Tanzania - Morogoro Industrial Complex Project

Report No. 1213-TA FILE COPY Tanzania: Appraisal of the Morogoro Industrial Complex March 3, 1977 Industrial Projects Department 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 US$ 1 = Tanzanian Shilling (Tsh) 8.3 Tsh 1 = US$ 0.119 Tsh 1,000 = US$ 119.00 WEIGHTS AND MEASURES 1 metric ton = 1,000 kilograms (kg) 1 meter = 3.28 ft. 1 kilometer = 0.62 miles 1 hectare (ha) = 2.47 acres 1 bale = 187 kg of cotton ABBREVIATIONS AND MEASURES EDF = European Development Fund EIB = European Investment Bank FA = Fixed Assets FE = Foreign Exchange IACP = Industrial Advisory Center of Pakistan ICB = International Competitive Bidding LC = ' Local Currency NATEX = National Textile Industries Corporation NDC = National Development Corporation NPC = National Price Commission NESPAK = National Engineering Services (Pakistan) Ltd. RCC = Reinforced Concrete Construction SIDO Small Industries Development Organization TANESCO = Tanzania Electric Supply Co. Ltd. TEXCO = National Textile Corporation TW = Third Window (Special IBRD Loan Facility) FISCAL YEAR Government July 1 - June 30 NDC January 1 - December 31  FOR OFFICIAL USE ONLY TANZANIA APPRAISAL OF THE MOROGORO INDUSTRIAL COMPLEX TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ................................ i -iii I. INTRODUCTION .1.......................................... II. THE INDUSTRIAL SECTOR ........ . . . .......................... I A. General ................... ........ ....... ... I B. Project Related Subsectors ........................ 3 III. NATIONAL DEVELOPMENT CORPORATION - THE EXECUTING AGENCY 6 IV. THE PROJECT ............................................ 8 A. General Description ............................... 8 B. Detailed Features ................................. 8 C. Markets and Marketing ..... ........................ 14 D. Project Management ................ .. .............. 15 V. COST ESTIMATES, FINANCIAL ARRANGEMENTS AND EXECUTION SCHEDULE . ............. 16 A. Capital Cost - By Project Component .... ........... 16 B. Capital Cost - Consolidated Estimate ............... 17 C. Financing Plan .................. . .................. 17 D. Allocation of Bank Loans, Procurement and Disbursements .................................. 19 E. Project Execution Schedule ........................ 21 VI. FINANCIAL ANALYSIS .................................... 21 A. Industrial Estate .......................... 21 B. Shoe Factory ..................................... 23 C. Leather Goods Factory ............................. 23 D. Consolidated Financial Return, Audits and Financial Management ........................... 26 E. Risks and Sensitivity Analysis .................... 26 This report was prepared by C. Goderez, E. Siou and B. Cu Kok of the In- dustrial Projects Department. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. ItU contents may not otherwise be disclosed without World Bank authorization.  -2- Page No. VII. ECONOMIC ANALYSIS ...................................... 28 A. Economic Return ................................... 28 B. Other Benefits .................................... 28 VIII. AGREEMfENTS ...................... ....................... 29 ANNEXES 1. The Industrial Sector - Structure and Performance 2. Regional Breakdown of Cattle Population, 1972 3. National Development Corporation - Structure and Performance 4. Industrial Estate - General Description 5. Water Requirements and Resources 6. Shoe Factory - General Description 7. Shoe Factory Prime Contractor - Corporate Profile 8. Leather Goods Factory - General Description 9. EIB/EDF Financing Plan - Canvas Mill 10. Canvas Mill - General Description 11. Markets and Marketing 12. NDC Project Management Organization 13. Industrial Estate - Capital Cost Estimate 14. Shoe Factory - Capital Cost Estimate 15. Leather Goods Factory - Capital Cost Estimate 16. Calculation of Price Escalation Factors 17. Working Capital Estimates 18. Disbursement Schedule 19. Project Implementation Schedule 20. INDUSTRIAL ESTATE Financial Projections, 1977-1998 Addenda: 1. Revenue and Operating Cost Statements 2. Income and Cash Flow Statements 3. Balance Sheets and Financial Return 21. Calculation of Price Deflators, 1975-1998 22. SHOE FACTORY Financial Projections, 1977-1998 it - Addenda: " - 1. Operating Cost Breakdown, 1982 2. Loan Amortization Schedule 3. Depreciation Schedule 4. Operating Cost Projection " - 5. Income, Cash Flow and Balance Sheets 6. Financial Return " - 7. Break-Even Chart  -3- ANNEXES (Continued) 23. LEATHER GOODS FACTORY Financial Projections, 1977-1998 if - Addenda: 1. Operating Cost Breakdown, 1982 " - 2. Loan Amortization Schedule " - 3. Depreciation Schedule 4. Operating Cost Projection 5. Income, Cash Flow and Balance Sheets 6. Financial Return 7. Breakeven Chart 24. Financial Return Sensitivity Tests 25. Economic Analysis 26. Foreign Exchange Impact 27. Glossary of Technical Terms MAPS IBRD 12052 IBRD 12053   TANZANIA APPRAISAL OF THE MOROGORO INDUSTRIAL COMPLEX SUMMARY AND CONCLUSIONS i. This report appraises a project to establish an integrated factory complex at Morogoro, a large town located 180 kms west of Dar es Salaam, which will produce shoes and other leather and canvas products. It consists of three components: (i) an industrial estate of 65 ha to provide developed land, power, waste treatment, housing and other common services for the initial factories of the complex as well as other small- and medium-scale factories expected to be attracted to Morogoro in the future; (ii) a shoe factory to produce canvas and leather shoes, primarily for export; and (iii) a leather goods factory to produce valises, wallets, handbags and garments, also primarily for export. Financing requirements for the project are estimated at US$36.2 million equivalent, to which the Bank would contribute two loans totalling US$23.0 million. The project implementation period is six years, 1977 to 1982, including three years of construction and three years of start- up and initial operations. ii. Not included in the Bank-financed project, but functionally in- tegral parts of the Morogoro industrial complex, are (i) a tannery which is already under construction with Bulgarian technical assistance and financial support, and (ii) a canvas mill to process Tanzanian cotton into canvas and other coarse count cloth for shoes, tents, tarpaulins, etc., to be financed by the European Investment Bank and European Development Fund. All three components of the Bank-financed project, as well as the tannery and the canvas mill, will be owned by the National Development Corporation (NDC), Tanzania's largest parastatal holding company, and will be organized and managed as independent corporations. iii. NDC has shareholdings in 22 corporations producing beverages and tobacco, leather, shoes, packaging materials, rubber tires, chemicals and metal products. These corporations have earned, on average, about US$10 million equivalent per year in after-tax profits since 1971, and have paid NDC about US$5 million per year in dividends. The trend of profits and dividend payments has been rising. NDC has a professional staff of 92 Tanzanian and 17 foreign experts, who have shared considerable experience over the years in implementing turnkey factory projects and operations. iv. Tanzania is one of Africa's largest producers of hides (cattle) and skins (sheep and goat). Most of the hides and skins are presently ex- ported in raw form. Only about 20% are processed to semi-finished and finished leather in the three existing tanneries, of which only one, at Moshi, can be classed as a large and modern unit. About 40% of the output of this plant is exported; the rest, with the output of the two smaller tanneries, is marketed for domestic use. The new tannery under construc- tion at Morogoro is planned to process annually about 280,000 hides and 900,000 skins and would raise Tanzania's capacity for leather production  - ii- to about 80/%O of the hides and skins expected to be commercially available in 1980. v. Tanzania is the fourth largest producer of cotton in Africa but processes only about 15% of its annual crop (430,000 bales in 1973) to yarn and cloth. Low grade cotton, which constitutes about 10% of the crop, is ex- ported at discounted prices. This would be suitable for the production of canvas and othier coarse count cloths. At present there is no domestic can- vas production in Tanzania. vi. One fairly modern shoe factory presently produces leather and can- vas shoes for the internal market. The output is of acceptable quality with- in Tanzania, but does not meet international standards. The new shoe factory planned as a project component would produce about 4 million pairs of shoes to international standards, primarily for export, but it is expected that a small part of the production will be sold internally. vii. The basic objective of the project is to use domestic hides, skins and cotton, which are presently exported as such, to produce finished pro- ducts of internationally competitive quality for export markets, and thereby increase domestic employment and foreign exchange earnings. The total number of jobs to be generated by the project is estimated at about 1,500, and the net foreign exchange earnings are projected at US$153 million equivalent (in constant 1975 terms) for the period, 1979-1998. The entire complex, includ- ing the tannery and canvas mill, will employ about 3,000 people. viii. Total financing required for the project would amount to US$36.2 million equivalent (Tsh 300 million) of which US$23.6 million is the direct and indirect foreign exchange content. The proposed Bank loans totalling US$23 million would be made to the Government and consist of: (i) US$11.5 million at 8.5% interest repayable over 20 years including 4-1/2 years grace, and (ii) US$11.5 million on "third window" terms, i.e., 4.5%. interest with the first principal repayment due on January 15, 1983 and final maturity on January 15, 2001. The Bank loans would cover 97.4% of the estimated foreign exchange requirement. ix. Both Bank loans would be on-lent to N4DC at 10% interest, repay- able over 15 years including 4-1/2 years grace. NDC will provide a suitable debt:equity structure for each project corporation. Its contribution to the project will amount to US$13.2 million equivalent to be provided out of internally generated funds or, if insufficient, funds from the national development budget. x. Adequate technical assistance will be provided through consultants and contractors for implementation of both the project design and construc- tion as well as the first three years of operations. For the shoe and leather goods factories, a qualified Italian consortium has been selected to provide engineering design, construction supervision, plant commissioning and management of operations, including international marketing, during three  - iii - years after start-up. A substantial training component has been built into the project to ensure eventual takeover of management by Tanzanians. These measures provide sufficient assurance of efficient project execution and achievement of planned production and marketing objectives. xi. The main element of risk in this project is associated with the international marketing of shoes in a rapidly growing but highly competitive world market. Even assuming the production of quality products at competi- tive cost, there is still a need for a high degree of specialized skills and adequate marketing channels in various countries, primarily within the OECD countries. These will be provided by the Italian group, which includes companies already in the business of marketing internationally shoes manu- factured in the lesser developed countries. xii. The aggregate after-tax financial return is calculated at 15.4% in constant 1975 terms and the economic return at 26.4%, reflecting the high level of net foreign exchange earnings and intrinsic national benefits to be derived from the project. The associated tannery and canvas mill are expected to yield comparable financial and economic returns. xiii. On the basis of the agreements negotiated and summarized in this report, the project is suitable for two Bank loans totalling US$23.0 million on the terms indicated in paragraphs viii and ix.   I. INTRODUCTION 1.01 In response to a request from the Government of Tanzania, the Bank has been advising and assisting the National Development Corporation (NDC) since 1974 in preparing a multi-plant industrial project at Morogoro, a town located 180 kms west of Dar es Salaam. NDC is a parastatal organization under the Mlinistry of Commerce and Industries with equity interests in a number of industrial companies and will act as the project executing agency and owner of the Morogoro Industrial Complex. 1.02 Based on the project parameters defined during the early assessment phase, two feasibility studies were commissioned covering the basic components of the proposed project: (i) an industrial estate to provide prepared land and common services for small-, medium- and large-scale factories and (ii) an integrated 4-factory complex consisting of a tannery, a canvas mill, a shoe factory and a leather goods factory, which will be the first industries to be located on the estate. The industrial estate study was prepared by National Engineering Services (Pakistan) Ltd. (NESPAK) and the factory study by the Industrial Advisory Center of Pakistan (IACP); both studies were received in mid-1975. 1.03 NDC negotiated Bulgarian technical and financial assistance for the tannery and this component of the Morogoro Industrial Complex is already under construction with start-up scheduled by late-1977. The remaining components were split between the Bank and the European Economic Community (EEC) on a parallel finance basis as follows: (i) the industrial estate, shoe factory and leather goods factory were taken up by the Bank, and (ii) the canvas mill by the EEC. It is expected that this first joint industrial development effort by the Bank and EEC will lead to other cooperative projects in the future. 1.04 An appraisal mission consisting of C. Goderez (Chief), E. Siou (Engineer) and B. Cu Kok (Economist), all of the Industrial Projects Depart- ment, was carried out in October 1975. The project in its present form has emerged after subsequent meetings in Washington, Luxembourg and Dar es Salaam of Bank, NDC, European Development Fund (EDF) and European Investment Bank (EIB) personnel to reach agreement on various questions. II. THE INDUSTRIAL SECTOR A. General 2.01 As detailed in Annex 1, industrial output (manufacturing value added) experienced sustained growth between 1964 and 1973 of 9.5% per annum in real terms. In reality, however, the growth rate was less significant than it might appear since the starting base was very small and incremental A glossary of technical terms commonly used in the leather and textile industries is given at the end of the report (Annex 27).  -2- ,utput wa-s not corimensurate with the large resources invested. Furthermore, since 1974 industrial production has stagnated. The economy is still pre- dominantly based on agriculture and industry accounts for only 10% of GDP, as compared to 8% in 1964. 2.02 Certain exogenous factors such as acute balance of payments problems since 1974, when imports rose sharply without a concommitant increase in exports (mainly cotton, coffee, sisal and other agricultural products), as well as an extended drought and power shortages, all contributed to the poor performance of the industrial sector in the last two years. But the Govern- ment acknowledges that in addition there are serious structural deficiencies which must be overcome if industry is to become the leading sector, as planned, in the short- to medium-term. These deficiencies are discussed briefly below since they have a direct bearing on the expected performance of the proposed project. 2.03 Industrial facilities are largely owned by the "parastatal" organi- zations, 1/ government-owned holding companies operating under the overall direction of various ministries (Table 1, Annex 1). In 1974, the parastatals through their operating companies accounted for 75% of value added, 50% of employment 2/ and 90% of new capital formation in the manufacturing sector. Generally, the performance of the parastatals has been deficient for a variety of reasons, including: (i) limited senior and middle management capabilities; (ii) excessive overhead costs; (iii) price controls based on manufactured cost plus fixed profit which tend to generate process ineffi- ciencies together with a lack of competition; (iv) low worker productivity because of overstaffing and absence of worker or management incentives for superior performance or disincentives for poor performance; and (v) low capacity utilization because of weak production planning, poor maintenance and lack of spare parts, raw and intermediate materials. 3/ Corrective measures needed range from those within the control of the parastatals (e.g., management improvement) to areas requiring Government policy adjustment (e.g., pricing). NDC, the largest parastatal and the executing agency for the Morogoro project, has begun to address these problem areas and, as noted in para 3.03, there has been encouraging progress. 2.04 The Government's industrial development strategy aims at increased processing of local raw materials for the national and foreign markets. Given the current balance of payments crisis (Annex 1) which is likely to continue for some time, highest priority is given to projects with strong net foreign exchange earning potential. This is the basic justification for the 1/ There are 11 parastatals which control 72 operating companies in the manufacturing sector. 2/ In 1972, the total work force in firms employing 10 or more was 59,000. 3/ A more detailed discussion is given in IBRD Report 647-TA, "TANZANIA: Industrial and Mining Sector Survey", March 31, 1975. Vol. 1.  Morogor, Industrial Complex in which locally available hides, skins and cotton are to be upgraded into finished leather, canvas and a variety of leather and canvas finished products for the export market. B. Project Related Subsectors 1. Livestock 2.05 Depending on the source, various estimates are available regarding the present cattle population of Tanzania, ranging from 9 to 15 million. According to a census made in 1972, the national herd was 9.3 million head (Annex 2). Since there are indications that there was some undercounting in the census, however, a reasonable estimate (for 1972) would be nearer the 10 million mark. 1/ An estimate of the cattle, goat and sheep population, their growth rates and off-take is given below from data supplied by the Livestock Development Authority: Tanzania - Herd Population, Growth Rate and Off-Take Annual Projected Estimated Hide Population Growth Population and Skin Avail- Livestock (1972) Rate Off-Take (1982) ability (1982) (million) (%) (%) (million) (million) Cattle 10.0 2.5 14 12.8 1.8 Goats 4.5 2.5 33 5.8 1.9 Sheep 3.0 2.5 21 3.8 0.8 2.06 The off-take of livestock is composed of official and unofficial slaughterings, and fallen animals. MAost of the animals are individually owned but grazed on communal land according to established tradition. The greater part of the herd is located in the Mwanza, Shinyanga, Musoma and Singida regions (Map, IBRD 12052) where cattle are kept by the Sukuma people as an auxiliary activity to growing cotton and maize. Large concentrations are also found in the Dodoma, Arusha and Kilimanjaro regions where animals constitute a major source of income for the Gogo and the Masai tribes. Extensive livestock-keeping in the south-east and in large areas of the west is precluded by the presence of the tsetse fly. Although the cattle herd has increased from about 3 million head in 1924 to the 1972 figure of 10 million noted above, its productivity is extremely low - a calving rate of about 50%, 1/ In the appraisal report, "Tanzania Dairy Development", Project Report No. 765-TA, para 2.06, the figure used is 10 million head.  -4- a calf and adult mortality of about 20% and 10% respectively and an average liveweight at slaughter of about 250 kgs. Low productivity can be attributed to inadequate nutrition, high disease incidence and parasite infection, inadequate herd management, and the poor genetic quality of the native cattle (small East African shorthorn Zebu). 2.07 The potential for livestock development in Tanzania is enormous, both through an improvement and intensification of husbandry in existing cattle areas, and by extending these areas through tsetse control. There are also areas where the size of herds could be increased substantially if watering facilities were provided. IDA has already approved two credits for livestock development in Tanzania, the first (132-TA) in 1968 for US$1.3 million (fully disbursed) and a second credit (382-TA) in 1973 for US$18.5 million. These two credits are aimed at creating a growing modern (non-traditional) cattle ranching and slaughtering sector. 2.08 It is estimated that the animal population in the country will improve steadily both in quantity as well as quality and the raw hide and skin requirements for Morogoro - 280,000 hides and 900,000 skins annually - will be available in the foreseeable future. Because of Morogoro's central location as a highway and railroad transportation hub, delivery of hides and skins will not be a problem. 2. Leather and Leather Goods 2.09 Hides and skins are by-products of the meat and dairy industries and, as such, their availability is directly linked to the growth in produc- tion of the primary products. The value of hides and skin ranges from 5 to 15% of the value of the animal. 2.10 Currently, three commercial tanneries are operating in Tanzania capable of processing some 200,000 hides and 310,000 skins per year or about 20% of local availability (1.0 million hides and 1.5 million skins in 1975). The balance is exported as wet-salted and dried hides and skins. The largest is the Tanzania Tanneries Company Ltd. at MIoshi which alone handled 140,000 hides and 300,000 skins in 1974, producing wet-blue, crust and finished chrome-tanned leather for both the domestic and export markets. Expansion plans already being implemented at this tannery will double the capacity by 1977. The two smaller tanneries produce vegetable tanned leather of lower quality for shoe soles and industrial purposes. Another modern tannery is under construction at Mwanza with a planned capacity of 360,000 hides per year. When the tannery at ltorogoro reaches full production at its design capacity of 280,000 hides and 900,000 skins per year, Tanzania will have a national capacity to process about 80% of the hides and skins expected to be commercially available in 1980. 2.11 Although not of the best quality, Tanzania successfully exports dried and wet-salted hides from all sources and wet-blue, crust and finished  - 5 - leather from the Moshi tannery. Sales are at world market prices correspond- ing to the quality of the products and exports are marginally profitable. 1/ Improved leather quality is expected at all three of the existing or planned modern tanneries at Moshi, Mwanza and Morogoro and there should be no dif- ficulty in exporting tanned leather at acceptable margins of profit in the future to a growing world market. Tanzania has not exported finished leather goods in any significant quantity as yet. Leather and canvas shoes produced at the Tanzania Shoe Co. Ltd. (formerly BATA), while of acceptable quality in the domestic market, cannot compete internationally. Recently, leather work gloves (from scrap leather) have begun to be exported and small quanti- ties of leather jackets and handbags have achieved limited acceptance among tourists. Internationally, there is a large and growing demand for quality leather goods and the entire production of these items at Morogoro should be easily marketable provided they are competitive in price and style and suitable marketing channels are established. 3. Cotton and Textiles 2.12 Tanzania is the fourth largest cotton producer in Africa with an output of 430,000 bales in 1973, up from 160,000 bales in 1958. Only about 15%, or 63,000 bales, of the cotton crop is processed to yarn and woven cloth domestically; the balance is exported as baled cotton. The textile industry, virtually non-existent 10 years ago, now ranks first in the manu- facturing sector accounting for about 25% of employment, 13% of value added and 11% of gross output for the sector as a whole. TEXCO, a government parastatal, holds shares in and oversees the operations of the 7 existing textile mills in Tanzania. In 1975, the Bank extended a US$15 million loan to one of TEXCO's mills at Mwanza to finance expansion of annual capacity from 23 to 43 million meters of finished fabrics; implementation of the project is proceeding well within the original cost and time estimates. 2.13 The quality of Tanzanian cotton is above average, falling into the medium to long category (fiber length of 1-1/32" to 1-3/32") and is suitable for spinning yarn up to 50 counts. Ninety percent of the crop is the so-called AR grade, which is comparable to U.S. Memphis SM 1-1/16", selling on the world market at about a 10% premium over the price of 1" staple. Ten percent, or 43,000 bales, is the BR grade consisting of shorter fiber lengths, overripe, off-color and weaker fibers with a trash content of 12% (vs. 7% for AR cotton). BR cotton sells at a discount of 25-35% below the AR prices. 1/ Part of the problem is the overvalued currency. In October 1975, the Tanzanian shilling was devalued by 15% and the exchange rate rose from Tsh 7.10/US$1 to Tsh 8.16/US$1. As a consequence, profit margins on leather and other exports increased in 1976 but even at the higher ex- change rate, the Tanzanian shilling still appears to be overvalued. For economic analysis purposes, the Bank assumes the real value of the shilling to be Tsh 11/US$1.  - 6 - 2.14 Currently, of the 63,000 bales of cotton processed in Tanzania annually, 60,000 are AR and 3,000 BR grade. All of the remaining 40,000 bales of BR cotton are exported at discounted prices. Canvas is made from BR cot- ton, but there is yet no indigenous canvas production (the 3,000 bales of BR cotton are consumed internally in producing other types of coarse cloth such as duck and drill). The Mlorogoro Canvas Mill will consume 23,000 bales of BR cotton annually, about 57% of the current exportable surplus, in pro- ducing canvas of various types for shoes, tarpaulins, tents, sails, knapsacks, etc. Canvas and made-up canvas goods are commodities traded internationally and with good long-range growth prospects. Given the existing production and consumption pattern for BR cotton noted above, it is self-evident that up- grading the raw material to higher levels of value added as proposed in the i>forogoro project is sound policy for Tanzania. III. NATIONAL DEVELOPMENT CORPORATION (NDC) - THE EXECUTING AGENCY 3.01 The National Development Corporation, headquartered in Dar es Salaam, is the largest parastatal holding company and Tanzania's principal instrument for industrial investment since its inception in 1964. As detailed in Annex 3, it is governed by a 9-man Board of Directors including the General Manager. IBC's 6 operating departments are staffed by 109 profesionals of which 17 are foreign experts serving in various managerial and technical capacities; office staff totals 134. 3.02 NDC holds shares in 22 companies of which 17 are classified as subsidiaries (over 50%l IDC shareholding) and 5 are associate companies (50% or less NDC shareholding). The 22 companies operate in the following fields: metal working (8); tobacco and beverages (4); printing and publishing (4); chemicals and allied products (3); and leather tanning and processing (3); together they employ about 9,000 people. Operations of the NDC Group compan- ies have been profitable every year since 1968 on a consolidated basis, although some companies had been experiencing losses. In 1974, for the first time, each of the companies made after-tax profits (Table 2, Annex 3). Similar results were achieved in 1975 and in 1976. 1/ The overall capitali- zation of the TBC Group is sound with a debt:equity ratio of 35:65 though a somewhat tight liquidity. Consolidated sales and profits of NDC's Group Companies in recent years are summarized below: 1/ With the exception of the Tanzania Fertilizer Co.; fertilizer prices are controlled as a matter of national policy and profitability is low or negative as a result.  - 7 - NDC Group Companies - Sales and Profits, 1971-1976 (Tsh millions) /1 1971 1972 1973 1974 1975 1976 Net Sales 1,062 1,427 1,734 1,083 1,340 1,300 Profit (after-tax) 114 144 103 83 90 104 Profit as % of Sales 10.7 10.1 5.9 7.7 6.7 3.0 /1 Including a number of profitable mining and textile operations which have been transferred to other parastatals, resulting in the sharp drop in revenue in 1974. 3.03 Operational results of the Group Companies can be considered modestly satisfactory. In 1974/75, NfDC instituted a comprehensive program of in-plant reorganization and efficiency studies to correct known problems in management, maintenance, inventory control, excess receivables, unbalanced process lines, worker skills and incentives. Initial results are promising. Vor example, in 1975 receivables were reduced in aggregate by Tsh 25 million, corresponding to a reduction from 41 days of net sales to 35 days. The in- crease in profitability from 6.7% in 1975 to 8.0% in 1976 may be partly attrib- utable to the efficiency measures undertaken and performance in future years can reasonably be expected to improve progressively. 3.04 Central office management and staff of NDC have developed substan- tial capabilities in the textile and leather sectors. Three of the Group Companies - Tanzania Hides and Skins, Tanzania Tanneries and Tanzania Shoe Co. - are the country's major processors of hides and skins from the raw state to finished products. Until 1973/74, N1C also managed the country's textile firms. These have since been transferred to another specialized parastatal, TEXCO, but NDC's experience in the textile sector provides a solid foundation for planning and implementing the canvas mill component of the llorogoro Complex. 3.05 To place the project in perspective, when completed it will add 3 operating companies to NDC's existing portfolio of 22. Project aggregate revenue in 1982, when full operating capacity is scheduled, will be about US$33.2 million compared to 1975 revenue for 1MC's existing 22 Group Com- panies of US$189 million and 1982 estimated revenue of US$450 million to 500 million for 27 Group Companies, including the tannery and canvas mill (all in current terms). These figures indicate that the I4orogoro project, while large, should not per se place an extraordinary burden on NDC's grow- ing financial and management capabilities. 3.06 NDC is therefore considered to have the basic management organi- zation and financial and functional capabilities to act successfully as the  - 8 - executing agency for the project. Specialized technical assistance will be needed, however, and has been incorporated into the project design as detailed in the next chapter. IV. THE PROJECT A. General Description 4.01 The project, to be implemented over a 6-year period from 1977 to 1982, consists of three components: Component Description 1 Industrial Estate - 65 ha of developed land complete with roads, surface drainage canals, power, water, sewage disposal, telecommunications, housing and other facilities for small- and medium-scale industries. The 2 factories to be constructed initially as project components are: 2 Shoe Factory - to produce 2 million pairs of leather shoes and 2 million pairs of canvas shoes per year; 3 Leather Goods Factory - to fabricate handbags, suit- cases, jackets and various minor items from 183,000 m of finished leather per year. The 3 project components together with the tannery, already under construc- tion on the estate 1/, and the canvas mill 2/, constitute a vertically inte- grated industrial complex fully owned by NDC. Each operating unit will be an independent company. The chart (next page) graphically illustrates the flow of materials and other related data of the interlinked factory complex. B. Detailed Features 1. Component 1 - Industrial Estate 4.02 For the industrial estate, described in greater detail in Annex 4, an area of 204 ha has been reserved 4 kms north of Morogoro, a large town of 1/ The tannery was designed and is being built with Bulgarian technical assistance and finance; construction started in September 1975. 2/ To be financed by FIB and EDF.  - a - TANZANIA MOROGORO INDUSTRIAL COMPLEX MATERIALS FLOW CHART HIDES SKINS COTTON (280,000 Pieces) (900,000 Pieces) (4,332 M.T.) TANNERY CANVAS MILL 300 Days/Year 300 Days/Year 1 Shift/Day 3 Shifts/Day Employment: 334 Employment: 921 Producing Producing Finished Leather Canvas (m2000) (iM2 000) For Shoes From Hides: 585 (Laminated): 2,800 As Dyed Canvas: 2,062 As Waterproof From Skins: 450 Canvas: 2,800 Total: 1,035 Total: 7,662 1,035,000m2 7,662,000m2 To Market 4 M 3 To Market 183,000m 2 558,000rn2 I I LEATHER GOODS SHOE FACTORY FACTORY 300 Days/Year 300 Days/Year 1 Shift/Day Shift/Day Leather Section: 1 Employment: 113 Canvas Section: 2 Other Section 1 Producing Employment: 1073 Units Producing Handbags: 18,000 Shoes: Suitcases: 10,000 Pairs Belts: 14,000 Leather: 2 Million Jackets: 40,000 Canvas: 2 Million Wallets: 32,000 To Market To Market World Bank-15843  - 10 - 40,000 population situated some 180 kms west of Dar es Salaam, Tanzania's capital and major port. The site is on the main hardtop road connecting lhorogoro and Dodoma and is 2 kms from the intersection with the Tan-Zam Highway. Norogoro also lies on the Central Railway line connecting Dar es Salaam with the main centers in the north and west of the country. Because of its excellent rail and highway connections, and its central location, Morogoro is particularly well suited for the proposed complex in terms of raw material and finished goods transport requirements. Topography, terrain and climate are suitable for factory construction and the operations planned. Sufficient labor will be available from tiorogoro and nearby rural areas. 4.03 The site plan (Annex 4, Addendum 1), covering the development of 65 ha required for the project shows the internal road network and the location of the tannery, canvas mill, shoe factory, standard factory buildings (one of which will house the leather goods factory), utilities and a housing 2 zone for about 35 residential units totalling approximately 5,250 m . Four standard factory buildings are planned, measuring 120 m x 12 m each, or 5,760 m total covered space with clear height under beams of 4 m. The smallest module will be 240 m and small- to medium-scale factories will be able to rent one or more modules as needed. About 16% or 240 m of the first building will be occupied by the administrative offices and maintenance shops of the estate corporation; the balance will be occupied by the leather goods factory. The second building will be built in anticipation of the demand for factory space of small- and medium-scale industries expected to be established in the future, some of which will be ancillary to the major project factories. Initially, only two of the buildings will be constructed until the demand for additional standard factory space becomes more certain and the decision to proceed with the third and fourth building will be taken in consultation with the Bank. 4.04 The expected land use pattern of the estate is given below: Industrial Estate - Land Use Pattern (Phase I) Industrial Plots for: ha _ Tannery 8.0 12.3 Canvas Mill 7.5 11.5 Shoe Factory 5.5 8.5 Standard Factory Buildings 2.0 3.1 Unallocated /1 15.0 23.1 38.0 58.5 Residential Area 5.0 7.7 Admin. Building 2.0 3.1 Roads, Utilities, Landscaping 20.0 30.7 Total 65.0 100.0 /1 15 ha of developed land will be ready for occupancy by non-project indus- tries in 1979; specific factories are not yet identified.  - 11 - 4.05 The Morogoro Industrial Complex, at3full capacity, is expected io have an average daily water demand of 2,800 m and a peak load of 4,000 m (Annex 5). 1/ Initially, water will be drawn from the nearby Ngerengere River but this source has limited capacity and during the dry season each year operations would have to be curtailed or shut down. A prolonged period of drought, as has occurred twice in recent years, would be a major disaster for the complex. What appeared to be a serious impediment to establishing the Morogoro Complex at the time of field appraisal, however, is being re- solved by means of a water supply project approved for a Bank loan of US$15 million in December 1976. 2/ This project, to be implemented between Jrne 1977 and July 1979, will expand Morogoro's peak water production by 25,400 m /day through the construction of a dam at Mindu, 5 kms from Morogoro, and water treatment facilities, pumping stations and a pipeline to Morogoro. The capa- city of the system is adequate to meet all demands, including the industrial complex, for the foreseeable future. Because of the importance of an assured supply of water, agreement has been reached that a condition for major disburse- ments 3/ will be that firm financing arrangements acceptable to the Bank have been made for the Mindu dam and pipeline and that all conditions for initial disbursements be fulfilled. This condition has been met with the effectiveness of the Bank-financed urban water supply project on March 2, 1977. 4.06 The feasibility study proposed a 57 ha evaporation/oxidation pond as the simplest practical method of liquid waste disposal. However, it has been agreed that this will be studied further by qualified consultants to determine if ecological considerations dictate a more sophisticated and effi- cient system and the required study will be part of the TOR for the design and construction of the industrial estate. Assuming that a higher technology system may be needed, the project capital cost estimates include a provision of US$800,000 for this purpose. 4.07 Operation of the industrial estate will be the responsibility of a resident Estate General Manager and an Engineer, the latter functioning as Assistant General Manager and Maintenance Supervisor. Staff will con- sist of no more than 15 (Annex 4, Addendum 2). It has been agreed that by December 1978 an estate corporation will be established and an experienced industrial estate manager will be recruited in consultation with the Bank for an initial period of 2 years. He will be responsible for operation and the training of a Tanzanian assistant who will take over as General Manager on completion of the 2-year technical assistance contract. The estate will 1/ Corresponds to consumption when the 4 starting factories are at full production circa 1982; future expansion of the estate would increase water consumption proportionally. 2/ For details, reference is invited to the Grey Cover Appraisal Report No. 1199-TA "Tanzania: Appraisal of Urban Water Supply Project", November 30, 1976. 3/ Refers to civil works and equipment but not to engineering expenditures.  - 12 - function as an independent corporation and "profit center" in all dealings with factories already located within its boundaries or planning to do so. Termination or extension of the General Manager's contract will be decided in consultation with the Bank. A short list of 6 qualified consulting organi- zations was prepared in consultation with the Bank, and their competitive proposals for detailed engineering and supervision of construction are being evaluated (February 1977). The contract is expected to be signed in the second quarter of calendar 1977. 2. Component 2 - Shoe Factory 4.08 The factory has been laid out and equipment specified (Annex 6, Addenda 1 and 2) for an annual production of 2 million pairs of leather and 2 million pairs of canvas shoes. IACP included a cardboard box-making depart- ment in the factory plan, but the need for this investment, although included in the cost estimate as a safety factor, will be examined further during the detailed design phase. 1/ 4.09 The IACP feasibility study was reviewed by a firm of experts prior to the field appraisal (Roit Corp. of the U.S.A.), who concluded that the factory layout and bill of equipment were suitable for the product mix and proposed production levels. Equipment cost estimates were also found to be realistic. It was recommended, however, that if possible and depending on the recommendations of the contractor responsible for the international mar- keting, the initial product mix be concentrated in one or two basic types of leather shoes and similarly for canvas shoes rather than the ten varieties of shoes assumed in the feasibility study. A further recommendation was to substitute manual in-factory movement of goods using simple locally-produced carts instead of the automated conveyor systems specified by IACP. Both recommendations will be considered in finalizing the marketing plan and plant design. It is also likely that equipment more suitable for hand-made rather than machine-made canvas shoes will be procured since international demand is strongly biased towards the former. As a result, labor intensity is likely to be higher than assumed by IACP and capital investment will decrease to some extent. 4.10 It has been agreed that NDC shall employ, during a period of at least six years, a qualified firm or firms to provide needed technical assistance during construction and initial operations. In consultation with the Bank, two technical assistance contracts have been negotiated by NDC with an Italian consortium headed by Italmacchine Plants S.p.A. of Milan; detailed information on this group of companies is given in Annex 7. The first contract, signed in February 1977 after review and approval by the Bank, covers the provision of engineering design, construction super- vision and training services including commissioning of the factory. The second contract covering factory management and international marketing services for a period of 3 years after factory start-up, is in draft form and has been submitted to the Bank for review and approval. After approval by the Bank, the contract will be submitted to the Economic Committee of the Cabinet whose approval is required for all management contracts signed 1/ NDC owns a large, well-equipped box-making plant in Dar es Salaam - Kibo Paper Industries Ltd. - which could expand its production to meet the needs of the Morogoro shoe factory.  - 13 - by parastatals, a procedure that normally takes 6 to 12 months. It has been agreed that extension or termination of this contract will be decided in consultation with the Bank. It was further agreed that a corporation will be established by December 1978 to take charge of the shoe factory. 4.11 At full capacity, staff requirements will be: (i) general manage- ment and office staff, 60; (ii) production management, 5: (iii) factory staff, about 1,000. Of the total, no more than 10 are expected to be expatriate management and technical personnel; most middle management, foremen and key skilled workers are likely to be drawn from the existing shoe factory in Dar es Salaam with supplemental training to be provided under the technical assist- ance contracts. The 10 expatriates will serve for 3 years and a few may be continued for an additional 3-year period under the possible contract extension noted in para 4.10. 3. Component 3 - Leather Goods Factory 4.12 As discussed in detail in Annex 8, this factory will be housed in one of the standard factory buildings. It will consist of a number of working areas in which skilled craftsmen using small powered and hand tools produce various types of leather goods. Planned annual production at full capacity, consuming 183,000 m of finished leather, will be: (i) handbags, 18,000; (ii) suitcases, 10,000; (iii) wallets, 32,000; (iv) leather belts, 14,000; (v) leather jackets, 40,000. In addition to the basic raw material (leather from the 1iorogoro tannery), imported lining material, thread, glue, locks and other assorted hardware will be needed. These imports, amounting to about 15% of total raw material cost, may eventually be replaced to some extent by domestic production in small-scale ancillary shops. 4.13 Staff will total 116, including 3 foreign experts - a leather tech- ,nologist, a modellor (to prepare samples and patterns) and a quality inspector. hanagement and marketing services will be provided by the shoe factory prime contractor. As Tanzanians gain the necessary skills, the foreign experts would be phased out. But, as mentioned in the section on Ilarkets and Mlar- keting, commercial linkages to be established with foreign marketing agencies will ensure that up-to-date designs will be continually available to keep the industry "fashion-competitive" even after the foreign experts leave. It has been agreed that a corporation will be established by December 1978 to take charge of the leather goods factory. 4. Canvas Mill 4.14 This factory, although not part of the Bank-financed project, is an integral part of the MIorogoro Industrial Complex and was appraised by the field mission in 1975 along with the 3 project components. Subsequently, it was agreed that EIB/EDF would undertake the financing of the canvas mill. These institutions conducted an independent appraisal in October 1976 and have scheduled final approval of a combined loan and grant package (Annex 9) by mid-1977.  - 14 - 4.15 The Bank appraisal, detailed in Annex 10, indicates the technical, financial aVd economic viability of the canvas mill. It will produce 7,662,000 m 2of canvas cloth to various specifications of which about 7% or 558,000 m will be delivered to the shoe factory and the balance sold for other domestic uses or exported. A leading Netherlands manufacturer of canvas has reassessed the original feasibility study and will be contracted to provide engineering design, construction supervision, mill management and marketing services similar to the technical assistance to be provided by the Italian group to the shoe factory. While the canvas to be produced at Morogoro is not essential to the success of the shoe factory (canvas can be imported), the development of the canvas mill in parallel with the Bank project would generate numerous benefits enhancing the overall performance of the industrial complex. For that reason, the Bank and EIB/EDF projects will continue to be closely coordinated through: (i) direct communication between Bank and EIB project staffs and (ii) central supervision by NDC's project management organization. C. Markets and Marketing 4.16 The project is strongly export oriented as shown in the table below: Projected Sales of Morogoro Complex, 1982 /1 Gross Direct F.E. Product Annual Production Product Value /2 Export Sales Earnings (US$ million) (%) (US$ million) Shoes Leather 1.8 million pairs) 29.8 80 23.9 ) Canvas 1.8 million pairs) Leather Goods 102,600 pieces 3.4 80 2.7 Total 33.2 80 26.6 /1 1982 is first full year of production at 90% of design capacity. /2 In current terms. 4.17 It is apparent that the success of the project as a generator of foreign exchange depends, primarily, on the success of the international shoe marketing strategy and to a lesser extent on the export sales of surplus leather and leather goods. Annex 11, which discusses at length the export prospects for all of Morogoro's products, indicates that the international demand for finished leather is so large that the modest increments to be offered by Morogoro starting in 1980 should be easily marketable given com- petitive quality and prices. Tanzania already has established channels for exporting leather from the Moshi tannery to Europe, the Far East and the USA and every indication is that the exportable surplus from Morogoro can be  - 15 - absorbed easily, even by the same customers. The paragraphs following, therefore, address the key question of export marketing of shoes. 4.18 The world market for shoes of all types was estimated by FAO at 4,000 million pairs in 1973, of which the OECD (developed) countries accounted for 1,700 million. Among the OECD countries, the USA alone consumes about 800 million pairs annually. Some 45% of the OECD market demand - and the proportion is increasing - is currently imported from low or moderate labor cost countries such as Korea, Taiwan, Hongkong, Brazil, Spain, Italy and the Philippines. As shown in Annex 11, world demand is growing at a rate of 2% p.a. while imports into the developed countries are growing at 3% p.a. In 1980, when ilorogoro shoes will become available for export, the OECD market will be about 2,000 million pairs, of which 1,000 million or 50% are expected to be imported. The annual incremental demand for imported shoes in the dev- eloped countries will then be of the order of 25-30 million pairs. While this represents the major potential export market for Morogoro shoes, signif- icant sales are also expected to be developed in other African countries and the Near East. The maximum planned production of 2 million pairs each of leather and canvas shoes at Morogoro will represent only 0.4% of the fore- casted imports of OECD countries alone in 1982 or about 14% of the annual incremental demand at that time. 4.19 Italy, Spain and, for higher priced leather shoes, England and France have been the traditional net exporters of shoes. Since the 1950's, a number of low-labor-cost countries - Japan, South Korea, Taiwan, Brazil, and Hongkong - have become major suppliers of the world market. Other countries, including China, the Philippines, Malaysia, Greece, 1Mexico, Iran, Pakistan and India are assuming increasing importance as exporters of shoes, both leather and canvas. The proliferation of new country sources of shoes in recent years strongly supports the assessment that, given Tanzania's com- parative advantages - basically, the availability of indigenous cotton and leather and relatively low labor costs - there are no inherent reasons to prevent tiorogoro from joining the expanding list of suppliers to the large and growing world market. Price and quality must, of course, be competitive. This was the conclusion of the IACP feasibility study as well as a special study conducted by an English firm in 1975. 1/ 4.20 More importantly, in support of this assessment, two leading world distributors of shoes were actively competing for the marketing contract. After joint evaluation of both proposals, the Italian group was selected and the proven marketing capabilities of this group will go a long way to ensure the commercial viability of the project. D. Project Management 4.21 Project implementation comprises 3 years of construction followed by a 3-year start-up period to reach full capacity production. Central man- agement responsibility will reside in NDC's Research and Development Depart- ment in Dar es Salaam headquarters which has carried out similar projects 1/ "Export Miarkets for Tanzania Leather and Leather Products", Atkins Planning (UK), November 1975.  - 16 - in the past. A Project Manager, Mr. A. Ng'amilo, has been appointed in con- sultation with the Bank; his qualifications are given in Annex 12. Mr. Ng'amilo will head the project management staff and report directly to the head of the R. & D. Department of NDC as shown in the chart attached to Annex 12. The duties of the project management staff will be inter alia: (i) preparation of a project execution plan based on modern strategic path concepts; (ii) screening, evaluation and selection of consultants and con- tractors; (iii) coordination and monitoring of the work programs of con- sultants and contractors; (iv) preparation of periodic progress reports as required by NDC and the Bank; (v) review and approval of billing submitted by consultants and contractors. The Project Manager and staff will be provided with office and other facilities (e.g., vehicles) required to fulfill their duties and will be assisted as appropriate by other NDC corporate staff who will provide necessary engineering, legal, accounting, recruitment and train- ing services. 4.22 Field management personnel, based in Morogoro, will consist of: (i) a Supervising Engineer and (ii) a Works Accountant, both of whom will report to the Project Manager. Their duties will be: (i) as owner's representatives, general on-site liaison with consultants and construction contractors, and (ii) checking and processing of workdone certificates. 4.23 On the completion of construction, start-up and operation of each project component will become the responsibility of the Operations Depart- ment of NDC. Planning for all management and staff requirements will take place during construction, and recruitment of key operating personnel for each factory is scheduled to be completed no later than 6 months before the planned date of start-up, in close collaboration with the contractors res- ponsible for start-up, training and initial operations. V. COSTS ESTIMATES, FINANCIAL ARRANGEMENTS AND EXECUTION SCHEDULE A. Capital Cost - By Project Component 5.01 Capital cost estimates summarized in para 5.03 from Annexes 13, 14 and 15 are realistic for the following reasons: (i) the feasibility studies were well prepared in this respect; (ii) for the industrial estate component, the Bank has up-to-date cost data on several comparable projects in other countries; and (iii) for the shoe factory, the project engineering contractor reviewed the design and cost estimate in November/December 1976 and com- municated its revised cost estimate to NDC and the Bank in January 1977; this estimate has been incorporated into the contract as the basis for cal- culating fees. For all civil works, the Bank appraisal mission in October 1975 checked actual costs being incurred at that time in civil works of similar nature under execution and, in addition, has been receiving periodic reports since on actual escalation taking place in Tanzania. (Depending on the type of construction, by end-1976 costs had escalated by 40 to 100% above the estimates in the feasibility study).  - 17 - 5.02 For the reasons given above, physical contingencies of 10% on civil works and 5% on equipment, respectively, are considered safe upper limits. Price escalation was calculated according to the methodology outlined in Annex 16 and reflects the Bank's estimate of annual rates of inflation to 1979. Since Tanzania's price index appears to follow the international trend closely, the same escalation factors were applied to both LC and FE expenditures. Working capital was estimated as shown in Annex 17. B. Capital Cost - Consolidated Estimate 5.03 The table below summarizes the capital cost estimates for the proj- ect by major expenditure category and then by project component: Capital Cost - Consolidated Project /1 (millions) Tsh US$ Expenditure Category LC FE Total LC FE /2 Total % Equipment 3.8 44.6 48.4 .5 5.4 5.8 36.3 Civil Works 28.7 32.1 60.8 3.4 3.9 7.3 45.6 Cons. & Eng. Serv. 3.4 17.2 20.5 .4 2.1 2.5 15.6 Training .6 2.5 3.2 .1 .3 .4 2.5 Base Cost Estimate 36.5 96.4 132.9 4.4 11.7 16.0 100.0 Contingencies 17.2 43.5 60.7 2.1 5.2 7.3 45.6 Installed Cost 53.7 139.9 193.6 6.5 16.9 23.3 145.6 Net Working Capital 42.9 30.5 73.4 5.2 3.7 8.8 55.0 Interest during Construction /3 8.4 25.4 33.8 1.0 3.1 4.1 25.6 Total Financing 105.1 195.8 300.9 12.6 23.6 36.2 226.2 Project Component 1. Industrial Estate 31.1 47.8 78.9 3.7 5.8 9.5 26.2 2. Shoe Factory 69.2 144.3 213.5 8.3 17.4 25.7 71.0 3. Leather Goods Factory 4.8 3.7 8.5 .6 .4 1.0 2.8 Total Financing 105.1 195.8 300.9 12.6 23.6 36.2 100.0 /1 Discrepancies to a tenth of a million occur due to rounding. /2 The estimated indirect foreign exchange component is US$2.0 million. /3 Interest during construction consists of: 8.5% p.a. capitalized interest, plus 0.75% p.a. commitment fee on the undisbursed portion of the loan, and 1.5% p.a. guarantee fee paid by NDC to Government. C. Financing Plan 5.04 The proposed financing plan is given below, first for each project component and then on a consolidated basis:  - 18 - Financing Plan /1 By Project Component ----Tsh Millions---- ----US$ Millions---- INDUSTRIAL ESTATE LC FE Total LC FE Total % Debt (IBRD) - 45.7 45.7 - 5.5 5.5 57.9 Equity (NDC) 30.7 2.5 33.2 3.7 .3 4.0 42.1 Total Finance 30.7 48.2 78.9 3.7 5.8 9.5 100.0 SHOE FACTORY Debt (IBRD) - 127.8 127.8 - 15.4 15.4 59.9 Equity (NDC) 68.9 16.6 85.5 8.3 2.0 10.3 40.1 Total Finance 68.9 144.4 213.3 8.3 17.4 25.7 100.0 LEATHER GOODS FACTORY Debt (IBRD) - 5.0 5.0 - .6 .6 60.0 Equity (NDC) 3.3 - 3.3 .4 - .4 40.0 Total Finance 3.3 5.0 8.3 .4 .6 1.0 100.0 Consolidated Debt (NDC) Financed by: IBRD - 178.5 178.5 - 21.5 21.5 Total Debt - 178.5 178.5 - 21.5 21.5 59.4 Equity (NDC) Financed by: IBRD - 12.5 12.5 - 1.5 1.5 4.1 NDC (Own Gen.) 102.9 6.6 109.5 12.4 .8 13.2 36.5 Total Equity 102.9 19.1 122.0 12.4 2.3 14.7 40.6 Total Finance 102.9 197.6 300.5 12.4 23.8 36.2 100.0 /1 Discrepancies to a tenth of a million occur due to rounding. See table, para 5.05, for details of Bank three-step flow of funds. 5.05 Two Bank loans to the Government totalling US$23.0 million are proposed consisting of: (i) US$11.5 million at 8.5% interest repayable over 20 years including 4-1/2 years grace, and (ii) US$11.5 million on "third window" (TW) terms, i.e., 4.5% interest, with the first principal repayment due on January 15, 1983 and final maturity on January 15, 2001. In turn, the Government will on-lend the proceeds of the loans to NDC at 10% interest repayable over 15 years including 4-1/2 years grace. NDC will then allocate the funds to the industrial estate, shoe factory and leather goods factory  - 19 - mainly as debt (US$21.5 million) on the same terms as those governing its own payback to the Government and the balance (US$1.5 million) as equity. The 4-1/2 year grace period corresponds to the 3-year construction period plus 1-1/2 years of operations during which the project should achieve sufficient cash flow to cover the debt service without difficulty. 1/ Interest will be capitalized during the 3-year construction period. The foreign exchange risk will be borne by the project companies. The flow of funds from the Bank to the project companies, through the Government and NDC, may be tabulated as follows: Three-Step Flow of Bank Funds to Project Companies US$ Millions Step Source of Funds Beneficiary Debt Equity Note 1 IBRD Govt. of Tanzania 23.0 - /a 2 Govt. of Tanzania NDC 23.0 - /b 3 NDC (Ind. Est. Corp. 5.5 1.0 /c (Shoe Factory 15.4 0.5 /c (Leather Goods Factory 0.6 - /c /a Terms - 50% of loan @ 8.5% interest, 20 years including 4-1/2 years grace; 50% of loan @ 4.5% interest, with first repayment due on January 15, 1983 and final maturity on January 15, 2001. /b " - 10% interest, 15 years including 4-1/2 years grace. /c " - Same terms as in /b on loan portion. 5.06 Additional equity to be provided by NDC amounts to US$13.2 million equivalent to be invested in the project companies in the amounts shown in the financing plan (para 5.04). These funds will be derived from NDC's cumulative earned surpluses or, if such funds prove to be inadequate, the national development budget. As indicated in Annex 3, cumulative earned surpluses are expected to total some US$36 million equivalent over the project execution period. It has been agreed that the Government will promptly cover, on terms and conditions satisfactory to the Bank, any shortfall in NDC's funding capacity to carry the project through to completion. D. Allocation of Bank Loans, Procurement and Disbursements 5.07 The Bank loans totalling US$23.0 million will cover 97.4% of the estimated direct and indirect FE content of the project as shown below: 1/ The first repayment of principal will actually occur 2 years after plant start-up, forecasted for January 1980.  - 20 - Allocation of Bank Loans - Consolidated Project (US$ millions) Total FE Bank Ratio Expenditures Content Allocation Bank/FE (%) Equipment 8.4 7.7 7.7 100 Civil Works 10.7 5.7 5.3 93 Cons. & Eng. Serv. 3.6 3.0 3.0 100 Training 0.6 0.4 0.4 100 Working Capital 8.8 3.7 2.0 54 Interest during Construction 4.1 3.1 3.1 100 Unallocated - - 1.5 - Total 36.2 23.6 23.0 97.4 5.08 All procurement of goods and services financed by the Bank will be carried out in accordance with Bank guidelines. The shoe factory and leather goods factory technical assistance group was selected after NDC's evaluation of competitive proposals. The industrial estate engineering design contract was internationally tendered to a short list of 6 firms in December 1976; the list had been reviewed and accepted by the Bank. Equipment and civil works of above US$100,000 equivalent will be bid internationally. Local manufac- tures will be granted a preference of either 15% or the actual tariff on equivalent imported goods, whichever is lower, and local contractors a pre- ference margin of 7-1/2%. Off-the-shelf purchase of imported items will be assumed to have 85% FE content for purposes of Bank disbursement. Civil works contracts and procurement of equipment and materials in amounts of up to US$100,000 equivalent will not require formal international tenders but com- petitive offers from prequalified lists of suppliers will be obtained interna- tionally in accordance with the Borrower's usual procedures and evaluated as to suitability, delivery and price in awarding such purchase contracts. Regarding the shoe factory, the project engineering contractor has close linkages with one or two Italian manufacturers of shoe production machinery. In order to ensure that international tendering will be equitable to all appropriate sources of such equipment, specifications will be written in generic form, i.e., without bias to any specific trademark, and compliance will be closely monitored by both NDC, through its Project Manager, and the Bank (documents will be released for tender only after review and approval by the Bank). The expected disbursement schedule is given in Annex 18. 5.09 The bulk of the technical assistance to be procured will be in the form of contracts with corporate groups who will provide engineering, cons- truction supervision, training, plant management and marketing services. Unit consultant costs have been estimated as follows: (i) for technicians, US$35,000 - 45,000/man year, and (ii) for management personnel, US$55,000 - 65,000/man year. These estimates refer only to the FE cost and include direct salary plus corporate overhead and profit.  - 21 - E. Project Execution Schedule 5.10 The projected time schedule for project implementation is given in the bar chart, Annex 19, covering the 6-year period from early-1977 to end- 1982. It is important that the contractor executing the shoe factory start work before loan approval since any delays in the early design, engineering and procurement phases would cause serious slippage in the planned 3-year construction schedule. Therefore, retroactive finance of up to US$150,000 under the Bank loan is provided to cover approved costs incurred, prior to loan signing, in connection with this contract. VI. FINANCIAL ANALYSIS A. Industrial Estate 6.01 Revenue accruing to the estate corporation will consist of: (i) rent paid by factories for developed land they occupy, (ii) rent paid by occupants of standard factory buildings, and (iii) rent paid on houses provided by the estate. As discussed in Annex 20, all rents have been set at levels which generate an appropriate financial return on investment 1/; the Government has agreed to this pricing principle. The financial statements on the next page, summarized from the detailed tables of Annex 20, assume that: vi) construction will be completed by mid-i981, (ii) revenue will begin in 1978 and build up through added occupancy to 1982, and (iii) there will be reasonable increases in rent and service charges averaging 8.3% p.a. in nominal terms. 1/ Understood to be about 8% in constant 1975 terms.  - 22 - Industrial Estate - Financial Statements, 1977-1985 (Tsh Millions) /1 --------Construction-------- 1977 1978 1979 1980 1981 1982 1983 1984 Land for Lease (ha) - 8 24 32 36 36 36 36 Standard Factori5s (units of 240 m ) - - 6 16 24 24 24 24 Housing _ - 35 35 35 35 35 35 Income Revenue - 0.5 5.7 8.2 10.4 11.2 12.2 13.2 Operating Costs - 0.2 0.4 0.4 1.6 1.7 1.8 1.9 Depreciation - - - - 1.3 1.3 1.3 1.3 Interest - - - - - 2.2 4.0 3.5 Net Income before Taxes - 0.3 5.3 7.8 7.5 6.1 5.1 6.5 Taxes (45%) - 0.1 2.4 3.5 3.4 2.8 2.3 2.9 Net Income after Taxes - 0.2 2.9 4.3 4.1 3.4 2.8 3.6 Cash Flow Sources of Funds Net Income after Taxes - 0.1 2.9 4.3 4.1 3.4 2.8 3.6 Depreciation - - - - 1.3 1.3 1.3 1.3 Paid in Equity 10.0 13.3 10.0 - - - - - increase in Debt 11.4 18.3 13.7 2.3 - - - - Payment from Pub. Util. Co's - - - 17.1 - - - - Total Sources of Funds 21.4 31.7 26.6 23.7 5.4 4.6 4.1 4.8 Uses of Funds Estate Development 16.8 27.7 24.9 6.6 2.9 - - - Debt Repayment - - - - - 2.3 4.7 4.7 Total Uses of Funds 16.8 27.7 24.9 6.6 2.9 2.3 4.7 4.7 Surplus (Deficit) 4.6 4.0 1.7 17.1 2.5 2.4 (0.5) 0.3 Cumulative Surplus 4.6 8.6 10.2 27.4 29.9 32.3 31.8 32.1 Debt Service Coverage - - - - - 1.5 0.9 1.0 Balance Sheets Current Assets 4.6 8.6 10.2 27.4 29.9 32.3 31.8 32.1 Net Fixed Assets 16.8 44.5 69.4 58.9 60.5 59.2 57.9 56.7 Total Assets 21.4 53.1 79.6 86.3 90.4 91.5 89.7 88.7 Current Liabilities - - - - 2.3 4.6 4.6 4.6 Long-term Debt 11.4 29.7 43.4 45.7 43.4 38.8 34.2 29.7 Equity and Retained Earnings 10.0 23.4 36.3 40.6 44.8 48.1 50.9 54.5 Total Liabilities & Equity 21.4 53.1 79.6 86.3 90.4 91.5 89.7 88.7 Current Ratio - - - - 13.1 7.1 7.0 7.0 Debt:Equity Ratio 53:47 56:44 54:46 53:47 49:51 45:55 40:60 35:65 /1 Discrepancies to a tenth of a million occur due to rounding.  - 23 - 6.02 The project reflected in the financial statements is the base case in which capital cost is assumed to include an incremental investment of US$800,000 (9.3% of total estate project cost) for a sewage treatment plant (para 4.06). This may be conservative, since it is not at all certain that the treatment plant will indeed be needed in place of tlhe aeration/settling pond specified in the feasibility study. The before-tax and after-tax returns on investment are 14.0% and 9.2% respectively in constant 1975 terms. The inherent financial viability of the estate component is further supported by the standard financial ratio tests. The debt:equity ratio, current ratio (liquidity) and debt service coverage are satisfactory in the early years and improve steadily over time. The assumed deflators used in converting from nominal (or current) terms to real (or constant 1975) terms are given in Annex 21; they have been used in this and all other project components. B. Shoe Factory 6.03 Revenues are based on the expected f.a.s., port of Dar es Salaam, prices for canvas and leather shoes whether intended for export or sold domestically. Shoe prices in the base year (1975) as specified in the fea- sibility study were checked by a major U.S. based international distributor and found to be realistic. Ilore recently, the Italian contractor for the shoe factory has reviewed the price and revenue assumptions and considers them conservative. In addition, reasonable factors of safety have been built into the estimates of operating costs, capacity utilization, quality of product and market acceptance. The financial tables on the next page have been summarized from Annex 22 and forecast a financial return of 24.4% before taxes and 17.2% after taxes, in constant 1975 terms. The standard financial ratio tests - debt service coverage, current ratio and debt:equity ratio - are at acceptable levels. C. Leather Goods Factory 6.04 The leather goods component is small compared to the other two project components. Revenues are based on the assumption that factory start-up will take place in 1979, about 6 months before the scheduled start-up of the shoe factory. Capacity utilization is expected to in- crease from 60,% in 1980 to 80% in 1981, and 90%, i.e., effective full capacity, in 1982. Prices assumed in Annex 23, are about 20% below world market for comparable quality goods, the reason being that Horogoro leather products may have to be discounted for some years before trade acceptance is achieved. Financial statements given on page 25 have been summarized from Annex 23. The forecasted return of 33.7% before taxes and 23.2%, after taxes, in constant 1975 terms, should be capable of improvement with intensive supervision, training and marketing.  - 24 - SHOE FACTORY - FINANCIAL STATEMENTS, 1977-1985 (Tsh Millions) 1/ Project Execution Period 2/ Commercial Operations 1977-79 3/ 1980 1981 1982 1983 1984 1985 Production (in million pairs) - 2.4 3.2 3.6 3.6 3.6 3.6 Capacity Utilization (%) - 60 80 90 90 90 90 Income Revenue - 143.9 205.3 247.5 264.1 282.6 302.4 Cost of Goods Sold - 96.7 121.8 144.5 157.6 169.1 181.5 Gross Profit - 47.2 83.5 103.1 106.6 113.5 120.9 Operating Costs - 8.7 11.9 14.3 15.2 16.3 17.5 Operating Profit - 38.5 71.6 88.8 91.3 97.2 103.4 Non-operating Costs - 28.3 28.3 28.0 26.8 25.6 24.3 Net Income before Taxes - 10.3 43.3 60.8 64.5 71.6 79.1 Taxes (45%) - 4.6 19.5 27.4 29.0 32.2 35.6 Net Income after Taxes - 5.7 23.8 33.5 35.5 39.4 43.5 Cash Flow Sources of Funds Increase in Equity 85.7 - - - - - - Increase in Debt 127.8 - - - - - - Net Income after Taxes - 5.7 23.8 33.5 35.5 39.4 43.5 Depreciation - 15.4 15.4 15.4 15.4 15.4 15.4 Total Sources of Funds 213.5 21.1 39.2 48.9 50.9 54.8 58.9 Uses of Funds Equipment 113.0 - - - - - - Civil Works 32.6 - - - - - - Debt Repayment - - - 12.2 12.2 12.2 12.2 Total Uses of Funds 145.6 - - 12.2 12.2 12.2 12.2 Surplus 67.9 21.1 39.2 36.7 38.8 42.6 46.8 Cumulative Surplus 67.9 89.0 128.2 164.9 203.7 246.3 293.1 Debt Service Coverage - 2.6 4.0 2.5 2.7 2.9 3.2 Balance Sheets Current Assets 67.9 118.6 172.1 211.1 252.2 297.3 346.8 Net Fixed Assets 145.6 130.2 114.8 99.3 83.9 68.5 53.0 Total Assets 213.5 248.8 286.9 310.5 336.1 365.8 399.8 Current Liabilities - 29.7 43.9 46.2 48.5 51.0 53.7 Long-Term Debt 127.8 127.8 127.8 115.6 103.5 91.3 79.1 Equity and Retained Earnings 85.7 91.3 115.1 148.6 184.1 223.5 267.0 Total Liabilities & Equity 213.5 248.8 286.9 310.5 336.1 365.8 399.8 Current Ratio - 4.0 3.9 4.5 5.2 5.9 6.5 Debt:Equity Ratio 60:40 58:42 53:47 44:56 36:64 29:71 23:77 1/ Discrepancies to a tenth of a million occur due to rounding. 2/ Covers construction period of 3 years, January 1977-December 1979 plus start-up of 2 years, January 1980-December 1981; at conclusion of start-up, forecasted utilization will be 90%. 3/ Financial statements as of December 31, 1979.  - 25 - LEATHER GOODS FACTORY - FINANCIAL STATEMENTS, 1977-1985 (Tsh Millions) 1/ Project Execution Period 2/ Commercial Production 1977-79 3/ 1979 1980 1981 1982 1983 1984 1985 Production (in thousand pieces) - 34.2 68.4 91.2 102.6 102.6 102.6 102.6 Capacity Utilization (%) - 30 60 80 90 90 90 90 Income Revenue - 7.6 16.3 23.2 28.0 29.9 32.0 34.3 Cost of Goods Sold - 6.5 13.6 16.3 19.6 21.4 23.0 24.6 Gross Profit - 1.1 2.7 6.9 8.3 8.5 9.1 9.6 Operating Costs - .4 1.3 1.6 2.0 2.1 2.3 2.4 Operating Profit - .7 1.3 5.3 6.4 6.4 6.4 7.2 Non-operating Costs - .4 .9 .9 .9 .8 .8 .8 Net Income before Taxes - .3 .4 4.4 5.5 5.6 6.0 6.5 Taxes (45%) - .1 .2 2.0 2.5 2.5 2.7 2.9 Net Income after Taxes - .1 .2 2.4 3.0 3.1 3.3 3.6 Cash Flow Sources of Funds Increase in Equity 3.5 - - - - - - - Increase in Debt 5.0 - - - - - - Net Income after Taxes - .1 .2 2.4 3.0 3.1 3.3 3.6 Depreciation - .2 .4 .4 .4 .4 .4 .4 Total Sources of Funds 8.5 .3 .6 2.8 3.4 3.4 3.7 3.9 Uses of Funds Equipment 3.0 - - - - Debt Repayment - - - - .5 .5 .5 .5 Total Uses of Funds 3.0 - - - .5 .5 .5 .5 Surplus 5.5 .3 .6 2.8 2.9 3.0 3.2 3.5 Cumulative Surplus 5.5 5.8 6.5 9.2 12.2 15.1 18.3 21.8 Debt Service Coverage - 2.3 2.2 6.6 4.0 4.3 4.7 5.2 Balance Sheets Current Assets 5.5 8.8 9.6 13.1 16.2 19.4 22.9 26.7 Net Fixed Assets 3.0 2.8 2.4 2.1 1.7 1.3 .9 .6 Total Assets 8.5 11.6 12.0 15.1 17.9 20.8 23.9 27.2 Current Liabilities - 2.9 3.1 3.8 4.1 4.3 4.6 4.9 Long-Term Debt 5.0 5.0 5.0 5.0 4.5 4.0 3.6 3.1 Equity and Retained Earnings 3.5 3.6 3.9 6.3 9.3 12.4 15.7 19.3 Total Liabilities & Equity 8.5 11.6 12.0 15.0 17.9 20.8 23.9 27.2 Current Ratio - 3.0 3.1 3.4 4.0 4.5 5.0 5.5 Debt:Equity Ratio 60:40 58:42 56:44 44:56 33:67 24:76 19:81 14:86 1/ Discrepancies to a tenth of a million occur due to rounding. 2/ Covers construction period July 1977 to June 1979 and start-up period July 1979 to December 1981; at conclusion of start-up period, forecasted capacity utilization will be 90%. 3/ Financial statements as of June 30, 1979.  - 26 - D. Consolidated Financial Return, Audits and Financial Ilanagement 6.05 The financial return of the project, in aggregate, is forecast at 15.2%o after taxes in constant 1975 terms (22.2% in current terms) as shown below: Consolidated Financial Return (in Constant 1975 Terms) Weighting /1 IFR Component Factor Before Tax After Tax (1) Industrial Estate .262 14.0 9.2 (2) Shoe Factory .710 24.4 17.2 (3) Leather Goods .023 33.7 23.2 Total Project .21.8 15.2 /1 Ratio of component project cost over total project cost. 6.06 NDC has already set up project accounts in its books, according to established procedures. The Accounting Department of NDC will also prepare Bank loan withdrawal requests periodically, based on the documentation of approved expenditures forwarded by the Project Mlanager. Audits will be carried out annually by the Tanzanian Audit Corporation, the Government agency responsible for all auditing of Government parastatals; this is satis- factory to the Bank. 6.07 NDC, as the project owner and beneficiary of the Bank loans, will be responsible for debt service. All aspects of financial management for NDC's Group Companies, of which debt service is one element, is under NDC's control. To ensure conservation of the financial soundness of the three project operating companies in general, and timely debt service in partic- ular, without impairing unnecessarily NDC's management prerogatives and flexibility, it has been agreed that, over the life of the Bank loans, NDC: (i) will not permit the project companies to borrow additional funds after completion of their respective projects if this would result in a debt:equity ratio in excess of 60:40; (ii) will limit dividends and other forms of cash distribution by the project companies to amounts which will not reduce their current ratios to less than 1.5:1; (iii) will maintain special reserve accounts in IHDC's books equivalent to 2 years of the combined debt service related to the project companies. E. Risks and Sensitivity Analysis 6.08 The forecasted return on investment indicated in para 6.05 reflects, of course, only the production/distribution model assumed in the flowchart, para 4.01. While the project is being implemented as an integrated indus- trial complex, each factory will be an independent profit-center and will deal with all other factories, at M4orogoro or elsewhere, on an "arm's length"  - 27 - basis. (This is established policy for all of NDC's Group Companies and has been found effective in fostering cost-competitiveness and efficiency). It is quite likely, therefore, that the Morogoro tannery will be actively com- peting with the Moshi and Mwanza tanneries as suppliers to the shoe factory. Similarly, the canvas mill may find itself competing with one or more of TEXCO's textile mills at some future date (as well as with imported canvas, conceivably), as suppliers to the shoe factory. This is as it should be. Consonant with this policy, NDC will have to be vigilant in enforcing independent decision-making by the managements of the project factories since close proximity at Morogoro may tend to induce comfortable supplier linkages which may be less than optimum in terms of generating operating efficiency. 6.09 Overmanning of factories and low worker productivity have been noted in para 2.03 as contributing to poor industrial performance in Tanzania. Both the Government and NDC are actively seeking to improve the situation. Recognizing this problem, labor costs in this appraisal were assumed to be 25% higher than specified in the feasibility study and this is considered to be a reasonable upper limit. If, in fact, labor costs go significantly higher, project profitability would be adversely affected. 6.10 Regarding the major project component - the shoe factory - other managerial, technical and commercial risks are apparent but the project has been designed to minimize the potential problems. NDC is an established organization whose staff has gained considerable experience in the planning, construction and management of diverse industrial plants since the mid-1960's. In addition to the basic back-up strengths of NDC, competent specialized engineering and management services will be provided through the technical assistance contracts outlined earlier. International marketing of shoes - perhaps the single most critical feature of the integrated project - will be handled by a firm with demonstrated capabilities to undertake this key responsibility. 6.11 Pricing of raw materials, intermediate products and finished goods is the responsibility of the National Price Commission (NPC) under the Regulation of Prices Act of 1973. In practice, NPC works closely with the operating parastatals in revising prices periodically to assure price structures which yield reasonable returns. Export prices are, of course, subject to world market constraints and NPC's role in this respect can only be nominal. As a practical consequence, therefore, price controls by a separate agency are not expected to have a negative impact on project return. 6.12 In a sense, the aggregate financial return of 15.2% corresponds to the lower bound of a reasonable probability range. Nevertheless, a further test was made based on a "worst case" set of assumptions, which is highly unlikely to occur, as follows: (i) a slippage of 1 year in pro- ject execution, (ii) capital cost increases by 10% and (iii) an across-the- board reduction in revenue of 10%. Under these conditions, the financial return in real terms after taxes is 7.6%. This is marginally acceptable  - 28 - in view of the satisfactory economic return estimated in the next chapter. Annex 24 tabulates the financial return for various sets of assumptions between the base case and the "worst case", indicating the extent to which these returns would be affected as a result of changes in capital cost, project implementation schedule and revenue. VII. ECONOMIC ANALYSIS A. Economic Return 7.01 The assumptions applied in converting financial to economic costs and benefits are discussed in Annex 25. The two basic guidelines are: (i) internationally tradable items are valued at the c.i.f. border price, expressed in local currency at the official exchange rate; this applies to both imports and exports as well as to transfers between fac- tories; (ii) non-tradable items are valued at their equivalent border prices by applying conversion factors established for Tanzania within the Bank. Where no specific conversion factor is available, a standard conver- sion factor (SCF) of 0.75 is used. 1/ 7.02 The aggregate economic return in constant 1975 terms is 26.4% and is the average of the weighted individual returns of each project component which are: for the industrial estate, 15.9%; shoe factory, 29.8%; and leather goods factory, 46.5%. Under the assumptions applying to the "worst case" - project completion delayed by 1 year, revenue decreased by 10% and operat- ing costs and capital costs increased by 10% (Annex 25, para 7) - the econo- mic return drops to 10.6%. B. Other Benefits 7.03 The estimated net foreign exchange (FE) impact of the project has been tabulated in Annex 26 over the life of the project (20 years, dating from start-up in 1980). A net positive FE flow is first registered in 1980, increasing steadily thereafter. Over the period 1979-1998, cumulative net FE earnings total US$153 million in constant 1975 terms. 7.04 Employment at full capacity will be about 1,500 (3,000 for the industrial complex as a whole). No attempt has been made to quantify up- stream and downstream linkage effects on employment but they are expected to be considerable. Capital investment per job created will be US$24,000 and falls within the range characteristic of modern medium-scale industries. 1/ This methodology is equivalent to traditional Bank practice using shadow prices. Assuming a shadow exchange rate of Tsh 11 = US$1.00 and a shadow rate for unskilled labor of .45, the economic return would be the same as given in para 7.02.  - 29 - During the detailed engineering design phase, efforts will be made to substi- tute labor for capital without compromising product style, quality and cost- competitiveness (para 4.09) but the extent to which this can be done is limited in export-oriented industries. 7.05 Finally, as discussed in Annex 4, the factories and the industrial estate in aggregate are expected to act as a growth pole, catalyzing further project investment and jobs which otherwise might be delayed. The location at Morogoro has been planned to contribute to the decentralization of industry away from Tanzania's capital and largest urban center. There is little doubt that in time Morogoro will become an attractive alternative to Dar es Salaam for migrant rural workers, thereby relieving to some extent the pressure on urban infrastructure in Dar es Salaam. VIII. AGREEMENTS 8.01 Agreements and assurances were obtained from the Government and NDC as listed below: (a) Construction of the third and fourth standard factory buildings will be undertaken only when demand justifies the added invest- ment and the decision to proceed with construction will be taken in consultation with the Bank (para 4.03); (b) A condition of major disbursement will be the availability of financing for the Mindu dam and pipeline. This condition has been met with the effectiveness of the Bank loan for the urban water supply project (para 4.05); (c) As part of the industrial estate project engineering contract, the need for more elaborate waste disposal facilities than the evaporation pond specified in the feasibility study will be evaluated (para 4.06); (d) By December 1978, NDC will establish an estate corporation and will appoint in consultation with the Bank a resident Estate General Manager, on terms and conditions acceptable to the Bank, for an initial period of 2 years. He will be responsible for the estate operations and the training of a Tanzanian counterpart. Termination or extension of the General Manager's contract will be decided in consultation with the Bank (para 4.07); (e) A corporation will be established by December 1978 to take charge of the shoe factory. NDC shall employ, during a period of at least six years, a qualified firm or firms to provide needed technical assistance during construction and initial operations. A contract with the firm responsible for the engineering design, procurement, construction, equipment installation, start-up and training, on terms and conditions acceptable to the Bank, has been signed and a  - 30 - draft of the proposed Management/Marketing Agreement has been submitted to the Bank for review and comment. Termination or extension of the Management/Marketing contract will be decided in consultation with the Bank (para 4.10); (f) A corporation will be established by December 1978 to take charge of the leather goods factory (para 4.13); (g) The Project Manager and staff will be provided with office and other facilities and will be assisted as appropriate by other NDC staff who will provide necessary engineering, legal, accounting, recruitment and training services (para 4.21); (h) Government will pass on to NDC, and NDC will in turn pass on to the project corporations, the proceeds of the Bank loans as debt and equity in the proportions shown in the financing plan (paras 5.04 and 5.05); (i) NDC will provide equity finance of US$13.2 million equivalent in a timely manner consonant with the needs of the project; any additional financing that may be required to complete the project will be provided by NDC or the Government on terms and conditions acceptable to the Bank (para 5.06); (j) For the industrial estate, rentals will be set to yield an appropriate financial return on investment (para 6.01); (k) Annual audits of all project corporations will be conducted by the Tanzanian Audit Corporation (para 6.06); (1) Over the life of the Bank loans NDC: (i) will not permit the project companies to borrow additional funds after completion of their respective projects if this would result in a debt- equity ratio in excess of 60:40; (ii) will limit dividends and other forms of cash distribution by the project companies to amounts which will not reduce their current ratios to less than 1.5:1; (iii) will maintain special reserve accounts in NDC's books equivalent to 2 years of the combined debt service related to the project companies (para 6.07). 8.02 Based on the above agreements and assurances, the project is suit- able for two Bank loans totalling US$23.0 million equivalent to the Government on the terms specified in para 5.05, to be relent to NDC also on the terms specified in the same paragraph. Industrial Projects Department March 3, 1977  ANNEX 1 -l TAiNZANIA MOROGORO INDUSTRIAL COMPLEX THE INDUSTRIPL SECTOR - STRUCTTJRE, PERFORMANCE AND OUTLOOK 1. Since the Arusha Declaration of 1967, Tanzania has been moving towards a centrally planned economy with direct public sector control of important economic activities including banking, insurance, wholesale trade and manufacturing (excluding small-scale units). The economy is still based predominantly on agric- ulture which contributes 40% of GDP, 51% of exports and supports 90% of the popula- tion. I^1hile industry accounts for only 10%O of GDP, as the leading growth sector in recent years it is rapidly assuming a more important role in the economy. 2. Industrial facilities are largely owned by the "parastatal!l' organizations-- government-owned holding companies operating under the overall supervision of various ministries. Many of the factories were taken over from private owners after 1967 on the basis of negotiated compensation payments which, on the whole, have been made on schedule and are now substantially completed. The general pattern was the acquisition of 50 to 100% of the shares by the Government. Since 1967, nearly all important industrial projects have been undertaken by the parastatals although, in some cases, with mrnority private foreign investment participation. In 1974, the parastatals accounted for an estimated 75% of value added, 50% of employment and 90% of new capital formation in the manufacturing sector. Nevertheless, of the totel 500 registered factories employing 10 or more, 4