and minimum wage earners, from 50 to 1 in 1961 to 8 to 1 in 1975. However, a large informal sector has emerged comprising large numbers of unemployed and underemployed workers with earnings significantly below the official urban minimum wage. The policies of wage restraint and higher producer prices pursued since 1975 should have a beneficial impact on almost all dimensions of income distribu- tion, and the basic needs oriented programs in rural water, health and primary education (para. 4 above) are resulting in a significant redirection in public expenditures toward the rural poor. 8. Despite this impressive overall record of development, some pro- blems have begun to manifest themselves in recent years. Exports have failed to keep pace with the growth of the rest of the economy; the overall export index is down almost one-third since 1966. This poor performance in exports  - 3 - is due to the poor growth rate of agricultural cash crops. While agricul- tural output has increased impressively in recent years (10.9% in 1976 and 8.2% in 1977), most of this growth has been in the hard-to-measure subsistence sector; the monetary sector has lagged well behind. This failure of export growth has led to increasing dependency on foreign loans and grants to pay for imports. 9. A second increasingly serious problem is the deceleration of the growth of domestic revenues. While still at a high ratio to GDP compared to most other developing countries, government revenues have been growing more slowly than GDP in recent years. At the same time recurrent expenditures have been higher than budgeted. As a result, public sector savings have been well below expectations and the Government has had to rely more upon borrowing (both foreign and local) and external aid for financing development than was planned. Recent Economic Developments 10. During 1975-77 the Government adhered to the program agreed to at the time of the Program Loan (No. 1063-TA) in late 1974. This program included redirecting investment to the directly productive sectors of industry and agriculture, higher agricultural producer prices, constraints on wages and salaries, price and tax increases to restrain consumption and tight control of imports. These policies, aided by the boom in coffee prices, succeeded in keeping government spending under control with low levels of borrowing from the banking system and led to a balance of payments surplus of almost US$150 million in 1977. Food production increased and government stocks of most foodgrains reached record levels. In 1978 the Government was able to ease import restrictions and begin to import the spares and raw materials needed by all the major sectors in the economy. 11. Unfortunately, the price of coffee, Tanzania's major export, began to fall at the same time that imports were liberalized. Also, in October, 1978 war broke out with Uganda and the resulting imports of military equipment and mobilization of resources required for the war effort put an increasing strain on the balance of payments and the domestic budget. Consequently, the current account showed a deficit of more than US$450 million in 1978 and the overall balance of payments was almost US$300 million in deficit. The Govern- ment's foreign reserves were rapidly drawn down and the country was forced to delay payment of about US$60 million in import bills. 12. The situation deteriorated further in 1979. The overall balance of payments for 1979 is expected to be almost US$200 million in deficit, and arrears on import payment were estimated at about US$200 million by the end of the year. At the same time the domestic budget deficit has increased substantially. A recurrent budget deficit of almost TSh 1 billion (US$120 million), was estimated for FY1978/79 and government borrowing from the banking system is estimated at TSh 3 billion (US$360 million), a major component in the increase in the money supply of about 35%. In an effort to deal with the increasing balance of payments deficit, import licenses were  reduced by almost 40% in real terms from the 1978 level and the Government announced a 10% devaluation in January of 1979. In addition the FY1979/80 budget called for a reduction in the level of recurrent expenditure and borrowing from the banking system of TSh 1.67 billion; however, through the first quarter of this fiscal year borrowing was already TSh 1.4 billion as spending agencies, due to lack of budgetary discipline, were able to exceed their budgetary allocations. In early 1979 the Government arranged for almost US$75 million in funds from the IMF from a First Credit Tranche, the Trust Fund and the Export Compensatory Fund, but negotiations for further assistance from the IMF have so far been unsuccessful. To deal with the increasing economic problems as well as provide a framework for IMF assistance, the Government urgently needs to develop a comprehensive program to overcome the emerging crisis, as it did in 1974; the Bank has offered to help the Government in developing such a program. 13. Tanzania continues to attract large amounts of foreign assistance on concessional terms. Because of the very concessional terms on which aid has been given to Tanzania and the Government's reluctance in the past to use higher cost commercial loans and supplier's credits, the overall debt service ratio has historically been less than 10%. However, the recent balance of payments crisis has forced the Government to utilize commercial loans and suppliers credits and as a result the debt service ratio is estimated at 12% in 1979 and projected at 15% in 1980. We expect it will remain in the range of 15-20% throughout the 1980's. In 1978 the Bank held 12% of Tanzania's external debt (for the Bank Group, it was 28%) and received 37% of Tanzania's debt service (40% for the Bank Group). We are projecting this debt service share to fall to about 21% in 1980 and to remain around 25% for the coming decade. 14. Tanzania's development program will require resources in excess of domestic savings and external capital made available to finance the foreign exchange costs of projects. Given the Government's efforts to mobilize domestic resources and in view of our support for its increased emphasis on local cost intensive rural investments, the Bank Group will continue to finance a high proportion of total costs including, in appropriate cases, a portion of local costs. East African Community (EAC) 15. The recent developments in the East African Community were outlined in a report to the Executive Directors dated December 19, 1977 (R77-312). Dr. Victor Umbricht, the independent mediator appointed by the Partner States, has visited East Africa on numerous occasions and has now prepared reports on the results of his fact-finding work on the EAC Corporations and the General Services, and the methodology adopted in appraising the assets and liabilities. In late March 1980, the mediator presented to the three Governments his proposals for the allocation of these assets and liabilities, for their con- sideration. The next step would be the start of negotiations among the three Governments based on the mediator's proposals. According to his terms of reference, the mediator would be available to assist in arriving at a  definitive settlement. The mediator's report and recommendations on the future structure of the East African Development Bank (EADB) have been accepted by the three Governments. The revised EADB Charter along with the Treaty amending and re-enacting the new Charter have been submitted to the three Governments for signature as soon as they are constitutionally ready; this is expected shortly. 16. The de facto breakup of the Community has had some impact on Tanzania's budget as new national entities take over the services formerly provided by the EAC Corporations. A major development related to the EAC difficulties was the closure of the border with Kenya. Kenya was a major trading partner of Tanzania and considerable adjustments 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/ 17. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1962, 42 IDA credits and 19 Bank loans, of which two on Third Window terms, amounting to US$812.5 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 10 loans totalling US$244.8 million which have been extended for the development of the common services and development bank operated regionally by Tanzania, Kenya and Uganda through their association in the East African Community. IFC investments in Tanzania, totalling US$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 new IFC investment of US$1.7 million in soap manufacturing in Mbeya was approved by the Executive Directors on June 8, 1978 and an investment of US$1.5 million in metal product manufacturing was approved on May 10, 1979. Annex II contains summary statements of Bank loans, IDA credits and IFC investments to Tanzania and the East African Community organizations as of March 31, 1980 and notes on the execution of ongoing projects. 18. To support Tanzania's overall development strategy Bank Group lending operations are increasingly focusing on the rural sector and directly productive projects. While up to the end of FY1972 Bank Group operations were directed mainly to infrastructure, the overwhelming majority of the operations approved since FY73 have been for directly productive projects. Furthermore, a number of recent 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 Industrial Complex in Morogoro (Loans No. 1385-T-TA and 1386-TA) 1/ This section is essentially the same as that of the President's Report on the Grain Storage and Milling Project dated April 15, 1980.  - 6 - and the Morogoro Textile Project (Loan No. 1607-TA and Credit No. 833-TA). Directly productive projects recently approved include the Second Cashewnut Development Project (Credit No. 801-TA), the Tobacco Handling Project (Credit No. 802-TA), the Mufindi Pulp and Paper Project (Loan No. 1650-TA and Credit No. 875-TA) and the Tanganyika Development Finance Company Limited Project (Loan No. 1745-TA). In addition, a Tourism Rehabilitation Project (Credit No. 860-TA), a Sixth Education Project (Credit No. 861-TA) and a Fifth Highway Project (Credit No. 876-TA) were approved by the Board in FY79. Since the beginning of this fiscal year five projects were approved; a fourth line of credit to the Tanzania Investment Bank (Loan No. 1750-TA), an Engineering Credit for the Dar-es-Salaam Port (Credit No. S-24-TA), the Tanzania Rural Development Bank (Credit No. 987-TA), a Pyrethrum Project (Credit No. 1007-TA) and a Grain Storage and Milling Project (Credit No. 1015-TA). Projects which have been appraised include a Second Urban Water Supply Project, an Agricul- tural Services (research) Project, a Second Technical Assistance Project, a Telecommunications Project, a Coconut Project, a Petroleum Exploration Project, a Seventh Education Project and a Rural Development Project in Mara Region. A small scale industries project, a third urban project, a harbours project, a structural adjustment project, a Coal Engineering Project, and a railway project are also under preparation. 19. Although the comparatively high undisbursed proportion of loans and credits, detailed in Annex II, 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 while 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 -- although potentially the source of long-term benefits -- have disrupted orderly execution of projects and made parts of earlier project concepts obsolete. Also, the Uganda war (para. 11) has had some impact on project implementation. In the early stages of the war there was some diversion of equipment and manpower; however most of these problems have been solved. The more serious medium term problem involves the financial and foreign exchange implications of the war. If these problems are not resolved, the availability of adequate local funds and the shortage of foreign exchange could become a major constraint to implementation and oper- ating performance. In general, implementation difficulties have been most severe in agriculture, particularly in the smallholder rural sector. 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 Morogoro Industrial Estate Projects, for example, are proceeding well. 20. As the Bank Group's lending program has expanded, increasing attention has been given to measures designed to improve project implementa- tion. A course was conducted in Dar es Salaam in 1973 and again in 1978 on  Bank Group procurement with the relevant Government officials. A special project implementation unit was set up in the Ministry of Agriculture and 14 Agricultural Development Services staff have been assigned to Bank Group financed projects in agriculture and rural development. In addition, a number of EDI supported courses on the transport and industry sectors have been held at the East African Management Institute in Arusha Tanzania. Furthermore, the need to establish a close and continuous working level dialogue between responsible Tanzanian officials and Bank Group staff on implementation problems was one of the prime reasons for the expansion of the Resident Mission to two professionals in October 1976. Finally, in February 1977 a regular Government/ Bank Group review of project implementation was established. Discussions on the Bank Group project portfolio, chaired by the Ministry of Finance (MOF) and attended by Bank Group staff and officials from implementing agencies, deal in detail with individual problem projects and problems which are affecting project implementation across a number of sectors. As a result of these efforts, there has been some improvement in project implementation. Actions agreed to during the reviews have been completed relatively quickly and coordination and communication between MOF and the various ministries and agencies responsible for project implementation has improved markedly. 21. The Government has become increasingly conscious of the importance of effective project implementation. In addition to fully supporting the project implementation review system, MOF has set up a unit to oversee project performance. As a consequence of these efforts, the disbursement record of Bank Group financed projects 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. While there is still a potential for further significant improvements, the Government is implementing its investment program, including Bank Group and other foreign aided projects, more effec- tively than in the past. However, the impact of the Uganda War (para. 11) on the Government's resources may affect the progress in project implementation until such constraints are dealt with. PART III - THE AGRICULTURAL SECTOR 1/ General Background 22. Agriculture and related activities constitute the largest single sector in the Tanzanian economy. Most agricultural production is from small- holdings 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% of the country which is free from tsetse fly infestation. It is largely managed along traditional lines. 1/ Paragraphs 22 to 26 are essentially the same as those in the President's Report on the Grain Storage and Milling project dated April 15, 1980.  - 8 - 23. The recent performance of the agricultural sector has been dis- appointing. Over the period 1967-77, the average annual rate of growth of agricultural production was 2.7%, almost equal to the population growth rate. In the early seventies food crop production failed to keep pace with popula- tion growth and, as a result, Tanzania became increasingly dependent on imports of maize, rice and wheat. A severe drought in 1973 and 1974 resulted in poor harvests and large imports of foodgrains. Following this, the Govern- ment implemented a number of policies to increase food crop production. Along with favorable weather conditions these had some effect on stimulating food crop production. Since the drought, in spite of substantial decline in export crop production, total agricultural production recovered, increasing in real terms at an average annual rate of about 7%. However these production increases represent primarily a recovery from the drought and only return agricultural expansion to its long-term growth path. In addition there is the problem of increasing export crop production as discussed above (para. 8). Increasing the long-term growth rate in agriculture and ensuring balanced growth are two of the key objectives of the Bank Group's investment strategy in agriculture. The proposed project fits into this strategy, and, although tea generates only about 7% of current foreign exchange earnings from agricul- tural exports, the potential for increasing export earnings is significant. Rural Organization 24. In order to improve the design and execution of rural development projects and programs and mobilize local resources, in 1972 the Government adopted a decentralized administrative structure. The country's 25 administra- tive Regions (20 on the mainland) were given substantial power to control the planning and budgeting of resources in their respective jurisdictions and a high degree of administrative autonomy. The Prime Minister's Office (PMO) was established to provide overall policy direction, coordinate regional plans and budgets and assist the Regions in preparing their development programs. While it is clear that this decentralization of authority has improved communication between the Government and the villages (as the civil service operating at the district and regional levels are directly involved in rural development efforts), problems of manpower availability and the ill-defined division of responsibility between the regions, central ministries and parastatals persist. 25. Since independence, but particularly from 1970, the grouping of dispersed farm families into villages (villagization) has been a key element of Government strategy for the rural areas. The objective of this program is to facilitate the provision of infrastructure and services to the rural population and encourage self-reliance and a community approach to rural development. During 1974, the emphasis shifted from creating additional Ujamaa 1/ villages to forming "development" villages, which place less stress on communal production. At the same time, the pace of villagization was accelerated; as a result there are now almost 8,000 registered villages, containing over three-quarters of Tanzania's rural population. While disrupt- ing production somewhat in the short term, it is still too early to judge how 1/ "Ujamaa" is a Swahili word meaning "familyhood".  effectively the villages will be able to meet their goals over the medium and long term. Agricultural Services 26. The Ministry of Agriculture (MOA) is responsible for the overall planning and monitoring of the sector as well as coordinating agricultural research, training and extension staff, pricing policy, seed multiplication and supervision of agricultural parastatals. Agricultural research is under- taken by a wide variety of Government agencies and while MOA has been given the responsibility for overall coordination, research resources have not always been allocated in accordance with development priorities. Agricultural extension services are manned by staff trained by MOA, but are under the control of the regional administrations. The links between research and extension are weak, and field staff are often poorly trained and inadequately supervised. A major review of both the research and the extension systems is underway, and the Bank Group has agreed to work with the Government to survey the needs in these areas. Pricing policy is an important tool of the Govern- ment in the agricultural sector. Since 1974, the Government has accorded greater recognition to the need to give farmers production incentives; crop and livestock prices are now reviewed annually and, within the context of panterritorial pricing, substantial producer price increases have been made in recent years. Agricultural Parastatals, which exist for major crops and livestock, play a key role in agricultural marketing and processing. The tendency has been to progressively enlarge the role and scope of these insti- tutions, and this has frequently strained their capacities to efficiently provide the services for which they are responsible. Overall operational efficiency is low, with correspondingly high costs for services. The Govern- ment is aware of the problems but has not yet developed a comprehensive strategy for addressing them. The Bank Group, in the course of its appraisals of agricultural projects, has been analyzing the parastatals involved and also intends to initiate sector work for a broader review of Tanzania's agricultural parastatals. The Tanzania Rural Development Bank (TRDB) 27. TRDB, a wholly Government owned rural credit institution, was established in 1971 to provide long and medium term financing for rural development as well as technical assistance and advice for the promotion of rural development. It was also required to administer special funds and to finance the purchase and resale of agricultural inputs on credit terms. The authorized share capital of TRDB is TSh. 300 million of which TSh. 172 million has been paid in. All powers are vested in a Board of Directors consisting of nine members chosen from among persons with knowledge and experience in economic and financial matters, agriculture, rural development and cooperative institutions. TRDB has been the financial intermediary under a series of Bank Group financed agricultural and rural development projects A project aimed at strengthening TRDB as an institution and supporting its long-term growth, including a small line of credit, has been approved by the Executive Directors on March 4, 1980.  - 10 - 28. TRDB now provides short-term (seasonal loans), medium and long-term financing for rural development. Eligible borrowers originally included: District Development Corporations, Cooperative Unions, Ujamaa and registered villages, and individuals or corporations engaged in rural development. However, the Cooperative Unions were dissolved in May 1976 and since that time the basic thrust of TRDB's lending has been to villages. In respect of the proposed project, TRDB will provide credit for the farm inputs (fertilizers and planting materials) related to the planting program component. The Tea Subsector 29. Tea has been grown in Tanzania for the last fifty years. Tea plantations, at altitudes of between 1,000 and 1,700 meters, are located in Rungwe, Mufindi and Njombe in the southern highlands, the Usambaras (Loshoto, Amani and Korogwe) in the northeast and Bukoba in the northwest. The total area now planted with tea is 18,700 ha of which 8,240 on private estates, 8,675 ha on smallholdings, 1,245 ha on TTA estates and the remaining 540 ha on cooperative and mission estates. Tanzania's production of made tea was 16,730 tons in 1977 compared with 10,000 tons in 1972 and is estimated to reach 25,000 tons (1% of projected world production) by 1985, of which 8,000 tons would represent smallholder production. About 29,000 smallholders are now growing tea on average holdings of about 0.3 ha. An average family of 6 persons would have adequate labor to plant and maintain 0.4 ha of tea which would provide an attractive net return per man day when compared with alter- native crops such as coffee and maize. The present favorable position of tea, while subject to changes in other crop prices, is expected to continue, unless the current green leaf price paid to farmers drops from TSh. 1.10/kg (after a 68% increase in 1977) to below TSh. 0.65/kg in real terms in relation to coffee or TSh. 0.45/kg in relation to maize. 30. Tea processing--i.e. conversion of green leaf to black tea--consists of withering, rolling, fermenting, drying, sorting and packing. One kilogram of made tea requires about 4.7 kg of green leaf. After removal of surface moisture (withering), the leaves go through the rolling process which crushes the leaves to small particles and ruptures leaf cells to express the juices which enables fermentation of the tannin. This stage is followed by fermen- tation of the juices which influences the flavor, strength and color of the liquors. After adjusting to the proper fermentation, the drying process fixes the fermented juices to the leaf particles. Processed tea is then sorted to suit the requirements of the various buyers. As of December 31, 1979, private estates owned 14 tea processing factories with 38 dryers (each dryer could process/produce about 500,000 kg of made tea per year) while TTA, the only other tea processor in Tanzania, owned five operating factories--Katumba, Lupembe, Bukoba, Mponde and Bulwa (recently acquired), with a total of 13 dryers. Recent deterioration in the quality of tea produced by certain factories has adversely affected tea export earnings as sold tea has fetched lower prices. Tea ranks fifth among Tanzania's export crops in earnings, and accounted for export receipts of US$20 million in 1977, and US$27 million in 1979 (5% of total export earnings). The increase in export earnings reflects an increase of the quantity exported.  - 11 - 31. The Tanzania Tea Authority (TTA) was established as a parastatal body corporate under the Tea Ordinance Act of 1968. TTA's functions include coordination of all aspects of production, processing, marketing and research of the tea industry. The Minister of Agriculture has direct responsibility for overseeing the activities of TTA which is headed by a Board of Directors representing concerned government ministries and regional authorities. Day-to-day control over TTA's activities rests with the General Manager. At present TTA is organized into four functional Departments at headquarters (Administration, Production, Marketing, and Finance/Planning), and has four field branches based in four of its existing tea factories. Each department is headed by a manager, who reports to the General Manager; the field branch managers report to the production manager. The last General Manager was reassigned in April 1980 after a five year tenure during which he was able to resolve some of TTA's serious organizational and management problems; a new General Manager is expected to be appointed shortly. TTA is, however, still hampered by lack of specialist staff, particularly in the Production Department (factory management and processing). Technical assistance to strengthen TTA's Production/Operations Department would be provided under the proposed project (para. 52). A review of TTA's organizational structure is discussed below (para. 58). 32. TTA has been recording cash deficits for the last six years mainly because of continuing losses by its factories resulting mainly from deteriora- tion in the quality of tea processed. Inability to handle efficiently the green leaf production because of limited withering capacity, irregular green leaf deliveries and lack of technical management expertise and supervi- sion are the main causes for the quality deterioration. As a result a large deficit had to be met by Government subventions, amounting to about TSh. 41 million over the period 1974 to 1977. Also, increasing cost of fuel oil and high administrative costs are responsible for part of these losses. A 68% increase in green leaf prices in 1977 aggravated the situation. Projections of TTA's financial position indicate that, without the project, TTA would not be able to meet its debt obligations and would continue to incur losses. To rectify this situation, the Government has decided to take steps to resolve TTA's financial problems (para. 66). 33. Previous Bank Group Experience in Tea Projects. An IDA Credit of US$10.8 million (Credit No. 287-TA) was extended in March 1972 for the Small- holder Tea Development Project. The project was designed to (i) expand the smallholder tea area by 8,300 ha from 3,270 ha to 11,570 ha and involving 14,000 smallholders; (ii) construct two new processing factories and expansion of three existing factories; (iii) provide extension and leaf collection services and facilities; (iv) provide farm inputs credit; (v) construct about 300 km tea roads; and (vi) provide technical assistance to strengthen TTA. A full review of the project was carried out in August 1979. In terms of production the full impact of the project will only be felt several years from now since the bulk of the tea plantings are still immature. As of now, however, project achievements have fallen short of appraisal targets; only 69% of the targeted area has been planted and at full development tea production is projected to reach 50% to 60% of appraisal estimates. Main reasons for the  - 12 - shortfall in plantings were over-ambitious targets, weak management during the early project years and Government decisions to introduce collective farming and to restrict hiring of immigrant labor from neighboring countries. Also, out of two new factories provided for under the project only one has been completed; the other was delayed but construction is now nearing com- pletion. Other project components were implemented in line with the reduced planting program. However, road construction targets were met fully and the number of participating farmers exceeded the appraisal estimates by 2,000 (from 14,000 to 16,000). While smallholder tea production has doubled between 1975 and 1979, the quality of processed tea has deteriorated because expansion of processing capacity has not kept pace with increased green leaf production. TTA's financial performance has been poor and the recalculated economic rate of return is 12% compared to the appraisal estimate of 17%. The overall targets set for achievement over a 5-year period were too ambitious. Tea development, a relatively complex and specialized undertaking, covers a range of activities involving a large number of small farmers with varying backgrounds, factory operations involving specialized technical and tea making expertise, and international marketing where time is of the essence and price is based on quality. To recruit and train staff to implement a wide-ranging project with a view to producing a successful and viable industry at the end of 5 years was too difficult a task. 34. The Project Performance Audit Report (Report No. 2787 dated December 18, 1979) concluded that it is essential that the next few years be devoted to consolidation and strengthening of TTA's organization rather than to further expansion. The quality of made tea has to be improved and the cost of produc- tion reduced. While this would require a general all-around strengthening and improvement of TTA's performance, the factory processing and closely related leaf collection aspects as well as the green leaf price need urgent attention because of their bearing on tea quality and production costs. It was also concluded that some additional processing capacity is needed to allow for the still expanding production from existing plantings. PART IV - THE PROJECT 35. The proposed project was prepared by the Government of Tanzania with the assistance of the Bank Group as a follow-up to the Smallholder Tea Development Project (Credit No. 287-TA). The project was appraised in July 1978 with a subsequent post-appraisal in September/October 1979 to reassess TTA's financial viability. A staff appraisal report entitled "Smallholder Tea Consolidation Project" (Report No. 2814-TA dated May 9, 1980 is being circulated separately to the Executive Directors. Negotiations were held in Washington from April 23 to 28, 1980 and the Tanzania Delegation was led by Dr. S. Madallali, principal Secretary, Ministry of Agriculture. A Credit and Project Summary is at the beginning of this report and a Supplementary Project Data Sheet is at Annex III.  - 13 - Objectives and Description of the Project 36. The proposed project would, over a five-year period (1980/81- 1984/85), concentrate on consolidating ongoing TTA operations and would provide additional processing capacity to cater for the expected increase in green leaf production from existing smallholder tea plantings, including those established under the First Tea Project, to rectify the imbalance between leaf production and leaf processing capacity and improve the quality of processed tea. The project would also aim at improving TTA's financial viability, organizational structure and technical management. Specifically, the project would include financing for: (a) construction of one new factory at Ukalawa, completion of the Mwakaleli factory to a four dryer factory, and extending and re-equipping of existing factories at Katumba, Lupembe, Bukoba, and Mponde; (b) provision of transport facilities including green leaf collection vehicles, spare parts to put repairable vehicles in working order, vehicles for both the factories and TTA headquarters, and vehicles operating costs; (c) establishment of fuelwood plantations to substitute wood for oil in operating the factories; (d) a tea planting program of an additional 200 ha at Njombe and a total of 630 ha infilling 1/ in three of the four tea areas; (e) provision of credit to project growers for farm inputs; (f) purchase of two warehouses in Dar-es-Salaam; (g) construction and maintenance of 176 km of tea roads; and (h) technical assistance and incremental local staff to strengthen TTA's factory engineering and technical management, and improve its operations. Implementation and Detailed Features 37. TTA would have overall responsibility for the implementation of the project except for the roads and credit components. However, TTA's Senior Economist will coordinate the flow of information in respect to the road and credit components as part of the monitoring and evaluation activi- ties, including the periodic reporting on project progress. 1/ Filling of gaps in existing planted area.  - 14 - Factory Construction and Rehabilitation 38. In order to rectify the imbalance between the increasing green leaf production from the planting program financed under the First Tea Project, and the existing leaf processing capacity as well as to prevent the recurrence of rejection and rationing of green leaf purchases from farmers, the proposed project would provide for the construction of a new factory at Ukalawa, completion of the Mwakaleli factory and re-equipping and rehabilitating of four operating factories. Also to ensure full utilization of TTA's factories, the project would support a small planting program (para. 45). 39. Smallholder green leaf production in Njombe district of the Iringa Region is expected to reach 8.6 million kg per year by 1985. This area is now served by the Lupembe factory (a three dryer factory) with a capacity to process 5.4 million kg per year. To process the excess leaf production, a new factory at Ukalawa would be constructed and equipped with two dryers with a third to be installed at a later stage if necessary. 40. In order to cope with the increasing production of green leaf in the Rungwe district of the Mbeya Region, the Mwakaleli factory, which was constructed and partially equipped under the First Tea Project, would be expanded and fully equipped to a four dryer factory rather than two dryers as originally envisaged. The same area is served at present by the Katumba factory (a four dryer factory). To reduce factory operating costs and limit consumption of expensive imported oil, TTA has started to convert the Katumba factory from oil to coal and the Mwakaleli factory is designed as a coal- fired factory. Although Tanzania's proven coal reserves are significant, present production is limited and falls short of existing demand. Therefore, arrangements satisfactory to the Association would be made by the Government to ensure the allocation of sufficient quantities of coal to Katumba and Mwakaleli factories. This is a condition of disbursement against the coal- fired boiler for Katumba and dryers for Mwakaleli, to be financed under the project (paragraph 4(b) of Schedule 1 to the draft Development Credit Agreement). 41. Four of TTA's existing factories (Lupembe, Katumba, Mponde and Bukoba) will be improved to alleviate present shortcomings and processing bottlenecks. The major objective would be streamlining and balancing of all steps of processing to improve the quality of processed tea. While the main constraint affecting all factories is the inadequacy of withering capacity (para. 32) which will be improved through provision of additional withering troughs, other shortcomings including lack of factory workshop facilities will be rectified through provision of machinery, equipment, tools and spare parts. To ensure proper operation of its factories, TTA will make adequate provision in its annual budget for funds required to regularly maintain and repair its factories (Section 3.04 of the draft Project Agreement). Transport Facilities 42. The project would provide for improved green leaf collection facili- ties for transport from collection centers to the factories. Reduction of  - 15 - delays in green leaf transport would minimize the risk of deterioration of made tea quality. Twenty-eight 7-ton trucks and 18 tractors with trailers would be purchased under the project to handle the increasing quantity of leaf as plantings mature. The tractors would be used for collection of leaf from centers located near the factories while trucks would cover the more distant routes. TTA, in cooperation with village committees, would work out detailed leaf collection schedules. TTA staff would ensure that only leaf of satisfac- tory quality is purchased, overloading of leaf transport vehicles is avoided and delivery to the factory is expedited. In addition, the project would provide for spare parts to put repairable vehicles in working order, and for other transport facilities including one four-wheel drive vehicle for each of the two new factories at Mwakaleli and Ukalawa, and one for each of the two expatriate Resident Engineers (para. 52) stationed at Katumba and Lupembe factories. To improve TTA headquarters' supervision over the factories, nine vehicles would be provided for the use of the General Manager, his six executive officers, and the two expatriates (Chief Engineer and Factory Superintendent). To ensure that TTA's vehicles' operating costs are kept to the minimum and to facilitate identification of the operating costs of the various vehicles, TTA would maintain separate records to reflect these costs and would establish operating procedures to ensure that its vehicles are used efficiently (Section 2.06 of the draft Project Agreement). TTA will also make adequate provision in its annual budget for funds required to maintain its vehicles (Section 3.04 of the draft Project Agreement) and the project would provide for financing the operating costs of all vehicles procured under the project as part of a financial package aimed at establish- ing TTA's financial viability. Fuelwood Plantations 43. The existing Lupembe and Bukoba factories already operate on fuel- woocl and the Mponde factory is in the process of being converted from oil to fuelwood. At present, the Lupembe factory purchases wood from a commercial company at Njombe. Transport costs are high and the same cost will apply to the new Ukalawa factory (para. 39). In Bukoba, firewood is purchased from the Forest Department and neighboring estates, but Mponde factory has recenty started to establish its own fuelwood plantation. 44. The establishment of TTA's own eucalyptus plantations would reduce fuel cost of its factories. Based on the quantity of firewood required to cover withering and drying processes a 400 ha fuelwood plantation would be required for each of the factories at Lupembe, Ukalawa and Bukoba, and 500 ha for Mponde. As Mpohde factory has already established about 100 ha, a total of about 1,600 ha fuelwood plantations would, therefore, be established under the project. Land for the plantations has been identified in the factories' areas except in Bukoba where a soil survey is being carried out to confirm the suitability of the proposed site. A full soil survey report on the proposed site or other alternative sites, will be submitted to the Association for its review and comments before the establishment of the plantation, but not later than December 31, 1980 (Section 2.05 of the draft Project Agreement).  - 16 - Planting Program and Farm Inputs Credit 45. In order to ensure full and balanced utilization of available processing capacity, the proposed project provides for new plantings of 200 ha and infillings equivalent to 630 ha. The incremental production from these plantings at maturity (after 10 years) is estimated at 0.6 million kg of made tea per year, equivalent to about 3% of Tanzania's current annual production. The minimum economic size of the new Ukalawa factory (para. 39) would be a two dryer capacity to produce about 1.0 million kg of made tea per year requiring the equivalent to 4.7 million kg green leaf. The existing plantings in the factory's area would only provide a maximum of 3.2 million kg green leaf, at maturity. To ensure full utilization of the Ukalawa factory, an additional 200 ha will be planted by smallholders in project years I and 2. Existing farmers whose tea plantings are less than 0.4 ha and new farmers would parti- cipate. An infilling program covering an equivalent of 630 ha would also be carried out in three of the four tea growing Regions with Rungwe district (Mbeya Region) undertaking 450 ha, and Njombe and Lushoto districts (Iringa and Tanga Regions perspectively) 90 ha each. 46. TTA would produce planting materials in the nurseries to be estab- lished under the project, for sale on credit to project growers (small- holders participating in the planting/infilling program). TTA would ensure that only healthy and vigorous plants are supplied. Fertilizer at the recom- mended rates would also continue to be supplied on credit. Project growers' credit for farm inputs (planting materials and fertilizers) would be provided by TRDB in a timely fashion to facilitate the implementation of the planting program (Section 3.02 (a)(i) of the draft Development Credit Agreement). 47. The proposed factory and planting investments are designed to provide the most economic utilization of the proposed factory network. Any further expansion of tea areas resulting in additional green leaf production would cause either a lowering of the quality of made tea or inability of the factories to process the green leaf. The Government, therefore, would not undertake any additional plantings without making adequate and appropriate arrangements for the processing of the production resulting from such plant- ings (Section 4.01 of the draft Development Credit Agreement). Warehouses 48. To improve facilities for storage of tea prior to shipment and to reduce storage costs, TTA would acquire two warehouses in the Dar-es-Salaam area. These warehouses will be fully financed by the Government and TTA. Road Construction and Maintenance 49. The proposed project would supplement the tea road network of 300 km constructed under the First Tea Project, through the construction and maintenance of a total of 176 km of selected tea roads. These roads would be constructed to appropriate technical specifications (Annex to Schedule 2 to the draft Development Credit Agreement) and would be maintained to ensure that they are passable in all weather. The relevant Regions (Iringa, I-beya, Tanga and IWest Lake) would be responsible for construction and maintenance of the tea roads within their boundaries.  - 17 - 50. At Rungwe (Mbeya Region) and Lushoto (Tanga Region) where 51 km and 53 km of tea roads respectively would be constructed, the Norwegian Agency for International Development (NORAD) will continue to provide both technical and financial assistance for road works as part of a broader feeder road program in these two areas. The Norwegian assisted roads, though an integral part of the project, would be treated as a separate component which would be financed by the Government of the Kingdom of Norway, on grant terms, and Tanzania. 51. A road Construction Unit would be established at Njombe (Iringa Region) by not later than December 31, 1980, to carry out the road works in that Region (53 km). This Unit would comprise of a Mechanical Engineer and a Road Construction Engineer, both internationally recruited, reporting to the Regional Road Engineer (Section 3.03 of the draft Development Credit Agreement). All necessary equipment would be provided for under the credit. In order to ensure that road works at Njombe would be implemented on time, an annual road work program would be submitted to the Association for review and comments not later than March 31 preceding the fiscal year to which the work program relates, starting on March 31, 1981 (Section 3.04 of the draft Development Credit Agreement). The project would also provide spare parts to rehabilitate the equipment of the construction unit set up under the First Tea Project at Bukoba (West Lake Region) so that it would be able to construct 19 km of roads in the Bukoba area. The Government would also ensure that roads constructed under the project are properly maintained and would provide the required funds (Section 4.06 of the draft Development Credit Agreement). Technical Assistance and Incremental Local Staff 52. In order to strengthen TTA's capability to implement the project, funds would be provided so that it continues to employ the present Factory Superintendent and a Chief Engineer at TTA's headquarters. These expatriates would oversee TTA's factory operations, construction and improvement program and train local counterparts. Two internationally recruited Resident Engineers would be employed, by not later than December 31, 1980, and based at the existing Katumba and Lupembe factories respectively. The Resident Engineers would be responsible for running the two factories, maintaining its vehicles and training factory technicians. They would also inspect quarterly the repair and maintenance of equipment at the Bukoba and Mponde factories, and supervise installation of new machinery and equipment at Ukalawa and Mwakaleli factories. The above-mentioned four expatriates (a total of about 204 man- months) would be employed at a man-month cost of about US$2,000. 1/ In addition, in order to assist TTA in the improvement of its management and accounting systems, organizational structure, crop husbandry and technical activities, short-term consultants would be employed (6 man-months) at a man-month cost of about US$10,000. 1/ These consultants would be engaged as and when required upon agreement between TTA and the Association. All of these expatriate staff and consultants would be qualified and experienced and would be appointed on terms and conditions satisfactory to the Borrower and the Association (Section 2.02 of the draft Project Agreement). 1/ Including the man-month rate, international travel and subsistence.  - 18 - 53. To assist the Iringa Region administration in implementing the road construction and maintenance program and to manage and operate the Road Construction Unit to be established at Njombe (para. 51), two qualified and experienced engineers would be employed (48 man-months) by not later than December 31, 1980, at a man-month cost of about US$6,000 1/, on terms and conditions satisfactory to the Borrower and the Association. The project would also provide for financing the salaries of 225 incremental local staff to be employed by TTA of which 12 would be in headquarters, 10 in Rungwe and Njombe branches and 203 in the Ukalawa and Mwakaleli factories which will start operations during the project period (Section 3.06 of the draft Project Agreement). Project Costs and Financing Plan 54. The total cost of the project is estimated at TSh. 166.2 million (US$20.0 million equivalent) including about TSh. 2.2 million (US$0.26 mil- lion) of taxes and duties. The foreign exchange component would amount to US$11.4 million or 57% of total cost. Details of project costs are included in the Credit and Project Summary. The proposed IDA credit of US$14.0 million would finance about 71% of total project costs net of taxes and duties -- 89% (US$10.2 million) of the foreign exchange costs and 45% (US$3.8 million) of local costs. The remaining 11% (US$1.2 million) of the foreign exchange costs and US$0.4 million of the local costs would be provided by NORAD to finance the road component at Rungwe and Lushoto areas (para. 50). The Government would provide the remaining US$4.4 million (US$4.2 million net of taxes and duties). 55. IDA and Government funds provided to TTA under the project and amounting to about US$15.0 million, including contingencies, to finance all project components except those for credit and road construction and main- tenance, would be relent by the Government to TTA for a period of 28 years including 8 years of grace at an annual interest rate of 10%, which is the current borrowing rate for parastatal organizations (Section 3.02(b) of the draft Development Credit Agreement). The Government would bear the foreign exchange risk. These terms are similar to those approved under the First Tea Project, except that the interest rate was 8.5%, and are expected to assist in establishing TTA's financial viability and to enable it to honor all its obligations without need for Government subventions. Execution of a subsidiary loan agreement between the Government and TTA would be a condition of credit effectiveness (Section 6.01(a) of the draft Development Credit Agreement). Procurement and Disbursement 56. Tea processing machinery and equipment, vehicles, road equipment and associated spare parts (US$8.2 million) to be financed under the project, would be bulked as far as possible and would be procured on the basis of international competitive bidding in accordance with Bank Group guidelines. In the evaluation of bids, qualified domestic manufacturers would be accorded 1/ Including the man-month rate, international travel and subsistence.  - 19 - a preference of 15% or the existing rate of duty, whichever is lower. Pro- curement of machinery, equipment, vehicles and spare parts which cannot be bulked in packages of US$100,000 equivalent or more would be procured, up to an aggregate of US$300,000, in accordance with the Borrower's competitive bidding procedures which are acceptable to the Association. Almost all contracts for civil works (US$4.2 million) would be too small and scattered to attract international interest. Procurement would therefore be by contracts awarded following locally advertised competitive bidding in which foreign firms would be allowed to participate. The establishment of fuelwood plan- tations and tea nurseries (US$1.5 million) would be carried out by force account through TTA. TTA has already acquired the necessary expertise and, therefore, efficient and economic implementation is expected. As it is scattered within large areas, road construction and maintenance work (US$0.6 million) would also be carried out by force account through the Regional administrations, in accordance with procedures satisfactory to the Association. All consultants and experts to be financed under the project (US$1.0 million) would be selected and employed on terms and conditions acceptable to the Borrower and the Association. Warehouses would be acquired following existing Government procedures. 57. Disbursements under the credit would be on the basis of (a) 100% of the foreign expenditures and 85% of the local expenditures on tea processing machinery and equipment, vehicles, road equipment, spare parts, consultants services and internationally recruited staff; (b) 80% of the cost of civil works; (c) 80% of local expenditures on roads construction and maintenance, and establishment of fuelwood plantations and tea nurseries; (d) 80% of local expenditures on salaries of TTA's incremental local staff; and (e) 70% of local expenditures on vehicles operating costs. Withdrawal claims for expenditures under (a) and (b) above would be fully documented. Disbursements against expenditures under (c), (d) and (e) above would be against certified statements of expenditures signed by TTA's General Manager, except for road construction and maintenance which would be signed by the respective Regional Roadl Engineer. The appraisal mission has examined TTA's accounting procedures and staffing, and found that it is capable of maintaining the records and documentation. The records and accounts covering expenditures for which disbursements would be made against certificates of expenditure would be subject to specific auditing and TTA, and the Regions, will retain until one year after the closing date, all records evidencing these expenditures, (Section 4.01 of the draft Project Agreement and Section 4.05 of the draft Development Credit Agreement). A separate opinion from an independent auditor in respect of the expenditures and records related to certificates of expenditures, will be prepared and submitted to the Association not later than six months after the end of each fiscal year. It is recommended that expenditures incurred after July 31, 1979 on minor civil works and purchases of equipment and spare parts mainly for improvement of existing factories included under the proposed project up to an amount of US$1.0 million, be financed retroactively under the credit.  - 20 - TTA's Organization and Management 58. TTA has recently undertaken a study of its management performance and future requirements. The study recommended that TTA should decentralize most of its day-to-day management responsibilities, except the marketing activities which would continue to be carried out from headquarters. With the decentralization, TTA headquarters' functions would be policy planning, monitoring and evaluation, marketing and programming. TTA would have two operational departments - the Marketing and Operations Directorates, and three service departments - the Finance Directorate (including Administra- tion, Planning and Accounting Divisions), the Manpower Development Division and the Audit Division. All Department heads would report directly to the General Manager. The last General Manager was reassigned in April 1980 and his replacement is expected to be appointed shortly (para. 31). The appoint- ment of a new General Manager would be a condition of credit effectiveness (Section 6.01(b) of the draft Development Credit Agreement). The position of Operations Director (to whom all Branch Managers, the Factory Superintendent and the Chief Engineer would report) to be established under the new organi- zational set up, would be filled by not later than March 31, 1981, after consultation with the Association with respect to the proposed candidate's qualifications and experience (Section 3.05 of the draft Project Agreement). 59. In order to achieve effective decentralization at the branch/factory level and to improve efficiency, it would be necessary to upgrade the staff at the field level, with particular emphasis on the financial and managerial aspects of Branch operations. Upgrading TTA's status and the salary grades of staff, would enable it to attract staff of a higher caliber particularly at the Branch level. The Government would therefore, by not later than December 31, 1980, take all necessary action to upgrade TTA as a parastatal organiza- tion (Section 4.02 of the draft Development Credit Agreement). Factory management, engineering and supervision would also be strengthened by employ- ment of the two expatriate Resident Engineers (para. 52). Accounts and Auditing, Monitoring and Reporting 60. Separate accounts relating to expenditures under the project would be kept by TTA and the Regions. Audited financial statements for the years up to June 30, 1978, have been submitted to the Association and are satis- factory. TTA's accounts would continue to be audited by independent auditors acceptable to the Association. TTA would also submit quarterly financial statements together with a progress report within six weeks of the end of each quarter. 61. An integral part of improving the management performance of TTA and its factories would be the monitoring and evaluation of the project. The Head of Planning (Senior Economist) of TTA, in cooperation with the Project Prepara- tion and Monitoring Bureau (PPMB), would be responsible for monitoring and evaluation. He would prepare and submit detailed quarterly reports of the physical implementation of the project and the use of funds, to the General Manager of TTA who would submit them to the Association. Information on the  - 21 - progress of the roads component would be made available to TTA by the respec- tive Regional Road Engineer. Within six months of the completion of the project, the Government (for roads component) and TTA would prepare and submit to the Association a Project Completion Report, analyzing the implemen- tation of the project and achievement of its objectives (Section 3.06(c) of the draft Development Credit Agreement and Section 2.07(c) of the draft Project Agreement). Markets and Prices 62. Out of the total Tanzania production of made tea (16,730 tons in 1977) the domestic market, through the local pool, 1/ absorbs about 20% annually. The remainder is exported, mainly to the United Kingdom and Western Europe through the London auction. Only top grades are shipped to London and a cross-section of top and intermediate grades is supplied to the local pool. This leaves the off-grades plus the balance of the top and intermediate grades for direct sales to private buyers. As the Tea Brokers' Association of London determines the individual country quotas in tea auc- tions, this limitation has caused delays in TTA's sales and increased its marketing costs. While the London Auction ceiling is expected to curtail tea turnover, TTA's improved marketing contacts with private buyers would facilitate an increase in direct sales. Therefore, TTA intends to reduce London sales and increase direct sales. Since factory investment and technical assistance provided under the project would increase the percentage of top grades at all factories, the quality of tea available for direct sales should improve and the price differential between direct sale prices and London auction fetched prices should narrow considerably. 63. In the past, the ex-factory price for the local pool sales was below the export parity price. In order to rectify this situation, the National Pricing Commission raised the price for the 1979/80 season from TSh. 10.00/kg to TSh. 11.90/kg which brings it closely in line with expected export prices. Based on the grade percentages traditionally supplied to the local pool, the export parity price is calculated at 10% below the annual average London auction price minus selling expenses, insurance, freight and local costs. The Government would continue to review the local pool price of tea and make any changes which might be required to reflect parity with the average world market price of Tanzanian tea adjusted for quality and cost differentials as outlined above (Section 4.03 of the draft Development Credit Agreement). 64. The real price of tea (in 1977 constant dollars) is expected to fall from its record level of US$2.69/kg (TSh. 22.23) in 1977 to US$1.49/kg (TSh. 12.37) in 1985, leveling off at US$1.48/kg (TSh. 12.28) in 1990. In current dollars, the projected price in 1985 is US$2.64/kg (TSh. 21.91). These projections imply a decline in real terms of 18% during the project period, and an increase in nominal terms of 19%. Tanzania's production of made tea is expected to reach 25,000 tons by 1985 which represents 1% of tea 1/ Local pool represents the participation of the various factories in meeting the domestic market's requirements.  - 22 - world trade. The increase in production resulting from new plantings and infillings provided for under the project will only add 3% to the 1985 produc- tion level, i.e. 0.03% of world trade and would have no measurable effect on world market prices. TTA's Financial Viability 65. TTA's continuous cash deficits and losses during the last six years are attributed mainly to losses by its factories (para. 32) and the increase in its administrative costs. The latter were brought under control when headquarter staff was reduced from about 240 in 1974 to 93 in 1979; a further reduction to 65 is planned. However, TTA's prospects of becoming financially viable depend entirely on the profitability of its factories. 66. The Government would take a number of measures aimed at establishing TTA's financial viability without affecting the attractiveness of planting tea (para. 29) by smallholders. Until completion of the project, the current green leaf producer price (established for 1979/80 season) will be held constant in nominal terms; MDB would continue to undertake annually detailed cost analysis of TTA's operations; the Government may, after review of the analysis, and in consultation with the Association, increase the producer price as long as TTA's projected net operating income is positive (Section 4.04 of the draft Development Credit Agreement). The Government has also decided to integrate TTA's extension service staff with the extension services of MOA in line with its existing policy; this would relieve TTA from an annual expenditure of about TSh. 5.0 million. Also recent increases of the tea local pool prices (para. 63) would provide TTA with additional revenue of about TSh. 2.0 million. The project is also designed to complement the Government's efforts to make TTA financially viable through financing of TTA's vehicles operating costs (para. 42) and salaries of incremental staff (para. 53). These measures, in addition to the results of the project investments as well as improved management performance and operations, are expected to strengthen TTA's financial position and turn its losses into a cumulative positive cash flow of TSh. 31.7 million by 1984/85, the Project year five. Project Benefits and Financial Results 67. The main benefits of the project would be improved quality of TTA's tea, increased sales volume and decreased unit cost through increased output and higher efficiency. Net realization from sales would increase between TSh. 1.0 - 4.0/kg made tea, depending on factory location and marketing channel, resulting in an increase of TSh. 14.0 million in TTA's operating profit of which about TSh. 6.0 million from existing factories. The administrative unit cost would be reduced from TSh. 3.0/kg made tea to TSh. 1.40/kg and the unit transport costs from TSh. 0.90/kg to TSh. 0.60/kg. Total green leaf transport costs for the current green leaf production would be reduced by about TSh. 1.5 million. Also the net return from mature tea holdings and the returns per man day are attractive, even when current green leaf price is kept constant during the next five years, and exceed those from coffee or maize which are part of the farmers' cropping system (para. 29). An added attraction of tea planting  - 23 - is that it brings continuous income to farmers throughout the year. This project would also maximize the production benefits of smallholder tea growers by assuring a reliable outlet for their increasing production through increas- ing TTA's processing capacity. 68. Projections, in current prices, of TTA's consolidated income show that, after continuing to operate at a loss until 1981/82, TTA would have a positive net income thereafter. In project year five, (1984/85) TTA's consoli- dated income before provision for tax would amount to TSh. 6.0 million; this compares with a projected without project loss of TSh. 1.5 million. TTA's projected cash flow with the project indicates that the cash-flow would also become positive during 1981/82 and by 1984/85 TTA's cumulative positive cash flow would reach TSh. 31.7 million. This compares with continuing losses without the project that could reach TSh. 16.0 million by 1984/85. 69. The major quantifiable benefits of the project would be the incre- mental foreign exchange earnings from made tea exports; US$22.3 million (net in current prices) over the period 1980/81 through 1985/86, and savings as a result of improved administration, and reduced green leaf transport costs. In addition, the project is expected to generate unquantifiable benefits from additional employment opportunities as a result of factory expansion and fuelwood plantation establishment. The economic rate of return of the project is estimated at 21% overall. The rate of return is relatively robust to changes in costs or benefits. A 10% reduction in benefits or increase in costs would reduce the rate of return to 18% and both events occurring simultaneously would lower the rate of return to 14%. Risks 70. The major risks of the project are organizational/managerial in nature. The performance of the various factories under the First Tea Project was adversely affected by the standard of factory management and TTA super- vision. However, TTA's management has gradually improved as local staff have accumulated experience and expertise. The risk of unsatisfactory management has been further reduced through provision of technical assistance in the key positions of factory supervision and engineering, short-term consultants to further strengthen TTA's management and Resident Engineers at factory site to minimize the risk of factory construction and rehabilitation lagging behind green leaf supply. A second risk is substantially lower than projected world tea prices. Forecasts for tea prices have been based on a realistic view of the key producing countries' abilities to achieve their expansion plans. During the December 1979 Meeting of the Intergovernmental Group of Experts on Tea, the producers agreed in principle on a system for supply management. However, it is too early to readjust the prices based on the assumption that supply would be controlled. 71. The project is not expected to have any measurable adverse impact on the environment. The tea factories will not be discharging any effluents which could pollute the surrounding areas. TTA and extension staff will encourage farmers to follow recommended husbandry practices in order to reduce soil erosion to a minimum.  - 24 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Development Credit Agreement between the United Republic of Tanzania and the Association, the draft Project Agreement between the Association and TTA and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement are being distributed to the Executive Directors separately. 73. Special conditions of the project are listed in Section III of Annex III. The draft Development Credit Agreement includes the following additional conditions precedent to its effectiveness: (a) execution of a subsidiary loan agreement between the Government and TTA (Section 6.01 (a) of the draft Development Credit Agreement); and (b) appointment of TTA's General Manager (Section 6.01 (b) of the draft Development Credit Agreement). 74. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 75. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments Washington, D.C. May 14, 1980  -25 - Annex I ?as* 1 of 6 -. 3L