Tanzania - Port Rehabilitation Project

The World Bank FOt OMCIL USE ONLY C H. AS-96- 7:; eput Pie P-3898-TA REPORT AID RECOADENDATrOJ OF TRE PRESIDENT OF TEE TNTERNATIONAL DEVELOPIlET ASSOCIATION TO THE EXECUTIVE DIRECTORS OW A PROPOSED CREDIT OF SDR 26.2 MILLION TO THE UNITED REPUBLIC OF TANZANIA FOR A PORT RERABILITATION PROJECT November 8, 1984 I his dome.d hw a zedbi il iu mi m be id by diefp inlr In d lb tofue of aU ofdi dmhs. lb emtm owa meUuib be Noedwud widu Wedd link uhwdIm.  CURREC EUIVA a/S Currency Unit shilling (TSh) TSh L00 US$ 0.06 US$ 1.00 U TSh 17.0 US$ 1.00 U SDR 0.9704 ABBREVIATIONS AND ACRNYMS DANIA - Danish International Developmet Agency EAC - East African Comaaity EAEC - East African Narbours Corporation FDRIIDA - Finnish International Development Agency mCiI Ministry of Communications and Works WMEA Ministry of PlaniLng and Economic Affairs NMC National MilLing Corporation NORAD - Norwegian Agency for Development ODA Overseas Development Administration (U.K.) SIDA Swedish International Development Authority TAMA T anzania-Zambia Railways THA. Tanzania Harbours Authority TRC Tanzania Railways Corporation FISCAL YEAR Government - July 1 to June 30 - a/ As the Tanzania shilling is officially valued in relation to a basket of the currencies of Tanzania's trading partners, the USDollartTanzania shilling exchange rate is subject to change. A rate of US$ 1.00 - TSh 17.0, which was the level set in the most recent exchange rate adjust- ment of June 1984, was used for appraisal of this project. The USDol1ar/SDR exchange rate used in this report is that of August 1, 1984.  FOR OMCIAL USE ONLY TANZANIA PORT R PROJEc Credit and Project Summary Borrower: United Republic of Tanzania. Beneficiary: Tanzania Harbours Authority (TEA). - Amount: SDR 26.2 million (US$27 million equivalent). Terms: Standard. Re-Lending Terms: Total credit vill be on lent to TRA, for 20 years including 5 years of grace at 112 per annum. THA to bear foreign exchange risk. Co-financing: The United Republic of Tanzania is arranging co- financing as follows: grants from the Governments of Denmark-DANIDA (US$7.9 million equivalent); Finland- FINNIDA (US$6.8 million equivalent); Italy (US$3.8 million equivalent); Netherlands (US$10.3 million equivalent); Norway-NORAD (USS2.8 million equiva- lent); and United Kingdow-ODA (US$0.3 million equiva- lent). ProJect ObJectives The proposed project is designed to provide for the and Description: rehabilitation and modernization of the Port of Dar es Salaam, Tanzania's major port which also serves as an important regional port fo. several neighboring countries (Burundi, Malawi, Rwanda> Zaire, Zambia). The proposed project would provide special container handling facilities and equipment, replace some deteriorated general cargo equipment, modernize grain handling facilities, rehabilitate lighterage facili- ties and the oetroleum jetty, repave sections of berths, and provide for a review of additional rehabilitation requirpments. technical assistance and training, and consult cy services. The container and grain facilities would lover trans- port costs for Tanzania and land-locked neighbors, while the jetty, lighterage and paving investments are necessary to restore facilities to acceptable condition. Technical assistance and training would improve the Tanzania Harbours Autbority's ability to train its personnel, and improve its operational and maintenance capability. This document has a restricted distribution and may be ued by reciients only in the performance of | her oficid dute Its contents may not otherwise bcedisosed without Wodd Bank authoiatio  Traffic could fail to increase as forecast; however, container traffic is likely to continue to grow rapidly and grain and petroleum imports are unlikely to decrease significantly. ITstitUtional beDefits may aateriaLi-e only slowly, but training and technical assitstce should reduce this risk. No major physical risks are anticipated in implementing the proposed project beyond those that are normally expected in the construction of a project of this type and for which provision has been made by use of consultants. Estimated Project Costs: Local Foreign Total --US$ m11ions- Components: Advance Civil Works 3.0 1.7 4.7 Main Project Civil Works 11.9 24.4 36.3 Main Project Equipment 0.6 17.6 18.2 Technical Assistance/Trailing 0.9 3.1 4.0 Consultative Services a/ 0.7 2.5 3.2 Base Cost (mid-1984 prices) 17.1 49.3 66.4 Contingencies: Physical 1.9 2.1 4.0 Price 13.0 7.6 20.6 Total Project Cost b/ 32.0 59.0 91.0 Financing Plan: Local Foreign Total USS ioions- Sources: IDA - 27.0 27.0 Co-financiers - 32.0 32.0 TEHA 32.0 - 32.0 Total Project Financing 32.0 59.0 91.0 a/ Includes refinancing of a US$950,000 PPF advance. b/ Identifiable taxes and duties amount to US$9.4 million equivalent and the total project cost, net of taxes, is about US$81.6 million equivalent.  Estisated Dissements: - I$ SllU 3DA FY 1985 1986 1987 1988 1989 1990 Annual 1.4 8.6 8.8 6.9 1.0 0.3 Caumlative 1.4 10.0 18.8 25.7 26.7 27.0 Economic Rate of Return: Abot 33X. Staff Mppraisal Report: Report No. 4212-TA, dated November 8, 1984. IBRD 16748R1 and 1667511. .  INTERNATIONAL DEVELOPHENT ASSOCIATION REPORT AND RECONMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A PORT REHABILTrION PROJECT 1. I submit the following report and recomnendation on a proposed * credit to the United Republic of Tanznana of SDR 26.2 million (US$27.0 million equivalent) on standard IDA terms to help finance a Port Rehabili- tation Project. These funds would be re-lent to the Taniania Harbours Authority (THA) at an annual interest rate of 112 for 20 years, including 5 years of grace. In addizion, the United Republic of Tanzania is arranging co-financing from the Governments of Denmark (DANIDA), Finland (FINNIDA), Italy, Netherlands, Norway (NORAD), and the United Kingdom (ODA). PART I - THE ECONOMY1/ 2. An economic memorandum on Tanzania (Report No. 5019-TA), based on the work of an economic mission which visited the country in September/ October 1983, was issued in August 1984. A summary of social and economic data is in Annex I. Background 3. At Independence in 1961, Tanzania was one of the poorest countries in the world. Almost solely dependent on subsistence agriculture and a few estate crops, the country had a very modest industrial base, which accounted for less than 5% of Gross Domestic Product (GDP), and a very small number of educated and trained personnel. For the first six years after Independence, the Government's development objectives resembled those of many other less developed countries, stressing growth in per capita income and national self-sufficiency in skilled manpower, based on market forces and capital intensive agricultural projects. This approach had a number of drawbacks, such as bigh investment costs in the agricultural sector. It led, in the Government's view, to unacceptable economic and social conditions, such as widening income differentials and unequal opportunities for advancement in the rural areas. In response to this situation, the national development strategy was reassessed in :967. The new priorities, enunciated in the Arusha Declaration and related policy statements, were directed toward establishing a socialist society, with emphasis on broad-based rural development, self-reliance in development efforts, and mass education. To accomplish these ends, the State, with 1I Part I of this report is unchanged from Part I of the Report and Recoummendation of the President for the Fourth Technical Assistance Project (Report No. P-3731-TA) of August 16, 1984.  - 2 - guidance from the Party, was expected to play the leading role, especially in the reform and creation of appropriate institutions. This led in the late 1960s to the nationalization of large-scale industry, commerce and finance, the creation of numerous parastatal bodies, the formation of ujamaa (cooperative) villages, the decentralization of Government (1972), and the mass campaign of villagization (1974-76). 4. Despite some disruption arising from these major institutional changes during the period, Tanzania managed to show improvements both in social welfare and in macroeconomic performance. Since Independence, primary school enrollment increased by more than 50%, life expectancy rose by almost 5 years, and access to safe water increased in both the rural and urban areas. GDP grew by 4.4% per annum from 1966 to 1973, investment averaged 24% of GDP from 1970 to 1973, and domestic resource mobilization improved with recurrent revenues rising as a proportion of GDP from 15X in 1967/68 to 19% in the mid-1970s. However, the productive sectors grew slowly and thte rate of return on new investments (which were concentrated on the industry and transport sectors) was poor. Perhaps the principal disappointment was in agriculture, the dominant sector of the economy, which grew by only 2.3% per annum from 1966 to 1973. Growth was also uneven among regions and precluded any narrowing of rural-urban income differentials. Tanzania made rapid progress toward the Africanization of key posts in the economy, but large gaps in manpower requirements remained. Dependence on foreign aid to finance both domestic investment and the widening balance of payments gap also increased. By 1973, the issues that were to be so important for Tanzania throughout the later 1970s and early 1980s were becoming clear. How quickly could a country with limited trained personnel develop a strong and efficient centrally administered economy? How long could the country afford the costs, in terms of efficiency and incentives, often resulting from the Government's emphasis on equity? What could be done to improve the growth rate of the monetized, productive sectors? 5. The oil price increases and world recession of 1973-74 coincided with two years of below average rainfall in Tanzania, which had a detri- mental effect on agricultural production. Agricultural production also was affected by disruptive changes in the rural areas at this time (decentrali- zation and villagization), and foodgrain production was reduced. The Government was forced into the world market, making large purchases of foodgrains for cash. Export crop production also fell during this period and the barter terms of trade dropped by about one-third during these two years. As a result, the current account deficit rose from US$118 million in 1973 to around US$340 million in both 1974 and 1975. Domestically, the recurrent budget fell into deficit and Government bank borrowing rose from TSh 416 million in 1973/74 to TSh 1,061 million in 1975/76. 6. The Government prepared a program to deal with at least the short-term effects of the crisis and received some assistance from the IMF and a program loan from the Bank Group. Under the Government program, import levels were tightly restricted, wages were frozen, government devel- opment expenditures were redirected towards the productive sectors, and the Tanzanian shilling was devalued by 10% against the SDR. Producer prices for food crops were substantially increased and, at the same time, the National Milling Corporation (NMC) was instructed to purchase a number of  drought-resistant crops such as cassava, sorghum, and pigeon peas in addi- tion to the usual foodgrains like maize. While these steps were taken to increase food production, they also discouraged the production of export crops, weakened the financial position of NMC, and required the banking system to extend large amounts of credit to NHC. Aside from the devalua- tion, little scope was given to market forces and Tanzania made no basic changes in its system of administered prices and government controls. The basic weaknesses of the economy persisted - declining export volumes, limited trained manpower, disappointing growth in the monetized and produc- tive sectors, and poor maintenance of existing capital stock and infra- structure, especially in agriculture and transport. 7. Nonetheless, the Government program, boosted greatly by the coffee boom of 1977, additional foreign assistance, and reasonable weather for agriculture, was able to keep the economy in balance until 1978. During 1978, the overly stringent import controls were relaxed at the same time as the terms of trade began to deteriorate again. The balance of payments went into deficit and foreign reserves were drawn down. Then, in October 1978, the country was invaded by forces from Uganda. The resulting war, the oil price increases of 1979, and the flooding and drought in different parts of Tanzania led to a worsening balance of payments deficit. The Government built up major arrears on its import payments for the first time since Independence. The domestic budget fell heavily into deficit as expenditures (led by defense) rose by 50% and revenues improved by only 10Z from 1977/78 to 1978/79. As a result, Government borrowing from the banking system increased from TSh 600 million in 1977/78 to more than TSh 3,000 million in 1978(79. Such borrowing was the major factor in money supply growth, which exceeded 53Z in this period. 8. The economy became troubled by major problems of falling production in agriculture and industry and declining factor productivity. In the mid 1970s, average GDP and per capita income growth rates were similar to those of other Sub-Saharan African countries. The average GDP grew by 5.2% per annum between 1970 and 1978. With population growing at 3.3% annually, per capita GDP increased at an average rate of about 2% annually. Between 1978 and 1980, growth in aggregate output slowed to 3.3% per annum. In 1981,falling agricultural and industrial production caused GDP to decline by 1.72; the rate of decllne accelerated to 3.2% in 1982. c Output in subsistence agriculture and manufacturing, which had experienced high growth rates of 6X to 7% per annum before 1978, fell by 8% and 16.6% per annum respectively over the next four years, while output in the services sector continued to grow steadily. The services sector, which accounted for only 9% of value added in 1966, now accounts for more than 25%. Output in the services sector reflects remuneration rather than output, and trends in subsistence production are at best guess-estimates with potentially large margins of error. For these reasons, trenJs in the rate of growth of GDP are in some doubt, but the shift away from a monetary to an informal economy is confirmed by the decline in the share of output marketed through official channels. 9. Although Tanzania has sustained a high investment ratio, this has not been matched by a similar success in the mobilization of domestic savings or in the return on investments. Up to the mid-1970s, foreign savings had financed 20-40Z of domestic investment. However, the depen-  - 4 - dence on foreign savings rose sharply to more than 60X of domestic invest- ment during the crisis years of 1974-75 and again from 1978. The major shortfalls in domestic savings have occurred in the Government sector, where they have actually been negative in some years since 1975. 10. Agriculture remains the most important sector in Tanzania, accounting for 83Z of total employment, 45Z of GDP, and 80Z of exports. The long-term trend growth rate of agricultural production has hardly kept pace with population growth and apparently has fallen in more recent years as the initial expansion of export crop production (through the mid-1960s) has been reversed. This poor performance cannot be adequately explained by the limitations of the natural environment. Although the importance of rural development has continuously been highlighted in Government state- ments, including the Arusha Declaration and successive plans, this has not always been reflected in the allocation of resources to the agricultural sector or in policy formulation and implementation. The general direction of the Government's post-Arusha agriculture strategy has also tended to emphasize the transformation of the institutional structure of rural devel- opment (through the formation of villages and increasing public involvement in the sector) over measures designed to improve agricultural production directly. Many of these institutional changes were introduced too rapidly, without careful planning or sufficient recognition that by themselves they could not compensate for inadequate incentives and shortages of skilled manpower and managers. More recently there has been a greater awareness of the role of incentives, and recent price adjustments attest to the Govern- ment's willingness to use incentives to influence the pattern of agricul- tural production. Available manpower, however, is still stretched rather thinly throughout the sector, mainly because of the predominant role assigned to the public sector. This has resulted in weakened capacity for policy planning and implementation, especially in the areas of research and extension, and deficient distribution of fertilizers and other on-farm supplies and equipment. Another factor underlying the poor performance of agriculture has been the deterioration of transport services. Road, rail, and water services have declined owing to a lack of spare parts, poor main- tenance, and inadequate planning and management. The Current Balance of Payments Crisis and Medium Term Prospects 11. The slow growth in agricultural production, transport bottle- necks, and external shocks described above have all contributed to the severe deterioration in the balance of payments since 1979. By 1982, export volumes had fallen to a level one-third below the peaks of the mid- 1960s and early 1970s. Furthermore, the terms of trade have declined by 40% since the coffee boom of 1977 due to a sharp increase in import costs, especially for petroleum, at a time when the overall level of export prices has been rising very slowly. Owing to these adverse developments, the pur- chasing power of Tanzania's exports in 1982 was more than one-third lower than in 1977 and only one-half of the 1966 level. The basic adjustment to the high current account deficits following the second oil shock was through a cutback in imports. By 1982, import volumes were 32% below the level in 1978 and 24% below the level prevailing in the early 1970s. Aid inflows have been maintained, but they increasingly have been tied to specific projects. Currently, food, oil and debt service account for almost all of export earnings resulting in a severe shortage of foreign  exchange for many categories of imports for which aid resources are not available. As a result, Tanzania has built up almost US$400 million of import arrears, and has drawn down all of its reserves. 12. Given the poor prospects for international commodity prices as well as the limited scope for further external aid, there is little immediate prospect for an improvement in the balance of payments. This continuing balance of payments constraint is inevitably having a debilitating effect on the economy, with lower imports reducing production and maintenance of existing assets, resulting in further falls in exports and available foreign exchange. This vicious circle will be difficult to break unless there is a substantial injection of foreign exchange and major improvements in producer incentives, parastatal operations, import alloca- tions, promotion of non-traditional exports, and overall government planning and budgeting. 13. In spite of intensive discussions with the Government in 1980 and 1981, it was difficult to focus on specific corrective measures needed for structural adjustment. In the absence of a comprehensive reform program, an Export Rehabilitation Program Credit (Credit 1133-TA) in the amount of US$50 million was negotiated in March 1981 to support a limited but sharply defined set of measures intended to assist the Government in arresting the decline in earnings from the country's major export crops. During negotiations of this Program Credit, agreement was also reached on a Memorandum of Understanding on Follow-Up Measures. These included more restraint and selectivity in the public investment program, more emphasis in the recurrent budget on the operations and maintenance needs of the economy, improved foreign exchange budgeting, reexamination of the roles (particularly purchasing mandates) of the State-owned crop authorities, introduction of more payment-by-results schemes in industry, and review of subsidy and cost recovery arrangements in the public sector. A special agricultural account was established to channel imports into agriculture with suprisingly little friction among the institutions concerned, although the Government was not able to meet its own obligation to contribute US$50 million to the account. The Government also agreed that an independent Advisory Group would be established to assist in preparing a comprehensive program of economic rehabilitaticn and recovery. 14. The Advisory Group began work in November 1981 and completed its Report in April 1982. A large number of its recommendations were adopted by the Government and incorporated into a Structural Adjustment Program, which was issued in July 1982. This Program includes a series of important initiatives and proposals. The development budget was substantially cut back in 1982/83 for the second year in a row to release resources for the operations and maintenance needs of the economy. Agricultural producer prices were adjusted in 1983/84 and in 1984/85, which initially maintained them broadly constant in real terms and more recently increased them in real terms. The Government also announced its intention to relax restrictions on interregional trade. It also opened up the marketing of some crops (mainly minor grains such as millet) to anyone interested in conducting such trade. 15. In the 1984/85 budget submitted to Parliament on June 14, 1984, the Government announced a series of new measures. The most recent  6- measures include a major exchange rate adjustment (36%), the second in two years, an increase in agricultural producer prices of between 46% and 55%, and an initiation of a program to improve the efficiency and productivity of agricultural parastatals. Preliminary analysis shows that these pricing changes are sufficient to allow agrlcultural parastatals as a group to break even while resulting in an increase of 5X in real incomes of export crop producers. There is a serious attempt to make the NMC, the parastatal responsible for grain marketing, financially viable through an increase in the consumer price for maize and a decontrol of the price of maize flour (sembe). These measures together should eliminate the need for budgetary transfers to the parastatals, which had amounted to nearly 11% of total recurrent expenditures in 1982/83. The measures also include politically sensitive actions such as the removal of subsidies on fertilizer and insecticides and the introduction of fees for secondary schoolr to cover a part of the costs. 16. The 1984/85 budget is thus bold in its attempts to reverse previous economic policies. However, the success of the budget in meeting its financial targets will, to a large extent, be contingent on availability of additional external assistance. Similarly, the supply response in agriculture to the improved incentives is likely to be weak in the absence of an increase in import capability that could finance incentive goods and agricultural inputs. 17. Tanzania has not had access to IMF facilities since December 1980, when the Government failed to meet performance targets under a previous Standby. Despite four rounds of discussions (in May, June, August, and October 1982), no agreement could be reached on a reform program. Following the announcement of devaluation and other new measures on June 14, 1934 (para. 15), the Government and the IMF have resumed discussions. Senior officials of the Ministry of Finance visited Washington in early July to elaborate upon the basis for the new measures. An IMF mission visited Tanzania in October to discuss the outline of a possible IMF program. 18. Even with a much improved export performance, Tanzania will continue to face a very difficult balance of payments situation, especially over the next three to fitie years. A halt in the decline in per capita GDP will require increasing amounts of aid in real terms and a careful review of import requirements, especially those for low-priority projects with long gestation periods and high foreign exchange costs. Otherwise the prospects would be for generally stagnant economic activity over the 1980s as a whole, with a substantial decline in per capita incomes. To avoid this situation, continued emphasis will be needed on export performance and concerted effort will be required to improve the level of capacity utiliza- tion and efficiency in the economy. Furthermore, this must be done without jeopardizing vital food production. 19. Although it may be possible to finance a small portion of the current account gap through commercial borrowings, the scope for this is clearly limited; in addition to the difficulties of raising commercial credit. during a period of balance of payments problems, Tanzania simply cantiot afford the heavy burden of debt service payments. Therefore, the bulk of the financing requirements will have to be met by additional  foreign assistance. Possible sources for this assistance include deferred payment arrangements and other concessional financing from oil-supplying countries, additional new commitments from traditional bilateral and multilateral sources, and continued movement toward non-project assistance. External Debt 20. Owing to the very concessional terms on which past aid has been given to Tanzania and the Government's previous reluctance to use higher cost commercial loans and suppliers' credits, the country's overall debt service ratios have historically been less than 10X. In recent years, there has been somewhat greater reliance on non-concessional borrowing. This borrowing, combined with falling exports, has resulted in an increase in the debt service ratio, which was estimated in 1982 to have been about 20%. The Bank Group is assisting the Government in carrying out a complete review of its external debt and improving its debt management system. Thio effort, which is still underway, has revealed that the reports on publicly guaranteed debt are incomplete and projected debt service payments may rise sharply as a number of old loans begin to fall due and coverage of the debt information improves. Unless Tanzania's poor export pe-formance is re- versed, the debt service ratio over the next several ; ars may be signifi- cantly higher than indicated above. Based on existing data, the Bank Group held 38X of Tanzania's external debt outstanding and disbursed in 1982 (IBRD 13%) and obligations to the Bank Group accounted for 14% of total debt service. PART II - BANK GROUP OPERATIONS IN TANZANIA2/ 21. Tanzania joined the Bank, the Association, and the International Finance Corporation in 1962. Beginning with an IDA credit for education in 1963, 58 IDA credits and 19 Bank loans, two of these on Third Window terms, amounting to US$1,116.5 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 10 loans totalling US$244.8 million which were extended for the development of the common services and development bank operated regionally by Tanzania, Kenya, and Uganda through their association in the former 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. Another IFC investment of US$1.7 million in soap manufac- turing in Mbeya was approved by the Executive Directors in June 1978, an investment of US$1.5 million in metal product manufacturing was approved in May 1979 and in June 1984 an investment of US$2.8 million was approved for the Amboni sisal rehabilitation project. Annex II contains summary statements of Bank loans, IDA credits, and IFC investments to Tanzania and the East African Community organizations as of September 30, 1984. 2/ Part II of this report is substantially unckanged from Part II of the Report and Recommendation of the President ror the Fourth Technical Assistance Project (Report No. P-3731-TA) of August 16, 1984.  - 8 - 22. Bank Group lending in Tanzania, ha been centered on: (i) *grk- culture; (il) transport and coi ano; () 4dustry; amd (iv) educa- tios and manpower development. Sice FY81, new Bank Group lending has been focussed primarily on the r liton d use of existing productive facilities and the itrodiuction of infrastructure and services (such as poer getion d eduation facilities) of long term use to the economy. Projects have been designed to miniie new demands on the GCverment's recurrent. developMent, and foreign exchange budgets; have been centered on already experienced or financially healthy institutions; and have been logistically insulated, as far as possible, from general supply difficulties in the economy. They have included considerable tech- nical assistance and training for better teacend use of existing capital facilities and more effective resource allocation in the economy. tending duriue FY8Z-FY85 along these lines included a second petroleum exploration project, tbird and fourth technical assistance projects (focus- sed on key manpower gaps in the agricultural sector), a rehabilita- tion project for the Dar es SaLasm sewerage system, a coal engineering project a hydroelectric power project, and the proposed port rehabilita- tion project. 23. A small number of other projects may be proposed in the agricul- tural, energy, aad transport sectors during the next three years. A sixth highway project, Involving mainly maintenance and reconstruction (particu larly sections of the Tanzania-Zambia bighway), and an agriculture rehabi- litation project are under preparation. However, the design and implemen- tation of viable projects in the productive sectors of the economy, especially agriculture and industry, will remain problematical in the absence of a wide-ranging economic adjustment program. 24. In addition to finacing specific projects, the Bank Group has provided non-project assistance on three occasions in support of Govern- ment efforts to deal with its balance of payments difficulties. The first such Credit was made in 1974. the second in 1977, and the most recent, an Export Rebabilitation Program Credit (No. 1133-TA), in April 1981. 25. Project implementation in Tanzania has been adversely affected during the last five years by the disruptions of the Uganda War and the country's extreme foreign exchange difficalties, which have resulted in shortages of fuel and building materials, even when budgetary allocations for such purchases have been adequate. External financing agencies have been increasing the share of direct and indirect foreign exchange costs covered by project budgets; however, it is impossible to cushion projects completely, particularly in remote areas, from the ramifications of the economic crisis. Bank Group disbursements grew from US$58 million in FY78 to US$115.9 million in FY82 and then declined to US$71.2 million in FY84. A comparison with other portfolios in the Eastern Africa Region indicates that Tanzanian disbursements have been about average for the Region, rang- ing as a proportion >f outstanding commitnents from 25.5% in FY78 to 21.4Z in FY84 (compared with 24.5Z and 23.0Z in the same years for the Region as a whole). 26. Supervision missions have been concerned with adapting project implementation to difficult factors facing the country or individual sectors, which were not anticipated or have proved worse than expected at  - 9 - appraisal. A major Country Implementation Review was held in Dar es Salaam in October 1982 during which Government officials and Bank Group staff agreed to recommend the restructuring or discontinuation of several projects experiencing persistent implementation problems. Intensive supervision and, in the case of the Mufindi Pulp and Paper Project (Credtt 1370-TA), tiiwly assistance from co-financiers have already had some reme- dial results. Even in the agricultural sector, where constraints on imple- wentation have been most severe, there have been improvements in some projects. However, considerable work remains to be done in improving project implementation and disbursements. The Country Implementation Review scheduled for Nay 1984, had to be deferred because of changes in the Government, but discussions were held on further rationalization of the project portfolio. The next Review is planned for Spring, 1985. PART III - THE TRANSPORT SECTOR 27. The Tanzanian transport system is small in relation to the size of the country, but is designed to connect all the main centers of economic activity. It comprises 50,000 km of roads (of which about 2,500 km are paved) and has two separate railway systems, one of which connects Dar es Salaam with the west and north, and one which connects Zambia to Dar es Salaam. There are three international seaports under the control of the Tanzania Harbours Authority (THA) of which Dar es Salaam is the most important by far, plus the separate Zanzibar ports. The transport system has considerable regional impcrtance. The Tanzania-Zambia Railway (TAZARA) and the Tan-Zam highway provide Zambia's main outlet to the sea, while the central line of the Tanzania Railways Corporation (TRC) provides the most important outlet route for Burundi, and also for eastern Zaire. About 50Z of Dar es Salaam port traffic is for Zambia, Burundi and Zaire. The main problem with the system is poor maintenance. The degree of the problem varies across sub-sectors, but the underlying causes are the same - scarcity of skilled and experienced p-ersonnel, inadequate budgetary allocations or generation of internal revenues and shortages of spare parts and materials. The main sub-sectors and Bank Group involvement in them are discussed briefly below. Highways and Trucking 28. Highway maintenance has been poor, partly due to diversion of maintenance equipment and staff to other activities during Tanzanian involvement in the war against Uganda. Since then, the ongoing Fifth Highway Project (Credit 876-TA of March, 1979) has assisted in improving the staffing situation and financing urgently required materials. This assistance, including further organizational improvements, is expected to be continued under a proposed highways rehabilitation project currently under preparation. Budget allocations for maintenance have declined in real terms in recent years, but the Government is now takivg steps to reverse the trend. In trucking, shortages of spares and tares, in turn caused by the lack of foreign exchange, have rendered the availability and utilization of equipment well below normal levels. The problem is being addressed partly by EEC assistance to rehabilitate crop authority vehicles, while the Bank Group is assisting in extending the capacities of the  - 10 - regional parastatal transport companies through the Trucking Industry Rehabilitation and Improvement Project (Credit 743-TA of November, 1977). The needs of the private sector have not yet been directly addressed but guidance is expected from a study on the efficiency of road transport financed by the Bank Group and due to commence in late FY85. Railways 29. The Tanzania Railways Corporation (TRC) provides rail services for all Tanzania except the southwest which is served by the Tanzania- Zambia Railways (TAZARA). The TRC is receiving considerable assistance from a number of sources, primarily bilateral and particularly Cnnada, which has in recent years funded equipment and technical assistance and training. Benefits from this assistance are only slowly being realized. Efficiency in TRC is still low and its financial situation is weak. The attention of TRC and the Government was focussed on this at a co-donors technical meeting initiated by the Government and held in November 1983, where the main emphasis was placed on better use of existing assets and less on the purchase of new ones. It was agreed that there was need for immediate improvements in TRC's financial situation particularly through appropriate tariff policy. These ideas were further discussed at a subsequent co-donors meeting in May 1984. Bank Group assistance is likely to be confined to a small amount of technical assistance to complement that already being provided by other donors. 30. Since comencing operations in 1976, TAZARA has been unable to handle traffic demand due to a precipitate decline in locomotive avail- ability. Provision of new locomotives (financed by the Federal Republic of Germany) has arrested and partly reversed this decline, but underlying managerial and staffing weaknesses which are even greater than in TRC, remain to be addressed. These are being studied under a Bank Group financed study which is now under review in the Bank. This recommends technical assistance and training combined with limited investment directed at addressing specific weaknesses, mainly in mechanical engineering and accounting. Ports 31. The THA administers the country's seaports of which Dar es Salaam, accounting for 90% of traffic, is the most important. The Dar port has been expanded rapidly from 3 berths in 1968 to the present 11, under the former East African Harbours Corporation (EAHC). The physical condi- tion of the berths, particularly of the never ones, is good, but the paving behind the transit sheds has been inadequately maintained. Also, the lighterage berth, which provides a safety valve when traffic demand on the main quay is high, is in poor condition. 32. The port is essentially designed for conventional general cargo operations, employing standard shore cranes with limited capacity, and with open space inadequate to handle the rapidly increasing container traffic. The important grain traffic destined for both Zambia and Tanzania is handled by an outdated and inefficient system of grab or suction discharge to open trucks. Operations are thus slow and grain loss and damage signi- ficant.  - 11 - 33. The port has handled a total of between 3.5 and 4.3 mllion tons of traffic in recent years, of which petroleum traffic was between 1.4 and 1.8 million tons. Container traffic has grown from zero in 1977 to about 200,000 tons in 1982. Total non-petroleum traffic is expected to grow quite slowly from about 2.0 million tons to 2.8 million tons by 1992, with container traffic increasing much more rapidly to 1.1 million tons. 34. Dar es Salaam port is still essentially geared to general cargo operations which has resulted in operations which are very labour intensive with the port employing about 9,300 staff of which about 6.600 (71%) are in operations. However, port productivity is at a reasonable level, and has been improving in recent years, and congestion which led to serious delays to shipping and in movement of goods out of the port in the late 1970's has largely disippeared as a result of the combination of increased containeri- zation and stagnation in total traffic volumes. Also, as a result of the general cargo nature of THA's operations, training and manpower development has not been given high priority, although a training center has been built and a limited number of courses are conducted. Summary 35. In sunmary, the main issues that need addressing urgently in the transportation sector, other than those directly covered by this proposed project are: (i) strengthening of effective sector planning, (ii) Improve- ments to the highway network through reconstruction with improved periodic and routine maintenance as necessary, (iii) rehabilitation of the trucking industry, particularly private, primarily through the provision of spare parts, and (iv) increasing the effective capacity and reducing the costs of operation of the railway system. The Government has accepted that there is a need to improve sector planning and the MCW planning unit is to be strengthened with Danish assistance. It is formally committed to pursuing a policy of encouraging public trucking but is increasingly aware of the need to assist the private sector, and in association with the Bank Group is making attempts to deal with the highway maintenance issue. Interna- tional assistance will be sought to further improve TRC and attempts are being made to improve TAZARA, although a systematic approach to the deeper rooted problems of managerial and staff weaknesses has yet to emerge. The * Bank has encouraged the strengthening of transport planning and has assis- ted in developing public sector trucking and in supporting highway mainten- ance. Previous Bank Group Lending and Strategy in the Sector 36. The general strategy of past Bank Group sector operations, parti- cularly since the breakup of the East Africa Community in 1977, has been to: (i) attempt to increase the Government's capability to deter- mine priorities within and across transport sub-sectors, both in capital investment proposals and in the distribu- tion of resources between investment and maintenance; and (ii) assist in the identification of priority investments, and support their execution through the Bank Group's lending program.  - 12 - 37. The Bank Group has assisted in financing seven projects in Tanzania concerned with roads and road transport: (a) IDA Credit 48-TA (US$14.0 million) in 1964 for construction of various road sections total- ling 860 km; supplemented by Credit 115-TA (US$3.0 million) in 1968; (b) IDA Credit 142-IA (US$15.5 million) and Bank Loan 586-TA CUS$7.0 million) supplemented by a US$7.5 million Sweiish Credit in 1969 for highway con- struction; (c) IDA Credit 265-TA (US$6.5 mUlion) in 1971 for construction of a main road in the south east and betterment of selected feeder roads; (d) IDA Credit 507-TA (US$10.2 million) in 1974 for improving the mainten- ance of primary roads and for carrying out a study of the road transport industry; (e) IDA Credit 743-TA (US$15.0 million) in 1977 for a trucking industry rehabilitation and improvement project, a-rising out of a road transport industry study under the previous project; (f) IDA Credit 876-TA (US$20.5 million) in M-.rch 1979 for impro"ing the matenance of trunk roads and f-r initiating a pilot program for regional road maintenance; and (g) IDA Export Rehabilitation Credit 1133-TA (US$50.0 million) in 1981 which provided inter alia, for the procurement of spare parts and tires for the trucks owned by parastatal companies transporting export crops. The first four hfghway projects have been completed with limited success in the achievement of project objectives. The Bank Andit Reports note on the first three that the physical targets were mostly achieved in that the civil works components were completed although, in the case of the third project, rather late and at considerably increased costs, adversely affecting the economic rate of return. Furthermore, institutional development and training of staff were unsuccessful because the lighway mantenance units which were developed and trained were discontinued. Attention is now increasingly directed to ensuring continuity and ongoing training. 38. The Bank has also participated in the development of railways