Tanzania - Tanzania Rural Development Bank Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. P-2707-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 TANZANIA RURAL DEVELOPMENT BANK PROJECT February 13, 1980 This doument as a resticted disibudion and may be ed by recipients only in the performace Of their OfficUl duties. Its contents may not otherwise be disclod without World Dank sutoriaton.  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 BOT = Bank of Tanzania CIDA = Canadian International Development Agency EAC = East African Community MOA = Ministry of Agriculture MOF = Ministry of Finance NBC = National Bank of Commerce NDCA = National Development Credit Agency p.a. = per annum SIDA = Swedish International Development Authority TFC = Tanzania Fertilizer Company TIB = Tanzania Investment Bank TRDB = Tanzania Rural Development Bank FISCAL YEAR Government: July 1 - June 30 TRDB : July 1 - June 30  FOR OFFICIAL USE ONLY TANZANIA TANZANIA RURAL DEVELOPMENT BANK PROJECT CREDIT AND PROJECT SUMMARY BORROWER: United Republic of Tanzania BENEFICIARY: Tanzania Rural Development Bank AMOUNT: US$10 million equivalent TERMS: Standard RELENDING TERMS: The credit proceeds of US$10 million would be relent to the Tanzania Rural Development Bank (TRDB) for 20 years including five years of grace at an interest rate not exceeding 4% per annum. PROJECT The proposed project would, over a three-year period, DESCRIPTION: aim at strengthening TRDB as a rural credit institution, and would help in developing its capabilities to provide needed credit for economically viable rural projects. Specifically, the project would finance a training program for TRDB's staff and for village officials; provision of consultants and local staff to strengthen TRDB's organizational structure; provision of new office facilities, office equipment and furniture; provision of transportation facilities; an input distribution study; and a line of credit to support TRDB's lending program. Project benefits would be the increased capacity of TRDB to efficiently meet village requirements of credit which would help in increasing village production and farmers' income. Recovery of the credit is the basic risk under the proposed project. However, seminars for village officials in accounting and credit concepts, improved billing procedures, efficient follow-up and supervision, and providing credit only to those villages with good credit records, should minimize this risk. | This document has a restricted distribution and may be used by recipients only in the performance of | their official duties. Its contenst may not otherwise be disclosed without World Bank authorization.  ESTIMATED COSTS -------- US$ Million------------- Local Foreign Total Training 0.60 0.99 1.59 Organizational Improvements 0.63 1.23 1.86 Infrastructural Improvements 0.84 1.14 1.98 Input Distribution Study 0.01 0.05 0.06 Credit 3.60 2.40 6.00 Sub-total 5.68 5.81 11.49 Physical Contingencies 0.21 0.34 0.55 Price Contingencies 0.56 0.64 1.20 Total Project Cost 6.45 6.79 13.24 of which taxes and duties 0.47 - 0.47 Project Cost net of Taxes and Duties 5.98 6.79 12.77 FINANCING PLAN: ------------US$ Million------------- Local Foreign Total % IDA 3.2 6.8 10.0 78 Government 2.0 - 2.0 16 TRDB 0.8 - 0.8 06 Project Cost net of Taxes and Duties 6.0 6.8 12.8 100 DISBURSEMENTS: -------------US$ Million------------- IDA Fiscal Year 1981 1982 1983 1984 Annual 3.6 3.8 2.0 0.6 Cumulative 3.6 7.4 9.4 10.0 STAFF APPRAISAL REPORT: Report No. 2362-TA dated February 1, 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 TANZANIA RURAL DEVELOPMENT BANK PROJECT 1. I submit the following report and recommendation on a proposed credit to the United Republic of Tanzania of US$10.0 million equivalent on standard terms to help finance a Tanzania Rural Development Bank Project. The credit proceeds would be relent to the Tanzania Rural Development Bank (TRDB) at an interest rate not exceeding 4% per annum for 20 years including five years of grace. 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 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 1/ This section is essentially the same as that of the President's Report on Dar-es-Salaam Port Engineering project dated December 5, 1979.  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 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  - 3 - 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  - 4 - 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. The next phase of the mediator's work will be to make recommendations on the allocation of these assets and liabilities. The mediator's report and recom- mendations on the future structure of the East African Development Bank (EADB) have been accepted by the Partner States. 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. 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, 39 IDA credits and 19 Bank loans, of which two on Third Window terms, amounting to US$749.5 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 November 30, 1979 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 support 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) 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. A fourth line of credit to the Tanzania Investment Bank (Loan No. 1750-TA) was approved on July 24, 1979 and an Engineering Credit for the Dar-es-Salaam Port (Credit No. S-24-TA) was approved on December 27, 1979. Projects which have been 1/ This section is essentially the same as that of the President's Report on the Dar-es-Salaam Port Engineering Project dated December 5, 1979.  appraised include a Second Urban Water Supply Project, an Agricultural Ser- vices Project, a Grain Storage and Milling Project, a Pyrethrum Project, a Coconut Project, a Tea Processing Project, and a Seventh Education Project. A rural development project in Mara, a small scale industries project, a third urban project, a harbours project, a second technical assistance project, a petroleum exploration 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 sten 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  - 7 - 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 implementation. In addition to fully supporting the project implementation review system, MOF has set up a unit to oversee project per- formance. 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. PART III - THE AGRICULTURAL SECTOR 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. 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.  -8- 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 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 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 with the intention of subsequently preparing research and extension projects; a national research project was recently appraised (para. 18). Pricing policy is an important tool of the Government in the 1/ "Ujamaa" is a Swahili word meaning "familyhood".  - 9 - agricultural sector. Since 1974, the Government has accorded greater recogni- tion 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 institutions, 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 Government 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 proj- ects, has been analyzing the parastatals involved and also intends to initiate sector work for a broader review of Tanzania's agricultural parastatals. Rural Credit 27. Two major institutions provide credit for rural development, the National Bank of Commerce (NBC), the only commercial Bank operating in Tanzania, and the Tanzania Rural Development Bank (TRDB). During the period 1972-78, approximately 93% of the provided credits were short-term, 6% medium term and 1% long term. By far the larger part of the short-term credit was provided by NBC as it is the only source of short-term credit for financing crop marketing. NBC presently has 99 branches and 204 agencies serving 71 administrative districts. During the same period, TRDB provided 37% of the credit made available for agricultural production, mostly in the form of seasonal inputs in kind. Short-term production credit is also provided by the Tanzania Coffee Authority and the Tanzania Cotton Authority. 28. In 1978, the charter of Bank of Tanzania (BOT), the Central Bank, was amended to allow BOT to provide financial assistance to the rural sector. BOT has been empowered to extend rediscounting facilities to development banks and designated financial institutions such as TRDB. BOT could also subscribe to the share capital of these institutions and grant them loans or advances for periods ranging from 1 to 20 years. In case of a default by rural bor- rowers due to the effects of natural calamities or other exceptional circum- stances, BOT could provide funds to the lending institutions to enable them to postpone the repayment periods by up to five years. The Tanzania Rural Development Bank (TRDB) 29. TRDB was established in 1971 to provide long and medium term finan- cing 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. On May 1, 1971, TRDB started its operation by taking over the assets and liabilities of its disbanded predecessor, the National Development Credit Agency (NDCA). The total portfolio transfered to TRDB was TSh. 73.4 million  - 10 - (US$8.8 milllion) of which TSh. 17 million (US$2.0 million) were already in arrears. The initial share capital of TRDB amounted to TSh. 25 million (US$3.0 million) representing the net tangible assets transferred from NDCA. This was increased through successive Government contributions, partly financed by foreign grants. As of June 30, 1978, the authorized share capital of TRDB was TSh. 300 million (US$36.1 million), of which a total of TSh. 172 million (US$20.7 million) has been paid in. Other resources amounting to TSh. 416 million (about US$50.1 million) consist of: loans tied to certain crop programs and rural development projects from the Bank Group (about TSh. 184 million) and the International Coffee Organization (TSh. 10 million); loans (TSh. 39 million) and grants (TSh. 160 million) from bilateral agencies to be administered by TRDB for general and specific purposes; special ujamaa village bonds (TSh. 10 million); and surplus generated by TRDB (TSh. 13 million). TRDB's total loan portfolio amounted to TSh. 436 million (US$52.5 million) with a provision for bad and doubtful debts of TSh. 74 million (US$8.9 million). 30. The 1971 Act establishing TRDB was amended in 1975 to permit TRDB to mobilize domestic resources for rural development by accepting deposits. However, shortage of trained manpower and lack of adequate facilities prevented TRDB from actively engaging in this field. Other arrangements have now been made to provide TRDB with access to domestic resources through BOT (para. 28). TRDB inherited from NDCA responsibility for the credit components under two IDA credits (Credits No. 80-TA and 217-TA). Since then TRDB has acted as a credit channel in a series of other agricultural and rural development projects, namely: Tea Development Project (Credit No. 287-TA), Second Livestock Project (Credit No. 382-TA), Geita Cotton Project (Credit 454-TA), Kigoma Rural Development Project (Credit No. 508-TA), Dairy Development Project (Credit No. 580-TA), National Maize Project (Credit No. 606-TA), Fisheries Development Project (Credit No. 652-TA), and Tobacco Handling Project (Credit No. 802-TA). 31. According to the TRDB Act, all powers are vested in a Board of Directors consisting of nine members. The Chairman, who is also the Managing Director, is appointed by the President. The Minister of Finance appoints the other members who are chosen from among persons with knowledge and experience in economic and financial matters, agriculture, rural development and coopera- tive institutions. In its organization chart TRDB has a position of General Manager who is responsible for day-to-day operations. However, since the last General Manager was reassigned in June 1978, this post has remained vacant and the Managing Director has assumed responsibility for operations. TRDB is organized along functional lines into four major departments: Operations, Development, Finance and Administration, and 19 regional offices. Each department and regional office is headed by a manager, all of whom presently report to the Managing Director. TRDB's existing staff is of good quality and is dedicated. Their performance is acceptable given the increasing demands of their responsibilities. The three main categories of staff are project officers responsible for appraisal and supervision, credit supervisors responsible for monitoring project implementation and ensuring the mainte- nance of adequate borrower records, and accountants. While there has been a substantial increase in the number of project officers and credit supervisors (they increased from 15 in each category in 1971 to 73 and 84, respectively, by  - 11 - 1979), the general shortage of experienced accountants in Tanzania coupled with the relatively high salaries offered by the private sector have resulted in high turnover and shortages in TRDB's accounting staff. It is expected, however, that the installation of a suitable computer under this project (para. 47) would relieve some of the pressure caused by shortage of accountants. 32. TRDB now provides short-term (seasonal loans up to one year repayment period), medium-term (up to 5 years) and long-term (up to 15 years) 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 because of mismanagement, lack of effective records and misuse of funds, and since that time the basic thrust of TRDB's lending has been to villages. This necessitates increasing TRDB's -staff to help in dealing with an increased number of inexperienced clients. 33. The basic guidelines for TRDB's lending are (a) that the loan amount should not exceed 75% of the total cost of the project; (b) that the value of the loan is always extended in the form of goods, i.e., there are no cash disbursements to the borrower; (c) that the borrower maintains a regular account with NBC and signs an irrevocable order instructing that a percentage deduction from crop payments be made directly by the crop marketing authori- ties to TRDB; (d) that loans are made only to borrowers who meet the usual lending criteria such as good management, proper maintenance of books and accounts, prompt repayment of previous loans; and (e) that the project is economically viable. The guidelines suggest that for all projects, an economic rate of return not less than 10% and a benefit/cost ratio not less than 1 using a 10% discount rate should be the criteria for acceptability. TRDB is supposed to obtain security for its loans. However, in practice security does not form an important part of the loan: the viability of the project and good management are considered more important elements. When TRDB takes security it normally consists of a chattel mortgage on movable property. 34. As of June 30, 1978, TRDB's total outstanding gross portfolio amounted to TSh 436 million (US$52.5 million). Although there is no available information to express in quantitative terms the impact of TRDB on the rural sector measured in numbers of incremental hectares planted or tons produced, the substantial number of loans approved gives an indication of its achieve- ments over the years. Between 1973 and 1978 TRDB approved 1,930 loans of which approximately 68% were seasonal loans, 12% medium-term loans, and 20% long-term loans; medium and long-term loans covered a wide range of activities such as farm machinery, rural transport, storage, livestock, farm development and small-scale industries. 35. It is difficult to compare the financial results of TRDB's opera- tions from year to year because of frequent past changes in its accounting procedures. To evaluate TRDB's portfolio in the absence of reliable data, the total of TRDB's bad and doubtful debts during the period 1972 to 1978 was measured against the total amounts disbursed during the period; this ratio was  - 12 - found to average 10%. By excluding the debts due from the now dissolved cooperatives, this ratio fell to 8% of disbursements. A review of TRDB's interest rate structure and the level of interest rates to be charged by TRDB is discussed below (para. 56). 36. The 1971 Act establishing TRDB recognized the fact that while TRDB should be guided in its operations by sound banking principles and should finance only economically productive and technically viable projects, it would have a development role to fulfill. For this, TRDB was allowed to administer "Special Funds" for those projects which may be considered of national priority but involving higher than normally acceptable risks or otherwise not meeting TRDB's lending criteria: any losses or liabilities arising out of the use of these funds would not be charged against the capital resources of TRDB. Any high risk or other project not satisfying TRDB's normal lending criteria would be financed out of the Special Funds in accordance with the provisions of the TRDB Act (Section 4.03 of the draft Development Credit Agreement). Previous Bank Group Experience 37. An IDA credit for US$5.0 million equivalent (Credit No. 80-TA) was approved in November 1965 to help finance the National Development Credit Agency's (NDCA) program for extending short, medium and long-term credits to cooperatives, and through the cooperatives, to farmers for developmental purposes. NDCA experienced a number of problems and its performance was disappointing. This failure reflected a number of factors: it inherited large bad debts from its predecessor the Agricultural Credit Agency; it suffered from weak management; and it proved unable to recover new loans from an increasing number of cooperatives. Together these factors culminated in NDCA's dissolution in 1971, when arrears amounted to about 25% of its loan portfolio and its assets and liabilities were transferred to TRDB (para. 29 above). 38. TRDB, the successor of NDCA, has been the intermediary for channel- ling credit under eight Bank Group financed projects (para. 30). TRDB's performance has been good. However, these projects, while they may have influenced short and medium-term crop production, contributed very little to TRDB's institutional capability and long-term growth; TRDB has been acting only as a conduit for funds with decisions on beneficiaries and purposes made largely outside TRDB. PART IV - THE PROJECT 39. The proposed project was prepared by the Government of Tanzania with the assistance of the Bank Group as the first project aimed at strengthening TRDB as an institution and supporting its long-term growth. The project was appraised in September/October 1978. A Staff Appraisal Report entitled "Tanzania Rural Development Bank," Report No. 2362-TA, dated February 1, 1980,  - 13 - is being circulated separately to the Executive Directors. Negotiations were held in Washington in April 1979 and in Dar-es-Salaam in November 1979. The Tanzania Delegation was led by Mr. E. Mulokozi, Principal Secretary, Ministry of Finance and Planning. A Credit and Project Summary is at the beginning of this report and a Supplementary Project Data Sheet is in Annex III. Project Objectives and Description 40. The proposed project would, over a three-year period, aim at strengthening TRDB's capacity to provide credit in an efficient manner for economically viable rural development projects. Specifically, the project would include financing for: (a) improving TRDB's training programs for its employees and village officials; (b) strengthening TRDB's organization through equipping and staffing as necessary a new Management Information Center (to provide updated information to management), a new Organization and Methods Division within its Development Department (to develop work routines, controls and procedure manuals), an expanded Research Division (to cover monitoring and evalu- ation); and a Regional Directorate (responsible for the coordination and supervision of TRDB's operations in the regions); (c) improving TRDB's infrastructure through the acquisition of adequate office accommodation, provision of needed furniture and equipment, provision of transport facilities (mainly for field staff) and the construction of three houses in Dar es Salaam for the technical experts employed to assist in training; (d) employment of consultants to assist the Government and TRDB in resolving the input distribution problem; (e) a line of credit to assist in financing TRDB's lending program. Implementation and Detailed Features 41. TRDB would have overall responsibility for the implementation of the project. TRDB is the main credit institution for the rural sector in Tanzania and, with the dissolution of the Cooperative Unions (para. 32), it deals directly with almost 8,000 rural villages in Tanzania. Detailed Features: Staffing and Training 42. In view of the increasing volume of lending and its large number of inexperienced clients, TRDB's requirement of new staff is expected to increase  - 14 - considerably. Given this, and as the annual allocation of university gradu- ates to TRDB has been below the number required in the past, the Government has undertake to satisfy TRDB's requirements for university graduates during the project period (Section 4.01 of the draft Development Credit Agreement). 43. TRDB's management has vigorously pursued a policy of training new recruits and existing staff through local and overseas training programs. In the past local training was undertaken by the Institute of Finance Management. However, because this training was geared more towards commercial banking than rural credit it was replaced by a program under the tutelage of senior officers of TRDB with the help of a technical assistance program provided by the UNDP/FAO. Because even this program does not address all TRDB's training needs, the project provides for a revised program to deal with existing deficiencies. 44. The staff training program to be financed under the project is designed to provide the maximum scope for problem solving by the partici- pants, both on an individual and group basis. Initial training courses would be organized for both Project Officers and Credit Supervisors and an attempt will be made to make the courses more practical and more focused on specific responsibilities of the staff involved. To allow for better interchange of theory and practice, the courses would be divided into two parts and the second part would normally take place after one year of field experience. Two further courses in project appraisal and new developments in agricultural practices would be provided. These refresher style courses would be designed to remedy skill deficiencies. Also, a one week course would be conducted annually for all Regional Managers about the role of management. 45. To complement the efforts of the Prime Minister's office under the Village Management Technicians Program (which is being supported under the Fifth Education Project, Credit 607-TA), the project would also provide for training of village officials. Six two-man mobile training teams would be established under the project to travel to centrally located villages covering eight to 15 neighboring villages to provide instruction to village bookkeepers in the proper maintenance of books and records. 46. An internationally recruited Chief Training Officer would have the specific responsibility for implementation of the training component. He would be assisted by an internationally recruited Agricultural and Farm Management Specialist and an Agricultural Economist. The Agricultural and Farm Management Specialist would be responsible for the development of adequate manuals on the technical aspects of agricultural projects and the Agricultural Economist would develop appraisal guidelines and assist in the overall training of TRDB staff. All three of these staff would be qualified and experienced and be appointed on terms and conditions satisfactory to the Association (Section 2.02(a) of the draft Project Agreement). The project would, in addition to financing the services of these experts, finance the construction of three houses for their use (para. 53).  - 15 - (b) Detailed Features: Strengthening TRDB's Organizational Structure 47. Management Information Center. Reliable data on operations are not available and the loan accounting system is inadequate. In 1977, TRDB com- missioned a firm of consultants to improve the accounting system based on the old accounting machinery but this machinery cannot cope with the increasing volume of operations. The project, therefore, provides for the establishment of the Management Information Center, which would initially operate as a Division under the Development Department and later as an autonomous unit reporting to the Managing Director. To identify the machinery capable of meeting TRDB's needs, the project provides for the employment of consul- tants (40 man-months) at a man-month cost of about US$10,000 (including the man-month rate, international travel and subsistence) to recommend a small computer suitable for TRDB's operations, and to develop and implement appro- priate computer programs. The computer, to be procured and installed under the project, would be part of an integrated information system. Such a system, in addition to accounting functions, would include statistical information to improve billing procedures through providing timely data on loans outstanding and arrears. The computer suppliers will train TRDB's staff in using the equipment and will provide for necessary services. 48. Organization and Methods Division. To facilitate the proper flow of information within TRDB, this division would be established within the Devel- opment Department to assist TRDB's management in simplifying, standardizing and expediting organizational control procedures and ensuring the proper plan of information. Consultants would be employed (48 man-months) at a man-month cost of about US$8,000 (including the man-month rate, international travel and subsistence) to assist TRDB in setting up this division and defining rules, practices and procedures by which TRDB staff are to operate. The consultants would, in particular, establish controls and specifications for the data collection system and implementation of a new procedures manual. The consult- ants would also train the division's staff in carrying out their functions. 49. Research Division. To ensure effective loan supervision, TRDB's management at all levels should receive adequate information showing the progress of the projects compared with the original plans. As the informa- tion becomes available from the information center (para. 47) a monitoring mechanism would be activated. The existing Research and Statistics Division would be strengthened by incorporating the monitoring and evaluation func- tions of all TRDB activities. This division would be responsible for develop- ing, in cooperation with the Training Division, simple, basic technical manuals for each crop and activity financed by TRDB. These would provide information on the types of farm inputs, good crop farming practices, pests and diseases, suitable farm models for different climate conditions and social organization. Development of such a manual for livestock has already started. 50. Regional Directorate. Under the old TRDB organizational structure, the nineteen regional managers reported to the General Manager. However, since the reassignment of the General Manager in June 1978 (para. 31), the  - 16 - increased duties of the Managing Director have resulted in considerable demand on his time. In order to reduce these demands and establish a more efficient management structure, TRDB will establish a Regional Directorate in the Head Office to be responsible for the coordination and supervision of the operations of TRDB's regional offices which accounts for the bulk of TRDB's lending activities. At the same time TRDB's management intends to strengthen the regional offices and to place greater responsibilities on them as they gain experience. The Head of the Regional Directorate will be assisted by four Zonal Managers and a Loan Collection Division Head, all to be appointed not later than October 31, 1980 (Section 2.02(b)(ii) of the draft Project Agree- ment). The appointment of the Regional Directorate Head will be a condition of effectiveness (Section 6.01(b) of the draft Development Credit Agreement). (c) Detailed Features: Improving TRDB's Infrastructure 51. New Office Accommodations. In view of the expected expansion of its activities and the increase in its staff, TRDB has contracted along with other institutions to participate in the construction of a new office build- ing. Construction of the building began in 1978 and is expected to be com- pleted by February 1980. With the construction of this building, TRDB would have adequate office space to meet office needs, training facilities and data processing space requirements. This office will be fully financed by the Government and TRDB. 52. Transport Facilities. Lack of adequate transport facilities has adversely affected TRDB's operations, particularly the supervision functions. To increase the mobility of TRDB staff engaged in project appraisal and supervision, the project will provide funds for the purchase of three cars for head office staff, 25 four-wheel drive vehicles for regional offices and 67 motorcycles for field credit supervisors. Each regional office would be provided with at least one four-wheel drive vehicle and each credit supervisor would be provided with a motorcycle in the regions where the terrain allows the use of this mode of transport. To encourage proper maintenance of motor- cycles, credit supervisors will obtain them through personal loans from TRDB. 53. Office Furniture and Equipment and Construction of Three Houses. In order to equip the new divisions and departments established under the project, the project would provide for office furniture and equipment. Due to the severe shortage of appropriate housing in Dar es Salaam which has always adversely affected recruitment and retention of essential expatriate staff, funds are also provided for the construction of about three houses, in accordance with Government standards, to house the training experts (para. 46). These houses will be owned by TRDB and after the departure of the expa- triates would be occupied by TRDB's other expatriates or rented to TRDB's staff. 54. Input Distribution Study. The agricultural input distribution system has experienced continuing modifications involving TRDB's role. In addition to providing input financing, TRDB is now providing agricultural inputs, both from local and foreign sources, directly to its own borrowers.  - 17 - In view of the difficulties experienced by TRDB in the procurement and physical distribution of inputs and the increasing demand on TRDB's staff time to fulfill this role, the Government has undertaken the responsibility of resolving the problem with a view to relieving TRDB of this burden, thereby enabling it to act as a purely financial institution. Consultants would be employed (8 man-months) under the project at a man-month cost of about US$8,000 (including the man-month rate, international travel and subsistence) to carry out a study to assist the Government and TRDB in reaching a satisfactory alternative solution. (d) Detailed Features: Line of Credit 55. Funds are provided under the Project to assist in the financing of TRDB's lending program over the three-year project period. These funds would be in the form of a general line of credit to be used by TRDB in the normal course of its operations. It is intended that this would be in the nature of a pilot project since it is the first such credit provided to TRDB by the Bank Group. The credit component would amount to US$6 million and represents only 6% of TRDB's projected annual loan disbursements. Certain limits and conditions would be placed on the application of these funds. First, there would be a free limit of US$30,000 for seasonal inputs and farm machinery sub-loans, US$70,000 for livestock subloans, and US$100,000 for all other sub-loans, with an overall limit of US$200,000 to any individual village or entity (Section 2.02(b)(ii) of the draft Development Credit Agreement). These limits are sufficiently high so as to give TRDB a significant decision making responsibility and any sub-loan beyond these limits would be subject to the Association's approval. Secondly, funds under the line of credit allocated to seasonal loans would be limited to crops for which there are established practices and would only be disbursed if the total number of seasonal loans in the particular region for any fiscal year is greater than the number of loans made in the previous fiscal year (Section 2.03 and Schedule 1, para. 2, of the draft Project Agreement). Credit would be limited to subprojects which meet TRDB's usual lending criteria such as good management, proper maintenance of books and accounts, prompt repayment of previous loans and economic viability of the enterprise (Schedule 1, para. 1, of the draft Project Agreement). Finally, the use of funds provided under this line of credit would be limited to five regions selected in consultation with the Association (Schedule 1, para. 1, of the draft Project Agreement). The selection would be on the basis of established demand for credit and where TRDB's activities are expected to materially increase during the project period. This would also facilitate monitoring and evaluation of project results within the short span of the project period as a gauge for future lending to TRDB and expansion of its activities under future projects. 56. Interest Rate and Financial Structure. TRDB will charge an annual interest rate of 7.5% on all medium-term loans and 8.5% on all short-term loans to Villages and Cooperatives, 9% on all loans to parastatals and District Development Corporations, and 10% on all loans to individuals, partnerships, companies and associations engaged in rural development (Section 4.02 of the draft Development Credit Agreement and Section 3.03 of the draft  - 18 - Project Agreement). At the anticipated portfolio mix, the weighted average annual interest rate would approximate 8.5%, which would be sufficient to allow TRDB to break even. However, such a rate would not cover fully the cost of maintaining the real value of TRDB's equity base as the current inflation rate in Tanzania is around 17% and is expected to decelerate over the period 1981 to 1982 to about 12%. The Government argues that the main- tenance of low rural interest rates is part of its more general effort to encourage investment by smallholders and to draw them from subsistence pro- duction into producing a marketable surplus. The Government also thinks that the level of interest rates has no major influence on domestic savings and resource mobilization in a rural economy where the prices of essential agri- cultural inputs and final produce are both tightly regulated. The Association intends to continue its discussion with the Government and TRDB on the level of interest rates within the framework of our on-going economic work. TRDB has agreed not to permit its debt-equity ratio to exceed 60:40 without the Association's Agreement (Section 4.04 of the draft Project Agreement). 57. Recovery of Loans. Prior to 1977, TRDB provided 1% of the loans approved in any year for bad and doubtful debts. As of June 30, 1976, the arrears of principal and interest amounted to TSh. 72 million against which the provision was only TSh. 16 million or about 22% of arrears. By June 1978 the arrears reached TSh. 173 million, due mainly to the dissolution of cooperative unions and the liquidation of the Tanzania Road Haulage Company. Reflecting this, TRDB increased its provision for bad debt to TSh. 55 million in 1977 and to TSh. 74 million in 1978. In addition, TRDB has been pursuing the issue of cooperative union debts with Government. In response the Government has undertaken to take appropriate action to remedy any financial loss to TRDB resulting from the cooperative union bad debts (Section 3.02 of the draft Development Credit Agreement). In any case, all debts due from dissolved cooperatives would be liquidated by June 30, 1981. 58. The project is designed to assist TRDB to reduce the accumulation of arrears in the future. TRDB has already adopted a policy aimed at cutting villages off from future loans unless they repay outstanding ones and in some cases foreclosing on defaulters. Educating the village officials in credit concepts and accounting (para. 45), improving TRDB's billing procedures (para. 47), and efficient follow-up and supervision would help alleviate this prob- lem. Also, extending credit only to those villages with good credit records constitutes an important factor in the recovery of loans. In addition, in order to facilitate credit recovery, each crop marketing authority responsible for the purchase of agricultural produce from TRDB's borrowers will deduct and promptly pay to TRDB the aggregate amount due by such borrowers to TRDB in respect to seasonal inputs based on information provided by TRDB to the crop marketing authorities (Section 4.04 of the draft Development Credit Agreement). TRDB will notify each crop marketing authority, before the commencement of each crop marketing season of the aggregate amount of prin- cipal, interest and other charges due from each borrower in respect of credit provided by TRDB for seasonal inputs (Section 3.02 of the draft Project Agreement). The repayments due to TRDB could then be automatically deducted  - 19 - from the villages by the crop marketing authorities on the strength of the irrevocable authorization provided by the villages at the time of making the loans, and credited to TRDB. This system is expected to improve loan recovery consiclerably as seasonal loans represent the bulk of TRDB's lending operations. Project Costs and Financing Plan 59. The total cost of the project is estimated at TSh. 110.0 million (US$13.3 million equivalent). Project cost net of taxes and duties is US$12.8 million of which US$6.8 million or about 53% in foreign exchange and US$6.0 million in local currency. Local taxes, principally import duties, estimated at TSh. 3.9 million (US$0.5 million) are included in the total project cost. The proposed IDA Credit of US$10.0 million equivalent would finance 78% of net project costs, covering all the foreign exchange costs and 54% of the -local costs. The Government would provide US$2.5 million (US$2.0 million net of taxes and duties) (Section 3.01(a) of the draft Development Credit Agree- ment), and would bear the foreign exchange risk. The proceeds of the IDA credit would be relent to TRDB for 20 years including 5 years of grace at an annual interest rate not exceeding 4% (Section 3.01 (b) of the draft Develop- ment Credit Agreement). Incorporating these arrangements into a Subsidiary Loan Agreement between the Government and TRDB will be a condition of effec- tiveness (Section 6.01(a)) of the draft Development Credit Agreement). TRDB will provide, out of its own resources, the equivalent of US$0.8 million. Procurement and Disbursement 60. Contracts for vehicles estimated to cost about US$0.8 million, including contingencies, would be awarded on the basis of international competitive bidding in accordance with Bank Group guidelines. A preference margin equal to 15% of the c.i.f. cost of competiig imports or the customs duty, whichever is lower, would be granted to qualified local manufacturers for purpose of bid comparison. The following items are not expected to attract international competition and would be awarded after local competitive bidding: furniture, office equipment and computer materials (about US$0.5 million), and construction of about three houses for the training experts (about US$0.2 million). TRDB would use its regular procurement procedures, which are satisfactory, in respect of purchases on behalf of its borrowers under the general line of credit (US$6.0 million). Computer machines (US$0.8 million) would be procured in a manner to be decided in consultation with the Association, after the recommendations of the consultants hired for this purpose are known (para. 47). All consultants and experts to be financed under the project (US$1.5 million) would be selected in accordance with Bank Group guidelines and employed on terms and conditions satisfactory to the Borrower and the Association (Section 2.02 of the draft Project Agreement). The office accommodation (US$1.4 million) has been tendered and awarded in accordance with local competitive bidding following existing Government procedures which are satisfactory. However, as noted above, this will not be financed by the Association. Tender evaluation documents would be reviewed prior to contract award except for contracts costing less than US$50,000 equivalent each.  - 20 - 61. Disbursements under the credit would be on the basis of (a) 100% of the foreign expenditures and 80% of local expenditures on vehicles, computer machines, consultant services, experts and training courses; (b) 80% of local expenditures on furniture, office equipment and computer materials; (c) 70% of local expenditures on construction of houses, incremental staff salaries and benefits, and operating costs of the mobile training units; and (d) 80% of the incremental loans disbursed by TRDB under the general line of credit. With- drawal claims for expenditures on vehicles, computer machines, office furni- ture and equipment, computer materials, construction of houses, consultants and experts would be fully documented. Disbursements against local training courses, staff salaries and benefits, and operating costs of mobile training units would be against certified statements of expenditures signed by the Managing Director of TRDB. Disbursements under the general line of credit for subloans would be against statements of expenditures signed by TRDB's Managing Director certifying that (i) subloans are made in one of the selected regions; (ii) for seasonal inputs subloans, such subloans are incremental to the total previous year's loans in that region; and (iii) no funds were received by TRDB to cover the specific loan from any other source. The appraisal mission has examined TRDB's accounting procedures and staffing, and found that TRDB is capable of maintaining the documentation and records. The records and accounts covering expenditures for which disbursements would be made against statement of expenditures would be subject to a specific auditing and TRDB will retain, until one year after the closing date, all records evidencing these expenditures (Section 4.01 of the draft Project Agreement). TRDB's accounts would be audited by independent auditors acceptable to the Association; within six months after the end of each fiscal year audited accounts would be submitted to the Association (Section 4.02 (a) of the draft Project Agreement). A separate opinion from an independent auditor in respect of the expenditures and records related to statements of expenditures, will be prepared and submitted to the Association not later than six months after the end of each fiscal year (Section 4.02 (a)(ii) of the draft Project Agreement). It is recommended that expenditures incurred after October 31, 1979 on recruitment of consultants to study TRDB's management information system, up to an amount of US$100,000, be financed retroactively under the credit. Prospects and Justification 62. TRDB has been acting as a conduit for the Association and other bilateral aid funds aimed at a specific crop or project; decisions on who gets the funds and for what purpose are made largely outside TRDB. Conse- quently, these credits have contributed very little to TRDB's institutional capability and long term development even though they may have improved short and medium term crop production. The principal purpose of the proposed project is to strengthen TRDB as an institution. 63. The strengthening of TRDB under the Project is expected to yield a number of benefits; at the most basic level it would allow TRDB staff to fulfill routine demands which must be carried out by any financial institu- tion. The streamlining of its organizational structure and the installation of computer machines to handle the increased load would produce the added advantages of a wide range of information necessary for effective management.  - 19 - from the villages by the crop marketing authorities on the strength of the irrevocable authorization provided by the villages at the time of making the loans, and credited to TRDB. This system is expected to improve loan recovery considerably as seasonal loans represent the bulk of TRDB's lending operations. Project Costs and Financing Plan 59. The total cost of the project is estimated at TSh. 110.0 million (US$13.3 million equivalent). Project cost net of taxes and duties is US$12.8 million of which US$6.8 million or about 53% in foreign exchange and US$6.0 million in local currency. Local taxes, principally import duties, estimated at TSh. 3.9 million (US$0.5 million) are included in the total project cost. The proposed IDA Credit of US$10.0 million equivalent would finance 78% of net project costs, covering all the foreign exchange costs and 54% of the local costs. The Government would provide US$2.5 million (US$2.0 million net of taxes and duties) (Section 3.01(a) of the draft Development Credit Agree- ment), and would bear the foreign exchange risk. The proceeds of the IDA credit would be relent to TRDB for 20 years including 5 years of grace at an annual interest rate not exceeding 4% (Section 3.01 (b) of the draft Develop- ment Credit Agreement). Incorporating these arrangements into a Subsidiary Loan Agreement between the Government and TRDB will be a condition of effec- tiveness (Section 6.01(a)) of the draft Development Credit Agreement). TRDB will provide, out of its own resources, the equivalent of US$0.8 million. Procurement and Disbursement 60. Contracts for vehicles estimated to cost about US$0.8 million, including contingencies, would be awarded on the basis of international competitive bidding in accordance with Bank Group guidelines. A preference margin equal to 15% of the c.i.f. cost of competing imports or the customs duty, whichever is lower, would be granted to qualified local manufacturers for purpose of bid comparison. The following items are not expected to attract international competition and would be awarded after local competitive bidding: furniture, office equipment and computer materials (about US$0.5 million), and construction of about three houses for the training experts (about US$0.2 million). TRDB would use its regular procurement procedures, which are satisfactory, in respect of purchases on behalf of its borrowers under the general line of credit (US$6.0 million). Computer machines (US$0.8 million) would be procured in a manner to be decided in consultation with the Association, after the recommendations of the consultants hired for this purpose are known (para. 47). All consultants and experts to be financed under the project (US$1.5 million) would be selected in accordance with Bank Group guidelines and employed on terms and conditions satisfactory to the Borrower and the Association (Section 2.02 of the draft Project Agreement). The office accommodation (US$1.4 million) has been tendered and awarded in accordance with local competitive bidding following existing Government procedures which are satisfactory. However, as noted above, this will not be financed by the Association. Tender evaluation documents would be reviewed prior to contract award except for contracts costing less than US$50,000 equivalent each.  - 20 - 61. Disbursements under the credit would be on the basis of (a) 100% of the foreign expenditures and 80% of local expenditures on vehicles, computer machines, consultant services, experts and training courses; (b) 80% of local expenditures on furniture, office equipment and computer materials; (c) 70% of local expenditures on construction of houses, incremental staff salaries and benefits, and operating costs of the mobile training units; and (d) 80% of the incremental loans disbursed by TRDB under the general line of credit. With- drawal claims for expenditures on vehicles, computer machines, office furni- ture and equipment, computer materials, construction of houses, consultants and experts would be fully documented. Disbursements against local training courses, staff salaries and benefits, and operating costs of mobile training units would be against certified statements of expenditures signed by the Managing Director of TRDB. Disbursements under the general line of credit for subloans would be against statements of expenditures signed by TRDB's Managing Director certifying that (i) subloans are made in one of the selected regions; (ii) for seasonal inputs subloans, such subloans are incremental to the total previous year's loans in that region; and (iii) no funds were received by TRDB to cover the specific loan from any other source. The appraisal mission has examined TRDB's accounting procedures and staffing, and found that TRDB is capable of maintaining the documentation and records. The records and accounts covering expenditures for which disbursements would be made against statement of expenditures would be subject to a specific auditing and TRDB will retain, until one year after the closing date, all records evidencing these expenditures (Section 4.01 of the draft Project Agreement). TRDB's accounts would be audited by independent auditors acceptable to the Association; within six months after the end of each fiscal year audited accounts would be submitted to the Association (Section 4.02 (a) of the draft Project Agreement). A separate opinion from an independent auditor in respect of the expenditures and records related to statements of expenditures, will be prepared and submitted to the Association not later than six months after the end of each fiscal year (Section 4.02 (a)(ii) of the draft Project Agreement). It is recommended that expenditures incurred after October 31, 1979 on recruitment of consultants to study TRDB's management information system, up to an amount of US$100,000, be financed retroactively under the credit. Prospects and Justification 62. TRDB has been acting as a conduit for the Association and other bilateral aid funds aimed at a specific crop or project; decisions on who gets the funds and for what purpose are made largely outside TRDB. Conse- quently, these credits have contributed very little to TRDB's institutional capability and long term development even though they may have improved short and medium term crop production. The principal purpose of the proposed project is to strengthen TRDB as an institution. 63. The strengthening of TRDB under the Project is expected to yield a number of benefits; at the most basic level it would allow TRDB staff to fulfill routine demands which must be carried out by any financial institu- tion. The streamlining of its organizational structure and the installation of computer machines to handle the increased load would produce the added advantages of a wide range of information necessary for effective management.  - 21 - Most important, however, the project would strengthen TRDB's ability to provide credit in an efficient manner to economically viable rural develop- ment projects, assisting in increasing village production and farmers income. Risks 64. The major risks of the project are those attached to the credit component, i.e, the problems of credit recovery. Because large grants and subsidies in one form or another have been given to settlement schemes and Ujamaa villages, loans in the minds of many people came to mean grants. However, TRDB has already begun a policy aimed at educating the villages in the concepts of credit through seminars for village officials, cutting villages off from future loans unless they repay outstanding ones and in some cases foreclosing on defaulters. This project is designed to minimize this risk by supporting TRDB's ongoing efforts in this area. PART V - LEGAL INSTRUMENTS AND AUTHORITY 65. The draft Development Credit Agreement between the United Republic of Tanzania and the Association, the draft Project Agreement between the Association and TRDB 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. 66. Special conditions of the project are listed in Section III of Annex III. The draft Development Credit Agreement includes the following additional conditions of effectiveness: (a) execution of a Subsidiary Loan Agreement between the Government and TRDB (Section 6.01(a) of the draft Development Credit Agreement); and (b) appointment of TRDB's Regional Directorate Head (Section 6.01(b) of the draft Development Credit Agreement). 67. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 68. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments Washington, D.C. FebruaryP13, 1980  -22- Annex I Page 1 of 6 TABLE 3A TANZANIA - SOCIAL INDICATORS DATA SHEET R EFRENCE GROUPS (ADJUSTED AyYRAGES LAND AREA (THOUSAND SQ. KM.) - MOST R