Tanzania - Tobacco Processing Project

Report No. 1141a-TA FILE Appraisal of the Tobacco Processing Project Tanzania August 20, 1976 Eastern Africa Regional Office General Agriculture Division FOR OFFICIAL USE ONLY Document of the World Bank 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"/ gtDR 1.00 = Tanzania Shillings (TSh) 9.66 SDR 1.00 US$1.20 US$1.00 Tanzania Shillings (TSh) 8.05 TSh 1.00 US$0.12 GOVERNMENT AND PARASTATALS FISCAL YEAR July 1 - June 30 WEIGHTS AND MEASURES 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 kilometer (km) = 0.62 miles 1 sq. kilometer (km2) = 0.39 sq. miles = 100 ha 1 kilogram (kg) = 2.20 pounds 1 sq. meter (m2) = 10.76 sq. feet ABBREVIATIONS MAJI = Ministry of Water Development, Energy and Minerals TANU - Tanganyika African National Union TAT = Tobacco Authority of Tanzania TTB = Tanganyika Tobacco Board TTPC = Tanzania Tobacco Processing Company Ltd. 1/ In October, 1975, the three East African Community currencies were pegged to the value of the Special Drawing Rights (SDR) of the International Monetary Fund. An SDR/US dollar conversion rate of 1.2 has been assumed for purposes of this appraisal.  FOI OFFICIAL USE ONLY TANZANIA APPRAISAL OF THE TOBACCO PROCESSING PROJECT TABLE OF CONTENTS Page SUNMARY AND CONCLUSIONS .................... ..... - ii I. INTRODUCTION.... 1 II. BACKGROUND... 2 A. General. . 2 B. Tobacco Production ... . . 3 C. Tobacco Processing . . 5 D. Government Tobacco Services . . 7 III. THE PROJECT. 9 A. General Description... 9 B. Detailed Features... 9 C. Project Costs. ....... 13 D. Financing ...15 E. Procurement ...16 F. Disbursement and Implementation ...17 G. Accounts and Audits .... . ... . .... 18 IV. ORGANIZATION AND MANAGEMENT ...... . ................ 18 V. PRODUCTION, MARKETING AND FINANCIAL RESULTS .19 A. Production and Capacity .19 B. Markets and Price .20 C. Foreign Exchange and Cash Flows .21 VI. ECONOMIC BENEFITS AND JUSTIFICATION . ...... 21 VII. AGREEMENTS REACHED AND RECOMMENDATION .............. 22 This report is based on the findings of an appraisal mission to Tanzania in October-November 1975 composed of Messrs. J.H. Cleave, P.M. Tamboli and Mrs. B.J. Curling (IDA), and Messrs. C.S. Etheridge and J. Whitelock (Consultants). Drafting assistance was given by Miss J. Maguire and Annex 9 was prepared by Ms. S.C. Hadler. Thi document has restrined dninbutiu w_ y be ued by recipies osly in the perfofnce i tbeir odciai duties. Its contents may osdiee be disclosed witout Wo ank authorization.   ANNEXES 1. Tobacco Production in Tanzania 2. Tanzania: Flue-Cured Tobacco Project (Credit 217-TA) 3. Past Tobacco Production and Forecasts of Growth of the Crop Table 1 - Projections of Tobacco Production from Major Growing Areas by Region (1976-85) Table 2 - Projected Total Tobacco Production in Tanzania Chart - WB 15587 - Projected Total Tobacco Production for Processing at Morogoro Plant 4. The Tobacco Authority of Tanzania (TAT) and the Tanzania Tobacco Processing Company, Ltd. (TTPC) Chart - WB 15992 - Organization of TAT Table 1 - Summarized Balance Sheets of The Tobacco Authority of Tanzania, 1974 & 75"(As of February 28) Table 2 - Summarized Balance Sheets of The Tanzania Tobacco Processing Company, 1974 & 75 (As of February 28) 5. Project Investments Table 1 - Plant Required for Improvement of Present Tobacco Processing Line Table 2 - Plant Required for New Processing Line to be Installed in 1979 Table 3 - Existing and Proposed Storage Facilities at Morogoro 6. Terms of Reference for a Study on Future Investments in Tobacco Processing and Storage 7. Project Costs Table 1 - Annual Project Cost Table 2 - Infrastructure and Storage Costs Table 3 - Technical Assistance and Training 8. Disbursement, Implementation and Monitoring Table 1 - Estimated Disbursement Schedule Chart - WB 15738 - Implementation Schedule  - 2- 9. Tobacco Marketing Prospects Table 1 - Tobacco Leaf - Summary of Production and Consumption by Economic Regions Table 2 - Tobacco Leaf Prices - Actual 1955-75, Forecast 1976-85 In Current and Constant 1974 Prices 10. Cash Flow Projections Table 1 - TAT Cash Flow Statement Table 2 - TTPC Cash Flow Statement Table 3 - Government Cash Flow Statement 11. Economic Costs and Benefits, and Sensitivity Analysis Table 1 - Economic Rate of Return Table 2 - Financial Rate of Return MAP: Tobacco Growing Areas in Tanzania - IBRD 12126  TANZANIA TOBACCO PROCESSING PROJECT SUMMARY AND CONCLUSIONS i. Tanzania's development strategy puts emphasis on increased agri- cultural production by smallholders in villages and, in view of Government's balance of payments problems, is concerned in particular with crops which have export markets. Tobacco is one such crop which has been expanding rapidly in the past decade and, although it is currently a relatively small earner of foreign exchange, it is expected to expand steadily over the next decade as a smallholder crop in response to ongoing programs. However, cured tobacco leaf, as purchased from farmers, has to be processed into a form in which it can be shipped for either domestic or foreign sale without deteriora- tion and Tanzania's processing capacity is already virtually full. ii. The proposed Project would therefore provide additional processing capacity. This would be in two successive increases in mechanical threshing plant, the first comprising additions and improvements to the existing line in the Morogoro factory and the second the installation of a complete new line with a theoretical capacity of 7,000 kg/hour of cured leaf. This would accommodate incremental leaf production over at least the next five years. A survey to determine the timing, scale, and location of any later invest- ment in processing plant would be provided for in the Project. The Project would also include technical assistance and training to improve plant produc- tivity and tobacco qualities, and would make provision for improved storage for both wet and processed tobacco at the factory site, and for storage of export orders at the port of Dar es Salaam. iii. The Project would approximately double the total tobacco process- ing capacity of the Tanzania Tobacco Processing Company, Ltd. (TTPC) which is a wholly owned subsidiary of the parastatal Tobacco Authority of Tanzania (TAT). TAT is charged with all aspects of tobacco production and marketing. Overall Project execution would be by TAT, but TTPC would be given specific responsibility for construction and installation at the Morogoro plant. The additions to the present line would be installed by the engineering staff at TTPC: the new line would be supplied and installed by a principal contrac- tor who would provide a Project Engineer to direct operations through to completion of acceptance trials. TAT would retain an independent consult- ing engineer to scrutinize all civil works design, specifications, and con- struction. iv. An IDA Credit of US$8.00 million is proposed. This would cover the foreign exchange component of the Project, 70% of the total cost of US$11.3 million over the 4-year Project period. The remaining 30% (US$3.3 million) would be provided by TAT (US$0.8 million) and TTPC (US$2.5 mil- lion) from self-generated funds. The proposed Credit would be to Govern- ment on standard terms. To ensure that the improvements to the existing threshing line are made in time for the next processing season and to  - ii - ensure the construction of new storage at Morogoro and Dar es Salaam in time to handle the expected increased volume of tobacco, authorization to enter into contracts on these items, in advance of Board presentation, was agreed in January 1976. Authorized advance contracts total US$2 million of which it is anticipated some US$0.7 million may be subject to retroactive financing. v. The new processing line and ancillary equipment (about US$4.5 million) would be procured under a turnkey contract with a major contrac- tor selected by international competitive bidding in accordance with Bank guidelines. Equipment for improving the existing line (about US$375,000) is being procured by international shopping in accordance with guidelines. Civil works construction (about US$3.9 million) would be subject to com- petitive bidding advertised locally, with local firms given a 7-1/2% pref- erence when competing with foreign bids. Technical assistance and con- sultants for the post-Project survey (about US$0.6 million) would be in accordance with Bank group guidelines for the selection and use of consultants. vi. The Project would facilitate increased farm incomes for an addi- tional 100,000 smallholder families (compared to some 40,000 currently growing tobacco), and would provide direct employment for about 325 semi- skilled workers. The annual foreign exchange earnings from tobacco are expected to be about US$57 million a year by 1985, up from US$27 million at present. In 1974, Tanzania's total agricultural exports were valued at US$254 million. vii. The internal economic rate of return of the Project is estimated at 25% over twenty-five years. In this calculation, foreign exchange costs and earnings were shadow-priced at 24% above the official exchange rate. It was also assumed that if the Project did not take place and processing capac- ity was exhausted, tobacco farmers would switch to an alternative production of maize, groundnuts and cotton, using twice the anticipated incremental to- bacco land area, and this lower value production was assumed for the "With- out Project" base-line. The Project is sensitive to the projected expansion of tobacco production and to world tobacco prices. At the extreme, a com- bined 10% adverse movement of these two factors could reduce the IER to 11% but a similar combined increase would give a return of over 40%. However, tobacco throughput has been estimated conservatively, whilst processing ca- pacity would be available to accommodate at least a 25% upward fluctuation in production. viii. Nine IDA Credits and two Bank loans totalling US$139.1 million have previously been approved for Tanzania in the field of agricultural production and rural development. Project implementation has tended to be slow with problems particularly arising from management and staff- ing problems, and smallholder projects have been affected by the recent acceleration of villagization. Two projects largely concerned with crop processing (Sugar and Cashew nuts) are, however, proceeding well. ix. The Project is suitable for an IDA Credit of US$8.0 million to the Government of Tanzania.  TANZANIA TOBACCO PROCESSING PROJECT I. INTRODUCTION 1.01 The Government of Tanzania has undertaken a comprehensive program to support the development of productive activities, particularly in the rural sector, in conjunction with efforts to achieve balanced regional growth and a more equitable income distribution. With these objectives, and in light of Government's current balance of payment difficulties, particular attention is being given to support for those crops which rep- resent sources of foreign exchange earnings. Although tobacco generates only about 4% of current foreign exchange earnings (as opposed to 23% for sisal, 17% for coffee and 10% for cashew), the potential for expansion is significant. Total tobacco production has trebled in the past decade and is expected to more than double in the period 1974/75-1984/85, with output thereafter continuing to expand at a somewhat slower rate. Moreover, as 75% of this crop is cultivated by smallholders averaging under 0.5 ha of tobacco each, the benefits from production are spread over a broad spectrum of the population. Before sale for export or to local cigarette manufac- turers, tobaccos are normally blended, the leaf and stem are separated, and are dried to moisture levels suitable for transport and storage. Process- ing is currently carried out in two aged plants, Songea (for fire-cured tobacco only) and Morogoro (handling all types of tobacco) and both are operating close to full capacity. If advantage is to be taken of the eco- nomic potential of the tobacco crop, it is essential that adequate process- ing capacity be available within Tanzania to handle the expected increases in production. 1.02 The proposed Project would assist Government in expanding the capacity of the Morogoro factory to accommodate production increases over the next five years. The Project expansion would be carried out in two stages to allow maximum flexibility; initially the existing threshing line would be improved by the purchase of new equipment and quality con- trol devices, and at a later date, a new and somewhat larger line would be installed. The Project would also include provision for improved storage facilities, additional infrastructure at the factory, technical assistance and training. 1.03 Previous Bank group financial assistance to the agriculture sector in Tanzania has included IDA credits totalling US$109.1 million and two IBRD loans for US$30 million for 11 Projects with agricultural production components. These Projects include, one for agricultural credit, two for beef and one for dairy production, and one each for tobacco growing, tea, cotton, sugar, cashew nuts and maize, and a rural development proj- ect in Kigoma Region. Financing for agricultural training and for feeder road development has been also provided under education and highway proj- ects.  - 2 - 1.04 Project implementation has tended to be slow, although there have been recent improvements in performance. In general, management, organiza- tion and staffing have been continuing problems. The smallholder projects for cotton and tea have been affected by the sudden acceleration of the villagization program in 1973 and 1974 (which has required major reorienta- tion of the projects and has caused significant delays), and have lacked effective management, whilst the cotton project has been further affected by the national emphasis on maize which competes with cotton. The tobacco production project is about 3 years behind schedule having suffered from problems particularly associated with its settlement aspects -- especially with village water supplies -- and also from early attempts to pressure farmers into communal cultivation (para. 2.06). The first livestock proj- ect was reasonably successful, but the second is progressing slowly due to delays in finalization of ranch plans, cost overruns in construction, and changes in project management. The Kilombero Sugar Project and Cashew Proj- ect, both largely concerned with construction of crop processing facilities, are proceeding well. The dairy development project and the maize project have only recently become effective. An agricultural and rural develop- ment sector study, carried out by the Bank in December 1974, reviewed the opportunities, constraints and strategy for agriculture and rural develop- ment, and outlined a long-term lending program. 1.05 This report is based on the findings of an appraisal mission to Tanzania in October-November 1975 composed of Messrs. J.H. Cleave, P.M. Tamboli and Mrs. J. Curling (IDA), and Messrs. C.S. Etheridge and J. Whitelock (Consultants). II. BACKGROUND A. General 2.01 Tanzania has a total area of about 880,000 km2. The population of 15.3 million (mid 1976), which is increasing at the rate of about 3% a year, is concentrated in a few regions, with about two-thirds of the popu- lation occupying only 10% of the land. Over 90% of the people are depend- ent on agriculture and 40% of GNP is derived from this sector. Per capita GNP was estimated at US$130 in 1974 but, in many rural areas, the per capita income does not exceed US$50 per year. The growth rate of the economy was about 5% per annum from 1964 through 1973; actual growth has lagged behind the Second Five-Year Plan (1969-1974) targets, mainly due to failure of the main agricultural crops to reach plan projections. 2.02 The 1973 drought and other factors, including the accelerated vil- lagization program, resulted in a serious reduction in agricultural produc- tion in 1974 and necessitated the import of 440,000 tons of food grains causing severe balance of payments problems. The total value of imports in 1974 was some 60% greater than in 1973 and, as total exports expanded at only about 2.4%, the trade gap increased, from TSh 0.9 billion (US$0.1 billion) in  -3- 1973 to TSh 2.5 billion (US$0.31 billion) in 1974. The overall balance of payments deficit in 1974 was estimated at TSh 980 million (US$122.5 million). Grain imports of about 415,000 tons were also reported in 1975, and although less than the previous year, were still seven times the normal level. The recent increase in petroleum prices and worldwide inflation have also had a severe adverse impact on the Tanzanian economy, and aggravated its problems. 2.03 Government recognized that immediate steps were required to meet this situation, and a comprehensive program designed especially to deal with the balance of payments problem was put forward in 1975. The main elements of the program consist of: (i) a reallocation of investment in favor of the directly productive sectors; (ii) measures to improve output in agriculture; and (iii) efforts to improve incentives in industry and mining and to in- crease the export orientation of these sectors. Tanzania's development policy also aims at reducing inequalities in income distribution through emphasis on smallholder agricultural and rural development, and on state control of important industries, services and large-scale agricultural enterprises, and the initiative for planning and implementing many devel- opment tasks has devolved to the regional and district administrations. Although the third five-year plan for the period 1975-1979 has been de- layed, it should be ready shortly and is expected to reflect these aims and continue the emphasis of the current program. B. Tobacco Production Tobacco Production (Annex 1) 2.04 About 75% of Tanzania's tobacco is grown by nearly 40,000 small- holders cultivating an average approaching 0.5 ha of tobacco each. The main tobacco growing areas are Tabora, Iringa and Mbeya Regions (see Map, IBRD 12126), although production is also expanding in Singida, Shinyanga, Kigoma and Lindi. In Iringa Region, production is dominated by about 60 large-scale farmers (mainly expatriates). However, the contribution of these farmers is decreasing and it is anticipated that over the next dec- ade their share of the nation's production will decrease from 25% to about 10%. Smallholder production is normally carried out in a village or vil- lage cluster and, under the Village Act of 1975, is subject to the control of an elected Village Council. It is not yet clear how this new Act will operate, but it does appear that communal or Ujamaa production will only be introduced at the wish of the village assembly. The Tobacco Authority of Tanzania (TAT) provides extension advice on growing, curing and classi- fying tobacco, as well as essential inputs. 2.05. Tobacco is typically grown in a five year rotation with food crops (mainly maize) and fallow. Farmers plant their own nursery beds in September and transplant the seedlings at the start of the rains in November. Reaping starts at the end of January and continues until March.  4 Farmers cure their own crop in individual or small-group tobacco barns con- structed largely from local materials and heated with wood cut from the ad- joining miombo (Brachystegia and Julbernadia spp.) forests. Farmers then grade their crop and sell it through the village cooperatives to TAT at the prices set in advance for each grade classification by TAT. Marketing starts in February and continues through March. The average smallholder farmer produces a crop with a biological yield of about 1,000 kg of wet, cured leaf per ha, similar to large farmers; however, it is estimated that the small- holder loses about 10% of his crop in the field due to lack of barn capacity, about 10% in the barn through poor curing techniques and another 25% in inefficient bulking and grading operation (mainly because of poor construction of, or a lack of grading sheds). Consequently, the average smallholder produces only 550 to 600 kg/ha of saleable tobacco. These figures indicate that there is considerabe potential for the improvement of overall yields, particularly from better handling. Flue-Cured Tobacco Project (Credit 217-TA) 2.06 An IDA credit for US$9.0 million was extended in 1970 to increase the production of flue-cured tobacco in Tanzania by about 9 million kg by 1978 (Annex 2). The Project aimed at settling some 15,000 new tobacco growers in villages of 100 farmers each; it was estimated that these farmers would, on average, cultivate about 0.5 ha of tobacco along with basic food crops. The Project also included provision for on-farm credit, extension services, construction of curing barns and grading sheds, access roads and water supplies and additional storage facilities. Progress under the Project has been slower than expected and incremental tobacco produc- tion is three years behind schedule. Some of the main problems have been associated with the settlement nature of the Project: delays in construc- tion of village water supplies; slow recruitment of farmers, due mostly to early attempts to pressure farmers into communal production; and smaller areas cultivated per family than anticipated. In addition, yields have been low and stagnant, in part due to an acute shortage of extension staff. A full review of the Project was carried out in 1972 which resulted in the rephasing of both physical development and of project costs and the estab- lishment of somewhat more realistic production targets. The reduction in the number of farmers participating in the project from 15,000 to 9,000 (along with the other factors mentioned above) has direct implications for the total volume of production expected to be achieved by the end of the Project period (1976). Total project production of wet leaf in 1974/75 was 675,000 kg, as compared with estimates of 3.9 million kg made at the time of appraisal. Production in the year 1975/76 season is expected to increase to about 1.2 million kg, which is still, however, well below the appraisal esti- mate of 6.3 million kg. Indications now are that the project is beglnring to show substantial progress, and it is expected that project production will expand at a greater rate than will overall national tobacco production. Projected Production (Annex 3) 2.07 In the last ten years, the production of tobacco in Tanzania has increased from 5 million kg to a peak (in 1972/73) of over 18 million kg cured leaf; most of the expansion was achieved in the smallholder subsector.  - 5 - Considerable further expansion into new areas is likely, without special pro- jects or external investment, and yields and area grown per family can be ex- pected to increase as farmers gain experience. It is not yet clear, however, at what rate production increases will be achieved; the rate of growth will depend on the number of families taking up and maintaining tobacco production, the area grown by each family, and the yields achieved; these variables will in turn be subject to such factors as relative product and input price levels, the availability of supplies, the longer-term effects of villagization, the delayed impact of Cr. 217-TA, and the efficacy of the extension service. TAT had forecast increases averaging 20% a year from 1973/74 (mainly in flue-cured tobacco), with production reaching nearly 46 million kg by 1979/ 80. These projections appear overly optimistic, however, and the follow- ing pattern of growth, the equivalent of 7-1/2% p.a., is considered more realistic.