Tanzania - Second Port Modernization Project

Document of The World Bank FOR OFFICIAL USE ONLY Cf;C' 95 F- Report No. 8149-TA STVFF APPRAISAL REPORT TANZANIA PORT MODERNIZATION PROJECT II JANUARY 10, 1990 Infrastructure Operations Division Southern Africa Department This doeoment has a redcted dibion and may be used by reipients only In the performance of their offlidil duties. Its contents may not otherwise be disclosed without World Bsnk authorization.  CURRENCY EQUIVALEN'S (as of November 30, 1989) Currency Unit - Tanzanian Shilling TSh ,.0 - US$0.00S US$1.0 - TSh 190 US$1.0 - 0.7792 SDR 1.0 - 1.28336 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) - 0.62 miles (mi) 1 metric ton (tonnes) - 1.02 short tons ABBREVIATIONS AND ACRONYMS ATC - Air Tanzania Corporation DANIDA . Danish International Development Agency DCA - Development Credit Agreement EEC - European Economic Conurunity ERP - Economic Recovery Program ERR - Economic Rate of Return FINNIDA Finnish International Development Agency GDP - Gross Domestic Product GOT - Government of Tanzania ICD - Inland Container Depot 1MO - International. Maritime Organization KOJ = Kurasini Oil Jetty MCW - Ministry of Communications and Works MOF . Ministry of Finance NORAD - Norwegian Agency For Development Cooperation NTC - National Transport Corporation ODA - Overseas Development Administration (U.K.) OGL Open General License Facility PCU - Project Coordination Unit RETCO - Regional Transport Corporation ROIRO - Roll-on/Roll-off Vessel RSA - Republic of South Africa RTG - Rubber Tired Gantry Crane SADCC - Southern Africa Development Coordination Conference SATCC - Southern Africa Transport and Communications Commission SIDA - Swedish International Development Authority SSG - Ship-to-Shore Gantry Crane TAC - Tanzania Audit Corporation TANPRO - Tanzania Trade Facilitation Council TAIT - Technical Assistance and Training TANZAM - Tanzania-Zambia Highway TAZARA 3 Tanzania-Zambia Railways Authority TEU , Twenty Foot Equivalent Unit (Container Size) THA - Tanzania Harbours Authority TRC = Tanzania Railways Corporation UNCTAD - United Nations Conference on Trade and Development ZBR - Zaire, Burundi and Rwanda FISCAL YEAR July 1 to June 30  FOR OFCIL USE ONLY UNITED REPUBLIC OF TANZANIA PORT MODERlIIZATION PRtOJECT II STAFF APPRAISAL REPORT TABLE OF CONTENTS Paae CREDIT AND PROJECT ................................i - ii. I. TRANSPORT SECTOR DEVELOPMENT STRATEGY ........... ................ A. Introduction .............................................. B. Current State of the Transport Sector . .................... 2 C. Government Objectives and Policy in the Sector ............ 4 D. Strategy for Transport Sector Recovery .. .................. 5 E. Resource Mobilization and Cost Recovery in the Transport Sector ........................................... 10 F. Previous Bank Group Involvement in the Sector ........... .. 11 G. Rationale for Bank Involvement ...... ...................... 12 II. THE PORT SUB-SECTOR ......... ...13 A. Introduction ... ........................................... 13 B. t:urrent Status and Issues ..14 C. Strategy for Operational Improvements . .20 D. Strategy for Improved Financial Management . .24 1I . THE PROJECT ..................................................... 25 A. Objectives ....................25 B. Project Scope ............................................. 26 C. Detailed Project Description ...... ........................ 27 D. Status of Project Preparation ...... ....................... 29 E. Cost Estimates ..................................... 30 F. Financing .... ... 32 G. Implementation and Project Monitoring .................. ... 32 H. Procurement ............................................... 33 I. Disbursements ............................................. 34 J. Accounting and Auditing ........ ........................... 35 K. Environmental Impact ...................................... 35 IV. ECONOMIC ANA,LYSIS . . .36 A. Future Traffic ........... ................................. 36 B. Project Economic Benefits ........................ 38 C. Project Economic Costs ........................ 41 D. Economic Return and Sensitivity Analysis ..... ............. 4: E. Project Risks ............ ................................. 44 This report has been prepared by Messrs. M. Konishi (Sr. Economist/Task Manager), K. Kohriki (Port Engineer), J. Baz (Economist/Financial Analyst) and G. Wilson (Economist/Financial Analyst) on the basis of their findings during an appraisal mission in June 1989. Ms. Laura Selvold produced the graphics and Ms. Hanni Najar assisted in procescLaS 'his report. This document has a restrictd distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (continued) V. FINANC'AL EVALUATION .***......................... .......... 45 A. Financial Management .. ....r ... 45 B. Operating Performance *..................................... 46 C. Financial Condition ..... ...... .. ... ... ...... . . .. .. . .. .. . 50 D. Corporate Financial Strategy *,,........., 51 E. Financial Forecast .........................I....... 52 F. Financial Rate of Return ........................ 54 VI. AGREEMENTS REACHED AND RECOMMENDATIONS .......................... 55 ANNEXES 1-1 Transport Related Bank Group Projects in Tanzania 2-1 General Cargo Traffics 1983 - 1988 2-2 Container Cargo Traffics 1983 - 1988 2-3 Distribution of Handling Methods: 1980 - 1988 2-4 Commodity Breakdown of Traffic Through Dar es Salaam: 1976 - 1988 2-5 Container Penetration Rates 1983 and 1988 2-6 Technical Working Paper 1s Operational Analysis 3-1A Schedule of Technical Assistance and Training Program 3-1B Breakdown of Donor Contribution to the T.A./T Program 3-2 IDA Funded Technical Assistance Program and Outline Terms of Reference 3-3 Draft Tems of Reference for Port Development Study 3-4 Project Financing Plan 3-5 Estimated Schedule of Disbursement 4-1 Dry Bulk Cargo Traffic Forecast: 1988 - 1995 4-2 Container Cargo Traffic Forecast in TEUs: 1988 - 1995 4-3 Container Cargo Traffic Forecast in Tonness 1988 - 1995 4-4 Rationale for Traffic Projection 4-5 Summary Dry Cargo Traffic Forecast for Dar es Salaam Port With and Without the Project 4-6 Ships' Service Time and Ships' Waiting Time at Dar es Salaam Port With the Project 4-7 Ships, Service Time and Ships' Waiting Time at Dar es Salaam Port Without the Project 4-8 Savings in Ships' Service Time and Waiting Time at Dar es Salaam Port Due to the Project 4-9 Technical Working Paper 2s Container Dwell Time and Customs Assistance 4-10 Savings from Container Dwell Time Reduction at Dar es Salaam Port 4-11 Savings Relating to Reassigned and Diverted Traffic 4-12 Economic Costs of the Project 5-1 Summarized Income Statements: 1983-1988 5-2 Tanzanian Shilling/US Dollar Exchange Rates: 1982-1989 5-3A Cost Breakdown by Activity, Dar es Salaam Port 1988 5-3B Tariff Structure, Dar es Salaam Ports July 1989 5-4 Summarized Balance Sheets: 1983-1988 5-5 Status of THA's Loans: June 30, 1989 5-6 Technical Working Paper 3s Corporate Financial Strategy  CHARTS 1. Projz'ct Implementation Schedule 2. Organization Chart of Tanzania Harbours Authority 3. Organization Chart of Dar es Salaam Port MAPS 1. Project Location (IBRD 21936) 2. Existing and Proposed Developments (IBRD 21937) DOCUMENTS IN THE PROJECT FILE 1. Joint Donor Port Hid-Term Review (May 1988 - Executive Summary, Main Report and six annexes); 2. February 1989 THA Donors' Conference Document; 3. Interim Reports SATCC Project No. 3.7.? Study of the Capacity of the Port of Dar es Salaam (Janrary 1989); 4. The Effects of South Africa Border Closure on the Demand for Transit Transport from the Southern African Land-Locked Countries with Particular Reference to the Port of Dar es Salaam (UNCTAD, December 1988); 5. Detailed Engineering of the Container Terminal Expansion; 6. Dar es Salaam Port Development: Final Report on Technical Assistance for Port Operations (Phase I) - March 1987 by SWEDPORT for THA and SIDA; 7. Container Terminals Project Continuation 1990-1993 - June 1989 by Roads and Water Administration of Finland for THA and FINNIDA; 8. Project Document for Finnish Contribution to Dar es Salaam Port Development - January 1989 by Roads and Water Administration of Finland for TEA and FINNIDA; 9. Supporting Analysis for Economic Evaluation. DOCUMENTS AND STUDIES RELEVANT TO THE PROJECT 1. Tanzanias Public Expenditure Review (Gray Cover Rpt. No. 7559-TA), May 22, 1989; 2. Tanzania: Financial Performance of the Public Transport Sector (Green Cover Rpt. No. 7610-TA), January 31, 1988; 3. Tanzania: Programme for Transport Sector Recovery: Report Prepared by the Government of Tanzania for the Transport Sector Donors' Conference. Arusha, Tanzania, December 1987.  - i - TANZANIA PORT MODERNIZATION PROJECT II CREDIT AND PROJECT SUMMARY Borrowers United Republic of Tanzania Beneficiary: Tanzania Harbours Authority and the Customs Department of the Ministry of Finance Credit Amounts SDR 28.9 million (US$37.0 millicn equivalent) Credit Termss Standard, with 40 years maturity Proiect The main objective of the project is to expand the Description: physical, managerial and operational capabilities of the Tanzania Harbours Authority (THA) to meet the traffic volume expected in the 1990s. The project will also provide a more reliable and cost effective transport link for neighboring landlocked countries, thus facilitating their overseas trade activities. The project includes: .i) civil works to expand the port container terminal by 200X, complete the Ubungo and Kurasini inland container depots, pave the lighterage wharf for container storage, construct a port access road, complete the second phase of general cargo terminal rehabilitation and repair concrete piles and fenders; (ii) rehabilitation of the port's central workshop and provision of technical assistance for training of mechanics; (iii) procurement of container and general cargo handling equipment; (iv) management assistance and training for middle and upper management; (v) technical assistance to Customs to introduce a simplified documentation process, computerize customs processing and train customs officers; (vi) addition of a technical assistance and training coordinator to the Project Coordination Unit; (vii) a development stuiy to review the options for future port capacity expansion, including a stuvy of the possible privatization of certain port activities; and (viii) consulting services for supervision of civil works and detailed engineering. Proiect Benefits The project will benefit the entire economy of Tanzania and Risks: and its landlocked neighbors, through lower prices on a wide variety of imported products and through increased exports brought about by more competitive export prices. Additionally, the introduction of a Corporate Financial Strategy will enhance THA's position as the second largest foreign exchange earner in the country, and also make it the first Tanzanian parastatal in recent years to provide a significant contribution to the general revenue of the country and introduce a performance based bonus scheme to provide greater incentives to its workers. Possible risks include: (i) lower than expected  - ii - traffic growth; and (ii) higher than targeted dwell time for containers. The first risk is minimal. Conservative assumptions have been used for traffic forecasts, and growth of just over one-half of the projected rate would still justify the investment. If the targets for container dwell time are not met, the port will, again, experience severe congestion by mid-1990s. Howevver, THA has already begun coordination of involved parties to actively pursue policies which aim to reduce dwell time. These activities will be supported by the project, in particular by providing technical expertise and training for customs to speed up documcnt processing and improve its operating practices. Economic Rate of Return: 202 Financial Rate of Return: 141 Staff Appraisal Report: No. 8149-TA Maps IBRD Nos. 21936 and 21937  Estimated Costs Local Foreign Total SSMillion Port Container Terminal & Depots 4.3 12.7 17.0 Copper Road 0.6 0.9 1.5 Berths 9, 10, 11 2.1 3.2 4.2 Lighterage Wharf Rehabilitation t.9 2.6 3.5 Belgian Wharf Rehabilitation 0.4 1.1 1.5 Port Central Workshop 0.3 0.4 0.7 Kurasini Oil Jetty 1.4 7.6 9.0 Be_ths 1-8 Rehabilitation 3.5 9.5 13.0 General Cargo Equipment 0.0 4.0 4.0 Container Handling Equipment 0.0 15.2 15.2 Office Equipment 0.0 1.0 1.0 Central Workshop Equipment 0.0 2.0 2.0 Design and Supervision 0.6 2.7 3.3 Port Development Study 0.2 0.8 1.0 Workshop Study 0.0 0.2 0.2 Technical Assistance 3.8 15.2 19.0 Total Base Cost 17.0 79.1 96.1 Physical Contingencies 1.5 5.8 7.3 Price Contingencies 3.3 15.6 18.9 TOTAL COST 21.8 100.5 122.3 Financing Plan; !DA 0.5 36 5 37.0 FINNIDA - 17.9 17.9 DANIDA - 4.2 4.2 NORAD - 11.5 11.5 Netherlands - 5.4 5.4 SIDA - 17.5 17.5 THA 21.3 7.5 28.8 TOTAL 21.8 100.5 122.3 Estimated Disbursement of IDA Credit: IDA Fs: 91 92 93 94 95 96 97 Annual 1.2 6.4 10.7 7.6 5.2 4.7 1.2 Cumulative 1.2 7.6 18.3 25.9 31.1 35.8 37.0  TANZANIA PORT MODERNIZATION PROJECT It 1. TRfNSPORT SECTOR DEVELOPMENT STRATEGY A. Introduction 1.01. In 1967, Tanzania's leadership introduced sweeping economic and social cha;.ges and embarked on an era of socialism. The new priorities of the country, as enunciated in the Arusha Declaration, were directed towards self- reliance, development of a system of basic education, and broad-based rural development. The public sector was viewed as the vanguard of development, with public expenditure as the principal means of transforming the economy. This led, in the late 1960s and early 1970s, to a rapid growth in the public sector throughs (a) the nationalizatior. of large scale industries and the financial system, the formation of Ujamaa (communal) villages, and the replacement of farmers' cooper tives with state-run crop marketing authorities; (b) dramatic increases in the provision of social services; and (c) expansion of centrally managed activities. 1.02. By the end of the 19708, the economy was faltering: industrial output had begun to decline, agriculture was stagnating, while the fiscal situation deteriorated sharply with deficits averaging about 16Z of Gross Domestic Product (GDP). In agriculture, parastatal marketing monopolies dampened incentives for farm output growtn, and involuntary resettlement disrupted ptuductive relationships in rural areas. In industry. inappropriate project designs and a heavily protective environment resulted in an import dependent sector with, in many instances, an inefficient production structure. By this time, it was clear that the Government was no longer capable of financing the extensive services which it had committed to delivering, and the poor performance of many Government agencies constituted a bottleneck to economic recovery. 1.03. The 1984/85 Budget represented a turning point, and provided the first indication of a new pragmatism in the Government's economic management. The Tanzanian Shilling (TSh) was devalued by one-third, parastatal subsidies were cut, an import liberalization program was initiated through the implementation of an "own-funds imports program', and restrictions on the movement of grain were eased. Positive responses to these measures encouraged the Government to consider a more comprehensive and systematic policy reform program to deal with the economic crisis, and to mobilize external support to bridge the expected financing gap. In 1986 the Government launched the Economic Recovery Program (ERP). The measures initiated at the time included: (a) significant exchange rate adjustments, moving towards an equilibrium rate; (b) adjustments in interest rates, aimed at achieving real positive rates; (c) increases in producer prices in real terms for export crops; and (d) significant reduction in the number of price-controlled items. These actions were followed up . th (a) trade liberalization measures including export retention schemes and the Open General License Facility (OGL); (b) gradual dismantling of administrative controls over prices and distribution; and (c) progressive devaluation of the currency. The economic response to these reforms was positive, with GDP growing at between 4  and 52 p.&., sufficient to enable per capita income and consumption to rise for the first time in several years. Agricultural production, helI '1'v good weather and stronger price signals, has increased substantially over the p_st two years. Similarly, manufactured and other non-traditional exports, have increased by nearly 601 over the same period. 1.04. Unfortunately, although not unexpectedly, the recovery and the strong jur4p in the level of economic activities have exposed how much the basic services and infrastructure have deteriorated over the past decade and a half of economic decline. The banking system, with the majority of its funds tied up in non- performing loans to the Government and parastatals, is essentially bankrupt and is incapable of providing fresh capital for new investments. Farmers responding to strong price signals have seen their efforts frustrated by inadequate processing facilities and marketing rigidities. Movement of goods and people throughout the country is at a virtual standstill due to severe deterioration in the country's transport network. These and other factors have made it difficult for the country to capitalize fully on the liberalization policy adopted by the Government under the ERP. It is remarkable that, despite these difficulties, the economy has still responded strongly to the liberalization and adjustment efforts of the Government. How long such recovery can be sustained depends heavily upon fundamental changes in the role of Government and how quickly some of the physical and institutional issues can be addressed and rectified. The challenge for policymakers in the next stage of the recovery process is to address effectively the problems of the public sector, to lift the burden of poorly performing state enterprises off the rconomy, to continue the shift from direct controls on economic activity to indirect levers working through macroeconomic policy and the price system, to remove Government from businesses that can be effectively and commercially delivered by the private sector, ad to Improve the effectiveness of Government programs in areas such as physical and social infrastructure where the state is the main provider- B. Current State of the Transno-t Sector 1.05. A well functioning transport system is crucial to the sustained economic recovery of Tanzania. The main linkages between transport and economic recovery are evident in four key areass (a) the size of the country, its structure of production and its population distribution; (b) the cost to the economy of an unreliable, deteriorated network; (c) the fiscal implications of inefficient transport operations; and (d) the sector's importance as a major foreign exchange earner. 1.06. First, the pattern of settlement and economic activity in the country gives transportation an extreordinarily strategic role in economic development. Tanzania has a large territory (slightly smaller than France and Spain combined) with a widely dispersed population, mainly around its geographic periphery. Agriculture, accounting for 541 of GDP, is dominated by smallholders scattered in small rural communities, while the major markets and the processing and collection centers for crops, as well as the distribution points for agricultural inputs and fuel, are concentrated in urban centers located at considerable distances from each other and from the major coastal seaport of Dar es Salsam. Exports are dominated by primary agricultural commodities of high bulk but low I  - 3 - value. Growth in agricultural output, which will constitute the primary basis for growth in th. economy for the foreseeable future, is predicated on the transport system being able to integrate efficiently the rural co&uunities with the urban centers and facilitate reliable and cost-effective transport of export crops from the major collection points to the port of Dar es Salaam. These two roles have not been effectively performed by the transport system and, as discussed in the next paragraph, the cost to the economy has been enormous. 1.07. Second, Tan,ania's road infrastructure, which is crucial to the linkage of rural communit.'es to the urban areas, has deteriorated markedly over the last decade and a half and its coverage of rural areas is limited even by regional standards. The state of the roads, 70? of which are impassable or unmaintainable, imposes significant penalties on agricultural activity through its effect on vehicle operating costs, delayed evacuation and damage to crops. Losses imposed on the economy through higher vehicle costs alone are estimated at up to US$150 million p.a., equivalent to about one-third of the country's export earnings. Tanzania's domestic railway system, which is strategically located to serve most of the major urban centers, has been unable to meet the demand for low-cost, long-distance transport of export crops and of critical inputs such as oil and fertilizer in recent years, due to its poor operational performance. As a consequence, significant stockpiles of cotton - one of Tanzania's major export crops - for which road transport is inappropriate on competitive grounds, have built up over the last few years and a significant proportion of the other export traffic, as well as bulk inputs, have been diverted to roads. The total cost to the economy of stockholding and diversion of traffic that an effectively performing railway would have been able to handle is of the order of US$40 million p.a. For the ports, the long dwell time of containers, caused by the inefficiency of operations as well as cumbersome customs procedtires to clear the cargo, costs the economy about US$10 million p.a. in working tapital costs and demurrage charges (assuming excess dwell time is 20 days per imported container). Based on these calculations, it is conceivable that the economy is losing nearly US$200 million p.a. in direct economic costs due to the deteriorated transport infrastructure and its inefficient operation. If the indirect costs such as loss of crop, theft, loss of export market, spoilage, etc, due to the current transport problems are taken into consideration, it would be difficult, if not impossible, to see how Tanzanian goods could be competitive in the world market, or how the cost of living could be held down. Without significant rehabilitation and actions to restructure the modes of operation and maintenance of the roads and railways, these costs and physical impediments will constitute a major barrier to sustained economic recovery. 1.08. Third, Tanzania's transport system i! characterized by a significant degree of public sector participation. The transport parastatals' financial performance has deteriorated substantially in the last decade with most of them making losses or generating low returns on their assets as a result of inefficient utilization of capacity, high fixed costs and sub-economic prices. In 1987, the combined losses of the transport parastatals amounted to US$55 million. Government budgetary support of the transport parastatals' cash flow shortfall is small, as most of it is financed by short-term borrowings from the state-owned financial system or deferred payments to suppliers. Although not directly affecting the level rof the Government's current account deficit, this  mode of firaucing has significant and adverse implications on current levels of domestic credit creation and the future level of Government budgetary support to restructure unsustainable levels of short-term indebtedness to the banking system and suppliers. Addressing the underlying causes of the parastatals' poor financial performance will contribute to the maintenance of a sound macroeconomic climate, which is a key basis for the incentive structures set in place by the ERP. In order to address and reverse the deterioration of the road network, the Government will need to increase significantly the budgetary allocation to road maintenance and rehabilitation. This will require a substantial but attainable turnaround in the performance of the parastatal transport sector to ensure that the task is accomplished without increasing the overall claims of the sector on Government revenues. 1.09. Finally, the transport sector has an important role to play in the generation of additional sources of foreign exchange for the country. Tanzania offers the intrinsically lowest cost route to a seaport for Zambia, Rwanda, and Burundi, largely because of the possibility of using the railways network for most of the distance; and is an important alternative route for the transport of Uganda's, Malawi's and eastern Zaire's foreign trade traffic, allowing them to diversify their use of transport corridors. However, this potential has never been fully tapped, largely because the cost advantages have been significantly outweighed by the inefficiencies of the roads and railways leading to extensive detention of traffic in transit. Improvements in the service reliability of the railways and the operating capacity of the port of Dar es Salaam and a generally more commercial orientation of financial management would allow Tanzania to increase its net foreign currency earnings from the transport sector. Currently, the port subsector is the second largest foreign exchange earner in the country after coffee, earning more than US$36 million p.a. Potentially, the transport sector could earn a total of between US$55 and 75 million p.a. (equivalent to about 12-18Z of total export earnings) in foreign exchange if the system were operated more effectively. C. Government Obiectives and Policy In the Sector 1.10. Given the critical state of the transport sector, the Government callid a Transport Sector Donors' Conference in December 1987 in Arusha. At the Conference, a draft National Transport Policy document was presented along with a Conference document entitled "Programme for Transport Sector Recovery' which outlined the basic policy, institutional changes and rehabilitation requirements of the sector in order to reestablish the transport infrastructure and services to cater to the requirements of the economy. As enunciated at the Conference, the basic objective of the Government in the transport sector is to generate immediate improvements in the supply of transport services in the first instance, followed by a more sustained growth in the capacity and the volume of services commensurate with the expansion taking place under ERP. As outlined in the Conference document, sustained improvement in the delivery of transport services will require major effort and change in the way transport has been managed in the past. The basic reforms needed in the sector are outlined belowt (i) deteriorated infrastructure requires a major shift in public expenditure towards the transport sector, particularly for the road  -5 - network. Over the past decade and a half, there has been a precipitous drop in the funds allocated for recurrent and development funding for the sector. Tanzania spent, on average, only 7S of its total public expenditures on transport, where 15 to 252 is normal for countries with far better maintained transport networks; (ii) a more flgxible and dynamic response to road infrastructure development requires a major institutional change to move away from the existing highly centralized administrative system to a more decentralized system with greater delegation of authority; (iii) to improve the financial and operational efficiency of transport parastatals, commercially oriented pricing and management must be adopted by all entities, including cost-based tariff setting (taking into consideration proper depreciation of assets), bonuslincentive schemes to reward good performance, and rigorous cost control systems. The enunciated policy of the Government is for all parastatals to generate at least an operating surplus; (iv) similar to the financial objectives for parastatals, cost recovery for the road sector must be improved, i.e. the revenues generated from the road sector should cover at least the recurrent and periodic road maintenance cost; (v) to improve provision of road transport services, all administered tariffs for trucking and passenger transport sector should be removed; (vi) to develop the local capacity in the transport sector more vigorously, private sector development should be promoted in the areas of civil works. engineering consultancy, mechanical services, truck and passenger transportation, and air charters; and (vii) to promote regional integration, customs procedures and trans.t arrangements should be simplified to improve the ease with which transit cargo can pass through Tanzania. D. Strategv for Transport Sector Recovery 1.11. To the Government's credit, and owing to its willingness to undertake major reforms in the transport sector, the donor community responded positively to the recovery program presented at the Trinsport Secto; Donors' Conference. In partnership with the Bank, the Government has formulated three major programs to address the shortcomings of the transport sector: (a) a proposed Integrated Roads Project (FY90); (b) a proposed Port Modernization Project II (FY90); and (c) a proposed Railway Restructuring Project (FY91). With the majority of required financing secured, the investments in the transport sector, supported by Bank Group operations, will total about US$1,230 million over the next eight to ten years. The largest allocation is for the roads sector with US$935 million, followed by railways with US$200 million and US$96 million for the port sector. The magnitude of investment foreseen is consistent with the  recoumuendation of the Public Expenditure Review (May 1989 Report No. 7558-TA), which suggests a major shift of public funds to the transport sector, increasing to over 20S of the total development budget expenditure. The following sections outline the general strategy of development for each of the subsectors as formulated in the proposed projects. 1.12. Roads. The deterioration of the roads network has been caused primarily bys (a) inadequate funding for road maintenance and diversion of scarce funds to non-priority investments; (b) an inefficient institutional structure which has three ministries and over 100 entities involved in road administration; (c) a highly centralized and bureaucratic procurement and administrative decision making process which stifles effective execution of programs; and (d) inadequate technical capacity to carry out maintenance and manage contracts. Efforts to install trunk road maintenance capacity under the Fourth and Fifth Highway Projects (Cr. 507-TA and 876-TA) failed to develop any improvements in road conditions, and road rehabilitation under the on-going Sixth Highway Project has been extremely slow in starting, mainly because of the institutional weakness of the Ministry of Communications and Works (MCW) and the protracted procurement process caused by outdated government regulations. 1.13. The Government has recognized that a major restructuring of roads administration is necessary if the road network is to be in good condition to serve its economic purposes. The primary objective of the Government in the subsector is to restore the country's essential roads and to develop institutional capacity in MCW for their maintenance. The physical targets are to restore the trunk road network to 701 in good condition by the mid-1990s and the regional roads network to a similar condition by the year 2000. The institutional objective will be to transform MCW from a basically ablue collar' construction oriented ministry to a ,white collar" administration/management oriented ministry, with executive authority being delegated to MCW's 20 Regional Engineer's Offices (REOs) for implementing road programs and maintenance. 1.14. The proposed Integrated Roads Project (FY90) is the vehicle through which the above noted objectives will be pursued. The following key actions would be implemented under the proposed project: (a) road administration would be reorganized to bring all roads essential to supporting the agricultural sector under MCW; (b) funding for maintenance of trunk and regional roads would be increased substantially, commensurate with full requirements; and (c) MCW operations would be decentralized by providing greater executive authority to its regional offices. Concurrently, greater participation of the domestic construction industry in road rehabilitation and maintenance would be encouraged through expanding the training of local contractors initiated under the Sixth Highway Project, and by limiting the growth of the Government's own force account activities. The donor community is responding by pledging large funding levels for road rehabilitation and by supporting the decentralization of road management through direct assistance to the newly-created REOs. Already, the Government has appointed a new Minister and Principal Secretary to inject leadership into MCW, and has significantly increased MCW's road maintenance budget for FY1990. The reorganization of road administration is being implemented, and a draft National Construction Industry Policy, which will, inter alia, promote private sector participation in road maintenance, is expected to be passed by the Government shortly (condition of Credit effectiveness for the proposed Integrated  Roads Project). 115. Road TransDort. The trucking sector plays a major role in the (omestic transport industry, carrying nearly 702 of the estimated 2.5 billion tonne-km of freight movement within Tanzania. The existing fleet size is estimated to be about 14,000 trucks (over three-tonne capacity), of which 78S is owned by the private sector, 4Z by the 12 Regional Tranaport Corporations (RETCOs) and 182 by other public sector organizations (marketing boards, cooperatives, etc.). The main feature until 1984 was a chronic shortage of replacement vehicles, spare parts, fuel and tires. Consequently, the vehicles were aged with a very low availability rate. Fleet replacement was only about 42 p.a., inadequate under Tanzanian conditions, when over 152 would be optimal because of the poor road conditions. Freight movement by road appears to have declined by at least 2? p.a. since the mid-1970s, but as the overall level of economic activity had stagnated, this did not result in persist6nt or widespread capacity shortage. Between 1985 and 1988, the situation changed dramatically with the revitalization of economic activity under the ERP. Since the introduction of the "own-funds imports program' and donor assistance for the import support program, the sector is in the process of being revitalized to cater to tne rapidly expanding demand. The sector, however, continues to experience major problems in meeting the rapidly growing agricultural production and the economic activities in the rural areas. Administratively, the Government, realizing the distortional impact of tight administrative controls, has eliminated essentially all barriers to market entry and administratively- set tariffs. The trucking business is now on an upswing, but will continue to require external assistance for procurement of spare parts and replacement trucks. The magnitude of the annual foreign exchange requirement is of the order of US$80 million. 1.16. Railways. In the railways subsector, the Tanzania Zambia Railways Authority (TAZARA) operates a service that is principally dedicated to Zambian transit traffic, although it is increasingly catering to local traffic in the southern part of Tanzania. The performance of TAZARA in terms of freight traneported has been good in spite of serious constraints on the availability of its locomotive fleet. However, cost recovery is poor and TAZARA has been unable to meet its debt-service obligations from its cash generation thereby necessitating a recent restructuring of its capital structure. TAZARA has formulated a well-designed investment program to address the constraints on efficient operations which has attracted considerable donor support. The effective haul capacity of the Tanzania Railways Corporation (TRC) -- which serves the central and northern parts of the country as well as transit traffic from Burundi, Rwanda, Zaire and Uganda -- has declined progressively from about 1.0 million tonnes of freight in the first year of its establishment in 1978 to 0.9 million tonnes in 1989, despite considerable additions to its asset base in the intervening years. This decline has proved particularly serious in the last three years with the pronounced upsurge in domestic agricultural production and increased diversion of transit traffic from other littoral countries to Tanzania. The decline in traffic moved has reflected (a) the poor availability of TRC's assets as a result of limited access to spare parts, deficient maintenance systems and skilled staff shortages; and (b) the poor utilization of assets when made available caused largely by ineffective management of operations and the unreliable condition of operational and infrastructural assets. The chronic  - a - underutilization of assets by TRC coupled with regulatory restrictions on its ability to adjust its tariffs in line with costs or to control the large labor component of its costs, has led to a worsening financial performance and a massive erosion of its financial position. As a commercial enterprise, TRC is currently a financially bankrupt entity. An Emergency Recovery Program for TRC (EP) was launched in 1987 with financing from the Bank and donors to stem and reverse the deterioration in TRC's performance. The program, which is being implemented, has so far succeeded in stabilizing TRC's performance. The Railways Restructuring Project (FY91) currently under preparation, will address the restructuring of TRC's organization and operating practices and systems, the changes in the system of Government regulation of TRC and the investment requirements that are necessary to enable it to cater fully and profitably to the underlying demand for freight transport by rail. 1.17 Ports. The port of Dar es Salaam is a major regional port serving the neighboring landlocked countries of Zambia, Malawi, Burundi, Rwanda, Uganda, and Zaire. The port throughput is the second largest on the eastern coast of Africa after the port of Mombasa, and is the second largest earner of foreign exchange in Tanzania after coffee. International traffic constitutes nearly 60Z of the total traffic throughput, and the efficiency and cost effectiveness of port operations is of paramount importance to its users. In order to modernize the port of Dar es Salaam, a major program was started in 1984 under the Tanzania Port Rehabilitation Project (Cr. 1536-0-TA). The project aimed to (ia) expand the container handling capacity of the port to meet the rapidly increasing containerized traffic; (b) rehabilitate the general cargo berths; (c) improve equipment maintenance; and (d) improve the management and skills level of the Tanzania Harbours Authority (THA). Since 1984, the traffic volume, which had fallen continuously since the mid-1970s, began to recover at a rate of nearly 72 p.a. During the same period, THA's operating efficiency also showed gradual improvements. However, it has become evident in the past two years that serious bottlenecks have begun to develop. First, physically (and perhaps most seriously), the capacity of the newly constructed container terminal is inadequate, with the demand already exceeding technical storage capacity by over 402. The second phase of terminal expansion must be started immediately if a major disruption in traffic movement is to be avoided. Second, institutionally, inefficient customs procedures, inter alia, have contributed to the excessive congestion in the container terminal through an unacceptably high dwell time of containers in the port. Third, managerially, a shortage of trained middle management and skilled workers continues to make management and operation of the port difficult. Better use of technical assistance and a more systematized management information system is required to improve management of operations. Fourth, operationally, equipment maintenance continues to be a major problem, especially with regard to the availability of dry cargo handling equipment. Fifth, financial management could be further improved to expand the profitability of port operations. And finally, a better incentive scheme is required to improve output. 1.18 The capacity shortage of the container terminal is of a very serious and imminent nature, requiring immediate action. The proposed Port Modernization Project II (this project) was prepared by THA, the Bank and donors to address the outstanding issues noted above. The project, with an estimated cost of US$122 million, will: (a) execute the second phase container terminal expansion  - 9 - to handle 2.4 million tonnes annually (2001 expansion in terminal capacity); (b) change the financial management of THA in order to allow THA to (a) repay to the Government all debts incurred in the past, including grants and (b) Introduce an incentive/bonus scheme for workers funded from its own profits; (c) improve equipment availability; and (d) improve customs processing through adopt'on of simplified documentation and training for the customs officers. Given the structure of the project, if successfully implemented, THA would be in a position to move expeditiously all cargo on demand, contribute between US$25 and 50 million p.a. to the general revenues of the Government, continue to be one of the largest earners of foreign exchange in the country (between US$30 and 40 million p.a.), and provide an incentive/bonus scheme of up to 1001 of existing salaries to its workers which would improve morale and productivity. Details of the project are provided in Chapter III. 1.19 Civil Aviation. Given the substantial distance between major population centers, aviation is an important means of transport in the country. The available seat kilometers on Air Tanzania Corporation (ATC), the sole provider of scheduled domestic services, has grown at an average of 162 p.a. from about 83 million in 1977 to about 363 million in 1987. The demand for ATC's services is high with an average passenger load factor of 762 on all routes and 832 in the domestic market, often resulting in a high turnaway rate for customers. Despite this favorable demand for its services, ATC's financial performance has been characterized by growing deficits: in 1986 its operating deficit amounted to TSh 583 million (about US$17.8 million equivalent). ATC faces perennial problems in acquiring minimum access to spare parts due to its inability to generate sufficient foreign exchange to finance its own recurrent requirements; it also has constraints on fleet utilization due to lack of proper facilities (e.g. lack of night-landing facilities and poor maintenance of runways). Furthermore, ATC is unable to train its staff properly due to lack of foreign exchange for training abroad. Given these conditions, a systematic assessment of ATC was carried out under a general civil aviation sector study funded by the Irish Trust Fund, and an issues-oriented report "Air Tanzania Corporation - Strategic Evaluation and Corporate Restructuring" carried out by the Bank (Report No. 7618-TA Green Cover - April 1989), set a suitable strategy for the sector both in terms of improvements to the financial performance of ATC, improved cost recovery in the civil aviation sector in general, and a least cost strategy to meet the apparent unsatisfied demand in air travel. 1.20 In order to rectify the situation and to implement the recommendations contained in the restructuring study, ATC has: (a) increased fares by 100-150Z; (b) streamlined its operations through reorganization and staff reduction; and (c) stopped operations on several uneconomic routes. Overall, with the actions being taken, ATC is expected to cover its operating cost by 1991. However, ATC has not as yet decided to implement a sale-leaseback strategy for its current fleet of Boeings and Fokkers; nor has the Government decided to inject fur-Is into the airline. One of these actions is mandatory if ATC is to repay its current indebtedness (including to suppliers). In order to assist ATC with management assistance and training, funds have been allocated under the proposed Integrated Roads Project for use by ATC, as long as the key recommendations of the Restructuring study have been implemented by negotiations.  - 10 - E. Resource Mobilization and Cost Recoverv in the Transaort Sector 1.21. As a follow-up to the Public Expenditure Review carried out in November 1987, a Bank study on revenue collection and funding needs in the transport sector was undertaken and presented to the Government in September 1988. The objective of the study was to investigate (a) how the transport sector, as a whole, including parastatals, was performing financially, and (b) how the increased requirements for the roads sector could be financed. In essence, to finance the massive rehabilitation program and the necessary increase in the road maintenance budget, Tanzania needs to increase its budget allocation for trunk and regional roads from the present 7Z of total public expenditure to about 21? at a stabilized level. 1.22. The study concludes that the overall revenue collected by the Government through road user charges and charges on civil aviation activities was TSh 4.9 billion (US$94.8 million equivalent) in 1986/87, accounting for about 15Z of the Government's total current revenue. On the other hand, the overall expenditure for the road and civil aviation sector amounted to TSh 2.5 billion (US$48.4 million equivalent), with a net contribution to general tax revenue of TSh 2.4 billion (US$46.4 million equivalent). This contribution is roughly the same as the total revenue raised from import duties in the same year and is equivalent in size to about 26Z of the Government's current account deficit. The net contribution made through the road user charges has, however, been negated by the overall deficit of the public transport enterprises which amounted to about TSh 2.8 billion (US$54.2 million equivalent). The existing financial status of the transport sector, therefore, cannot accommodate the need to increase the annual maintenance requirement from the current level of US$11 million to US$40 million, without adversely affecting resource allocation to other sectors. 1.23. The study, however, also concludes that the financial control of road user revenue collection and road expenditures is weak and the tax structure is too complicated for it to be effectively administered. The study estimates that due to administrative weaknesses, about 40Z of the potential revenue is either not collected or never reaches the Treasury. It recommends that financial controls be strengthened, the structure of taxes be simplified and the present road toll tax rates be replaced by a tax on motor vehicle fuels which would raise their prices by 1.6? in real terms. Since fuel prices in Tanzania are significantly lower than those in neighboring countries (particularly Kenya), which encourages smuggling that leads to a drain on foreign exchange, it is also suggested that fuel prices additionally be raised by 7.5? p.a. in real terms for each of the next four years. The aim of the tax would be to mobilize extra revenues to support road maintenance and rehabilitation. Implementation of this program would allow the increases in road expenditures to be met. Revenue would rise under the proposed program to US$127 million p.a. to enable the road sub- sector to continue making a substantial contribution to the general Government revenue.  - 11 - 1.24. An overall strategy for improving financial performance will requires (a) institutional arrangements which provide incentives for revenue mobilization and controlling costs (roads and civil aviation); (b) financial controls which foster a commercial outlook and facilitate timely decisions on important financial matters (in relation to MCW's control of road expenditures and management of public transport enterprises); (c) a framework of financial and performance targets which promotes market discipline and encourages optimum use of existing assets; (d) introduction of appropriate monitoring mechanisms to ensure that sector agencies meet establishee performance targets; and (e) selection of appropriate price and fiscal instruments which discourage avoidance/evasion and minimize leakages. The Government is currently reviewing the various options open to it to generate sufficient revenues to finance the massive increase in public funding for road maintenance and rehabilitation. In addition to the above-mentioned study, a specific study of petroleum pricing is being undertaken in connection with the preparation of the proposed Petroleum Sector Rehabilitation Project (FY91). 1.25. Apart from the resource mobilization program to be agreed with the Government in terms of road user charges (at the negotiation of the Integrated Roads Project), specific action programs are being prepared for each public transport enterprise: (a) a Bank study on the financial performance of the civil aviation sector and ATC has been completed and some of its recommendations are already being implemented; (b) a Bank study on financial performance of the Tanzania Harbours Authority has been completed and will be implemented under this proposed Port Modernization Project II; and (c) a financial restructuring plan has been formulated for TRC and will be implemented under the proposed Railways Restructuring Project. If the respective programs are successfully implemented, the overall effect would be: (a) ATC and TRC would begin to make modest operating surpluses (i.e. elimination of US$10 million p.a. combined loss suffered by the two parastatals in the past); and (b) THA would increase its profitability and contribute between US$25 to 40 million p.a. to the general revenue of the Government. The transport sector, therefore, would become a net contributor to the general revenues of the Government (US$75 to 80 million p.a., combining the THA contribution and the net contribution from the road user charges). F. Previous: Bank Group Involvement in the Sector 1.26. The Bank Group has extended credits and loans to help finance six highway projects, one trucking project, one railways project and three port projects, totaling US$272.6 million since Tanzania became a Bank Group member in 1964. During the earlier years of lending, the projects concentrated on financing of construction and equipment. The focus later shifted to strengthen- ing of local institutions with provisions for technical assistance and training, particularly for road maintenance and road transportation. While experience with the execution of physical components has generally been acceptable, the objectives of technical assistance and training have been difficult to achieve mainly because of: (a) delays in appointment of technical assist.nce staff; (b) cultural and language adjustment problems of technical assistance staff; (c) lack of effective administrative commitment by Government agencies; (d) lack of suitable local counterparts; and (v) unrealistic targets. A more detailed assessment of past Bank involvement in the sector is given in Annex 1-1.  - 12 - 1.27. These lessons have been confirmed by the eight Project Performance Audit Reportsl, and have been highlighted in the comprehensive audit carried out by the Bank's Operations Evaluation Department on all Tanzania projects from 1964 to 1988. For the port sector, the main lesson has been the lack of institution building under the first two port projects. Under the on--going Port Rehabilitation Project (Cr. 1536-TA), a major component has been included to assist THA in developing its institutional capability. The shortcomings of current assistance, however, have been (a) a lack of monitoring, coordination and guidance of technical assistance by THA; and (b) delays in appointment of local counterpart staff. These points have been discussed among TEA, donors and IDA, and the necessary adjustments will be made under the proposed project (para 3.12). G. Rationale for Bank Involvement 1.28. Since December 1987, when the Transport Sector Donors' Conference was convened in Arusha, IDA has taken the lead in working with the Government to bring together a comprehensive rehabilitation and restructuring program for the transport sector of Tanzania. Nearly 20 donor agencies have mobilized over US$1 billion in their resources to join Tanzania in implementing the ambitious program. The large commitment by donors reflects not only the donor community's understanding of the problems facing the sector, but is also a tribute to the Government, which is undertaking difficult policy and institutional changes to revitalize not only the transport sector, but the economy in general. What ID#. has contributed is: (a) a vision of the future, of how the tran-port sector can operate in the future if specific actions are taken to adjust the institutional and policy framework under which the transport sector is managed; (b) the technical expertise which has been brought to bear on the complex issues stifling the existing system and which has recommended options on what and how the system can be changed to improve the effectiveness of the Government's effort; and tc) a change in the attitude of Government officials towards liberalization of transport operations, manifested in the following policy changes: (i) decentralization of decision making authority; (ii) expansion of private sector involvement; (iii) encouragement to parastatals to operate strictly on commercial merits; and (iv) less restrictive procurement and administrative practices. The impetus to change, however, has come from Tanzania, and IDA's role has been primarily in providing a nroad map' to attain the new objectives set by the Goverment. 1.29. The proposed project embodies the main principles of the transport sector recovery program, and is geared towards expanding the capacity of Tanzania Harbours Authority to meet the increasing volume of traffic expected in the 1990s. The rationale for IDA involvement is based not only on the lead it has taken in producing a strategy to modernize and expand the port capacity, but also the benefit which TEA and the Government derive from the technical expertise which IDA can provide in developing the sector. 1 PPAR Noss 791 of June 26, 1975; 4029, 4030 and 4031 of June 30, 1982; 4533 of June 30, 1983; 6483 of November 7, 1986; 6938 of September 15, 1987; and 7571 of December 30, 1988.  - 13 - II. THE PORT SUB-SECTOR A. Introduction 2.01. With the collapse of the East African Community in 1977, the Government of Tanzania established, by legislation, the Tanzania Harbours Authority (THA) to develop, improve, maintain, operate and regulate the harbors of Tanzania and also to construct and operate new ports as and when required. THA is legally responsible for the four major ports of Dar es Salaam, Zanzibar, Tanga and Mtvara as well as several minor ports. However, Zanzibar essentially functions as a separate entity, albeit under the direction of THA, and its accounts are separate from those of THA. The other three major ports function as separate administrative and operational units managed by port managers, under the supervisory control of the General Manager of THA. The minor ports are attached to one of the major ports for administrative and operational purposes, depending on their location. Tanga and Mtwara handle only a limited amount of traific (about 350,000 tonnes and 145,000 tonnes respectively, p.a.); the bulk of the traffic is handled by the port of Dar es Salaam. Consequently, the staff employed in the former two ports is small, being only 1,500 and 400 respectively. Dar es Salaam currently employs about 6,550, of which 4,180 are in the operations department. 2.02. The port of Dar es Salaam, Tanzania's largest seaport, is served by two rail systems connecting the Tanzanian hinterland and Zambia and a radiating road network. The main port facilities consist of 11 berths totalling 2,013 meters in length built between 1956 and 1977. In the northern port area there is a group of wharves for coasters, dhows and port service boats. The land area behind the berth is restricted by a high natural embankment. Historically, the port has evacuated and received most of its cargo by rail, hence the port lands are partly taken up with separate rail sidings and distribution networks for the TRC and TAZARA systems, which are of different gauge. 2.03. Berths 1 to 3 in the port have traditionally handled the transit traffic for ZBR (Zaire, Burundi and Rwanda) and thus the storage area behind these berths is used for the storage of containers associated with that traffic. Berths 4 to 8 serve dry bulk carriers, conventional cargo ships and Roll-On/Roll- Off ships (ROIRO) carrying break-bulk and containerized cargo. The transit cargo for Zambia and Malawi and domestic cargo transported by TAZARA and the TA-NZAM highway are handled within these berths. The quay space between berths 6 and 7 is mainly allocated to RO/R0 vessels. The area between berths 1 to 8 is now being rehabilitated under financing from the Swedish International Development Authority (SIDA). The work includes paving of the quay apron, the open storage area anr. the main roads, and railway track restoration in the mid-port area. Completion of this work is expected in mid-1990. 2.04. Berths 9 to 11 and part of the back-up area were converted to a container terminal under the ongoing Port Rehabilitation Project. The total quay length is 540 m which is enough to accommodate two container vessels of 1,500 TEU capacity. Two ship-to-shore gantry cranes (SSGs), five rubber-tired gantries (RTGs) for container stacking and one rail-mounted gantry for  - 14 - transshipment to railway wagons have commenced operation. Approximately half cf the back-up area behind these barth3 was paved, creating storage capacity of about 2,000 TEUs. The two inland container depots (ICD), at Kurasini and Ubungo, function as the main area for stuffing and stripping of containers and have open storage area capacities of 150 and 315 TEUs, respectively. 2.05. In addition, the port of Dar es Salaam has (i) a bulk grain handling facility on berth 4 and silos with 26,000 tonnes of storage capacity, financed by the Netherlands (expected completion in December 1989); (ii) Kurasinl oil jetty, located at the south end of the main berths, which handles bunkers and pelroleum products, and was rehabilitated with funding from Norway (completed in January 1989); and (iii) transit sheds totalling 81,040 sq.m of floor area on the general cargo berths, with additional sheds at Kurassni and Ubungo ICDs. B. Current Status and Issues Past and Present Traffic 2.06. The traffic throughput of Dar es Salaam port has been extremely volatile during the past twelve years (Figure 2.1). Dry cargo declined by more than a third betweern 1977 and 1983. The port regained a part of the lost traffic thereafter, with the tra'fic growing at about 7Z p.a. between 1983 and 1988, as the macroeconomic adjustmenats under the ERP were beginning to take effect. The relaxation of import restrictions and the implementation of Open General Licenses (OGL) along with the depreciation of real exchange rates have respectively helped boost imports and exports. In 1988, the traffic level had recovered to nearly 2.1 million tonnes, or 80Z of the peak traffic level recorded in 1977. Figure 21 Port of Dar es Salaam Dry Cargo: Import/Export Trafflc 3 25Toa afi 4) 2 9 0.5 0 1076 1977 1978 1979 1960 1981 1962 1963 1984 1985 1986 1987 1988  - 15 - 2.07 The composition of trairic has also changed. In the late 1970s and early 1980s, combined Tanzanian and Zambian traffic accounted for nearly 902 of the total throughput of the port. Since then, there has been a rapid increase in traffic from other landlocked countries, witb Uganda, Rwanda and Burundi traffic more than doubling since 1983. In 1988, Tanzanian traffic accounted for 412, Zambia 402, ZBR 142 and the remaining equally split between Malawi and Uganda. The change in the composition is due to li) the weak performance of the Zambian economy, particularly in declining exports; and (ii) increasing Figure 2.2 preference shown by ZBR and Uganda for ConttdfbPenbtration using the port of Dar es Salaam, instead of the port of Mombasa in Kenya, due to relatively higher . operational efficiency and lower ocean g freight cost to Dar es Salaam. 2.08 Container penetration has g also been strong, with the proportion of dry cargo carried in containerized form increasing from less than 1S in 1977, to 19Z in 1983, and 332 in 1988, equivalent to 674,000 tonnes (Figure Yg 2.2). Imports and exports have con- ie tributed equally to the trend. 'Whereas 5 Container DOy Bulk Cargo overall dry cargo traffic has increased at about 72 p.a. since 1983, container traffic has increased over 202 p.a. There are, however, significant differences in how containerization has penetrated the different countries. Nearly half of Tanzania and Uganda traffic is now containerized, whereas ZBR and Malawi have containerized 30 to 40Z of their traffic, with Zambia at only 162 of its traffic. The difference in the pace of containerization is due mainly to (i) conditions of onward shipment (e.g. lack of appropriate trucks or rail wagons for container transport); (ii) lack of container handling facilities at inland transshipment points (for ZBR and Uganda traffic); and (iii) slow introduction of container use (e.g. copper). Annexes 2-1 to 2-5 provide details of historic traffic levels. Current Operational Situation 2.09 Despite substantial operational difficulties caused by the construction of the container terminal (from 1985 to 1989) and rehabilitation of the general cargo terminal (since 1987), Dar es Salaam port has managed to make significant improvements in its operational efficiency. Comparison of the operational performance between 1981 and 1987 (Table 2.1) indicates the following: (i) average cargo handled per gangshift improved substantially beyond the target set under the Port Rehabilitation Project; (ii) average cargo handled per ship-day improved beyond the target for break bulk cargo; (iii) very little improvement for bagged cargo; and (iv) somewhat below the target improvement for containers. The substantial increase in gangshift productivity is somewhat misleading due to the way in which TRA collects its statistical data, but  - 16 - interviews with shipping agents and others indicate significant improvements since the mid-1980s. For the ship-day productivity, the low improvements in bagged cargo handling is due to the delay in completion of the bulk grain handling and storage facilities. The facilities which were to be completed in 1987 will now only be completed by December 1989. Similarly for containers, the container terminal and handling equipment were only handed over to THA Lor full operation in early 1989. But the general conclusion is that the productivity increases have been acceptable, particularly under the exceptional conditions under which THA had to work during this period (nearly 302 of the port area was under construction). Table 2.1 Der as im Porb Der Care Producteltw Rates (1) (2) (3) Average Average Annual Cargo/ongsehlft Cargo/Shipday Cargo Throughput Actual SAR Target Actual Actual SAR Target Actual Actual SA TargetActual 1981 1088 1987 1981 1988 1987 1981 1968 1987 Break Bulk 48 SO ) 422 4S0 480 - - } ) 112 } 1,650 1,740 } 1,490 Bagged Cargo 67 65 3s 718 2,400 000 } . } Container - - 5 800 200-800 160 810 600 TOTAL N.A. N.A. N.A. N.A. N.A. N.A. 1,710 2,850 2,090 2.10. In addition to the above operational improvements, significant improvements were also made in overall staff productivity. Continuing from improvements over the 1968-1980 period, where dry cargo traffic nearly doubled while the number of gangs increased by or.ly two-thirds, from 1980 to 1988, THA reduced 3ta staff by 34? in the face of a 10? increase in traffic. The overall productivity improvement during this period was an impressive 672, a result of both the gang productivit- improvement seen in the general cargo operation, as well as the continuing strong increase in containerization of cargo. 2.11. Despite the operational improvements noted above, the port is beginning to experience some congestion and capacity constraints. First, for the general cargo berths 1-8. congestion was beginning to be observed in 1988, with berth occupancy over 85?. In order to avoid further congestion, and reduce ships' turnaround time, further improvement is required in cargo handling speed. 2.12. Second, the port is also severely congested by containers. The new container terminal, which (with the 1CDs) provides a storage capacity for 2,507 TEUs, was handed over to THA in March 1989. However, the number of loaded containers on hand, averaging 3,560 in June 1989, has already exceeded capacity. The excess containers are scattered throughout the port wherever space can be found. Technically, if the average dwell time for loaded containers were at an  - 17 - acceptable level of, say, 12 days (18 days for imports and 4 days for exports), the existing terminal could hpndle a throughput of about 76,250 TEUs p.a., or 58Z more than the 1988 throughput of 48,152 TEUs. However, congestion is being caused by the inordinately high average dwell time of import containers, which was 37 days in July 1989 (albeit down from 37 days in June 1988). The extraordinarily high levels of 1988 were caused by implementation of a strict (1002) customs verification procedure, which started in January 1988, and the overall administrative inefficiency in processing the necessary documentation for clearing the cargo from the port. Although the procedures were eased, and the average dwell time has dropped, further reduction is required if the port is to handle greater volumes of container traffic, or even the present volume efficiently. 2.13. Lastly. the availability of cargo handling equipment has fallen and will become a major hindrance to cargo operation in the future. Owing to the dilapidated central equipment workshop and the insufficient number of skilled mechanics, the equipment availability level has been low: below 602 for both forklifts and tractors. Training programs for mechanics are being started by the Bandari college, and funds for equipment rehabilitation have been allocated under the ongoing project. As for container terminal equipment, the equipment is still relatively new and availability is at an acceptable level. However, the training program for local mechanics has been slow in taking root and the FINNIDA technical assistance is making a concerted effort to transfer the necessary skills to the THA mechanics. 2.14. Under the coordination of THA and the Bank, a Joint Donor Mid-Term Port Review was carried out in May 1988 to review the implementation of the ongoing project for the Dar es Salaam port and its impact on improving the operation of the port. A comprehensive report was produced, reviewed by the donor group and presented to a THA Port Donors' Conference in February 1989. The results of the review highlighted the above-noted major shortcomings of the ongoing operation and the constraints faced by THA in effectively operating the newly-modernized Dar es Salaam port. 2.15. The main conclusion of the Review, which has been confirmed by an independent assessment of THA, is that despite moderate improvements in port operational performance and the addition of equipment and terminal infrastructure to begin a full container terminal operation, the port of Dar es Salaam is experiencing a severe capacity constraint in the container storage area. Furthermore, the port will face greater capacity constraints unless: (i) the container terminal is expanded immediately; (ii) the operational efficiency of dry cargo and container berths is further improved; and (iii) the dwell time of containers is reduced to an acceptable level. The Review also recommended that a Development Study be commissioned to study the options available for further expansion in the mid-1990s in order to meet the forecast traffic for 1996 and beyond. The specific capacity constraints are presented in the following sections, and a detailed analysis of operational capacity is given in Annex 2-6.  - 18 - Putur(e Traffic and C apcity Constraint 2.16 Various assessments made by the Review mission, THA and the Bank, indicate that Dar es Salaam port will handle about 2.6 million tonnes of dry cargo by 1993. This implies an increase of 262 over the five-year period, corresponding to an average annual growth rate of 52. Although this growth rate is lower than the 7? p.a. growth rate experienced between 1983 and 1988, it compares well to the 4.6X p.a. growth of the economy forecast by various macroeconomic assessments by the Bank. During this period, rapid container penetration is assumed to continue with about 55Z of the total traffic being containerized. This implies that by 1993, 1.4 million tonnes will be in the form of containers and the remaining 1.2 million tonnes in break bulk; i.e. there will be a modest decline in non-containerized dry carga traffic with all the growth being in the form of containerized traffic. A detailed forecast is give in Chapter IV. 2.17 The impact of the foreca,t demand on berth and port storage capacity, as indicated in Figures 2.3s A to D, reveals major capacity constraints for the port. The critical constraint is the storage capacity in the container terminal. Other major constraints are the berth capacities at both the conventional and container terminals, which can be removed by improving operational efficiency and providing additional cargo handling equipment. The cumulative effect of the three conRtraints, however, is that by not having sufficient container terminal space, it not only limits the volume of container traffic which the port can handle, but it effectivelys (a) lowers the total capacity of the port of Dar es Salaam; (b) limits the growth of containerized traffic which is a cheaper form of transport; (c) reduces the earning capacity of THA; and id) prevents THA frcm capturing the full benefit of the modernization process which began in 1984. The various constraints and their impact on the forecast traffic are analyzed in the following sections (paras 2.18 to 2.22). 2.18 As indicated, the most Figure 2.3 critical constraint Is the container Dar es Salaam Pot storage capacity. The forecast container Demand Forecast and Port Capacity 1993 traffic in 1993 is 1.4 million tonnes, or 103,000 loaded TEUs p.a. As shown in Figure 2.3(A), with the current terminal FigureA storage capacity of 2,507 TEU and cwIIntO9s.scapa.tI assuming that the average dwell time for . d"- loaded imports can be reduced from the current level of 37 to 33 days, the terminal capacity is only one half of the expected traffic demand. On an emergency basis, additional terminal capacity of 700 TEUs is being constructed behind X berths 7 and 8 with SIDA financing to alleviate the expected congestion. Even with this addition, it is clear that a e_.________1_'_*_" __ shortfall of nearly 402 of forecast demand can be expected. The result of r such a mismatch in demand and capacity is that: (i) container traffic will be capped at  - 19 64,700 loaded TEUs or 880,000 tonnes OodanwapaeIty p.a.: (ii) all additional container traffic will then have to be routed through berths 1-8 as break-bulk cargo with the additional expense involved; (iii) ships' turnaround time will rise dramatically; and (iv) the total dry p cargo capacity of Dar es Salaam port will be limited, leading to diversion of traffic to other ports, such as Mombasa, with loss of revenue for THA. Expansion of the container terminal and paving for - _ _ _ _ additional storage areas at the two ICDs g O Ea have been included in the proposed FueC project (para 3.03, A.1 and A.2). U Gawucaw BeehcapaLc 2.19 The major constraint on the containtr berth capacity is indicated in 2 Figure 2.3(B). This constraint is determined not by the berth itself, but by the number of Ship-to-Shore Gantry E.. Cranes CSSGs) to handle the forecast , container throughput (loaded and empties) of 122,000 TEUs in 1993. Given the existing operational speed of SSGs of 16 containers per hour (and assuming 751 availability, 602 berth occupancy and o ship's gear handling rate of 5 containers Do 0 U w-u->n * per hour), THA's container berth capacity P D is 102,000 TEUs p.a. With productivity oJecarostmaepcax improvement up to 20 containers per hour a and availability up to 802, which are reasonable standards. the terminal will 2 _ be able to handle a throughput of about 129,000 TEUs p.a., matching the forecast demand. Any further increase in container traffic would require installation of an additional SSG 1 _ (Sections II and VI of Annex 2-6). Provision for an additional SSG and RTGs 0 - I ::- hi.ve been included in the proposed project (para 3.03, B.2 and B.3). C3