Tanzania - Investment Bank Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7744 PROJECT PRFORMANCE AUDIT REPORT TANZANIA TANZANIA INVESTMENT BANK (TIB) (LOANS 1172, 1498 AND 1750-TA) AND I TANGANYTA DEVELOPMENT FINANCE COMPANY LTD. (TDFL) (LOAN 1745-TA) MAY 4, 1989 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ACRONYMS ADS - African Development Bank BOT - Bank of tknxania CDC - Comonealth Development. Corporation CIDA - Canadian International Development Agency DEG - Deutsche Entvicklungagesellachaft (German Finance Company for Investments in Developing Countries EADB - East African Development Bank EEC - European Economic Comanit$7 EIB - European Investment Bank ERP - Economic Recovery Program FMO - Nederlandse Financierings Maatschappij Voor Ohtvikkelingsladen N_V. (Netherlands Finanee Company for Developing Countries) KfW Kreditanstalt fer Wiederaufbau -NBC - National Bank of Commerce NDC - National Development Corporation NIC - National Insurance Company NORAD - Norwegian Agency for Development PCR - Project Completion Report PPAM - Project Performance Audit Memorandum PPAR - Project Performance Audit Report PR - President's Report SAR - Staff Appraisal Report SIDA - Swedish International 'evelopment Agency TDFL - Tanzania Development Finnce Company Ltd. TIB - Tanzania Investment Bank CURRN'Y EQUIVALENTS Currency Unit = Tanzanian Shilling (T Sh) = 100 cents 1978: 1US$ W T Sh 7.7 1979: 1US$ T Sh 8.1 1980: 1US$ = T Sh 8.2 1981: 1US$ T Sh 8.3 1982s 1US$ - T Sh 9.3 1983: 1US$ T Sh 1i.1 1984: 1US$ = T Sh 15.3 1985: 1US$ T Sh 17.5 1986: 1US$ T Sh 32.7 1987: 1US$ T Sh 64.3 1988: 1US$ a T Sh 120.0 FISCAL YEAR TDFL: January 1 - December 31 TIB: July 1 - June 30 FO *1SIAL E ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A Oke at 0secto4nel Opealsons Evauh May 4, 1989 DOMANDUHM TO THE EECUTIVE DIRECTORS AND THE PRESIDENT SUBJECTs Project Performance Audit Report on Tanzania Tanzania Investment Bank (TIB) (Loans 1172, 1498 and 1750-TA) and Tanganyika Development Finance Campany Ltd. (TDFL Loan 1745-TA) Attached, for information, is a copy of a report enitled 'Project Performance Audit Report on Tanzania - Tanzania Investment Bank (TIB) (Loans 1172, 1498 and 1750-TA) and Tanganyika Development Finance Company Ltd. (TDFL) (Loan 1745-TA)* prepared by the Operations Evaluation Department. Attachment This document has a estricted distribution and may be Used by socipients only in the perfortmance of their ofciol duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY ROJECT PEmORmANCE AUDIT -ERT TANZANIA ANZANIA IV1EIENT BANK (TI) (LOANS 1172. 1498 AND 1750-TA) AND TANGANMIA DEVELOIMNT FINANCE CGMPANT LTD. (TDFL) (LOAN 1745-TA) T AB. OF COTTs Page No. BASI~ DATA SHEETS .*...............................*......... 1ii EVALUKTION Sm~fAR .................................... Ix PROJECT PERIORANCE A1ODIT HDfANil I. 3ACGROUND ................ ............ 1 The Industrial Setting ........ ............... ........ 1 Objéötlveg ....................,. 4 II. PROGESS IN KMTING OBJECTVES ........................... 5 TID ................... .. .... ........... 5 Institutional Development .................. .. ..... 5 Sectoral Contribution ................................ 6 Tl ...4....0 .... .....9........... ... ....*............ 8 Institution Building and Sectoral Impact ............. 8 II. OPERATIONAL AND FINANCIAL PERFORMANCE .................... 9 TID .............. ...... ... ......... . ...... ....... 9 Operations ........... ......................... 9 Utilisation of Bank Funds ................-............ 9 Financial Condition ............ ....... . ...... 10 TDF ......... . .. . ........ .. .. ........9......... .1 Operations ........ . ........... . ...... * ...... ...... 11 Utiliaation of Bank Funds .................. . ......... 12 Financial Condition ................................. 12 IV. FINDINGS AND ISSUES ...................................... 13 Bank Performance ......................................... 13 Upact of Bank's Association ......................... 16 Overall Assessment .................. . ... * ... ......... 17 Outstanding Issues Requiring Initiatives by Tanzanian Authorities ............... ................... 18 Lessons of Experience and Recowendations ......,....... 20 This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwis be discsed without World Rank authoriation. TABLE OF CONTENTS (cont'd) Pae No. ATTarsonmTS 1. Problems Affecting Industryt Bottlenecka, Causes and Policy Igsues ........................... 25 2. TIB s Analysis of Approvals (Loene and Zquity) .............. 26 3. TIS t Lending and Equity Operations 1974-1987 ............... 27 4. TIB i Position of Operations Financed by Agency and Special Pands (at of September 30, 1987) ............ 28 5. TIB : Balance Sheets 1980-1987 .............................. 29 6. TIB : Income Statements 1980-1987 ........................... 30 7. TIS : Financial Ratios 1980-1987 ............................ 31 8. TDFL: Lending and Equity Operations 1979-1984 ............... 32 9. TDFL: Balance Sheets 1979-1987 ........................... 33 10. TDPL: Incowe Statements 1979-1987 ........................... 34 11. TDPL: Financial Ratios 1979-1987 ............................ 35 12. TDFL: Sources and Uses of Funds 1979-1987 ................... 36 13. TDFL: Analysis of Arrears 1979-1987 .......................,. 37 14. TDFL: Portfolio Analysis .................................... 38 15. TDYL: Collection Performuance 1982-1987 ...................... 39 PROJECT C LETION REPORT (TANZANIA IVESTMT BANK) I. INTRODUCTION ............................................ 43 Background ......................... 43 Project Objectives and World Bank Role ................. 45 II. MACROECONOMIC, INDUSTRIAL AND FIRANCIAL SETTING .......... 46 Background ............................................. 46 The Industrial Sector ................................. 47 The Financial Sector ................................... 49 III. INSTITUTIONAL PERFORMANCE ............................... 51 Developments During Implementation and Present Status .. 52 Procedures ............................................. 53 IV. ALLOCATION OP THE LOANS .................................. 55 V. OPERATIONAL AND FINANCIAL PERFORMANCE .................... 56 Operations ............................................. 56 Portfollo ........................... ....... 57 Loans .................................................. 58 Equity Investments .................... ................ 59 Financial Performance and Condition .................... 59 VI* CONCLUSIONS .. ....................................... 60 TABLE OF CONTENTS (contd) Page No. PCR ANNRaS 1. Schedule of Cumulative Bank Disbursesents for Loan 1172-TA, Loan 1498-TA and Loan 1750-TA ............. 63 2. (1) Subprojects Financed Under Loan 1172-TA ................... 64 (2) Subprojects Financed Under Loan 1498-T& ................... 65 (3) Subprojects Financed Under Loan 1750-Th ................... 66 3. (1) Financial Characteristics of Subprojects Financed Under Loan No. 1172-TA ................................. 67 (2) Financial Characteristics of Subprojects Financed Under Loan No. 1498-TA .............................. 68 (3) Financial Characteristics of Subprojects Financed Under Loan No. 1750-TA .................................. 69 4. (1) Economic Characteristics of Subprojects Financed Under Loan 1172-TA .................................. 70 (2) Economic Characteristics of Subprojects Financed Under Loan 1498-TA ......... ....... ................... 71 (3) Economic Characteristics of Subprojects Financed Under Loan 1750-TA ....................................... 72 5. Summary Description and Present Status of Selected Subprojects Financed Under Loans 1172-TA, 1498-TA and 1750-TA *...... ............... .......... 73 6. Analysis of Approvals (Loans and Equity) .................. 77 7. A Comparison of Actual and Forecast Operations 1980-1986 ..................... ....* ......... ..... 78 8. Schedule of Arrears Over 3 Months ......................... 79 9. Analysis of Equit. nvestments as at June 30, 1987 ........ 80 10. Projected and Actual Income Statement (1980-1986) ......... 81 11. Comparison of Projected and Actual Balance Sheets (1980-1988) ..............,,.............................. 82 12. Projected and Actual Sources and Uses of Funds (1980-1986) .............................. ............... 83 13. Projected and Actual Financial Ratios 1980-1986 ........... 84 PROJECT COMPLETION REPORT (TANGANTIEA DBVELOMHINT FINANCE COMAPNT LTD.) I. INTRODUCTION .o............................ 87 Project Background ...................................... 87 Project Objectives and World Bank Group Role ........... 88 II. MACROECONOMIC, INDUSTRIAL AND FINANCIAL OBJECTIVES ....... 89 Background ............ ....................... 89 The Industrial Sector ......... . ........... 90 The Financial Sector ....................... . 91 TABLE OF CONTENTS (cont'd) Page No. PCR (cont'd) III. INSTITUTIONAL PEFORMANCE .................. 93 Developments During Project Implementation and Present Status .............................. 94 Statt Training ........................ 94 Procedures ....................... 94 IV. ALLOCATION OF Tn LOAN .................................. 95 V. OPEVATIONAL AND FINANCIAL PERFORMANCE .................... 96 operations .......... o................................... 96 Financial Performance and Condition .................... 99 VI. CONCLUSIONS .................0.. ...... ...*........... 100 PCR AWRRWRR 1. Schedule of Cumulative Bank Disbursements .................... 103 2. List of Subprojects Financed Under Loan 1745-TA .............. 104 3. Financial Characteristics of Subprojects Financed Under Loan No. 1745-TA ..................... *.*......*..... 105 4. Economic Characteristics of Subprojects Financed Under Loan No. 1745-TA ..... ... ....... ...... ..... . 106 5. Summary Description and Present Status of Selected Subprojects Financed Under Loan 1745-TA .................... 107 6. Analysis of Approvals (Equity, Income Notes and Loans) ....... 110 7. A Comparison of Actual and Forecast Operations (1979-1984) ... 111 8. Schedule of Arrears Over 3 Months ............................ 112 9. Analysis of Arrears (1983-1984) .............................. 113 10. Projected and Actual Income Statement 1979-1984 .............. 114 11. Comparison of Projected and Actual Balance Sheetu (1979-1984) ................................................ 115 12. Projected and Actual Sources and Uses of Funds 1979-1984 ..... 116 13. Projected and Actual Financial Ratios 1979-1984 .............. 117 APPENDICBS 1. Comments Received from the Borrower - Ministry of Industries and Trade ...... 119 2. Comments Received from the Borrower - TIB .................... 127 3. Commen-Ls Received from the Borrower - TDFL ................... 141 PROJECT PERFORMANCE AUDIT REPORT TANZANIA INVESTMENT BAm (TIB) (LOANS 1172, 1498 AND 1750-TA) AND TANGANYIYA DEVELOPMENT FINANCE COMPANY LTD. (TDFL) (LOAN 1745-TA) This is a performance audit on the second, third and fourth loans to the Tanzania Investment Bank (TIB).1 and the first loan to Tanganyika Development Finance Company Ltd. (TDFL). Loan li72 to TIB for US$15 million was approved nA-October 1973 and was closed in December 1481, one year after the original date; loan 1498 also -for US$15 million was approved in December 1977 and was closed in June 1983 on schedule; and loan 1750 for US$25 million was approved in July 1979 and was closed in June 1986, two years behind schedule. The loan to TDPL was approved in June 1979 and wav closed in December 1984, one year after the original date. A total of US$2.4 million of the loans to TIB and US$0.8 million to TDPL were cancelled. Because of the economic conditions of the country which have affected the financial situation of the institutions, and pending the development and implementation of action programs to restructure and rationalize the manufacturing sector, there has been no frrther lending to these institutions. The PPAR consists of the Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and the Project Completion Reports (PCR) for TIB and TDFL prepared by the Africa Regional Office of the Bank, based on statistical information supplied by the financial intermediaries. The PPAM is based on the attached PCRs, Staff Appraisal and the President's Reports, sector and economic reports, OED's forthcoming study *The World Bank and Tanzanias Review of a Relationship' (chapter on Tanzania's Industrialization Effort 1961-87), the loan documents, summaries of the Board discussions, study of the project files and discussions with Sank staff. An OED mission visited Tanzania in March 1988 and discussed the affectiveness of the Bank's assistance with TIB and TDFL. Government officials, and representatives of the banking and business community. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. 11 The first credit to TIS in the amount of US$0 million, approved in February 1974, was audited in 1981. See OND, PPAR No. 3881, Tanzania - Tanzania Investment Bank (TIB) I (Cr. 460-TA), March 30, 1982. The PCRs ably discuss the project experience with regard to implementation, operatiop;s, financial performance and utilization of the Bank's funds, elaborate on the financial condition of TIB and TDFL, and comment on the Bank's role. The PPAM examines in some depth the functions and the role of these financial intermediaries within the framework of the country's industrial strategy and policies, the success or failure in discharging their functions, the rationale for the Bank's involvement, the quality of the Bank's appraisal work and effectiveness of supervision effort, the Bank's influence on the institutions' decision-making process and lending pattern, the impact of the policy environment on subprojecL performance, the deep-seated portfolio problems of the DFCs, and the fundamental conditions for institutional sustainability. The PPAM then draws the lessons from the project experience, suggests specific macro- and micro-economic actions to help rectify the situation, and makes recommendations for potentially more effective courses of action to foster the development of sustainable financial intermediaries. Copies of the draft PPAR were sent to the Government, the Coi-ral Bank, and the financial intermediaries involved. Responses fr*m the Ministry of Industries and Trade, TIB and TDFL are reproduced as Appendices to the PPAR. PROJECT PERFORMANCE AUDIT REPORT TANZANIA TANZANIA INVESTNENT BANK (TIS) (LOANS 1172. 1498 AND 1750-TA) BASIC DATA SEET LIAN POSII. <Amunte In US* Mil.ot) Ae of February 28. 1989 Orilal Olebu~d Caei ed-id L~nd1U Lesn 1172-TA 16.0 14.8' 0.4 14.8 0.0 Lesn 14W-TA 15.0 13.9 1.1 18.4 0.5 Loon 1760-TA 25.0 24.1 0.9 18.8 6.8 CUIIJLATIVE ESTIMATD Alm AC-TUAL DIUSEMENTS (Lean 1172) FY78 Y? FY7S FM7 FY8O FYS1 rFY82 Appraisal ME1e (U<18) 0.2 2.0 0.6 11.9 14.0 15.0 15.0 Actu s <108 M> 1.6 6.0 10.6 18.2 18.4 14.1 14.8 A~el se 9 of Apprlsa* 1) 750a g 001 1601 110 90 94% 97% 0ate of Final Olebreoe: mavet 30, 192 (Lean 1498) FYO FS YSI FYQ2 FYMS FYS4 Appr*laal £Eimate (Un MJ 1.3 6.2 10.6 14.8 16.0 16.0 Actual (U~8 m) 4.7 10.2 13.2 18.4 18.8 13.9 Abl s I of App8ele (1) 8701 2001 122 94% 92 981 0Ste of Pinal Fesbureon6: Augus 22, 198 (Loa. 1750) ag_0 FT81 FM FU Yf FYSS FY88 _ Appralsel Estlmte (Us m) 0.2 2.2 8.0 17.0 26.0 26.0 25.0 Acual (UM3 M) - 1.8 9.4 18.8 20.1 22.7 24.1 Ae6lal os 5 of Apprsleal (9) - 82 118% 1081 80 91 9a Dato of Final Dløburoeæmnt: .oury 9, 1987 Appreteel 0s/80/78 1o/0s/7s Beerd Approval 10/83/71 10/23/78 L*e An er~amn n/18/7s n/i2ps EffeeIveness o2/8o/7 02/20/76 Complotion f C"Meet 12/80p7 08/8/78 L.an CIosInø 12/M1/M 12/81/91 &osa 148s) Orlalnal RevIedfActual Apprelsal 04/10/77 11/21/77 soard Approval 12/0s/77 12/0s/77 LeO Agreent 11/ne/ 12/29/77 Efftlvness 04/»8/7 04/08/7 Compten et Comitt.nto 18/81/80 1/81/80 L.on CIesIng 8//88 s/80/8* (Len 17so original RevlmedfActual ApproIfel 1atsops 06/22/79 8e4 Approvl 07/24/79 07'4/7 Loen Agement 08/20/7» 08/20/79 Eff~ctveene 02/0/80 02/0s/80 Cowltoloo o celtmne 06/aO/s os/so/a Len ClosIng 0/80/4 0/80/8s STAFF WUT (staff seeks) (Loan_1172) æ.4 FY75 RY76 FM? Ff719 FMT MO8 MOAI FfM ~FM FYS4 FYU FM8 FU7l Tota PreapproaSl - e.g - - - - - - - - - - - - 5.s Apprasl - 9.0 17.8 - - - - - - - - - - - 26.8 Nego6lations 0.1 - 2.1 - - - - - - - - - - - 2.2 supervlelen - - 18.2 5.0 8.1 1.5 0.1 0.1 - 0.1 0.7 - - 0.8 29.6 other :- -_ 14 g _L _-_ .:. g . - - - - 1 7 To6l 0.1 14.8 84.5 5.1 8.2 1.5 0.1 0.1 0.1 0.1 0.7 - - 0.8 5.8 (staff weeke) FI4 FMlZ f7t FM. FY79 YU E R F. FM EY - "M a*7.go Pr oeppr.lsal - - 0.4 0.7 0.4 - - - - - - - - - 1.5 Approsal 0.5 - - 22.4 6.8 - - - - - - - - - 28.2 legotløte - - - - 9.0 - - - - - - - - - 9.0 suurwlen -- - - - 8.0 4.* 1.8 - - 0.1 0.4 0.1 12.6 1.7 29.6 Dthr .-; ; -, . 22 K- -- -;--. -. z- .---; -.- To~al 0.5 - 0.4 28.8 24.2 4.s 1.6 - - 0.1 0.4 0.1 12.6 1.7 70.1 aL~e 17=0 FYS FY79 fY8 F!YI f! FY FM E affPE Total Prp4a0lo0 1.8 0.7 1.1 - - - - - - - 8.6 Approlssl - 1S.4 - - - - - - - - 18.4 [ Ngotlatltio - 4.6 1.5 - - - - - - - - 6.1 suporvlelen - - 14.0 18.4 8.0 8.8 4.4 9.8 10.4 8.4 67.8 06hr --;. .-7 ..;_ -= - Sa-. 2-8 .:-. - ' :;- -LA1 Total 1.6 1.4 17.2 18.4 8.0 g.J 4.5 8.8 10.4 8.4 98.5 MIss~N DATA no. of I. øf Soff D4 øf tienthlYear gegg M epr Appealsal (Ln. 1172) 0/7 8.0 8 0.0 10/s sprvlel 1 06/76 2.s 2 .0 0s/76 Suprvilston 1 r/Appealsl (La. 1498) 04M L. 8 7. u1/77 supervletn II es/s 8.0 8 9.0 /78 Supervlloen IV/AppaLsal ca. 1760) 1/78 2.5 2 5.0 04/79 supervale V 1"/7 2.6 1 2.s 02/0 supervtsloe VI 08/81 2: 2 4.0 04/S1 Supervlln VII 09/61 2.0 8 6.0 10/81 supor"talon VIII 09/2 1.5 1 8.0 11/82 supervIslen IX UM1s 2.0 1 2.0 0/84 SuprvlIele X 11/84 1.0 1 1.0 12/84 supervmlln XI 02/86 1.0 1 1.0 08/8 cofpftle 09/87 8.0 1 8.0 02/88 01HER PROJECT DATA Borroer: Gooernnt of Tlzaia Excutltg Agecy: Tønni Investe Bnk (TIB) Fo los-on Projet.: -vil. PROJECT PEM SANCE AUDIT REPORT TANZANIA TANGANYIMA DEVLOP~hNT FINANCE COMPANY LTD. (TDFL) (LOAN 1745-TA) BASIC DATA SEET (Am~un"s le UU Mil l 1i> As of Febuary 28. 1989 ,isnaiu Disbu d c*afflt. sE~d g~ ian Lean 1745-TA 11.0 10.2 0.8 7.6 2.7 CULATIVE ESTIMATED AI ACTUAL DISMMSSEMBITS FYGI FMS FY89 FMS FMS Approsa Eeita~ (USS M) 4.8 8.0 10.5 11.0 11.0 Actual (US* ir 8.7 8.0 8.2 9.9 10.2 Acual as 1o Approsal (5) 80 765 765 905 2 Det. of Flal 01*urømwn: May 8, 1885 PROJECT DATES orleal ReIsed]A~øual Board Approva 08/28/79 0/28/79 Le~n Agre~men6 07/27/79 02/27/79 Effee6 eness 11/01/78 11/01/79 Completlo of Co=itm~nt 12/81/81 12/*1/81 Le Cing 12/81/88 12/81/84 S7AFP DPUT (s~aff ws~) FY74 FY7S FY78 FMf Fl$ FY79 PY8O FYG1 FM5 ff FYG4 f5fi FYM ! Fg7Toto Preparation 1.8 8.2 0.8 - 0.1 2.1 - - - - - - - - 8.0 Appra~sal - - - - - 12.4 - - - - - - - - 12.4 NHeolatlonm - - - - - 8.9 - - - - - - - - 8.9 Supervll -. - - -Z 184 14 1.4 .2 6.9 .7 27 8.. 88.7 TOal 1.8 8.2 0.1 - 0.1 18.4 18.4 1.4 1.9 .2 6.9 8.7 0.7 8.5 61.0 monthyr para Iisøke R~r' Appralsi 11/78 2.0 2 4.0 08/79 Suporvislon I 11/79 1.4 1 1.4 11/70 Supervislon II L 07/M0 1.8 2 8.2 11/80 SupervIslon III 12/01 1.7 1 1.7 12/81 Supervlelon IV 0/U2 1.4 2 2.0 11/02 Superviølon V 11/08 1.4 1 1.4 01/14 Supervleléw VI 11/4 0.8 1 0.0 01/8 Complatlon 02/86 0.0 1 0.0 12/80 OlTimt PROJECT DATA Dorrower: Govaen of Tanzania Execu~ing Agncy: Tanganylka Develop~en6 Finane Company Ltd. (TDFL) Foilow-on Prolecta: None A TDFL wa appraled for o seond Bank lean In July 1080; processing of the loan was pos~poned IndsfInItely pending resolutlon of an Impa~e betwen the Government and the IW regarding macrooconomle polley lseoe and a struc~ral adjustmsn6 program. PROJECT PURORUANCE AUDIT RIPORT TANZANIA TANZANIA INVSTHENT BANK (TIB) (LOANS 1172, 1498 AND 1750-TA) AND TANGANYIMA DEVELOPMENT FINANCE COMPANT LTD. (TDFL) (LOAN 1745-TA) EVALUATION SUIMARY Introduction I. A centrally directed strategy of Industrial development was adopted by Tanzania's political leadership during the late 1960s to advance the objectives of self-reliance, economic growth and ittuctural transformation. The Government firmly believed that a strategy promoting resource-based, producer goods industries that would cater to basic needs, dubbed as the basic industry strategy, coupled with extensive state involvement in the economy, could accelerate growth and achieve a mote equitable socio-economic development. The Bank originally endorsed this approach to industrial development, and even became its staunch supporter th%oughout the 1970s (PPAM, paras. 1-7). ObJectives ii. TIB's establishment in 1970 aimed at channelling all public Indus- trial.investment through a single state-owned banking institution, thereby ensuring adequate vetting of projects, independent judgment on the technical, financial, and economic merits of the projects submitted for financing, and appropriate design of financing packages. In supporting TIB, the Bank sought to strengthen the institution to enable it to diva charge successfully this function, particularly in such dimensions as project analysis, policies, procedures, management information systems, to transfer resources for investments within the framework of the basic industry strategy, and to build up TIB's capacity to extend technical assistance to project sponsors (PPAM, para. 8). iii. TDFL was established in 1962 under the joint sponsorship of CDC and DEG, with PMO joining in 1965 and EIB more recently. TIB is a minority (242) shareholder. TDFL supports primarily privately owned manufacturing enterprises (70%). In associating with TDFL, the Bank aimed at increasing TDFL's effectiveness in resource allocation by providing policy, institutional and operational advice, and at transferring resources in support of medium sized private enterprises catering to basic needs (PPAM, parn. 8). Implementation Experience iv. The implementat2on of all operations in-solving both institutions has been satisfactory, as Institution building aspects and issues pertaining to financial and lending policies had been resolved during appraisal and negotiations. However, TD1L complied only partially with a covenant to use the economic rate of return criterion in project appraisals, and with a long delay to a deadline to prepare an operations manual (PPAM, para. 14; PCR - TDL, para. 1.06). Results v. Durirg the critical period of the 1970s., TIB was Involved only in some 202 of fie new industrial investments having been adroitly by-passed by investing parastatals which arranged tweir own financing with external sources. In many instances, projects were presented to TIB iNt a very late stage of preparation, or even after the Government had comitted funds and equipment had been ordered, when rejection was not possible and changes in scope were difficult to make. Quite a few projects were also financed at the Government's behest and risk without adequate vetting. Furthermore, as achieving a high level of Investment has been a major element in Tanzania's industrialization effort, and since its board has been dominated by high ranking government officials, TIB was not entirely immune from institutional pressures in its decision-making process. Such practices defeated the most important purpose of TIB's institution, namely the exer- cise of an independent quality control function over project investment decisions (PPAM, para. 11). vi. Both intermediaries have made commendable efforts to build up their organizational structures and appraisallsupervision capability; nevertheless, their technico-economic capacity has not been developed at the requisite level. During the investment spree of the 1970s, both TIB and TDFL did not pay enough attention to design and issues affecting the longer-term viability of subprojects (e.g., technology, market size, scale economies, management capability, capital structure, import dependence. export potential) as well as to mounting constraints (e.g., prospective foreign exchange availability, irregular flow of domestic raw materials, wanting infrastructure). Cost and demand projections tended to be over- optimistic, as were implementation schedules. The potential impact of cost overruns, delays in implementation, and different product prices were not tested by sensitivity analysis. Apparently, subprojects were not subjected to the critical review they warranted at the successive management review levels. On occasion, projects sponsored by parastatals were approved prematurely and without sufficient investigation regarding availability of financial resources and implementation capability. Appropriate feedback mechanisms were not developed to ensure that the lessons from earlier operations were taken into account in appraisals of new projects. As a result, the institutions" impact on project selection and design and, by extension, on the pattern of industrial Investment in the sector, has been substantially attenuated (PPAM, paras. 9-14, 25). - xi vii. In both institutions, approvals, comnatments and disbursements in real terms peaked in 1979 and declined precipitously during the 1980s, reflecting the deterioration of economic conditions, lack of bankable projects, and the drying up of external resources. Virtually all sub- projects that were supported were import substituting -- which is not surprising given the thin domestic production base -- but most were alac heavily import dependent and few domestic resource based (PPM, paras. 15, 18). About three-quarters of TIB's aubprojects and over one-quarter of TDFL's involve parastatals, whose performance has been particularly weak. Both institutions find it extremely difficult to collect due to the weak financial position of most clients, affected by the poor state of the economy, the excessive and inefficient controls over economic activities, deficient project design, cost overruns, poor management, inadequate main- tenance, technical, local resource and infrastructural problems, and mounting indebtedness due to successive and dramatic devaluations (PPAM, paras. 17, 20). The performance of the subprojects financed by the Bank through both intermediaries has also been disappointing, and their sustain- ability remains uncertain (PPAH, paras. 16, 19). Sustainability viii. Though marginally profitable on paper, TIB's financial position is not sound, since almost three-quarters of its portfolio is affected by arrears as a result of poor subproject performance. Quite a few projects in its portfolio are under liquidation and, in view of the severe structural, management and liquioity problems faced by most client para- statals, TIB's financial condition can be ascertained only after a full assessment of their true financial situation and prospects. The institu- tion is in urgent need to rehabilitate its portfolio, and TIB's sustain- ability as an institution therefore remains uncertain. But this would require, inter alia, weeding out unviable parastatals, resolving the issue of the denominated in foreign currencIes debt, financial restructuring, employing expatriate managemenz to man key positions on a long term basis, ensuring access to working capital, resolving pressing industrial, trade, and financial policy issues, and assuring operational independence -- a tall order requiring tough political decisions and a substantial amount of technical capacity and financial resources. TDFL's situation is not very different. TDFL's profitability has been negative since the early 1980s, over three-quarters of its portfolio is affected by arrears, while its collections have not kept pace with the mounting arrears. TDFL faces the same set of difficult issues as TIB, namely rehabilitation of its port- folio, improving the operating efficiency of its potentially viable clients, and restoration of its own financial viability. TDFL's sustain- ability is also uncertain and conditioned on the viability of its clients (PPAM, paras. 17, 20). Findings and Lessons ix. Although TIB is state owned and TDFL privately controlled, their performance has been equally poor and the net outcome well below what could - X11, - have been possibly achieved. Conceptually, support to TIB and TDFL satis- fied the Bank's policy directives to assist specialized institutions and, on these grounds, it would be difficult to fault its initial involvement. However, the uncritical endorsement of an industrialization strategy with demanding requirements upon an emerging nation (PPAM, para. 2), and the continued support of TIB after the development of an environment fraught with difficulties affecting both sub-borrowers and the institution itself is more difficult to rationalize. Evidently. Bank missions did not detect early on the impact of the distortions of broader policies, as well as of the operational problems of parastatals, on the performance both of the intermediaries and their sub-borrowers (PPAM, paras. 21-23, 25, 26). X. Progress in institutional development has been marginal, as both institutions have hardly been able to develop to the desired level the capacity for hard-nosed appraisals. Emphasis on expanding industrial financing without adequate regard to subproject viability and financial prudence, inadequate project vetting and approval processes, passing sub- project review by the Bank, and the acute systemic distortions have eroded both institutions' effectiveness in resource allocation. Although top management in both institutions was knowledgeable and experienced and had developed a core of capable staff, their efforts to steer their respective institutions on the right course during these difficult times have been frustrated in a large measure by compelling environmental factors, the policy framework in particular. Indeed, the fact that TIB and TDPL operated in a difficult environment has affected dramatically their perfor- mance and sectoral contribution. Furthermore, TIB and TDFL (as well as the Bank for that matter) have not been able to pursue effectively policy issues which affected their sub-borrowers' performance and undermined their own viability, nor have they been able to exercise fully their potential influence on project formulation and the operating efficiency of para- statals (PPAM, para. 25). xi. Considering the original obectives and expectations, the actual achievements by TIB and TDFL to date, their present financial impasse, unsettled prospects, and uncertain sustainability, it transpires that the Bank's objectives largely were not met during its long association with TIB and TDFL, their contribution to improving investment allocation has been marginal at best, and the projects under review cannot be viewed as suc- cessful, albeit to some extent for reasons beyond the institutions' control (PrAM, paras. 24-26). Important issues requiring the attention of the Tanzanian authorities to help restore the financial health of the inter- mediaries remain unresolved (see PPAM, paras. 27-30 and summary in para. viii above). xii. Bank appraisals were overly upbeat and reassuring, and the supervision effort insufficient. It turns out, that TIB's capacity to select economically justified and financially viable projects has been overstated. Bank appraisal and supervision missions did not question early on TIB's pattern of appraisals and depth of economic analysis, in particu- lar market analysis, sourcing of inputs, and the assumptions underlying - xiii - calculations of economic rates of return, did not address the issue of working capital availability, and did not appreciate fully the impact of poor project conception, competent enterprise management, and economic policies and conditions on subproject performance. Missions apparently did not discern early on the full extent of the problems faced by the DFCs' clients as a result of the deteriorating economic situation in the 1970s. Consequently, the Bank was not circumspect enough in its subproject review and subprojects were approved which later on proved financially and economically unviable. The Bank (and other multilateral and bilateral creditors) were late in attempting to sensitize the intermediaries on the need to reorient their lending policies and operations to reflect the changing economic conditions. xiii. DFC operations in Tanzania did Lot address policy and strategy questions, as such matters were thought of as best be taken up in the context of the macroeconomic dialogue. But the dialogue during the concep- tion, preparation and disbursement of the loans to TIB and TDFL appears to have been rather ineffective -- in contrast to the more constructive macro- economic dialogue in recent years, where the Bank and the Government are working jointly to develop action programs to rationalize the industrial sector. Nevertheless, macroeconomic conditions and policies, as well as the degree of independence of the financial intermediaries, have had an overwhelming impact on the success or failure of subprojects. In retro- spect, it emerges that follow-on operations to TIB were launched rather hastily, and without adequate regard for the deep-seated problems impacting on subproject performance and TIB's limited capacity to influence i a positive way investment allocation, perhaps in response to institutional pressures for much needed resource transfers (PPAM, paras. 7, 21-23, 26). xiv. The lessons of the Bank's experience, which affirm lessons drawn earlier from other DFC operations, as well as specific recommendations are detailed in PPAM, paras. 31-40 and summarized below. The experience in Tanzania reaffirms that a project is unlikely to succeed in an unconducive policy environment and economic milieu. This raises the question whether the Bank should be lending to sectors (or at all) if conditions are unin- viting, it is unable to exercise any influence, and project implementation and sustainability are likely to be impaired. Lending under such circum- stances would hardly be consonant with prudent banking policies and respon- sible development assistance (PPAM, para. 32). xv. Political and social circumstances, cultural differences, and societal characteristics rather than the form of ownership per se appear to impact more forcefully on, and can explain more convincingly, the observed variations in institutional structure. development, management style, and financial performance of DECs. In view of the difficulties faced by state- controlled DFCs in many countries, their ro'.e and potential needs to be re- evaluated, and privatization as an alternative may have to be considered as an alternative (albeit not necessarily facile) in cases where state owner- ship turns out to be an unworkable option. However, whether private or - xiv - public, no financial intermediary can reasonably be expected to perform efficiently in a hostile policy and economic milieu (PPM, paras. 33, 34). Where public ownership is deemed serviceable, to preserve the independence of the DFC, it is important that definitive rules be established regarding the relationship between state-controlled financial intermediaries and the government authorities concerned, assuring them of a degree of autonomy sufficient to anable them to discharge effectively their functions, subject to a system of ex-post accountability based on well and a priori defined and monitorable criteria to assess their performance (PPAM, paras. 33-35). xvi. in connection with the operations of financial intermediaries, the evidence suggests the need for improving their appraisal and supervision capacity by focussing on fundamentals, e.g., by reviewing more carefully technical designs and capital structures, placing greater emphasis on policy parameters, demandisupply developments, the sourcing of inputs and the prospective availability of foreign exchange, developing feedback mechanisms, paying more than lip service to establishing the economic merit of subprojects by calculating thoughtfully and systematically economic rates of return, undertaking sensitivity analysis and risk assessment, devising realistic financing plans, and ensuring that sponsors have the management capability to set up and operate the project. Institution of a comprehensive and uniform data collection system, effective follow-up procedures, particularly for subproject post-implementation performance, and determined collection efforts are essential to keep arrears within acceptable levels. Also, action should be Laken early on to identify client problems and work out solutions, including provision of technical assistance (PPAM, paras. 36, 40). Finally, the Bank has been lax in dealing with the mechanical calculation of economic rates of return, and its own faith and commitment to compliance with this facet of subproject appraisal in DFC operations needs to be reaffirmed, along with parallel efforts to dislodge macroeconomic and sectoral policy distortions in the course of its economic and sector dialogue (PPAM, para. 40). xvii. With respect to conceptualization and design of DFC operations, experience points to the importance of sector work preceding project preparation, to the need for understanding political realities, attitudes and, more generally, of the way decisions are taken and implemented in a particular environment, and to the expediency of linking project financing to actions already taken, rather than mere assurances of initiatives, and delaying lending until there is convincing evidence of sustainable progress in the implementation of agreed upon action programs. Yielding to pres- sures to meet lending targets may well jeopardize the success of the project. Collection of facts and fortitude in presenting them in undiluted form, including a discerning risk assessment, to the Regional Management can prevent the Bank's involvement in unsustainable projects (PPAM, paras. 37, 38). ,viii. With regard to the Bank's appraisal and supervision work, appraisals should be transparent and pay greater attention to policy issues, the economic milieu, and emerging trends, since the subprojects to - xv - be supported by the DFC are unlikely to succeed in an uninviting environ- ment. Bank appraisals should analyse more carefully the prospective demand for investible funds and ground DFC lending on a fairly concrete project pipeline. The Bank should be more circumspect in the review and approval of subproject appraisals, should insist on frequent in-depth reviews of a DFC's portfolio either by competent external auditors or its own missions, and ensure continuity of the staff assigned for the supervision of a particular DFC operation. Furthermore, since supervision is usually per- ceived by Bank staff as receiving less recognition compared to the more visible and captivating appraisals, the Bank's incentive system needs to be reviewed. Emphasis on sound macroeconomic and industrial sector policies would also help improve the sustainability of subprojects and, to that extent, remove some of the underlying causes of the DFCs' portfolio problems (PPAM, para. 39). xix. Finally, the fundamental conditions for the sustainability of a finan,ial intermediary, whether private or public, are summarized in PPAM, para. 41. PROJECT PERFORMANCE AUDIT MENORANDUM TANZANIA TANZANIA INVESTMENT BANK (TIB) LOANS 1172, 1498 AND 1750-TA) AND TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL) (LOAN 1745-TA) I. BACXGROUND The Industrial Setting 1. A centrally directed strategy of industrial development and policy framework was adopted in earnest by Tanzania's political leadership during the late 1960s to advance the objectives of self-reliance, economic growth and structural transformation.- Indlastry was seen as a powerful engine of growth that could modernize the economy through more capital-intensive, higher-productivity processes, promoted within a protected environment. The government firmly believed that a rigorously pursued industrialization strategy with emphasis on resource-based, producer goods industries that cater to basic needs, dubbed as the basic industry strategy, coupled with an extensive state involvement in the economy, would accelerate growth and achieve a more equitable socio-economic development. The Bank originally endorsed this approach to industrial development from its inception, and even became its staunch supporter throughout- the 1970s.. 2. The implementation of the adopted industrialization strategy implied inter alias creation of effective organizational structures and planning processes to ensure appropriate inter-sectoral (e.g., industry,. agriculture, infrastructure) and intra-sectoral (e.g., rational project selection) allocation of resources; the substitution of an administrative apparatus for the market mechanism to effect allocation decisions and implement policy measures; development of public management capability to ensure efficient project implementation and operation; significant levels of investment in relatively large, capital-intensive and import-intensive industries; a constant and dependable stream of foreign exchange to finance imported capital and recurrent import requirements; a relatively large domestic market to reap scale economies; and an adequate supply of tech- nically trained manpower, including manager&, to operate industrial under- takings -- a tall order. Considering Tanzania's level of development and the demanding requirements of a basic industry strategy, it is arguable whether the strat?gy could have been effectively implemented at the projected pace and time frame. 3. Major setbacks set in and indeed the achievement of these goals in the immediate future is far from assured. After two decades of misperceived and poorly implemented Inward-looking industrialization, and - 2 - despite the injection of an inordinate amount of external financial and technical assistance, the industrial structute that has evolved to date is not significantly different from that which existed in the early 1960s, real per capita income and wages in the mid-1980s are lower than in the mid-1960s, thr balance of payments situation remains critical, and heavy dependence on foreign inputs, financial resources, technology ad expertise persists -- in defiance of the stated goals. A confluence of factors, encompassing an excessive -and poorly managed planning system, inadequate policies and ineffective institutional arrangements, extremely low productivity of the work force and of the investments undertaken and, to some degree, external shocks, has led to the development of an inefficient industrial structure which is incapable of generating the hoped for sustainable growth and transformation of the economy. 4. Real GDP grew at 3.32 annually during 1967-79 and at 1.72 through 1986; it virtually stagnated during the first half of the 1980s, but picked up in 1985-86. This compares with a 52 per annum growth in 1961-66. Investment in manufacturing was strong during 1967-79, growing at over 152 annually in real terms, induced inter alia by substantial inflows of official aid at concessionary terms. It tapered off in the early 1980s, and declined dramatically (by one half) by the mid-1980s, mirroring the dire economic difficulties afflicting the sector and the economy as a whole. Real value added in manufacturing increased 6.82 per annum in 1967-79, but declined precipitously through the 1980. -- by about 52 per annum. During the same period, the share of manufacturing in GDP rose from 9.5% to 122, but fell to 7.32 in 1986. Capacity utilization averaged around 502 in the 1970s but dropped to 25? in the 1980s, due to over- design, heavy dependence on imported inputs, management and technical problems, poor maintenance, and insufficient infrastructure. Despite industrial investments amounting to some US$3 billion in real terms during the past two decades, labor productivity remains below the 1966 level. Real output per employee in manufacturing has been declining constantly since the late 1960s, and by 1979 was 702 of the 1966 level; by 1986, it had fallen further to 56Z. Real earnings per employee increased by 112 between 1967 and 1973, but declined sharply thereafter; by 1979 they were more than a quarter lower than in 1966, and by the mid-1980s only 302 of the 1966 level. Finally, exports of manufactures have been erratic, averaging 13Z of total exports during 1967-79 and 72 during 1980-86. They grew (from a small base) 82 annually in nominal terms during 1967-79 but declined by 72 a year throughout the 1980s. In real terms, manufacturing exports increased marginally in 1967-72 and have declined constantly thereafter through the mid-1980s. 5. The string of intractable problems afflicting industrial perfor- mance (for a summary in tabular form see Attachment 1), whose severity assumed unwieldy proportions during the 1980s, includes oversized or sub- optimal plant scale; completed but inoperative plant capacity due to lack of infrastructure; shortage of technical and managerial skills and continued reliance on expatriates; acute shortages of imported inputs due to the lack of foreign exchange; low factor productivity due to overmanning, rigid labor laws, poorly maintained equipment, absence of incentives to reward performance, and poor plant utilization; inadequate -3- economic infrastructure (shortage of power and inadequate transport system in particular) reflecting the poor inter-sectoral allocation of investment and recurrent resources; under-capitalized and heavily indebted, if not virtually bankrupt, parastatals due to poor management and performance, reinforced by successive drastic devaluations.1 The poor condition of the parastatals and their mounting indebtedness has in turn undermined the viability of TIB and TDFL, which display an extremely weak portfolio and are striving to remain aflost.2 6. Inadequate allocation of resources and deficient incentive struc- tures for the development of the agricultural sector, excessive administra- tive controls over economic activities, and the continued growth in the size of the public sector without due regard to the limited administrative capacity available distorted the pattern of development process and stifled progress. Ineffective organizational structures and pl4nning processes incapable of ensuring proper coordination and inter- and intra-sectoral allocation of resources; ambitious investment programs, largely supported by the largess of the Bank and sympathetic donors; poor project screening procedures and haphazard project selection; underestimation of the human, institutional and organizational capacity of the country; poor organiza- tional structure and performance of parastatals; and a distorted policy framework resulted tn the development of an industrial sector which is over-extended in relation to the size of the market and the country's tech- nological and skill (managerial, technical and lafor) capabilities. The policias adopted ended up favoring industries linked to imported capital, skills and materials, rather than the use of domestic resources, thereby creating mounting pressures on the balance of payments at a time when, largely because of the anti-export bias, foreign exchange earnings were dwindling. Industrial investments made in the 1970s lacked selectivity, were grossly unproductive, and did not succeed in changing perceptibly the industrial structure, as no effective mechanism was developed to ensure that they interlocked and made the best use of available resources. The flaws and underlying problems of the strategy became more forcefully evident in the late 1970s and persist since then, suggesting that external dependence in all its dimensions will continue well into the 19908. 7. In 1986, the government prepared an Economic Recovery Program (ERP), taking the first initial steps to rectify the distortions created by 11 Between 1966 and 1988, the shilling has depreciated dramatically: in 1966 T Sh 7 - US$1; in 1988 T Sh 120 - US$1. 21 For details on the concept of the basic industrial strategy, policy framework, and the structure and performance of the manufacturing sector see: OED, The World Bank and Tanzania: Review of a Relationship, Chapter on *Tanzania's Industrialization Effort 1961-87' (forthcoming). The present condition of the manufacturing sector has been ably diagnosed and analysed in a very recent World Bank sector study entitled: Tanzania: An Agenda for Industrial Recovery, 1987, 3 volumes. See also PCR - TIB, paras. 2.01-2.12. -4- earlier policies in an attempt to reverse the protracted deterioration of the economy. The areas addressed include exchange rate policy, the trade regime and foreign exchange allocations, performance of parastatals, the agricultural marketing system, pricing policies, industrial restlucturing, transport sector efficiency and public expenditures. The government's objectives in the industrial sector aim at improving cap&eity utilization, rehabilitation of major industries, completion of on-going projects, and at ensuring that resources are directed toward the more productive and effi- cient firms in the sector. The ERP envisages a recovery period of five to seven years.3 Furthermore, in the framework of an active macroeconomic dialogue, the Bank and the government have been working jointly in recent years to develop specific action programs to rationalize the industrial sector, to be supported by sector leading. The proposed industrial restructuring scheme envisages three phases. Phase I will involve a diagnostic study of selected subsectors and the identification of pressing issues both at the enterprise and subsector levels. During Phase II, rehabilitation and restructuring programs will be developed, including timetables for Implementation. Phase III will lead to the implementation of agreed action programs.4 ObJectives 8. TIB's establishment in 1970 aimed at channelling all public indus- trial investment through a single state-owned bankinl institution, thereby ensuring adequate vetting of projects, independent judgment on the technical, financial, and economic meritp of the projects submitted for financing, and appropriate design of financing packages.5 In supporting TIB, the Bank sought to strengthen the institution to enable it to discharge successfully this function, particularly in such dimensions as project analysis, policies, procedures, management information systews, to transfer resources for investments within the framework of the basic industry strategy, and to build up TIB's capacity to extend technical assistance to project sponsors. TDFL was established in 1962 under the joint sponsorship of CDC and DEG, with PND joining in 1965 and EIB more recently. TIB is a minority (24Z) shareholder. TDFL supports primarily medium scale privately owned manufacturing enterprises (702). In 3/ The government's program of policy and institutional reforms for 1987-90 are outlined in Tanzaniat Policy Framework Paper, 1987-90, No. SecM87-1077, October 2, 1987, paras. 6-24. 4/ For details see PR No. P-4944, Industrial Rehabilitation and Trade Adjustment Program, November 22, 1988, paras. 93, 100-103. Recent economic developments and the impact of the ERP are discussed in Ibid., paras. 12-19. 5/ The establishment of TIB, as well as of sectoral holding companies in the early 1970s, also meant to curb the dominance of the National Development Corporation, a quasi-DFC, which had been involved heavily in the take-over of private enterprises after the nationalization as well as in a wide range of new investments, and whose effectiveness had been questioned. associating with TDFL, the Bank aimed at increasing TDFL's effectiveness in resource allocation by providing policy, institutional and operational advice, and at transferring resources in support of medium sized private enterprises catering to basic needs. II. PROGRESS IN HEETING OBJECTIVES TIB Institutional Development 9. Over the years, TIB has built up its organizational structure and appraisal/supervision capability, and has reduced substantially its reliance on expatriate staff -- probably prematurely. Although professional staff increased from 31 in 1975 to 57 in 1988, due to shortage of engineers, TIB had not been able to build up its technical staff in numbers commensurate with the volume of its operations and needs for super- vision of problem projects. Accounting, including procedures, and its management information system have also improved (PCR - TIB, paras. 3.01-3.07.) TIB prepared guidelines for project pre-appraisals to facilitate the pre-screening of applications, as well as a manual for project appraisal, and introduced, though belatedly, new investment criteria to reflect the economic realities of the 1980s, emphasizing export-oriented and energy-saving projects and investments leading to improving the capacity utilization of existing industries. In 1987, TIB's Board approved a partial reorganization of its structure, the most important change involving the creation of separate departments under the Directorate of Project Supervision for projects under implementation, companies in operation, and debt management, to enhance the institution's responsiveness to the changing environment and operating needs (e.g., growth of arrears, rise of cases in litigation), and to improve cost effectiveness. Also, the former Administration Directorate is expanded to Manpower Development and Administration Directorate with the creation of a Hi=an Resources Department, reflecting the emphasis on staff career development, and the need to attract, motivate and retain qualified personnel in the wake of the high turnover over the years. These changes are in the right direction. 10. Two technical assistance credits (approved in 1975 and 1980, respectively) were channelled through TIB and financed consultancy services for the preparation of pre-investment and feasibility studies, productivity and capacity utilization improvement studies, and training in project preparationlimplementation, management and related techniques in an effort to strengthen the capacity of local institutions (e.g., parastatals, government agencies, development banks), including the establishment of a technical assistance unit in TIB. After some initial problems stemming from the lack of experience by both the Bank and TIB in the management of a complex program were sorted out, the first credit financed a total of 21 feasibility studies (most of which were included in TIB's project pipeline), 7 special studies (some of which were implemented), and trataing - 6 - programs for some 400 public sector managers.6 The second credit (still not fully disbursed) has financed to date some 40 feasibility and special studies and training for over 800 managers covering subjects in management, in-plant activities including maintenance, export marketing, and project implementation. The pre-feasibility studies have been helpful in identifying some potentially viable projects, but also some risky or non- viable ones. The impact of the implemented special studies on capacity utilization and efficiency improvement, involving mostly TIB's clients, has largely been vitiated by the persistent economic difficulties and the results are far from visible. TIB has benefited from the training provided to its own staff, although one would have expected TIB to have been more effective in its project identification and appraisal work, and to have influenced in a more positive way sectoral investments, especially for projects it financed. Nevertheless. TIB's Feasibility Studies Unit has developed capacity to prepare terms of reference for consultants to be engaged by public sector agencies, to evaluate feasibility studies prepared by consultants, and to assist in providing training to the staff of parastatals. Sectoral Contribution 11. The fact that TIB operates j.n a difficult environment has affected dramatically its periormance and sectoral contribution. During the critical period of the 19709, TIB was Involved only in some 202 of the new industrial investments, having been adroitly by-passed by investing para- statals which arranged tteir own financing with external sources. In many instances, projects were presented to TIB at a very late stage of prepara- tion, or even after the government had committed funds and equipment had been ordered, when rejection was not p-)ssible and changes in scope were difficult to make. Quite a few projects were also financed at the Govern- ment's behest and risk without vetting. Furthermore, as achieving and sustaining a high level of investment has been a major element in Tanzania's industrialization effort, and since its board has been dominated by high ranking government officials, TIB was not entirely immune from institutional pressures in its decision-making process. Obviously, such practices defeated the most important purpose of TIB's institution, namely the exercise of an independent quality control function over project investment decisions. 12. During the investment spree of the 1970s TIB did not pay enough attention to design and issues affecting the longer-tern viability of subprojects (e.g., technology, market size, scale economies, management capability, capital structure, import dependence, export potential) as well as to mounting constraints (e.g., prospective foreign exchange availability, shortage of construction materials, irregular flow of domestic raw materials, wanting infrastructure). Cost and demand projections tended to be over-optimistic, as were implementation schedules. The potential impact of cost overruns, delays in implementation, and 61 For details see OED, PCR No. 6732, April 8, 1987, Tanzania - First Technical Assistance Project (Cr. 601). - 7 - different product prices were not tested by sensitivity analysis. Apparently, subprojects were not subjected to the critical review they warranted at the successive tiers of management. Appropriate feedback mechanisms were not developed to ensure that the lessons from earlier operations were taken into account in appraisals of new projects. On occasion, projects sponsored by parastatals were approved prematurely and without sufficient investigation regarding availability of financial retources and implementation capability. Finally, it was not until the early 1980s that TIB began to place emphasis on project rehabilitation, moving away from financing new projects and using part of its foreign exchange resources to finance working captal requirements. As a result. TIB's actual impact on project selection and design and, by extension, on the pattern of industrial investment in the sector, have been substantially attenuated.7 13. TIB (as well as TDFL for that matter) have not been able to pursue effectively policy issues affecting enterprise performance with the respec- tive ministries, even though some of their top managers and board members were participating in influential committees (planning, budget allocation) that reviewed and approved parastatal investment programs and allocated resources to individual projects. TIB-client seminars, conducted annually and attended by representatives of the ministries concerned, did dwell on these issues; but they did not elicit action either. Finally, the finan- cial intermediaries have not been able to develop at the expected level (SAR - TIB II, para. 5.01) the so crucial in investment banking intimate bank-client relationship that would have enabled them to influence early on project formulation and the operating efficiency of the parastatals, possibly because of a hands-off attitude, not unusual in relations among public entities, and/or resistance by parastatal managers (e.g., because of the perception that the lending institution was encroaching on the manage- ment's autonomy). Thus, the DFCs' potential influence as financiers was not exercised fully.8 7/ An illusion of effective project vetting in the public sector was created by the establishment in the mid-1970s of a three-tigr evaluation process. All proposed projects by parastatals were scrutinized by TISCO (Tanzania Industrial Studies and Consulting Organization -- a public entity), which prepared feasibility studies. This would ostensibly ensure the application of national criteria and avoid external influences. Then, TIB would make its own *independent' project analysis, considering foreign exchange savingslearnings, financial viability, and socio-economic aspects. Finally, there was the review at various ministerial/Central Bank levels, each agency examining different aspects of the project. Ultimately, however, the intended scrutiny proved to be perfunctory, and project appraisals were biased by conflicting investment criteria, bureaucratic expediencies, and availability of foreign financing. 8/ For TIB's comments on PPAM, paras. 9-13 see Appendix 2. TDFL Institution BuildinA and Sectoral Impact 14. Over the years, TDFL has developed an organizational structure adequate for the volume of its operations, has updated its Financial and Investment Policy Statement to reflect more fully the evolving economic conditions, as well as its own operational objectives and requirements, and has prepared, albeit with long delay (PCR - TDFL, para. 1.06), comprehen- sive manuals and procedures for project appraisal and supervision. Its professional staff rose from 20 in 1978 to 28 in 1980, but declined to 22 in 1987 because of resignations or transfers to subsidiaries. This level may be adequate for the present depressed vclume of operations, albeit prospective portfolio restructuring operations are likely to be staffq intensive. Despite progress in building up managerial and staff capacity, TDFL's appraisal capability heretofore has not developed commensurately, in part because staff lacked practical experience and was weak in engineering and market analysis. As a result, analysis of demand, marketing and finan- cal aspects (e.g., highly leveraged capital structure) of projects turned out to be not as thorough as was originally supposed,9 and calculations of economic rates of return to ascertain the economic merit of projects in most instances were not performed. The management capability of sponsors also did not receive adequate attention and, often, project design has been poor. Nor the combination of local and foreign expertise on-its Board has proven to be as advantageous to TDFL's lending operations as was expected. On the other hand, the Bank's laxity in its subproject reviews was not conducive to selection of local resource-intensive projects and to ascer- taining their economic merit and viability, a task of singular importance in a controlled economy with rank distortions of economic parameters and interest rates playing virtually no role in resource allocation.10 TDFL's supervision and collection procedures and capacity were strengthened in recent years (PCR - TDFL, para. 3.04), although the results of these efforts are not yet fully noticeable (see PPAM, para. 20 below). Super- vision work has been handicapped by poor record-keeping procedures and delays in reporting by many firms. As in TIB's case, the difficult economic environment and the alignment of TDFL's operations to the govern- ment's industrial strategy and policy framework have had an adverse impact on th, performance of the subprojects it financed, as well as on TDFL itsel-. Inadequate and partial appraisals also took their toll. Thus, TDFL's project vetting and approval processes, ,oupled with the acute systemic distortions, have undermined its effectiveness in resource alloca- tion (see also PPAM, p4ra. 13). 91 SAR - TDFL, No. 2416, June 8, 1979, para. 3.14. 10/ See also PCR - TDFL, paras. 3.01, 6.02, 6.04. -9- III. OPERATIONAL AND FINANCIAL PERFORMANCE TIB Operations 15. TIB's approvals, commitments and disbursements on loan and equity operations during 1974-87 in nominal and real terms are shown in Attach- ment 3. They increased through the late 1970s, peaked in 1979, and declined dramatically during the 1980s, reflecting the deterioration of economic conditions lack of bankable projects, and the drying up of TIB's external resources.il Specifically, commitments in real terms almost tripled between 1974 and 1979, rising from T Sh 146 million to T Sh 385 million; in 1987 they had declined to T Sh 34 million, or less than one- tenth of the 1979 level. The bulk of TIB's lending operations in recent years has been in manufacturing, agro-industries and mining (852), Involving mostly parast.tals (62% in number and 732 in amount). In terms of the type of loans extended, new projects accounted for 56Z, expansion for 22Z, rehabilitationldiversification for 19?, and loans for working capital for 32 in amount (Attachment 2. In addition, TIB has supported projects at the behest and risk of the ti6us (agency funds) which have not been subjected to appraisal, with commitments amounting to over T Sh 200 million (Attachment 4). Virtually all subprojects cater to the domestic market, and most are heavily import-dependent. Utilization of Bank Funds 16. There has been some delay in disbursing Bank funds and some can- cellations arising from difficulties in subproject implementation. Half a dozen of the subprojects are still under implementation, and about one- third of the remaining have had cost overruns exceeding 10Z, and quite a few over 502, in part due to price increases, delays in construction due to poor implementation capacity of parastatals, transport problems, shortage of building materials or unrealistic implementation schedules, and cost underestimation. The profile (size, sectoral and regional distribution) of the 53 Bank supported subprojects, although apparently satisfactory, does not necessarily reflect judicious project selection or circumspect Bank review prior to their approval (see PPAM, para. 21 below; PCR - TIB, paras. 4.01, 4.02 and Annexes 3 and 4). In terms of ownership, about 852 in volume of the Bank funds were allocated to parastatals. Close to one half of these subprojects involved expcAsion/rehabilitation of existing enterprises, and their capital intensity varied widely reflecting sectoral characteristics. The subprojects financed cater almost exclusively to the domestic market. Although the data are not always reliable, it appears that only one half of the Bank supported subprojects in operation are profitable, albeit most of them marginally, reflecting the impact of prevailing poor economic conditions and operational problems on capacity utilization and, to a considerable extent, TIBs quality of appraisals (see 11/ See also PCR - TIE, paras. 5.01-5.03. Over the years TIB has mobilized foreign resources (tied and untied) from such official sources as ADB, IDA, KfW, NORAD, and SIDA. - 10 - PPAM, paras. 10, 12). Ex ante financial and economic rates of return were satisfactory, but ex post returns have not been calculated. Nevertheless, since most of the subprojects have incurred substantial cost overruns, have been operating at low capacities due to severe management, raw material, maintenance and infrastructural problems, and have enc-untered financial difficulties, it is unlikely that the financial and economic rates of return estimated at appraisal will be realised.12 Indeed, the sustain- ability of many subprojects remains uncertain. On the whole, the perfor- mance of the subprojects financed by the Bank has been disappointing, not surprisingly paralleling that of most other industrial parastatals in the sector. Financial Condition 17. TIB's profitability throughout its extstence has been very low in nominal terms, and has been declining in recent years. Its equity base in real terms has been substantially eroded because of increasing financial charges, administrative expenses,13 provisions for bad debts, and the rising proportion of non-performing assets (Attachments 5-7). Provisions, amounting to 27Z of the loan and equity portfolio, despite their size, do not fully reflect the poor quality of TIB's portfolio and their adequacy cannot be established, since the scope and depth of the audits performed by the Tanzania Audit Corporation (TAC) are very inadequate (see also PCR - TIB, paras. 5.07, 6.02). Though marginally profitable on paper, TIB's financial position is not sound, since almost three-quarters of its port- folio is affected by arrears (involving two-thirds of the total number of projects) as a result of poor subproject performance (CR - TIB, paras. 5.04-5.07, 6.02). TIB has not been in a position to influence the operating efficiency of parastatals, and finds it extremely difficult to collect due to the weak financial position of most clients, resulting from the general deterioration of economic conditions, the excessive and ineffi- cient controls over economic activities, deficient project design, cost overruns, poor management (many firms are run by inexperienced political 12/ Calculations of economic rates of return implicitly assume, inter alia, realistic cost and market demand/supply projections, competent project management, appropriate capital structure, no time and cost overruns, efficient operation and no measurable deviation from projected production build-up levels, uninterrupted flow of inputs and consumables, adequate infrastructure (power, water, transport), and access to foreign exchange and institutional credit. This suggests that, even barring imponderables, a satisfactory ex ante economic rate of return per se does not guarantee project success, and that appraisals should be pondering over the realism of these assumptions and the chances of subsequent distortions occurring in light of the surrounding circumstances and past project experience, since they impact significantly on the sustainability of the project's benefits. 13/ Administrative expenses rose from 1.9Z of average total assets in 1979 to 3.7% in 1987, compared to a normal of 12-22 in financial intermediaries. For TIB's views see Appendix 2. - 11 - appointees), inadequate maintenance, technical, local resource and infra- structural problems, and mounting indebtedness due to successive and dramatic devaluations. Quite a few projects in its portfolio are under liquidation and, in view of the severe structural, management and liquidity problems faced by most client parastatals, TIB's financial condition can be ascertained only after a full assessment of their true financial situation and prospects. TIB's sustainability as an institution therefore remains uncertain as it faces the prospect of a financial collapse in view of the amount of prospective write-offs, and is in dire need to rehabilitate its portfolio.14 But this would require, inter alia, weeding out unviable parastatals, resolving the issue of the denominated in foreign currencies debt, financial restructuring, employing of expatriate management to man key positions on a long term basis, ensuring access to working capital, resolving pressing industrial, trade, and financial policy issues, and assuring operational independence -- a tall order requiring tough political decisions.35 Moreover, the task exceeds TIB's financial and technico- economic capacity. TDPL Operations 18. TDFL's approvals, commitments and disbursiements on loan and equity participations during 1979-87 in nominal and real terms are shown in Attachment 8. Generally, they have been declining through 1986 but picked up in 1987, reflecting the domestic economic difficulties, the economic uncertainty and uninviting climate for private investment, TDFL's de- emphasis on import-intensive projects and emphasis on rehabilitation of existing projects, and the shortage of foreign exchange resources.16 Thus, commitments in real terms declined from T Sh 40 million in 1979 to T Sh 15 million in 1986, to almost one-third; they increased measurably in 1987 to T Sh 24 million. About 87Z of TDFL's lending has been in manufacturing and agro-industries, involving primarily private enterprises (74% in number and 692 in amount). New projects account for 40% of TDFL's portfolio in amount but 27Z in number, whereas expansion/rehabilitation for 60% in amount but 14/ For TIB's comments see Appendix 2. 15/ TIB's approach is to review all problem projects, identify the root causes, and propose solutions. If the project is viable and management is good, but undercapitalization or excessive debt is the problem, the remedy should be to provide additional funds or reschedule outstanding debt. If the project is viable but management is a problem, expatriate managers would have to be hired for a long period. And if the project is not viable, reorganization or dissolution perhaps is the only alternative. 16/ TDFL relies on its foreign shareholders for resources, which take the form of equity, bonds and lines of credit (see PCR - TDFL, para. 5.07). - 12 - 732 in number. Virtually all subprojects supported by TDFL are import- substituting. and a very large number excessively import-dependent (PCR - TDFL, paras. 5.01-5.03, 5.05, and Annexes 5, 6). Utilization of Bank Funds 19. Although the Bank funds were committed on schedule, there was one year delay in disbursement due to delays in implementation (PCR - TDFL, para. 4.01). Almost all of the 21 Bank supported subprojects cater to the domestic market, and about half depend heavily on imported inputs. One- fourth of the subprojects were new and the balance expansion/rehabilitation of existing firms. Subproject selection, design and location do not always suggest thorough and impartial appraisal by TDFL, or the Bank's thoughtful review (see PPAM, para. 21 below; PCR - TDFL, paras. 3.04, 6.02). There have been substantial time and cost overruns due to foreign exchange restrictions, shortages of construction materials, cumbersome administra- tive controls, and import licensing procedures. Most of the subprojects operate well below rated capacity, and only half are marginally profitable, reflecting the cumulative effect of the difficult economic situation and the inadequate assessment during appraisals of key economic parameters and market analysis (for details see PCR - TDFL, paras. 4.02-4.04 and Annexes 2-5). Economic rates of return were not calculated for the majority of the Bank financed subprojects, let alone for non-Bank supported projects, while calculations were perfunctory for those few on which they were performed. The sustainability of half the subprojects remains uncer- tain and, on the whole, subproject performance for the most part has not been satisfactory, albeit to a certain extent for reasons beyond TDFL's control. Financial Condition 20. TDFL's profitability in the 1970s has been very low in nominal terms, but since 1982 it has turned negative due to mounting finance charges, slow upward adjustment of the controlled lending rates, steep rise of administrative expenses, and the substantial increase in non-performing assets (Attachments 9-11 and PCR - TDFL, paras. 5.04-5.08). TDFL's admin- istrative costs, at 3.71 of average total assets, are high and largely reflect the impact of the declined volume of operations, while its spread, despite some improvement recently, remains very low. Over three-quarters of its portfolio (one-third among its larger projects) is affected by arrears (Attacbmento 13, 14), while its collection performance (Attachment 15) has not kept pace with the mounting arrears.17 Since 1985, TDFL has strengthened its equity base through conversion of EIB bonds and income notes into share capital. This has restored TDFL's debt/equity ratio 17/ It is extremely difficult, if not impossible, to realize security in the case of parastatals, while the process is extremely lengthy and time-consuming in the private sector. On the other hand, to discourage willful defaulters, who in effect take advantage of the high and tax- free unofficial rates by withholding repayment of their obligations, TDFL levies a minimum rate of interest of 3 per month on arrears. - 13 - within the ceiling agreed with the Bank (3:1) and has resolved the issue of TDFL's foreign exchange risk (PCR - TDPL, para. 5.07), but still leaves TDFL's financial position precarious due to the high proportion of arrears affecting its portfolio. Provisions, amounting to about 322 of the loan and equity portfolio, do not cover fully potential losses in view of the grave situation of many of its clients who suffer from severe structural, management and liquidity problems. TDFL's true financial condition can be determined only after a full assessment of its clients' financial health and prospects. fDFL faces the same set of difficult issues as TIB (PPAM, para. 17 above; PCR - TIB, paras. 6.01, 6.03), i.e. rehabilitation of its portfolio, improving the operating efficiency of its potentially viable clients, and restoration of its own financial viability -- a taxing undertaking beyond TDFL's present financial resources and staff technico- economic capacity. IV. FINDINGS AND ISSUES Bank Performance 21. Bank appraisals were unjustifiably upbeat and reassuring, asserting repeatedly that TIB "is making positive contributions to the economic development of Tanzania through the selection and financing of economically justified, financially viable and technically feasible projects....19 And although they voiced concern about the condition of TIB's portfolio since the mid-1970s and acknowledged the existence of general policy and operational problems in the industrial sector which affected TIB-financed projects, they expressed optimism that these were being addressed by the Government and that they were not expected to endanger TIB's viability or to prevent it from operating effectively as a financial intermediary.20 Bank appraisal and supervision missJons did not question early on TIA's pattern of appraisals and depth of economic analysis, in particular market analysis, sourcing of inputs, and the assumptions underlying calculations of economic rates of return, did not address the issue of working capital availability, let alone provide for it, and did not appreciate fully the impact of poor project conception, competent management, and economic policies and conditions on subproject performance. Missions apparently had not been able to fathom early on the full extent of the problems faced by the DFCs' clients and, as a result, 181 TDFL's external (private) auditors cannot be credited with having done an adequate job over the years in enlightening all parties concerned with regard to the quality of TDFL's portfolio. 191 PR, TIB III, No. P-2173, November 21, 1977, para. 47; PR, TIB IV, No. P-2606, July 12, 1979, para. 51. Similar statements in SAR, TIE II, No. 849, October 6, 1975, para. 6.01; SAR, TIB III, No. 1730, November 21, 1977, para. 6.01; SAR, TIB IV, No. 2400, June 22, 1979, para. 3.09. 20/ PR, No. P-2173, November 2). 1977, para. 47. - 14 - the Bank had no clear perception of their status. On the other hand, the Bank has not been circumspect enough in its subproject review and, inevitably, economically unviable subprojects were approved (see also PCR - TIB, para. 3.04; PCR - TDFL, paras. 6.02, 6.04). 22. The Bank has not been able to influence TIB's lending pattern, e.g., by suggesting better balance between large and medium size sub- projects, capital-intensive and labor-intensive, import-intensive and local material-intensive. More generally, the Bank (and other multilateral and bilateral creditors) did not sensitize early on the intermediaries on the need to reorient their lending policies and operations to reflect the changing economic conditions. DFC operations in Tanzania did not address policy and strategy questions, taking as given the policy environment and supporting import-substituting industrialization as perceived and applied by the Government. As a result, there has been no macroecoomic or sector conditionality, and lending to financial intermediaries was not used as a vehicle to press for reforms on issues affecting directly enterprise per- formance (e.g., the pattern of and administrative mechanisms for foreign exchange and -credit allocation, cost-plus price setting practices, licensing, infrastructure bottlenecks) and, by extension, the DPCs them- selves. Such matters were thought of as best be taken up in the context of the macroeconomic dialogue. But the dialogue during the conception, preparation and disbursement of the loans has been tentative and ineffec- tive -- in contrast to the more active macroeconomic dialogue in which the Bank and the Government have been engaged in recent years in an attempt to develop jointly workable action programs to restructure the industrial sector (PPAM, para. 7). Yet, macroeconomic conditions and policies, as well as the degree of autonomy of the financial intermediaries, have had an overwhelming impact on the success or failure of subprojects. In retro- spect, it emerges that follow-on operations to TIB were launched hastily and in disregard of the deep-seated problems afflicting the sector which impacted on subproject performance, in the hope that somehow things would turn around.21 The Bank took a dim view of TIB's limited capacity to influence in a positive way the allocative pattern of investments, casting doubts on the transparency of the Bank's appraisal and supervision reports, in the sense that industrial leading through financial intermediaries seems 21/ A strong correlation has been found between price distortions and growth rates in 31 borrowing countries, including Tanzanias the greater the degree of price distortions in their economies, the lower their GDP growth rates were. "Pricing for Efficiency,6 Chapter 6 in World Bank, World Development Report 1983, 1984. In the context of its Annual Review (1987), OED found, not surprisingly, a similarly negative correlation between price distortions and the performance of (Bank- assisted) projects implemented in the seventies in the same group of countries. These findings confirm the conventional wisdom that borrowers' economic policies and management do influence project performance and can undercut the positive contribution of individual projects to economic growth. - 15 - to have been prompted more by institutional pressures under the guise of much needed resource transfers and less by a circumspect assessment of the potential sectoral and institutional impact to be attained.22 23. The Bank's involvement with TDFL in 1979 may be justified grima fade by the heightened level of private investment activity in the late 1970s, as reflected in the rise of new enterprise formation, suggesting 221 The Bank had acknowledged as early as 1975 that TIB's major problem was ,the condition of its portfolio* (SAR - TIB II, para. 6.03). In 1977, with 39Z of TIB's portfolio affected by arrears, the SAR could state that: 'since 50Z of the portfolio was outstanding in projects under implementation, it is premature to make a judgment on the portfolio's overall quality,' (SAR, TIB III, No. 1730, November 21, 1977, para. 4.04). By 1979, the SAR could make such untenable claims as OTIB's appraisal of projects is thorough (SAR - TIB IV, para. 2.15): 'over the years TIB has developed its capability to make sound investment decisions and has thus been providing an independent check on the firancial, technical and economic feasibility of projects submitted by parastatal organizations for financing. Its project appraisal capability is thus making a useful impact on the quality of resource allocation in Tanzania* (loc. cit., para. 2.01); 'despite this growth [in operations), TIB's financial situation has remained very sound' (loc. cit., para. 2.32); 'since all these problem projects are parastatals, there are good prospects that TIB will recover most of the amounts from the relevant holding companies,' (PR, TIB IV, No. P-2606, July 12, 1979, para. 38). On a different plane, Bank staff argued that 'most TIB-assisted projects utilize domestic raw materials' (PR, TIB III, No. 2173, November 21, 1977, para. 32), which was counter to reality. Furthermore, while the President's Report on TIB III (No. P- 2173, November 21, 1977, para. 33) stated that 'over the past two years, TIB has considerably strengthened its follow-up capacity,* two years later the appraisal for TIB IV (SAR, No. 2400, June 22, 1979, para. 2.15) indicated that "in recent months, TIB has improved the quality of its project supervision by strengthening its staff and by paying special attention to its problem projects' (emphasis added). Despite mounting arrears, Bank supervision reports rated TDFL's performance status as 1, i.e. problem free or incidence of minor problems, through 1982, downgrading it suddenly to 3, i.e. major problems, only in 1983. Similarly, despite the deteriorating condition of its portfolio and questions regarding its supervisionlcollection capability, TIB's ratings were 1 through 1980, 2, i.e. incidence of moderate problems, through 1984, and 3 only in 1985, based on the claim that TIB and the Government were taking corrective action and that provisions were adequate. The portfolio problems nwere attributed largely to implementation difficulties, the shortage of foreign exchange, import restrictions, and infrastructural problems, and seldom was attribution made to management, technical, or other problems relating to inadequate project design and appraisals (see PPAM, pares. 12 and 14 above). Finally, despite deteriorating economic conditions, TDFL was appraised in 1980 for a second loan, but the operation was aborted (see PPAM, para. 23). - 16 - that private entrepreneurs were able to exploit market opportunities and proved to be remarkably resilient. The trend, however, had reversed itself from 1979 on, and by 1981 the number of establishments employing ten or more employees had declined by 55Z, following massive closures, due to the difficult economic conditions.23 Yet, the Bank appraised TDFL for a second loan in 1980, an operation which never materialized because of the impasse in the dialogue on macroeconomic issues and the change in the Bank's posture vis-a-vis Tanzania. These developments underscore the significance of the policy environment and emerging economic trends for the success of individual projects, and suggest that Bank appraisals should analyze more carefully the prospective demand for investible funds and base DFC lending on a more concrete project pipeline, and not rely on expectations that the role and the level of private investment in the sector will increase and on vague project ideas, as was the case with TDFL (SAR - TDFL, paras. 1.11. 1.17, 3.37). Impact of Bank's Association 24. Progress in advancing stated institutional objectives has been well below what could have been possibly achieved, while the performance of the subprojects financed by Bank funds in both institutions has been dis- appointing. Whether because of the adverse policy environment, intrusive external intervention in project selection, errors of judgment, failure to supervise effectively or to take a more critical stance on important sec- toral issues, or lack of receptivity by the borrower, the Bank's involve- ment has not had the hoped for catalytic effect and expected results, and its Impact on industrial development has been marginal -- at best. The Bank identified deficiencies in TIB's and TDFL's organizational and insti- tutional set-up and operations, provided constructive criticism, and contributed to the formulation of skill upgrading programs. Nevertheless, emphasis by the financial intermediaries on expanding industrial financing without adequate regard to subproject viability and financial prudence, suggesting insufficient attention to project selection and design and failure to consider factors affecting the sustainability of the ventures they supported in the face of mounting constraints (see PPAM, paras. 12 and 14), has resulted in poor performance of the subprojects supported, most of which are in dire need of rehabilitation and/or financial restruc- turing. The Bank, who was (or was supposed to have been) more sensitized to the persistent macro- and micro-economic problems as a reult of its extensive sector work and supervision missions, subjected these inadequate subproject appraisals to a passing review, apparently due to staff con- straints, and as a result, its input and influence have been marginal. Socio-political considerations and institutional pressures also colored the DFCs' decisions to finance industrial undertakings, while the Bank took no initiatives to ward off external pressures on the institutions' decision- making process. And since the local capacity to screen projects has always been inadequate, projects undertaken at the behest of the government 23/ OED, World Bank and Tanzanias Review of a Relationship (Chapter on OTanzania's Industrialization Effort,* 1961-87), para. 24. - 17 - (usually of fairly large scale, capital-intensive and import-intensive) were also implemented without due attention to their economic merit. As a result of these circumstances, the financial position of the institutions is critical, their sustainability remains uncertain, progress in achieving the original institution-building goals, in particular a solid appraisal capability, has been modest, and their ability to guide and influence the performance of parastatals has been very limited. As it turned out, the Bank's objectives largely were not met during its long association with TIB and TDFL, and its contribution to improving investment allocation has been marginal. Overall Assessment 25. Conceptually, support to TIB and T'PL satisfied the Bank's policy directives to assist specialized institutions and, on these grounds, it would be difficult to fault its initial involvement. However, uncritical support for an industrialization strategy with demanding requirements upon an emerging nation, and continued support of TIB after the development of an environment fraught with difficulties and affecting both sub-borrowers and the institution itself is more diffict.it to rationalize. Evidently, Bank missions -- and the DFCs themselves -- did not detect early on the full implications and impact of the distortions caused by the broader policies, as well as of the operational problems of parastatals, on the performance both of the intermediaries and their sub-borrowers (PPAM, paras. 21-23, 26). To all intents and purposes, progress in institutional development has been marginal, as both institutions have hardly been able to develop to the desired level the capacity for hard-nosed appraisals. The performance of the subprojects financed by Bank funds in both DFCs has been disappointing, suggesting poor utilization of the Bank's funds. The financial position of both institutions is precarious and their future sustainability remains uncertain. The fact that these intermediaries operate in a difficult environment has affected dramatically their perfor- mance and sectoral contribution, in particular in the exercise of an inde- pendent quality control function over project investment decisions in the public sector, more so than the circumstance that TIB is state owned and TDFL privately controlled. Furthermore, TIB and TDFL (as well as the Bank for that matter) have not been able to pursue effectively policy issues which affected their sub-borrowers' performance and undermined their own viability, nor have they been able to exercise fully their potential influence on project formulation and on the operating efficiency of para- statals. Inadequate project vetting and approval processes reinforced by the Bank's passing subproject review, coupled with acute systemic distor- tions, have eroded both institutions' effectiveness in resource allocation. Although top management in both institutions was knowledgeable and experienced and had developed r. core of capable staff, their efforts to steer their respective institutions on the right course during these 4tffi- cult times have been frustrated, in a large measure by compelling exogenous factors. TIB and TDFL are in urgent need to rehabilitate their portfolios, improve their operating efficiency of their potentially viable clients, and restore their own financial viability -- a task well beyond their present financiai and technico-econamic capacity. - 18 - 26. In retrospect, the Bank's appraisal work has not been up to par, and its supervision effort has not been very effective. The Bank (and other multilateral and bilateral creditors) did not sensitize the interme- diaries on the need to reorient their lending policies and operations to reflect the changing economic conditions. Apparently, the missions made no serious attempt to discern the real causes of the intractable problems parastatals were facing and to ascertain early on the real financial situa- tion of the two institutions; instead, they relied on second-hand informa- tion supplied by the intermediaries and on their assurances.24 Had this been done, it is conceivable that the frequency of lending operations may have been lower, and that the latest TIB operations, and possibly the loan to TDFL, may have not been undertaken. Looking back, one wonders whether the staff's persistent optimism and reassuring attitude concerning the institutions' performance and financial health during the late 1970s (and in the early 1980s as well) were grounded on fact-based assessments or they were slanted to reflect the Regional Management's beliefs or expectations at that time. Considering the original objectives and expectations, the actual achievements by TIB and TDFL to date, their present financial impasse, unsettled prospects, and uncertain sustainability, the projects under review cannot be viewed as successful, albeit to some extent for reasons beyond the institutions' control. Outstanding Issues Requiring Initiatives by Tanzanian Authorities 27. One important issue that concerns TIB, TDFL and their clients is that debt denominated in foreign currencies is expected to be repaid in high depreciated (and depreciating) Tanzanian shillings. which has created an unbearable financial burden on the enterprises concerned and renders extremely difficult the development of a restructuring plan. In principle, offering project sponsors the option of paying a fee to the government for assuming the foreign exchange risk (since DFCs cannot be expected to assume the risk) appears to be warranted, particularly in countries with persis- tent balance of payments problems. Giving sub-borrowers a choice, instead of imposing one scheme or another indiscriminately on them, would be more effective in promoting industrial investment and in ensuring their willing- ness to comply with the terms of repayment. Under such a system, sponsors would be given the option of borrowing either in foreign exchange or in local currency; those who choose the latter would be charged an appropriate fee for being protected from the exchange risk. In addressing the present impasse, the Tanzanian authorities would be well advised to consider seriously pegging the liability of firms on outstanding foreign currency denominated loans at some "reasonableu exchange rate, to be negotiated between the Treasury and the DFCs and their sub-borrowers, taking into 24/ For instance, in the President's Reports of 1977 and 1979 (paras. 33 and 38, respectively), there is an identical statement asserting that "TIB has conducted comprehensive reviews of each problem project, made specific recommendations for resolving the causes of the problems and used its influence as a financier to ensure that appropriate steps are taken in response to these recommendations. The actions have yielded good results....' - 19 - Rccount the surrounding circumstances, with the difference to be forgiven and absorbed by the Treasury. To insist that enterprises repay debt at thirteen times the original amount (in 1982, T Sh 9.3 - US$1; in 1988, T Sh 120.0 = US$1), a dramatic depreciation of the local currency which to a large extent was the direct consequence of the Government's own policy decisions and management of the economy and over which enterprises had no control, appears impractical, unfair, and counterproductive, the more so since the bulk of the debt is owed by parastatals.25 28. Access to institutional credit for working capital is another critical issue faced by many DFC clients, emanating from the credit restrictions and the bias in credit allocaticn favoring enterprises catering to basic needs, producing revenue for the treasury, etc. Frozen credit ceilings for a long period under strong inflationary pressures, coupled with the additional financial requirements to service the rising indzbtedness in foreign currencies, has created severe liquidity problems. This has reduced the capacity of many firms to procure needed raw materials and other inputs, even if they had access to foreign exchange, and has contributed to continued underutilization of capacity and low supply response, while it hampers the development of realistic reorganization- plans by financial intermediaries. 29. In order to restore their financial health, TIP and TDFL are in need to rehabilitate their portfolios. This would require, inter alia, weeding out unviable parastatals, resolving the issue of the denominated in foreign currencies debt, financial restructuring, employing expatriate management to man key positions on a long-term basis with a significant claim on foreign exchange resources, ensuring access to working capital, resolving pressing industrial, trade, and financial policy issues, and assuring operational independence -- all demanding courageous political decisions which, however, cannot be put off much longer. 30. The Tanzania Audit Corporation (TAC), because of a serious national shortage of accoatants and high turnover of qualified staff, cannot discharge effectively its auditing function over some 370 para- statals. In particular, when it comes to auditing the operations of finan- cial intermediaries, the scope and depth o' the audit remains extremely limited. Accounting and auditing standar,s with respect to financial intermediaries therefore need to be improved. Better assessment of the intermediary's profitability, portfolio quality, adequacy of provisions for bad debts, etc., are needed by the managements of the intermediaries, by 25/ A related issue which has created consternation among DFC sub-borrowers is the treatment for tax purposes of the "loss' arising from the repayment of loans denominated in foreign currencies in depreciated shillings. In a Technical Circular issued on July 18, 1987, the Ministry of Finance, Economic Affairs and Planning, ruled that such an exchange loss is of a 'capitalO nature and should be capitalized, "to be taken into account when the asset is disposed of," and cannot be viewed as an expense in determining the firm's taxable income. The matter deserves consideration by the responsible authorities. - 20 - the authorities in charge of financial supervision, and by the major creditors. In general, improvement of financial information and of the accounting profession responsible for preparing that information deserves urgent attention. To date, the authorities (and the Bank) have not focussed on these important issues. Lessons of Experience and Recommendations 31. The experience with TIB and TDFL adds new emphasis to lessons drawn from other DFC Bank operations. Many have wider implications which warrant the Bank's attention and suggest courses of action for potentially more effective interventions by governments and the Bank to foster the development of sustainable financial intermediaries. 32. The Tanzanian experience reaffirms that a pro.Ujct is unlikely to succeed in a hostile policy environment and an unconducive economic milieu. This raises the question whether the Bank should be lending to sectors (or at all) if conditions are uninviting, it is unable to exercise any influence, and project implementation and sustainability are likely to be impaired. Would leading under such circumstances be consonant with prudent banking policies and responsible development assistance? 33. Political and social circumstances, cultural differences, and societal characteristics rather than the form of ow4ership per se appear to account for, and explain more convincingly, the observed variations in institutional structure and development, management style and financial performance among DFCs, as evidenced by the equally poor performance of TIB (state owned) and TDFL (privately controlled). State-owned institutions can be as dynamic and efficient as privately owned if they are run by qualified managers, are allowed the requisite degree of autonomy in decision-making, and operate in an inviting en-ironment. The problem is that in many instances state-controlled financial intermediaries suffer from the consequences of intrusive political interventions, the appointment of unqualified top executives, and the social tasks thrust upon them that distort their behavioral pattern, reflecting narrow if not self-serving perception by the authorities of their role. Institutional inertia and lack of receptivity, reinforced by a weak policy framework and the Bank's inability or reluctance to press more forcefully these issues, tend to furrber stultify progress in promoting sound public financial interme- diaries. 34. In view of the difficulties faced by state-controlled DFCs in many countries, a re-evaluation of their role and potential, establishment of conditions for their sustainable growth, institution of performance criteria, and development of arrangements to restructure the weak ones may be in order. In this regard, the derivative implications of the form of ownership, viewed in the light of the prevailing local socio-political circumstances and economic environment, deserve greater attention than they have received heretofore, and privatization may have to be considered as an alternative (albeit not necessarily facile) if state ownership turns out to 12 i - 21 - be an unworkable option. Nonetheless, as already alluded, whether private or public, no financial intermediary can reasonably be expected to perform efficiently in an unconducive policy environment and economic climate. 35. Where the institution or public enterprise is viewed as service- able, to preserve the independence of the DFC, several positive courses of action suggest themselves. Thus, it is important that unequivocal rules be est&blished regarding the relationship between state-controlled financial intermediaries and the government authorities concerned, and such under- standings should be adhered to. Public DFCs should be assured of a degree of autonomy sufficient to enable them to make investment, staffing and other management decisions free from political pressures; to establish appropriate salary scales and benefit packages to attract and retain high caliber staff; to raise resources (domestic and foreign) on their own initiative; and to set lending rates in line with costs and risks. At the same time, a well-designed system of e' post accountability should be instituted based on meaningful and monitorable criteria to assess their performance. Furthermore, given that composition, quality, continuity, and modus operandi of the Board of Directors greatly affect a DFC's effective- ness and performance, due attention should be paid during selection to the qualifications, experience, non-allegiance to special interests, earnestness, and diversity (e.g., in terms of affiliation, skille, back- ground) of the appointees to enable the Board to provide guidance and ensure impartial decision-taking based on strictly commercial principles and free of self-serving influence. 36. In connection with the operations of financial intermediaries, the evidence suggests particular concerns and avenues for possible remedial action. For example, there is room for improving appraisal and supervision capability by focussing on fundamentals affecting eubproject performance, e.g., by reviewing more carefully technical designs and capital structures, placing greater emphasis on sectoral and policy parameters, demandisupply developments and marketing strategies, developing feedback mechanisms, paying more than lip service to establishing the economic merit of subprojects by calculating thoughtfully and systematically economic rates of return, undertaking sensitivity analysis and risk assessment, and by devising realistic financing plans, completion schedules and cash-flow projections. The sourcing of inputs and the prospective availability of foreign exchange deserve full consideration. Care should also be taken to ensure that sponsors have the management capability to set up and operate the project, have a high enough stake in the project, and that political considerations and government guarantees do not dilute appraisal standards. Institution of effective follow-up procedures, particularly for subproject post-implementation performance, and determined collection efforts are essential to keep arrears within acceptable levels. Action should be taken early on to identify client problems and work out solutions, including provision of technical assistance through referrals if required. In this respect, development of a more intimate and trusting bank-client relationship between the DFC and its sub-borrowers enables the lending institution to provide guidance, to instill financial discipline, and to have a more tangible impact on their operations and performance when - 22 - circumstances warrant such intervention. Finally, a comprehensive and uniform data collection system needs to be devised and enforced to ascertain subproject performance and facilitate evaluation. 37. With respect to conceptualization and desi&n of DFC operations, the experience suggests that sector work preceding project preparation is essential as it enables the Bank to appreciate better the workings of the financial institutions and mechanisms in a country, to identify gaps and shortcomings in the industrial and financial structures and institutional arrangements, and to design more purposeful projects. Deeper understanding of political realities, attitudes and, more generally, of the way decisions are taken and implemented can help determine what is practicable and workable. Also, when addressing institutional upgrading and policy issues, the Bank ought to take an unambiguous and unwavering stance, linking project financing to actions already taken rather than mere assurances of prospective initiatives. And when there are strong and well-substantiated doubts about the commitment and capability of the government and/or the financial intermediary to implement competently the various components of the project, the Bank should not hesitate to defer lending until it is convinced that *astainable progress has been made in implementing agreed action program4. Going ahead with a project prematurely can lead to far greater problems than holding it up, and the success of the project should not be compromised by pressures to meet lending timetables. Finally, collection of facts and fortitude in presenting them in undiluted form to the Regional Management, including a discerning risk assessment, can go a long way in preventing the Bank's involvement in unsustainable projects. 38. Further to the Bank's macroeconomic and sector dialogue, lending to financial intermediaries should also be used as a vehicle to press for reforms on issues affecting subproject and, by extension, DFC performance and sustainability through appropriate macroeconomic and/or sector conditionality, albeit past experience has not been very encouraging. In the same vein, it is incumbent upon the management of financial interme- diaries to take up such issues with their parent ministries, and to raise the awareness of the ag.acies concerned in appropriate fora (e.g., by organizing seminars). External aid agencies lending to DFCs could also encourage policy-makers to initiate policy reforms through concerted action. 39. With regard to the Bank's appraisal and supervision work, appraisals should be transparent and pay greater attention to policy issues, the economic milieu, and emerging trends, since the subprojects to be supported by the DFC are unlikely to succeed in a hostile policy environment. Bank appraisals should analyze more carefully the prospective demand for investible funds and ground DFC lending on a fairly concrete project pipeline, and not rely on vague project ideas and unsubstantiated expectations of future demand growth. The Bank should be more circumspect in the review and approval of subproject appraisals, questioning key parameters and in particular the depth of market analysis conducted by the DFC. The Bank should insist on frequent in-depth reviews of a DFC's portfolio either by competent external auditors or its own missions. - 23 - Continuity of the staff assigned for the supervision of a particular DFC operation can ensure greater familiarity with the institution and its environment and trigger timely interventions by the Bank. To be sure, not infrequently, the Bank operates in particularly difficult environments. In such instances, staff should be encouraged to convey early on sensitive issues to the top regional management and seek guidance. The low receptivity of the Government and the entities concerned to external advice may continue to be a drawback to action-oriented initiatives, impelling the Bank to take difficult decisions. But such decisions may be unavoidable when persuasion has not produced the desired results. Finally, emphasis on sound macroeconomic and industrial sector policies would also help improve the sustainability of subprojects and, to that extent, remove some of the underlying causes of the DFCs' portfolio problems. 40. More than lip service must be paid to establishing the economic merit of subproiects. Economic rates of return need to be calculated at a very early stage of project appraisal, if they are to serve as a management tool for guiding project selection or for improving project design (e.g., by identifying potential economies of scope; ascertaining the optimal plant scale in the face of alternative technologies and skill mix, product mix, degree of product standardization, and production runs; types, degree of processing and sourcing of inputs; plant location; balance between the different processes of a unified operation). See also PPAM, para. 16, footnote 12. Yet, DFCs seem to remain unconvinced that this technique can add measurably to their own effectiveness; or perhaps they do not fully appreciate the need for establishing the economic efficiency of their investments in environments where external and internal competition is the exception and distortions in key parameters are prevalent. Instead, calcu- lations are performed, though not always thoughtfully (and often grudgingly), only for relatively large Bank supported projects, only to satisfy an imposed requirement, and only after the appraisal work has been completed. Moreover, economic rates are not always recalculated ex post and, even when they are, they are of questionable reliability and provide virtually no feedback on the actual economic merit of the projects sup- ported. The Bank has been lax in dealing with this issue- Clearly, its own faith and commitment to rigorous compliance with this facet of sub- project appraisal in DFC operations needs to be reaffirmed. This does not mean to imply that the Bank should not pursue in parallel the dislodgment of macroeconomic and sectoral policy distortions vitiating the industrial environment through its economic and sector dialogue (PPAM, para. 39). 41. Finally, the experience seems to suggest that a financial inter- mediary's sustainability is organically conditioned on an array of impacting internal and external factors, includings conception (e.g., prospective role, market share, and strength of competition); human resource development, including a competent, dynamic and resourceful management team and board; degree of independence in decision-making, more the outcome of the government's perception of a DFC's role, the absence of intrusive external interventions, and the institution of an effective defense mechanism rather than the form of ownership; development of an appropriate organizational structure, systems and procedures, work methods, - 24 - and a balanced structure of operations; ability to operate on sound banking principles and financial discipline; rational selection of projects based on thorough appraisals and close supervision of the projects financed; conducive economic environment, policy framewok, and institutional arrangements (e.g., economic policy framework, regulatory apparatus, legal system) allowing for business-like sub-borrower conduct and performance, the development of a healthy portfolio, adequate ri-turns on the financial resources employed, and ability to mobilize resources; adaptability to changing economic conditions and shifting parametere and judicious guidanceloversight by creditors and parent ministries. - 25 - Attacbment 1 -U2 AFEfTii DCfRf1 UTT B . CAB . PDLICY ZB- ggga ig aii% Pl lev Zmmumm 1. SCMCITY OP RAII Reduced import ~epiilItv to servic an Sincet (1) I.emr sai4ty w;iil ~a VATe~1ALS le oretended ;ndstral sear, the reult of in~ffimlenl to servie mede of e~ere~tended GPAfE PAWTS ani-agricuitural palicy blease, exc~esive indselrial eector, end (6i) m~y firu auid Invetmenti In Impora Intonivo indsrie. be inefflmIenl e alminabie Ca*esit, the and exgsnmu~ fatore. allocakan of rsurce huld be esleeehve. 2. DADEQIATE De to inmuffiunen vaab inotaat. Ov erl Ifra rutural ipre nte ars requirMd. DelRASTuMifuTWE inadeuats maintonance ad overal H -bser, sPecifla döbottIenecking fer parslevigr (Pm ATER, deteriorat4an. combined with loca4anl onterpriem (e.g., provielon of rmad and er TRAPT) ~bolcee of firma qhich often rapn~ to g ratore) juftified oney if benei~ wald non-euanamie ceideraliano. In additian. in e ~ 0d eornlially hig) lnvestmanl caute. tratporl, ther, are farge lneffieleniee in the paratatal Gector. 3. EN0II Vr1ng lechnalogical ehoic. lack of preventive Röfored polM frasasork required to reard INAD1C cintenance poor quality control, eli related effectve mintonence and upgrading (rther to ak tchnologicel caenbility and inadeate tha~ coinuing porha~s of n~. equipanl), for Iaon%i4e eructerc. Rol af mid In provoiion adopoan of apropriate technogy. and ~r~ of Inadeate equpen. to enhane tschnological capablilty. ftadirelt n of ald fia.. 4. DuAE~JATE Overeutended industrial eanter for the counltry%. rroaemnt ln aer-,. e, trade and laduelrimi TenLodwAL. tochnologicli cepabil ity: reng cholces of pol Moie ncm'am-y bul noö OuW eflt. Speelfle gLA LAM indu~lroal ~biVilite. 4nd lc a empaillty aeure rmmaired for tchnologlal earIMg and AO lANAGERAL grath oer 6ima. lmaroeconamic and trade , educatian press. ebch i* a elp proecm. CAPAOLITY policie and role of e*pautre~ often wore nob conducive to Indenous tehnologiceal capabi tu Grouth. 8. 0 PAN SCALE, Exchange and inter~l rate and prico control Viahililty of fperating &arga trajeats e-@6 DNAP PfIATr polielm which rewarded larg-eed Impru and ta be asesmmad canidoring capital Cabe e M~RT AM CAPITAL capitel-intensive inveetsalel non-oconomic eunk. Far new projeots. edquate pllac DIN~"TY tactore in paramtetal lnvetmnt. Na~~esa in frammuerk. inveatment appralal eapabilily aess letof recurref need and markch 4se. and eid coordinatian In esunlie. Rol, of Role of eld in the design and imple..ntaecmn of me develapuanl. large projete. 6. NUPPICIENT Depreed state of the cnm. ta prdue6 Reformod policy framsor~ limperta e DBORO quai ity. and high produlan cost ra=ulling in increaae GP gre th and aggregae dend high pricee and oxceaive Capacity. Them. in and to Iier Ccat (and pricMs). tura, are dua to Oast pol icy inedequacies, over- epanolan of enpelty. and ezternal fachore. 7. VASTOFJL Duo ta pricing pol icls that do nol Wn"orege Improved overal 1 poliy frmamsork and beter UrILIZATM oaving in reeurce me, and to ndequate tchnologlei,al abiled 1bar. and aP 11aUS t~ehnoloiceal chdie, equipanet Condilin and omnagerial capbility. tochnologieal capabiily. C i orld eank, Rporh Ota. 8210. Tanania: An Amanda for Induat,imi Rever. June 0. 1987. Vol. 1, p. ag. - 26 - Attachment 2 TANmANIA TANZANIA INVESTMENeT SAPIt (TIU) ANALYSIS OF APPROVALS (LOANS AND EcUm As of December 81, 1987 No. of Aeoung~ in Apre_eis 1 Uitilons 1 A. SZ OF LOANS OR EUITY (T Sh) Up to i million 88 16 20.6 1 1 to a ieillon 69 24 112.4 4 a to 7 milion 8 24 26.0 11 7 to 12 alilHon 82 12 304.0 12 Over 12 mi IIon U . 2 1.782.2 _2 Total 249* 2.41A 10 8. MATRITY OF LOANS Up to 8 years 66 28 290.4 18 6 to 7 years 70 29 687.6 28 7 to 10 yeara 78 33 908.2 87 Over 10 years 24 10 440.0 L9 Tota 288 100 2.428.2 100 C. INTEREST RATES Up to ex p.e. - - - - 6 to U p.a. 7 a 19.0 1 8 to 10 p.a. 64 27 293.0 12 10 to 121 p.a. 140 69 1,480.4 60 12 to13 p.&. 7 a 140.0 6 Over 18= p.. _20 _8 548.6 - Total _28 r 2,428.2 1 0. SECTOR OF ACTIVITT Manufacturing and Engineering 188 6 1,843.8 67 Agriculture and Agro-Processng 26 11 169.7 7 Ulning and Quarrying 16 6 291.6 11 Flahing and Fish Procasaing 11 a 16.2 1 Tourlum and Note# 20 8 100.7 4 Forestry and Wood Processing 11 4 64.0 2 Services, e.g. Tranaport, Printing, etc. 27 11 198.2 . Total 249 100 2.4g4.1 1d0 E. SECTOR Private 94 s8 688.4 27 Publle 165 82 1.817.7 _7 Total 249 120 2.484.1 100 F. TYP! OF LOANS New Projecta 178 s8 1,32.1 sS Expansion Projects 78 83 68.4 22 Rohabilltation/Diversification 16 6 464.0 19 Working Capita _ 8 80.9 _ Total 23 100 2.428.2 100 *Of which 11 equity Investmento. Source: TID. OED March, 1imS TAMMAIA TANZANIA DNVESTMEN7 BA (M)TIB LEINM AM ESqM oPER ONS 1974-1987 (T Sh tililons) Yoar endlne J 80. 974 197. 1076 L97? 1978 1979 LO U IMR L 1 1967 L Loane 97.1 128. 18.4 809.S 389.7 80.2 888.0 811.0 150.0 107.0 112.0 18.0 210.0 119.0 Equity ,72 _0- 10.6 5.8 4.6 _L8JE 1.0 19-0 - - Total 104.3 129.2 184.0 816.8 844.2 0.7 . , 81.0 161.0 12.0 112.0 18.0 210.0 119.0 (In real tea: 1980=100). 255.6 265.8 260.4 886.9 871.7 880.0 83.0 267.6 121.7 88.1 62.9 8.6 76.0 84.2 Lan* 64.8 181.4 120.8 48.1 226.Ø 310.0 880.0 801.0 180.0 112.0 92.8 179.0 2=0.0 116.6 Equity 5.2 .7~ 10.6 8.8 2.0 ..L'~- - 190 a - - Total 59.5 112.1 181.4 46.9 22. s 8 18 0_. 801 0.0 1s 94.8 179.0 260.0 118.6 (n real tema: 1980=100)* 146.8 271.8 200.6 67.6 247.1 884.7 880.0 248.8 104.8 86.4 8.8 82.7 90.6 84.0 DISBURSEENTS Lant 39.0 70.8 77.6 142.1 92.6 169.0 178.0 2.0 8.0 282.0 285.0 168.0 170.0 276.2 Ewlty . - . 5.1 0-6 10.0 6-0 1.0 6.0 .0 1.0 2.0 - Total 48 70.S 78- 148.8 97 7 69 --S 1U80 241.0 224.0 237.0 240.0 169. 172.0 276.2 (In real tema: 1980=100)* 107.4 144.7 119.2 178.4 106.6 196.7 188.0 194.8 108.6 156.8 184.8 78.1 62.8 79.3 La End of 1987. • Manufactur1ng price Index. sourea: TID. oE March, 1988 - 28 - Attachment 4 TANZANIA TANZANIA INVESTMENT BANK (TIN) POSITION OF OPERATIONS FINANCED BY AGENCY AND SPECIAL FUNDS As of September 30, 1987 (T Sh Millions) 1. Agency Funds* Loans Approved 466.8 Loans Camfitted 208.1 Loans Disbursed 109.8 Repayments 26.2 Loans Outstandia 83.6 II. Special Funds Loans Approved, Committed and Disbursed 1.9 *Comprise operations ffnanced by local and external funds, and involve projects that have not been subjected to normal appraisal procedures, or otherwise fail to satisfy TIB's financing requirements, which TIE has undertaken at the government's behest and risk and administers as an agent of the Treasury for a fee. Sources TIB. OED March. 1988 TANZANIA TANZANIA INVESTENT SANK& (TIB) BALANCE 1I<ETS 1900-1987 (T Sh millions) - ffi1 LM 19æ æ æ m Lt Current1 Aseeb. CaIh ø Short-Term Investmønte 482.9 488.8 870.9 887.0 411.6 *22.6 802.1 26.7 Other Current Asta 196.1 24J 5L 877.7 S8 ..27 ....7å21 L I Total Current A~se6s 67.0 705.7 611.1 768.7 978.1 1,06.8 1,261.8 1,814.2 Portfolio Loans 667.5 610.1 971.7 1,171.8 1,886.4 1,882.6 2,056.9 2,44.2 Equity / 56. . 62.7 82. _,6 7..2* ... : 7,, 0 Total Portfolio (Grose) 724.4 872.4 1,084.4 1,289.8 1,469.8 1,408.1 2,181.9 2,642.8 L~ss Cure6 imturl1es (122.6) (168.9) (167.6) (24.7) (889.2) (481.9) (616.6) (1,224.1) Les* prøvl*søn 4.8) (22.6 (9.S) (M61 79.1) (98.3 Q06.9) (119.i> Total Portfollo (Ne) 597.8 696.7 827.6 928.0 991.0 888.9 1,409.6 1,196.7 let FIxed Asse. 2.6 4.7 8.8 14.2 29.6 68.8 91.7 112.6 TOTAL ASSE 1.277.9 14M.1 1.487.5 1.705.9 X.9.7 1.967.5 2.74.0 8&16,.4 LABILTIES & NET WIH Current L111 etl« 78.6 109.8 140.6 226.7 849.2 846.0 551.9 678.1 Lone-Ter e Brrowing 316.4 410.2 407.7 88.4 627.2 664.0 1,076.7 1,291.9 Fun 55.8 82.. . .1 ...754 78.5 109.0 J.. A Total Liabilitle 444.3 62.8 06.7 678.2 1,051.6 972.6 1,789.6 2,102.4 Ne6 Worth Pald-in Capital 100.0 100.0 100.0, 100.0 100.0 100.0 100.0 100.0 > Grante 69.7 68.O 644.0 868.0 081.0 685.2 702.0 78.2 Rtalned Earning 78-9 88.9 187.8 .-_M*_. 1Ma2 I2. ..X,4 9.. 8n Total Ne Uorth 888.6 828.6 881.8 1,082.7 947.2 98.0 1,008.4 1,08.4 ir TOTAL LIASILITIES A NET UMM 1.277.9 1.4MA 1.487.5 X.706. 1.9M.7 1.957.5 2.748.0 8165.4 Exclude the Special Fund Account. Includes InvestmentD in 70FL. Source: TIS. MED Narch, 198 - 30 - Attachment 6 TANZANIA TANZANIA INVESTMENT BAK LM INCOME STATEMENTS 1980-1987 /a (T Sh Militons) Year Ending June 30 1980 1981 1982 198 1984 1986 1986 1987 fb INCOME Interest Fees on Loans 66.0 69.8 106.4 140.6 177.9 204.4 297.6 744.4 Commissions 2.9 2.8 0.6 1.6 0.4 1.1 1.9 0.2 Income from Investments 15.7 20.6 15.7 16.6 22.6 16.6 8.0 7.2 Other Incoe 0.4 0 2 1 8.1 9 TOTAL INCOME 87.0 118.0 124.5 162.4 202.0 228.2 810.6 754.6 EXPENSES Finance Charges 24.5 26.7 83.4 36.1 84.7 52.6 97.8 282.9 Administrative Expenses 7.0 10.7 18.1 16.6 16.6 27.0 80.8 49.7 Depreciation 0.8 0.6 0.6 1.0 1.1 1.1 1.0 2.6 Provisions 5.1 21.6 21.8 29.1 82.2 15.7 149.5 864.8 Other Expenses L -= -1. - 1-2 _ 2. TOTAL EXPENSES 87.5 59.5 76.1 62.7 6.0 96.6 801.2 727.7 Net Profit before Taxes 49.5 53.5 40.4 79.7 116.0 126.0 9.4 26.9 Provision for Income Tax 27.2 87.6 88.6 58.8 @7.7 70.5 8.0 18. NET PROFIT 22.8 15.9 14.8 25.9 48.8 56.1 1.4 8.8 L Actuals exclude the Special Fund Account. / End of 1987. Le Includes foreign exchange losses and feasibility study cost write-offs. Source: TIB. OED March, 1988 - 31 - Attachment 7 TANZANIA TANZANIA INVESTENT DAMI( (TIS) FINANCIAL RATIOS 1980-1987 1980 198 1982 1988 1984 1985 198i 198? Income Stat~mnt Elements as % of Averag Total Assets 1. Totäl Income 8.6 8.4 8.6 10.2 10.9 11.5 18.2 28.6 2. Flnanco Charges 2.4 2.0 2.5 2.8 1.9 2.7 4.1 7.4 8. Adaleistra6lve Expensee 0.7 0.3 1.2 1.0 0.9 1.4 1.8 1.6 4. Net Profit (10s) 2.2 1.2 1.0 1.6 2.6 2.8 0.1 0.8 Profitabllty- Indicaetors (M 5. NetProfit (los)/Yer End N~b Torth 2.7 1.9 1.7 2.5 8.1 6.7 0.1 0.A 6. Incom frem Loang/Avorage Loan PorollIo 11.2 12.6 11.9 18.1 14.2 16.0 17.6 80.8 7. Cos of D~J/Averag De* 7.7 4.8 7.7 7.8 6.1 6.6 8.9 18.0 Structural Ratlos and Dob Coverage 8. Current Ratlö 9.2 6.4 4.6 8.4 2.8 8.1 2.8 2.7 9. Long-~e* Dol/Equity 0.4 0.5 0.5 0.4 0.9 0.8 1.9 1.2 10. Cumulattve Provislons *s 5 of Loan and EquIty Portfollo 2.0 4.0 6.0 7.0 8.0 9.0 18.0 27.8 Source: TID. OED March, 1988 TANZANIA TANGANVIKA DEVELOPMENT FINANCE COMPANY LTD. (iDFL) LENDING AND E4UITY OPERATIONS 1979-1984 (Amounts in T Sh *000s) Year onding December 31 1979 1980 191 1982 1984 1985 19m 197 APPROVALS Loane 89,982 41,815 34,300 11,000 6,060 16885 10,672 45,98 109,068 Incom Notes 4,00 17,000 - 4,00 2,000 - - - - Equity 14, 644 7.900 - . 1.600 _6Q 000 2,34 4,0 - Totae 1 09.278 66.515 34.30 23.Ml 9.WO~ 20,5 12.708650.173 109,05 (In real terms 1960=100)* 134.1 66.5 27.7 19.3 6.8 11.6 5.9 18.2 81.8 COMMIMENTS w Loans 28,696 86,246 80,235 86,501 25,995 20,976 - 31,226 82,037 Income Notes - 1,000 500 3,s - - - 2,000 - Equity 3,475 6,016 S. 748 74 S.m - 6.726 Total 82.37 43.28 94.825 40.744 26I738 26.L478 - 41.94 92&037 (In real terms 1960=100)* 89.7 43.3 27.7 82.9 17.6 14.9 - 15.2 23.8 DISBURSEMENTS Loans 64,396 50,604 22,878 29,806 80,08 16,941 20,354 22,189 20,048 Income Notes 2,600 2,64 500 4,000 4,187 - - - - Equity 18.476 4,112 2,226 S.90 8.36 11730 280 4,278 2.184 Total 80.472 57.190 25.101 42,278 !!,!0 28.671 20.634 2,417 22.m (In real terms: 1980=100)* 61.5 57.2 20.8 84.1 24.6 18.1 9.5 9.8 8.5 ft *Manufacturing price ladex. Sources TDFL. OED March, 1986 TAl~ANI TANNIKA DEVELOPMENT FrANCE COWANY LTD. (IDFL) 8A.AlEMET 1979-19m7 YeaC ending December 81 1~7 IND1 igel, 1i8m im IN7 Cash and Short-Term Investmente 26,411 29,662 40,56 1,608 6,942 18,640 89,132 92,687 140,798 O~ler Currmt Asset £a 18,088 16,f8t 25,859 32,848 26,866 80,607 90,06 145,908 8*0,404 Portfol lo Equlty 55,p7 59,467 61,682 70,649 72,08 8,081 85,840 87,968 89,802 Los, 148,66 128,418 174,665 197,697 207,726 255,161 180,470 879,240 4^@,878 lmese Not~ -11.88 14.12 14.852 1j.1j 2 21819 .og 14.494 1886a 12.889 Total Porfolo (Gro*) 210,711 252,02? 250,889 288,48 328,08 857,041 250,804 481,077 542,049 Icea Provelons 88658 10.658 12,1S' 24.07 8.491 48.f0e 48 5 .84&74 188.292 Total Portfollo (Nt) 202,05R 241,869 288,731 262,411 287,58 810,8^1 201,709 396,855 378,757 nit Fixed Asets 19,872 22,10 25,483 28,488 28,582 82,589 84,854 84,217 88,969 Statf ~lousg Loans 50 _98 788 na 1i8 1.266 1128 -1.0 1.674 TOTAL ASSET3 261.94 8 4 1.287 80.742 8.927 670.192 876.521 LIABILTIES Current .sbi lit.s 28,285 27,961 81,288 28,45 24,442 26,468 88,87 169,946 278,592 Long-Tra LlablItl** Ine . Not.. 80,000 80,000 80,000 80,000 80,000 80,000 12,500 12,888 12,888 Efn Bnda 29,818 27,058 22,742 28,315 20,90 82,488 - - - LoU _8 882.9 99, 81 03048 .141 177.«8 10.941 2.2W 078 TOTAL ROINGS 146,279 189,998 202,58 20,858 242,416 290,802 118,441 277,184 348,96 Share Capita% 88,000 88,000 88,000 88,000 88,000 88,000 210,000 240,000 240,000 Reserv.o 8q. 4.8 9.476 __1 (4,1181 (11.488) -(8 (6,987f 18. 91,900 92,80 97,426 88,010 88,884 ' 76,r47 204,611 288,068 2 e8,968 TOTAL UABILTIES A10 ES1ITY 810.784 881.267 .828.618 80.742. .-% 406.927 670.192 876.521 f, Debor. and curront maturItis of portfollo loans. Sourco: TDFL. OED March, 1988 TANZANIA TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD. (7DFL) INCOME STATEWENTS 1979-1987 (T Sh '~00s) yoar endinG December 81 1979 1990 1981 1982 1988 1984 1m8 1986 1987 Interes6 12,604 18,274 19,767 22,018 28,780 38,148 29,210 50,875 25,89 DividAds 4,181 2,82 0,025 4,576 4,99 4,658 5,728 7,248 3,821 Directore/Managemenb Fes 4,245 7,178 6,082 7,778 4,089 4,962 9,998 6,370 8,926 Other Incos. 1.648 1.428 2.110 4.168 4.67,2 8.107 6.977 7.77 10.781 TOTAL INCOME 22.578 29f0 88.974 88. 40.420 49.965 61.908 71.070 98 427 Administrative Exponss a 4,788 7,148 9,160 9,077 10,889 11,780 14,211 17,693 82,294 Doubful Deb6 414 2,822 664 10,646 4,500 4,289 (910) 14,746 16,984 Finance Charges 10,340 18,723 16,88 9,009 18,627 21,698 26,403 41,205 47,971 Losel(Profit) on Disposi of Adjs2tm~ns - .,.: . - . : .- 2.88 .(4591 16,492 23691 26,682 28,732 29,016 37,767 42,287 70,18 97,229 Profi6 I efore Ta 7,081 6,012 8,292 9,808 11,404 11,188 9,671 887 (802) Tax 8.=8 8.082 8.650 7.570 2.547 7.887 2.108 2.786 S.M Profit After Tax/(Losn) 8,88 2,980 4,742 11,854 8,857 8,861 7,668 3,620 (0,091) Exchange Loss/(eln) - - - - - - - (79,5683) Provislons 2.000 100 21.045 11.404 11.188 1.916 (88.147) 88.550 mot Profit/(Loss) ( 10.242 .991) (2,547) (7.87) 5.647 (82.547) 10.078) /a Incuds doprociation. .b Injluds provislon apinst om value of investents. Sourco: TDFL. MED March, 1989 - 35 - Attachment 11 TANZANIA TANaANYIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL) FINANCIAL RATIOS 1979-1987 1970 190 1981 1982 198 104 1965 1986 1937 Income fiatement Elements as X of Average Total Assets 1. Total Inoe 9.6 10.4 10.6 11.9 12.2 18.2 12.7 10.6 11.0 2. Floance Charges 4.0 4.0 4.9 2.8 4.0 5.6 6.5 0.1 5.5 8. Adminierative Expenses 1.9 2.4 2.6 2.8 3.1 8.1 8.5 2.6 8.7 4. Net Profit (lose) 1.9 0.8 1.0 (8.0) (0.8) (2.0) 1.4 (4.9) (1.4) Profitability Indicatore (M 6. ge Profit (0oes)/Year End Net Worth 4.2 1.1 8.8 (10.9) (8.0) (9.6) 2.7 (18.9) (4.0) 6. DIvidend Income/Equity Portfolio 7.5 4.6 9.6 6.5 6.6 5.5 6.7 0.2 4.2 7. Income from Loans/Average Loan Portfolio 7.0 7.9 7.2 8.2 6.6 9.7 17.7 12.9 16.6 8. Cost of Dbt/Average Debt - 8.1 8.8 4.5 6.8 6.6 28.8 14.9 18.7 Liquidity and Creditworthiness 9. Current Ratio 1.7 1.7 2.1 1.2 1.4 1.9 1.9 1.5 1.7 10. Long-term Debt/Equity 1.6 2.1 2.0 2.8 2.6 8.5 0.5 1.1 1.5 11. Debt Service Coverage Ratio - - 2.9 1.7 2.9 2.4 - - - Source: TDFL. OED March, 1988 TANZANIA TANANIKA DEVEUIPENT FINANCE COMANY LTD. TDFL) souRcM AND USES OF RAIDS 19794,97 Year onding December at 1070 16 1961 108 89 1984 1985 INS 1987 1URCES Funds from Operatlons 7,668 9,528 10,850 21,8)6 16,885 22,518 15 77 18,488 17,494 Loan Repayment 18,479 14,788 16,862 24,697 28,107 88,822 84,724 58,469 104,070 New Equity 48,000 - - - - - 6,000 80,000 - Loans 46,519 46,641 21,498 17,322 20,819 18,198 16,041 88 - Other / - 1.082 9 **271 5.18 442 Subtotal 114,720 72,805 50,710 8,595 60,781 74,912 S07,618 107,475 122,006 -erations Equity 18,477 4,118 2,225 6,967 3,869 11,780 280 4,278 2,184 Loans and Income Notes 71161 58.068 22.676 Mso$ 84220 16.941 20854 22.189 20 6,116 57,201 25,101 42,278 87,600 26,671 20,684 26,417 22,760 Repayment of Borrowings 410 - 6,467 18,566 9,860 15,682 84,882 96,100 76,124 Fixed Assets 5,8809 2,90 4,181 1,952 8,187 4,945 8,078 1,120 1,108 Taxes and Dividends 1,401 1,250 8,200 8,519 4,871 8,411 8,748 4,692 5,289 Other& 98 427 201 47 567 188 15 - as Subtotal 92,054 61,888 41,190 66,847 55,564 57,872 64,605 128,588 107,062 Increase/Decreane In Funds 21,772 10,987 9,520 (8,752) 6,177 17,040 48,000 (21,068) 14,044 Includes staff housing losn. sale of Investments and fixed assets. Includes creditors (income notes and EIB bond interest), staff housing loan. and deferred taxation. urces TDFL. rch, 1988 TANGANYKKA DEVELCPMENT PINANCE COMPANY LID. (FI.) ANALYSIS OF ARREARS 1979-1987 1,979 IM 1961 1M82 1998 1g"- LES IS4U 1. Tei Numbr of Loans in Por6føllo 82 82 74 70 60 67 76 76 72 2. Nuber of LanAff~eced by Arrre 6 16 16 84 81 87 88 26 25 8. Exposure Ratio 7% 18% 245 48 62% 6"5 0% 84% 845 4. Toal F Otsandla g Leon P rfolo21 (7 Sh '000) 28,000 98,440 150,829 215,849 228,000 272,000 227,822 494,767 718,404 6. Portolo Affecte by Arreara (T $h '000) 6,000 88,400 66,000 110,000 116,000 160,000 180,000 886,000 S50,000 0. Exposuro Ratio 20% 40% 48 S1 60" 69% 0m1 725 775 7. Arrearo Over 8 »l~th (Principal A Interesi, T Sh '000) 8,000 8,000 12,000 85,000 26,000 88,000 60,000 90,000 226,000 8. Arrears s % of Total TDFL Portfolo 125 a1 85 10m 115 14% 221 18 s1 some: tFT.. march, 1996 TANZANIA TANAYIA DEVEPMENT FMNAM COMWNY LTD. MFL) PORTFOLIO ANALYSIS AD of December a1. 1987 (T Sh 000.> Portfol o Affectad by Arrear* Nuber of Total ArroareL Arrears of Arreara of Arreare of Arreare of Project Cateor Projecte Affn 0-8 monthe 84 montho 6-12 monthe 1-2 y=ars Over 2 yeast A. Operatina Prolects Profitable Projcte 6 56,82 6,848 84,768 12,874 f,89 82 Unprofltable Projecta Lh 18 186.189 12.985 41.m 26.518 89.»9 51.a27 Subtota 19 220,618 19,828 76796 88,892 44,198 67,889 9. Proleete Under Implementation 6 4,8m 1.912 8.962 1.458 1.110 1.62 Total 24 228.124 21.240 79j767 40.845 48.0 59.014 C. Profltable/Publies 2 21,110 8,092 18,010 2,878 722 - Unprofltabl*jPublile 4 44,849 797 897 . - Under Impleentation/Publle 1 8,644 575 688 806 1,62 N.B.: Projecte In Secilon C ar* included In A and 8 abov*. a Arreara of principal and Interost. 0 S: Includes companles under Ilquldation. Source: TOFL. OED March, 1988 - 39 - Attachment 15 TANZANIA TANGANIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL) COLLECTION PERFMANCE 1982-1987 (T Sh *000) 1982 L~8 I98 19n18 1. Arreare at Beginning of Year 18,882 29,018 40,840 60,864 48,164 90,158 2. AmountIng Falling Du. Principal 20,26 29,471 44,167 46,692 89,884 1m8,20 Inter~6 28.100 28.749 26678 42.29f 88.021 14.780 40,726 6,220 70,840 87,87 177,855 297,98 8. Total Rocoverable Collchion 60,107 8,888 111,480 148,751 225,119 888,091 4. Cach 80,494 46,198 50,610 100,87 109,994 109,596 6. Reschdule Principal - - - - 20,112 20,112 Inter~ _8-.2-0 8.20 - - - - 28,872 28,872 6. Total Collection 80,494 45,198 S0,616 100,87 188,866 182,987 7. Arreare at End of Year 29,618 40,40 60,864 48,164 90,18 2U8i124 8. 4/8 (5) sig 62 465 675 49 208 9. 4 s/8 () • - - - 05 84% 10. 6/1 (s) - - - - o81 20 Source: lDFL. OED March, 1988 - 41 - PROJECT COMPLETION REPORT TANZANIA TANZANIA INVESTMENT BANK (TIB) (LOANS 1172, 1498 AND 1750-TA) February 1988 Industry and Energy Operations Southern Africa Department * 43 - PROJECT COMPLETION REPORT TANZANIA TANZANIA INVES7HENT BANK (TIB) (L*NS 1172, 1498 AND 1750-TA) 1. LaNTODUCTION Background 1.01 The Tanzania Investment Bank (TIB) was established in 1970 as a -wholly Government-owned institution to provide term financing for medium- and large-scale investments in the productive sectors, and technical assistance to projects. Since many of the larger projects have been promoted by parastatals with equity financing provided directly through the budget, TIB's main role in Tanzania's financial sector has been to provide loans for larger-scale investments undertaken by the parastatal sector. As of June 30, 1986, the authorized share capital of TIB was T Sh200 million of which T Sh.00 million was paid in and held by Government (602), the National Bank of Commerce (NBC - 302) and the National Insurance Corporation (NIC - 101). 1 1.02 The Bank Group first assisted TIB in 1974 with a line of credit of US$6 million (IDA Credit 460-TA), which was reviewed in a Project Performance Audit Report (No.3881) dated karch 30, 1982. This was followed by three lines of credit, together with an EEC Special Action Credit for a total of US$70 million. TIB has also administered two IDA technical assistance credits: Credit 601-TA for US$6 million and Credit 1060-TA for SDR8.4 million. The three lines of credit, which were IBRD loans (Nos. 1172-TA, 1498-TA and 1750-TA), accounted for US$55 million and are the subject of this report. Implementation of these three repeat operations spans a decade (1976 to 1986), but since the performance of TIB prior to 1980 was partly covered in the above-mentioned Project Performance Audit, this report focuses mainly on the period 1980-1986. The EEC Special Action Credit is not referred to separately in this report, since the performance under this credit is considered to be the same as under Loan 1750-TA. 1.03 Loan 1172-TA for US$15 million was approved on October 28, 1975, signed on November 12, 1975, and became effective on February 20, 1976. The purpose of the loan was to finance part of TIB's foreign exchange requirements to cover its commitments through December 31, 1977. The loan was made to TIS st an interest rate of 8.52 p.a., repayable in accordance with a schedule conforming substantially to the aggregate of the amortization schedules applicable to the subloans. The maximum repayment period was set at 15 years. It was agreed that TIB would onlend the proceeds of the loan at its lending rate prevailing at the time of subproject authorization and that it would pass on the foreign exchange risk to subborrowers. In accordance with TIB's policy statement, its 1/ Both NBC and NIC are wholly Government-owned. -44 - minimum interest rate was to substantially reflect the cost of capital in Tanzania. Consistent with this policy, TIB was charging a minimum rate of 10% p.a. for up to 15 years. While this rate was not positive in real terms (inflation was about 152 p.a. between 1975-77), it was in line with other rates in Tanzania and it enabled TIB to have an adequate spread. An individual subproject free limit of US$400,000, with an aggregate free limit of US$3 million equivalent was agreed upon. An additional feature of the loan was a limitation on TIB's debt:equity ratio, which was not to exceed 3:1. There were no other features of the loan that were of special interest. The loan was fully committed by June 1978 and the loan was closed one year later than anticipated on December 31, 1981. 1.04 Loan 1498-TA for US$15 million was approved about two years later on December 6, 1977, signed on December 28, 1977, and became effective on April 3, 1978. As with the previous loan, the purpose of this loan was to finance part of TIB's foreign exchange needs up to December 1980. The terms and conditions of the loan were similar to Loan 1172-TA, except that the Bank interest rate was 7.92 p.a. and the minimum onlending rate TIB agreed to charge its subborrowers was increased to 11Z p.a. In recognition of the improved quality of TIB's appraisal work, the free limit for individual subprojects was increased to US$800,000 and the aggregate free limit to US$7 million equivalent. The loan was fully committed and closed as scheduled on December 31, 1980 and June 30, 1983, respectively. 1.05 Loan 1750-TA was the Bank's fourth line of credit to TIB. The IBRD loan amount was US$25 million, and it was agreed at negotiations that since TIB needed additional resources, US$15 million from the EEC Special Action Fund allocated to Tanzania would also be lent to TIB. The loan was approved on July 24, 1979, signed on August 20, 1979, and became effective on February 5, 1980. As with the previous loans, the main purpose was to provide foreign exchange resources for TIB's commitments up to June 30, 1983. It was also felt that the Bark's continued association with TIB was justified in order to enable it to influence the channelling of funds into financially sound and economically viable projects and to improve TIB's overall performance. The terms and conditions of the loan were the same as with the previous loan including the Bank's interest rate, but the free limit was furth6r increased to US$1 million and the aggregate limit to US$8 million. The EEC Special Action Credit, which was administered by IDA, was on standard IDA terms to the Government and onlent to TIB on terms equivalent to the IBRD loan. The main issue during negotiations was TIB's interest rates and the problem posed by a Bank of Tanzania (BOT) circular in 1978, which directed banking institutions to adopt a new schedule of interest rates. This directive required that TIB lower its rates to medium and large-scale industry from 112 p.a. to 102 p.a. The issue that concerned the Bank was how the process of interest rate determination would be conducted, particularly whether, as in the past, TIB's Board would have the authority to make future interest rates changes or whether BOT would henceforth determine TIB's interest rate structure. During negotiations, the Bank was informed that BOT would set TIB's interest rates, but it was agreed that since funds from external sources are exempt from the BOT directive, TIB would charge 112 p.a. for all onlending from the Bank loan and EEC Credit. The loan was fully committed two years later than anticipated on June 30, 1985, and closed a year later on June 30, 1986. The EEC Special Action Credit was also closed on June 30, 1986, about three years later than anticipated. -45 - 1.06 While project implementation for Loans 1172-TA and 1498-TA was smooth, with initial disbursements ahead of schedule, by the time the fourth loan became effective, the economic situation in the country had deteriorated significantly. This was reflected in TIB's financial performance and operations, including loan approvals, which started declining rapidly. Annex I shows a schedule of cumulative Bank disbursements for all three loans. Throughout the period under review, TIB was in compliance with all loan covenants, except those relating to audited financial statements. These statements, which were prepared by the Tanzania Audit Corporation, were often submitted late and were deficient in certain standard information required by the Bank from all DFC clients (para 3.07). Project Objectives and World Bank Role 1.07 The objective of all three operations was to provide foreign exchange resources to TIB for investments in, inter alia, medium and large- scale industries, agro-business and tourism. It was also the Bank's objective to assist in TIB's institutional strengthening, particularly in improving its project analysis capabilities and procedures. It was felt that the Bank's continued association with TIB would enable the Bank to influence the channelling of funds into financially sound and economically viable projects and improve their overall performance. These objectives have met with limited success. Today, over three-quarters of TIB's investments are in unprofitable or problem projects. While this is mainly due to the difficult economic situation in the country, it is also due to the fact that in the face of deteriorating economic conditions, TIB has been unable to allocate scarce resources effectively due to Government policies. One of the Government's main objectives, during the several years of economic deterioration, has been to keep the larger enterprises in the country afloat; therefore, these enterprises have benefitted from the Government's foreign exchange allocations. Many of these enterprises have been unviable, and as a result large amounts of credit have been allocated to negative value-added activities. The Bank's objective of financing sound investments and improving TIB's effectiveness in resource allocation have, therefore, been largely undermined. The Bank, however, did make a contribution towards strengthening TIB institutionally. In line with Bank recommendations, TIB recruited competent expatriates and Tanzanian professionals and developed an active and effective staff training program, which benefitted from the IDA technical assistance credits. The Bank also had an important impact on TIB's policies and procedures, including dividend policies, reporting and management information systems, supervision and debt collection, and project appraisal methodology, and also helped TIB reorient its lending towards rehabilitation of its existing portfolio. However, inspite of improvements in appraisal methodology, with the benefit of hindsight it is clear that the economic viability of investments was not properly assessed, particularly their long-term viability in a continuously deteriorating environment. -46- II. UACROECONOMIC, INDUSTAIAL AND FIANCIAL SETTING Background 2.01 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 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, in the Government's view, led 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 1967. The new priorities, enunciated in the Arusha Declaration, were directed toward establishing a socialist society and led in the late 1960s to the nationalization of large-scale industry, commerce and finance, the creation of numerous parastatal bodies, the formation of Ujamas (cooperative) villages, the decentralization of Government (1972), and the mass campaign of villagization (1974-76). 2.02 Between 1966 and 1973, Tanzania's performance in terms of growth, domestic resource mobilization and income distribution was satisfactory. During this period, real GDP grew by 4.4Z p.a., the gross investment rate rose above 20Z and gross domestic savings fluctuated around 15-18% of GNP. In 1974, a severe drought and a drastic increase in import prices, especially oil, triggered a serious economic crisis in Tanzania. This crisis exposed some of the longer-term weaknesses related to dwindling domestic savings, low productivity of investments, parastatal inefficiencies, and declining exports. The Government restricted imports and froze wages in an attempt to manage the short-term situation. These measures, aided greatly by the coffee boom in 1977 and by increased external financing, were able to keep the economy in balance until 1978. A new balance of payments crisis occurred in 1978 due tos relaxation in import controls without compensatory exchange rate management; falling coffee prices; and a poor performance from the agricultural sector. The fiscal situation further deteriorated following the outbreak of war with Uganda in 1979. Inflation accelerated from 112 to 282 and growth in aggregate output slowed to 3.3% p.a. between 1978 and 1980 as compared with 5.2% p.a. between 1970 and 1978. In addition to the series of external factors, the economic downturn of the country has in large measure been the result of underlying weaknesses in the management of the economy, particularly with respect to incentives in the agricultural sector, exchange rate and trade policies, administrative controls, expansion of the public sector, and implementation of a poor industrial strategy. 2.03 Tanzania's economic crisis has deepened since 1980, with GDP per capita (which is now estimated at US$240) falling at an average of 2.5Z p.a. Exports declined by about 10Z between 1979-1980 and 1981-1982 (when - 47 - exports averaged US$488 million) while imports were kept stable at over US$1.1 billion by additional foreign financing. By 1981-82 foreign financing had become at east as important as exports as a source of financing the import bill. By 1983, Tanzania had virtually no access to international creditors and exports had declined by an additional 20Z compared with 1981-82. Tanzania had to adjust to its external imbalance by a major reduction in imports, which declined by 30 percent (in value terms). After several years of economic deterioration, the situation in Tanzania today continues to be characterized by sluggish growth, high inflation and low productivity. The country's physical and social infrastructure has also deteriorated over the years, and transportation bottlenecks now impinge on every sector of the economy. 2.04 In an effort to address the country's economic problems, the Government launched "Economic Survival Plans8 in 1980 and 1981, but it was not until 1982, with the introduction of a *Structural i-Ijustment Program," that a comprehensive approach to resolving them wa. initiated. The measures taken to revamp the economy (including cuts in the budget and imports, some trade liberalization and devaluation) represented a move in the right direction, but were not unfficient to improve resource allocation and lay the basis for economic recovery. In October 1985, the new Government formed under President Hwinyi took further measures to tackle the deepseated problems of the Tanzanian economy. A more pragmatic approach to economic policy has now emerged following the launching of a new Economic Recovery Program (ERP). The basic objectives of the ERP are to increase the rate of growth of output, rehabilitate the country's infrastructure, and xestore external balance. The main features of the ERP include: (a) sustained action on the exchange rate to eliminate the overvaluation of the Tanzanian shilling by mid-1988; (b) supporting fiscal and monetary policies consistent with an IMF program; (c) measures to reduce price controls, improve foreign exchange allocation, and reform the trade regime; (d) policies to improve the performance of the main sectors; and (e) interest rate adjustment, with the objectives of achieving positive real rates by end-1988. The Government's initiatives are being supported by the Bank'o Multisector Rehabilitation Project and the IF Standby Arrangement. The first year of implementation of the ERP is now complete, and the effects on the economy are beginning to show. Over the past year, the economy has grown by about 3-4Z; adequate to generate a modest growth in per caipita income. A sound foundation for recovery appears to have been established, and the prospects for durable economic growth are good provided Government sustains progress on sectoral policy and institutional reform, and adequate amounts of foreigu exchange are available for key inputs Eor domestic production and rehabilitation. The Industrial Sector 2.05 At independence, Tanzania had an extremely limited industrial sector dominated by private firms. Three major features have characterized the sector since then: (i) rapid expansion followed by a sharp decline; (ii) a diversification in output towards consumer goods; and (iii) a major shift in ownership from the private to public sector. The share of manufacturing in GDP rose from just under 4Z in 1961 to 121 in 1978 before registering a sharp decline. After using a massive amount of investment resources during the 1970s and early 1980s (over US$2 billion), Tanzania's -48 - industry now produces only about 3Z of the country's GDP (measured at world prices), although for much of the seventies as much as one-third of all investments were channeled to industry. Tanzania's manufacturing sector, which at world prices produced only US$56 million worth of value-added in 1984, utilized an estimated US$420 million worth of recurrent inputs, of which US$290 million were (direct and indirect) imports. The average capacity utilization rate of the sector as a whole is in the range of 20-30Z. 2.06 The overall decline in industrial output is directly related to the drop in export agriculture, which has meant fewer materials to process and less foreign exchange to pay for imports of the needed spare parts and intermediate goods. Government policies resulting in an overvalued exchange rage, administrative allocations of diminishing foreign exchange resources, restrictive import licensing, and price controls, have also combined to produce an inefficient, over-protected industrial sector. The Bank's recent Industrial Sector Report "Tanzania: An Agenda for Industrial Recovery" (Report No. 6357-TA) indicates that while there would be productivity gains across-the-board by increases in capacity utilization in industry, far greater benefits would be derived from reallocating existing resources from firms that produce &t negative value-added to other industrial firms producing at positive value added (whether efficiently or not). 2.07 The main objectives of the Government's three-yvar Structural Adjustment Program (AP) in 1982 as it related to industry was inter alia, to cut back on new capacity creation, encourage industrial rehabilitation in selected priority enterprises, double manufactured exports, and improve parastatal efficiency. However, structural, operational and managerial inefficiencies in the sector continue to persist; infrastructural bottlenecks remain; and the availability of raw materials and inputs is constrained. Equally important, resource misallocations persist, particularly regarding foreign exchange and credit. Although the recent exchange rate adjustments and the decontrol of prices have reduced somewhat the skewed set of incentives facing industry, the distortions in the trade regime and the foreign exchange allocation mechanism are still substantial, resulting in highly variable rates of effective protection across industries. The Bank's recent industrial sector report spelled out an industrial reorientation strategy aimed at emphasizing efficiency and productivity. The main elements of the strategy includes () intersectoral reorientation, where agriculture (the most productive sector and higher foreign exchange earner) together with infrastructure, would have access to a large share of resources, while industry would have a substantive supportive role; (ii) reorientation within industry away from inefficient industries to productive ones; (iii) reorientation of resources away from new investments toward rehabilitation; (iv) reorientation of resources towards smaller-scale firms; (v) balance between the private and parastatal sectors; (vi) reduced import-substitution and increased export orientation; and (vii) technological capability development. The Bank intends to follow up this study with a policy-based industry and trade adjustment lending operation, which would initiate the process for restructuring of the industrial sector and support the trade liberalization measures envisaged under the Multisector Rehabilitation Project. - 49 - The Financial Sector 2.08 Tanzania's banking system comprises a central bank - the Bank of Tanzania (BOT), and ten financial institutions: two comercial banks, four development banks, a savings bank, a housing bank, an insurance company and a national provident fund. One of the commercial banks, the National Bank of Commerce (NBC), enjoys a virtual monopoly in the mobilization and allocation of short-term funds. All the institutions are fully state-owned except for tbet (i) East African Development Bank (EADB), which is mainly owned by the Governments of Kenya, Tanzania and Uganda; (ii) Tanganyika Development Finance Company Limited (TDFL), which is jointly owned by TIB and three development finance institutions from the U.K., the Federal Republic of Germany, and the Netherlands; and (iii) Cooperative and Rural Development Bank, which is owned by the Government, cooperatives and BOT. Tanzania has no private capital market and there are no plans to start one. 2.09 Almost every aspect of the Tanzanian financial sector is state controlled, with the market playing practically no role. Monetary and credit policies and targets are determined in the Government's annual Finance and Credit Plan, which indicates the distribution of credit classified by economic activity and borrower, with explicit allocations made for the Central Government, public enterprises and the rest of the economy. Over 902 of the credit allocated is absorbed by the Government and public enterprises. Through the Finance and Credit Plan, the Government provides priority ranking of borrowers by economic activity. At present, emphasis is placed on meeting the credit requirements of the agricultural and export-oriented sectors. 2.10 One of the main issues affecting the financial sector in Tanzania is the significant misallocation of credit. The objective of keeping many large unviable enterprises afloat has resulted in the provision of large amounts of credit to negative value-added activities. Many factors have been important in determining the significant misallocation of financial resources in the economy, including inter alias (a) interest rates, which are discussed in the following paragraph; (b) limited competition in the mobilization and allocation of financial resources (NBC enjoys a virtual monopoly in the mobilization and allocation of short-term fluads); (c) rescheduling practices and lack of recognition and appropriate absorption of losses by the financial institutions; (d) political pressures in granting loans and provisions of Government guaraatees for certain types of loans; and (e) administrative allocation of foreign exchange. Under these circumstances, the imposition of aggregate credit ceilings for the economy has had the unintended effect of leaving many efficient firms out of the official credit allocation system. The form of ownership, with the dominance of the 1,arastatal sector in industry has resulted in the private sector receiving a very small share of the credit. Many private firms have had to turn to informal credit markets and pay exorbitant interest rates. Firms in the private sector have also had problems in raising equity due to the lack of a private capital market, and therefore, tend to be over- leveraged, particularly in debt denominated in foreign currency. The successive devaluations of the past few years have had a serious negative impact on their debt servicing abilities. This exposes one of the serious problems of Tanzania's financial sector, which is its inability to mobilize term deposits and its resulting excessive dependence on external resources to finance investment. - 50 - 2.11 The structure and level of interest rates have been a major deterrent to raising domestic resources. Interest rates are determined administratively anC a detailed structure of deposit and lending rates for all financial institutions is prescribed annually by BOT. Different rates are set by Government for different borrowers depending on economic activity, ownership (foreign versus local), location (urban versus rural), and loan amount. Interest rates have been negative in real terms since at least 1975, but it was not until 1980 that they became substantially negative. There was no general adjustment of interest rates between July 1982 and October 1985 inspite of an average inflation rate of 30Z p.a. and interest rates which remained negative in real terms by about 172. Since October 1985, interest rates have been adjusted upwards four times, with the last adjustment taking place in April 1987. The last adjustment in interest rates has made rates substantially less negative. Inflation today is still estimated to be about 30Z p.a. and nine to twelve-month deposit rates are 17.752, savings rate is 21.5Z, the maximum commercial bank lending rate is 292; and the lending rates for medium- and large-scale industries are 28-29Z. The strongly negative level of interest rates over the past several years has resulted in reduced savings, lending rationing, and capital flight. Savings deposits in real terms have declined since 1980. The structure of interest rates has also contributed to a distorted allocation of financial resources because of the disparities in rates paid by different users, particularly those paid by clients of financial institutions compared to others who are forced to pay rates as high as 70Z from the informal markets. In addition, the same rates have been charged to both borrowers of local and foreign currency loans, even though the latter also have to bear the foreign exchange risk. It appears that TIB and Government have now agreed, in principle, that in view of the foreign exchange risk, different interest rates for local and foreign currency loans will be charged. 2.12 The deterioration of economic conditions and the controls imposed on the financial sector have combined to contribute to the practical insolvency of Tanzania's main financial institutions. As with other financial institutions. TIB has suffered a substantial deterioration in the quality of its portfolio over the years. Many of TIB's investments are in enterprises that are dependent on imported raw materials, and many of these enterprises tend to be over-leveraged in term debt denominated in foreign currencies. Over the years, the profitability of many of these enterprises has been undermined by: (i) the shortage of foreign exchange and resulting shortage of imported raw materials; (ii) successive devaluations of the Tanzanian shilling, which have increased their debt burden; (iii) price controls; and (iv) restrictions on overdraft facilities. The lack of full recognition by TIB of the extent of the economic losses incurred by clients, and the continuing misallocation of credit by TIB to finance the losses of inefficient enterprises has further compounded the problem. The level of interest rates imposed on TIB has also had a negative effect on TIB's financial performance and its ability to efficiently allocate resources, and successive devaluations and the high levels of inflation of the past years have eroded TIB's capital base and increased its indebtedness. - 51 - III. INSTITUTIONAL PERFORMANCE 3.01 The following institutional changes occurred during appraisal and negotiations of the three Bank loans: (i) Restrictions on Debt. It was agreed under all three loans that TIB would limit its debtsequity ratio to 331, since TIB's policy statement does not set a debt:equity limit on its capital structure. During negotiations of Loan 1750-TA it was agreed that TIB and the Bank would review this ratio whenever it appeared that the limit would impose a constraint on TIB's operations. TIB has benefitted from substantial grants over the years, so this ratio has not been binding. However, once TIB makes the necessary write-offs, it would need to be recapitalized. (ii) Free Limit Restrictions. The free limit on subloans was increased with each successive Bank loan in recognition of the improved quality of TIB's appraisal work and the increased costs of imported equipment and materials. The individual subproject free limit was increased from US$400,000 under Loan 1172-TA to US$800,000 under Loan 1498-TA and US$1 million under Loan 1750-TA. The aggregate free limit correspondingly increased from US$3 million to US$7 million and then to US$8 million. (iii) Special Fund Investments. During appraisal of Loan 1172-TA, one of the major issues was the treatment of TIB's ordinary versus special operations; the former being at TIB's risk and the latter, financed from special funds, at Government's risk. One of the problems was that some donors had provided their funds as special funds without realizing that TIB was exempt from the risk. To ensure that TIB take the appropriate responsibility, since a portion of its operations were being financed from special funds at the time, the Bank suggested that TIB abolish the distinction or, alternatively, use the special funds for projects on which TIB did not want to take the risk, At negotiations, it was agreed that the only distinction between ordinary and special operations would be that the latter would be made at concessionary terms. The special operations would, as with ordinary operations, have to meet TIB's financing criteria and TIB would have to bear the risk. It was also agreed that TIB would manage a new type of fund on behalf of the Government. The operations financed out of this managed fund would not be appraised by TIB and would not be at TIB's risk. (iv) Interest Rates. During appraisal and negotiations of Loan 1750-TA, TIB's interest rates became a major issue, because BOT issued a directive requiring all financial institutions to charge interest rates according to a prescribed schedule. Subloans financed out of foreign lines of credit were exempt from this directive. The rates to be charged were lower than the prevailing rate of 11? p.a. charged by TIB for all types of industry and - 52 - estate loans. The prevailing rate, though negative in real terms (inflation was 152 p.a. during 1975-77), was in line with other rates and enabled TIB to have an adequate spread, and was considered acceptable by the Bank. The BOT directive raised some important concerns for the Bank, namely: (i) the criteria to be used to determine TIB's interest rates; (ii) the frequency with which interest rates would be reviewed; and (iii) the manner in which disputes on the level of rates between TIB and BOT would be resolved. During negotiations it was emphasized to the Bank that BOT's Act enabled it to set the framework of interest rates for TIB and that henceforth, BOT would be responsible for determining TIB's rates. It was agreed that Bank funds would continue to be onlent at 112 p.a. since they were exempt from the BOT directive, but funds from local sources would have to be lent at the lower rates. Developments During Implementation and Present Status 3.02 Management and Orianization. Over the years, TIB has undergone several changes in its organizational structure, senior management and staffing. These changes have been effected without any serious disruptions, and throughout, TIB has managed to maintain its reputation as a well-managed institution with generally well-trained and capable staff. Up to 1984, TIB's senior management consisted of a Managing Director and a General Manager. The former was responsible for policy matters and external affairs, and the latter for the day-to-day management of the Bank. In July 1984, TIB's Act was amended to abolish the position of Managing Director. The General Manager, therefore, is now responsible for all policy and management issues. He is assisted by five directors, one treasurer and a chief internal auditor. Around the time the first loan (Loan 1172-TA) was appraised in 1975, TIB's total professional staff numbered 31, nine of which were expatriates. TIB relied heavily on expatriates funded by bilateral aid for engineering and other technical skills. Today, TIB's total professional staff amounts to 56, with far fewer expatriates. The depressing economic situation and the uncertain prospects for the future have the potential to hurt staff morale and confidence, but TIB has managed to maintain most of its capable managerial and technical staff by providing incentives such as promotions and training. TIB management has been responsive to the economic environment over the years and has given increasingly greater importance to project supervision, and the staff assigned to this activity has significantly increased. In 1984, a special Debt Management Unit was created to review all projects with serious arrears. Bank supervision missions have played an important role in redefining lending strategies, identifying weaknesses in staffing skills, and recommending improvements in organizational structure. 3.03 Staff Training. TIB managed to maintain active and effective staff training psograms throughout the period under review. It has funded these programs mrinly through IDA technical assistance and bilateral aid. Many of these programs have involved training courses abroad and at the Eastern and Southern Africa Management Institute in Arusha. - 53 - Procedures 3.04 Appraisals. At the time TIB was appraised for the first Bank loan in 1975. TIB's appraisal division consisted of eight professionals, half of whom were expatriates. The quality of appraisals was considered satisfactory, but in need of improvement, particularly in carrying out sensitivity analysis on key assumptions and assessing the impact of cost overruns caused by delays in implementation. Over the years, with Bank assistance, appraisal procedures have improved, but in reviewing the condition of TIB's portfolio it is evident that mistakes were made ins (a) approving projects that were heavily dependent on imported raw materials; (b) accepting overly optimistic assumptions for assessing the viability of projects, particularly assumptions on shadow exchange rates, prices, demand, capacity utilization, etc.; and (c) improperly assessing schedules of implementation and evaluating the cost of delays. Appraisal procedures, therefore, need further improvement, particularly in assessing the economic viability of the investments financed. 3.05 Supervision. Over the years, with the gradual deterioration of the loan portfolio, TIB has been paying greater attention to supervision activities. In 1984 a special Debt Management Unit was established to follow-up chronic arrears cases. With the help of this unit, TIB has strengthened its efforts at debt collection, loan reschedulings, restructurings, and as a last resort, court proceedings. In addition to in-house reviews, TIB has used the services of the Tanzania Industrial Studies and Consultancy Organization (TISCO) to review the critical weaknesses of projects and recommend measures to increase productivity and efficiency. The quality of the TISCO reports has been generally good. The Bank made an important contribution towards strengthening TIB's supervision. It recommended: (i) increasing in-house legal capabilities to expedite legal action against chronic defaulters; (ii) strengthening the Project Department, responsible for project supervision, by assigning additional staff from other departments; (iii) implementing a debt recovery action plan; and (iv) streamlining reporting. 3.06 Procurement and Disbursement. TIB's procurement and disbursement procedures are satisfactory. TIB requires competitive quotations for all procurement involving TSh 100,000 or more. Disbursements are made on the basis of the pre-determined implementation programs for each project, and after sponsors' contributions have been made and all preconditions met. 3.07 Accounts and Audit. TIB's bookkeeping and accounting procedures are largely adequate. TIB has generally submitted its quarterly and half-yearly reports (which are quite detailed) on time. However, its audited accounts are usually late, due to the delays on the part of the Tanzania Audit Corporation (TAC), which is responsible for auditing the accounts of the parastatals. The quality of the audit carried out by TAC has been generally satisfactory, but often deficient in certain standard information required by the Bank from its client DFCs. This information, inter alia, includes: (i) statements classifying the investment portfolio into companies that are profitable, unprofitable, including under liquidation, or under implementation (ii) comments on the adequacy of -54 - provisions for losses on portfolio investments; (iii) auditors' examination of the Statement of Shareholders' Equity; and (iv) scope of examination by auditors on supplementary data. Each year the Bank cosmented on the adequacy and presentation of the audited statements, but for the most part, the comments were unheeded. - 55 - IV. ALLOCATION Of TE LOANS 4.01 As Table 4.1 shows, the total PuAmber of subloans approved under the three .IBRD loans being reviewed was 53 and the total amount disbursed was US$52.6 million. Seven of the subloans were for financing working capital. The total number of subprojects assisted by the Bank loans was 46, since 9 of the subloans provided supplementary financing to cover overruns and finance expansions of previously approved subprojects. Thirty-five of the subloans financed were above the free limit and subject to the Bank's subproject review and approval procedAre. In its subproject reviews, the Bank made useful comments on the technical and financial aspacts of projects, and thereby contributed to improvements in TIB's appraisal methodology. The size of the subloans (excluding working capital loans) ranged from about US$60,000 to Quality Garage, a private concern engaged in building bus bodies and cargo bodies for trailers and vans and in which TIB also had an equity investment, to about US$3.8 million in a tannery. The subloans carried an interest rate of about 10 to 112 p.a. The following table summarizes data on subprojects under the three loans, and Annexes 2-7 provide more detailed data: Table 4.1: Summary Data on Subproiects 1) La.1172-TA Ln.1498-TA Ln.1750-TA Total 1. No. of subloans financed 14 11 28 53 A-Subloans 11 8 14 33 B-Subloans 3 3 7 13 C-Subloans - - 7 7 2. Average Subloan Size (US$1000) 1,039.9 1,261.5 814.9 961.5 A-Subloans 1,277.5 1,590.8 1,201.1 1,317.5 B-Subloans 168.5 383.7 359.7 323.9 C-Subloans - - 507.3 507.3 3. Z of Projects with 27 11 21 21 Sales exported 2/ 4. I of Projects Using 55 66 87 74 Primarily Local Raw Materials 1 5. I of Profitable 30 80 62 54 Projects 2/ (4) (6) (13) (25) (No. of Projects) 11 Excludes cancellation. gL Based on projects for which data is available. Excludes "C" loans. -56 - 4.02 The subprojects covered a wide range of activities including manufacturing, tourism, transport and agriculture. About 60? of the subprojects are located in Dar-es-Salaam and 46? were for the expansion or rehabilitation of existing enterprises. About one fourth of the subprojects depended primarily on imported raw materials and most of the output produced was for the domestic market. Precise data on the actual costs of subprojects, rates of return and investment costs per job is frequently not available for the older projects, although it is possible to note general profitability or lack of profitability of the 46 projects for which data is available. Twenty-four subprojects appear to be operating profitably, nine are unprofitable, and 11 are still under implementation. Those projects still under implementation have experienced serious delays and frequently have amassed arrears, their future profitability must be questioned. While the majority of subprojects (25 of 46) for which data is available are operating profitably, the first results of 1987 indicate that about six of the subprojects will experience losses in 1987 due to currency devaluations. The present status of a few selected subprojects is shown in Annex 5. From the available data it would appear that, in general, the Bank-financed subprojects have performed slightly better than TIB's overall portfolio; however, it should be noted that it is the more profitable enterprises that tend to submit data and therefore the percentages are biased. V. OPERATIONAL AND FINANCIAL PERFORMANCE Operations 5.01 From the date of its establishment in November 1970 up to June 30, 1986, TIB had approved about TSh 2.310 billion in loans and equity investments in about 244 projects (Annex 6). TIB'S lending activities have been the major focus of its activities, accounting for about 97? of its total approvals. The loans have been for large-scale investments, with about 70% of the total value of loans approved being over TSh 12 million (US$200,000). TIB'S financial commitment in a single project has not generally exceeded 202 of its net worth, which is presently TSh 1.0 billion. Details on the maturity of loans and interest rates charged are shown in Annex 7. 5.02 The manufacturing sector has been 'he main recipient of TIB'S loans and equity investments, accounting for 69% of the total amounts approved. The remaining 31? has been fairly evenly distributed amongst the other sectors, with services accounting for 9?, agriculture 8%, mining 7?, tourism 4? and fishing and forestry 3?. Seventy-four percent of the amount of loans and equity investments approved were in the public sector. New projects accounted for 58? of the total amount of loan approvals; expansion of projects accounted for 23?, rehabilitation and diversification for 15?; and working capital for 4?. 5.03 A summary of TIB's actual and forecast operations during the period 1980 - 1986 is shown in Annex 7. TIB's total loan and equity approvals declined by 66? from TSh 333 million in 1980 to TSh 112 million - 57 - by 1984. In 1986 approvals increased to TSh 210 million, but since most of TIB's loans are denominated in foreign currency, this increase reflects the major devaluation that occurred between 1984 and 1986 rather than an actual increase in approvals. Measured in US dollar terms, approvals declined by 88Z from US$40 million in 1980 to US$5 million in 1986. Between 1980 and 1983 the actual approvals, commitments and disbursements were significantly lower than appraisal estimates, especially in 1982 and 1983. The pattern of approvals has mirrored the economic situation in the country with the economic crisis being the main reason for the sharp and steady decline. Due to the foreign exchange shortages, TIB adopted an operational strategy which focussed on lending for rehabilitation and for projects which depended more on local raw materials, but the latter type of projects were hard to find. Portfolio 5.04 As of June 30, 1986, TIB's total outstanding portfolio amounted to TSh 2.132 billion consisting of about TSh 2.057 billion in loans and about TSh 75 million in equity investments. In contrast to TIB's loan portfolio, its equity portfolio, which is significantly smaller and invested in the private sector, has performed satisfactorily. As shown in the table below as of June 30, 1986, 49% of the value of TIB's loan portfolio and 4Z of the value of equity investments were in operating companies that were unprofitable. Table 1: Summary Status of TIB Portfolio (Amounts in TSh Million) Loans Equity 1) Amount Amount No. of Our- No. of Out- Companies standina % Companies standing 2 Operating Companies Profitable 32 770 23 6 55 73 Unprofitable 1 47 1,617 49 2 3 4 Subtotal 79 2,387 72 8 58 77 Companies Under Implementation On Schedule 31 8 410 12 1 17 23 Behind Schedule 13 531 16 -- -- ** Subtotal 21 941 28 1 17 23 TOTAL 100 3,328 100 9 75 100 1/ Includes income notes. 2/ Includes all companies in arrears and also under liquidation. 3/ These projects have interest in arrears of 3-12 months. - 58 - The reasons for the poor performance of the loan portfolio include the general deterioration in economic conditions and the increased liabilities of subborrowers due to the devaluations that have occurred over the last few years. While the country's critical foreign exchange situation has been partly responsible for capacity underutilization and the poor performance of some projects, manr of TIB's clients, particularly in the parastatal sector, have been able to obtain import licenses from BOT for importation of raw materials, so their poor performance has been attributed to other factors including: (a) poor management and maintenance of capital equipment; (b) transportation bottlenecks affecting procurement of local raw materials and marketing of finished goods; and (c) inadequate supply of inputs, such as power, water, etc., and local raw materials. Many of TIB's projects have also suffered from implementation delays due tot (a) inadequate project planning and implementation capabilities of the parastatal sector; (b) chronic transportation problems; and (c) shortages of building materials. This has resulted in large cost overruns, and for the parastatals, which are almost entirely dependent on Government funding, arrangements for additional funding have often been difficult and time consuming. Of the 49 unprofitable projects in the portfolio, nine involve companies under liquidation. These include Tanzania Aviation Limited, an air charter service company whose airplanes were grounded due to the lack of spare parts, two saw mills, three leather goods industries, a seed processing company, and two other companies involved in mining and agriculture. Loans 5.05 As of December 31, 1986, TIB'S loan portfolio amounted to TSh 3.33 billion in 100 companies, of which 47 were operating at a loss and 13 were behind schedule in implementation. This seriously affected TIB's loan arrears, which amounted to TSh 1.8 billion (in principal and interest) as of December 31, 1986. The principal outstanding in the affected projects was TSh 2.56 billion, amounting to 77Z of the total loan portfolio. The amount in arrears was 54% of the total loan portfolio. Annex 8 shows a detailed schedule of arrears over three months. The following table summarizes the deterioration in the loan portfolio over the past decade. Table 2: Comparative Analysis of Arrears As of Year Ending June 30, June 30, June 30, Dec.31 1977 1982 1984 1986 Total TIB Outstanding Loan Portfolio (TSh million) 295 981 1,386 3,328 Portfolio Affected by Arrears (TSh million) 114 413 539 2,558 Exposure Ratio (Z) 39 42 39 77 Arrears of Over Three Months (principal) (TSh million) 9 133 322 1.796 Arrears as I of Total TIB Portfolio 3 14 23 54 - 59 - Around the time Loan 1172-TA was being appraised, in mid-1975, TIB's loan portfolio consisted of 37 projects totalling TSh 122 million. At the time about 352 of the total number of loans and about 40% of the total outstanding portfolio was affected by arrears. As of June 30, 1986, the total number of loans affected Iy arrears had risen to 68% and the portfolio affected by arrears to 77Z. The reasons for the poor quality of the portfolio are given in the previous paragraph, but the deterioration is also due to the fact that the portfolio has been decreasing in real terms and as profitable loans have been repaid, the portfolio has been left with a higher concentration of non-performing loans. Despite TIB's intensified efforts at debt collection, especially over the last four years, the portfolio has continued to deteriorate. Equity Investments 5.06 There has been no significant increase in TIB's equity investments since 1980. Annex 9 gives an analysis of TIB's equity investments as of June 30, 1986. As of June 30, 1986, TIB's equity portfolio amounted to about TSh 75 million, of which TSh 44 million was invested in the Tanzania Development Company Limited (TDFL) and TSh 17 million was invested in a 1002 owned subsidiary (Raslimali Ltd.,), which was formed for the purpose of constructing and owning a TIB office building. The remaining TSh 14 million was invested in seven predominantly privately owned companies, including four engineering and metal product enterprises, a soft drink bottling company, a hotel, and an air charter company. TIB's ownership in these seven companies range from 192 in Afro Cooling (a firm engaged in the manufacture of car radiators) to 26.82 in the Morogoro Hotel. TIB's equity portfolio, though small, is performing well. As of June 30, 1986, there were two companies that were unprofitablet West Lake Bottlers, a bottling company which has suffered due to the lack of inputs, and the Tanzania Aviation Company, which was discussed in para 5.04. Financial Performance and Condition 5.07 TIB's projected and actual income statements, balance sheets, sources and uses of funds, and financial ratios for 1980-1986 are presented in Annexes 10-13. TIB's income statements indicate that it was profitable up to FY86 inspite of the poor quality of the portfolio, mainly because TIB was able to operate on high spreads, having benefitted from loans on highly concessional terms. TIB was also able to keep its administrative costs low. In more recent years, the profitability of TIB has been inflated, since provisions for bad debt have not adequately reflected the increasing risks of the portfolio and interest income on non-performing loans have continued to accrue. In FY86, TIB's profit was reduced to TSh 1.4 million, a significant decrease from its TSh 56 million level in FY85. This represented almost no return on average total assets as compared to 2.62 in FY84 and 2.82 in FY85. This poor return was due mainly to the fact that provisions for bad debt increased significantly and finance charges increased due to.the major devaluation that took place during the year. Inspite of the increase in provisions in FY86, the level of provisions (cumulative provisions were 131 of the outstanding loan and equity portfolio) still appears to be inadequate, in view of the high risk of TIB's portfolio. Some of the loans will have to be written off entirely. It is clear, therefore, that TIB has not yet fully recognized the large losses -60- incurred by the lack of productivity of many of its client firms. TIB's profitability is, therefore, more notional than real. It is worth noting that TIB's adminstrative costs throughout the period under review have ranged between 0.8Z and 1.42 of average total assets and have been among the lowest in the Bank-assisted DFCs in the Africa Region. TIB's debt- equity ratio has also remained well below the limit of 3:1 agreed with the Bank. As of June 30, 1986, this ratio was 1.5:1. TIB's liquidity position is also comang under severe strain. As of June 30, 1986, its current ratio was 2.331, but its quick ratio (cash and short-term investments divided by current liabilities) was only 0.5:1. 5.03 TIB's approvals are projected to average TSh 400 million (US$6.7 million) p.a. over the next five years, representing a significant decline in US dollar terms. As of December 15, 1986, TIB had a pipeline of 32 projects with a total investment cost of TSh 1,758 million and requiring TIB financing of about TSh 720 million over the next two years. As of June 30, 1987, TIB had only TSh 58 million (about US$970,000) in local resources available for commitment and no foreign exchange resources. To meet its additional local resource needs. TIB will approach the National Insurance Corporation (NIC) and the National Providend Fund for local currency loans for future lending to clients. In order to increase the equity base, TIB has appealed to Treasury to pass on to TIE as equity funds that Treasury has received as grants. However, the prospects of obtaining foreign exchange resources in the immediate future appear slim and TIB will not be able to undertake its planned operations. These operations, which focus on the rehabilitation, modernization and expansion of existing projects, are critical to the improvement of TIB's portfolio. VI. CONCLUSIONS 6.01 TIB is an interesting example of a well-managed DFC operating in a difficult environment. The Bank, under all its lines of credit, focussed on strengthening TIB internally and did not concentrate enough on the effectiveness and efficiency of TIB's project lending in the face of a deteriorating economic conditions. Very little economic analysis was carried out on the subprojects financed and the implications on TIB's performance of the broader macro-economic issues, particularly those relating to interest and exchange rates, were not sufficiently analyzed. Inspite of TIB's knowledgeable and experienced management and capable staff, the institution has been unable to greatly influence the pattern of investments in the public sector or efficiently allocate scarce resources. Its role as a promoter of financially and economically sound investments in the public sector has been greatly undermined by economic distortions, rigidities and inefficiencies in the financial sector, and Government intervention. The lesson to be drawn from this experience for the Bank is that the economic environment is critical to the success of DFC operations, since it is difficult to separate good projects from bad ones when there are severe distortions. It is also crucial for DFCs to be able to operate independently and to determine investment decisions on the basis of rigorous economic and financial assessments. 6.02 Today, TIB faces increasingly serious financial problems without new injections of equity and foreign exchange resources needed to - 61 - rehabilate its portfolio. Prospects for improving its role as a promoter of preductive economic activities will not improve, however, unless the pressing industrial, trade and financial policy issues are resolved. Substantial policy reforms are necessary as well as the development of a program for rehabilitating, restructuring and closing down of industrial enterprises. TIB could play a useful role in the restructuring process. The Government's Economic Recovery Program emphasizes policies to improve the performance of the main sectors and the Bank and the IM have been actively involved in assisting the Government in the recovery effort. Any future assistance to TIB should follow significant progress masde in tackling the broader issues of the economy and should aim to support TIB's reorientation in policy towards: (a) consolidation of its existing portfolio through rehabilitation of viable projects; and (b) new investments that contribute to foreign exchange savings and earnings, and for which rigorous appraisals based on realistic assumptions indicate high economic rates of return. - 63 - ANMX 1 TANF.ANYI. IUmItmWuf BANK Seted,ue of Cumlative k Dsbur.e aew . for Lnes 1172-TA, LsM 1498~A and Los. 1750"A InnD Loan 1t724A L 1se 49"4A Loan 1750~A Plaent year Appratual actual as 2 Apprftsal aAtua1 ss 3 Appalsa Actal as 3 and Somester Estteates Actual of Appratsal Estiontes Atul of Apprasal Estiates Actual of Appatsal VY76 tat (July-ec.1975) 2nd (Ja-June,1976) 0.2 1.5 8 177 let 0.8 2.5 2.0 6.0 300 R178 let 4.0 7.2 2nd 6.5 10.5 162 VY79 let 9.4 12.9 b.4 0.2 2nd 11.8 13.2 11 1.3 4.7 362 1st 13.6 13.5 3.2 6.9 16.4 '1.5 92 5.2 10.2 196 0.2 • - mi 1*£ 15.0 13.5 - *.0 13.0 - 0.8 - - 2ad 15.0 14.1 94 10.8 13.3 122 7.2 1.8 82 1T82 let 15.0 14.4 97 12.5 13.2 - 5.0 4.0 2nd ¯ 15.0 14.6 97 14.3 13.4 94 8.0 9.4 118 lat 15.0 14.6 - 15.0 13.5 - 12.0 12.2 - 2nd -- -- 15.0 13.8 93 17.00 1.3 108 lst - - - 15.0 13.9 - 21.0 19.6 - 2nd - - - 15.0 13.9 93 235,0 20.0 80 1185 let - - - - - - 25.0 21.0. - 2nd - - - - - -- 5.0 32.7 91 ."86 let - - - - - - 25.0 22.7 91 2nd - - - - - - 25.0 2.1 96 AF6IE .eptent~er 22. 1957 - 64 - ANNEX 2 Table 1 TANZANIA TANZANIA INVESTMENT BANK (TIB) Subprojects Financed Under Loan 1172-TA I/ (in US$) Subproject Date Amount Amount Amount Subproject Name No. Authorized Authorized Cancelled Disbursed 1. Saburi Industries A-1 2/76 818,312 27,596 790,716 2. Tanzania Coastal Shipping A-2 2/76 735,295 2,956 732,339 3. Tanganyika Tegrey Plastics A-3 2/76 1,043,478 2,608 1,040,870 4. South. Cashewnut Project A-5 2/76 1,212,121 - 1,212,121 5. Aluminium Africa Limited A-6 3/76 2,418,380 188 2,418,192 6. Tanganyika Weaving Mills A-T 3/76 691,634 - 691,634 7. Moproco Limited* A-8 6/76 1,615,000 21,765 1,593,235 8. Mwanza Tanneries A-10 12/76 410,000 - 410,000 9. Tabora Spinning Mil A-11 5/77 3,785,889 - 3,785,889 10. New Africa Hotel Limited A-12 8/77 1,210,072 178,727 1,031,345 11. Mbeya Cement Co. Limited A-13 6/79 373,765 27,487 346,278 12. Tanzania Autoparts Limited B-1 2/76 236,024 30,122 205,902 13. Quality Garage B-2 2/76 60,099 - 60,099 14. Tanzania Aviation B-3 5/77 239,521 - 239,521 Total 14,849,630 291,490 14,558,140 1/ Subprojects A-4 and A-9, involving loans of US$400,000 and US$963,855 to Cotton Wool Products and Kibo Paper Industries respectively were entirely cancelled. AF61E September 23, 1987 - 65 - ANNEX 2 TANZANIA TANZANIA INVESTMENT BANK (TIB) Subprojects Financed Under Loan 1498-TA IBRD Total Subproject Amount Amount Amount ame of Projects No. - - Anthorized Disbursed Cancelled (USS000) 1. Highland Soap and Allied A-1 2,315 2,287 88 Products 2. KIO0 Ltd. A-2 3,625 3,608 17 3. Tanzpep Bottlers Ltd. A-3 1,575 1,575 - 4. Rubber Reclaim Co. A-4 742 192 550 5. Metal Products A-5 1,646 1,646 - 6. Calico Textiles Ltd. A-6 1,937 1,937 - 7. Dodoma Railway Hotel A-7 140 130 10 8. Mvanza Fishnet Manufacturing A-8 1,348 1,348 - 9. Garment Manufacturers Ltd. B-1 188 188 - 10. Tanzania Printers Ltd. B-2 638 638 38 11. Tropical Products Supply Ltd. B-3 360 325 14,574 13,877 1,127 AF6E September 18, 1987 - 66 - ANNEX 2 Table -3 TANZAliA TANZANIA INVESTMENT BANK (TIB) Subprojects Financed Under Loan i750 TA 2/ (in USO) Sub- project Date Amount Amount Amount Subproject Name No. Anthorised Authorised Disbursed Cancelled 1. Kibo Match Corp.Ltd. A-2 02/80 1,686,747 1,618,050 68,697 Kibo Match Corp.Ltd. (supplemental subloan) A-2 '9/82 858,370 858,370 0 2. Dodoes Railway Hotel A-3 63/80 839,840 827,511 12,329 3. Kibo Paper Industries Ltd. A-4 04/80 3,900,000 3,669,344 230,656 4. General Tyre (HA) Ltd. A-S 06/80 4,217,000 3,017,008 1,119,992 5. Calico Textile lad. Ltd. A-6 09/80 150,800 150,800 0 6. Traile:p & Lavloaders A-7 09/80 1,097,470 415,771 681,699 Manufacturing Ltd. 7. Rio Ltd. A-8 05/81 855,000 756,693 98,307 8. Anto-fech Ltd. A-9 06/82 1,170,000 1,170,000 0 9. Nibo Paper Industries Ltd. A-10 12/82 361,710 356,410 5,300 (supplemental subloan) 10. Tanzania Shoe Co. A-11 02/83 1,072,970 1,054,101 18,869 11. Friendship Textile A-l2 05/83 1,300,000 1,279,655 20,345 Will Ltd. 12. Anche Mueds Ltd. A-13 10/83 601,9451/ 601,945 0 13. Kibo Match Corp. Ltd. A-14 11/84 1,000,000 1,000,000 0 14. Tanpack Industries Ltd. A-15 04/85 1,241,570 1.241,570 0 15. Afro Textile Ind. Ltd. 1-1 02/80 722,891 722,156 735 16. Kioo Ltd. B-2 07/80 224,325 223,737 588 17. Tanzania Film Co. B-3 01/81 95,304 93,401 1,903 18. Kibo Metal 6 Furniture B-5 02/82 76,400 61,333 15,067 Works Ltd. 19. Tanzania Cigarette Co.Ltd. B-6 11/82 858,370 835,54 22,826 20. Fish Products Supplier B-7 06/83 115,700 115,700 0 Ltd. 21. Woodlands Ltd. B-8 07/85 825,480 825,480 0 22. Tanzania Shoe Co. C-1 10/81 1,000,000 984,655 15,345 23. Tanzania Cables Ltd. C-2 10/81 241,000 230,257 10.743 24. Shah Industries Ltd. C-3 10/81 60,000 59,008 992 25. Tanzania Pharmaceutical Ind.C-4 10/81 693,000 692,730 270 26. Metal Products Ltd. C-5 11/81 645,000 583,952 61,048 27. Aluminium Co. Africa Ltd. C-6 06/82 963,860 962,932 928 28. Calico Textiles Ltd. C-7 07/82 193.140 37,823 155,317 27,067,892 24,445,936 2,621,956 It Includes an increase of $24,945 granted 09/84. subprojects A-i and B-4 were entirely cancelled. AF61E December 16, 1987 - 67 - ANM 3 Table 1 i II å 0 114 m g.u n m min $m i~ d E ! Il ik iII 4jj W~ t~3 0. -- -all -68- 1ANM 3 Table 2 11 . 3 mig % Nid 4 94 1 &K~ - 69 뿔 。．】，…’.-.!; !;- m Vw n lm Mo mn~ *~300 aulam Jim t-* 001191AV vig~ 191 m ZZI 0 ez 0 a" fibysøl-p~ ovw 9-4 *ft-D £III~ ti '110 tz 0 0 0 mm §laud 03" 1-« ouw~tw oY-tun *ti tnill salt t 1 000. ont cool W1i, oonlom ti 00% wi wi a" «gu ti-v *Pin,o3 z~ wx~ *il I I Tø wi go¥-"n mengs-o-sse Iolm ti-v *P" i"Fii "lap m% 101 rsz - itstlot 1901fer uo, ;q£ 61 0 06 wi øm wieligl Og£ 61133*1 1 1-¥ "lit ftýoolde virm *6 Orø) £*Q LOZ C64,99 1Z6'et w-S olev 0 og 001 3*"M 01-V solý*ogn n~ R (61 6L1 "I 004*sc mlil 001,91 6 0 001 wl SoTog~ pø" S-T - - - i Lt ~05 og is »"&¥m vu~11un *9 *Ml sso,"l gLe* Gel stilet i 1 0 0 5* tg 1~9 P" valilv enID~" -5 nn1191 igslu Col 0 wi wi gui- om A~T3 sab-wri ql" *1, Afz Etz m t W91 i vti 0 0 wt toiddlqs IRZ stz it ow.9 <W s 001 9*61 w 111 wi 0039~22 ufflus-os-mo uodowaz vi" In 19 6tz #/t i ogt wilis W91ý1 wilgt te 0 01-< wi *Sun. I-T 60133691101 ¥"gus *1 -10W.RU) 11m33¥ 1661W3"dy p*leøj2 (In qør Md TRýis, 3090 39 uinigt Gøjgs jo mm olmå s jo odt4 -Oadm -foad iglo& 30 9393 ulum U901 jo~ P~U 633,0Poldm to "lliljolsik1m0 3 TAMMEIANga LTNI A Beofoite Charagtorgettco of SubpEojes finauced Une Loan 1498-TA 1ND ftain 9 Local kte of rotal Projeet Cot snt Subpro- teoeoe Type ot i ftbite Ram 9 of sea& tatre et cp pe Job Cr Scbprojoct jet No. Actitvty loc0t ton Project OunareIdp Ntartal BapoteOd Apprtalau ¥Dcal taFig TOM Appr. Actua sted 1. fitshland Snap A-1 Soap Mbs Nev 0 0 5 14 29,740 33,000 62.740 thu acd AlIted Products 2. umoo Liited A-2 Glas* Deus-Samaaa empanmton 0 80 0 10.6 10,62 43,121 53,747 3. Tanspep Bottile Lted., A-3 Soft Drinks Dar-n-Salm Nav 0 60 0 13 32.00 4. Iubber aectat* Co. M-4 Dubber Dar-a-Salaam seu 100 98 0 37 -- 3. ktatl Produc *-5 Stect Dar-es-SalM ERpaaton 26.4 0 so~. 21 - 6. CattCo TextIlew A-6 Tetela& Dar-ua-SUam 11pax~to 6 80 0 19 39,940 27,000 66.940 9- 7. Ddam etitay tnu A-7 Betet lada.. EIpaao 100 me na 15 8. nasha ftabtu anfac. A-8 Ptobrata tuansa Espaelow 0 0 0 9.3 14.19 i,08 25,427 557 9. Garant Nautart.tLd., 9-1 Garments DP6-9-Salaa Espfnsion 0 100 0 U - 10. tna Printes L.td., -2 Paper Dar-a-Salasa apaastoa 0 100 0 41 - ta. Tropicel P~roaee 5-3 Plastic Boecle. Der--Saaa Epanatan 0 90 se 40 8,966 2,820 11.76 Spply Uitecd A0611 Deember 16. 1987 TAKIA INTE12 ! ~ MI &e~ c Caagncterkotice of 8bpoetg nca eod Uader La 1750.TA I1ND 3 Loca Rate of total ~oject taploy- Supro- tEonoai Typ of a pubite U n of Salew actura at Coots at Comlto4- Geat Cofit Pr Job Subpmejct je No. actity kocatLo Project etip Naortals fmported Appataal local fore Total) Created Appra16al Actost ... ...--.........................._____(.I -.. (- t ( 0Tb. 0- -- -T.0.- 8. Nibo aetch Corp.Ltd. A-2 P ~prn.onfact. Nabi Diversttcattga 100 90 25 15.6 43.595 54.965 98.560 427 Babo Natch Corp.1,d. A-2 Paper mact. MuIÄi Divoratiteatton 100 90 25 15.6 •--- h ab-. rn- 427 (epplea~tal abloam) 2. Sedena tallvay Natel -3 Notal Sedern .u 0 8s 3. Eibe Paper led. Ltd. A-4 Dapr arna- 6~paasto5 7 90 0 -43 13,725 32.275 46,000 676 ~onufacturong Sal~. 4. Oaral tyre (C Led. A-5 Tire f~nct. Au~a Ik Empaes4on 26 0 0 31.7 fs a ms 363 5. Callco Tot. lad.Ld. t-6 Teatla Di~- Ia ESpaton 100 00 0 28 ms na 9.600 279 manatactutia SalaaN 6. Tratlera 6 Louoadere A-7 Tirck tratt Da - krw 0 91 0 44 70.600 61.20m 131.600 60 187 02 Nafotaeturing Ltd. manuetuttag Saloam 7. Ltee Ltd. 4-8 C ooate 01a.e Dr-ea R0h3nbtDu-ioroaote 100 80 0 mi 631 7,541 8.172 0 NaKufacturtag Salana 15. Aute-Nach Ltd. A-9 aute paet a. Dt-se- Now 53 12.3 0 22.6 27,633 37,301 6496 250 t/ Ä. 9. tbo Paper ld. Ltd. &-10 taper mig. St-rn- ~apaslon 7 90 0 16.4 54l00 1.900 7.500 375 (mupplenaatal *GbIoan) Salaa to. tanaffta So Company A-1 Shu mig. Der-o~- bablttatlen 0 75 0 0 2.000 2,000 Slaam I. Nraenmdshp Teattle &-12 Textile afg. Ser-wa- mahablittattem 80 0 14.~15 12,00 *6.65 KIll Ltd. Salaa 12. Anca fud Ltd. A-13 Vac flaäk afg. Dar-a~ muv 100 50+ 0 44 97.030 394 $Slaan 703 9 13. Kabe Match Corp.Ltd. A-14 papar afg. Nashi DIvoerltlcation 100 90 0 14. Tapack lduieca Ltd. A-15 Paper idS. Ser-rn- E Upaso. 49 5 (phase 1) 0 I8,1 not co~plote Sala 800 (pbao 2) 15. Aro Tex. bd. Ltd. D-t Towl efg. Dar - Exp*a*o 100 77 0 20.7 6.986 5,914 12.900 185.3 16. ItCo Ltd. 8-2 Container Olasw St-~s- Rehab/lepr~Covsat 100 80 0 10.6 8.172 0 Nanufacturi~g Salaa 87. Tansanta ita Company 5-3 Nfg./photogaph Dar-rn- Nov 0 na. no. 15.3 not complete Secord Sel~ai 1. tåbo Ntala a Fratgäre S-5 vurattura alg. No n Epanaon 100 94 0 36.9 2.336 1.384 3,749 60 23 Uoths Limited 19. Tansata Cigar~*9e 3-6 CIarett* mig. Datre- Espans&C 0 95 0 20 18.000 18,000 &$,600 Company Ltattd Selwee 20. pFöb Produecs 5-7 Träull%g Noaa Eepkn~son 800 100 0 34.4 3,935 1.308 5.246 0.08 Supplir LINIted 21. ~ ~odlande Ltd. 8-5 Samåll mat KIW 100 100 0 30.0 TSb33,300 Us 33b 33.3dW *83.63 pli1- 0$ 336 aujaro g A 6 1 ~aeer 16. 1987 - 73 - ANNEX 5 Page 1 of 4 TANZANIA TANZANIA INVESTMENT BANK Summary Description and Present Status of Selected Subprojects Financed Under Loans 1172-TA, 1498-TA and 1750-TA Loan 1172-TA 1. Mbeya Cement Companv. Subloan A-13 for US$373,765.42. Mbeya Cement Company Limited (MCCL), a wholly owned subsitdiary of Tanzania Saruji Corporation, produces and sells cement. The purpose of the IBRD subloan was to assist in the financing of the construction of the cement factory. Expected to became operational in 1980, the project was not completed until late 1983 largely because of the non- availability of a reliable power supply. Total project costs, estimated at approximately TSh 524,825,000, were over TSh 700,000,000. MCCL has been operating at around 20 percent of capacity, with breakeven estimated at about 50 percent of capacity. Production has been constrained by lack of foreign exchange, raw materials, affordable and available fuel, and trained personnel. Equipment is aging and will need to be replaced. The project has been very unprofitable. As of December 31, 1986, interest arrears on the TIB loan amounted to TSh 69.1 million (including principal and interest). TIB is conside-ing rescheduling the loan. 2. Tanzania Coastal Shilping Lines. Subloan A-2 for US$732,338.44. TCSL was established by the Government in 1971 to provide cargo and passenger transport along the coast of Tanzania. TCSL has received three loans from TIB. The IBRD subloan, made in 1975, financed the purchase of the Mwenge, a used cargo boat with a carrying capacity of 2,100 tons. The company's operational performance ever since this purchase bas been unsatisfactorys TCSL has experienced serious losses every year except 1978. (Although financial results as of June 1987 indicate large profit, these results have been distorted by improper recording of bilateral assistance received from Norway in the form of spare parts, which were accounted for as revenue. Norwegian assistance will end at end-1987). The losses have been due in large part to low freight rates and passenger fares fixed by the Government and, to a smaller degree, to lack of dry docking facilities. The seervicing of the TIB loan has been satisfactory, except for that of the Mwenge loan. Given the poor performance of the boat, TIB was able to persuade the Government to sell the ship for TSh 12.1 million in 1986 and give the proceeds to TIE. TIB is negotiating with the Government on the settlement of the rest of the loan, which as of October 1987 had a cumulative balance of TSh 108 million (including interest arrears). - 74 - ANNEX 5 Page 2 of 4 3. Tanganyika Tegry Plastics. Subloan A-3 for US$1,043,478.00. TIP was established in 1962 to manufacture polyvinyl-chloride and polyethylene pipes, bags, films, bottles and containers. The company is a wholly owned subsidiary of the National Chemical Industries, a public company. The IBRD subloan was made in 1976 for the purchase of additional machinery. Project completion was delayed from January 1977 to July 1978 due to procurement problems. Capacity utilization, projected at appraisal to reach 75 percent by 1978 and remain at that level thereafter, has been about 30 percent because of shortages of raw materials due to foreign exchange constraints. In 1983, TIB gave another loan to TIP for rehabilitation. Although the rehabilitation program was implemented on schedule, TIP experienced losses in 1984 and 1985, due again to shortages of raw materials. Under this subproject, 53 jobs have been created at a cost of TSh 212,800 per job. TIP has repaid the TIB loan. Loan 1498-TA 4. Highlands Soap and Allied Products. Subloan A-1 for US$2,375,000. Highland Soap and All1ed Products (HSAP) is a private, limited liability company incorporated in 1877. The purpose of the -BRD subloan was to finance the erection of a soap-making factory at Mbeya to produce laundry and toilet soap for the domestic market. IFC also participated in this project. Production has been curtailed by lack of raw materials; HSAP was unable to produce laundry and toilet soap in the entire second half of 1986 primarily due to lack of caustic soda. Because of liquidity problems that resulted from production stoppage, HSAP was unable to service TIB debt and at end-1986 had arrears (interest and principal) amounting to over TSh 60 million. The company had asked TIB to consider a moratorium on repayment until 1988, which TIB has rejected; TIB has proposed rescheduling the loan. 5. Dodoma Railway Hotel. Subloan A-7 for US$130,000; also subloan A-3 under Loan 1750-TA for US$827,511. These subloans were extended to assist in the financing of the construction of the Dodoma Railway Hotel, a new project under the aegis of the Tanzania Railways Corporation (TRC), a public company. Project implementation has run into serious problems, and has been delayed about five years, due in part to consultant problems. Construction was completed in October 1987. In the past, TRC has met its TIB obligations promptly, but recently has experienced problems and as of September 1987 has arrears of TSh 55.4 million (largely principol). TIB is working with TRC to solve the problems. 6. Calico Textile Limited. Subloan A-6 for US$1,937,000; also subloan C- 7 under Loan 1750-TA for US$37,823. Calico Textile Limited (CTL) was registered in Tanzania in 1960. Ownership is 1002 private, many of whom are foreign. The first IBRD subloan was made to assist in the financing of machinery and equipment to produce higher quality materials. Because CTL was experiencing serious problems in getting foreign exchange with which to buy the needed Imported raw materials, the second IBRD subloan was extended for working capital. CTL is still experiencing difficulties in getting raw materials, with the - 75 - ANNEX 5 Page 3 of 4 corresponding effect on production and sales. The 1986 devaluation of the Tanzania Shilling increased TCL's liabilities in terms of foreign loans, which has aggravated the liquidity position of the company and led to arrears of TSh 60 million (principal and interest) Loan 1750-TA 7. Kibo Paper Industries Limited. Subloan A-4 for US$3,669,344 and subloan A-10 for US$356,410. Kibo Paper Industries (KPI) is a parastatal engaged in the manufacturing of packaging materials and corrugated paper. KPI has received three loans from TIB, which have been and continue to be serviced on time. IBRD extended subloan A-4 to assist in the purchase and installation of machinery to use in the existing facility; subloan A-10 was a supplemental subloan. The company is profitable, although recent sales have been lower than planned, due largely to lower production caused by shortage of some raw materials (PI has been operating at about 25 percent of capacity in 1986; in previous years about 60 percent). KPI is in the process of rehabilitating its facilities, which should help to alleviate production problems by reducing down-time for old machinery. KPI has recently experienced some difficulties in meeting its debt service obligations to TIB, and now is about TSh 9 million in arrears. 8. General Tyre (E.A.) Limited. Subloan A-5 for US$3,017,008. General Tyre was founded in 1969. Ownership is about 74 percent public, with the rest owned by General Tire International of the US. IBRD subloan A-5 was granted to assist in the expansion of General Tyre in order to produce truck and radial tires. General Tyre has been profitable, although operations have been constrained by shortages of natural rubber and nylon. In 1987, General Tyre expects to increase production to 66 percent of installed capacity. Until recently, .t is current on its loan obligations to TIB, but as of September 30, 1987, it has arrears of TSh 24.8 million (largely principal). 9. Tanzania Shoe Company Limited. Subloan A-11 for US$1,054,101. In 1968, the Bata Shoe Company (East Africa) Limited was renamed the Tanzania Shoe Company, and placed under the management of the National Development Corporation. In 1979, controls of the company was transferred to the Tanzania Leather Associated Industries Corporation, a holding parastatal for leather and associated industries. TSC also has received working capital loan from TIB. IBRD subloan A-11 was extended to assist in the rehabilitation of the company, specifically for the purchase of equipment and spare parts. At the time this subloan was granted, TSC had been servicing its TIB obligations satisfactorily. However, as of September 10, 1987, TSC is in arrears of TSh 119.5 million (including interest and principal), mainly due to low production steaming from lack of raw materials, absenteeism machinery breakdowns, and, to some extent, poor management. TIB does not foresee a rapid clearing of these problems. 10. Tanzania Cimarette Company Limited. Subloan B-6 for US$835,544. Tanzania Cigarette Company (TCC) was incorporated in 1965.. It is a -76- ANNEX 5 age of 4 public company owned by the Treasury Registrar. IBRD subloan B-6 was made for the expansion of cigarette making and packaging facilities. TCC is profitable, and has been able in 1984 and 1985 to declare a dividend. However, production has been constrained by lack of raw materials and down-time resulting from old machinery. A rehabilitation program is underway. TCC has been servicing the TIES loan sat4efactorily. 11. Kibo Metal and Furniture Works, Limited. Subloan B-5 for US$61,333. Kibo Metal and Furniture Works (DI) is a private company, incorporated in 1976. NFV is engaged in furniture making, primarily of metal furniture. TIB granted a loan to Kibo Metal in 1978 to assist in the expansion of the company through purchase of additional equipment and machinery. The costs of expansion proved to be larger than expected, due to inaccurate estimates, additional machinery, and delays in implementation, and the IBRD subloan was extended to assist in meeting the additional costs. While the company made a profit in 1985, it experienced losses in 1986 due in large part to shortages of metal. Despite the weak financial condition, EM has been able to service TIB obligations satisfactorily, although as of September 30, 1987, EMW had minor arrears of TSh 1.6 million. The TIR loan should be repaid within the year. 12. Kioo Limited. Subloan A-9 for US$756,693 and subloan B-2 for US$223,737. Kioo Limited is a private company engaged in the manufacturing of glass containers. IBRD subloan A-9 was made to finance the installation of a metal recuperators subloan B-2 was made to finance import of moulds for glassmaking. These projects were in large part cost-saving in nature, so no new employment was anticipated. Capacity utilization has been increasing, averaging about 76 percent in the last half of 1986. Kioo has been profitable, although problems of liquidity are increasing due to currency devaluation in 1986 and to the Government requirement that import support funds from Treasury be covered by 100 percixt cash. Kioo is expected to be marginally profitable in the future. - 77 - AlNNE 6 TANZANIA TANZANIA INVESTMENT BANK <TIB) Analysis of Avrovals (Loans and Equity) Dp to June 30. 1986 No. of Approvals 2 Amounts in Hillion* % A. SIZE OF W0ANS OR EMUITY <Taba) Up to l million 38 16 20.5 1 I to 3 million 59 24 112.4 5 3 to 7 million 58 24 265.0 11 7 to 12 million 32 13 304.0 13 Over 12 million 57 23 1.608.2 70 Total 244 2,310.1 100 B. NATURITT OF LOANS Up to 5 years 65 28 370.9 16 5 to 7 yara 69 30 662.6 29 7 to 10 years 75 32 778.7 35 Over 10 years 24 10 440.0 20 Total 233 100 12252.2 100 C. INTEREST RATES Up to 5 p.a. - - - 5 to 8% p.a. 7 3 19.0 1 8 to 10% p.a. 64 28 298.0 13 10 to 12Z p.a. 140 60 1,460.4 65 12 to 13% p.a. 7 3 140.0 6 Over 13% p.a. 15 6 334.8 15 Total 233 100 2.252.2 100 D. SECM0R OP ACTIVT Xansfacturing and Engineering 135 55 1,582.8 69 Agriculture and Agro-Processing 26 11 189.7 8 Nining and Quarying 14 6 168.5 7 Vishing and Fish Processing 11 5 16.2 1 Touriem and Hotels 20 7 100.7 4 Porestry and ood Processing 11 5 54.0 2 Services, e.g. Transport, 27 11 198.2 9 Printing, etc.. Total 244 100 2.310.1 100 E. E Private 92 38 621.9 27 Public 152 62 1.688.2 73 Total 244 100 2.310.1 100 F. TYPE OP LOANS Nev Projects 124 53 1.307.6 58 Expansion Projects 77 33 521.9 23 Rehabilitation/Diversification 14 6 341.8 15 Working Capital 18 8 80.9 4 Total 233 100 2.252.2 100 AF61E September 8, 1987 cr Sh KLi~m 19E0 1981 1982 1983 19m 19B6 Year Jn 3ojected ctu Projected Atual Projectd A~u P ojectedctual cA 1aa 398.0 333.0 398.0 311.0 398.0 150.0 398.0 107.0 112.0 185.0 210.0 2qf0 2.0 2- 2*0 3.0 2.0L 19.0 - T~oal 400.0 333.0 400.0 331.0 400.0 151.0 400.0 126.0 112.0 185.0 210.0 ao 1aan 381.6 380.0 398.0 301.0 398.0 130.0 398.0 112.0 92.8 179.0 250.0 ~1,ty 2.0 -LO -2.0 - 2.0 19.0 2.0 - T 383.6 380.0 400.0 301.0 400.0 1o.0 400.0 131.0 94.8 179.0 250.0 Imn 320.7 173.0 391.3 235.0 413.5 223.0 394.1 232.0 235.0 168.0 170.0 Fquty 2.0 10.0 .0 6.0 20 1.0 2.0 5.0 5.0 ,. 2.0 11tal 322.7 183.0 393.0 241.0 415L5 224.0 396.7 237.0 240.0 iba.0 172.0 As pmjected far lam 1750-R TANZANIA TANZANIA INVESTMENT BANK (TIB) Schedule of Airears Over 3 Months (As of December 31, 1986) Outstanding Portfolio Total Arrears1/ Arrears of Arrears of Arrears of No. of Over 3 - 12 1 - 2 Over Projects Amount 3 Months Monthsl/ Yearsl/ 2 Years -(TSh Million) OPERATING PROJECTS Projects Without Problems 32 769.6 - - - - Projects With Moderate Problems2/ 14 656.5 162.8 162.8 - - Projects With Major Problcms3/ 14 367.7 295.5 127.8 86.3 81.4 Projects With Chronic Problems4/ 19 593.2 854.5 24%.9 159.9 448.7 Subtotal 79 2,387.0 1,312.8 536.5 246.2 530.1 PROJECTS UNDER IMPLEMENTATION Projects on Schedule5/ 8 409.5 18.7 18.7 e- - Projects Behind Schedule: 13 531.0 465.0 185.0 109.5 170.5 - with moderate problems 7 166.- 44.5 31.8 12.7 - - with major problems 6 365.0 420.5 153.2 96.8 i 170.5 Subtotal 21 940.5 483.7 203.7 109.5 170.5 TOTAL 100 3,327.5 1,796.5 740.2 355.7 700.6 1/ Arrears of principal and interest T/ Projects with atrears of 3 to 12 months S/ Projects with arrears of 12 to 24 annthe T/ Projects with arrears of over 24 months 3/ Arrears of interest only; no principal in arrears AF61E September 30, 1987 TANZANIA TANZANIA INVESTMENT BANK Analysis of Equity Investments as at June 30, 1987 Amount TIB Most Recent Preference Ordinary Ownership Profit FY87 Shares Shares Share Before Tax Dividend -(TSh Million)- (%) - (TSh Million)- l. Profitable Companies 1. TDFLIf 20.0 24.0 23 0.9 - 2. Metal Products Ltd. - 3.5 18 69.0 1.3 3. National Engineering Co. 1.0 - 17 10.0 0.2 4. Tanzania Auto Parts 1.3 - 40 - 0.2 5. Afro Cooling System 1.0- - 19 0.5 n.a* on 6. Morogoro Hotel 3.7 - 23.8 0.2 - c II. Unprofitable Companies 1. West Lake Bottlers - 1.5 21 - III.Companies Still Under Implementation 1. Rasilimali Hotel - 17.0 100 - - IV. Companies Under Liquidation 1. Tanzania Aviation Ltd., - 2.0 36 - - TOTAL 27.0 48.0 1/ TSh 24 million in ordinary shares and TSh 20 million in the form tf income rates. A~NI 10 rn-81 m ] v a 232.§ a 21, iil 1i3 221. 11 1 a 1 111111 J 2 -82- AN1 1 Kli K aug - -~In - no '00.1 e n- -81nf 4ra axil ri (T Sh la) 19 19- 19g2 195 __9 Yer Endn .kk~ 30 ProjectdAual Prjectd actual tojectud lctkul tPojected >:ual ctual Actual lctaul fems frozpera~ 59.6 21.1 80.6 36.4 98.2 38.9 114.8 49.2 142.2 142.1 157.6 1ca payent 61.3 60.5 O0 63.5 OLO 87.3 135.0 142.6 141.8 207.4 216.2 Loa/G ts 178.0 223.7 24.0 153.7 250.0 71.7 198.0 117.0 152,9 561.1 126.3 Otherf 53.8 - 31.3 - 31.5 0.5 21.6 6.3 1.8 0.1 - SUBr~ -W 1393 '2U T8T.T Tiia Ww TIM. lv7 . lun nighå.s 320.7 170.8 391.3 231.5 413.4 218.5 394.7 229.3 169.7 177.1 170.6 ~dty Intmets 2.0 9.7 2.0 5.8 2.0 - 2.0 5.1 1.2 0.7 1.5 DIvide Taes 19.2 4.8 i4.8 2.8 34.2 - 42.7 - 43.2 75.8 70.0 epaymnt of Enwings 24.1 25.6 28.4 35.6 29.4 38.7 31.1 56.5 117.6 61d.2 149.3 Eixmd pmse 0.5 0.2 0.5 1.6 0.7 2.5 0.7 1.0 2.5 1.0 4.6 Otlw 3.0 0.4 3.3 8.4 3.6 2.1 4.0 7.2 14.4 23.8 25.4 a;r369a .114 WT WT W3 47!42 299. M6 M6 421.4 Increase/(Decrease) In Fuds (16.8) 93.8 (14.4) (32.1) (1.6) (63.3) <5.8) (16.0) (84.1) (24.1) (7.7) al Incudes sale of fied maets. actuls eind the Specal 1d Acunt. Fl E ~cIuding arent nturdtif. TANZANIA TAMANIA INVESTHRNT DAM (TIB) Projected and Actual Finaneial Ratios 1980-1986 1/ 1980 1981 1982 1983 1984 1985 1986 Projected Actual Projected Actuel Projected Actual Projected Actual iual Actual Actual Income Statement Blements as 2 of Average Total Assets 1. Total Income 8.6 8.5 9.5 8.4 10.0 8.6 10.2 10.2 10.9 11.3 13.2 2. noiace Charges 1,8 2.4 3.0 2.0 3.4 2.5 3.4 2.3 1.9 2.7 4.1 3. Administrative Bapenses 0.8 0.7 0.8 0.8 0.8 1.2 0.9 1.0 0.9 1.4 1.3 4. Net Profit (loss) 2.0 2.2 2.5 1.2 3.0 1.0 3.8 1.6 2.6 2.8 - Probability Indicators (Z) 5. Net Profit (1osa)/Tear End Het Worth 3.5 2.7 4.3 1.9 4.8 1.7 5.5 2.5 5.1 5.7 - 6. Income from Lane/Average Loan Portfolio 11.1 11.2 11.2 12.5 11.1 11.9 11.1 13.1 14.2 15.0 17.6 7. Cost of Debt/Average Debt 6.3 7.7 6.0 6.8 6.6 7.7 6.5 7.3 5.1 6.6 8.8 Structural Ratios and Debt Coverage 8. Current Ratio 6.4 9.2 4.2 6.4 3.0 4.6 2.2 3.4 2.8 3.1 2.3 9. Long-term Debt/Equity 0.5 0.4 0.6 0.5 0.8 0.5 0.9 0.4 0.9 0.8 1.5 10.Cumulative Provisions as 2.8 2.0 3.0 4.0 3.2 6.0 3.4 7.0 - 8.0 9.0 13.0 2 of Loan and Equity Portfolio 1/ As projected for Loan 1750-TA W - 85 - PROJECT COMPLETION REPORT TANZANIA TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL) (LOAN 1745-TA) December 1986 Industrial Development and Finance Division Eastern and Southern Africa Projects Department '.87* PROJECT COMPLETION REPORT TANZANIA TANGANTIKA DEVELOPHENT FINANCE COMPANY LTD. (TDFL) (LOAN 1745-TA) I. INTRODUCTION ProJect Background 1.01 The Tanganyika Development Finance Company Limited (TDFL) was established in 1962 as a private limited liability company under the Tanzania companies ordinance. The authorized capital of TDFL is T Sh 145 million of which T Sh 100 million has been issued and T Sb 88 million has been paid in. At present, 342 of TDFL's paid in capital is held by the Netherlands Finance Company for Developing Countries (PHD), 27Z each by the Tanzania Investment Bank (TIB) and the German Finance Company for Investments in Developing Countries (DEG), an# 122 by the Commonwealth Development Corporation (CDC). Foreign governmental development agencies thus hold the majority ownership in TDFL. TDFL's main role in Tanzania's economic system is to finance capital investments In medium scale privately owned manufacturing enterprises. It identifies investment opportunities and promotes these by bringing together interested investors, technical partners, and other local and . teign financiers. It also provides equity . financing to supplement investments by project sponsors, and is the main institution in Tanzania which provides such equity funds for non-parastatal projects. 1.02 The World Bank Group's involviment'with TDFL began In 1975 when TDF-L first requested Bank Group financial assistance. The Bank did not * provide assistance at the time because it was not clear whether the Government of Tanzania would guarantee such financial assistance. TDFL applied again for Bank support In 1977, by which time it had been clarified at the highest level of Government that private sector investment, especially in medium-scale industrial enterprises, was important for implementing Tanzania' s Basic Industrial Development strategy. A recon- naissance mission which visited Tanzania in May 1978 found that planned private sector investment was in fact on the increase as a result of this clarification, and that TDFL had a clear and Important role to play In promoting and assisting such Investment. The mission found that the Government was also ready to support and guarantee Bank assistance to TDIL. - 88 - 1.03 A Bek mission appraised TDL in November 1978 (Appraisal Report No. 2416-TA) and recommended a US$ 6.0 million line of credit to finance the foreign exchange component of TDFL's loan and equity Investments during a three year period (TDIL FY79-FY81). The investments to be financed Included medium scale industrial, transportation, agro-processing and touriso projects. During negotiations, at TDFLs request, the loan was increased to US $11.0 million. The loan was approved on June 28, 1979, signed on July 27, 1979 and became effective on November 1, 1979. The loan was made to TDFL at an Interest rate of 7.9 2 p.a., repayable in accordance with a schedule conforming substantially to the aggregate of the amortization schedules applicable to the subloans. The maximum repayment period was set at 15 years. ToIL agreed to on-lend the protteds of the loan at a minimum interest rate of 112 p.a., which was positive in real terms giving TDFL an adequate spread, and to pass on the foreign exchange risk to sub-borrowers. It was also agreed that for any portion of the loan that TDFL Intended to use for equity investments, a satisfactory plan ffr covering foreign exchange risk would be presented to the Bank. Other important features of the loan included an individual subproject free limit of US$250,000 with an aggregate free limit of US$3.5 million, and the use of the economic rate of return criterion in appraising subprojects above the free limit . All equity investments made out of the proceeds of the loan would require prior Bank approval. TDFL also agreed to maintain a debt-equity not exceeding 3:1 aud to prepare a satisfactory operations manual by December 1979. 1.04 During FY79, operational and financial results were significantly higher than expected with investment approvals about 48% higher than estimated at appraisal and net profit almo3t 702 higher. The growth in approvals resulted from both an increase in the number of projects financed and in the financial assistance per investment. This reflected the backlog of suppressed demand for investment capital by the private sector, caused by years of uncertainty about the role of private enterprise. Due to this higher level of operations, TDFL had almost fully committed the loan of US$11.0 million one year after loan effectiveness. 1.05 The need for a second line of credit to meet TDFL's foreign currency resource requirements was identified during the first Bank supervision mission, and in July 1980 An apppraisal was undertaken. The appraisal team recommended a credit of US$15 million consisting of: US$12.5 million to finance TDFL's equity investments and loans; US$2.4 million for importation of raw materials and spare parts; and US$0.1 million for technical assistance. The second line of credit was approved for negotiations by the Loan Committee in December 1980, but was postponed indefinitely, pending resolution of an impasse between the Government and the Bank and IMF regarding macro-economic policy issues and a Structural Adjustment Program. By this time, the economic situation in the country started deteriorating and this had a negative Impact on TDFL's performance. Project Objectives and World Bank Group Role 1.06 The main objectives of the project were: (1) to Increase the effectiveness of TDFL In resource allocation in Tanzania, by providing it with policy, institutional and operational advice; and (ii) to contribute to the foreign exchange resources available for medium-sized investments in - 89 - the productive sectors. Under this project, by providing foreign exchange resources to TDFL for private sector Investments, the Bank played an Important role in promoting private sector development In Tanzania. The bank's objectives of Improving TDFL's Institutional capabilities were met with mixed results. In line with the Bank's recommendations, TDFL recruited competent expatriates and Tanzanian professionals and Improved its staff training. However, other Bank recomendations relating to: (1) utilization of the economic rate of return criterion in project selection; and (i) preparation of an operations manual by December 1979 were not successfully Implemented. In most Instances, the economic analyses of subprojects were either not undertaken at all or Inadequately prepared, and the preparation of the operations manual was delayed by several years; it was not completed till 1984. The Bank's objective of Improving TDFL's effectiveness in resource allocation has been largely undermined by the difficult financial situation that the country has been facing for the past several years (paras. 2.01 to 2.14). II. MACROECONOMIC. INDU3TRIAL AND FINANCIAL OBJECTIVES Background 2.01 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, in the Goverament's view, led to unacceptable economiz atd 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 1967. The new priorities, enunciated in the Arusha Declaration, were directed toward establishing a socialist society and led in the late '1940's 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) 2.02 Between 1966 and 1973, Tanzania's performance in terms of growth, domestic resource mobilization and income distribution was satisfactory. During this period, real GDP grew by 4.42 per annum, the gross investment rate rose above 20% and gross domestic savings fluctuated around 15-182 of GNP. In 1974, a severe drought and a drastic increase in import prices, especially oil, triggered a serious economic crisis In Tanzania. This crisis exposed some of the longer term weaknesses related to dwindling domestic savings, low productivity of investments, parastatal Inefficiencies, and declining exports. The Government restricted Imports and froze wages in an attempt to manage the short-term situation. These measures, aided greatly by the coffee boom In 1977 and by increased - 90 - external financing, were able to keep the economy in balance until 1978. A new balance of payments crisis occurred in 1978 due to: relaxation in import controle'Vithout compensatoty exchange rate management, falling coffee prices, and a poor performance from the agricultural sector. The fiscal situation deteriorated further following the outbreak of war with Uganda in 1979, Inflation accelerated from 11% to 28% and growth in aggregate output slowed to 3.3% per annum. 2.03 After several years of economic deterioration, the situation in Tanzania today can be characterized, at best, by sluggish growth, high inflation and low,productivity. GDP contracted in the three years 1981-83, and although growth in the range of 2-3% is estimated for 1984 and 1985, this is insufficient to reverse the deterioration of most other indicators of the country'a economic well-being. With the population growing at over 3% a year, per capita income has continued to fall. Agricultural output grew by 2.3% over 1980-85 as a result of an expansion in food crop production, sufficient to offset the continued fall In the output of export crops. Industrial output fell by 15% p.a. over the same period, and capacity utilization in industry declined to very low levels. The country's physical and social Iafrastructure has also suffered and trans- portation bottlenecks impinge on every sector of the economy. Fiscal policy has been tightened and inflation has eased since 1984, but the contracting revenue base has meant a fall in budgetary allocations to the economic and general services of the Government. Exports have continued to decline, thereby reducing Tanzania's ability to finance imports, to the point that imports are no longer sufficient for the normal functioning of the economy. 2.04 In an effort to address the coutry's economic problems, the Government launched "Economic Survival Plans" in 1980 and 1981, but it was not until 1982, with the introduction of a "Structural Adjustment Program" (SAP), that a comprehensive approach to resolving them was initiated. In October 1985, e new Government was formed under President Myinyi with a fresh mandate to tackle the deepseated problems of the Tanzanian economy. A more pragmatic approach to economic policy is now emerging, and new policy initiatives were announced in the budget on June 19, 1986. The emphasis of actions taken so far has been on macroeconomic adjustment. Since the beginning of April 1986 the Tanianiav shi"ling has been devalued by 60% against the US dollar. This has improved agricultural export incentives and producer price incentives. Fiscal and monetary policies, consistent with an IMF program have been reflected in the budget for 1986/87. If they are to have the desired effects on economic performance, they need to be underpinned by sectoral policy reform, as well as by greater availability of foreign exchange for key inputs for domestic production and rehabilitation. The Industrial Sector 2.05 At Independence, Tanzania had an extremely limited industrial sector which was dominated by private firms. Three major features have characterized the sector since then: (i) rapid expansion followed through by a sharp decline; (ii) a diversification in output; and (iii) a major shift in ownership from private to public hands. The share of manufacturing in GDP rose from just under 41 in 1961 and reached a peak of - 91 - 12% in 1978 before registering a charp decline. After using a massive amount of Investment resources during the 1970's and early 1980's (over US$2 billion), Tanzania's industry now produces only about 32 of the country's GDP (measured at world prices), while using almosat one-third of the country's total imports. The average capacity utilization rate of the sector as a whole is in the range of 20-30%. 2.06 The overall decline in industrial outpat is directly related to the drop In agricultural exports, which has meant fewer materials to process and lss foreign exchange to pay for imports of thE'needed spare parts and intermediate goods. Government policies resulting in an overvalued exchange rate, administrative allocations of diminishing foreign exchange resources, restrictive import licensing, and a price control system, have also combined to produce an inefficient, over-protected industrial sector. 2.07 The Government launched the three-year St;uctural Adjustment Program (SAP) in 1982 to cope with the crisis. The main objectives of the SAP were inter alia to cut back on new capacity creation, encourage industrial rehabilitation in selected priority enterprises, doublq manufactured exports, and improve parastatal efficiency. However, because of the lack of adequate funding and the slow pace of policy reforms, the industrial sector, like the rest of Tanzania's economy, is still in a critical state. Based on data collected by recent Bank missions to Tanzania, it is estimated that a reallocation of resources from the more inefficient industrial activities to the more efficient ones .could provide annual benefits (in increased value added) exceeding US$200 million in 1984 prices, even with the present structure of installed capacity. To achieve these benefits, however, major policy reforms would be required to encourage enterprises to expand efficient activities and to contract or abandon inefficient ones. The Government has recently adopted some of the necessary policy changes and the Bank is supporting this process through a continuing dialogue and the Multisector Rehabilitation Operation. In cooperation with the Bank and the IMV, specific incentive and institutional measures have been developed for 1986/87. The Financial Sector 2.08 Tanzania's financial system comprises a Central Bank, namely the Bank of Tanzania (BOT), and ten other financial institutions: two commercial banks, four development banks, a savings bank, a housing bank, an insurance company and a nalAonal provident fund. All the institutions are fully state-owned except for: (i) East African Development Bank (EADB), which is mainly owned by the Governments of Kenya, Tanzania and Uganda; (ii) Tanganyika Development Finance Compnay Limited (TDFL), which is jointly owned by the Tanzania Investment Bank (TIB) and three development finance institutions from the U.K., the Federal Republic of Germany, and the Netherlands; and (iii) Cooperative and Rural Development Bank (CRDB) which is owned by the Government, cooperatives and BOT. Tanzania has no private capital market and there are no plans to start one. 2.09 Monetary.and credit policies and targets are determined in the Government's annual Finance and Credit plan. This plan indicates the distribution of credit classified by economic activity and borrower, with - 92 - explicit allocations made for the Central Government, -ublic enterprises and the rest of the economy. Over 902 of tih credit allocated is absorbed by the Government and public enterprises. Through the finance plan, the Government provides priority ranking of bereere by economic activity. At present, emphasis is placed on meeting th credit requirements of the agricultural and export oriented sectors. 2.10 Interest rates are determined administratively and a detailed structure of deposit and lending rates for all financial institutions is prescribed annually by the Bank of Tanzants (30T). Interest rates have been negative since at least 1975, but it was not till 1980 that they became substantially negative. There was no general adjustment of interest rates between July 1982 and October 1985 inspite of an average Inflation rate of 302 p.a. and interest rates which remained negative in real terms, averaging about 171. :n October 1985, interest rates were raised by 1.01 4.5%. Twelve-month deposit rates are now 7.52, savings rates are 102, the maximum commercial bank lending rate is 14%, and the lending rate for specialized financial institutions is 162. The strongly negative level of interest rates has had a negative effect on savings and lending and has also resulted in capital flight. The parallel market exchange rate, an indication of capital flight, has depreciated during the past two years from T Sh 60 per US dollar to T Sh 140-160 at present (compared with an official exchange rate of T Sh 40 per US dollar). The structure of interest rates is geared to support priorities established b the Government. Thus, rural, small-scale, farming, domestic and export activities pay one or two percentage points less than large-scale industrial and foreign controlled activities. 2.11 Almost every aspect of the Tanzanian financial sector is state controlled, with the market playing almost io role. This has serious negative implications for resource allocation, mobilization of savings, credit and equity for the private sector. The lack of a private capital . market poses a special problem for raising equity. Firms tend to be over leveraged, with serious financial implications for their debt service if their loans are in foreign currency and the Tanzanian shilling is devalued. 2.12 The deterioration of economic and financial conditions, discussed in the previous paragraphs have seriofsly affected TDFL's performance. . Much of TDFL's investments are in enterprises which are dependent on imported raw materials. Moreover, some of these enterprises tend to be overleveraged due to the difficulties in raising equity, and have most of their term debt denominated in foreign currencies. Over the years, the profitability of many of these enterprises has been undermined by: (1) the shortage of foreign exchange and resulting shortage of imported raw materials; (ii) successive devaluations of the Tanzanian shilling, which have increased their debt burden; (iii) price controls; and (iv) restrictions on overdraft facilities. The controls on TDFL's interest rates have also affected TDFL's ability to efficiently allocate resources. The substantially negative interest rates have tended to encourage over-investment in fixed capital. -93- III. INSTITUTIONAL PERFORMANCE 3.01 The following Institutional changes occurred during appraisal, negotiations and project Impleaentation: (1) Management and Invibtment Policy Statement: At the time, of appraisal, TDPL's existing policy statement existed only as a guide t6 the Management and Board, and Its clauses were not binding. On the Bankes recommendation, a revised policy statement which could not be changed without prior consultation with the Bank, was adopted by the Board prior to negotiations. The following additions and amendments were incorporated into the statement: (a) an increase to the single maximum Investment limit per project to T Sh 12.0 million; (b) an Increase in the normal maximum contribution to a project's capital cost to 60%; and (c) a clause specifying that TDFL would protect, itself against exchange risks arising from foreign currency borrowings. (ii) Free Limit Restrictions: In documents submitted to the Loan Committee, it was proposed that the individual free limit on sub-loans be US$250,000, with an aggregate free limit of US$2.0 million. At negotiations, TDFL indicated that these amounts were too restrictive and requested that these free limits be increased to US$500,000 and US$4.0 million, respectively. Since this project was the first operation with TDFL, it was agreed that the individual free limit of US$250,000 was appropriate and that the aggregate free limit should be US$3.5 million. (iii) Economic Analysis of Projects: Prior to this loan, TDFL's evaluation of projects did not include an economic analysis. TDFL agreed to calculate the economic rate of return for all projects that exceeded the free limit. (Section 3.03 of the, Loan Agreement). However, in many projects, this was either not done at all or improperly calculated. (iv) Operations Manual: Although procedures for project promotion, appraisal and superv0s on were well documented by TDFL in various internal documents, the Bank recommended that these be compiled as an Operations Manual to facilitate easy reference and training of new staff. TDFL agreed to prepare an Operations Manual by DecemSer 3f, 1979. (Section 3.09 of the Loan Agreement). However, TDFL was considerably lste in complying with this covenant. The manual was finally comoleted In 1984. (v) Restriction on Equity Investment: It was agreed at negotiations that a limit on equity investments amounting to TDFL's paid-up capital plus unimpaired reserves would be incorporated into TDFL's new Policy Statement. Tt was also agreed that income notes, while having many of the features of equity, would nevertheless not fall within the category of unimpaired paid-up share capital, surplus and free reserves". The Bank agreed to modify this covenant if it proved to be unduly constraining on TDFL's equity operations. TDFL also indicated that it would discuss with the Government the possibility of selling off some of its equity Investments or establishing a mutual fund. - 94 - Developments During Project Implementation and Present Status 3.02 Management. TDFL is a well-managed institution and the staff is generally well-trained and capable. There was a change in TDFL management in 1901 and the General Manager, the Controller of Investments, and the Secretary were replaced. The change in management was accomplished with no disruption to TDFL's operations. The present Managing Director has vast experience in development banking and provides compettnt leadership. At the time of appraisal there were 21 professional staff, of which 2 were expatriates. At present, TDFL has 20 professionals all of which are Tanzanians. The majority of TDFL's professional staff is well trained and capable. However, staff morale is low due to the decreasing level of TDFL's activities, low-salaries, and uncertainties about TDFL's future (paragraphs 5.03-5.07). TDFL is likely to lose some of its key professional staff to the private sector or positions outside the country. Staff Training 3.03 TDFL has maintained an active staff training program mainly through sending staff overseas on short-term specialized training courses. The Loan Agreement was amended to allocate an amount of US$25,000 for training. Recently, however, the training program has suffered a set back due to the lack of foreign exchange and sponsors, especially for exchange programs with DFCs overseab. Procedures 3.04 (i) Appraisals: At the time TDFL was appraised for the Bank loan, the economic appraisal of subprojects was virtually nonexistent. To improve the quality and procedure of appraisals, Bank loan covenants included the preparation of an Operations Manual by December 31, 1979, and the use of the economic rate of return criterion for projects exceeding loan amounts of US$250,000. Over the past few years, with Bank assistance, appraisal procedures have improved, but in reviewing TDFL's portfolio it is evident that mistakes were made at appraisal in: (a) approving projects that were heavily dependent on imported raw materials; (b) permitting projects to be located at ill-suited sites, where both the delays in construction of the factories and non-availability of raw materials resulted in several operational problems; and (t) accepting over ambitious assumptions for assessing the viability of projects. Appraisal procedures, therefore, need improving and TDFL will have to pay more attention to the longer term prospects of the enterprises it finances and their economic viability. (ii) Supervision: During implemertation, at the Bank's recommendation, a Supervision Manual was prepared to assist TDFL in improving the quality of supervision reports. Supervision efforts, however, remained weak, and the enforcement of loan covenants was sometimes lax. In 1982 the Supervision Department was reinforced with several project officers who were moved out of the Appraisal and Investigations Department. With increasing loan arrears, a Debt Collection Task Force was created in 1983 and replaced by a Litigation Task Force to try and further improve collections. The Task Force's main functions include: (1) systematically monitoriug defaulters; (ii) enlisting the support of the National Bank of Commerce in denying overdraft facilities to willful defaulters; (iii) enforcing defaulters to - 95 - sign promissory notem; and (1v) proceeding with court cases against willful defaultets. In addition to the Task Force,the Department of Supervision has begun mounting Intensive loan recovery operations. (i1) Procurement and Disbursement: Project sponsors are responsible for the procurement of items financed by TDFL. Procurement is made on the basis of competitive qpotations from at least three suppliers. Disbursements are made on the basis of the predetermined Implementation programs for each project, and after sponsors' equity has been paid in and all preconditions have been set. (iv) Accounts and Audits: TDFLe annual accounts are audited by Coopers and Lygriand, a firm of international repute. The audits have been satisfactory, but have usually been submitted late to the Bank due to delays in preparing the accounts. IV. ALLOCATION OF THE LOAN 4.01 The Bank loan was almost fully committed within one year of loan effectiveness, but disbursements lagged behind for a number of reasons including: (1) delays in implementation resulting from the Government's restrictions on Imports and delays in delivery of machinery and equipment; (ii) project sponsors' decisions to defer investments given the foreign exchange crisis, even though the subloans were already approved; and (iii) failures on the part of project sponsors to obtain foreign exchange financing to supplement the subloans approved by the Bank. The closing date of the Bank loan was extended to December 31, 1984, and by then US$10.16 million or 92% of the original loan was fully disbursed. The remaining balance was cancelled in May 1985 (Annex 1). The Bank loan financed twenty-one subloans, and a small amount of funds (US$14,784) was disbursed for training of TDFL staff. 4.02 Twenty-eight subprojects were originally approved by the Bank for financing, but seven were cancelled (Annex 2). Fifteen of the subprojects financed were above the free limit and subject to the Bank's subproject review and approval procedure. In its subproject reviews, the Bank made constructive comments on the quality of projects, resulting in, inter alia, improvements in TDFL's appraisal methodology, notably for the economic appraisal. The size of the subloans ranged from US$48,193 for a printing press to US$1.45 million for a cement factory. The subloans carried an interest rate of 11% p.a. for an average term of seven years including a two-year grace period. 4.03 The financial and economic characteristics of the subprojects financed under the Bank loan are summarized in Annex 3 and 4 respectively. Among the twenty-one subprojects are eight metal processing factories, two textile mills, two agro-processing projects, a furniture plart, a slipway, a fishnet manufacturing plant, a paper processing plant and a printing press. About 522 of the projects are located in Dar as Salaam, Tanzania's principal commercial and industrial center, and six are located in Mwanza. Thirteen of the twenty-one subloans financed were for the expansion of - 96 - existtng projects, three subloans financed the rehabilitation of existing enterprises; and five subloans financed new projects. The total Investment cost per subproject ranged from US$12 million for plant and equipment to produce paper boards for the Kibo Natch Corporation to about US$122,000 for a printing press. As a proportion of total investment cost per project, TDFL financing ranged from 10% for the Kibo Match Corporation project to 1002 for a soft drink bottling project, a wholly-owned subsidiary of TDFL. About half of the projects financed depended primarily on Imported raw materials. Most of the output produced was for the domestic market. Only Lhe two agro-processing projects aimed at exporting most of their output. Employment creation data is available for twenty subprojects. These projects generated about 3,000 new jobs at an average investment cost per job of about US$40,000. The investment cost per job ranged from about US$2000 for a cement project to US$329,000 for an enamelvare factory. The latter project involved expansion of existing capacity. The investment costs per job have been high due mainly to cost over-runs resulting from delays in Implementation, and to the fact that expansion projects typically require only marginal increases in the labour force. 4.04 Of the 20 projects for which data is available, 11 are operating profitably. Nine of the subprojects were Implemented on schedule with actual costs reasonably close to appraisal estimates. The Implementation of eleven projects lagged behind schedule, leading to cost overruns. One project is still under Implementation. Delays in Implementation were due to var*,ous reasons including lack of building materials, delays in procurement of Imported raw materials and spare parts, and in a-number of cases, underestimation of project costs, which necessitated mobilization of additional funds. Two of the projects ceased operations due to the lack of spare parts. The present status of a few selected subprojects is shown in Annex 5. V. OPERATIONAL AND FINANCIAL PERFORMANCE Operations 5.01 From the date of its establishment in 1962 up to September 30, 1985, TDFL had approved about T Sh 547 million in loans and equity to some 226 projects. Annex 6 gives a summary of TDFL's approvals. The majority of the number of TDFL loans and equity investments were below T Sh 1 million and accounted for 392 of the amounts approved. In terms of value however, approvals were dominated by loans and equity of between T Sh 1 to 5 million; accounting for about 52% of the total amount approved. Large-size loans of T Sh 10-12 million accounted for only 62 of the amount approved. None were approved over T Sh 12 million in line with TDFL's policy of limiting its financial commitment In a single project to T Sh 12 million. Details on the maturity of loans and interest rates charged are - shown In Annex 6. -97 - 5.02 In terms of sectoral distribution, TDFL's Ppprovals covered a wide variety of economic activities including manufacturings tourism, agriculture and agro-processing, mining, forestry and wood processing, and acquaculture. Manufacturing was by far the principal activity financed; accounting for 66% of the total amount approved. Tourism and hotels followed: accounting for 152 of the amounts approved. Seventy-four percent of the number of loans and equity investments approved ware in the private sector, and this accounted for 692 of the total amounts approved. New projects accounted for 40% of the total amount of approvals; expansion of projects accounted for 572; and rehabilitation and diversification for 32. 5.03 A sumar:y of TDFL's actual and forecast operations during the implementation period 1279-1984 is shown In Anne 7. TDFL's total loan and equity approvals declined from T Sh 109 million In 1979 to T Sh 20 million in 1984; a decline of about 82%. During the five year period under review, total approvals, commitments and disbursements were about 502, 60% and 402 respectively below the levels projected at appraisal. The main reason for this sharp and steady decline in operations was the economic crisis in Tanzania. Due to the foreign exchange shortages, TDFL sought to finance projects which depended more on local raw materials, but few such projects were submitted for approval. 5.04 Portfolio. As of December 31, 1984, TDFL's portfolio amounted to T Sh 357 million consisting of T Sh 272 million in loans and income notes, and T Sh 85 million in equity investmevts. The following table summarizes the status of the portfolio. As shown in the table b.low, 48% of the value of TDFL's loan portfolio and 33% of the value of equity investments were in unprofitable projects. During the time of appraisal, 302 of the total value of TDFL's equity and loan portfolio (in operating projects) were in unprofitable projects. By December 1984, this had increased to about 502. Nearly half of these unprofitable projects depend mainly on imported raw materials and their poor financial performance is thus largely attributed to the foreign exchange crisis in Tanzania. The poor performance of the others is due to various factors including poor management, over-investment in fixed assets, inadequate equity, technical problems, poor project design, inadequate supplies of locally produced raw materials, and inadequate marketing arrangements. Of the 50 unprofitable projects, 14 involve companies under litigation afid liuidation. These include an air charter service company whose airplanes were grounded due to the lack of spare parts, an enamelvare manufacturing plant that depends entirely on imported inputs and a na-'1 manufacturing company that also lacks spare parts. - 98 - Table Is Summary Status of TDFL Portfolig (Amounts in T Sh '000) m s*/ Equity No. o WMunt No. of Amount Projects outands A Outstanding operatiPJ Projects Profitable Projects 22 124,664 46 30 42.241 50 Unprofitable Projectgb/ 30 130.072 48 20 8172 33 Subtotal 254736 707 Projects Under Implementation 5 17,242 6 3 14,647 17 STAL 57 271,978 100 53 85,060 100 a/ Income Notes included. / Includes companies under liquidation. 5.05 Loans. As of December 31, )84, TDFL's loan portfolio amounted to T Sh 272 million in 57 companies, of which 30 were operating at a loss. This seriously affected TDFL's loan arrears. As of December 31, 1984 the total amount of principal and interest in arrears over three months was T Sh 60.9 million. The principal outstanding in the affected projects was T Sh 160 million, amounting to 59% of the total loan portiolio. The amount in arrears was 22% of the total loan portfolio. During appraisal, this exposure ratio was considerably lower at 25%. The number of loans affected by arrears as of December 31, 1984 wav 37, representing 65% of the total number of loans in the portfolio. Arrears of over I year amounted to 56% of the total amount in arrears. In addition to the problems cited in the previous paragraph, arrears have also resulted due to willful default. To a certain extent this has been exacerbated by the economic situation in the country and the problems associated with enforcing payments through the court system. As discussed in paragrap 3.04(i), TDFL has given special emphasis to debt collection efforts. (Annexes 8 and 9). The results of these efforts are not available. 5.06 Equity investments. As of December 31, 1984, TDFL's equity portfolio amouneto T-Sh 85 million in 53 companies. TDFL ownership in these companies range from 3% in the Kilimanjaro Textile Ltd Company to - 100% in four wholly owned subsidiaries. These subsidiaries are Ruaha Bottling Company Ltd., Hotel and Tours Management Ltd., Perma-Sharp Ltd (all of which are operating profitably) and Enterprises Ltd., which is operating at a loss. A fifth subsidiary, TanL.ania Aviation Ltd, which Is not fully owned by TDFL, Is under liquidation. TDFL does expect to recover a substantial portion of its investment through the sale of the company's assets. TDFL's overall equity portfolio is in poor condition. As of December 31, 1984 only 30 companies (562) were operating profitably; 3 were - 99 - In the Iaplementation stage; and 20 were unprofitable. TDFL has taken due account of the status of these winprofitable projects in asking its provisions against the portfolio. In 1284, TDFL's return on Its equity portfolio was about 5.52. Financial Performance and Condition 5.07 TDFL's projected and actual income statements, balance sheets, sources and uses of funds, and financial ratios for 1979-1984 are presented in Annexes 10-13. TDFL's profitability has steadily deteriorated since 1982 due largely to (1) the provisions made against doubtful debts and reductions in the value of equity investments; (11) the increase in loan Interest arrears; and (111) the decrease in the volume of operations. In 1984, the provision made against doubtful debts and diminution In the value of equity Investment was T Sh 11.2 million. A large proportion of the provision related to the Tanzanian Aviation Ltd subsidiary, which was under liquidation. In 1984, TDFLts losses amounted to T Sh 7.3 million, with accumulated losses at T Sh 11.5 million. TDFL has not declared dividends since 1979; moreover the dividends declared to foreign shareholders from 1976 to 1979 have not been repatriated as the Bank of Tanzania has not been able to allocate the necessary foreign exchange. The gradual deterioration in TDFL's profitability as well as the devaluations in the Tanzanian shilling have had an adverse impact on TDFL's financial structure. Due to accumulating losses, TDFL's equity declined from a high of T Sh 97.4 million in 1981 to T Sh 76.5 million in 1984. At the same time, due to the devaluations, the local currency equivalent of TDFL's external borrowings Increased. (Although the exchange rate risk on IBRD and EIB lines of credit is passed on to subborrowers, TDFL absorbs part of the risk on loans from CDC and EIB bonds. This practice is in violation of its policy statement which stipulates that TDFL should adequately protect itself against exctange risks arising from foreign currency borrowings). As a result, TDFL's debt to equity ratio has been steadily increasing, and in 1984 was 3.5:1, exceeding the ceiling of 3:1 agreed with Bank as per Section 4.06 of the Loan Agreement. A ltter was sent in November 1984 requesting an amendment to the Loan Agreement to increase the ratio ceiling to 4:1. The Bank indicated that such an increase would not solve the problem, since TDFL would find it difficult to maintain such a ratio without resolving matters relating to: (1) Government assuming the foreign exchange risk on TDFL's borrowings from CDC and EIB; (i) conversion of EIB bonds into common stock; and (iii) prospects and timing of increases in TDFL's equity. TDFL's foreign shareholders have been reluctant to increase their subscription to enlarge TDFL's equity base, because they have not been able to repatriate dividends. As of December 31, 1984, TDFL's current ratio and debt service coverage were adequate at 1.9 and 2.4 respectively. 5.08 In the past year, TDFL's financial position improved, largely due to the decrease in the provisions for investments which resulted from the eventual sale of the Tanzania Aviation company's assets. Accumulated losses at year end were reduced from T Sh 11.5 million In 1984 to T Sh 5.8 million in 1985. However. TDFL's financial forecasts for the next five years show a continued decline, due mainly to the low level of operations. Without additional foreign exchange resources and improved loan recoveries, TDFL faces a risk of financial collapse. - 100 - VI. CONCLUSIONS 6.01 TDFL has an important role to play in the development of the Tanzanian economy. It is the main financial intermediary providing assistance to medium-sized private sector enterprises. Its ability to carry-out this role has, however, been severely curtailed by various constraints prevailing in a difficult economic environment. Prospects for enhancing TDFL's role and its effectiveness in the promotion and development of productive economic activities will not improve until the pressing industrial policy issues are resolved. The Bank is currently discussing these policy issues with the Government in the context of an industrial sector report. Substantial policy reforms are necessary as -Uell as the development of a program for rehabilitating, restructuring and closing down of industrial Onterprises. The Government recently adopted some of the necessary policy changes and in cooperation with the Bank and the IMF specific incentive and policy measures have been developed for 1986/87. The Bank should now give serious consideration to assisting TDFL again. Without the needed foreign exchange resources, TDFL's institutional capabilities and financial viability will be further eroded. 6.02 Under Loan 1745-TA the Bank helped institute important policy changes in TDFL. However, the Bank's objective of providing term financing to productive economic investments has not been substantially met. As discussed in the report, exogenous factors were mainly to blame for the shortcomings of several of the projects financed. With the benefit of hindsight, it is also clear that: (i) too many of the investments financed were import intensive; (ii) the economic appraisals of the subprojects were not adequately carried out by TDFL or properly reviewed by the Bank; and (iii) the project should have provided for the financing of working capital. 6.03 TDFL faces a risk of financial collapse and weakening of the institutional capabilities that have been established, unless (i) the macro-economic policies in the country are improved; (ii) TDFL obtains additional foreign exchange resources to assist its existing investments currently in distress and to resume its normal level of operations; and (111) TDFL improves its debt recovery. Any future assistance to TDFL should aim to support TDFL's reorientation in policy towards: (1) consolidation of its existing portfolio through rehabilitation of existing projects, and financing of spare parts and imported raw materials to increase capacity utilization; and (ii) new investments that contribute to foreign exchange savings and earnings. - 101 - 6.04 The Bank, through its supervision efforts, assisted TDFL in reorienting its policies, and made useful recommendations regarding project supervision and debt collection. However, several subprojects above the free limit, which were economically not viable, were approved. While this may have reflected in part poor economic appraisal by TDFL and insufficient review by the Bank. one of the,lessons to be learnt from this project for future DFC operations is that it is difficult to separate good projects from bad ones when there are severe distortions in the economy. In such cases, the typical ERR calculations may fail to reflect fully the extent of the distortions. Therefore, it may be safer to defer lending for this type of projects until'the most extensive distortions in the economy have at least begun to be tackled through a process of policy reform. - 103 - AM= I TANZANIA TANGANTIYA DEVELOPMENT FINANCE COMPANT LTD (TDgL) Schedale of Cumulative Bank Disbursements Cmulative Disbursements Actual Disbursement IBRD . (US$ million) As 2 of Fiscal Year Appraisal Appraisal and Semester Estinates Actual Estimates 1981 1st (July-*Pecember 1980) 0.70 0.68 97 2nd (January-June 1981) 4.60 3.70 80 1982 1st 5.60 5.60 100 2nd 8.00 6.00 75 1983 1st 9.50 7.53 79 2nd 10.25 8.15 80 1984 lst 11.0 9.13 83 2nd 9.90 90 1985 1st 9.97 91 2nd 10.16 1/ 92 Undisbursed balance of US$837,872 cancelled effective May 3, 1985 - 104 - AfRfE 2 TAWNIK EOMWt FIM 0 ~N L2iED Ust of 9Sroect fn ~d d amn No. 1745 - I. i m () s- Au MM- o 9xolcf woseetlb. ~mu dta~. U .d DIk~ ÖD 1. lanm~ka eunmer F&~tory Ltd. A - 1 11/ 23,855 245,50 18,55 2. H~g Foa & F=niture Ltd. A -2 9/» 292,771 - 32,771 3. hzna mg bles Ltd. A -3 11/ 938,916 938,507 409 4. iti ratch Oxpationi Ljited A - 4 878,313 877,723 590 5. Callo 'T~ Indus~tris Ltd. A- 5 90,614 903,24 360 6. mm Fisnt nfactu Ltd. A -6 87,952 681,217 675 7. Almadini Aria -imnitse A -7 421,687 410,287 11,400 8. Tan S & S QuarriesLtd. A-8 " 542,169 5u,887 - 9. 2 d cmpn Ld. A -9 12179 542,168 538,%963 3,5 10. Fanitue Ingries Ltd. A -10 542,169 541,120 1,069 11. Pam-African nterris Ltd. A -11 1/79 570,0 - 570,0 12. Pattex Knt~ -aufactuers (T) Ltd. A -12 3/80 361,446 33,339 - 13. XI1anjaro T=Wie Corporatimn Ltd. A -13 0 g 602,410 - 602,410 14. Ferm ~ (T) Ld. A -14 5/80 843,000 843,000 - 15. bx~kreef Gold m~ni. Ch. Ltd. A -15 8/ 602,410 - 602,410 16. uh &~tting Co. Ltd. A -16 1/82 312,500 310,20B 2,292 17.. 1L e Indumtries Ltd. A -17 4/M 365,854 - 365,854 18. Twmana 0*t:d Tools Ltd. A -18 10/80 287,500 285,701 1,799 19. Tna 0in Coalmny Ltd. A -19 1/81 964,000 - 964,000 20. Tw~anin Prtland Puo~ nt Co. Ltd. A -20 " " 1,445,783 1,435,964 9,819 21. m~ganyka Wattle Company ltd. A -21 5/83 515,464 515,464 - 22. Nyanza Qurries Ltd. 5- 1 11/79 20,964 M6,445 34,519 23. 1mnz Printi Centre Ltd. B - 2 % " 48,193 47,680 513 24. Jays NMtal Puna~ Ltd. B - 3 12/79 240,^4 220,689 20,275 25. 'nai~ Inustrles Ltd. B-4 1/80 67,590 64,452 3,138 26. Te Cas & ~bes Ltd. B-5 3/80 101,205 101,159 46 27. cmen~ Fery Ltd. B-6 5/80 61,446 61,787 - 28. Hetoxide (T) Ltd. B - 7 9/80 122,000 - 122,000 29. T~unfz Ed 25,000 14,784 10,216 13,806,295 10,162,130 3,644,165 一105一〞師個×3 常 韋 t 念 痲日 言言言華萬 〕豆呈騙騙 名日日煙煙 怏量量呈煙優廈 /i-!11!!1 11!}｝〕｝｝】！1 1 1 11一！ &&！〔〕〕一 Ly o a og> i om 2 a ANNEX 4 g, 9 359. 09 illkog-221-913=3ý-Razzt 4416!2211e6264e*nagaon, enda inti- 111'11::qammllqrklllmllii 81 rn 1311 !m ii-iiiibiiii-ibiiiii grc--e-t--r.§%ELgg.ktigget feiiiifj*:ttf 5 111111. u l ffi.11,31 till 11341 211 cl = lik Mål 1-iiiiiiigA-L&--lfb-ý&2ýzillt fila ffillefi '#tillit -107- ANNEX 5 Page 1 of 3 TANZANIA TANGANTIRA DEVELOPMENT FINANCE COMPANY LIMITED (TDFL) SUMMARy DESCRIPTION AND PRESENT STATUS OF SELECTED SUBPROJECTS FINANCED UNDER LOAN 1745-TA 1. Kibo Mtch Corporation Limited. Subloan $878.313. Kibo Hatch Corporation (KMC) was established in 1962 to manufacture safety matches. The company is owned 252 by TDFL, 222 by private Tanzanian investors and 432 by foreign investors from Kenya and the United Kingdom. In the 1970's KMC diversified its operations to include a pulp and paper mll. an agro-forestry business and a sisal farm. The World Bank subloan, approved in 1979, financed the purchase of machinery and equipment to manufacture duplex paper boards for use as packaging material. Due to unrealistic Implementation schedules., and faulty specifications for machinery at the time of appraisal, project Implementation was delayed for two years. As a result cost overruns were substantial, and total project costs exceeded appraisal estimates by 45 percent. The project to now profitable and operating at 752 capacity. The company has been vble to meet its debt service obliga- t1ons to TDFL. The project has created 130 new jobs at an investment cost per job of US$75,400. This high figure reflects the cost overruns and the level of automation of the plant. 2. Mwanza Fishnet Manufacturer's Lt,. Subloan $687,952. 7he company was established in 1964 to manufacture acrylic fishing nets. TDFL owns 29% of the company's shares; 511 is held by a group of private Tanzanian investors (who also manage the company) and 20% by a private Japananese company (who arrange for the procurement of machinery and raw materials). TDFL made its initial loan and equity investments in the company in 1974 to facilitate a modest expansion/rehabilitation programs. The World Bank subloan, approved in 1979, financed the purchase of imported machinery and equipment needed to increase ccpacity. A shortage of building materials delayed project implementation for nine months. Operations have been hampered by thelack of foreign exchange to import raw materials. The factory operates for less than 3 months a year and capacity utilization is only 15%. As a result, the company is only marginally profitable and its debt service obligations to TDFL are being met by payments from the private Tanzanian investors. 140 new jobs were created at an investment cost per job of US$14,800. 3. Rotian Seed Company Limited. Subloan $542,168. The company, which was established in 1979 to cultivate seeds and flowers for export, is owned by a groa of Dutch and Tanzanian corporations and Investors. The primary sponsor, with 602 of the shares, is a Dutch agro-business corporation whose Tanzanian subsidiary manages Rotian's operations. Other shareholders are FMD, the Netherlands Finance Corporation, Agricultural and Food Corporation (NAFCO) and a private Tanzanian Investor. The subloan, approved in 1978, financed the importation of farm equipment, plant and machinery for growing and processing the seeds. Implementation of this project was substantially delayed by - 108 - AMNE 5 Page 2 of 3 more than 4 years due to legal proceedings related to acquisition of disputed fare property. This led to a change In project scope and design and resulted In costs escalating by over 40. Seme minor delays were also experienced as a result of the temporary suspeto of disbursements by ISID to Tanzania In 1983, following Tanzania's delay In meeting overdue IID debt repayments. Farm production has been below appraisal estimates, because of a decrease In acreage cultivated and lower yield rates caused by Inadequate rain fall In recent years. Although lotian Is only marginally profitable it has met its financial obligations to TFL promptly, and its prospects for the future look bright. The number of employees fluctuates between 425 people to 1,240 people at peak season. Using an average of these two figures, the Investment cost per job amounts to US$5,900. 4. Aluminium Africa Limited. Subloan $421,687. The company, which was established in 1960, manufactures aluminium cooking utensils and galvanised roofing sheets and pipes. It is owned by the National Development Corporation (601) and a group of Asian Investors based in Kenya, who also provide the company with management services. In 1976, TDFL provided a loan to finance part of the costs of establishing a division to manufacture a asbestos cement roofing sheets. The initial project design was poorly conceived, and as a result the project site had to be changed. This led to considerable delays in Implentation and cost overruns. The World Bank subloan, approved In 1979, was part of a financing package to enable the project to be completed. The funds were used to Import 6 months stock of raw materials and equipment and also to finance part of the local construction costs. Production commenced in 1981, but output has fallen far short of appraisal estimates, with capacity utilization between 15 to 35 percent. Once again, the cause is the lack of foreign exchange to Import raw materials. The project has bee,a making losses, but thecompany's debt service obligations to TDFL are being met adequately. The project created 140 new jobs at an investment cost per job of US$21,400. 5. Ruaha Bottling Company Ltd. Subloan $312,500. The company was estab- lished in 1972 by TDFL and a group of non-resident businessmen to bottle and distribute a line of soft drinks under licence from the Cola Cola Company. In 1973, TDFL bought out its partners and Ruaha Bottling Company became a full subsidiary, managed.by TDFL staff. The company's performance for the first five years was satisfactory and its profits contributed significantly towards TDFL's earnings. However, poor maintenance of machinery and lack of spare parts re-vulted in frequent breakdowns, and by 1980 the company's profitability started declining. World Bank subloan, approved in 1982, financed 50% of the foreign exchange cost of rehabilitating the plant and equipment; the other 501 was to have been financed by EI, but due to the lapse in the EI8 line and difficulties in securing alternative financining, the project experienced considerable delays in Implementation. The resulting cost overruns amounted to over 901. Financing to complete the rehabilitation progra was recently secured from DEC, a development finance company from the Federal Republic of Germany. The prospects for the project are good and Rusha Bottling Company, Ltd. should be able to service its debt obligations satisfactorily. When completed, the project will create 76 new jobs at an investment cost per job of US$12,600. - 109 - ANNEX 5 Page 3 of 3 6. Tanganytka Wattle Company Limited. Subloan $515,464. The company was set up In 1948 by the Commonwealth Development Corporation for the pur- pose of growing wattle trees and processing wattle extract from its barks for export. In 1969, TDFL made an equity Investment In the company and acquired 162 of the shares. The company has siace diversi- fied into farming of maitse and wheat, livestock and forestryproducts. In 1982, TD?L made a convertible local currency loan to the company to finance a rehabilitation/consolidation program. In 1983, due to diffi- culties i obtaining letters of credit to Import equipment and spare parts, the company requested TDFL to convert the undisburted balance Into a foreign currency loan. This was arranged by mans of the World Bank subloan and approved in 1983. Implementation of the project has proceeded on schedule and should be completed in 1986. The company is profitable and a significant foreign exchange earner. When completed, the project should on average create 100 new jobs at an investment cost per job of US$17,200. 7. Perma-Sharp Tanzania) Limited. Subloan $843,000. The company was established in 1969, with a 35Z ahareholding by TDFL, to manufacture razor blades. In 1972, TDFL bought out the other investors and took control of the company. The bar.-_ of razor blade Imports in 1973, gave the company monopoly statues and ensured profitability. In 1980, the company decided to expand its capacity in order to meet unsatisfied local demand and to export possible surpluses. The World lank subloan, approved in 1980, financed the Importation of machinery and equipment for the company's expansion program. Project implementation was delayed considerably because of changes in locating the new plant, the slow pace of construction, and defective machinery. Cost overruns exceeded 1002. The plant is expected to start production by end 1986. The company has sufficient raw materials for one year's production, but it is heavily dependent on Imported inputs, and with anticipated foreign exchange shortages in the country for the foresee- able future, furture prospects do not appear good. When completed, the project will create 85 new jobs at an Investment cost per job of $165,100, reflecting the cost overruns. 8. Patte Knitwear Manufacturing Limited. Subloan $361,466. The company was established in 1971, to manufature knitted garments. TDFL provided 34% of the equity, and the remainder .was provided by a group of Tanzanian investors. In 1980, the company decided to establish a spinning and dyeing plant that would produce acrylic yarn for use as a raw material in their knitting operations. The World Bank subloan helped to finance part of the foreign exchange costs of importing machinery and equipment. Additional financing was provided for by equity contributions from TDFL, FMD and the Tanzanian investors, and credit financing was provided by the machinery supplier. Minor delays in project Implementation were experienced because of a lack of building materials, but there were no cost overruns. Commercial pro- duction commenced in 1982, but output has fallen far short of appraisal expectations for a number of reasons; Including; the shortage of foreign exchange to import raw materials; inefficiencies due to poor plant design and the quality of machinery; and competition from cheap Imported second hand knitwear. The project is unprofitable and will continue to decline unless the economy Improves. As a result of low production levels, no new jobs have been created. - 110 - TANEANIA ANNEX 6 TANGANTIKA 9WdLOPMENT PINANCE COMPANT LIMITED Analsis of A9orovels (ultv. r9cow Notes and Loans) A. SIZE OF LOANS Number of Amots OR IQUITY AT.Sho.) Approvall I in '000 2 Up to I allon 89 39 49,113 9 I to 3 aillion 74 33 141,024 26 3 to 5 million 35 16 141,533 26 5 to 7 allliaw 14 6 87,227 16 7 to 10 aillion 11 5 94,558 17 10 to 12 million 3 1 34,030 6 Over 12 million - - - - TOTAL 26 15 547.485 100 B. MATURITY OF LOANS Up to 5 years 140 68 271,991 59 5 to 7 years 48 23 116,201 25 7 to 10 years 17 8 56,901 12 Over 10 years 2 1 17 836 4 TOTAL C. INTEREST RATES Up to 5% p.a. -- - - 5 to 82 p.a. 17 8 18,490 4 8 to 10% p.a. 88 43 100,843 22 10 to 122 p.a. 94 45 322,611 70 12 to 132 p.a. 7 3 19,585 4 Over 132 p.a. 1 1 1,400 - TOTAL 207 100 462.929 100 D. SECTOR OF ACTIVITY Manufacturing 142 64 362,716 66 Agriculture & Agro-Processing 12 6 40,785 8 Mining & Quarrying 7 3 15,811 3 Fishing & Fish Processing 5 2 7,234 1 Tourism & otels 33 15 79,574 15 Forestry & Wood Processing 7 3 11,640 2 Various Services e.g. transport and printing 15 7 23.335 5 TOTAL O547,485 B. SECTOR Private 168 74 375,441 69 Public/State Owned 58 26 172,044 31 TOTAL 226 100 547 485 100 F. TYPE OF PROJECTS New Projects 62 27 225,564 40 Expansion Projects 95 42 306,469 57 Rehabilitation/Diversifieation 69 31 15,452 3 TOTAL 226 10485 Iu l一二’！付 112 - A~ 8 wmmw mm amåff UD LEL &~ of Aý Omr 3 pcc~ AU~ P~ bl i ý ~ cc Arm»'/ Ar~ cf AT== et Ar~ c£ A et P~= å~ Owe 3 mnffi >4 w~ Gm-12 m~ 1-2 y~ Omw 2 y~ 10 48X slug 3JW Ilm lln 1^4 0~1~ P~ 4904 9,7M .0^ 24 10,m 11,706 sub~ 34 147.316 5?-,%3 13,87 11,420 18,86 uvo pr~ ulder 3 12,U5 3,281 943 749 m al T~ 37 L%,301 60^4 14,640 ä,1(0 19,5% 14,461 et ~pd ud Imueft. v-u4. aq~ - 113 - An!Z 9 m m emfi - a~hm a a .) Yr ig b~Dm~r 31 183 114 1. TIta 4brLo n ofo D 57 2. Nr f L Afc by Amir 3 37 3. bprn== Ra~Io 62 4. T~a IML Ofnf=lirf lam PartoHo 1b 2= 111Ud bh 272= U1m 5. otfolt~o Afted by Ars Th 115 z~11J ab 160 ut11Um 6. rea aio 7. Arsars of Our 3 Nknth (prit) Th 26 t1~m Mi 38 m111~ 8. rs e n Of bta1. M oo lt 149 Ar1 af mr 3 gth Tt~ LKA E~hf FD ~MB LDiEM1D (L) Proected ad ~ctual 1In Statt 1979 - 198 (T ". 0(0) Tr 9lh a 31 199 1m igl im lm im P'udf balle~ fallctel ~ ~ffjeto - 11,= 12,6 15,791 18,274 20,^6 19,757 26,141 22,018 37 2170 33,14 l UMiv~ 4,^5 4,181 6,0 2,825 8,665 6,025 11^, 4~6 1A015 4,049 i fntonw/Iklme. 3,80 4,245 4,90 7,176 5,00 6,2 5,0 7,778 6,00 4.m 4,92 -29t .10 1_543 2.01 . 2.110 2 4.163, 2' 4.M M UTl . 21,46 22,93 29,642 29,703 3,68 33,974 4,%9 3,40 529M ,40 4,3 - Aebog tie Bqau 2f 4,452 4,73 6,424 7,148 8,037 9,160 8,~5 9.077 9.6 10,0 11,9 - i m 541 414 541 2,2 541 664 54 10,66 541 4.l 49 -N~I iM 10d 1,203 1323 4 i t. 9~ 2DJM 1. 21^ - ~'tft ~in 1h 6,32 7,081 9,474 6,012 13,8% 8,292 17,273 9,= 21,6W Il,4 Hel.fi -~.~ 3,61 4,203 UM 6,212 3550 777 M~ 5 972 2~ i - Prfit M97r 12st - ,216. 1 1.653 -. .AM .M1> .1966 2105, .205 fl 11.18 - mtofttAIt Ms) 2,23 3,^83 3,53 1v 5,692 3,242 7,536 (9,891) 9,5 (2.547) (7,33) 1/ ib Pme~.cd. . mm Iw fr P 84' k.~.a. dqftcc.~,. kf~. pro... sleinst q~ theal of eeenb~. TAtNEANIA TANGANTIKA DEVuneO#PWT FINAmCB OPANt LTc JTDL) Compartiom of Projeeted and Attnal Ban e Sheuta (979 1984) (TSHS '000) tear fedag Decoebr 31 1979 1980 1981 §982 1963 1996 /1 Projecteåd tual Projeted-Actuem Projeted ae l Proetd-aual t Meteda £88818 and Short Tarm aomatmåte 7,903 26,411 3,962 29,562 1,076 40,508 6,258 1,608 4,032 6,942 1,640 - Other Corrent Accete /2 24,082 11,038 26,814 16,685 31,868 25,859 38,705 32,348 44,8~1 26,36 w~,307 fortfotto - qUtT 61,190 55,557 87,123 59,457 117,305 61,682 148,994 70,649 '18,310 72,508 83,061 - Laea i3,200 141,566 151,643 128,418 192,842 174,555 228,998 197,697 20,333 207,72 233,461 -eteotes s en.588 - 14 152 - 14652 - 1 a 2819 8 19 i Total fortfolto (Go~) a> 2480,7r; 2m7 2,02 I TIfC4T ,O:51 UT5 93 3 Lco prlt fta 9 874 8 658 ta 527 10 658 13 427 k21I8 133ni 240897 5739m 33491 46 W1 >0 Total Fortfolto (not) nt. *~ T ~5,-~ Tfl."-; CT3I ffig! ik.7 fiff1 t ~.,- T ~.- T ~.' NCM Ti ~.- t - Mot plud A*ete 20,886 19,872 20,595 22,160 20,354 25,433 20,113 26,463 19,872 28,5332 3,339 8 M.ff Nouateg Lem 44 540 859 958 964 736 1 059 783 1 544 1 340 . 10TAL A~8 188101 3I0,92 331,267 LIAI2LIT188 Omernt Libtitties 12,669 23,235 19,685 27,861 18,825 31,233 23,862 28,345 35,053 24,442 2,46 lanT.Trlaieb tmblttes - aeaeNoten 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 30,800 - ti honda 28,100 29,813 28,100 27,058 28,100 22,742 28,100 23,315 28,100 20,90% 32,436 -tm a34.835 36 966 48 304 82 935 808 785 998016 143 712 503 043 586025 141 350 1728MG TOTAL 801O 0INGS 42,"3 s46,279 8 m 93, * icf 5-d W iw.ffli O YI- MIWE w Capie 60,000 88,000 106,000 88,000 110,fl0 88,000 145,000 88,000 170,O . 88,9N0 8,000 6 ,227 900 3 380 4.850 5.37 9476 8 060 980 52 X 3 iÉffi ff ffi38 9388 15,26 , 8,10 TI 1TTAL LIABILITIS 4 BQITf 218,035 261,914 279,469 310,734 350,982 331,267 428,734 323,613 491,137 350,742 192,33 /l No Proj~mttn uere made for 1T 84 /2 Deton and current aturttlen of portfoljo loong TAINGAlITIKA UVU8ANEUiT VIU*MCE COMPANT LIlUTD(9L Projectedand Atua Source and Ueh oftunde 1979 - 1 (TSNs '00) Tear 9di Daemeber 31 1979 1980 1981 982 e~ 59S4 Proected hg" ProectedAua_ Proe ictmnI Projected Actute - Punds from operattons 14,192 7,688 18,065 9,526 22,395 10,850 23,864 31,376 30,211 e6,835 22,513 - Lo. epsmente 9,%8 13,479 15,224 94,738 18,366 18,362 23,610 24,897 30,477 23.107 ,822 - ~., Eg.1ty 20,000 48,000 40,0m0 - 10,000 - 33,000 - 2o000 • • • Lomsa 42,477 45,519 18,236 48,k41 61,244 21,48 38,220 17,322 36,60 20,819 13.98 -Other.f 20 - 35 - 45 - 55 - 63 1,032 379 - A810TAL @6,237 554,726 92,060 72,805 112,240 50,710 122,749 63,395 119,323 40,761 74,912 Mattom • Lqity 16,050 13,477 23,933 4,113 30,182 2,223 31,689 8,967 32,316 3,3M9 55.730 - Lacua Icomc notes 44 731 71 641 36 99 33068 64809 2387lö 46603 J306 67 921 34220 56 945 - Repmt of Borrowing 98 410 767 - 4,267 8,467 767 18,556 767 9,=80 153.02 * • ized Assets 7,190 5,839 250 2,980 30 4,131 300 1,952 390 3,167 4,943 • Tasm 6 Kividend. 4,348 1,491 4,613 1,250 6,868 3,200 10,00 3,3519 2,523 4,375 8,411 • Other 2/8 96 7 427 8,200 291 om= 47 8200 337 163 • 10320TAL 81,311 92.954 %,001 61,838 115,126 41,190 117,567 66,347 124,349 3$,384 37,872 • loeuesse//Dsreasm ta r~mds 4,946 21,772 (3,941) 10,967 (2,866) 9,320 5,182 (3,732) (5,326) 5,177 57,040 1/ Kncines staff ~iesing loans; sal of Inveatmente ond fåned assetc. / nelodse etoditorm (~asOe »otu. and 118 bond Interest), staff housng loan and deferred tamtion. TAMEAUIA TANCAIITIKA UBVILOPMSBIT FiiNAæ NC PAUT LTD. (9L> 0recitd n Atee ieses seo w-90 3979 1980 191 92 93 8 se f g 8. 9otal mene~ 11.5 9.5 11.5 10.4 11.6 P0.8 11.5 1.9 FM.5 12.2 3.3 3. Fieee Chargu 5.4 4.0 4.9 4.8 4.5 4.9 4.7 2.8 4.5 4.0 5.8 3. A~ateetteMs eem 2.7 L.9 2.6 2.4 2.6 2.8 2.3 2.8 2.1 3.1 3.1 4. at frwfit (ee) .2 1.9 1.4 0.3 1.8 1.0 1.9 (3.0) 2.1 (0. (2.0) 5. Ikt Vrufit (1s)/Tr. &nd let brt 3.7 4.2 3.4 1.8 4.9 3.3 4.9 (0.9) 5.64 (3.0) (9.6) 6. u*wtdeI tenee /Eg.tty 7fftfolig 7.4 l.5 7.2 4.8 7.4 9.8 1.6 6.5 7.7 6.8 s.s 7. lee^ fee Lees/Av. 1oe Prtfolio 7.5 7.0 7.6 7.9 7.6 7.2 7.6 8.2 7.5 .. 9.7 8. Cest f Wet/Avergp oebt 8.2 - 0.2 8.1 7.9 8.3 7.8 4.5 7.9 6.3 8.6 LteeIdtv se Crediteethiese 9. Caret lette 2.5 1.7 .6 1.7 l.8 2.1 1.9 1.2 1.3 .4 1.9 10. ea-m eb~t/Bgety 2.3 1.6 1.5 2<1 1.9 2.0 1.7 2.3 8.5 i. 3.s 18. Seb Serite sveerage etto , 3.3 - 2.8 - 2.3 2.9 4.0 1.1 3.8 2.9 2.4 - 119 - TB Ut~ED MEnu oF TA hA^ omEm OF < WIW A D.1Uam Pg* i of 6 C~ mi de-- *VUA". DAA ES SALA~ P. 0. om Tda s.: 41US *DIW. DA SAL M . Tuksasse: WVsorrIsI9 '-r- eesnd as uh t.c "k miifflm*~ut ba e a~ne p.ass a.r. .... c/D.10/t ~ - 20th ~o, 1989 COM nrUS RCEIVEC POM TRE BORRER The Divisioni Chief, Operwainm ~luatin Dep~rtmnt, World Esk, 1818 R skreet, N, V., Vashintan1, D.C. 20433, (i$ention: Ditr indæ"'" N4miCadIl Deff sir# E TANZANIA INl|!1*Bal (CTB) (Los 1172, 1498 m 1750 • TA- AlTAUG~Nk[ MEiLOPmæ!I KL~lC COPAr LT. mm 'Nm) UAo 1745 - GMO)!T -PBØmMNCE A~DI BE=R piese refer to the above eabjet. I have etudied the draft project pwfrmance ~lIt geport (PPAR) you gabdtited to m far comat. i hereby a ind.t &V obscrvabions and co~nts on the reporbp (Éteched). I would like to ebend V ~ratitde for gLvng me en opportunity to see the- draft and gLvin me a ohæne to comnt on it. It is iV a: re hope that aV casents will be of some use to yoa. øks for your oo-operatian. (3. s. homv'n) for PRNCPA SWEA - 121 - - APPMDI 1 Page 2 of 6 cOUi'0' æU E PRO.TET PDBURAUC EDE2 EORT IUVNOPNT PsINcI co. »L!EZD. 1. I is true that indntry ao sen a a p~erful ngine ~ ot grmuh. h elemæt of racte itensity vas not olealy addemed to ab initift. S repart stateg that mre capital intensive- tff~e logies vere desired. dn a mtter ot fnt ith indespena one of the ar objetiveg mas to areate mare ~efploimnt. Ilit in this is that labor intensive te~onologtes vre ore desirable. It is the import sab"titutian inantrial straef vhich ~aed in capital intensive indstries contray to the miøation of eployment generation objetive. 2. in the report the ~port - abstitutia Imnatrial etrategf is taken av synanymous to basia industrial strateg. Wis is basically not the situatin. *ile aort subtitutio indastrial trateg i geared tomards the estabishet at indos- stries ioh will prodmoe hat the ecoza used to impart* basio ind.str.al stratef f ius at establishing indutries hiah pro~oe basio inputs and ms= onun~ items based aa loa3ky available rav ~ateriale. h baio industrial strate hav been taken as an alternative trate8 after the failure of the import subtitution trateff. lxmhtutional avelaoent: la the report MTI is com~nan for redaoing substantially.its reliance on 'xpatriøte staff. ctfrtu~ey this aohiøve~ent is negtively qualified by the report by the statement frobab~y rerm orelyn. Due report should have quanified this. Is it premare in te of time ar qumtity nd qality of epert.. Is tøere a time schedule for 1oalisatia? The reprt should have come - =t ole~ily an hav lang is eough ad hov, mny o hiah ~rilla are requred to be suffi<ient. 122- APNDIX 1 Pagae 3 ofT -6 Financial Ccndi-tions: Pwa 17 of the report there is a recomendation to rehabilitate TIB portfolio to save it from financial collapse, Water alia the report list the following as the measures: (a) "Weding out unviable parastatales (e wanders wby the recommendation has limited itself to parastatals aWl* TI is financing projects and not institutions. See PPAM, (b) "Resolving the issue of the denominated in fareigm currency para. 27 debts" No where in the report is this issue takled. (o) "gpoying of expatriate managemet to man key positions an a long term basisn. As a footnote to what the report term as "bough political decision" this position is reconfirmed by he following statement:. "If a project is viable but management is a problem expatriate managers would have to be hired far a long period". Eipatriate is seen and propagated as solution to management VrobleIM and infact the question of duration is stressed 4ong period, This looks like a biased a preconceived solution* She country has trained and has a pool of technically capable managers. Se recomendation should be change of management by different ways including local managers recruitment. agpatriate recruitment to us is a last resolt due to the foreigm exchange implications. - 123 APPNDIX 1 Page 4 of 6 IV. WIllZDiaID IS5ES gek perfarmnce: KOrld Mk IRolvemnt in TID and TDEL ham been assessed on the follwing poraitors- (a) Uhilisation of its itnds; (b) efetivene«ss of ite loan polioie; (o) in appaisail and mup~rvision missiona effectiveness and conceptualizatin of the aritical iulie at both micro and maro eoonfic levels. (C) »ility to Infinence nanal policies and re^tion of oanduciee policy nuviramt and economic milia. The reprt after asessing the above paramtors has canlued that the *arld Bonk bau contributed subtantively tOlard the poor pformanoe of M and TDEL. ge tend to con to this obsevation cn the foLowing Grouds:. (i) m vwrld h«nk bas been quite slippery on settrng up ri f£r bankaility of projects. it has a stereoype appraisal criteria Which do not take into coonideration the different coutries sociopolitico ---sonei environmens. (ii) Wprried appraisal missioens s The bank ha« tended to coumiusion h=ried appraisals of its loan. Te mision Members somt~ies do have a pjire preconceived ideas and conolusiona about the assigment. T .has created sometimes conficting appratsal remilts with respect to the sam project. The foonote en page 16 number 19 is a olear Oawe in point (a) while in 1975 the k stated among the major problmg of M is "he conditin of it8 ortfolioef. In 1977 the ~ conl~uded that it nis Prev~ure to m=ke a judg~ment on the portfoliogns". 1ich is whioh? - 124 - APPENDIX 1 page 5 of76 aw come in 1975 the bank was able to judge the portifolio of T33 n3Y to fiA out too years latter that it, was Vream- Inwe to judge even by 1977. (b) In 1979 the Baks staff appaisal Report (sAR) put on record that naIis appraisal of project is thorough"* j*thermore in jne, 1979 another SAR found that "TIB has improved the quality of its project supervision by strang- theming its staff%. 3 the sAR under disacussion quite an opposite view is being presented to the extend of recommending epatriate staffs. GLven these observations one fails to apprectiate the bankls capability to execute its responsibility and becomes incapable of implemeting suggested solutions. Leesons of apecience and RommendatiOnP 1s A very valid statement has been made in para 33 page 21 in respect to form of ownerahip. We concur with position presented that it is the socio political circumstance4 cultural differew;v and society's characteristics which tend to influence the nature and extend of institutionalisation and not the ownership pattern. "astate owned institutions tan be as dynamio and efficient as private owed if thq are run by qualified managers". privatisation is been considered as an alternative (albeit not .ecessarily facile). 2. MIch as we appreciate the repart% questioning the modi -operand4 of poard of DLreotars and the appointment Irocedures we would like to record that there is a wave of obange at the soment of late the , tendency have being to get people with relevant qualifications and expecience in Dard of DLrectors. C.1. are becomdng a necessary prerequisite for appointment into a Board. - 125 - APPENDIX 1 Page 6 of 6 on part of management the Government has already directed parastatals to advertise all posts of Chief Eecutives. We hope that by this method the most competent and qualified resource persons will be given the responsibility to run the state owned firms. GfEAL COMMNTS: The project performance audit report is a litazy of problems ranging from the bankts weakness, DX;st malfunctioning and generosity of donors. We anticipated that the report would have enumerated major achievements of the DMs, problems arising from the operations of the DICs and for each problem a reconmded solution or alternative approaches, She report ts first attachment is on problems as if there are no positive achievements at alle mile identified problems include:. (a) Inadequate allocation of resources (b) Deficient incentive structures; (c) Ineffective organizational structures; (d) Ambitions investment programs; (e) Largess of the World Bnk; (f ) eympathetic donnors; (g) Poar project screening procedures; (h) Haphaard project selection; (i) Ari-export BLas; (j) inability of Dpos to influence macro economic policy issues. If the report is to be of any meaningful impact an TIB and TDVL future See PPAM, paras, performance the suggestion of solutions or alternatives rather than to over 32-41. shadow their achievement with problems some not of their own making is of fundumental importance. - 127 - APPENDIX 2 Page 1 of 12 TANZANIA IN SBANK P.O. Box 9373 Dar as Salamn United Repubic of Tannis CeAe "WVETMW1W O Tdephous 3MRS COMMTS RECEIVED FROM THE BORROWER - TIB 1st March, 1989 TIB/OR/60/8 Mr. Alexander Nowicki, Division Chief, Policy-Based Lending, Industry, Public Utilities and Urban Sector# Operations Evaluation Department, The World Bank, 1818 a Street, N.V.* WASHINGTON, D.C. Z0433, U.S.A. Dear Mr. Novicki, Re: UIS COMMENTS ON TIB DRAFT PROJECT P8RFORMANCE AUDIT RAPORT (PPAR) Thank you for' your letter dated 10th January, 1989. I regret very much that I have been able to reply to it only now. The PPAR indeed raised very important issurs which TIS thought it had to consider thoroughly before communicating to you our comments on it. Enclosed herewith is our commentary on the PPAR. Our observations, I trust, will be found to be self explanatory. I sincerely hope that in compiling the final PPAR, your Department will give consideration to out comments. Yours faithfully, TANZANIA INVESTMENT BANK h C. Rbambe GEBRA1 MANAGER c.c. Mr. Gilman Rutihinda Principal Secretary Ministry of Finance, Economic Affairs and Planning P.O. Box 9111 DAR ES SALAAN coc. Mr. B. Hchomvu Ag. Principal Secretary Ministry of Industries and Trade P.O. Box 9503 DAR E8 SALAAM c.e. Mr. M.. Ritomarti c.c. Mr. Ian C. Porter Deputy Governor Resident Representative Bank of Tenzania World Bank P.O. Box 2939 P.O. Box 2054 DAR ES SALAAM DAR ES SALAAM Ota Conepeadw daoud be edeed to th Gmal Muang :so - 129 - APPENDIX 2 Page 2 of 12 TANZANIA INVESTMENT BANK COMMENTS ON THE WORLD BANK PROJECT PERFORMANCE AUDIT REPORT ON TANZANIA INVESTMENT BANK.(LOANS 1172. 1498 AND 1750-TA) 1.0 INTRODUCTION TIB has in the first place specific remarks about the two documents forming the Project Performance Audit Report (PPAR), that is the Project Performance Audit Memorandum (PPAM) and the Project Completion Report (PCR). These are set out in parts 2.0 and 3.0 hereinafter, and they either make corrections of certain specific factual errors or dispute some of the deductions made from the stated findings. In part 4.0 are general observations about the PPAR, but in particular the views held and conclusions drawn by the World Bank's Operations Evaluation Department in the PPAM, most of which regrettably TIB has found totally unacceptable. TIB's comments are restricted to the remarks that affect it. 2.0 SPECIFIC REMARKS ON PROJECT PERFORMANCE AUDIT MEMORANDUM 2.1 THE PREFACE AND BASIC DATA SHEETS (PAGES (i)-(vii) TIB has no comments on this part of the Report and is in agreement with the statements and figures therein. 2.2 THE EVALUATION SUMMARY (PAGES (ix)-(xv) 2.2.1 TIB's Shareholding-in TDFL: The second sentence of paragraph (iii) should be corrected to read as follows:- "TIB is a 24.17% shareholder". This should be corrected also at page 6 of the PPAM, Para 7. APPENDIX 2 -130 - Page 3 of 12 2.2.2 TIB's independence in approving projects: All the statements made in para (v) at page (x) about TIB are basied on completely false facts. TIB has never had to approve projects for funding because of government pressure or influence, either through government representatives on the TIB Board or in any other way whatsoever. The Report fails to cite a single instance to substantiate the allegation of practices that have defeated TIB's role of "exercising an independent quality control function over project investment decisions". Rather, TIB can cite clear cases of government sponsored projects which TIB rejected either because they were submitted at an advanced stage when TIB could not have good opportunity to appraise them or because they were not viable. Neither did TIB fear, nor were there any pressure tactics from the government. These projects include: (a) Mbagala Sheet Glass Project (W) Mbeya Textiles Project (c) Nyanza Salt Mines Project (vacuum plant) (d) Mwanza Container Glass Project (e) Light Source Project - 131 - APPENDIX 2 Page 4 of 12 Besides, the predominant presence of high ranking officials on the TIS Board has never had the negative effect of eroding TIB's Independence and self reliance in approving projects. Members of the TIS Board are appointed by' the shareholders, namely, the Treasury, the National Bank of Commerce and the National Insurance Corporation in the respective proportion of 60%, 30% and 10%, in accordance with the provisions of the TIB Establishment Act, which stipulates as follows: "All Directors shall be persons experienced in economic and financial matters or in banking". TIB notes with concern that such an important report as the PPAR could draw conclusions from unproven assumptions about TIB. These assumptions, unfortunately, are belaboured on the PPAM in para 11 and on their strength, incorrect remarks are repeated here and there in the Report. Each of these remarks are commented on appropriately in -these comments, and in the part on general remarks TIB more clearly dwells on the matter as a whole. 2.2.3 TIB's capability to appraise Profects jpage (x) Para vi) The remarks made about TIB in this part of the Summary (which are elaborated in paras 9-14 of the PPAM), are incorrect. - 132 - APPENDIX 2 Page 5 of 12 Observations like "Ouring the investment spree of the 1970*s. both TIB and TDFL did not pay enough attention to design and issues affecting longer-term viability of projects"; or "The potential impact of cost overruns, delays in implementation and different product prices were not tested by sensitivity analysis"; "TIB has supported projects at the behest and risk of the fiscus which have not been subjected to appraisal" cannot have been based on proven findings of fact. For one thing, the PPAM itself in para 15 at page 9 confesses that the factors that principally dislocated the viability of the TIB financed projects were such that neither TIB's nor any other appraisal expertise could have predicted. (TIB's comments on these factors appear later). For another, TIB has a specific Project Appraisal system, as is observed in the PCR at page 11 in para 3.04. This system is known to the World Bank and has been useful, although TIB accepts that there is room for improvement. In view of the above, TIB registers its disappointment at the fashion in which the PPAM seeks to project TIB as so lacking in project appraisal capabilities that even the elementaries of this discipline, such as sensitivity analysis, feedback mechanisms, project design,' implementation schedules, etc. are completely lost on it. - 133 - APPMNDIX 2 Page 6 of 12 This simplistic analysis sets the trend for so many distortions of facts about TIB's operations, and it so dounplays the real factors leading to the operational problems experienced today that TIB is compelled to make comments on it again in the general remarks. 2.2.4 Parastatal vs. Private Project Performance (ParA Vii at Page xi) TIS does not agree with the assertion that parastatal subprojects have been particularly weak compared to non-parastatal subprojects. Both groups have been facing similar periormance problems; and it is not true that TIB would be facing less operational problems if it had discriminated in favour of the private sector. The Report should at least have singled out the problems that affect the performance of parastatal subprojects exclusively, if any. This distinction, wherever it appears in the Report, should be removed. 2.2.5 Sustainability (Pace xi Para viii) TIB agrees that it faces liquidity problems at the moment and accepts as valid the proposed measures against this. particularly the need to resolve the issue of the foreign currency denominated debt. However, the remark "Though marginally profitable on paper" should be reworded to read "Though recently TIB has been only marginally profitable...." etc. The reason is that TIB. has been quite profitable in real terms (not on paper) for a long period, and it was only recently, on account of having had to provide for doubtful debts that TIB is only marginally profitable. - 134 - APPENDIX 2 Page 7 of 12 2.2.6 Findings and Lessons (Page xi -ara ix) TIB disagrees with the opening remark that its performance has been poor at all times. TIB's profitability has been good all along, and became poor only in recent years. 2.2.7 on UnrLd_Bank/TIB Association (Page xii) Again, as in para 2.2.3 above. TIB is disappointed that the Report in essence passes Judgement on the Project Appraisal capabilities of TIB. the World Bank and all other agencies associated with the approval of the subprojects conceived in happier days in the economic developmenti of the country, by looking at the failures that are almost exclusively' a result of subsequent unpredictable developments. On the capability of TIB to appraise projects and the extent to which this has contributed to the failure of subprojects, the Report regrettably has inconsistencies. For instance, having observed that TIB lacks even the simplest skills in project appraisal, the Report concedes, at page xii, that TIB has a knowledgeable and experienced top management, a developed core of capable staff, whose efforts however were frustrated in a large measure by compelling environmental factors! The Report's success in noticing what went wrong is not so surprising, considering it had the benefit of hindsight. TIB feels this success should not be celebrated as a disclosure of what the Report views as TIB's hitherto unnoticed incompetence and lack of foresight. - 135 - APPENDIX 2 Page 8 of 12 2.2.8 Key Parameters in project appraisal/ evaluation (pages xiii-xv) TIB agrees with the Report on what parameters should be considered in appraising a project. The implication however that TIB either was oblivious of these parameters or did not apply them in evaluating projects is rejected by TIB. At the risk of being repetitive, TIB considers such an outlook rather simplistic as a _ay of reviewing the real problems that the Report set out to address. 2.3 THE PROJECT PERFORMANCE AUDIT REPORT ITSELF 2.3.1 Background TIB has no comments and generally agrees with what is stated in this part. 2.3.2 Institutional Development (pages 5 to 6) (a) The opening remark of para 9 should be amended to remove the impression that TIB's localisation efforts were made prematurely. In reality. TIB reduced its reliance on expatriates after suitable replacements had been recruited. The only problem TIB has had in the past is that of retaining local engineers. (b) The phrase $projects under supervision* in para g should read 'Projects under Implementation'. - 136 - APPENDIX 2 Page 9 of 12 (c) On page 6, th, remark that TIB's training activities did not help it to be more effective in project identification and appraisal work is untrue. TIB holds the view that training activities have tremendously assisted in improving the skills of our professional staff. 2.3.3 Sectoral Contribution (Panes 6-8) (a) The remarks in para 11 and 12 have already been commented upon in para 2.2.3. and will be again referred to in the general remarks. This paragraph should be rewritten to reflect the true situation. TIB's independence in assessing those projects submitted to it is proven, and there is no case of premature approval as claimed. (b) Para 13, too, should be rewritten. Contrary to what is stated in the Report, there are several useful major policy decisions which the government passed in response to the recommendations of the TIB Clients Seminars. There has also been effective influence on policy decisions through TIS representation on various committees. (c) There exists effective TIB-Client relationships, contrary to the remark in para 13. TIB used to organize annual clients' seminars which brought together all its clients. 137 - APPENDIX 2 Page 10 of 12 TIB has full representation on all subprojects Boards of Directors and officers of the Bank pay quarterly physical visits to these projects. TIB feels this kind of relationship cannot fairly be descrIbed as being based on "a hands-off attitude" as stated in the Report. The paragraph should be reuritten to reflect the influence of TIB as a financier on the operations bf the subprojects it financed. 2.3.4 Financial Condition (Para 17 at Baae 11) Although rIB generally agrees with the observation that its equity base has been eroded, and that its profitability has been low in recent years, what is stated in connection with administrative expenses is incorrect. Administrative expenses have never been a contributing factor in the erosion of the equity base or low productivity. This has to be corrected, as indeed the PPAR does not give any reason to disprove what appears in the PCR at page 17 that TIB has been able to keep its administrative costs low. 2.3.5 Findings and Issues (Part IV) paae 13-25 This part of the Report, in the opinion of TIB, contains ordinary findings which any analyst with the benefit of hindsight would. see. TIB feels that the Report has unfairly passed judgement on its performance and that of the World Bank at the time when the bulk of the present problems could not be foreseen. - 138 - APPENDIX 2 Page 11 of 12 This shortcoming in analysis should be kept in mind by all the addressees of the Report lest damage of no small proportion results from such conclusions as "In retrospect, it emerges that follow-on operations to TIB were launched hastily and in disregard of the deep-seated problems afflicting the sector. etc." (Para 22. page 14). The remarks about the auditing capabilities of the Tanzania Audit Corporation (TAC) are not completely true. There have been differences of opinion between TAC and the World Bank on matters of principle, but this does not mean TAC has not been thorough in its audit. 3.0 SPECIFIC REMARKS ON THE PROJECT COMPLETION REPORT TIB finds the PCR as representing a correct appraisal of the operations of TIB and the World Bank/TIB association over all these years. The PCR resulted from, an actual field study/review of the situation, and it arrives at conclusions that are borne out by facts. TIS commends the positive and forward looking attitude of the compilers of the PCR. 4.0 GENERAL COMMENTS ON THE AUDIT REPORT 4.1 Shortcomings in Analysis TIS cannot accept the style of analysis adopted by ,the compilers of the Audit Report (excluding the Project Completion Report). It is an analysis bound to be negative in attitude, as the compilers neglected to remind themselves that: - 139 - APPENDIX 2 Page 12 of 12 (a) Hindsight makes situations appear too obvious to an analyst when the same cannot be observed by the most analytical experts who did not have that benefit. This benefit has unfortunately obsessed the compilers of this Report, and as a result they devote so much of the Report' towards passing unfair Judgement on the role played by TIB and the World Bank over the years. (b) Given the weight-of the Report, the findings in it had to be bas(d on proven facts and not mere assumptions as it has been demonstrated in the earlier part of this commentary. In so far as it seeks to.prove wrong all previous World Bank study missions that worked closely with TIB, it should be rejected. (c) TIB has a Ckarter, embodied in the establishment statute, the Tanzania Investment Bank Act. In it, TIB's mission is defined, and if the compilers had examined it closely, the Charter does not predetermine any bias in favour of the public as opposed to the private sector. As said in (b) above, however. TIB is assessed throughout the Report as having been chartered to cater for the parastatal sector. That the bulk of its clientele is parastatal merely reflects the national development policy trend of the period, when public enterprises were the vehicles of development. - 141 - APPENDIX 3 TANGANYIKA DEVELOPMENT FINANCE COMPANY LIMITED TDFL Buildift ReS. Office PloK No. 1009 Upea Road and Ohio Str". Tdsphm Dw a Selm 2gM-4, 312U-7. P.O. Box 347. De a Salm. Temui Tebs 41153 Ca A Tdpm. DEVFIN Dw a Selbm. COMMTS RECEIVED FROM THE BORROWER - TDFL Ref No.37/89/C/T/35 20th February 1989 Hr Alexander Nowicki Division Chief Policy-Based Lending. Industry, Public Utilities and Urban Sectors Operations Evaluation Department The World Bank 1818 H Street,N.W. Washington, D.C. 20433 U.S.A Dear Mr Nowicki, Re: Tanzania Investment Bank (TIB) (Loans 1172, 1498 and 1750-TA) and Tanganyika Develpment Finance Co.Ltd (TOFL) (Loan 1745-TA) Project Performance Audit Report Thank you for your letter of 10th January and for sending to me a copy of draft PPAR. I am sorry I was unbble to respond to you earlier than today as I was away in the Far East for a month from where I returned last week. I have hurridly gone through the draft and do not have any comments I look forward to receive a copy of the final report. Yours sincerely, J K Chande Chairman Board of Directors Dbmsm J.1. Chand0 (Cha) (TamAn) O.F. Mbowe (Maanw), (Tamunian) J.C. Robombs, (Tanoulaa) D.auts easilushaft Per Wintuaftelsh (D.3.O.)(WWes Gemea). W.H.. Diller(West Omn=a), PJ. Bys (Dutch). P leandering laepp Voor Outwikkefelgduaet N.V. (.M.0.) (Dutch). A. Van Daum (Briti,hO.W. Browa (Briis).