Tanzania - Mufindi Pulp and Paper Projects

Document of The World Bank FOR oMCIL USE O4LY Report No 11481 PERFORMANCE AUDIT REPORT TANZANIA MUFINDI PULP AND PAPER PROJECT (LOAN 1650/CREDIT 875-TA) AND TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT (CREDIT 1370-TA) DECEMBER 22, 1992 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. CURRENCY EQUIVALENTS (annual averages) Currency Unit = Tanzanian Shilling (TSh) 1983 US$1.00 = TSh 11.1 1984 US$1.00 = TSh 15.3 1985 US$1.00 = TSh 17.5 1986 US$1.00 = TSh 32.7 1987 US$1.00 = TSh 64.3 1988 US$1.00 = TSh 99.3 1989 US$1.00 = TSh 143.4 1990 US$1.00 = TSh 195.1 1991 US$1.00 = TSh 219.2 1992 US$1.00 = TSh 297.0 ABBREVIATIONS AND ACRONYMS CDC - Commonwealth Development Corporation DFC - Development Finance Company DM - Deutsche Mark ECA/MNA - Europe & Central Asia/Middle East & North Africa EEC - European Economic Community ERP - Economic Recovery Program ERR - Economic Rate of Return FRR - Financial Rate of Return GOT - Government of Tanzania IBRD - International Bank for Reconstruction and Development IDA - International Development Association JFA - Joint Financing Agreement KfW - Kreditanstalt fir Wiederaufbau NDC - National Development Corporation NIB - Nordic Investment Bank OED - Operations Evaluation Department OGL - Open Generalized Licensing OMC - Operations Management Contractor OPEC - Organization of Petroleum Exporting Countries PAR - Performance Audit Report PCR - Project Completion Report PR - President's Report PTA - Preferential Tariff Area SAR - Staff Appraisal Report SEK - Swedish Crowns SIDA - Swedish International Development Authority SPM - Southern Paper Mills Company TANESCO - Tanzania Electric Supply Company TAZARA - Tanzania-Zambia Railway Authority TDFL - Tanganyika Development Finance Company, Ltd. TIB - Tanzania Investment Bank tpy - tons per year TWICO - Tanzania Wood Industry Corporation FISCAL YEAR Government: July 1 - June 30 NDC and Subsidiaries: January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation December 22, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Tanzania - Muindi Pulp and Paper Project (Loan 1650/Credit 875-TA) and Technical Assistance and Energy Conversion Proiect (Credit 1370-TA) Attached is a copy of the report entitled "Performance Audit Report on Tanzania - Mufindi Pulp and Paper Project (Loan 1650/Credit 875-TA) and Technical Assistance and Energy Conversion Project (Credit 1370-TA)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by reciplents only in the performance of their official dalles. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT TANZANIA MUFINDI PULP AND PAPER PROJECT (LOAN 1650/CREDIT 875-TA) AND TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT (CREDIT 1370-TA) TABLE OF CONTENTS Page No. PREFACE .............................. BASIC DATA SHEETS........................................iii EVALUATION SUMMARY..................................... vii I. BACKGROUND ....................................... 1 II. PROJECT OBJECTIES. DESCRIPTION AND MANAGEMENT .. . 4 Stagel... ............................... ........... 4 Stage II ........................................... 5 M. IMPLEMENTATION EXPERNCE .......................... 6 Stagel.... ............................... ........... 6 StageH .............................................. 6 IV. PROJECT OUTCM ................................... 7 Operating Performance....................................... 7 Financial Performance and Position ............................... 8 Financial and Economic Rates of Return ....................... 8 Institutional Development ................................ 8 Environmental Concerns ...................................... 9 V. ISSUES .. . . . . . .. . . . . . . .. . . . . . . . 9 VI. OVERALL ASSESSMENT AND SUSTAINABLTY................ 11 VII. LESSONS OF EXPERIENCE AND RECOMMENDATIONS . ... 12 ATTACHMENT: 1: Organization Chart .. ...................................... 15 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. TABLE OF CONTENTS (cont'd.) Page No. PROJECT COMPLEION REPORT PART I; PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .......... 19 Project Identity ....................................... 19 Background ......................................... 19 Project Objectives and Description ........................... 20 Project Design and Organization ............................. 21 Project Implementation .................................. 22 Project Results ....................................... 25 Project Sustainability .................................... 27 Bank Performance ..................................... 27 Borrower Performance ................................... 29 Project Relationships ....................................... 30 Consulting Services........................................ 30 Project Documentation and Data................................ 31 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ...... 32 Introduction ......................................... 32 Implementation of the Mill Construction ........................ .... 32 Implementation of the Mill Operational Assistance Program ............ .. 33 Financial Outlook ...................................... 34 Benefits ............................................ 34 PART III: STATISTICAL INFORMATION .......................... 35 1. Related Bank Loans and/or Credits ........................ . 35 2. Project Timetable ..... ................................... 36 3. Loan/Credit Disbursements ..... ............................ 37 4. Project Implementation .................................... 38 5. Project Costs and Financing ..... ........................... 39 6. Project Results ......................................... 41 7. Status of Covenants ...................................... 46 8. Use of Bank Resources.................................... 48 ANNEX: Economic Rate of Return ................................ 51 APPENDICES I. Comments Received from the Kuwait Fund for Arab Economic Development ..................................... 55 II. Comments Received from the OPEC Special Fund ................ 59 -1- PERFORMANCE AUDIT REPOR TANZANIA MUFINDI PULP AND PAPER PROJECT (LOAN 1650/CREDIT 875-TA) AND TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT (CREDIT 1370-TA) PREFACE This is a Performance Audit Report (PAR) on the Mufindi Pulp and Paper Project, supported by Loan 1650 and Credit 875, both approved in January 1979, in the amount of US$30 million each. Additional funding for the project was provided by the Swedish International Development Authority (SIDA) in the form of a grant (US$45 million); the Kreditanstalt flir Wiederaufbau (KfW), a grant for US$34 million; the Commonwealth Development Corporation (CDC), a loan of US$20 million; the Kuwait Fund for Arab Economic Development, a loan for US$18 million; the Nordic Investment Bank (NIB), a loan of US$12.5 million; the OPEC Special Fund, a loan of US$10.5 million, of which US$5.5 million equivalent in local counterpart funds; and the Government, US$51.7 million, raising total investment costs to US$251.7 million equivalent. By the time the project was nearing physical completion, it was recognized that additional funding was required for boiler conversion, importation of essential inputs, and a more extensive program of management and operational assistance and training. In May 1983, IDA approved the Technical Assistance and Energy Conversion Project (Credit 1370) in the amount of US$18 million, SIDA a grant for US$13.5 million, KfW a grant for US$8.5 million, while the Government contributed another US$5 million, for a total of US$45 million. These contributions raised the investment cost of the project to US$298 million. In addition, SIDA provided financing for 50 railway wagons for the transportation of finished products; the Kuwait Fund US$25 million for the construction of the local township, including physical and social infrastructure; and the EEC US$25 million for the construction of the escarpment road by the Government. The Bank loan/credits were made to the Government and on-lent through the National Development Corporation (NDC) to the newly established Southern Paper Mills (SPM), a parastatal. They were fully disbursed, except for US$65,054 of Credit 1370, and the last disbursement was in May 1992. Credit 875 closed in December 1982, Loan 1650 in December 1986, and Credit 1370 in December 1991. The PAR was prepared by the Operations Evaluation Department (OED). The Project Completion Report (PCR) was prepared jointly by the Industry and Energy Division of the ECA/MNA Regions' Technical Department and the Africa Regional Office of the Bank (Parts I and III) and the Borrower (Part II). Co-financiers SIDA and KfW provided comments on the PCR which have been incorporated in the text. The PAR is based on the attached PCR, the Staff Appraisal and President's Reports, sector and economic reports, OED's study "World Bank/Tanzania Relations, 1961-1987" (chapter on "Tanzania's Industrialization Effort 1961-87"), the loan/credit documents, the summary of the Board discussions, study of the project files, and discussions with Bank staff. The OED mission discussed the - n - effectiveness of the Bank's assistance within the context of the country study with NDC, SPM, and Government officials. Their kind cooperation and invaluable assistance is gratefully acknowledged. The PCR provides a satisfactory account and assessment of the project experience with regard to the origin, preparation, implementation, management, operations, and financial, economic and institutional performance, and draws the lessons learned. The PAR focuses and elaborates on the framework of the country's industrial strategy and policies at appraisal, the project design, the quality of the Bank's appraisal work and effectiveness of supervision effort, the outcome of the project, the extent and effectiveness of the Bank's advice and interventions to help resolve critical issues, and the project's sustainability. The PAR then draws additional lessons from the project experience, and makes recommendations for potentially more effective courses of action to foster the design of sustainable industrial projects. Copies of the draft PAR were sent to the relevant Government officials, NDC, SPM, and the co-financiers for review and comments. Responses from the Kuwait Fund for Arab Economic Development and the OPEC Special Fund are reproduced as Appendices I and H, respectively. - 111 - PERFORMANCE AUDIT REPOR TANZANIA MUFINDI PULP AND PAPER PROJECT (LOAN 1650/CREDIT 875-TA) BASIC DATA SHEET LOAN/CREDIT POSITION (Amounts in US$ Million) As of Nov. 30, 1992 Loan/Credit Original Disbursed Cancelled Repaid Outstanding Loan 1650 30.00 29.98 0.02 17.00 12.98 Credit 875 30.00 30.00 - 1.05 28.95 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Loan 1650 FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 Appraisal Estimate (US$M) - - 17.5 30.0 30.0 30.0 30.0 30.0 30.0 Actual (US$M) 0.2 0.5 0.7 7.2 18.8 23.2 28.3 29.7 30.0 Actual as 2 of Appraisal (2) - - 42 242 63% 772 94% 992 100% Date of Final Disbursement: August 25, 1987 Credit 875 FY79 FY80 FY81 FY82 FY83 Appraisal Estimate (US$M) 1.5 8.6 23.7 30.0 30.0 Actual (US$M) - 2.9 13.0 26.0 30.0 Actual as 2 of Appraisal (2) - 34% 552 87% 1002 Date of Final Disbursement: March 24, 1983 PROJECT DATES Loan 1650 Original Actual Appraisal - 02/78 Board Approval - 01/04/79 Signing 02/79 04/06/79 Effectiveness 07/79 04/15/80 Loan Closing 12/83 12/31/86 Credit 875 Original Actual Appraisal - 02/78 Board Approval - 01/04/79 Signing 02/79 04/06/79 Effectiveness 07/79 04/15/80 Credit Closing 12/82 12/31/82 - iv - STAFF INPUTS (staffweek*) Pre- Ln. 1650/Cr. 675 FY79 FT79 1T80 F81 FT82 Y83 FT64 F$5 186 FT87 Y18 F92 TOTAL Preappraisal 90.4 - - - * - - - - - - - 90.4 Appraisal 36.3 7.5 - - - - * - - - - 45.8 Negotiations 0.5 4.7 - - - - - - - - - 5.2 Supervision - 9.4 34.2 33.8 34.6 30.3 7.7 6.6 6.7 2.9 0.1 0.6 167.1 Other 14.5 6.4 - - - - - - - - * - 22.9 Total 143.7 30.0 34.2 33.8 34.8 30.3 7.7 6.6 6.7 2.9 0.1 0.6 331.4 MISSION DATA No. of No. of Staff Ln. 1650/Cr. 875 Month/Year Weeks Persons Weeks Prefeasibility 03/75 0.4 3 1.2 Prefeasibility 08/75 0.6 4 2.4 Feasibility 03/76 0.4 1 0.4 Feasibility 05/76 0.2 2 0.4 Feasibility 06/76 0.2 2 0.4 Preappraisal 07/76 2.4 3 7.2 Preappraisal 10/76 0.4 1 0.4 Preappraisal 04/77 2.0 2 4.0 Preappraisal 05/77 0.2 2 0.4 Preappraisal 08/77 0.4 1 0.4 Appraisal 10/77 3.6 3 10.8 Cofinancing 11/77 0.4 2 0.8 Cofinancing 03/78 0.8 1 0.8 Cofinancing/Appraisal 05/78 0.4 2 0.8 Appraisal 06/78 1.4 1 1.4 Cofinancing 07/78 0.4 1 0.4 Supervision I 04/79 0.4 2 0.8 Supervision II 04/79 1.4 3 4.2 Supervision III 10/79 1.4 4 5.6 Supervision IV 06/80 1.8 3 5.4 Supervision V 02/81 2.0 2 4.0 Supervision VI 06/81 0.4 2 0.8 Supervision VII 10/81 2.0 1 2.0 Supervision VIII 02/82 2.8 4 11.2 Supervision IX 05/82 2.4 3 7.2 Supervision X 11/82 1.2 3 3.6 Supervision XI 03/83 2.0 4 8.0 Supervision XII /b 02/84 1.4 2 2.8 Supervision XIII 05/84 1.0 1 1.0 Supervision XIV 12/84 2.0 3 6.0 Supervision XV 10/85 1.4 1 1.4 Supervision XVI 06/86 2.4 2 4.8 Supervision XVII 02/87 1.8 2 3.6 Supervision XVIII 09/88 2.2 2 4.4 Supervision XIX 05/89 2.6 1 2.6 Supervision XX 05/90 1.8 1 1.8 Supervision XXI 03/91 1.6 1 1.6 OTHER PROJECT DATA Borrover/Executing Agency: Government/National Development Corporation & Southern Paper Mills Follow-on Prolect: Project: Technical Assistance and Energy Conversion Project Credit No.: 1370-TA Amount: US$18.0 million equivalent Board Date: May 19, 1983 At Supervision missions XII-XXI also cover the Technical Assistance and Energy Conversion Project (Cr. 1370-TA). - V - PERFORMANCE AUDIT REPORT TANZANIA TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT (CREDIT 1370-TA) BASIC DATA SHEET CREDIT POSITION (Amounts in US$ Million) As of Nov. 30, 1992 Credit Original Disbursed Cancelled Repaid Outstandini Credit 1370 18.00 19.49 a 0.50 - 23.08 a CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 Appraisal Estimate (SDR M) 3.2 6.7 11.4 13.9 15.4 16.4 16.7 16.7 16.70 Actual (SDR M) 2.1 5.0 8.6 10.8 12.0 13.1 14.4 15.9 16.65 Actual as % of Appraisal (2) 66% 752 75% 782 78% 80% 86% 952 99.7% Date of Final Disbursement: May 1, 1992 PROJECT DATES Original Actual Appraisal - 02/83 Board Approval 04/83 05/19/83 Signing 04/83 09/22/83 Effectiveness - 12/20/83 Credit Closing - 12/31/91 STAFF INPUTS (staffweeks) FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 TOTAL Preappraisal 1.6 - - - - - - - - - 1.6 Appraisal 33.9 - - - - - - - - - 33.9 Negotiations 7.5 - - - - - - - - - 7.5 Supervision 1.7 8.7 8.2 4.9 6.1 8.5 18.4 5.8 3.9 3.4 69.6 Other 6.0 - - - - - - - - - 6.0 Total 50.7 8.7 8.2 4.9 6.1 8.5 18.4 5.8 3.9 3.4 118.6 /a Disbursed and outstanding total differs from the original amount of the credit in terms of US$ because of changes in the US$/SDR exchange rate. - VI - MISSION DATA No. of No. of Staff Month/Year Weeks Persons Weeks Appraisal 02/83 2.0 4 8.0 Supervision I A 02/84 1.4 2 2.8 Supervision II 05/84 1.0 1 1.0 Supervision III 12/84 2.0 3 6.0 Supervision IV 10/85 1.4 1 1.4 Supervision V 06/86 2.4 2 4.8 Supervision VI 02/87 1.8 2 3.6 Supervision VII 09/88 2.2 2 4.4 Supervision VIII 05/89 2.6 1 2.6 Supervision IX 05/90 1.8 1 1.8 Supervision I 03/91 1.6 1 1.6 OTHER PROJECT DATA Borrower/Executing Agency: Government/National Development Corporation & Southern Paper Hills Follow-on Prolect: None J. Supervision missions also cover the Mufindi Pulp and Paper Project (Ln. 1670/Cr. 875-TA). - vi - PERFORMANCE AUDIT REPORT TANZANIA MUFINDI PULP AND PAPER PROJECT (LOAN 1650/CREDIT 875-TA) AND TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT (CREDIT 1370-TA) EVALUATION SUMMARY Introductiwell as efforts at reform in recent years, are discussed in paras. 1.01-1.07. 1. This is an audit of the Mufindi Pulp and Paper Project, the first stage of which was supported by Loan/Credit 1650/875, approved in January 1979, and the second stage by 3. In line with the precepts of the basic Credit 1370, approved in May 1983, for a total industry strategy, the main objective of this of US$78 million. Co-financiers provided an greenfleld project was import-substitution, and additional US$220 million, for a grand total the perceived derivative benefits therefrom. The project cost of US$298 million (Preface, p. i, project consisted of a fully integrated pulp and paras. 3.02, 3.04). paper mill, including facilities to harvest and deliver wood, with a rated capacity of 60,000 2. In 1967, Tanzania's political leadership tons annually of various grades of paper. The adopted in earnest a centrally directed strategy of Southern Paper Mills Company (SPM) was industrial development and policy framework to established to build and operate the project. The advance the objectives of self-reliance, economic Government undertook to provide the requisite growth and structural transformation. Industry infrastructure. The fbllow-on Technical As- was seen as a powerful engine of growth that sistance and Energy Conversion Credit would could modernize the economy through more capi- enable SPM to convert the existing boiler into tal-intensive higher-productivity processes, using wood fuel; recruit expatriate operating promoted within a protected domestic market. management and provide training to its staff; The Government firmly believed that a rigor- import essential materials and supplies; and ously pursued industrialization strategy with strengthen SPM's equity base (paras. 2.01-2.09). emphasis on resource-based, producer goods industries that cater to basic needs, dubbed as the Implemnin basic industry strategy, coupled with an extensive state involvement in the management of the 4. Construction, procurement, installation and economy, would accelerate growth and achieve commissioning were effected in a reasonably a more equitable socio-economic development. efficient manner, although there have been some The Bank endorsed this approach to industrial organizational, financial, and contract award development from its inception, and even became problems. In retrospect, a simpler organizational its staunch supporter throughout the 1970s. The structure involving fewer entities and conducive industrial setting and performance to date, as to greater delegation of authority might have - Viii - been more efficient. On the whole, the per- rates have remained low (paras. 3.04, 3.05, formance of the consultants during implementa- 4.05). tion and operation has been satisfactory, albeit in certain respects there have been lapses by the Reults operating management contractor and suppliers of equipment (para. 3.01). 8. The mill is currently operating at just over 35% of its rated capacity. The reasons for the 5. The mill commenced operation with a poor performance to date include flaws in equip- delay of 36 months because of a confluence of ment fabrication; optimistic demand projections; factors: difficulties in coordinating financing by incorrect estimation of the composition of the co-financiers; shortage of local funds and product demand; short production runs; product temporary gaps in external funding due to variation in terms of moisture, weight and grade Tanzania's inability to service foreign debt; and affecting quality; transport bottlenecks (shortage the late completion of infrastructure (township, of wagons, lack of handling equipment at the escarpment road, and electric power trans- port, poor maintenance of the escarpment road); formers). Despite the time overrun, the installed irregular power supply; frequent machinery cost of the plant was only 2% higher than the breakdowns due to inadequate preventive and original estimate. The project was closely and routine maintenance; high turnover of main- effectively supervised, and Bank staff contributed tenance and technical staff; shortage of imported to the resolution of difficult and sensitive issues inputs, spares and consumables due to unavail- (para. 3.02). ability of foreign exchange; insufficient working capital; lop-sided capital structure; and rising 6. The sponsors have had difficulties in indebtedness due to recurring devaluations complying with covenants and understandings. (para. 4.01). The Government did not provide agreed infra- structure on time; a system to organize the main- 9. By 1989, injection of new capital was tenance and finance repairs of the escarpment urgently needed for investments to improve the road has yet to be developed; the use of local operating efficiency of the mill, as well as for the coal had to be abandoned due to insufficient and financial restructuring of the company. A re- irregular supplies; the company was not provided structuring program was put together in 1990, in with adequate funds, and was not ensured of the amount of US$23 million, with the participa- foreign exchange allocations for the timely tion of IDA, KfW and SIDA. However, KfW, procurement of imported inputs and spares. because of SPM's continued poor performance, SPM, for its part, has not been able to comply declined to disburse its portion. The late imple- with the financial and reporting covenants mentation of the restructuring program, as well (para. 3.03). as its reduced scope, has meant a two-year delay in SPM's mill rehabilitation program with serious 7. The uncertainty of domestic coal supplies consequences on the efficiency of mill operations necessitated the conversion of the boiler to wood and financial results (para. 4.02). fuel. However, after extensive field trials, the costs of conversion proved prohibitive, and the 10. SPM has been incurring heavy losses since plan to covert the boiler was not carried out. it began operating, which had accumulated to The SPM now relies largely on imported coal. US$48 million by the end of 1991. Re-estimated The Operation Management Contract, originally FRR and ERR are unsatisfactory. Reasons for for six years, was extended for another four. this poor performance include extremely low SPM retained the same foreign operators, and production and sales levels, negative margins on they were given full management responsibility export sales dictated by the limited domestic mar- including operation, financial control, sales, and ket, and high operating costs as discussed in training. A comprehensive training program was para. 8, albeit largely for reasons beyond the implemented over the years, but trainee retention management's control. SPM is in a dire finan- - ix - cial position, is unable to meet its current obliga- the processing of a domestic resource and dons, and its future financial and economic catering to basic needs; it would ensure a viability remain uncertain. To ease SPM's dependable supply of paper to the country at financial plight, the Government has injected new stable and reasonable prices; and would provide equity funds, converted part of SPM's long-term employment and save foreign exchange. Clearly, debt into equity, and reduced interest rates on the the overall goal of efficient import substitution remaining loans. Nonetheless, SPM's financial was not achieved. The project does make modest restructuring is far from completed, and con- use of domestic resources and labor, but at an tinued financial support will be required for the inordinately high social cost. The size of the foreseeable future to sustain operations mill, much less than the minimum economical, (paras. 4.03, 4.04). still is excessive in relation to domestic demand; the prospects for domestic market growth are 11. Institutionally, SPM encounters difficul- dim, while exports even at full capacity utiliza- ties. After seven years in operation, SPM con- tion are not competitive and result in substantial tinues, and will continue at least until 1994, to be losses. Institutionally, the company remains run by expatriates. Concerted efforts at training, weak. SPM's operating efficiency is very low, staff advancement, and succession planning have it has sustained heavy losses, and its equity basis not succeeded in sustaining a core of cadres. has been eroded. SPM cannot meet its current This has frustrated expectations to develop obligations, continues to be a drain on the indigenous staff capable of replacing high level budget, and is in need of physical rehabilitation expatriate management and, as a result, SPM's and financial restructuring. The Government is reliance on expensive expatriates to fill these considering privatization as a way to wean SPM positions persists. SPM has been unable to retain from the budget, attract new capital, and ensure many of the trained local staff, as they sought strong management. In the circumstances, the more remunerative opportunities elsewhere. Yet, sustainability of the project is unlikely at non-skill intensive levels SPM is overstaffed (para. 6.01). by over 50%. Production management systems are not yet up to par. Process control procedures 14. The key issue in this project relates to its are inadequate, while an efficient system of design and the justification for the Bank's in- preventive and routine maintenance has yet to be volvement. The Mufindi pulp and paper mill is developed, hampering mill maintenance. Super- the largest and most complex industrial project vision of maintenance and operations could be ever undertaken in Tanzania, with an investment strengthened (paras. 4.05, 4.06). cost amounting to US$300 million. The mill is based on simple, established and versatile tech- 12. The equipment designed and installed at nology, and is technically sound. However, it is SPM is capable of controlling air and water too large in relation to the size of the domestic pollution. However, since 1989, the equipment market and, even so, its scale is uneconomical. has not been maintained and operated properly Seven years after start-up, it operates at just over due to shortage of spares and consumables and, one-third of its rated capacity. It is notable, that inadvertently, SPM has been unable to meet annual consumption of paper products at environmental standards consistently. Improve- appraisal was a small fraction of the proposed ment in pollution control is closely related with capacity, and that, even allowing for the optimis- improvements in SPM's process efficiency and tically projected domestic market growth, the financial health (para. 4.06). project would have had to export part of its production until the early 1990s, and at a price Overall Assessment and Issues that hardly covers variable costs even under ideal operating conditions. The Bank's technical staff 13. The Mufindi integrated pulp and paper pondered over an array of technological, infra- mill was justified on grounds that it was given structural and environmental parameters and high priority by the Government, as involving imperatives, but the stumbling block was always -x - the inability to reap scale economies, which are 17. With respect to project conceptualization crucial in pulp and paper production. The end and rationalization, SPM's experience suggests result was a flawed design -- an unworkable the following: compromise between size of plant, technology and returns (paras. 5.01-5.03). * There are inherent difficulties in pursuing an industrial strategy stressing the rapid develop- 15. The Bank's management rationalized the ment of an indigenous producer goods industry at support for the project by arguing that: an early stage of industrialization, since aM "development of this project was iustified:.... deepening of the industrial structure is con- The project is consistent with the Government's strained by crucial threshold relations (e.g., size Basic Industry Strategy and will lead to signifi- of plant and market, technology and skills, cant foreign exchange savings through import attitudes and values, organizational structures, substitution.. .in view of the limited absorptive institutional arrangements), which cannot be cal2acity of other priorily sectors and the lack of circumvented with impunity. other industrial proiect alternatives. it was appropriate from both the point of view of the * Impatience with and unwarranted accelera- Government and the Bank to commence a large- tion of a country's industrialization effort are scale industrial proiect such as this at this time, likely to entail heavy economic, financial and No pipeline of incremental smaller industrial social costs down the road, as the evolutionay proiects with higher priority existed." Clearly, development of human capital. institutional the rationale for supporting such an inordinately capacity. and cultural parameters set binding high capital, skill, infrastructure and import in- constraints and determine the pace and sustain- tensive project of sub-optimal scale which defied ability of the industrialization process. basic economic and market considerations was shallow. The Bank's technical staff was called * The Bank's unwavering support and upon "to generate" a project, and come up with uncritical commitment to the country's socialist a design reflecting major technical and economic experiment, which for a long and critical period compromises which seriously affected the via- set the tone on policy matters and lending opera- bility of the project. In the Tanzanian circum- tions, suggests that the Bank's effectiveness and stances. and strictly on technical. economic. and development impact can be compromised if the financial grounds. the proiect should have never Bank's top managers make policy and lending been undertaken. Undoubtedly. the Bank exer- commitments impusively, and the technical staff cised poor judgment in going ahead with this is then called upon to make good on such com- REQiW. The Government's aspiration to imple- mitments - thus allowing no room for airing ment an ill-conceived industrial strategy (the internally important policy and technico-econo- "original sin"), the donor community's eagerness mic issues. Discretion is called for to prevent to assist, and institutional pressure to lend within erosion of the staff's professionalism. stifle staff the Bank coalesced, and led to the Bank's in- initiative. participation and forthrightness. thwart volvement in this unsuccessful two-stage opera- dissenting views. and undermine the credibility tion (paras. 5.02-5.06). and effectiveness of the in-house decision-making proces. A two-way exchange is more likely to Lessons and Recommendations ensure transparency in the decision-making process. enhance the operating efficiency of the 16. The lessons of experience, including institution. and minimize unwelcome project out- suggestions, are detailed in paras. 7.02 and 7.03, comes, the incidence of which affects the quality and PCR, paras. 42, 43. They are briefly sum- of the Bank's portfolio, tarnishes the Bank's marized below. image. and reflects on all Bank staff. - xi - Project aid encouraged the recipient to assistance inputs. Close supervision can help launch large (in relation to the size of the domes- elicit responses swiftly when difficulties emerge tic market, yet sub-optimal) capital and skill in- so as to minimize their adverse impact. Never- tensive projects. Indiscreet external financing. theless, there are certain elusive issues that which has an opportunity cost. may inadvertently require constant attention and review because of end up supporting injudicious industrial invest- the difficulties in devising effective controlling ments. while it legitimizes ideologically colored mechanisms. They include depth and continuity but unsound industrialization policies. More- of borrower commitment, management effective- over, the launching of such unproductive projects ness, availability of counterpart funds, com- creates a real burden for the country by in- pliance of contractors and subcontractors with creasing its external debt service requirements specified standards of quality and performance, without commensurate benefit. early detection of flaws in equipment design and fabrication, and the precariousness of demand 18. Insights from the experience with lgji and price forecasts. design. appraisal and implementation include: * Since covenants committing the Govern- * Design, an all-encompassing concept ment to provide infrastructure in a timely fashion involving technico-economic, institutional and do not necessarily guarantee compliance, there is policy dimensions, is a critical phase in the need to make sure early on during project prep- proJect cycle, with telling consequences on aration that such facilities are being implemented prQiect outcome. Unsatisfactory project outcomes and that progress is being duly monitored. ranging from outright failures, to changes in scope during implementation, to poor operating * To ensure uninterrupted production, aiy performance, or to uncertain sustainability, can appreciation of existing or potential flaws in be traced back to deficiencies in design. Con- backward-linked activities impacting on the versely, successful projects appear to owe much availability, quality, and the regular flow of raw to the fact that their configuration was the out- materials supply is crucial. come of circumspect and painstaking scrutiny. * Experience affirms: the high pav-off of * Shortcomings in the area of project selec- using competent and highly experienced en- tion, design and implementation generally relate gineering firms from project preparation through to the undue emphasis on "apropriate technol- operation; the importance of keeping the organi- 2gy" in areas where, by virtue of the nature of zational structure for proiect implementation the industry, applicability is very limited; exces- limp&], defining clearly the functional respon- sive reliance on outside "specialized firms" to sibilities between sponsor and consultants; de- carry out market analyses. resulting in optimistic signing project management arrangements in such demand projections: failure to respect the critical a way as to ensure efficient decision-making importance of scale economies; and the Bor- authority and adequate monitoring of contractor rower's insufficient budetary resources and performance, based on pre-determined criteria; delivery capacity. and the cost-effectiveness of stipulating bonus/penalty clauses tied to implementation * Subtle proiect implementation problems schedules for contractors. can never be avoided completely. However. their incidence can be reduced by assessing early * The frequency, but more importantly, gh& on the risks and uncertainties associated with new sensitivity. skill and effectiveness of the Bank's process technology transfer, vetting more thor- supervision effort can influence proiect imple- oughly technological, technical, and market mentation and outcome. dimensions during project preparation, devel- oping the requisite institutional capability of the * Provision of training for managers, opera- sponsor, and injecting the proper technical tors and craftsmen is not enough. In parallel, - xii - steps would have to be taken to ensure that after * In view of the persistent difficulties SPM completion of their training. the trainees are ade- is facing, a realistic evaluation of its prospects. quately compensated to induce them to stay on financial situation. and conditions for future and not seek more remunerative opportunities development and sustainable growth is long elsewhere, to the detriment of the sponsoring the overdue. In this regard, privatizatn would have program enterprise -- albeit not to the country. to be considered as an alternative to the Au go, particularly if it can provide a practical escape to SPM's impasse. PERFORMANCE AUDIT REPORT MUFINDI PULP AND PAPER PROJECT (LOAN 1650/CREDIT 875-TA) AND TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT (CREDIT 1370-TA) I. BACKGROUND 1.01 In 1967, Tanzania's political leadership adopted in earnest a centrally directed strategy of industrial development and a supportive policy framework to advance the objectives of self-reliance, economic growth, and structural transformation. Industry was seen as a powerful engine of growth that could modernize the economy through more capital-intensive higher-productivity processes, promoted within a protected domestic market. The Government firmly believed that a vigorously 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 endorsed this approach to industrial development from its inception, and even became its staunch supporter throughout the 1970s. 1.02 The implementation of the adopted industrialization strategy implied inter alia: 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 resource 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-, import-, and skill-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 technically trained manpower, including managers, to operate industrial undertakings -- a tall order. Considering Tanzania's level of development and the demanding requirements, the basic industry strategy was injudicious, and it is highly unlikely that it could have been effectively implemented at the projected pace and time frame. 1.03 Indeed, major setbacks set in early on, and progress in achieving these goals was thwarted. After two decades of misperceived and poorly implemented inward-looking industrialization, and despite the injection of an inordinate amount of external financial and technical assistance, the industrial structure that had evolved by the mid-1980s was worse than that which existed in the early 1960s. Real per capita income and wages were lower than in the mid-1960s, the balance of payments situation remained critical, and heavy dependence on foreign inputs, financial resources, technology and expertise persisted -- 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 the investments undertaken and, to some degree, external shocks, led to the development of an inefficient industrial structure, encumbered with poorly performing facilities and incapable of generating the hoped for sustainable growth and transformation of the economy. 1.04 The string of intractable problems afflicting industrial performance, and whose severity assumed unwieldy proportions during the 1980s, includes oversized or sub-optimal plant scale; completed -2- but inoperative plant capacity due to lack of infrastructure; shortage of technical and managerial skills and continued reliance on high-priced expatriates; acute shortages of imported inputs due to 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 physical 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 rising indebtedness due to successive drastic devaluations.Y' The poor condition of the parastatals and their inability to service their debt in turn undermined the viability of the financial intermediaries (TIB and TDFL), which have piled up an extremely weak portfolio of non-performing assets and are striving to remain afloat. 1.05 Inadequate allocation of resources and deficient incentive structures for the development of the agricultural sector, excessive administrative 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 planning 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 organizational structure and performance of parastatals; and a distorted policy framework resulted in the development of an industrial sector which is over-extended in relation to the size of the market and the country's technological and skill (managerial, technical and labor) capabilities. The policies adopted ended up favoring industries linked to imported capital, skills and materials, rather than the intensive 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. Import licensing and other quantitative restrictions isolated the industry from external competition, while price controls, regulatory policies, and the confinement of goods created barriers to domestic competition. The flaws and underlying problems of the strategy became more forcefully evident in the late 1970s and early 1980s.2' 1.06 To reverse the protracted deterioration of the economy, in 1986, the Government prepared an Economic Recovery Program (ERP), taking the first major steps to rectify the distortions created by earlier I' Between 1966 and 1992, the shilling has depreciated dramatically: in 1966, TSh 7 = US$1; in 1992 (November), TSh 370 = US$1. For details on the concept and a critique of the basic industry strategy, policy framework, structure and performance of the manufacturing sector, and the low productivity of external aid see: OED, Report No. 8329, World Bank/Tanzania Relations. 1961-1987, January 16, 1990, Vol. II, "Tanzania's Industrialization Effort 1961-87," pp. 45-142. The condition of the manufacturing sector has been ably diagnosed and analyzed in the World Bank sector studies entitled: Tanzania: An Agenda for Industrial Recovery, Report No. 6357, June 30, 1987, 3 volumes; and Report No. 7100, Parastatals in Tanzania: Towards a Reform Proqgram, July 27, 1988. See also OED, PPAR No. 7744, Tanzania: TIB (Loans 1172. 1498 and 1750) and TDFL (Loan 1745), May 4, 1989; PPAR No. 8696, Tanzania: Moroloro Textile Proiect (Loan 1607/Credit 8), May 31, 1990; and PPAR No. 8836, Tanzania: Morogoro Industrial Complex ProiEct (Loans 1385/1386), June 29, 1990. Ex 2gs evaluations show that the performance of all Bank-supported industrial projects and DFC operations in Tanzania has been unsatisfactory. -3- economic policiesY The areas addressed included exchange rate management, pricing policies, the trade regime, foreign exchange allocation, performance of parastatals, industrial restructuring, agricultural pricing and marketing systems, transport sector efficiency, and public expenditures. In the industrial sector, the objective was improvement of capacity utilization, rehabilitation of major parastatals, completion of ongoing projects, and ensuring that resources are directed toward the more productive and efficient firms in the sector. The ERP envisaged a recovery period of five to seven years, and provided the first indication of a pragmatic approach to economic management. The reforms have resulted in some improvement in the trade and industrial poliey environment, mainly through exchange rate adjustments, the policy of own-funded imports, greater access to foreign exchange through the creation of the Open Generalized Licensing (OGL) facility, tariff and sales tax reforms, provision of export incentives, and internal trade liberalization. 1.07 In the framework of an active macroeconomic dialogue, the Bank and the Government in the context of the ERP worked jointly to develop specific action programs to rationalize the industrial sector. The proposed industrial restructuring scheme envisaged three phases: Phase I would involve a diagnostic study of selected subsectors and the identification of pressing issues, both at the enterprise and subsector levels; Phase II, development of rehabilitation and restructuring programs; Phase III, implementation of agreed action programs. Except through changes in the broader macroeconomic framework (e.g., exchange rate adjustment, trade liberalization, price decontrols, limitation of direct subsidies), industrial parastatals have yet to undergo a major restructuring, and continue to be a burden on the government budget. Despite their persistent economic and financial problems, only a limited number of inefficient parastatals have been dissolved or privatized, albeit negotiations with potential investors are going on with several parastatals. Though production by inefficient parastatals has contracted, these ailing firms continue to operate because they have access to foreign exchange and short-term credit? In December 1991, a Parastatal Sector Reform Commission was established to implement and coordinate the reform program. The Commission, still in the process of being organized and staffed, will prepare an indicative divestiture/privatization program, categorizing parastatals for divestment, closure or retention; indicating the envisaged type of sale or management (full or partial sale of shares, joint venture, leasing, management contract); and providing an approximate timetable. Nonetheless, the rationalization of the parastatal sector presents intricate problems (e.g., "whom to sell to", asset valuation, handling of debt denominated in foreign currencies, social dimensions) and remains an all-important issue which awaits resolutionY 'The policy and institutional measures introduced by the "Economic Survival Plans" of 1980 and 1981, and especially the "Structural Adjustment Program" of 1982, were inadequate both in scope and intensity, and did not have a lasting impact. ' Recent economic developments and the impact of the ERP on the industrial sector are discussed in Report No. 4944, Tanzania - Industrial Rehabilitation and Trade Adiustment Progzram, November 22, 1988, paras. 12-19; and World Bank Report No. 9352, Tanzania Economic Report - Towards Sustainable Development in the 1990s, 2 vols., June 11, 1991, Vol. I, paras. 5.01-5.69. The latter report also discusses the poor results of past external assistance in Vol. II, pp. 120-132. F For details see Tanzania - Industrial Rehabilitation and Trade Adiustment Program, pars. 93, 100-103; Tanzania - Towards Sustainable Development in the 1990s, Vol. I, paras. 3.14-3.19, 5.15-5.32, 5.52-5.62; Ministry of Finance, Parastatal Sector Reform - A Policy Statement, December 31, 1991. ' See PR No. P-5629, Tanzania - Financial Sector Adiustment Program, October 17, 1991, paras. 1.18-1.20; OED, PAR, Tanzania - Industrial Rehabilitation and Trade Adiustment Program (Credit 1969-TA) (forthcoming). -4- II. PROJECT OBJECTIVES, DESCRIPTION AND MANAGEMENT 2.01 The basic objective of the project (Loan 1650/Credit 875) was to substitute for imports, supplying the bulk of the industrial and cultural papers used in Tanzania, utilize and process local resources (wood, coal, limestone, chemicals), generate employment opportunities, and conserve foreign exchange. The project consisted of a fully integrated pulp and paper mill, including facilities to harvest and deliver wood, with a rated production capacity of 60,000 metric tons per annum of various grades of pulp, paper and board. Facilities to be provided included: a wood preparation plant, a chemical pulp mill producing bleached and unbleached pulp, a mechanical pulp mill, two paper machines with associated stock preparation and paper finished equipment, steam and power generation equipment, an electrolytic chlorine and caustic soda plant, related pollution abatement equipment, logging roads and equipment, and part of the supporting infrastructure. At full production the mill would produce annually about 22,000 tons of kraft paper, 23,000 tons of printing and writing paper, 7,000 tons of newsprint, 8,000 tons of kraft linerboard, and 1,400 tons of market pulp. The principal project facilities would also incorporate spare capacity that could raise production to 75,000 tons of paper and board annually (SAR No. 1929, December 14, 1978, paras. 5.01, 5.05-5.09). 2.02 The mill was located about 15 km south of Mufindi in south-central Tanzania, some 590 km from its major market of Dar-es-Salaam. The site has good road and rail connections with Dar-es-Salaam and with other parts of the country. The Southern Paper Mills Company (SPM) was established as a subsidiary of the National Development Corporation (NDC) to build and operate the project. The Loan/Credit of US$60 million was lent to the Government, and on-lent partly (US$40 million) to the Company for 16 years, including 5 years of grace, while the balance was passed on to the Company as equity. The foreign exchange risk was borne by the Company (SAR, paras. 5.01, 6.06, 9.03). 2.03 The wood was to be supplied from the Sao Hill plantations, established primarily for this project, supplemented by waste wood from the Tanzania Wood Industry Corporation (TWICO) saw mill, also located at Sao Hill, and by wattle from the Tanganyika Wattle Company. If required, additional wood resources could be tapped from the Mbeya region. The coal and the limestone were to be provided by the State Mining Corporation from national mines, while the salt required for production of chlorine and caustic soda was to be delivered from the coastal region (SAR, paras. 5.10-5.16; PCR, para. 5). 2.04 The project included construction of housing for senior staff, while the Government undertook to build a local township with houses and facilities for the mill operating staff and the forest workers, obtaining financing from other sources. The project would partly finance a railway spur, while the Tanzania-Zambia Railway Authority (TAZARA) would design, construct, finance the balance, and maintain the spur. A 40 km escarpment road from Sao Hill to the mill would be financed and built by the Government. Finally, a power transmission line would be constructed by TANESCO, the Tanzania Electric Supply Company (SAR, paras. 5.20-5.26). 2.05 As stated in the SAR (para. 5.17), a full environmental impact study was not carried out at appraisal. However, the facilities were designed to minimize the undesirable environmental aspects of a sulphate pulp and paper mill, by keeping the discharge of solid, liquid, and gaseous wastes within inter- nationally acceptable limits. Moreover, a monitoring program was planned to keep effluents and emissions under review (SAR, paras. 5.17-5.19). See also paras. 2.07, 4.07. 2.06 The mill was expected to provide direct employment for about 800 Tanzanians, of whom about 40 will be highly skilled, 160 skilled, and 140 semi-skilled technicians. Technical staff would be trained -5- at the University of Dar-es-Salaam, schools overseas, and at the Kibo paper recycling plant, including practical training abroad. In addition, it was envisaged that as many as 120 skilled personnel from mills in Europe, North America, and Asia will be recruited immediately prior to and for the first several years of operation to assist with the start-up and on-the-job training of Tanzanians. Wood harvesting operations were expected to employ an additional 440 skilled and 110 unskilled workers, while the Company's Wood Supply Division would also have approximately 140 salaried personnel, of which about five managerial positions would be filled initially by expatriates. Total employment was estimated at about 1,500 (SAR, paras. 5.34, 5.35; Joint Financing Agreement (JFA), Section 3.06). 2.07 The Government undertook. inter alia, to make pulpwood and coal available at required quantities; ensure that the railway spur, the township, the escarpment road, and the power line projects be implemented in a timely fashion; provide its share (21%) of the total financing, as well as any local or foreign funds that may be required to complete the project; ensure adequate allocations of foreign exchange to permit the timely importation of industrial inputs and spares; and empower SPM to set prices at levels that would enable it perform on a sound financial basis under conditions of efficient operation. The NDC and SPM agreed. inter alia, to submit to the Bank detailed marketing and distribution programs for both the domestic and the export markets; enter into a suitable long-term arrangement for the supply of wattle timber; install the necessary anti-pollution devices at the mill, and institute acceptable procedures for monitoring their proper operation; maintain a current ratio of at least 1.5, subsequently reduced to 1.2; and not exceed a debtlequity ratio of 60:40, subsequently raised to 50:50 (SAR, para. 9.01; JFA, Sections 3.06, 3.10, 3.14-3.18, 5.01-5.05). 2.08 The organization for project implementation and operation included the Company's Project Team, and the Project Advisers, Managers and Engineers -- the latter being foreign firms. The Company would delegate most management responsibilities to Project Managers, who would coordinate all aspects of project implementation and early operations. Plantation establishment and maintenance, as well as replanting after clear felling, would be the responsibility of the Sao Hill Forestry Project (SAR, paras. 5.27-5.33). Stan 11 2.09 As the physical completion of the project drew near, it became clear that a much more extensive program of expatriate management, operational assistance, and training in the operation, maintenance, and management of the entire Company would be required than that originally envisaged. Also, at the time of the appraisal of the first stage, it was expected that the Songwe-Kiwira coal deposit would be developed and provide the main source of fuel for the power boiler of the mill. However, the coal deposit was not developed, and given the difficult logistics and high cost of imported coal, it was decided to convert the boiler to burn fuelwood derived from logging residues as well as coal and oil. The follow-on Technical Assistance and Energy Conversion Project (Credit 1370), approved in 1983 a year or so before the expected completion of the project, would enable SPM to: (a) recruit expatriate operating management and provide training to its staff for six years; (b) convert the existing coal/oil power boiler into using wood fuel; (c) procure wood harvesting, preparation, and transport equipment; and (d) import fuel and pulp for the first six months of operation until wood fuel became available, as well as other essential materials and supplies (e.g., chemicals, spares, consumables) for the first three years of operation. Furthermore, to strengthen SPM's financial position, the Government agreed to convert the previously on- lent portions of IDA and SIDA funds into equity (PR No. 3546, May 2, 1983, paras. 66, 68, 72, 79, 82). -6- II. IMPLEMENTATION EXPERIENCE 3.01 Construction, procurement, installation and commissioning were effected in a reasonably efficient manner, albeit there were some organizational, financial, and contract award problems. Despite the clear division of labor and delineation of responsibilities (SAR, paras. 5.27-5.33), coordination among the local Project Team and the foreign Project Advisers, Managers and Engineers suffered because of the different backgrounds, approaches and attitudes, and because the multi-level organizational structure proved unwieldy. This rendered decision-making difficult, and necessitated some modification in the organizational structure during implementation (see Attachment 1). In retrospect, a simpler organizational structure involving fewer entities and conducive to greater delegation of authority might have been more responsive and efficient. On the whole, the performance of the consultants during implementation and operation has been satisfactory, albeit in certain respects there have been lapses by the operating management contractor and suppliers of equipment (PCR, paras. 18, 42-46 and Part II, paras. 50, 60). 3.02 The mill commenced operation with a delay of 36 months because of a confluence of factors. Implementation was delayed because of difficulties in coordinating financing by the co-financiers (e.g., cross-effectiveness). Throughout implementation, there was shortage of local funds and temporary gaps in external funding due to Tanzania's inability to service foreign obligations (for details see PCR, paras. 15-17). The construction of the township for the operating staff lagged behind considerably due to the Government's inability to secure the requisite financial resources; but approval of a US$25 million loan by the Kuwait Fund prevented delays in the recruitment of staff. The TAZARA railway siding was completed in time, but the late completion of the electric power transformers by TANESCO delayed the mill start-up. Due to the Government's inability to finance the escarpment road, the EEC provided US$25 million equivalent. However, a combination of over-budget bids, poor performance of the original contractor, and the need to re-design the road to match the available funds led to major delays, and the road was completed one and a half years after mill start-up. Yet, despite the time overrun, the installed cost of the plant was only 2.4% higher than the original estimate (PCR, paras. 15-17, 21, 22, 27; Tables 5A, 5B; and Part H, para. 7). 3.03 The Government, NDC and SPM have had difficulties in complying with covenants and understandings. The Government has not been able to provide agreed infrastructure on time: the escarpment road and township were completed with a delay of 18 months; provision of suitable railroad wagons was delayed and inadequate; a system to organize the maintenance and finance repairs of the escarpment road has yet to be developed; the use of local coal had to be abandoned due to insufficient and irregular supplies; the Government has been unable to provide adequate funds to NDC/SPM, while SPM was not ensured of foreign exchange allocations for the timely procurement of imported inputs and spares. SPM, for its part, has not been able to comply with the debt/equity and current ratio stipulations, and audited accounts are furnished with undue delay (PCR, Table 7). 3.04 As already alluded (para. 2.09), the uncertainty of future domestic coal supplies necessitated the conversion of the boiler to wood fuel. Extensive field trials were conducted for harvesting and chipping of wood residue to determine the feasibility of converting the power boiler to use wood fuel. However, the results showed that the costs were prohibitive due to the low percentage of residual wood from the pine plantation harvests; the long and difficult hauling required; the inadequacy of the chipping and loading equipment supplied; and the difficulty to operate this equipment under the conditions prevailing in the logging areas. Moreover, SPM encountered operational difficulties in the use of wood fuel. As a -7- result, the plan to convert the boiler was not carried out, and the equipment was integrated into the normal woodland operations. Nonetheless, the poor quality of the local coal and unreliable supply added to SPM's operating problems, and forced the company to use a mix of imported and local coal. SPM is considering the possibility of using imported oil which is operationally more efficient (PCR, paras. 30, 31). 3.05 The Operation Management Contract for SPM, originally for six years, was extended for another four. The same foreign operators were retained, and they were given full management responsibility including operation, financial control, sales, and training. Recruitment of expatriates at all levels was expeditious. By 1985, the operators had brought in 134 expatriates, and an extensive training in the operation of the installations was organized to enable the Tanzanians take over (PCR, para. 20). The project has been closely and effectively supervised to date, and Bank staff contributed to the resolution of difficult and sensitive issues (PCR, para. 42; Table 8B). Financial support to assist SPM over the difficult initial operating phase was provided by the IDA Credit 1370, and was supplemented by co- financing to a total of US$53 million, or an increase of 18% over the original estimate, which was funded by SIDA (PCR, Table SC). At the completion of stage II, the total cost of the project had reached US$298 million - just about the appraisal estimate (PCR, Tables 5A, SB and SC). This figure excludes US$50 million of financial assistance extended to the Government by SIDA and the Kuwait Fund (para. 3.02). IV. PROJECT OUTCOME Operating Performance 4.01 In 1991, the mill produced 23,000 tons, operating at just over 38% of its designed capacity. Domestic consumption was 17,000 tons -- compared to 23,000 tons at appraisal (1978). SPM supplied 13,800 tons, or 81% of the domestic needs, and exported 9,100 tons, or 39% of total sales. Production peaked in 1989 at 32,000 tons. The reasons for the poor performance to date include flaws in equipment fabrication; optimistic demand projections; weak domestic market; incorrect estimation of the composition of product demand; short production runs; product variation in terms of moisture, weight and grade affecting quality;2' transport bottlenecks (shortage of wagons, lack of handling equipment at the port, poor maintenance of the escarpment road); irregular power supply; frequent machinery breakdowns due to inadequate preventive and routine maintenance; high turnover of maintenance and technical staff; frequent rotation of supervisory staff; poor work ethics (e.g., absenteeism); insufficient expatriate support in key positions; shortage of imported inputs, spares and consumables due to unavailability of foreign exchange; insufficient working capital; lop-sided capital structure; inability to collect from client parastatals; and rising indebtedness due to recurring devaluations (PCR, paras. 21-24, 29, 32, 42; Table 4; and Part H). 4.02 By 1989, it was clear that injection of new capital was urgently needed for investments to improve the operating efficiency of the mill, as well as for the financial restructuring of the company. For instance, there was need to improve the product mix and quality (installation of process computers, increase of bleaching and sheet cutting capacity), to remove bottlenecks (increase of roll wrapping capacity, improvement of roll handling system), to procure materials handling equipment, to replace worn out logging equipment, to erect warehousing facilities, etc. A restructuring program was put together in 1990, in the amount of US$23 million, with IDA contributing the undisbursed balance of US$3 million of Credit 1370, SIDA US$10 million, and KfW US$10 million. Implementation of this program did not commence until April 1991, when the Treasury, IDA and SIDA funds became available. However, KfW, because of SPM's continued poor performance, declined to disburse its portion. The late implementation Certain non-automated activities (e.g., materials handling, mill roll handling system), designed to maximize employment opportunities, turned out to have had adverse effects on product quality. -8- of the restructuring program, as well as its reduced scope, has meant a two-year delay in SPM's mill rehabilitation program, with serious consequences on mill operations and financial results. Procurement of necessary spare parts and equipment replacement has been curtailed, resulting in higher frequency of breakdowns and equipment failures, and adversely affecting operating efficiency (see also PCR, paras. 25, 26, 40). Financial Performance and Position 4.03 SPM's financial performance and situation are reflected in PCR, Tables 6A, 6B. SPM has been incurring heavy losses since it began operating which, by the end of 1991, had accumulated to TSh 14 billion, or US$48 million equivalent. Contributing factors include extremely low production and sales levels, negative margins on increased export sales dictated by the limited domestic market (40% of production, up from the 10% originally projected), and high operating costs as discussed in para. 4.01, albeit largely for reasons beyond the management's control. SPM is in a dire financial position, is seriously short of working capital, is unable to meet its current obligations, and continues to be a drain on the budget, while its future financial and economic viability remain uncertain. To ease SPM's financial plight, the Government has injected new equity funds, converted part of SPM's long-term debt into equity, and reduced interest rates on the remaining loans. Nonetheless, SPM is still in need of financial restructuring, and continued financial support will be required for the foreseeable future to sustain operations. Financial and Economic Rates of Return 4.04 Exani FRR and ERR were estimated at 9% and 11%, respectively -- marginally satisfactory (SAR, paras. 7.12, 8.05). On the basis of the revised project cost at the time of the follow-on operation, the ERR was 5% and, if all incurred expenditures by that time were taken as sunk costs, 20% (PR, para. 92). Re-estimated FRR and ERR are negative (PCR, para. 34 and Annex 1). The reasons for the unsatisfactory returns can be attributed primarily to SPM's very low production, and the array of factors impacting on its operating costs and revenue as detailed in paras. 4.01-4.03. Institutional Development 4.05 After seven years in operation, SPM continues, and will continue at least until 1994, to be run by expatriates. Concerted efforts at training, staff advancement, and succession planning have not fully succeeded in developing and sustaining a core of cadres. This has frustrated expectations to develop indigenous staff capable of replacing high level expatriate management and, as a result, SPM's reliance on expensive expatriates to fill these positions persists. Although a comprehensive training program was put in place early on and was successfully implemented over the years, SPM has been unable to retain many of the original trainees. Turnover among trained local staff has been high, as they sought more remunerative opportunities in the private sector. By 1992, the number of expatriates had been reduced to six, perhaps prematurely so, largely occupying key management and technical positions. Yet, at non-skill intensive levels, the mill is overstaffed by 50%, and there appear to be problems of work ethics (e.g., absenteeism) and staff morale (PCR, para. 28 and Table 4). 4.06 Production management systems (e.g, financial and cost accounting systems, management information and control systems) are not yet up to par -- computerized financial and cost systems have not been implemented due to inadequacies in the systems, lack of linkage between financial and cost systems, and lack of qualified staff. Process control procedures are inadequate, while an efficient system of preventive and routine maintenance and a spare parts inventory and control system have not been adequately developed, hampering mill maintenance. Supervision of maintenance and operations could be -9- strengthened. Finally, lack of automation in certain process activities has affected the quality of SPM's products. Environmental Concerns 4.07 The equipment designed and installed (e.g., effluent treatment plant, mechanical and electrostatic precipitators for the power and recovery boiler stacks) at SPM is adequate, and capable of controlling air and water pollution to acceptable levels -- provided they are maintained and operated properly. An environmental study carried out in 1987 established that the waste water treatment plant operated satisfactorily, and there had been no complaints of river pollution by downstream users. The study identified though certain inadequacies in the control of air emissions. Following the study's recommendations, SPM took remedial action, and the situation was rectified. Thus, during 1985-89, all discharge standards set and agreed upon by the National Environmental Council were achieved. However, from 1989 onward, the mill has had serious process problems due to lack of spares and consumables, and this led to an excessive discharge of solids to the effluent treatment plant and, in turn, in the discharge of low quality treated effluent. Lack of funds also has affected the operation of the air pollution control equipment. Thus, inadvertently, SPM has been unable to meet environmental standards consistently. It is apparent, that improvement in pollution control is closely related with improvements in SPM's process efficiency and financial health (see also PCR, para. 36). V. ISSUES 5.01 The key issue in this project relates to its design and the justification for the Bank's involvement. The Mufindi pulp and paper mill is the largest and most complex industrial project ever undertaken in Tanzania, with an investment cost amounting to US$300 million, and accounting for some 60% of total industrial investment in 1978-82. The mill, based on simple, established and versatile technology, is technically sound but substantially sub-optimal in scale (60,000 tons per annum) and operates at just over one-third of its rated capacity. It is notable, that annual consumption of paper products at appraisal was only 23,000 tons and that, even allowing for the optimistically projected domestic market growth, the project would have had to export part of its production until the early 1990s, and at a price that hardly covered variable costs even under ideal operating conditions (SAR, paras. 4.01-4.14). As scale economies are significant in pulp and paper production,V establishment of a minimum economic size plant in Tanzania (circa 200,000 tons a year) would have to be much larger than could be justified by domestic demand for many years to come to make it competitive at world prices, and financially and economically viable. 5.02 In grappling with the issue of the plant size, the final configuration and scale of the project reflected significant modifications in concept to reach an "optimum" between project size, cost, and financial and economic viability. But, as the project aimed at supplying the whole range of the paper needs of Tanzania, "of necessity, this has meant that diverse and sometimes complex processes have been included. Moreover, the cost of chemicals, most of which will need to be imported, and environmental considerations, have required that the mill be equipped with full chemical recovery and effluent treatment ' See M.A. Amsalem, Technology Choice in Developing Countries: The Textile and Pulg and Paper Industries, MIT Press, 1983, pp. 111-6; M. Roemer, "Resource-based Industrialization in the Developing Countries: A Survey," Journal of Development Economics, 6 (1979), pp. 177-9, and R. Skarstein and S.M. Wangwe, Industrial Development in Tanzania: Some Critical Issues, p. 150, and references cited therein. - 10 - facilities. This has led to a mill concept which is expensive in relation to the economy of the country. and to the scale of production" (SAR, para. 5.02, emphasis added). Also, the project concept emphasized the use of "appropriate technology" to lessen operating complexity, save on capital, and increase employment opportunities (SAR, para. 5.04; PAR, para. 4.01, footnote 7), notions alien in this capital and skill intensive process industry, which necessitated design and technology compromises and resulted in many operational drawbacks. 5.03 Other technologies, such as mechanical pulping, semi-chemical pulping, and the pulping of sisal or bagasse, were also examined. Significant reductions in plant capital costs could be achieved in some cases, but there was little scope for corresponding reductions in the cost of infrastructure and related items. "The overall effect has been a sharp loss of scale economies and econmic rates of ret " (SAR, para. 5.03, emphasis added). Although some 90% of the infrastructure would be financed outside the project, the cost of such facilities together with the technical assistance package proposed, raised the project cost by about 30% over and above what might be expected for a similar project where infrastructure and technology are already in place (SAR, paras. 5.20, 5.21). A phased approach, where certain facilities would be added only at a later date, was also examined. Under this approach, a very large proportion of the total expenditures would be required in the first phase; and although training and start-up would be simplified, the adverse financial and economic implications of high initial expenditures for delayed benefits were severe. "The project concept now being proposed represents a reasonable compromise between project cost and complexity on the one hand, and economic benefits on the other" (SAR, para. 5.03). Furthermore, it was acknowledged at appraisal that the risks of proceeding with the project were significant given the very large size and complexity of the project; the mill would have to be much larger than justified by market demand, while the local market might not grow as fast as projected, thereby necessitating a higher volume of exports and resulting in increasing loss of revenue due to lack of competitiveness; and, finally, the FRR (9%) was unsatisfactory while the ERR (11%) was marginally satisfactory (SAR, paras. 8. 13-8.18). 5.04 The Bank's management rationalized the support for the project by arguing that: "develpmen of this project was justified; only its appropriate timing was in question. The proiect is consistent with the Government's Basic Industry Strategy and will lead to significant foreign exchange savings through import substitution. .in view of the limited absortive capacity of other priority sectors and the lack of other industrial proiect alternatives. it was appropriate from both the point of view of the Government and the Bank to commence a large-scale industrial pro*ect such as this at this time. No pipeline of incremental smaller industrial proiects with higher priority existed" (Decision Memorandum, 11/8/1977, emphasis added). Clearly, the rationale for supporting such an inordinately high capital, skill and import intensive project of sub-optimal scale which defied basic economic and market considerations was shallow and self- serving. The Bank's technical staff was called upon "to generate" a project, and come up with a design reflecting major technical and economic compromises which seriously affected the viability of the project. Indeed, the recalculated FRR and ERR turned out to be negative, while SPM is in a precarious financial condition and its future viability uncertain. In the Tanzanian circumstances. and strictly on technical. economic. and financial grounds. the proiect should have never been undertaken. The Government's ambition to implement an ill-conceived industrial strategy, the donor community's eagerness to assist, and institutional pressure to lend within the Bank coalesced, and led to the Bank's involvement in this unsuccessful operation. 5.05 By the time of the appraisal of the follow-on project, the Bank had acknowledged the array of operational problems the company would face on completion (Decision Memorandu, March 24, 1983; para. 4; Intemal Memo, April 12, 1983, paras. 4, 6, 7). In effect, Stage II was deemed as "a rescue operation for an earlier Bank-financed proiect which is in serious trouble because of both the country and the project factors...some Bank support for this proposed operation is justified, in part to avoid the - 11 - embarrassment to all concerned if this expensive mistake were to be abandoned mid-stream.. .even after the proposed operation, the project would remain in precarious health..." (Internal Memo, April 18, 1983, para. 1, emphasis added). "...The proposed proiect... will grobably draw adverse attention as an a0arent supplemental. salvaging operation" (Internal Memo, April 12, 1983, para. 5, emphasis added). 5.06 It is noteworthy that at the Board presentation of the first operation, Executive Directors voiced concern whether, inter alia, "such a large and risky investment in a project that involved relatively little - and expensive -- job creation reflected an appropriate choice of development priorities for a country that faced major problems in agricultural production" (Summary of Board Discussions, January 4, 1979, para. 35). Similarly, at the Board presentation of the follow-on project, the Bank staff acknowledged that the Mufindi Pulp and Paper Project was not an "ideal project," and that the Bank would not have supported the project "were it a brand new one" (Summary of Board Discussions, May 19, 1983, paras. 30, 31). There can be no doubt that the Bank exercised poor judgment in going ahead with this project. By the same token, it is unlikely that the Government would have initiated the project if it had to borrow the funds in the world capital markets at going interest rates and terms -- even if it could have recourse to such funding. VI. OVERALL ASSESSMENT AND SUSTAINABILITY 6.01 The Mufindi integrated pulp and paper mill was justified by the Bank on grounds that it was given high priority by the Government, because it involved processing of a domestic resource and catered to basic needs; would ensure a dependable supply of paper to the country at stable and reasonable prices; and would provide employment and save foreign exchange. The overall goal of efficient import substitution was not achieved. The project does make modest use of domestic resources and labor, but at an inordinately high social cost. The size of the mill, much less than the minimum economical, still is excessive in relation to market demand; the prospects for domestic market growth are dim, while exports even at full capacity utilization are not competitive and result in substantial losses.V Institutionally, the company remains weak. SPM's operating efficiency is very low, and the company has sustained heavy losses. SPM cannot meet its current obligations, continues to be a drain on the budget, and is in dire need of physical rehabilitation and financial restructuring. The Government is in the process of privatizing SPM, as a way to wean the company from the budget, attract new capital, and ensure sound management. The task at hand is difficult, and at this juncture the outcome of this effort remains uncertain. In the circumstances, the sustainability of the project is unlikely (see also PCR, paras. 37-41). Cleariy. Bank support for a project of such a configuration and magnitude (exceeding US$350 million to date) was not jusified. See also PCR, para. 42(f). 2' While the initial appraisal was performed under restraining conditions, the follow-on operation was dictated by the expediency of completing the project and ensuring that it will not remain idle (paras. 5.01-5.05). On the other hand, the cancellation of the planned conversion of the boiler to burn wood fuel and reversal to imported coal at the second stage operation right after Board approval suggest less than thorough investigation of workable options. - 12 - VII. LESSONS OF EXPERIENCE AND RECOMMENDATIONS 7.01 The project experience is instructive in many respects. Further to the lessons aptly drawn in the PCR (paras. 42, 43) some additional observations and recommendations are offered below. 7.02 With respect to proiect conceptualization and rationalization, SPM's experience suggests the following. (i) There are inherent difficulties in pursuing an industrial strategy stressing the rapid development of an indigenous producer goods industry at an early stage of industrialization, since the deeMning of the industrial structure is constrained by crucial threshold relations (e.g., size of plant and market, technology and skills, attitudes and values, organizational structures, institutional arrangements), which cannot be circumvented with impunity. (ii) Impatience with and unwarranted acceleration of a country's industrialization effort are likely to entail heavy economic, financial and social costs down the road, as the evolutionary development of human capital. institutional capacity, and cultural parameters set binding constraints and determine the pace and sustainability of the industrialization process. (iii) The Bank's unwavering support and uncritical commitment to the country's socialist experiment, which for a long and critical period set the tone on policy matters and lending operations, suggests that the Bank's effectiveness and development impact can be compromised if the Bank's top managers make poliey and lending commitments impulsively, and the technical staff is then called upon to make good on such commitments - thus allowing no room for airing internally important policy and technico-economic issues. Discretion is called for to prevent erosion of the staff's professionalism. stifle staff initiative, participation and forthrightness. thwart dissenting views. and undermine the credibility and effectiveness of the in-house decision-making process. A two-way exchange is more likely to ensure transparency in the decision-making process. enhance the operating efficiency of the institution, and minimize unwelcome proect outcomes. the incidence of which affects the quality of the Bank's portfolio. tarnishes the Bank's image. and reflects on all Bank staff. (iv) Project aid has encouraged the recipient to launch large (in relation to the size of the domestic market, yet sub-optimal) capital and skill intensive projects. Indiscreet external financing may inadvertently end up supporting injudicious industrial investments. while it legitimizes ideologically colored but unsound industrialization policies. Moreover, the launching of such unproductive projects creates a real burden for the country by raising its external debt service obligations without commensurate benefit. (v) Policy-induced distortions (e.g., unsound industrial, fiscal, infrastructure, monetary and foreign exchange policies) tend to undercut the positive contribution of individual projects to economic development. Monitoring of the Borrower's entire investment program with respect to, inter alia, aggregate size, composition, and availability of foreign exchange and local funds to meet implementation and operational requirements, becomes essential. if there is to be some assurance that aid funds. which do have an opportunity cost. are put to productive use. 7.03 The experience with proiect design. apraisal and implementation provides some useful insights. - 13 - (i) Djsiga, an all-encompassing concept involving technico-economic, institutional and policy dimensions, is a critical phase in the proiect cycle, with telling consequences on proiect outcome. Unsatisfactory project outcomes ranging from outright failures, to changes in scope during implementation, to poor operating performance, or to uncertain sustainability, can be traced back to deficiencies in design. Conversely, successful projects appear to owe much to the fact that their configuration was the outcome of circumspect and painstaking scrutiny. (ii) Shortcomings in the area of project selection, design and implementation generally relate to the undue emphasis on "appropriate technology" in areas where, by virtue of the nature of the industry, applicability is very limited; excessive reliance on outside "specialized firms" to carry out market analyses. resulting in optimistic demand proiections: failure to respect the critical imortance of scale economies; and the Borrower's insufficient budgetary resources and delivery capacity, as reflected in the Borrower's inability or disinclination during implementation to carry out important undertakings, e.g., provision of infrastructure. (iii) Painstaking preparatory work is of critical importance in appreciating resource endowment, market developments, binding macroeconomic constraints, and the modus prandi of key economic and institutional parameters; in identifying deficiencies in institutional structures and policies; and in enhancing the Bank's capability to design purposeful projects. Moreover, a deep understanding and appreciation of the cultural background, political realities, institutional arrangements, attitudes and, more generally, of the way decisions are taken and implemented in a country can lead to more practicable solutions to emerging problems in project design and implementation. (iv) Subtle proiect implementation problems can never be avoided completely. However, their incidence can be reduced by assessing early on the risks and uncertainties associated with new process technology transfer, vetting more thoroughly technological, technical, and market dimensions during project preparation, developing the requisite institutional capability of the sponsor, and injecting the proper technical assistance inputs. Close supervision can help elicit responses swiftly when difficulties emerge so as to minimize their adverse impact. Nevertheless, there are certain elusive issues that require constant attention and review because of the difficulties in devising effective controlling mechanisms. They include depth and continuity of borrower commitment, management effectiveness, availability of counterpart funds, compliance of contractors and subcontractors with specified standards of quality and performance, early detection of flaws in equipment design and fabrication, and the precariousness of demand and price forecasts. (v) Since covenants committing the Government to provide infrastructure in a timely fashion do not necessarily guarantee compliance, there is need to make sure early on during project preparation that such facilities are being implemented and that progress is being duly monitored. (vi) To ensure uninterrupted production, early apreciation of existing or potential flaws in backward-linked activities (e.g., production, processing, pricing, marketing) impacting on the availability, quality, and the regular flow of raw materials supply is crucial. (vii) Experience affirms: the high pay-off of using competent and highly experienced engineering firms from project preparation through operation; the importance of keeing the organizational structure for project implementation simple, defining clearly the functional responsibilities between sponsor and consultants; designing proiect management arrangements in such a way - 14 - as to ensure efficient decision-making authority and adequate monitoring of contractor performance, based on pre-determined criteria; the cost-effectiveness of stipulating bonus/penalty clauses tied to implementation schedules for contractors; and the need to develop realistic project implementation schedules, factoring in economic, policy, and environmental constraints and the sponsors' experience. (viii) Timely availabilily of ecialized knowlede and experienced staff can help avert or correct promptly design problems. Clearly defined obligations of the engineering and advisory groups, and establishment of a goo ra2Wrt between sonsor. advisors and contracto are crucial for problem solving and smooth project execution. Also. the frequency. but more imortantly. the sensitivity, skill and effectiveness of the Bank's supervision effort can influence project implementation and outcome. (ix) Provision of training for managers, operators and craftsmen is not enough. In parallel, steps would have to be taken to ensure that. after completion of their training, the trainees are adequately comensated to induce them to stay on and not seek more remunerative opportunities elsewhere to the detriment of the sponsoring the program enterprise - albeit not to the country. (x) In view of the persistent difficulties SPM is facing, a realistic evaluation of its prospects. financial situation. and conditions for sustainable growth is long overdue. In this regard, privatization may be a viable alternative, if indeed it can provide a practical escape to SPM's impasse. - 15 - Attachment 1 TANZANIA MUFINDI PULP AND PAPER PROJECT ORGANIZATION CHART (ORIGINALI TNDCISPM AVISEW PROJECT MANAGEMENT GROUP- ENG: CONSULTANT lCONTRACTOR ORGANIZATION CHART (REVISED) SPM BOARD OF N CHAIRMAN AND DIRECTORS MANAGING DIRECTOR IGENERAL PROJECT DIRECTOR MANAGER LEGAL ADVISER OPERATIONS MANPOWER AND MANAGER ADMIN. MANAGER PUBLIC RELATIONI OFFICER [CHIEFACCOUTN PROJECT IMPEEMENTATION, CNSULTING MANAGER -ENGINEER PROJECT ACCOUNTANT CONSTRUCTION TECHNICAL CO-ORDINATOR SPECIALISTS COST ACCOUNTANT ACCOUNTANT Source: NDC/SPM.  - 17 - PROJECT COMPLETION REPORT TANZANIA MUFINDI PULP AND PAPER PROJECT (LOAN 1650-TA/CREDIT 875-TA) AND TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT (CREDIT 1370-TA) June 12, 1992 Southern Africa Department Africa Regional Office  - 19 - PROJECT COMPLETION REPORT TANZANIA MUFINDI PULP AND PAPER PROJECT (LOAN 1650/CREDIT 875-TA) AND TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT (CREDIT 1370-TA) PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE Proiect Identity Names: Mufindi Pulp and Paper Project (Loan 1650/Credit 875-TA) Technical Assistance and Energy Conversion Project (Credit 1370-TA) RVP Unit: Africa Region Country: Tanzania Sector: Industry Backaround 1. At independence in 1961 and during the following years Tanzania had only a limited industrial sector dominated by private firms. However, with the policies laid down in the Arusha Declaration in 1967 industrial development was given a high priority, the primary focus being on import substitution of essential consumer goods and meeting the basic needs of the population. In 1974 the Basic Industrial Strategy furthermore placed emphasis on the use of domestic resources in the production of the import substitutes. Important in both policies was the centralization of the control and ownership of major manufac- turing plants in Government parastatals, and soon the public sector accounted for more than half of the value-added and of the employment in industry. Most important among these parastatals was The National Development Corporation (NDC), established in 1964. 2. Almost half of Tanzania's land area is classified as forest land. The dominating part is open woodland of little commercial value, which supplies fuel-wood and timber for the local population. The most valuable forest resources consist of about 70,000 ha of softwood plantations. About 40,000 of these are located at Sao Hill some 500 km south west of Dar es Salaam. With the purpose of a further development of these plantations for utilization in the production of timber and paper the Bank approved a loan of US$7 millon for the First Sao Hill Forestry Project in 1974 and a credit of US$12 million for the Second Sao Hill Forestry Project in 1982. Both projects have been successfully implemented. - 20 - Proiect Obiectives and Description 3. The Bank's involvement in the Mufindi Pulp and Paper Project has been continuous since the late 1970s, but there are two separate operations being reviewed in this PCR. The first Bank operation, covered by Loan 1650-TA and Credit 875-TA, was for the construction of a pulp and paper mill. The second Bank operation, covered by Credit 1370-TA, was to support the initial operation of the mill and to train the Tanzanians to take over its operation and to manage the Company. 4. The identification of a paper production project in Tanzania in accordance with the Basic Industrial Strategy started in the mid 1970s. After a number of studies the project was defined and appraised and in 1978 the Government of the United Republic of Tanzania, GOT, requested financial assistance from a number of bilateral and multilateral agencies to help finance a pulp and paper project in the Mufindi region of south-central Tanzania. The total financing was estimated to be US$252 million. GOT pledged the equivalent of US$52.2 million equivalent in local currency, and the foreign exchange component was arranged through the following donors: - Sweden, through the Swedish International Development Authority, SIDA, a grant of SEK200 million (US$45 million) - Germany, through Kreditanstalt fUr Wiederaufbau, KfW, a grant of DM67.9 million (US$34 million) - Kuwait, through the Kuwait Fund for Arab Economic Development, a loan of KDS million (US$18 million) - United Kingdom, through the Commonwealth Development Corporation, CDC, a loan of E10 million (US$20 million) - OPEC Special Fund, loans equivalent to US$10.5 million - Nordic Investment Bank, NIB, a loan of US$12.5 million - The World Bank, an IBRD loan of US$30 million (Loan 1650-TA) and an IDA credit of US$30 million (Credit 875-TA). 5. The project concept was to produce most of the paper used in Tanzania in order to substitute imports and to utilize local resources. The wood was to be supplied from the Sao Hill plantations supplemented by waste wood from the TWICO saw mill, also located at Sao Hill, and by wattle from the Tanganyika Wattle Company. The coal and the limestone were to be provided by the State Mining Corporation from national mines, and the salt for production of chlorine and caustic soda was to be delivered from the coastal region. 6. The project consists of a fully integrated pulp and paper mill including a Forestry Division to harvest and deliver wood. The plant consists of the following main sections: a wood preparation plant, a chemical pulp mill producing bleached and unbleached pulp, a mechanical pulp mill, a paper mill with two paper machines, a paper finishing plant, process steam and power supply plant, an electrolytic chlorine/caustic soda plant, a chemical recovery system, - 21 - a waste water treatment plant, technical control department, work shops, stores, and offices. 7. The construction of a local township with houses and additional facilities for the mill operating staff and the forest workers was not included in the project financing, as GOT expected to obtain this financing from other sources. 8. Also excluded from the project financing was the infrastructural development of the TAZARA railway transportation, the escarpment road from Sao Hill to the mill, and the TANESCO electrical power supply. This essential infrastucture was to be financed from other sources and implemented by GOT. 9. The Southern Paper Mills Company, SPM, was established as an NDC subsidiary to build and operate the mill. Proiect Desiqn and Oroanization 10. The mill is located in a remote area in the Mgololo Valley some 600 km south west of Dar es Salaam. This location was chosen because of its proximity to the Sao Hill wood resources, the Kigogo Ruaha River water supply and the TAZARA railway transportation facilities. Apart from the railway there was virtually no local infrastructure. 11. The options for choice of the technology and the design capacity were studied and discussed extensively before the choice was made. The doubt behind the actual choice is reflected in the appraisal report which charac- terizes the choice as a "reasonable compromise". The problem was that the capacity had to be high enough to obtain a satisfactory economy of scale, but was limited by the small Tanzanian market. Large scale export to the world market was not considered viable. Consequently, a design capacity of 60,000 tpy was chosen. Furthermore, the mill had to produce a wide variety of paper grades to fit the domestic market, and even after careful attention was given to choosing technology appropriate to Tanzania, the resulting mill was complex and required a staff with industrial skills and experience for its operation and maintenance. Such skills were lacking in Tanzania and the need for extensive training both locally and abroad was foreseen. 12. The project included provisions for reduction and treatment of effluents and emissions according to internationally acceptable standards. A full environmental impact study was carried out in connection with the detailed design, and NDC agreed to monitor the future environmental impact of the project. 13. A number of market and price studies were made in connection with the appraisal. The projections indicated that the project would, for a few years, have a capacity which was slightly higher than the Tanzanian consumption. The surplus was foreseen to be temporarily exported to the African market at reduced prices. 14. As this was the largest and most complex industrial project ever undertaken in Tanzania, the financiers insisted upon a very comprehensive project organization to ensure timely implementation, and the establishment of - 22 - this organization was formulated as a covenant in the financing agreements. According to this organization the NDC project team was to be assisted by a Project Advisory Company, a Project Management Company, and a Project Engineering Company. In addition, it was foreseen that an expatriate management team would be required for some years after commissioning to operate the mill and train the local staff. Proiect Implementation 15. The coordination of nine loans, credits and grants was complicated, and partly because all the financing agreements contained a cross-effectiveness clause, the availability of funds was delayed for about one year until April 1980. This caused a equal delay in the start of implementation. Of the original E10 million CDC loan, US$10.8 million equivalent was cancelled due to Tanzania being delinquent on servicing other CDC loans. Also, US$1.7 million equivalent of the NIB loan was not disbursed when NIB was unable to get export guarantees on Nordic equipment during the latter part of the project implementa- tion when the overall economic situation in Tanzania was deteriorating. As a result, there was a temporary gap in the foreign exchange financing which was eventually closed by the Yugoslav firm which undertook the erection of the mill with a US$7.7 million supplier credit. Throughout the implementation, there was also a shortage of local funds because of more pressing priorities which faced the GOT at that time. 16. In spite of these financial problems, the design, construction, purchasing, installation and commissioning were completed in a reasonably efficient manner, and the mill commenced operation in late 1985, 3 years later than envisioned in the SAR, but less than a year longer in elapsed time. The finished plant is of high quality, equivalent to similar plants in industrial- ized countries, except for its lower production capacity. 17. The construction of the local township for the operating staff and their families was the responsibility of GOT and was much delayed due to difficulties in finding the necessary financing. The lack of progress became a major issue and took up an unreasonable amount of attention. Eventually the Kuwait Fund approved an additional loan of US$25 million to build a township and thereby avoided delay in the recruitment of staff and the start-up of the mill was able to proceed immediately upon physical completion. 18. During implementation it became apparent that the multi-level hierarchy with three companies and the owner, all with different backgrounds and attitudes, made decision-making difficult. In fact either the Project Manager or the Project Engineer, both eminent consulting firms, alone could have assumed responsibility for project design and management and probably would have done so more efficiently. Some modifications of the organization therefore had to be introduced during the implementation. 19. As the physical completion of the project drew near and operation was imminent, it became clear that a much more extensive program of management and operational assistance and training would be required than that envisaged in the SAR. An Operation Management Contract, OMC, was therefore designed to provide for 6 years of expatriate management of SPM, including extensive training of Tanzanians in the operation, maintenance, and management of the - 23 - entire Company. Furthermore, it was realized that essential inputs, particu- larly coal and salt, would not be available from domestic suppliers, and additional foreign exchange would be required for imports. The future uncertainty of domestic coal supplies resulted in a decision to convert the boiler to burn wood fuel derived from logging residues. The foreign exchange cost of the boiler conversion and the associated forestry equipment to harvest, process, and deliver forest bio-mass, the imported inputs, and the OMC, was estimated at US$45 million equivalent, and a second stage project was appraised and approved in 1983 to provide additional financial support to assist SPM over the difficult initial operating phase. The GOT pledged US$5 million equivalent in local currency, and the foreign exchange was provided by a Swedish Grant (SIDA) of SEK100 million, a German grant (KfW) of DM20 million, and an IDA credit of SDR16.7 million (Credit 1370-TA). 20. Through an international competition the OMC was awarded to an internationally well known consulting firm in joint venture with a successful developing country pulp and paper manufacturing company. The OMC covered a period of 6 years and the contractor was given full management responsibility for SPM, including supervision of the final construction, commissioning, operation, financial control, sales and training. The contractor brought in 109 expatriates in 1984 and the number was increased to 134 expatriates the following year. An extensive training in operation of the installations was organized in order to enable locals to take over with the result that the number of expatriates was systematically reduced and at project completion only 6 remain. 21. In spite of much good will and cooperation between the expatriates and the local personnel, the capacity utilization has not reached the expectations at appraisal. In fact the capacity utilization has never exceeded more than about 50% on a yearly basis. The main reason for the low capacity utilization has been the slow and insufficient development of the infrastruc- ture. The mill start-up was delayed because of late completion of the transformers by TANESCO, and the production has continually suffered from power cuts. The TAZARA railway siding was finished in time, but the mill has been closed for considerable periods because of insufficient railway wagons to transport finished paper to market. The railway wagon shortage was subsequently solved through the purchase of 50 specially designed wagons with the financial and technical assistance of SIDA. The product transportation problems were accentuated by the lack of appropriate equipment for handling paper for export in the port of Dar es Salaam. 22. The road down the Mufindi Escarpment which connects the forest with the mill was considerably delayed and has been a continual source of operational problems causing shortages of wood and occasional mill stoppages. Foreign exchange financing of US$25 million equivalent was provided by the EEC, and although the road was expected to be available at mill start-up, a combination of over-budget bids, lack of sufficient foreign and local financing, poor performance of the original contractor (who had to be replaced), the need to re- design the road to fit the available remaining funds, all contributed to a major delay, and the road did not open until mid-1987, one and a half years after mill start-up. In the interim a temporary and much longer road was used to by-pass the escarpment, and this added considerably to the wear and tear on the logging trucks and increased delivery cost of wood. The escarpment road suffered from - 24 - mud slides due in part to the reduction in construction standards dictated by the lack of funds. Although the maintenance of the road is the responsibility of the Department of Works, other priorities have limited the Department's attention to the road, and all maintenance and repairs have been undertaken by SPM on an emergency basis. 23. While the poor production performance of SPM has in the first few years been largely the result of infrastructural problems beyond the control of SPM, since 1989 problems have arisen also from the mill itself. A number of break-downs have been caused by lack of a efficient preventive maintenance in combination with the heavy wear on the machinery as a result of long periods of intermittent operation. Lack of spare parts and tools and an insufficient control of stocks contribute to the modest performance. Particularly hard hit has been the power boiler, and the mill has suffered extended shut downs for lack of steam. An extensive rebuild of part of the boiler is currently being implemented. Under the current production level, the woodlands division has no difficulty meeting the wood requirements. However, much of the logging equipment, particularly skidders and log delivery trucks, needs intensive overhaul and in many cases replacement. This is quite normal for this type of logging operation, particularly considering the extended use of the temporary delivery road before the escarpment road was completed. Additional logging equipment will be required when the mill reaches full capacity. 24. The availability of foreign exchange for the purchase of essential imported inputs has been a continuing problem for SPM and is a contributing factor to the mill's poor performance because of the difficulties in maintaining an appropriate inventory of spare parts. In the earlier years of operation SPM had no option but to generate its own hard currency through exports, even though export prices barely recovered variable cost. Losses on exports have contributed heavily to SPM's poor financial position. During this period SPM was permitted to retain 100% of its export earnings and managed its overseas purchases through an account in London. Since the institution in Tanzania of a system of Open General License, SPM no longer operates its own foreign exchange account, and access to foreign exchange is more difficult. 25. Faced with continuing poor performance, SPM commissioned an independent study in 1990, financed by KfW and undertaken by Price Waterhouse, to determine what should be done to increase capacity to a sustainable level and make SPM financially viable. This study recommended a financial restructuring package plus additional investments amounting to US$25 million to replace some logging equipment, purchase essential spare parts, and make some minor modifications to the mill equipment. It was also recommended that the OMC be extended to 1993. SPM, GOT, and the financiers agreed to pursue the recommen- dations of this study. GOT pledged new equity funds, converted some of SPM's long-term debt to equity, and reduced interest rates on the remaining loans. To cover the foreign exchange costs of this program SIDA and KfW agreed to contribute 50 million SEK and 20 million DEM respectively, and IDA agreed to extend the closing date on the approximately US$3.3 million undisbursed funds from the existing credit (1370-TA) which would otherwise have been cancelled. 26. At the time of preparing this PCR, the financial restructuring agreed to by the GOT has been put in place. The IDA Credit has been disbursed and the Credit has been closed. SIDA has disbursed a portion of its committment - 25 - but because of continuing poor performance by SPM, KfW has declined to disburse any of its portion. Consequently few of the equipment changes have been completed and no improvement in operation has been achieved as yet. Proiect Results 27. The construction of a modern pulp and paper facility in Tanzania was completed as planned. Although the completion was delayed 3 years from the estimate in the SAR, total elapsed time for the mill construction was less than 1 year longer than anticipated. In spite of delays in construction, the installed cost of the plant was only 2% higher than estimated in the SAR. 28. From a base of essentially no industrial background, the training of the Tanzanians has been successful to the point that they now have all the technical expertise to operate this complex modern factory equipment and its associated forestry equipment and routinely do so. Extensive training has also been successful in the area of mechanical and electrical trades. Many of the trained maintenance staff have left SPM for better paying jobs in the private sector, and while a benefit still accrues to Tanzania, loss of these trained staff has been a serious problem for SPM. 29. A major objective of the project was to substitute paper imports by local production. In 1991 total domestic consumption was 17,000 tons. Of this, SPM supplied 13,800 tons or 81%. In the same year, exports sales were 9,100 tons. 30. Another objective was to produce the paper from Tanzanian resources. Today Tanzanian resources represent 63% of the direct manufacturing cost, of which wood is 7%, domestic power is 23%, and labor and administration 14%. At appraisal it was visualized that all salt and fuel would be supplied from domestic sources, but this has only been partially achieved due to slow development of the local supplies and the necessary infrastructure to support them. In 1991, some progress was made in switching to domestic salt and coal, but the reliability of the supply, and the quality of the coal have exacerbated SPM's operating problems. Up to now, SPM has therefore used a combination of imported and local coal in the power boiler, but is now studying the possibility of using imported oil. While the use of oil to generate steam is expensive, requires National expenditure of foreign exchange, and might appear to be a retrograde step, it could have a major impact on improving capacity utilization because of its relative ease of operation resulting in a more reliable steam supply. 31. The objective under the second project of converting SPM's boiler to allow replacement of imported coal with logging residue has not been achieved. The logistics of chipping forest residues and transporting the material to the mill proved to be too costly. Furthermore, operational difficulties with the boiler, even when using conventional fuel, were a major problem restricting mill production, and the management decided against introducing further complications with experimental fuel. The boiler conversion program was focused instead on improving the utilization of local high-ash coal. 32. The paper mill is technically sound and has demonstrated for short periods its ability to produce a variety of good quality products at its design - 26 - capacity of 60,000 tpy. The mill operation is, however, dependent on a weak infrastructure, which during the implementation period has caused frequent stoppages, resulting in low capacity utilization and excessive wear on the machinery and equipment. The result has been negative financial results throughout the period so that insufficient funds have been available for the required maintenance and replacement. 33. The financial statements of SPM are given in Part III, table 6B. They show that the expectations at appraisal have not been achieved. Instead of generating an operating profit after the third year of operation, SPM is still making an operating loss after 6 years of operation. The main reason is low production which has remained below 50%, and SPM continues to make substantial losses, which up to 31 December 1991 have accumulated to Tsh 14 billion (about US$48 million at the current exchange rate). 34. Clearly the financial internal rate of return estimated in the SAR, 6.8% after taxes, has not been achieved. In fact, since the current operation generates only cash losses, the rate of return is negative. The economic rate of return was estimated in the SAR at 11.3%. The economic rate of return has been recalculated on the basis of actual results achieved up to the end of 1991, and expected performance to the end of the century. The assumptions made in the SAR to convert financial values to economic values, and the portion of infrastructural costs to be included, have been retained in order to make the calculations comparable. The economic rate of return is now estimated at minus 5%. This poor result is due almost entirely to the low production. The SAR assumed that within five years of the start of construction, the plant would be producing at a level sufficient to generate a positive cash flow, and that after four years of operation full capacity would be achieved. This was not an unreasonable assumption for a pulp and paper mill in another part of the world, but was clearly over-optimistic for Tanzania. The current estimate of EIRR, minus 5%, is obtained even under optimistic assumptions about future production. Details are given in Part III, Appendix 1. 35. The establishment of the mill has had an important impact on the local social environment. The township which was constructed to house most of the operational staff represents today a thriving community with schools, medical facilities, community clubs, sports facilities, etc. In addition an agricultural program has been developed, which provides the inhabitants with fresh meat, dairy products, poultry, fish, fruit and vegetables. 36. An environmental study was carried out by a Swedish consulting firm two years after the start-up of the mill. The consultants found the waste water treatment plant to operate satisfactorily but some imperfections were pointed out as to the emission to the air. Remedies were indicated and the mill has subsequently taken appropriate action. There have been no complaints of pollution in the river by downstream users. Neither has there been any complaint of odor or other atmospheric discharges from the local inhabitants, including the operators of the tea plantations at the top of the escarpment. - 27 - Proiect Sustainability 37. At the present level of production and sales, SPM is not financially sustainable and its continued operation under current conditions is difficult to support. 38. During the early years of operation, SPM exported paper in order to earn foreign exchange, even though such sales generated an overall loss. To partly make up for these losses, domestic prices were set much higher, as much as double the export prices. However, under the more open market conditions prevailing now in Tanzania, SPM's domestic prices are essentially set at the equivalent cif prices. 39. The mill is basically sound, consisting of high quality equipment equal to that used in mills in industrialized countries. Of prime importance is that production is based on a wood resource of high quality in species well suited to papermaking, which with proper management is capable of supplying wood in perpetuity to the mill running at full capacity. The Tanzanian operating staff have been well trained and have all the necessary technical skills to operate and maintain the plant and forestry equipment. The market potential in Tanzania and the neighboring countries of the PTA group can easily absorb the total production at full capacity. Financial projections indicate that at present costs and prices and about 40,000 to 45,000 tpy production (about 70% of design capacity), the mill can generate a positive cash flow before debt service. 40. Much of the earlier difficulty with infrastructure has been corrected, and the current poor performance is mostly due to equipment failures, primarily in the steam generating plant. Clearly there is an immediate need for some physical rehabilitation of the plant, a situation which is not surprising given the past history of the plant -- it has been in operation for seven years under severe stop-start conditions. 41. To turn SPM around and make it financially viable, the most pressing objective is obviously to increase production and sales volume. The key to achieving such a turn around is privatization. The GOT is pursuing this course of action, and has announced its agreement to allow majority private ownership. Initial discussions have already been held with two foreign pulp and paper companies and the GOT has requested IFC to assist in the privatization process. To make privatization work, the GOT will have to play an active role in securing the wood supply, undertaking permanent repairs and maintenance of the escarpment road, ensuring a reliable power supply, and taking over much of the social infrastructure associated with the SPM township. Bank Performance 42. The Bank has had the role of coordinating cofinancier and has been an active promoter in the original construction project and in the subsequent project providing post-construction management assistance. Throughout the implementation of both phases, the project has been closely supervised by senior staff -- during the critical construction stage, three missions per year consisting of Division Chief, Pulp and Paper Engineer, and Financial Analyst - 28 - supervised the project and provided a wide range of advice on all aspects of the project. The following lessons may be learned: (a) At the time of appraisal, expectations for Tanzania's economic development were high, and this is reflected in the Project SAR in which the Bank was too optimistic regarding the growth of the domestic market, and the development of infrastructure essential to the implementation and operation of the project. The difficulties for the implementing agencies in a basically non-industrialized society to adjust to the challenges of implementing a large and complex project under difficult circumstances were clearly under- estimated by the Bank. (b) The expectations for capacity utilization in the SAR were high -- 50% the first year, 70% the second and full capacity after 4 years. The weak physical, social and technological infrastructures and other local conditions should have signalled the Bank to have more modest expectations. (c) The project was started before the necessary financing had been found for development of vital infrastructure such as the Escarp- ment road and the township. If all the necessary financing had been available before start of implementation serious delays might have been avoided. (d) The rather complex project organization, required by the Bank and the other cofinanciers turned out to cause much friction during project implementation. A more simple organization with fewer participants might have been more efficient. However, the Bank reacted quickly to the need for a more comprehensive OMC and its financing. The need to be flexible in such matters during project implementation is well illustrated in this project. (e) The project is the biggest industrial investment in Tanzania to date. During the implementation period more than 40 other Bank financed projects were under implementation. More than 10 were industrial projects and a similar number were infrastructure projects. In the same period a great number of bilateral projects were implemented. The fact that GOT was not able to fulfill all covenants and other obligations may originate from an overestima- tion by the Bank of the managerial and financial capacity and capability of GOT, the relatively short industrial tradition of Tanzania taken into consideration. (f) This project has proven to be too difficult for Tanzania and with hindsight should probably not have been attempted. However, at the time of appraisal the Bank and the Borrower were confronted with a difficult dilemma: On the one hand, the project had an excellent raw material source and a ready market and it would clearly fit Tanzania's development strategy -- on the other hand the project was complex, had relatively low financial and economic rates of return, and would severely tax the abilities of the Borrower to implement it. The existence of the Bank-financed Sao Hill forest - 29 - plantation, which was ready for harvesting, and the projections of growth in the domestic demand for paper, appeared to justify the establishment of a paper mill to supply Tanzania's domestic demand. Such a project would be in line with Tanzania's development strategy, established by the Arusha Declaration of 1967, which emphasized industrial development, particularly of industries providing subsitution of imported goods. However, the size of both the domestic market and the wood resource dictated that the paper mill should be about one third the capacity of internationally competitive paper mills being built at that time. As the industry is highly capital intensive, building a small mill was clearly risky. Not only is the mill small, it is also complex: The paper market in Tanzania, as in any country, demands a wide variety of paper grades: cultural papers such as newsprint, writing papers, printing papers, as well as industrial grades such as cement sack paper and linerboard. To produce this multiplicity of grades requires a complex plant consisting of two paper machines, mechan- ical and chemical pulp mills, a pulp bleaching plant, an electro- chemical plant to supply the bleaching chemicals, a full chemical recovery system, high pressure steam boilers, co-generation facilities for part of the electric power requirements, and extensive environmental protection measures including an external primary and secondary effluent treatment plant. In addition to the plant itself, it was necessary to provide essential infrastructure including railway connections, a road for wood delivery, connection to the National electric grid, a township for the employees, and all of this was to be accomplished in a remote and totally undevel- oped area of Tanzania. Thus, while the wood supply and the market were deemed to be assured and the building of a paper mill would fit in well with Tanzania's development strategy, the Bank failed to attach sufficient importance to the financial and technical management skills which would be required on the part of the Borrower to coordinate the implementation and the operation of such a complex project, and to develop the supporting infrastructure in the country. The inexperience of the Borrower with such complex projects, coupled with the unexpectedly poor economic performance of Tanzania, which depressed the domestic paper market and restricted SPM's access to foreign exchange, has resulted in a project which, judged on its financial and economic impact, is a failure. If the foreign exchange spent on the project had been used instead to simply import paper, the volume which could be imported would be approximately equal to SPM's actual production up to the end of 1991 plus the optimistic projection of production up to the end of the century. Borrower Performance 43. Table 7 in Part III of this PCR contains a review of the Borrower's performance. It shows that GOT, NDC and SPM generally have had difficulties in meeting the agreed covenants and other obligations. The main lessons that can be learned by the Borrower from the project experience are the following: - 30 - (a) A project concept based on the Basic Industrial Strategy which implies a production of paper for the Tanzanian market only and of all relevant grades used in this market is a very difficult business concept. (b) Implementation of exploitation of national raw materials (coal and salt) takes time. (C) Financing and implementation of development of infrastructure (Escarpment road and township) should be tightly coordinated with project financing and implementation in order to avoid delays. Revisions of capacity and quality of existing infrastructure (power supply, railway transport and harbor loading facilities) should be carefully coordinated with project requirements. (d) Employment of consultants for management of project implementation is essential, and delegation of sufficient authority is important. (e) Employment of consultants for running-in, operation and main- tenance, recruitment and training as well as administration and management, is essential for obtaining even modest results of large industrial projects. Establishment of performance criteria and base lines is important. Proiect Relationships 44. Bank relationship with Borrower and cofinanciers has generally been good. The only major dispute arose when the Borrower and KfW did not agree with the Bank's position on the award of a US$30 million contract to supply two paper machines. The bids were to be evaluated under Bank guidelines and the contract was to be financed by KfW. The problem arose because of rapidly changing exchange rates between the DM, Yen, and US$. According to the strict application of the Bank guidelines, a Japanese bidder was marginally lower than a German bidder, but the Borrower decided, with KfW's agreement, to award the contract to the German supplier. The Bank consequently had to insist on an abrogation of the relevant sections of the Memorandum of Understanding with KfW. This event resulted in a strong protest from the Japanese firm and its US parent company, but did not adversely affect cooperation between the Bank and KfW at the working level during project implementation. Consultina Services 45. The Project Advisor, the Project Manager and the Project Engineer all performed professionally and according to the terms of their contracts. However, as noted above, the multi-level organization of this implementation group proved unwieldy and had to be changed during project implementation. Quality of the completed mill is excellent, and the installed cost was close to budget. 46. At the close of the project, relationships between the owner and the OMC became strained, as will be seen in Part II of this PCR. Although project results are far below those expected at appraisal, it is the opinion of the cofinanciers that for the most part the consultant implementing the OMC has - 31 - performed as well as can be expected under the difficult conditions prevailing in Tanzania throughout the period of operation. Training of the Tanzanian staff has been largely successful, and without the OMC it is doubtful if the mill would have reached even its present level of performance. Proiect Documentation and Data 47. The appraisal reports were very comprehensive and provided an appropriate framework for reviews, supervision and for the present PCR. As the project is quite extensive, it would have been useful to have more and clearer definitions of indicators of project implementation, project benefits, etc. and their corresponding base lines. 48. Project documents were filed in different locations in the Bank and the filing systems were not always consistent. This is in part due to the Bank's own reorganization and the transfer of the project from the former central Industry Department to the Africa Region. - 32 - PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVEY Introduction 49. The project concept was started in 1973-74 and was completed in October 1985 when it was inaugurated by the First President of the United Republic of Tanzania, His Excellency J. K. Nyerere. The project concept was to use "appropriate technology" suitable for a developing country, and as well as making paper, to provide employment opportunities. Simple, established, reliable but versatile technology was adopted, a concept which has many advantages, but also has many drawbacks. Implementation of the Mill Construction 50. In retrospect it is felt that the implementation hierarchy consisting of a Project Advisor, a Project Manager, and a Project Engineer, had too many tiers. The Consultants could have improved their performance. There were instances of delays in submitting designs to the civil contractor and insufficient supervision of the erection. There were three main contractors covering civil work, equipment installation, and township construction. Except for a few problems and minor defects, these contractors performed satisfac- torily. 51. Procurement following World Bank guidelines did not cause any problems, although it is felt that there were some instances when quality was sacrificed for price. 52. Delays in cross-effectiveness of the cofinanciers loans, and some suspensions of disbursements, caused some delay in project implementation. Most of the delays were beyond the control of the contractors or NDC. 53. Disbursement procedures set forth by the Bank and the other financiers were generally speedy. Establishment of a letter of credit for ocean freight took a lengthy 3 months, mainly because of the mechanics and interpreta- tions by the National Bank of Commerce, but its operation was smooth. 54. A comparison of the 1979 Construction Budget compared with the actual Project cost, not including working capital or interest during construction is as follows: The Part II contribution received from the Borrower contains extensive descriptive material and tables, most of which is already covered in Parts I and III. For the sake of readability the main points of the Borrower's contribution are presented in the following sumary which has been prepared by the Bank. The original full text of the Borrower's contribution is retained in the project file. - 33 - USS millions Local Foreign Total Construction Budget 44.4 188.1 232.5 Actual final cost 48.2 174.3 222.6 55. There were compensating over-runs and under-runs, some of the important ones being: Over-runs: added air strip, higher freight and insurance on imported equipment, vendor storage charges due to delays in shipping equipment, construction of temporary road due to escarp- ment road delay, increased engineering and project management, additional logging equipment. Under-runs: shunting locomotive deleted, mobile crane deleted, recovery boiler precipitator changed from double to single chamber, other equipment deletions. Implementation of the Mill Operational Assistance Program 56. Prior to the completion of the plant construction, a second stage project was initiated with the assistance of the World Bank, SIDA, and KfW, to provide training and operational management assistance, to provide initial working capital, and to purchase equipment and convert the boiler to allow harvesting and delivery of logging residue for fuel. 57. The plan to use logging residue for fuel was not successful for several reasons. There was less logging residue than expected, and the portable chipping and loading equipment proved inadequate and difficult to operate under the conditions prevailing in the plantation logging areas. Conversion of the boiler for wood burning has not been carried out. 58. An Operations Management Contract (OMC) was signed for an initial six year period, during which time 15 Canadians and 131 Indians were hired to supervise the completion of construction, to commission the equipment, to operate the mill and forest, and to train Tanzanians. 59. The training of Tanzanians in the operation of the mill and forestry equipment, and in mechanical/electrical trades has been very successful. However there has been a large turnover of trained people who have left for other employment in Tanzania, and this has been a major problem for SPM. 60. Although the training aspect has been largely successful, it is NDC's opinion that the OMC failed to meet its contractual obligations in the following areas: did not adequately supervise the suppliers and other contractors in the final stages of mill construction and commissioning; did not set up a workable preventive maintenance system; did not develop suitable manuals for financial and cost accounting and did not establish and put into operation a computerized management information system. - 34 - Financial outlook 61. Because of low production and sales, SPM generates financial losses. Only at a production level of 42,000 tpy or better will the Company be able to cover all its variable and fixed costs, not including depreciation and interest on long-term debt. Continued financial support from the Treasury and SPM's external financiers is essential for the foreseeable future. Benefits 62. In spite of its poor financial performance, SPM provides several benefits, such as: - employment opportunities - greatly improved social amenities - support of other local industries - support of local suppliers of raw materials including coal, kaolin, salt, limestone - support of local suppliers of services including railway (TAZARA), and electric power (TANESCO) - revenue to the Government through sales taxes - 35 - PART III: STATISTICAL INFORMATION 1. Related Bank Loans and/or Credits Loan/Credit Purpose Year of app2roval Status Loan 1370-TA Sao To finance July 1977 Completed Hill Forestry industrial Project I. plantations at Sao Hill to provide wood for sawmills and April 1982 a pulp and paper mill. Credit 601-TA, To finance Jan. 1978 Completed Subprojects 1-A- preproject costs April 1979 10 and 1-A-10A. of project Technical management for Assistance. Mufindi Pulp and Paper project. IDA Project To finance July 1978 Completed Preparation preproject costs Facility of basic engineering for Mufindi Pulp and Paper Project. - 36 - 2. Project Timetable Item Date Planned Date Revised Date Actual Loan 1650/Credit 875-TA Project identification Nov. 1972 Prefeasibility report March 1975 Feasibility Report Feb. 1976 Project Brief Aug. 1976 Staff Preappraisal Report Nov. 1976 Project Advisors appointed June 1977 Appraisal Oct. 1977 Project Managers appointed Feb. 1978 Staff Appraisal Report Feb. 1978 Project Engineers appointed March 1978 Appraisal Report Dec. 1978 Board Approval Jan. 1979 Borrower Approval Feb. 1979 April 1979 Loan/Credit signature Feb. 1979 April 1979 Loan/Credit Effectiveness April 1979 April 1980 Commercial Production Oct. 1982 July 1984 Jan. 1986 Railway Siding operational July 1979 April 1983 March 1986 Escarpment Road operational July 1979 Oct. 1984 July 1987 Township finished July 1982 April 1985 April 1986 Power Line operational Oct. 1981 April 1983 Nov. 1984 Credit 1370 Appraisal Feb. 1983 Report and Recommendation May 1983 Board Approval April 1983 May 1983 Signature April 1983 Sept. 1983 Effectiveness July 1983 Dec. 1983 Tech. Assist. start Oct. 1983 Dec. 1983 Wood Fuel start Dec. 1984 not yet implemented - 37 - 3. Loan Disbuse3Mets 3ANK FISCAL YZ.R Loan 1850-TA, USO million Credit 875-TA. USO million Credit 1370-TA, SOR million & QUARTER Estimated Actual Actual % Estim. Actual Actual Estim. Actual Actual Z Cumlative Cumulative at 1 Estimated 1978-79 III 0.5 0 0 IV 1.5 0 0 1973-80 I 3.0 0 0 II 4.7 0 0 III 8.8 0 0 IV 0.2 8.8 2.9 34 1980-81 1 0.2 10.9 4.4 40 II 0.4 14.2 8.4 45 ::1 0.4 18.7 9.8 52 IV 0.5 23.7 13.0 55 1981-82 1 0.5 30.0 14.8 49 II 6.5 0.6 9 30.0 19.3 64 1I 12.3 0.6 5 30.0 22.9 78 IV 17.5 0.7 4 30.0 25.0 87 1982-83 1 21.7 0.7 3 30.09 26.9 90 1: 25.5 0.9 4 30.0 29.7 99 III 27.9 5.1 18 30.0 30.0 100 IV 30.0 7.2 24 1983-84 1 30.0 8.8 29 0.1 0 0 II 30.0 13.1 44 1.7 0 0 III 30.0 15.3 51 2.4 0.3 13 IV 30.0 18.8 63 3.2 2.1 66 1984-85 I 30.0 23.1 77 3.9 2.7 69 II 30.0 18.8 63 4.7 3.7 79 III 30.0 20.1 67 5.6 4.2 75 IV 30.0 23.2 77 8.7 5.0 75 1985-86 I 30.0 26.6 89 7.9 6.1 77 II 30.0 27.3 91 9.3 7.0 75 III 30.0 27.5 92 10.5 7.9 75 IV 30.0 28.3 94 11.4 8.6 75 1986-87 I 30.0 28.6 95 12.4 9.4 75 U: 28.9 96 13.1 10.0 76 III 29.5 98 13.5 10.5 78 IV 29.7 99 13.9 10.8 78 1987-88 I 30.0 100 14.2 11.1 73 I 14.6 11.4 78 1t 15.0 11.7 78 IV 15.4 12.0 78 1988-89 I 15.8 12.3 79 II 15.9 12.4 78 1t 18.2 12.7 78 IV 16.4 13.1 80 1989-90 1 16.8 13.4 81 1: 16.7 13.6 81 111 16.7 13.9 S3 IV 16.7 14.4 8 1990-91 1 16.7 14.8 89 II 16.7 15.1 91 1t1 16.7 15.6 93 IV 18.7 15.9 95 1991-92 I 18.7 16.5 99 I 16.7 15.6 99 Itt 16.7 1.65 99.7*/ IV */ 46944 SDR Canceled 4. Project Implementation 83 84 85 86 87 88 89 90 91 INDICATOR App. Act. App. Act. App. Act. App. Act. App. Act. App. Act. App. Act. App. Act. App. Act. Production, 1000 t 30 0 42 0 50 8 56 16 60 29 60 27 60 32 60 23 60 23 Capacity utilization, 1 50 0 70 0 83 13 93 27 100 48 100 45 100 53 100 42 100 38 Sales 30 0 42 0 50 6 56 15 60 28 60 25 60 28 60 28 60 23 Domestic 30 0 39 0 44 4 46 11 49 12 52 13 56 2) - 17 - 14 Exports 0 0 3 0 6 2 8 4 11 16 8 12 4 2) - 11 - 9 I Exports 0 0 7 0 12 34 14 27 18 57 13 48 7 2) 29 39 Local staff, persons 1500 0 1500 1003 1500 1933 1500 1919 1500 2085 1500 2285 1500 2) 1500 2343 1500 2244 Expatriates, persons - - - 109 - 134 - 104 - 43 - 12 - 13 - 8 - 10 I0 - 39 - 5. Project Costs and Financing (in current USS) A. Mill Construction Project Cost Appraisal (USS miLlion) Actual (US$ million) Item Local Foreign Total Local Foreign Total Civil Works 6.6 15.5 22.1 13.4 23.2 36.6 Machinery 0.1 77.0 77.1 3.0 82.1 85.1 Freight and Insurance, Inland 2.7 0.0 2.7 2.1 0.0 2.1 Erection 6.0 15.8 21.8 5.6 26.7 32.3 Construction Overhead 3.4 6.4 9.8 4.9 7.5 12.4 Engineering and Project Management 3.0 15.6 18.6 2.2 26.3 28.5 Total Plant Cost 21.8 130.3 152.1 31.2 165.8 197.0 Logging Capital 0.6 3.5 4.1 3.1 5.8 8.9 Railway Spur 2.1 0.0 2.1 1.0 0.0 1.0 Senior Staff Housing 1.3 0.3 1.6 0.0 0.0 0.0 Pre-Operating and Start-up 1.5 0.8 2.3 11.2 0.6 11.8 TA and Training 2.2 7.2 9.4 1.2 3.0 4.2 Sub-totaL 7.7 11.8 19.5 16.5 9.4 25.9 Base Cost Estimate 29.5 142.1 171.6 47.7 175.2 222.9 Physical Contingencies 2.9 14.1 17.0 0.0 0.0 0.0 Price Escalation 6.6 22.5 29.1 0.0 0.0 0.0 Sub-total 9.5 36.6 46.1 0.0 0.0 0.0 Installed Cost 39.0 178.7 217.7 47.7 175.2 222.9 Working Capital 4.0 2.7 6.7 1.5 7.6 9.1 Interest During Construction 15.1 12.2 27.3 9.7 3.4 13.1 Sub-total 19.1 14.9 34.0 11.2 11.0 22.2 Total Financing Required 58.1 193.6 251.7 58.9 186.2 245.1 B. Mitt Construction Project Financing Financing Plan at Appraisal (USS million) Actual (US$ million) Source Local Foreign Total Local Foreign Total Tanzania 51.7 0.0 51.7 56.1 0.0 56.1 IBRD Loan 1650TA 0.0 30.0 30.0 0.0 30.0 30.0 IDA Credit 875TA 0.0 30.0 30.0 0.0 30.0 30.0 SIDA 0.0 45.0 45.0 0.0 45.0 45.0 KfW 0.0 34.0 34.0 0.0 34.0 34.0 Kuwait 0.0 18.0 18.0 0.0 17.4 17.4 OPEC 0.0 10.5 10.5 0.0 4.9 4.9 CDC 0.0 20.0 20.0 0.0 9.2 9.2 WIB 0.0 12.5 12.5 0.0 10.8 10.8 Yugoslavia 0.0 0.0 0.0 0.0 7.7 7.7 Total 51.7 200.0 251.7 56.1 189.0 245.1 - 40 - C. Operational Assistance Project Cost Appraisal (USS million) Actual (US$ million) Item Local Foreign Total Local Foreign Total Operating Management Contract 3.5 18.9 22.4 2.5 25.0 27.5 Machinery and Equipment 0.6 6.5 7.1 0.5 14.5 15.0 Operating Materials 0.0 10.0 10.0 2.0 8.5 10.5 Sub-total 4.1 35.4 39.5 5.0 48.0 53.0 Physical Contingencies 0.4 1.2 1.6 0.0 0.0 0.0 Price Escalation 0.5 3.4 3.9 0.0 0.0 0.0 Sub-total 0.9 4.6 5.5 0.0 0.0 0.0 Total Financing Required 5.0 40.0 45.0 5.0 48.0 53.0 D. Operational Assistance Financing Financing Plan at Appraisal (USS million) Actual (USS million) Source Local Foreign Total Local Foreign Total Tanzania 5.0 0.0 5.0 5.0 0.0 5.0 IDA Credit 1370TA 0.0 18.0 18.0 0.0 18.0 18.0 SIDA 0.0 13.5 13.5 0.0 21.5 21.5 KfU 0.0 8.5 8.5 0.0 8.5 8.5 Total 5.0 40.0 45.0 5.0 48.0 53.0 ==ZZZZ. ==XzWWW .....aW ===WUW. ===am.. =MUZZU. -41- 6. Project Results 6A. Direct Benefits Appraisal Estimated at Estimated at Indicator Estimate Closing Date Full Development Paper production 60 23 60 1000 tons/year Wood utilization 262 115 330 1000 cu. m/year Operational revenue before 300 (1,483) 3,330 depreciation, amortization (1978) (1991) (1992-terms) interest and tax, TSH million/year Foreign currency revenue 30 4.5 8 USD million/year (1992) Jobs created, persons 1,500 2,250 1,500 Persons trained, persons - 1,500 1,500 6. Project Results 6B. Financial Impact INCOME AND CASH FLOW STATEMENTS TZS millions Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 APPRAISAL, 1983 Terms 1983 1984 1985 1986 1987 1988 Sales Revenue 254.2 345.9 399.9 444.9 476.2 480.7 Manufacturing Costs 163.0 188.8 202.8 210.9 197.0 193.1 Depreciation and Amortization 178.0 179.5 Interest 0 96.2 87.0 77.8 68.6 59.2 9 Net Income after Tax ( 86.8) (118.6) (70.9) (26.3) 49.8 113.4 Cash Generation before Interest 91.2 157.1 197.1 234.0 279.2 287.6 Debt Service 0 142.2 179.0 169.8 160.6 151.2 ACTUAL, Current Terms 1986 1987 1988 1989 1990 1991 Sales Revenue 404.8 1,019.4 1,713.3 2,575.7 2,951.2 3,100.3 Other Income 14.5 48.1 167.0 374.6 203.8 166.1 Manufacturing Costs 578.4 1,323.4 1,333.9 2,423.6 3,883.5 5,143.2 Depreciation and Amortization 314.2 500.9 742.8 917.2 1,003.6 1,599.5 Interest 483.5 1,097.7 1,768.1 841.8k 940.6 1,257.8 Net Income after Tax (956.8) (1,854.5) (1,964.5) (1,232.3) (2,672.7) (4,734.1) Cash Generation before Interest (473.3) ( 255.9) 546.4 526.7 ( 728.5) (1,876.8) Debt Service 0 0 0 0 0 0 6. Project Results 6B. Financial Impact BALANCE SHEET TSH millions Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 APPRAISAL, 1983 Terms 1983 1984 1985 1986 1987 1988 Current Assets 49.6 345.9 399.9 444.9 476.2 480.7 Accumulated Cash Surplus 92.8 188.8 202.8 210.9 197.0 193.1 Current Liabilities 55.4 179.5 Net Fixed Assets 1,737.5 96.2 87.0 77.8 68.6 59.2 Long Term Debt 947.8) (118.6) (70.9) (26.3) 49.8 113.4 Equit 876.8 157.1 197.1 234.0 279.2 287.6 L Current Ratio 2.6 142.2 179.0 169.8 160.6 151.2 1 Long Term Debt Equity 52/48 53/47 53/47 51/49 45/55 38/62 ACTUAL, Current Terms 1986 1987 1988 1989 1990 1991 Current Assets 617.3 915.9 1,697.9 2,192.6 2,730.0 3,171.5 Accumulated Cash Surplus 42.1 102.3 59.5 561.0 90.0 644.2 Deferred Liabilities 733.6 652.1 570.6 489.1 407.6 326.1 Current Liabilities 958.2 2,578.8 5,474.1 2,552.5 3,726.1 4,869.3 Net Fixed Assets 7,102.2 10,971.6 16,379.1 19,913.5 19,306.1 20,572.2 Long Term Debt 6,032.6 9,882.1 14,751.2 10,958.6 11,625.1 14,360.9 Equity 1,504.4 181.0 (1,518.2) 9,645.1 7,182.4 5,483.7 Current Ratio 1.5 0.6 0.4 1.3 0.9 0.9 Long Term Debt Equity 80/20 98/2 - 53/47 62/38 72/88 - 44- 6C. Studies 1. "Opportunities for an Integrated Pulp and Paper Mill in Tanzania". BIS Marketing Research Limited, UK, Oct. 1977 Market data utilized during appraisal of Loan 1650/Credit 875-TA. 2. "Ecological Study and Oxygen Balance Prognosis for the Kigogo- Ruaha River downstream from the planned Mufindi Pulp and Paper Mill". Swedish Water and Air Pollution Research Institutes' IVL, Sweden, Dec. 1979. Data utilized in the detailed design of the waste water treatment system. 3 "Waste Water Loads and Air Emission of the Mufindi Pulp and Paper Mill". Jaakko Poyry & Co., Finland, April 1980. Data utilized in the detailed design of the mill. 4 "Power Boiler and Fuel Revision". Ekono Consulting Engineers, Sweden, March 1983. Recommendations utilized during appraisal of Credit 1370-TA. 5. "Study of the Transport of Paper Products". John A. Davies, UK & Tanzania, April 1987 Recommendations utilized by SIDA during appraisal of financing of railway wagons. 6. "Environmental Survey of the Southern Paper Mills, Tanzania". Af-Industrins Proceskonsult AB, Sweden, Oct. 1987. Recommendations utilized in the operation of the mill. 7. "Review of Current Operations and Proposals for future Restructuring". Treuerarbeit/Price Waterhouse, Oct. 1988. Data utilized during the appraisal of the 1991-95 Five-Year Plan. - 45 - 8. "Study on the Potential of Mechanical Wood Industry in Sao Hill Plantation". Jaakko Poyry & Co., Finland, Oct. 1989. Data utilized for assessment of the future wood supply. 9. "Report on Observations concerning the Technical Conditions of the Mufindi Pulp and Paper Mill at Mgololo, Tanzania". Hans Rahm Ingenieurplannung Ag, Germany, March 1991. Recommendations to be utilized for the future maintenance, repair and replacement of equipment. 10. Report on Privatization Opportunities. Jaakko Poyry & Co., Finland, 1992. - 46 - 7. Status of Covenant Covenant 1/ Subect Compliance Remarks JFA1, 3.02 (c) Insurance of goods to be imported Yes JFA2, 3.02 (d) JA1, 3.03 (a) Furnish project documentation to the Bank Yes JFA2 3.03 (a) promptly. J-A1, 3.03 (b) Monitor project progress and furnish Yes JFA2, 3.03 (b) financial statements, progress reports and procurement reports within 45 days after each quarter. JA1. 3.03 (c) Prepare Project Completion Report 3 months Yes Completed J7A2, 3.03 (d) after closing data/agreed date. J7Al, 3.05 Submit marketing programe before December Yes 31, 1980. JFA1, 3.06 Ensure anti-poLlution operation. Yes JFA1, 3.07 Submit organisation plan of SPM before June Plan subaitted to supervision mission 30, 1979. Yes October 1979. IFA1, 3.08 Submit training programme before June 30, Yes Plan received October 1979. 1979. JFA1, 3.09 Appoint Forestry Ministry representative to Yes the Board of SPM. JFA1, 3.10 Arrange supply of wattle from Tanganyka No The supply of wattle became unnecessary. Wattle Company. JFA1, 3.11 Employ an advisory firm, a management firm Yes Firms employed June 1977, February 1978 and an engineering firm for the implementa- and March 1978. tion of the project. JFA1, 3.12 (a) Provide funds and resources to SPM and ND Yes The provision of local currency was often delayed. JFA2, 3.07 JFA1, 3.12 (b) Establish agreed infrastructure in time. No Escarpnent road was delayed 1-1/2 years after mill start-up. Availability and type of railroad wagons were inadequate. JFA1, 3.13 (b) Furnish quarterly progress reports of in- No Periodically reported during Bank frastructure construction. supervision mission. JFAL, 3.14 Operate, maintain and repair infrastruc- No System and financing of maintenance of ture. escarpment road have not yet been found JFA1, 3.15 Secure sufficient supply of wood from Sao Yes Sao Hill has presently a capacity that Hill. exceeds the full capacity requirements of the mill JFA1, 3.16 Secure sufficient supply of coal. No The coal mines were not developed in time and import of coal is being combined with local coal supply. JFA1, 3.17 Ensure national prices of paper that give Yes SPM is free to set their prices. JFA2, 5.07 SPM - operating efficiently - a sufficient revenue. JhAl, 3.18 Ensure foreign currency for timely procure- No Processing of foreign currency applica- ments. tions causes serious delays JFA1, 4.01 Insure installations Yes JTA2, 4.01 - 47- JFA1, 5.02 Maintain appropriate accounts of SPH, have No Audited accounts have been generally 1 JFA2, 5.02 said accounts audited and furnish audited year overdue. accounts 4 months after end.of each year. JFA2, 3.05 Submit marketing programnne before March 31, Yes Delayed, but available when needed. 1984. JFA2, 3.06 Submit training programme before December Yes Delayed, but available when needed. 31, 1983. JFA2, 4.02 Introduce compensations and incentives be- No fore June 30, 1984. JFA2, 4.04 Open foreign currency account before Decem- Yes ber 31, 1983. JFA2, 5.03 Maintain SPM debt-equity ratio below 50:50. No See Table 6B. J?A2, 5.04 Maintain SPM current assets-current liabi- No See Table 6W1 lities ratio above 1.2:1. 1 JFA1 Joint Financing Agreement of April 6, 1979, Loan 1550/Credit 875-TA. jA2 :Joint Financing Agreement of September 22, 1983, Credit 1370-TA. - 48 - 8. Use of Bank Resources 8A. Staff Inputs Stage of Project Period Staff Weeks Appraisal FY 75-79 141 Loan 1650-TA Credit 875-TA Appraisal FY 83 43 Credit 1370-TA Supervision FY 79-92 219 Loan 1650-TA Credit 875-TA Credit 1375-TA Total 403 - 49 - 8B. Missions Stage of Project Cycle Month, Number Number Specialization Performance Types of Year of of Represented Rating Problems Persons days 1) 2) 3) Through Appraisal of - Loan 1650-TA - Credit 875-TA Prefeasibility Mar. 75 3 2 E 2T Prefeasibility Aug. 75 4 3 E+F 2T+F Feasibility Mar. 76 1 2 E 2T Feasibility May 76 2 1 E 27 Feasibility June 76 2 1 E 2T Preappraisal July 76 3 12 E+F 2:+F Preappraisal Oct. 76 1 2 E 2F Preappraisal Apr. 77 2 10 E+F 2T+M Preappraisal May 77 2 1 E+F 2F+M Preappraisal Aug. 77 1 2 E 2M Appraisal Oct. 77 3 18 E+F 2T+F+M Cofinancing Nov. 77 2 2 E+F 1F Cofinancing Mar. 78 1 4 F IF Cofinancing/Appraisal May 78 2 2 E+F 1T+F Appraisal June 78 1 7 E 1T+F+M Cofinancing July 78 1 2 E 17 Through Appraisal of - Credit 1370-TA Appraisal Feb. 83 4 10 E+F 1T+F+M - 50 - Stage of Project Cycle Month, Number Number of Specializat Performance Types of Year of days ion Rating 2) Problems Persons Represented 3) 1) Supervision of: - Loan 1650-TA - Credit 875-TA - Credit 1370-TA Supervision Apr. 79 2 2 E+F 1 T+F Supervision Apr. 79 3 7 E+F 1 T+F Supervision Oct. 79 4 7 E+F 2 T+F Supervision June 80 3 9 E+F 1 T+F Supervision Feb. 81 2 10 E+F 1 F+M Supervision June 81 1 2 E+F 1 F+M Supervision Oct. 81 1 10 E 1 F+H Supervision Feb. 82 4 14 E+F 2 T+F+H Supervision May 82 3 12 E+F 2 T+H Supervision Nov. 82 3 6 E+F 3 T+H Supervision Mar. 83 4 10 E+F 2 T+F Supervision Feb. 84 2 7 E+F 1 T+F Supervision May 84 1 5 E 2 T+F Supervision Dec. 84 3 10 E+F 2 T+F Supervision Oct. 85 1 7 E 2 T Supervision June 86 2 12 E+F 2 T+F Supervision Feb. 87 2 9 E+F 2 T+F Supervision Sept. 88 2 11 E+F 2 T+F Supervision May 89 1 13 E 2 F Supervision May 90 1 9 E 3 T+F Supervision May 91 1 8 E 3 T+F+M 1) E: Engineer 2) 1: Routine problems 3) T: Technical problems F: Financial Analyst 2: Important problems F: Financial problems 3: Serious problems M. Management problems ANNEX -51 - Page l of 4 ECONOMIC RATE OF RETURN Basis of Calculation The economic rate of return has been calculated based on the actual performance of the project up to the end of 1991, and projections up to the end of the century, all at constant 1991 costs and prices. It is assumed for the purpose of this calculation that SPM will be, privatized by 1994 and will reach its design production level within two years of privatization. Domestic selling prices have been adjusted to the estimated long-term cif prices for equivalent grades, and world prices for exports. In order to allow a consistent comparison with the economic analysis in the SAR, the assumptions used in that report for adjustment of financial values to economic values have been used in the present analysis also. The main adjustments are as follows: -unskilled labor has been valued at 50% of its financial value. -all foreign exchange costs and benefits have been converted at a shadow exchange rate estimated in 1991 at 350 Tsh/IJS$. -stumpage for wood from the plantations has been reduced to 60% of its financial cost (a net reduction of 10% of total wood cost). -only 50% of the cost of the escarpment road has been included because the road also serves as a general economic benefit to the local community and to the country. -because the residents of the township pay rent, only 25% of the cost is included in the project capital cost. Details of the analysis are given on the following pages. - 52 - ANNEX Page 2 of 4 TANZANIA Mufindi Pulp and Paper Project Project Completion Report Economic Rate of Return A. EXCHANGE RATES Year Official Shadow 1960 8.2 20.0 1981 8.3 20.0 1982 9.3 20.0 1983 11.1 25.0 19864 15.3 30.0 1985 17.5 35.0 1986 32.7 60.0 1987 64.6 100.0 1988 99.3 130.0 1989 143.4 200.0 1990 195.0 235.0 1991 220.0 350.0 B. MANUFACTURING COST (Based on 1991 actual figures) Annual Annual Item Financial Economic of which: Cost Conversion Cost Local Foreign (Mit.TSh) Factor (MIL.TSh) (Mit.TSh)(MiI USS) Variable: Wood 420.1 0.9 378.1 378.1 0.0 Chemicals 568.5 0.8 454.8 227.4 0.6 Purchased Power 658.7 1.0 658.7 658.7 0.0 Coat/Oil 843.6 0.8 674.9 202.5 1.3 Repair Material 20.0 0.8 16.0 6.4 0.0 Consumables 97.6 0.8 78.0 15.6 0.2 Total VariabLe 2608.4 2260.5 1488.6 2.2 Based on 20882 tons, cost per tons 108249.1 71287.7 105.6 Fixed: Salaries and Wages skitted/semi skilled 341.0 1.0 341.0 341.0 0.0 unskilled 85.2 0.5 42.6 42.6 0.0 Purchased Power 439.1 1.0 439.1 439.1 0.0 Coal/Oit 210.9 0.8 168.7 50.6 0.3 Repair Material 179.6 0.8 143.7 57.5 0.2 Consumebles 19.1 0.8 15.3 3.1 0.0 Overhead 406.3 1.0 406.3 365.7 0.1 Total Fixed 1681.3 5.9 1556.7 1299.5 0.7 Total Manufacturing Cost 4289.7 3817.2 =wFwan aan (Finan.) (Econ.) ANNEX Page 3 of 4 - 53 - C. PRODUCTION VOLUMES & REVENUES (Based on 1991 actual prices) Economic Selling Prices: Tonnage cif export economic Grade domestic export S/T S/T S/T Newsprint 7200 5400 630 479 640 Kraft Liner 4200 1440 570 422 580 Sack Kraft 7200 4200 615 464 625 Printing/Writing 7200 0 810 650 820 Total 25800 11040 weighted Average Economic Prices: Domestic TSh/t = 236698 Export S/t= 466 Economic Sales Revenue: Sales Volume (tons) Sales Revenue (mill. TSh) Year Domestic Export Total Domestic Export Total 1980 0 0 0 0 0 0 1981 0 0 0 0 0 0 1982 0 0 0 0 0 0 1983 0 0 0 0 0 0 1984 0 0 0 0 0 0 1985 0 0 0 0 0 0 1986 9439 6835 16274 2234 1114 3349 1987 17038 12338 29376 4033 2012 6045 1988 16925 10000 26925 4006 1631 5637 1989 23825 12000 35825 5639 1957 7596 1990 15602 8000 23602 3693 1304 4997 1991 14293 7000 21293 3383 1141 4524 1992 11000 5000 16000 2604 815 3419 1993 20000 5000 25000 4734 815 5549 1994 25000 5000 30000 5917 815 6733 1995 40000 5000 45000 9468 815 10283 1996 55000 5000 60000 13018 815 13834 1997 55000 5000 60000 13018 815 13834 1998 55000 5000 60000 13018 815 13834 1999 55000 5000 60000 13018 815 13834 2000 55000 5000 60000 13018 815 13834 D. ECONOMIC RATE OF RETURN (Amounts in millions) New Investment Recurrent Invest. Township Escarpment Road Operating Mangmt. Manufacturing Cost Net -_---.......-... .........------- ---------------- ..............-. ---------------- ---------------- Total Economic Local Foreign Local Foreign Local Foreign Local Foreign Local Foreign Local Foreign Revenue Benefit Year TSh $ TSh $ TSh S TSh $ TSh $ TSh S TSh TSh -- --.....--------------------------------------- --------------------- -.0 ------ ------ 6------ 1980 83.7 30.5 0.0 0.0 0.0 -10763.6 1981 82.8 60.8 0.0 0.0 0.0 -21367.6 1982 205.5 43.5 0.0 0.0 0.0 -15419.6 1983 160.5 47.4 0.0 0.0 0.0 -16761.1 1984 212.7 60.1 12.2 1.9 7.3 1.1 40.0 3.2 0.0 0.0 0.0 -23473.4 1985 252.5 34.7 23.6 3.5 28.3 4.2 50.0 4.1 0.0 0.0 0.0 -16610.0 1986 114.3 12.3 32.3 3.0 38.8 3.6 50.0 4.5 1160.1 1.7 3348.6 -6865.6 1987 143.1 6.3 16.7 0.9 30.0 2.7 2094.1 3.1 6044.6 -780.9 1988 153.1 4.1 20.0 2.0 1919.4 2.8 5636.6 424.9 1989 175.0 3.0 20.0 2.0 2553.9 3.8 7595.9 1772.9 1990 175.0 3.0 20.0 2.0 1682.5 2.5 4997.4 497.5 1991 175.0 3.0 20.0 2.0 1517.9 2.2 *524.5 274.5 1992 175.0 3.0 20.0 2.0 1140.6 1.7 3418.9 -258.1 1993 175.0 3.0 20.0 2.0 1782.2 2.6 5549.2 898.0 1994 175.0 3.0 20.0 2.0 2138.6 3.2 6732.7 1540.2 1995 175.0 3.0 3207.9 4.8 10283.2 4186.9 1996 175.0 3.0 4277.3 6.3 13833.6 6113.7 1997 175.0 3.0 4277.3 6.3 13833.6 6113.7 1998 175.0 3.0 4277.3 6.3 13833.6 6113.7 1999 175.0 3.0 4277.3 6.3 13833.6 6113.7 2000 -140.8 -30.0 4277.3 6.3 13833.6 17968.3 Economic Rate of Return -5% - 55 -APPENDI Page 1 of 4 KUWAIT FUND FOR ARAB ECONOMIC DEVELOPMENT Ref : KF/Gen//f/I- 26- October 4, 1992 COMMENTS RECEIVED FROM THE KUWAIT FUND FOR ARAB ECONOMIC DEVELOPMENT Mr. Mark Baird Division Chief ctunrtry Policy, Industry and Finance, Operations Evaluation Department The International Bank for Reconstruction and Development 1818 H Street, N.W. Washington DC. 20433 U.S.A. Dear Mr. Baird: We have read with great interest the Draft Performance Audit Report on the Mufindi Pulp and Paper Project in Tanzania. This is probably one of the few, if not rare, cases where most development risks seem to have conspired against a project which was launched with all good intentions by all concerned parties. However, the lessons to be learned as you rightly state are numerous and should be remembered and taken seriously in future, especially by financing institutionc. AS for the borrower3, it i felt that swallowing the bitter pill is sometimes much healthier than incurring such heavy losses in foreign currencies at the time they were looking forward to exactly the opposite!. . In general we certainly agree with your judgement regarding the reasons and circumstances which had contributed to the present unsatisfactory results after seven years operation of the mill. The losses amounting to US Dollars 48 million are of course very heavy and indicate that some serious action has to be taken in order to find ways and means to stop the continuations of drainage of the country's meager foreign currency resources. The Kuwait Fund's brief comments are as follows: (Naturally in making these comments we are benefiting from the advantage of hind sight). 56 - APPENDIX I Page 2 of 4 KUWAIT FUND FOR ARAB ECONOMIC DEVELOPMENT (a) Like other co-financiers, when agreeing to participate in the financing of this project, the Kuwait Fund was also impressed by the concept of assisting a borrower to utilize local raw materials for the purpose of import substitution of an important commodity. Also in so doing, assisting in creating job opportunities for some 1500 people. (b) In spite of this our appraisal report stressed the following: i) Although the project has economic and other benefits, this depends to a high degree on its efficient implementation within its estimated cost and the proposed time schedule for its implementation. ii) The sensitivity analysis indicated that a 10% decrease in sales price can lower the ERR from 11.3% to 9.4%. Also any possible increase of 10% in the project cost with a delay of 6 months in the project completion tends to reduce the ERR to 9.7%. (c) The size of the mill seems to be one of the major setbacks to the project. Being less than the minimum economical, yet excessive in relation to domestic demand and with no prospects for growth, as well as being uncompetitive for export - all indicate that the project should not have been launched in the first place (again relying somewhat on hind sight). However this should have, at least necessitated an unhurried and" much more thorough approach and investigations. It is rather surprising that a number of such large industrial projects, which remain shelved for a good many years, are suddenly required to be implemented at break-neck speed, resulting in such unfortunate lack of success. The aspect of the size of the mill and the inability to reap the benefits of scale has been well high lighted in your report. (d) Of the aspects which had been worrying the Kuwait Fund considerably of late we should like to mention the following: i) The greater the number of co-financiers in any project - the greater is the delay in its implementation, which can amount upto two years. ii) Industrial projects in a number of developing countries, which usually need foreign currency, even when well conceived and implemented suffer from lack 2 - 57 - APPENDIX I Page 3 of 4 KUWAIT FUND FOR ARAB ECONOMIC DEVELOPMENT of foreign currency for the purchase of essential spare parts and some other necessary inputs. iii) To aggravate this, failure to honour their repayments of other loans can lead to stoppage of repayments for the completion of other projects which may be much more promising, when completed, in earning foreign currency. iv) The reliance on some borrowers to implement important parts of a project, as in the case of Mufindi Pulp and Paper Mill, might result in delays. From our own experience, some borrowers fail even to come up with the local component of items being financed by foreign loans - resulting also in further delays. As you rightly remark, covenants committing governments to provide infrastructure in a timely fashion do not necessarily guarantee their compliance. It is sometimes felt, when these covenants are being drafted, that the borrower shall not or cannot comply. We therefore agree with you that some much more positive action is needed. Although the Kuwait Fund loan was helpful in preventing delays of staff recruitment, still the delay to the mill start up was 36 months due to shortage of local funds, gaps in external funding because of Tanzania's inability to service foreign debt, the late completion of escarpment road and electric power transformers. (e) Despite all the above, difficulties still persist that need quick solutions. These include organisation of maintenance system and finance for the escarpment road, the abandoning of the use of local coal and relying on imported coal, the lack of funds for foreign exchange needed for the procurement of imported inputs and spares. (f) Experience has also shown that local staff training, especially for the purpose of project management after completion usually takes much longer than expected, due mainly to the absence of heavy industries like the project in hand. (g) Reverting to measures to be taken we certainly agree that the suggested revaluation of the project prospects, financial situation, and conditions for future deve- lopment and sustainable growth are very desirable. Privatisation is also very worthy of consideration (at least no private management can allow overstaffing of unskilled labour of upto 50%). Furtheremore, experience had shown that government management of such technically 3 - 58 - APPENDIX I Page 4 of 4 KUWAIT FUND FOR ARAB ECONOMIC DEVELOPMENT involved factories is not the best alternative. Privatisation can induce incentives and improve the efficiency of operation and marketing by virtue of concentrated efforts and speed of decision making and action. It is also hoped that trained staff can be attracted and kept in the service of the mill. one also hopes that operating the mill at 35% of its rated capacity needs immediate attention if all the ailments enumerated on page (viii) of the evaluation summary under Results (para 8) of your report are addressed seriously. We should also like to recommend in this respect the use of oil in the boiler for the purpose of more efficien operation. (h) Finally, now that the goal of import substitutions cannot be attained would it be possible to reconsider the following steps: i) The use of bagasse in the raw material mix for the production of pulp. ii) Concentrate on the production of only two types of paper - namely those which form the larger production types and the best foreign currency earners - thereby easing the technical processes somewhat. iii) Consider the sale of pulp if possible in addition to paper and conduct a fresh marketing survey in neighbouring and other countries. With best regards, Your Sincerely, Hisham Al-Woqayan Director of Operations - 59 - APPENDIX II COMMENTS RECEIVED FROM THE OPEC SPECIAL FUND (Incoming Telex) REF NO. 6768/16 SEPTEMBER 16, 1992 FROM: OPECFUND VIENNA TO: MARK BAIRD, DIV. CHIEF, COUNTRY POLICY, INDUSTRY & FINANCE OPERATIONS EVALUATION DEPT., WORLD BANK, WASH., D.C. SUBJECT: TANZANIA - DRAFT PERFORMANCE AUDIT REPORT ACKNOWLEDGE WITH THANKS RECEIPT OF ABOVE REPORT. WE HAVE NO OBSERVATIONS TO MAKE REGARDING CONTENTS ITSELF, HOWEVER PLS NOTE PAGE NO. ROMAN Text amended. NUMERAL ONE, FIRST PARAGRAPH WHERE REF IS MADE TO OPEC SPECIAL FUND'S LOAN. AMOUNT QUOTED IS USD 10.5 MILLION. IN ACTUAL FACT, LOAN AMOUNT IS USD 5.0 MILLION PLUS USD 5.45 MILLION EQUIV. IN LOCAL COUNTERPART FUNDS. WOULD APPRECIATE CORRIGENDUM. THANKS AND BEST REGARDS, S. AISSI ASST. DIRECTOR-GENERAL OPS MGT OPECFUND