Tanzania - Mufindi Pulp and Paper Project

Docunment of The World Bank FOR OFFICIAL USE ONLY Report No. P-2436-TA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR THE MUFINDI PULP AND PAPER PROJECT December 20, 1978 This documnt has a resticted disthibuti o u ay be med by reiplents ondy in the perfomance of their ofki duties. its contes may not oerwie be discied without World Bnk utbhorzaion.  CURRENCY EQUIVALENTS Currency Unit Tanzania Shilling (TSh) US$1.00 - TSh 8.0 TSh 1.0 = US$0.12 (As the Tanzanian Shilling is officially valued at a fixed rate of 9.66 TSh to the SDR, the US Dollar/Tanzania Shilling exchange rate is subject to change. Conversions in this Report were made at US$1.00 to TSh 8.0 which is close to the 1978 average exchange rate.) GLOSSARY OF ABBREVIATIONS ASSI Aktiebolaget Statens Skogsindustrier BIS Basic Industial Strategy CDC Commonwealth Development Corporation Company Southern Paper Mills Company Government Government of Tanzania EAC East African Community ha Hectare KF Kuwait Fund KfW Kreditanstalt fur Wiederaufbau NDC National Development Corporation NIB Nordic Investment Bank OPECSF OPEC Special Fund SIDA Swedish International Development Authority TAZARA Tanzania Zambia Railway TIB Tanzania Investment Bank TPA tons per annum FISCAL YEAR Government - July 1 to June 30 NDC & Subsidiaries - January 1 to December 31  FOR OFFICIAL USE ONLY TANZANIA: MUFINDI PULP AND PAPER PROJECT LOAN/CREDIT AND PROJECT SUMMARY BORROWER: United Republic of Tanzania BENEFICIARIES: National Development Corporation (NDC) Southern Paper Mills Company (The Company) AMOUNT: Loan: US$30 million Credit: US$30 million TERMS: Loan: 20 years, including 5 years of grace at an annual interest rate of 7.35%. Credit: Standard COFINANCING: The Commonwealth Development Corporation (CDC) is providing a loan of US$20 million equivalent for 20 years including 5 years of grace at an annual interest rate of 8-1/2%; Kreditanstalt fur Wiederaufbau (KfW) is providing a grant of US$34 million equivalent; the Kuwait Fund (KF) is providing a loan of US$18 million equivalent for 24 years including 6 years of grace at an annual interest rate of 4%; the Nordic Investment Bank (NIB) is providing a loan of US$12.5 million equivalent on terms which will be determined by the country of supply (likely terms are 15 years including 5 years of grace at an annual interest rate of 8%); the OPEC Special Fund (OPECSF) is providing a total of US$10.5 million equivalent, a credit of US$5 million equivalent for 20 years including 5 years of grace with a service charge of 0.75% and US$5.5 million equivalent in counterpart funds from their previous operations in Tanzania; and the Swedish International Development Authority (SIDA) is providing a grant of US$45 million equivalent. RELENDING TERMS: US$9.9 million equivalent of the IDA credit and the entire IBRD loan will be relent to the Company for 16 years including 5 years of grace at an annual interest rate of 10%. US$20.1 million equivalent of the IDA Credit will be passed on to the Company as equity. PROJECT The project consists of the establishment of an integ- DESCRIPTION: rated pulp and paper mill with an initial capacity of 60,000 tons per annum of paper and board as well as 1,400 tons of pulp for sale outside the mill. Facil- ities to be provided include: logging roads and equip- ment, a chemical pulp mill with a bleach plant, a This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  mechanical pulp mill, two paper machines with asso- ciated stock preparation and paper finishing equipment, steam and power generation equipment, a chlorine and caustic soda plant, related pollution abatement equip- ment, and some supporting infrastructure. The mill will be located near the Sao Hill forest area, 15 km south of Mufindi in south-central Tanzania, some 590 km from its major market of Dar es Salaam. The primary risk of the project is NDC's ability to implement it in an efficient manner: substantial technical assistance as well as the considerable project pre- paration work should adequately address this risk. (US$ million) ESTIMATED COST: 1/ Local Foreign Total Civil Works 6.6 15.5 22.1 Machinery and Equipment 0.1 77.0 77.1 Freight and Insurance (inland) 2.7 - 2.7 Erection and Construction Overhead 9.4 22.2 31.6 Engineering and Project Management 3.0 15.6 18.6 TOTAL PLANT 21.8 130.3 152.1 Logging Capital .6 3.5 4.1 Rail Spur 2.1 - 2.1 Housing 1.3 .3 1.6 Misc. Expenses, Technical Assistance 3.7 8.0 11.7 BASE COSTS 29.5 142.1 171.6 Physical Contingencies 2.9 14.1 17.0 Price Contingencies 6.6 22.5 29.1 TOTAL PROJECT COSTS 39.0 178.7 217.7 Working Capital 4.0 2.7 6.7 Interest During Construction 15.1 12.2 27.3 TOTAL FINANCING REQUIRED 58.1 193.6 251.7 I/ Because this project will be exempt from import duties, taxes are negligible.  - iii - FINANCING PLAN: US$ million _ CDC 20.0 8 Government/NDC/Local Banks 51.7 20 IBRD 30.0 12 IDA 30.0 12 KfW 34.0 14 KF 18.0 7 NIB 12.5 5 OPECSF 10.5 4 SIDA 45.0 18 TOTAL 251.7 100 ESTIMATED DISBURSEMENTS: US$ million IBRD/IDA FY 79 80 81 82 83 Annual 4.7 9.5 22.3 19.0 4.5 Cumulative 4.7 14.2 36.5 55.5 60.0 RATE OF RETURN: 11.3% APPRAISAL REPORT: No. 1929-TA dated December 14, 1978   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR THE MUFINDI PULP AND PAPER PROJECT 1. I submit the following report and recommendation on a proposed loan of US$30.0 million equivalent and a proposed credit of US$30.0 million equivalent to the United Republic of Tanzania to help finance the Mufindi Pulp and Paper Project. The loan would have a term of 20 years including 5 years of grace at an annual interest rate of 7.35% and the credit would be on standard IDA terms. The grant element of the combined IBRD loan and IDA credit is just under 50%. IBRD/IDA funds totalling US$39.9 million would be onlent to the Southern Paper Mlills Company (the Company) for a period of 16 years including 5 years of grace at an annual interest rate of 10%; UJS$20.1 million in IDA funds will be passed on to the Company as equity. In addition to the IBRD/IDA funds and the total domestic financing of US$51.7 million, the United Republic of Tanzania is arranging financing totaling about US$140 million from other sources. The Commonwealth Development Corporation (CDC) is providing US$20 million equivalent for 20 years including 5 years of grace at an annual interest rate of 8-1/2%. Kreditanstalt fur Wiederaufbau (KfW) is providing a grant of US$34 million equivalent; the Kuwait Fund (KF) is providing a loan of US$18 million equivalent for 24 years including 6 years of grace at an annual interest rate of 4%; the Nordic Investment Bank (NIB) is providing a loan of US$12.5 million equivalent at terms which will depend on the country of supply (likely terms are 15 years including 5 years of grace at an annual interest rate of 8%); the OPEC Special Fund (OPECSF) is providing a total of US$10.5 million equivalent, a credit of US$5 million equivalent for 20 years including 5 years of grace with a service charge of 0.75% and US$5.5 million equivalent in counterpart funds from their previous operations in Tanzania; and the Swedish International Development Authority (SIDA) is providing a grant of US$45 million equivalent. PART I - THE ECONOMY 1/ 2. A Basic Economic Mission visited Tanzania in August 1976. The Basic Economic Report was distributed in December 1977 (Report No. 1616-TA). A summary of social and economic data is in Annex I. 1/ This section is essentially the same as that of the President's Reports on the Sixth Education and Tourism Rehabilitation Projects, both dated November 29, 1978.  -2- Profile of the Economy 3. Tanzania is one of the twenty-five least developed countries in the world with a per capita income in 1977 of US$200. The economy is still heavily dependent on agriculture: 90% of the labor force is engaged in agriculture and approximately 40% of GDP and two-thirds of total exports are derived from agricultural production. Average rural incomes are much below average urban incomes and there is considerable regional variation in rural incomes owing largely to differences in climate and land fertility. Overall population density is low, although a few areas are considered overpopulated. Population growth is estimated at 2.7% per annum with both fertility and mortality at relatively high levels. 4. Since the Arusha Declaration in 1967 Tanzania has pursued a socialist development strategy. Banking, insurance, and most large-scale enterprises in manufacturing, plantation agriculture, and wholesale trade are under state control. Controls are used extensively to direct economic activity, including import licencing, foreign exchange control, price control, the reservation of some activities to the state or cooperative sector, and detailed Government investment planning. The second major feature of Tanzania's development strategy is its consistent emphasis on rural development and social programs to benefit the poor. This is reflected in ambitious programs for the provisih.q-i of rural water supplies and health services and in the decision to achieve universal entry into primary education by 1977. The Government policy of settling rural population into villages, villagization, is an important element in its attempt to facilitate the provision of economic and social services in rural areas. Long Term Economic Trends 5. In the decade 1967-77 real GDP at factor cost grew at an annual average rate of 4.6%, or about 1.8% per annum per capita. While economic growth was severely disrupted by the economic crisis following the failure of rains and large increases in import prices in 1973 and 1974, reasonable growth resumed with the improved weather in 1976 and 1977. 6. The Government has an impressive record of domestic resource mobilization. Between 1966-67 and 1976-77 the share of recurrent revenue rose from 14.3% to 20.2% of GDP. This has been achieved through a combina- tion of highly progressive direct taxes and proportional or moderately progressive indirect taxes. Except during the economic crisis in 1974-75, the rate of national savings has also been high: gross national savings fluctuated at around 16-17% of GNP from the mid-1960's through 1973, fell to half that level during the crisis years and recovered to the pre-crisis level in 1976-77. These are extremely high levels of savings for a country at Tanzania's income level. 7. Some progress has also been made in achieving the Government's objective of a more equitable income distribution. While between 1969 and 1975 the average urban-rural gap remained approximately constant, it is likely that the gap has now been slightly reduced due to continued recovery  -3- of agricultural production and higher producer prices. Within the urban sector there has been a dramatic narrowing of the post-tax income differen- tial between the highest-paid government officials and minimum wage earners from 50 to 1 in 1961 to 8 to 1 in 1975. However, the overall formal urban sector earnings structure has remained relatively stable while a large in- formal sector has emerged comprising large numbers of unemployed, under- employed and other workers with earnings significantly below the official urban minimum wage. The policies of wage restraint and higher producer prices pursued since 1975 should have a beneficial impact on almost all dimensions of income distribution and the basic needs oriented programs in rural water, health and primary education (para. 4 above) are resulting in a significant redirection in public expanditures toward the rural poor. 8. Despite satisfactory performance on growth, domestic resource mobilization, and income distribution there are other areas in which per- formance has been less than satisfactory. The most problematic long-term trend is the slow growth of agricultural production. From 1967-77 agri- culture grew at an annual rate of 2.7%, the same as the rate of growth of population. In the past three years agricultural growth has been higher, but this primarily represents recovery to the long-term trend from the poor harvests in 1973-1974. In addition, the recovery has been largely limited to subsistence agriculture; monetary agricultural production was only 2.2% higher in 1977 than in 1972. 9. Slow agricultural growth has been largely responsible for a second problem, the disappointing slow growth of export volume. While the total volume of exports of goods and services was 7.7% higher in 1976 than in 1966, the volume of exports of goods alone was actually lower in 1976 than a decade earlier. From 1966-71, the volume of exports of goods and services grew at 7.7% per year, but this was followed by a decline after 1971, a sharp drop in 1974, and only a partial recovery by 1976. Increased levels of foreign assistance and high coffee prices have mitigated the worst effects of the decline in export volume, but Government authorities have been forced to impose stricter import controls; among other things, this has had a particu- larly adverse effect on industrial production. Recent Economic Performance 10. The economy continued its recovery from the oil crisis and drought in 1977. Total GDP increased by 5.9% while agricultural production increased by 5.6%. There was no significant change in export volume but the boom in coffee prices helped raise mainland commodity export receipts from TSh 3,828 million in 1976 to TSh 4,585 million in 1977. External reserves were US$280 million at the end of 1977 but dropped to US$200 million by May 1978 largely as a result of falling coffee prices. This is equivalent to three months imports at the 1977 level. 11. Recovery has been aided by good economic management. The Govern- ment has continued to adhere to the principal elements of the policy package introduced in late 1974 at the time of appraisal and negotiation of the Program Loan (No. 1063-TA). These include reallocation of investment in  -4- favor of directly productive sectors, higher agricultural producer prices, constraints on wages and salaries, and price and tax increases to restrain private consumption. Since mid-1976 the Government has also succeeded in bringing Government spending under control and has begun to relax import controls. Because excessive Government spending and borrowing from the banking system was threatening to undermine financial stability and the economic recovery in early 1976, a program of budgetary control was developed by the Government; in early 1977 this was supported by IMF assistance and a Program Credit (No. 688-TA). Through the introduction of new budgetarv control measures and the reimposition of a progressive tax on coffee exports, the Government was able to reduce Government debt to the banking system and in 1977-78 hold bank borrowing to nearly zero. The Program Credit was also designed to support selected relaxation of import controls in order to provide needed imports of spare parts and raw materials for increased capacity utilization. After some delays, the availability of essential maintenance imports has increased. 12. In addition, the Government has experimented in recent months with measures to increase labor productivity. These have included layoffs of redundant workers and consultancy studies of the operational problems of individual firms. Of potentially greater importance, in his Budget Speech in June 1978 the Minister of Finance called for the immediate adoption of payment-by-result wage systems to stimulate productivity. 13. Tanzania continues to attract large amounts of foreign assistance on concessional terms. Because of the very concessional terms on which aid has been given to Tanzania and the Government's refusal to use higher cost commercial loans and supplier's credits, the overall debt service ratio has remained low. Including a notional 40% share of the debt of the East African Community Corporations, it was less than 8% in 1977. Bank Group debt as a percentage of Tanzania's total debt was about 26% in 1977; this is projected to rise to about 29% in 1985 and remain stable thereafter. While the favor- able terms of much of Tanzania's foreign assistance (particularly the increas- ing proportion of grants) significantly reduce the debt service burden, they also increase Bank Group exposure. Debt service payments to the Bank Group were about 28.6% of Tanzania's total debt service payments in 1977, and are projected to rise to approximately 30% in 1980. 14. Tanzania has a suitable development program which will require sub- stantial domestic funds in excess of local savings and external capital. In view of our support for the Government's increased emphasis on local cost intensive rural investments and the importance of not aggravating the local funds shortage, local cost financing is justified on country grounds. East African Community (EAC) 15. The major developments in the East African Community were out- lined in a report to the Executive Directors dated December 19, 1977 (R77-312). Dr. Victor Umbricht, the independent mediator appointed by the Partner States, is continuing his work on appraising the assets and liabilities of the EAC  -5- Corporations. The de facto breakup of the Commiunity is expected to have some impact on Tanzania's budget as new national corporations take over the ser- vices formerly provided by the EAC Corporations. While substantial invest- ments have been made in the formation of the national airways corporation and the rehabilitation of the railways, the burden on the Government budget should be temporary as these corporations are expected to become self-financing. A major development related to the EAC difficultiLes was the closure of the border with Kenya: Kenya was a major trading partner of Tanzania and in the short run considerable adjustments have had to be made in locating new suppliers for some items and developing alternative outlets for numerous manufactured goods and agricultural products. PART II - BANK GROUP OPERATIONS IN TANZANIA 1/ 16. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1962, 36 IDA credits, 16 Bank loans including two on Third Window terms amounting to US$630.5 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 10 loans totalling US$244.8 million which have been extended for the development of the common services and the development bank operated regionally by Tanzania, Kenya and Uganda through their association in the East African Community. IFC investments in Tanzania, totalling US$4.7 million, were made to the Kilombero Sugar Company in 1960 and 1964. This Company encountered financial diffi- culties and in 1969 IFC and other investors sold their interest in the Com- pany to the Government. A new IFC investment of US$1.75 million in soap manufacturing in Mbeya was approved by the Executive Directors on June 8, 1978. Annex II contains summary statements of Bank loans, IDA credits and IFC investments to Tanzania and the East African Community organizations as of October 31, 1978 and notes on the execution of ongoing projects. 17. Consistent with Tanzania's overall development strategy, Bank Group lending operations are increasingly focusing on the rural sector and directly productive projects. Up to the end of FY72, 10 out of 14 loans and credits made individually to Tanzania had been for infrastructure. The overwhelming majority of the operations approved since then have been for directly produc- tive projects. Furthermore, a number of Bank Group supported infrastructure projects have been closely linked with specific productive activities. For example, the Urban Water Supply Project (Loan No. 1354-TA) approved in January 1977, will support the Industrial Complex in Morogoro (Loans No. 1385-T-TA and 1386-TA) and the Morogoro Textile Project (Loan No. 1607-TA and Credit No. 833-TA). Directly productive projects recentLy approved include the Second Cashewnut Processing Project (Credit No. 801-TA), the Tobacco Handling Project (Credit No. 802-TA), and the Mwanza/Shinyanga Rural Development Project (Credit No. 803-TA). The first Bank Group assisted project in the forestry sector, 1/ This section is essentially the same as that of the President's Report on the Sixth Education and Tourism Rehabilitation Projects, both dated November 29, 1978.  -6- the Sao Hill Forestry Project (Loan No. 1307-TA), approved in July 1976, will provide the raw materials for the proposed project. Projects which have been appraised include a Second Urban Water Supply Project, a Smallholder Tea Consolidation Project and lines of credit to the Tanzania Rural Development Bank, the Tanzania Investment Bank and the Tanganyika Development Finance Limited. A rural development project in Mara, a harbours project, and an agricultural services project are also under preparation. 18. Although the comparatively high proportion of undisbursed loans and credits, detailed in Annex II, is in large part a result of the recent approval of many of these projects, it also reflects the fact that overall project implementation has been slower than projected. It is clear in retrospect that both the Bank Group and Tanzania have been optimistic re- garding Tanzania's absorptive capacity. The causes of the difficulties in implementation are varied. Some stem from the scarcity of suitably trained and experienced manpower, some reflect the problems in identifying agronomic input packages appropriate to the needs of smallholder farmers while others result from the strains associated with attempting a "frontal attack" on poverty. These problems have been compounded by frequent and drastic admi- nistrative changes, which -- although potentially the source of long-term benefits -- have certainly disrupted orderly execution of projects and made parts of earlier project concepts obsolete. In general, difficulties have been most severe in agriculture, particularly in the smallholder rural sector. As our lending program has increasingly concentrated on this sector, these problems have become correspondingly more apparent. By contrast, the "modern" sector projects have tended to fare better: the Tanzania Investment Bank, Mwanza Textile, Morogoro Industrial Estate and Cashewnut Processing Projects, for example, are proceeding well. 19. As the Bank Group's lending program has expanded, increasing attention has been given to measures designed to improve project implementa- tion. A course was conducted with Government officials in Dar es Salaam in 1973 and again in 1978 on Bank Group procurement procedures. A special project implementation unit was set up in the Ministry of Agriculture and nine Agricultural Development Services staff have been assigned to Bank Group agricultural projects. The need to establish a close and continuous working level dialogue between responsible Tanzanian officials and Bank Group staff on implementation problems was one of the prime reasons for the expan- sion of the Resident Mission to two professionals in October 1976. In Feb- ruary 1977 a regular Government/Bank Group review of project implementation was established: discussions on the Bank Group program chaired by the Ministry of Finance and attended by Bank Group staff and officials from implementing agencies were to be held on a quarterly basis. Steps to strengthen this review process were taken in August 1977 when these discus- sions were shifted to a monthly basis. The Government also agreed that periodically the reviews should be conducted on an "in-depth" basis to discuss in detail individual problem projects and problems which are affecting project implementation across a number of sectors. As a result of these reviews, a number of positive developments have been noted: most actions agreed to  - 7 - have been completed and coordination and communication between Finance and the various ministries and agencies responsible for project implementation have improved markedly. 20. The Government has also become increasingly conscious of the importance of implementation. In addition to fully supporting the project implementation review system, the Ministry of Finance has now set up an internal unit to oversee project performance. Furthermore, there have been more consistent responses to Bank Group suggestions and a willingness to openly discuss project problems raised by Bank Group staff. As a consequence, the disbursement record of Bank Group projects has improved somewhat over the last two years, and a recent analysis indicated that the Tanzanian disburse- ment performance is about equal to the Bank-wide average. PART III - INDUSTRIAL SECTOR 21. At the time of independence in 1961, Tanzania had a rudimentary industrial sector which contributed less than 5% to GDP and was mainly confined to simple processing of export items such as cotton, sisal, and coffee; cotton ginning was the largest single manufacturing activity. 22. With the new orientation of economic policies after the Arusha Declaration of 1967 (para. 4), industrial development became a major concern of the Government, the primary focus being on import substitution in essential consumer goods and meeting the basic needs of the population. Existing major manufacturing plants were brought under the newly established Government parastatals (companies), and these parastatals became the leading investors in medium and larger scale industrial units. By 1974, parastatals accounted for an estimated 50% of new capital formation and 50% of manufacturing value added. However, even with the increase in parastatal activity, the private sector remains an important participant in industry (430 of 500 factories with over 10 employees are in private hands.) 23. The expansion of public ownership of manufacturing enterprises (there are currently six parastatals under the Ministry of Industry) has been accompanied by increasing reliance on direct controls in allocation decisions. Components of the control system include centralized decision making on investments, detailed allocations of foreign exchange through import licensing, credit allocations according to the annual Finance and Credit Plan, wage setting, and price controls. 24. The growth of industry until 1973 was quite significant, reaching an average annual rate of 9.4% in real terms between 1964 and 1973. During this period, the share of manufacturing in GDP at current prices rose from nearly 7% to 11.5% and by 1973 almost half of the total supply of manufac- tured goods in Tanzania was produced locally. Particularly rapid advances were made in import substitution of consumer goods, which represented about 60% of the total output of large and medium scale manufacturing firms in 1973.  -8- After a decade of significant growth, however, the manufacturing sector stagnated during 1974 and 1975 because of steep increases in the prices of imported commodities, the acute balance of payments problem, and shortages of water and power. Industry has subsequently recovered from the economic crisis and a real industrial growth rate of over 5% was achieved in 1976 and 1977. 25. While this record of increasing output would seem to indicate satisfactory industrial performance, a detailed analysis of Tanzania's record in the manufacturing sector reveals some problems, specifically low productivity and output well below what is feasible given the level of investment in the sector. The problems underlying this suboptimal performance are many. First of all, the Government has not yet developed the administra- tive capability to monitor and coordinate effectively the control systems which were instituted along with increased public ownership of manufacturing enterprises (para. 23). While the Government believes these controls are needed to achieve its development goals, their effect has largely been to insulate public enterprises from the discipline of market forces. Secondly, performance indicators consistent with the control systems and clear guide- lines for evaluating performance are still lacking; managers and workers, therefore, have few motivating incentives. Finally, there is a scarcity of trained managerial personnel and skilled labor, and most enterprises have had to live with periodic shortages of other key inputs. 26. These issues have been raised in various Bank reports on the Tanzanian industrial sector and were a particular focus of the review of the Basic Economic Report in November 1977. Considerable discussions have taken place within Tanzania on possible solutions and a number of positive steps have been taken. An important recent development was the Government's decision to institute trial incentive systems; in parallel it has indicated that future wage increases will be closely tied to increases in productivity (para. 12). In addition, parastatal managers are now being held accountable for perform- ance, steps have been taken to loosen or remove import controls on spare parts and raw materials, there has been retrenchment in overmanned parastatals, a limit has been placed on allowable increases in overhead costs of manufactur- ing firms which approach the National Price Commission for price increases, and foreign consultants have been hired to advise on how to achieve opera- tional/ managerial improvements. Finally, the Government's recent statement encouraging private investment in Tanzania is expected to have a significant effect in mobilizing incremental financial and human resources for the indus- trial sector. Basic Industrial Strategy and the Third Five-Year Plan 27. Future development of the sector will be based on the Basic Indus- trial Strategy (BIS) which was adopted in 1974 by the Government. The two main goals of this strategy are structural transformation and self-reliance and its main emphasis is on the use of domestic resources for domestic needs. This involves giving top priority in investment allocations to industries supplying (i) basic needs of food, shelter, health, education and transport, and (ii) producer goods which contribute to the production of a wide range  of industrial products. However, as it has emerged, BIS will also permit expansion of export-oriented production, especially that based on domestic raw materials (for example, cashew processing, sisal spinning, textile manu- facturing, and meat and leather processing). The Basic Economic Report sup- ported the BIS but dealt at length with some of its potential problems. In particular, it highlighted the fact that attempts to restructure the economy too quickly during the present period of resource stringency may ultimately frustrate both growth and structural change. In addition, too rapid expansion of individual sectors may lead to excessive reliance on external finance, know-how and markets, and the massive investment coordination required by the strategy may overburden the country's already weak planning capacity. 28. The recently published Third Five-Year Plan (FY1977-81) envisages an investment program of about TSh 23 billion, of which about 27% will go to the manufacturing sector. Industrial projects earmarked for development/ implementation under the Plan are mainly based on Tanzania's domestic re- sources. Among the sizeable industrial projects involved are the Bank Group financed polyester textile mill and industrial estate at Morogoro (para. 17) and the proposed project. National Development Corporation and the Southern Paper Mills Company 29. The National Development Corporation (NDC), which is sponsoring the project, was established in 1964 with its headquarters in Dar es Salaam. It is Tanzania's largest parastatal holding company and the country's principal instrument for industrial investment. 30. NDC is run by a Managing Director who also serves as Chairman of the nine-man Board of Directors. The Board functions as a policy making body for NDC as well as a liaison and coordinating group between NDC and the Gov- ernment. The influence of the Government on long-term planning is strong, although there is little involvement in day-to-day operational matters where decisions are left to the operating companies (paras. 31 and 32). NDC's staff totals 247 of which 108 are professionals (including 19 expatriates) serving in five operating departments: (i) Planning and Finance; (ii) Account- ing; (iii) Manpower Development; (iv) Administration; and (v) Industrial Development. 31. The overall capitalization of the NDC Group is sound with a debt/ equity ratio of 12/88. The Group holds shares in 23 operating companies of which 18 are classified as subsidiaries (over 50% NDC shareholdings) and 5 as associates (less than 50%). In 1977 the total sales of the companies totalled US$330 million and profits before taxes totalled US$29 million. The consolidated operation of the companies has been profitable every year since 1968 though some companies experienced losses in 1975 and 1976. The 23 companies operate in the following fields: metal working (7); tobacco and beverages (4); paper converting, printing and publishing (4); chemicals and allied products (4); and leather tanning and processing (4). In total, the Group companies employ about 12,000 people. Through its four subsidiaries in the printing, publishing and packaging sector, NDC converts about 50% of the  - 10 - present paper consumption in Tanzania, representing a sales value of over US$13.0 million per year; the printing and converting industry has expanded rapidly in recent years. 32. NDC Head Office's administrative expenses increased to 81% of its income in 1974, and became a cause of concern. After a review of the respective roles of the Head Office and the operating companies, a decision was made to restructure the services the Head Office provides in order to ensure that the operating companies had enough independence of action and could be held accountable for their performance. This resulted in a period of retrenchment for the Head Office: administrative expenses were held constant in absolute terms over the 1975-77 period and decreased to 32% of income in 1977. This reflected the much improved organization and coordination of Head Office/operating company work. Since the reorganization, the only new activity of the Head Office has been its involvement in the identification of technical assistance to review operational problems in the individual companies and make recommendations for improvements (paras. 12 and 26). This was partly respon- sible for the improved profit record in 1976 and 1977. 33. The Southern Paper Mills Company (the Company) has been established as a wholly-owned subsidiary of NDC and is responsible for the implementation and operation of the project. It is a limited liability company under Tan- zania industrial and commercial laws and its initial authorized share capital of TSh 10 million (US$1.2 million) will be increased to provide for additional equity subscriptions as execution of the project proceeds. While NDC will be involved in major policy decisions, the day-to-day operations of the mill will be under the control of Company management. The total staff of the Company, after the start of operations, will reach about 1,500 people. Forest Resources and Industries 34. About one-half of the total area of Tanzania, 44.4 million hectares (ha), is classified as natural forest, the greater part of which is open wood- land. There are 540 forest reserves totalling 13 million ha (or about 30% of the forest area) which serve as a source of wood and wood products, and as catchment areas. However, as most of these forests have a low stocking of merchantable timber and are widely scattered, prospects for their economic utilization and development are poor except to meet the large domestic demand for fuelwood and provide small quantities of valuable hardwood. 35. In addition to the natural forest, there are 42,000 ha of softwood exotic plantations and 6,000 ha of hardwood plantations. The past planting program has averaged 4,000 ha per year, and this is expected to increase to 5,600 ha per year during the 1975-80 period. The plantations cover a very small area of the country, but in the future are expected to supply most of the timber required for forest industries. Located primarily along the recently built Tanzania-Zambia highway, the plantations are now within rela- tively easy reach of the country's important consumer centers and the main port of Dar es Salaam.  - 11 - 36. Total wood consumptiQn, estimated as 34 million m3 in 1973, is ex- pected to rise to 37 million m in 1980 and 48 million m by the year 2000. More than 95% of this total wood consumption comprises fuelwood. The demand for industrial wood and wood-based material (mainly for sawnwood, paper and paperboard), is currently 500,000 m ; it is expected to almost double by 1980 and to reach 3 million m by the year 2000. 37. Tanzania has not yet developed a sizeable forest industry. In addition to pit-sawing, which is still fairly widespread, there are over 150 small and ill-equipped sawmills producing about 160,000 m per year. Before 1976 the largest mill's annual output was approximately 5,00C m3 and only 25 mills produced more than 500 m per year each. At that time a Norwegian-financed mill was completed by Tanzanian Wood Industry Cor- poration at Sao Hill; this is now 3the country's most important mill, currently producing some 12,000 m per year. In addition to sawmills, there are 2 plywood mills, a particle board factory, a fiberboard mill and a few small paper converting plant in operation. Finally, Kibo Paper Industries Limited, an NDC subsidiary, began operations of a small 10 ton-per-day paper plant (using waste paper) in June 1978; it is now producing near capacity. All the other paper and paperboard requirements of the country must be imported. Bank Group Experience in Industry and Forestry 38. The Bank Group has approved three lines of credit to the Tanzania Investment Bank (TIB), two textile projects and an industrial estate project. It has also approved one loan to the forestry sector. 39. TIB's main role is to provide medium and long-term finance for investments in productive sectors. The Bank Group has been involvedl with TIB since its formation in 1970 and provided a US$6 million credit in 1974 (No. 460-TA) and US$15 million loans in 1975 and 1977 (Nos. 1172-TA and 1498-TA). Over this period, TIB has grown substantially in size and im- proved its operations. The most recent appraisal report of TIB (No. 1730-TA) described it as "a well organized institution with a reputation for making sound investment decisions." 40. Thus far, one Bank Group project has directly involved NDC sub- sidiaries, the Morogoro Industrial Estate Project. Loans for this project (Nos. 1385-T-TA and 1386-TA) were approved in April 1977 and implementation is proceeding satisfactorily on schedule. Two textile investments have been made in subsidiaries of the National Textile Corporation. The first loan of US$15 million (No. 1128-TA) financed the expansion of the Mwanza Textile Corporation mill by 20 million square meters per annum. Physical completion of this project was practically on schedule, and the project was completed within cost estimates. Initial mill performance has been above expectations. The second project, identified by the textile sector study  - 12 - funded under the Mwanza Textile Project, involves the establishment of a new integrated polyester textile mill with an annual capacity of 21.5 million square meters of blended fabrics and 650 tons of yarn. A US$20 million credit (No. 833-TA) and US$25 million loan (No. 1607-TA) were recentlv approved; implementation of the project is just commencing. 41. A US$7 million loan to the Sao Hill Forestry Project (No. 1307-TA) was approved in July 1976. Over a 5-year period, it includes the planting of about 16,000 ha of pulp wood, the maintenance of 10,000 ha of existing plant- ation and the related infrastructure required. Although this project started slowly with a number of difficulties, a managerial change has resulted in evident progress in project implementation. All project activities are now proceeding satisfactorily and initial technical problems (which resulted in the failures of early project plantings) have been resolved. During the present planting season the project management expects to restock most of the failures of past years as well as plant new areas. PART IV - THE PROJECT 42. The Government of Tanzania has been preparing a pulp and paper project for almost a decade. Approximately four years ago, Bank Group parti- cipation was requested by NDC. After a brief review of the investment pro- posals being considered by NDC, Bank staff highlighted the need for a detailed feasibility study on the project. This study was executed during 1975 and 1976 and detailed comments were made by Bank staff at all stages, particularly on project scope, technology, and market assumptions. While ,his feasibility work was being completed, an IBRD loan of US$7 million was approved to develop the raw material base at Sao Hill for the proposed paper mill (paras. 17 and 41 above). In August 1976, a preappraisal mission visited Tanzania to discuss the major project issues and reach agreement with the Government and NDC on the actions required to proceed with this project. By October 1977 enough progress had been made on the outstanding issues to justify project appraisal; the Bank Group appraisal team was joined by representatives of KfW and SIDA. The Kuwait Fund's appraisal took place in mid-1978. Negotiations were held in Washington in November 1978 and the Tanzanian delegation was led by Mr. E. Mulokozi, Principal Secretary, Ministry of Finance and Planning. A Loan/ Credit and Project Summary is at the front of this report and the Supplementary Project Data Sheet is contained in Annex III. A Staff Appraisal Report (No. 1929-TA) is being circulated separately. Project Description 43. The project consists of the establishment of an integrated pulp and paper mill with an initial capacity of 60,000 tons per annum (TPA) of a com- bination of various grades of paper and board, as well as 1,400 TPA of market pulp for Kibo Paper Industries. Facilities to be provided include: logging roads and equipment, a chemical pulp mill with a bleach plant, a mechanical pulp mill, two paper machines with associated stock preparation and paper finishing equipment, necessary steam and power generation equipment, and some supporting infrastructure. The mill will produce about 22,000 TPA of kraft  - 13 - paper, 23,000 TPA of printing and writing paper, 7,000 TPA of newsprint, 8,000 TPA of kraft linerboard and 1,400 TPA of market pulp. The principal project facilities will incorporate spare capacity enabling a total of 75,000 TPA of paper and board to be produced at minimal additional cost. The mill will be located near the Sao Hill forest area, 15 km south of Mufindi in south-central Tanzania, some 590 km from its major market of Dar es Salaam. The site has good road and rail connections with Dar es Salaam and with other parts of the country. Project Concept and Choice of Technology 44. The project has been specifically designed to supply a substantial proportion of the paper needs of Tanzania: the mill will produce a broad range of domestically consumed paper products and is closely tied to the projected Tanzanian demand for those products. Of necessity, this has meant that diverse processes have been included. Moreover, the cost of chemicals, most of which will need to be imported, and environmental considerations have required that the mill be equipped with full chemical recovery and e[fluent treatment facilities. 45. Throughout the period of project preparation a number of modifica- tions to the project concept (including reducing the size and/or the number of products produced) have been suggested and evaluated with a view to reduc- ing mill complexity as much as possible. Although some of these reductions would have led to a lowering in plant capital cost, they also involved lost revenues with little or no savings in infrastructure costs. Thus, these options resulted in a loss of economies of scale and their projected economic rates of return were well below the estimated opportunity cost of capital in Tanzania. Another alternative examined was a phased approach where certain facilities would be added at a later date. However, as a very large propor- tion of the total expenditures would be required in the first phase, the adverse financial and economic implications of high initial expenditures for delayed benefits were also unacceptable. The project concept now being pro- posed therefore represents the optimum balance between project cost and complexity on the one hand, and economic benefits on the other. 46. Within the basic mill concept there were considerable choices with respect to the degree to which labor can be substituted for capital and the extent to which the mill is appropriate to Tanzanian conditions. This was extensively discussed with the Government and NDC by the Bank and other financiers throughout preparation and significant steps have been taken to increase labor intensity and simplify mill operations and processes in a way which would not prejudice product quality or environmental impact. This concern received particular attention in the basic engineering stage 1/ when a large number of decisions were made on types of equipment, the degree of automation required and other technical factors of mill design. Reflecting this attention, Bank staff and technical representatives of the other financ- ing institutions are now fully satisfied that the mill design proposed is appropriate to Tanzania. 1/ Basic engineering for this project was partially financed by a $500,000 advance from the Project Preparation Facility.  - 14 - Market Analysis, Marketing and Pricing 47. Current consumption of paper in Tanzania is approximately 23,000 tons per annum. Nearly all paper is imported and the total value of paper im- ports is currently about US$15 million annually. While growth in consumption averaged about 13% per year from 1965-71, the growth rate dropped to 3% from 1971-77. This slowing reflected primarily the economic crisis of 1974-76 and the subsequent import restrictions. The use of paper is widely distributed through all sectors of the economy, the major consumers including newspapers, publishers of text books and the packaging industry. Packaging grades are used for both domestic consumption goods (cement, sugar, milled products, fertilizer, etc.) and exported products (particularly sisal). 48. Because the mill concept is so closely linked with domestic con- sumption (para 44), a number of market investigations have been undertaken: two studies during the project feasibility study stage (1974 and 1976), a Bank Group study including both end-use and statistical projections (1976) and two independent studies by BIS Marketing Research Limited of the United Kingdom (1977 and 1978). After reviewing the results of these studies, the BIS end-use studies for the short term and the Bank's statistical projections over the longer term were judged the most realistic and used for mill design and project analysis. Using these estimates of total consumption, a further investigation was made into paper demand by grades of paper in order to relate mill output to domestic demand to the maximum extent possible. 49. While the proposed mill is designed for the Tanzanian market, economies of scale in pulp and paper production require a minimum size plant which would be larger than can initially be absorbed by Tanzania. Therefore, although the proposed mill would operate with an annual production of 60,000 TPA of paper and board by 1987, demand projections by grade indicate that Tanzania's demand for Mufindi's output will not reach that level until 1990. Thus, for a few years, the Company will have to export some of its output. Although no detailed survey of possible export markets has been undertaken, a number of the market studies contained examinations of likely export markets. Given the projected consumption of neighboring countries and assuming that all other paper projects presently under consideration in East Africa come on stream as scheduled, the maximum level of excess Tanzanian capacity would represent less than 10% of the total import demand of neighboring countries. In view of this, little difficulty is anticipated in marketing the projected level of export tonnages. 50. At the present time, the 5 or 6 major consumers of paper in Tanzania (who account for as much as 75% of paper consumed) import directly from the producing countries, while most smaller consumers are supplied by Elimu Paper Supplies, a Government agency. When the mill is in operation the major consumers and Elimu Paper Supplies will receive their supplies directly from the Company. Particular attention will be paid to ensuring a smooth transi- tion from imported to domestically-produced paper; to provide the framework for this, the Company will submit to the Bank by December 31, 1980 detailed  - 15 - marketing and distribution programs for both the domestic and the export markets (Section 3.05 of the draft Joint Financing Agreement). For export sales, either the sales staff of the Company would be augmented or the Company would sell to domestic paper dealers who in turn would handle exports to the ultimate customers. 51. Paper prices would be established by the Company. It has been agreed that the prices of paper products produced by the mill would be set at levels which would permit the Company, operating efficiently, to obtain revenues sufficient to cover all of its costs, service all of its debt and earn a reasonable return on its invested capital (Section 3.17 of the draft Joint Financing Agreement). Bank staff analysis indicates that prices so determined would be approximately equal to the average long-term prices of imported paper (excluding taxes and duties). Raw Material Supplies and Infrastructure 52. When the project relches normal operating capacity, the total wood requirement will be 262,000 m annually. This wood will be supplied from the Sao Hill pine plantations, sawmill waste, and a wattle plantation; a pine plantation in Mbeya is available as a reserve resource. The Sao Hill pine plantations, established primarily for this pulp and paper project, currently cover some 10,000 ha; an additional 14,000 ha financed by the Bank Group under the Sao Hill Forestry Project will be established during the period 1979-81. Based on the growth rates which have actually been achieved, and with a generous 30% allowance for losses, this resource should be adequate to support the mill. However, as a margin of safety, an additional resource exists in the form of a 4,000 ha pine plantation in Mbeya, some 240 km by rail from the Mufindi site. Furthermore, the mill represents an obvious and potentially profitable outlet for waste wood from the sawmill at Sao Hill (para. 37) and for over-mature wattle from the Tanganyika Wattle Company some 170 km from the mill site; both organizations are interested in supplying these materials to the pulp and paper mill. To the extent required for the efficient operation of the mill, the Government has agreed that the Sao Hill resource, the Mbeya plantation and the wastewood from the Sao Hill sawmill will be available for the project (Section 3.15 of the draft Joint Financing Agreement). In addition, the Company shall enter into suitable long-term arrangements with the Tanganyika Wattle Company for the supply of wattle timber (Section 3.10 of the draft Joint Financing Agreement). 53. Because coal is not currently mined on a large scale in Tanzania, assurances were obtained that adequate quantities of suitable coal will be available for the efficient operation of the mill (Section 3.16 of and Part B(4) of Schedule 1 to the draft Joint Financing Agreement); the needed investment will be financed separately from the project. The State Mining Corporation is planning to expand production and stockpile from an existing small mine to ensure availability of coal for mill startup while larger fields are being developed; however, if the full requirement of coal is not available on time, the mill could use fuel from the refinery in Dar es Salaam. Limestone for the project is available from several alternative locations in the project areas and State Mining Corporation is currently sampling  - 16 - and conducting chemical analyses to determine the most economic source for full-scale exploitation. Salt for the mill's cholorine and caustic soda plant is available on the coast and will be shipped by rail to the plant. All other chemical raw materials will, at least initially, have to be imported through Dar es Salaam. 54. One problem which created significant problems for industrial companies in Tanzania in the mid-1970s was the availability of imported materials, and spare parts (para. 9). To address this potential problem, the Government has agreed to take all appropriate measures, on the basis of a reasonable allocation of its foreign exchange resources, to ensure the timely procurement of the imported raw materials, maintenance materials and spare parts needed for the efficient operation of the mill. (Section 3.18 of the draft Joint Financing Agreement). 55. The Tanzania-Zambia Railway (TAZARA) passes within 8 km of the proposed mill site, requiring a railway spur. Following its usual practice, TAZARA will engineer, construct and maintain the spur and will finance ap- proximately one-third of the initial costs; the remaining costs are included in the project cost estimates and will be financed under the project. With respect to housing, the project's capital cost estimate includes allowances for 20 houses for senior staff and a 20-room guest house. In addition, it has been estimated by NDC that an additional 540 houses and other township fa- cilities will be required for mill operating staff as well as several villages for forest workers. These will be financed separately by the Government and are not included in the project cost estimates. An escarpment road will provided the necessary link between Sao Hill and the proposed mill site; this road will also facilitate transportation from the Iringa region to TAZARA. As tentative agreement has been reached with the European Community to finance this road construction, its costs are not included in the project cost estimates. A transmission line into southwestern Tanzania is being estab- lished as an extension of the national grid. While this extension would not have taken place until the early 1990s without the mill load, it has been concluded that implementation of the mill justifies its immediate construc- tion. The Tanzania Electricity Supply Company is currently engaged in calling tenders for detailed engineering of the line and investigating possible sources of finance; finacing for this is not included in the project. 56. The Government has confirmed that all the infrastructure and coal mining investment required for the project would be completed in time to meet the requirements of the mill (Section 3.12(b) of the draft Joint Financing Agreement). In addition, it has been agreed that quarterly reports describing the implementation progress of the infrastructure investments would be sub- mitted to the Bank Group (Section 3.13(b) of the draft Joint Financing Agreement). Although, as reviewed above, a number of the infrastructural requirements of the project are being financed separately and have not been included in the financing plan, all costs not recovered by direct charges have been taken into account in the economic evaluation of the project (para 73).  - 17 - Project Implementation and Operation 57. The mill will be constructed by NDC on behalf and for the account of the Company (Section 3.01 of the draft Joint Financing Agreement). The arrangements for project management have been a major focus of project pre- paration, reflecting both the size of the project and the critical impor- tance of its timely implementation. The arrangements agreed to between the Government, NDC and the financiers include (i) the Project Team, (ii) the Project Advisers, (iii) the Project Managers, and (iv) the Project Engineers. A Project Team has already been established within NDC, and will eventually comprise a staff of 7 to 10 Tanzanian professionals. A number of NDC depart- ments will provide support to the Project Team and later to the Company. This team will be led by a Tanzanian national, who is expected to become the Company's General Manager, thereby ensuring continuity from project execution to operations. 58. In the early phases of project preparation NDC had the continuous assistance of Aktiebolaget Statens Skogsindustrier (ASSI, the Swedish state pulp and paper company) in analyzing various project alternatives, resolving technical issues and for general advice on project development. However, as ASSI does not have the experience in developing countries needed to oversee project implementation, it was decided that other firms will be required for project management and engineering and that ASSI would assume the role of Project Adviser. In this role ASSI has already been involved in the selection of the Project Managers and Engineers; during implementation it will be responsible for assisting NDC in monitoring the work of the Project Managers and Engineers, in providing whatever specific pulp and paper expertise is needed by the Project Team and in helping in the design and execution of a training program for the mill (paras. 63 and 64). ASSI's initial contract is for a term of five years with provision for extension on terms to be agreed. 59. The Project Manager will have management responsibility for the project and will coordinate all aspects of project implementation. In late 1977 NDC selected Sandwell of Canada, a qualified international pulp and paper consulting firm with extensive experience in the pulp and paper industry in the developing world, to assume this role. Sandwell's initial work on the project, under an interim contract, is being financed by US$500,000 from the Technical Assistance Project (Credit No. 601-TA). Project Engineers are needed to complete the basic engineering and detailed design of the mill. In early 1978 Jaakko Poyry of Finland was selected for this role; Poyry's initial work under an interim contract has been financed from a US$500,000 advance from the Project Preparation Facility (para 46). The selections of ASSI, Sandwell and Poyry were acceptable to the Bank Group; a condition of credit effectiveness will be the signing of final contracts with the Project Advisers, Managers and Engineers (Section 4.01(c) of the draft Development Credit Agreement). It has also been agreed that throughout project implementation, Project Advisers, Managers and Engineers with quali- fications and experience acceptable to the Bank Group will be employed and retained on terms and conditions acceptable to the Bank Group (Section 3.11 of the draft Joint Financing Agreement).  - 18 - 60. The management arrangements proposed for this project are viewed as necessary to provide adequate back-up for the Project Team and to ensure effective project implementation. They reflect the size and complexity of the project and are similar to those which worked well in the case of Mwanza Textile Project (para. 40). To date coordination among the various organiza- tions involved has been excellent. 61. Subsequent to the physical implementation of the mill, it is expected that Sandwell will serve as the Company Managers for at least the first three years of mill operations and will provide all services relevant to proper mill oper- ation. The structure of the Company's organization during operations is expected to be substantially similar to that during implementation in order to ensure adequate continuity. The Company has agreed to submit to the Bank Group by June 30, 1979 a plan for the Company's organization during imple- mentation and operation (Section 3.07 of the draft Joint Financing Agreement). 62. Plantation establishment and maintenance as well as replanting after clear felling will be the responsibility of the Sao Hill Forestry Project under the Ministry of Natural Resources and Tourism. Tree felling will be carried out by the Wood Supply Division of the Company; this Division in the Company will be headed by a Tanzanian Wood Supply Manager. To ensure close cooperation between the Company's Wood Supply Division and the Sao Hill Forestry Project, the Ministry responsible for forestry will be represented on the Company's Board of Directors (Section 3.09 of the draft Joint Financing Agreement). Employment and Training 63. The mill will provide direct employment for about 800 people of which 40 will be highly skilled, 160 skilled, and 140 semi-skilled. Pre- liminary training plans for the technical staff have been prepared by ASSI; they include acquisition of technical knowledge at the University of Dar es Salaam and pulp and paper schools overseas and practical training at Kibo Paper Industries and at South Asian and Swedish plants. The Company will submit a detailed training program for mill operation to the Bank Group before June 30, 1979 (Section 3.08 of the draft Joint Financing Agreement). 64. The wood harvesting operations are expected to employ some 440 skilled and 110 unskilled workers when the paper mill is fully in operation. In addition, the Company's Wood Supply Division will have approximately 140 salaried personnel of which about five managerial positions will be filled initially by expatriates. The selection and training of the harvesting labor force will need to be arranged well in advance of mill operations. It is expected that the expatriate teachers required for the training can be provided through bilateral or multilateral arrangements assisted by the principal suppliers of the pulpwood harvesting equiment. The Company will submit detailed training programs for the forestry operation to the Bank Group no later than June 30, 1979 (Section 3.08 of the draft Joint Financing Agreement).  - 19 - Project Costs and Financing 65. The total financing required for the project is estimated at US$251.7 million; the estimated foreign exchange component is US$193.6 million, 77% of the total. In addition to an installed mill cost of US$217.7 million, the total financing includes US$6.7 million for working capital and US$27.3 mil- lion for interest during construction. These cost estimates were prepared by Sandwell and Poyry during the completion of basic engineering in mid-1978 and the base cost estimate is based on August 1978 prices. Foreign equipment will not be subject to import duties under exemptions drawn up to encourage industrial development. Physical contingencies of 10% have been added on all costs and price contingencies total about 15% of the base cost estimates plus physical contingencies. 66. The proposed Bank Group financing of US$60 million--a US$30 million IBRD loan and a US$30 million IDA credit--would cover 24% of the total financ- ing required for the project. The proposed IBRD loan would be repayable over 20 years, including 5 years of grace at an interest rate of 7.35%. The proposed IDA credit would be on standard IDA terms. US$20.1 millicon of the IDA credit would be passed on from the Government to the Company through NDC as equity and the remaining US$9.9 million in IDA funds and all IBRD funds would be onlent from the Government to the Company under a subsidiary finan- cing agreement on terms and conditions satisfactory to the Bank Group; this would include an interest rate of 10%, repayment in 16 years including 5 years of grace and the foreign exchange risk borne by the Company (Section 3.04(a) of the draft Joint Financing Agreement) 1/. Execution of the subsidiary financing agreement acceptable to the Bank Group will be a condition of effectiveness of the proposed credit (Section 4.01(a) of the draft Development Credit Agreement). An additional US$191.7 million equivalent will be required to implement this project. The Government is committed to providing US$51.7 million from local sources (representing 20% of the total financing required) and cofinancing is being arranged from CDC for US$20 million (8% of the total), from KfW for US$34 million (14% of the total), from KF for US$18 m:Lllion (7% of the total), from OPECSF for US$10.5 million (4% of the total), and from SIDA for US$45 million (18% of the total). Effectiveness of all cofinancing arrangements is a condition of effectiveness of the proposed Loan and Credit (Section 4.01(b) of the draft Development Credit Agreement). 67. In order to ensure an acceptable financial structure for the Company, it has been agreed that all funds required to complete the project would be provided by the Government to the Company through NDC in a debt/ equity ratio of 50:50 (Section 3.04(a) of the draft Joint Financing Agree- ment). Procurement and Disbursements 68. With the exception of items costing less than US$100,000 all machinery, equipment, materials and minor civil works financed by the 1/ These terms are about average for onlending to parastatals in Tanzania.  - 20 - Bank Group, CDC, KfW and SIDA (estimated to total over US$150 million) will be procured on the basis of ICB consistent with Bank Guidelines. The recovery boiler package, financed by NIB, will be procured on the basis of competitive bidding within the Nordic countries. The major civil works contract will be financed by KF and OPECSF and will be procured on the basis of ICB consistent with KF guidelines. With regard to the equipment packages to be financed by CDC, SIDA, KfW, the Bank and IDA, a 15% margin of preference or the actual tariff on equivalent imported goods, whichever is the lower, will be accorded for purposes of bid evaluation to qualified local manufacturers; qualified local civil works contractors will be granted a preference of 7-1/2% for the minor civil works to be financed by these agencies. Individual items costing less than US$100,000 equivalent and totalling not more than US$5 million, could be purchased internationally on the basis of their suitability, avail- ability and price. As noted previously, the Project Advisers, Managers and Engineers have already been identified. 69. The NIB would administer the disbursements on the recovery boiler package and the Kuwait Fund would administer disbursements on those components financed by OPECSF and itself. KfW would disburse the bulk of its funds on the paper mill package. Bank Group funds will be disbursed against 48% of the foreign expenditures for relevant machinery, equipment and material packages, 48% of the foreign expenditures for consultancy services, and 48% of the foreign expenditures for technical assistance and training; CDC and SIDA funds will finance the remaining foreign expenditures for these components on a pari passu basis. In addition, interest and other charges on the IBRD loan will be financed from IBRD loan funds and disbursements under the Project Preparation Facility (para. 46) will be refinanced from the IDA credit. Financial, Accounting and Reporting Covenants 70. In order to ensure a sound financial base for the mill, the Company will not incur any debt if its debt/equity ratio would fall to 60:40 or below and the Company will maintain a current ratio of at least 1.5:1 (Sections 5.03 and 5.04 of the draft Joint Financing Agreement). In addition, the Company would not incur any debt in excess of US$3 million in any fiscal year unless a reasonable forecast of its revenues and expenditures shows that its projected net revenues for any fiscal year shall be at least 1.5 times its projected debt service requirements in the same fiscal year (Section 5.05 of the draft Joint Financing Agreement). Dividends shall be paid by the Company only after three years of commercial operation and then only if the current ratio would remain above the 1.5:1 limit (Section 5.06 of the draft Joint Financing Agreement). Finally, (i) until project completion the'Company would not make any investment outside the scope of the project and (ii) until operating at full production the Company would not make any investment in fixed assets in excess of US$3 million equivalent without prior approval of the Bank Group (Section 4.04 of the draft Joint Financing Agreement).  - 21 - 71. Annual financial statements of NDC and the Company, audited by an independent auditor acceptable to the Bank Group, would be submitted to the Bank Group within four months after the end of each fiscal year (Sections 5.01 and 5.02 of the draft Joint Financing Agreement). Quarterly financial statements and project progress reports will be submitted within 45 days after each quarter (Section 3.03(b) of the draft Joint Financing Agreement). Environmental Impact 72. At the present time there are a few scattered settlements near the project site; an ujamaa village is proposed nearby but its location will not be selected until the mill's exact location is confirmed. Although a full environmental impact study has not been carried out, the facilities proposed have been designed with a view to minimizing the undesirable envir- onmental aspects of a sulphate pulp and paper mill and no undue disturbance to residents in the area is anticipated. As there are as yet no Tanzanian standards for pollution control, provision has been made in the project to keep the discharge of solid, liquid and gaseous wastes within internationally acceptable limits. Agreement has been reached that the necessary antipollu- tion measures will be taken to ensure that the project is carried out and the mill operated in accordance with sound ecological and environmental practices (Section 3.06 of the draft Joint Financing Agreement). Project Justification 73. The project's financial rate of return has been estimated at 9% before and 7% after taxes. To calculate an economic rate of return all costs that would not be recovered through direct charges were added to project costs (including half the cost of the escarpment road and all the basic township infrastructure) and labor and foreign exchange costs were shadow priced. This calculation resulted in an estimated economic rate of return of just over 11%. 74. The decision to recommend Bank Group financing reflects a number of concerns. First, the estimated economic rate of return exceeds the Bank Group staff's estimate of the opportunity cost of capital in Tanzania. Second, the project has been given high priority by the Government as a central element in its Basic Industrial Strategy (para. 27 above); consistent with that strategy it involves the utilization and processing of a domestic resource and has been specifically designed to address domestic needs. The project also will result in significant net foreign exchange savings, estimated at US$30 million per year at full production. 75. There are also a number of benefits of the project which are not reflected in the rates of return. Certainly the most important is that the mill would provide a dependable supply of paper to Tanzania at stable and reasonable prices. As paper is a highly cyclical industry, Tanzania has been subject in the past to extremely high prices and to the non-availability of certain paper grades when supplies were short. In addition, the benefits of the possible expansion of the project with minimal investment (para. 43)  - 22 - are not included in the rate of return calculation. This expansion of the mill to 75,000 TPA would have an economic rate of return above 30%, including its costs and benefits would increase the economic rate of return of the proposed project by over one percent. Risks 76. Given the very large size of the project and its modest economic rate of return, the risks in proceeding are significant. The Government and NDC have recognized this throughout project preparation and have made consid- erable efforts to reduce the risks. This must continue to be a major focus during project implementation and to ensure that the expected benefits are realized, it is imperative that (i) the project be implemented efficiently within the time and cost presently allowed for, and (ii) production be brought up to capacity operations at least as quickly as forecast in this report. 77. To minimize the risk of shortfalls in implementation and production, three specific measures have been taken. Firstly, the project's basic engi- neering has been substantially completed and a detailed construction budget and implementation schedule have been prepared. This step was closely super- vised to ensure that the equipment design would be appropriate to Tanzanian conditions and that the capital cost estimate is realistic. Secondly, con- sistently conservative assumptions have been utilized in regard to important project variables; in particular the construction time allowed for the project is some 12-18 months beyond what might be considered reasonable in an indust- rialized country. Thirdly, substantial expatriate assistance will be provided during project implementation and initial plant operations. While the scope of assistance to be provided is expected to be adequate, its impact can only be as effective as the close cooperation that needs to be developed between the Company and the firms providing expatriate assistance: as noted above, the initial relationship between NDC and its expatriate assistance has been good. In view of these considerations, it has been concluded that the project risks have been adequately addressed and that the project should proceed. PART V - LEGAL INSTRUMENTS AND AUTHORITY 78. The draft Loan Agreement between the United Republic of Tanzania and the Bank, the draft Development Credit Agreement between the United Republic of Tanzania and the Association, and the draft Joint Financing Agreement among the United Republic of Tanzania, the Kingdom of Sweden, the Bank, the Associa- tion, the Southern Paper Mills Company and the National Development Corpora- tion are being distributed to the Executive Directors separately. Also being distributed separately are the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, and the Recom- mendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association.  - 23 - 79. The draft Joint Financing Agreement describes in detail the joint financing procedures that apply to SIDA's contribution. A Memorandum of Understanding will be signed among the United Republic of Tanzania and all cofinanciers describing in a general fashion the cofinancing arrangements agreed between them. Special conditions of the project are listed in Section III of Annex III. Conditions of effectiveness include execution of the Subsidiary Financing Agreement between the United Republic of Tanzania and Southern Paper Mills Company, the meeting of any condition of the effective- ness of the various cofinancing agreements and the conclusion of suitable final contracts with the Project Advisers, Managers and Engineers (Sections 4.01(a), (b) and (c) of the draft Development Credit Agreement). The loan would become effective only upon fulfillment of the effectiveness condition specified for the credit (Section 5.01 of the draft Loan Agreement). 80. I am satisfied that the proposed Loan and the proposed Credit would comply with the Articles of Agreement of the Bank and the Association. PART VI - RECOMMENDATION 81. I recommend that the Executive Directors approve the proposed Loan and Credit. Robert S. McNamara President Attachment Washington, D.C. December 20, 1978  -24- ANNE I TABLE 3A Page 1 of 6 TANZANIA - WOIAL LIfICATON2S DATA SHEET RiLrziuNci GROUPS (ADIJUSTED AVErAGES LAND AREA (MO'JSAND St). KM.) TANZANIA - MOST IECTNT !STIATE ) Li TOTAL 9'5.1SAE SM NXTICE AGRICULTURAL 303.3 iDaT ugCuWr CzocuruzC INCOME INCOME 1960 LI 1970 Lb ESTIMIATE /4 REGION /4 GROUP /d GROUP /e GNP-PFR CAPITA (05$) 70.0 1f 110.0 14 200.0 if 223.6 182.9 432.3 ENERGY CtIS5PTKnIH PER CAPITA (KILOCRAAC L COAL. IQULVALENT) 41.0 62.0 69.0 86.7 38.9 251.7 POPULATION A." VITAL S7ATISTICS TOTAL PQPU:ATION. MID-Eal (MILLIONS) 9.6 14 12.9 If 15.5 /4 URBANI POPULATION (PmERcE or ToTAL,) 4.6 5.5 7.3 13.6 15.0 24.2 POPULATION DENSITY PER SQ. P34. 10.0 14.0 16.0 18.4 46.8 42.7 PER SQ. 734. AGRICULTURAL LARD 20.0 26.0 30.0 53.6 254.1 95.0 POPULATION AGE STRUCTURE (PERCE.'r) 0.-IA YES. '2.5 LLI 44.4 14 46.7 44.4 43.6 44.9 15-64 YES. ~5.5 14,Aj 53.0 1h 50.9 52.7 53.3 52.8 65 YES. AND ABOVE 2.0 Lia 2.6 /h 2.4 2.8 2.9 3.0 POPULATION CROVYg RtATE (PEREN!1T) TOTALL 2.3 3.0 If 2.7 /f 2.6 2.4 2.7 URBAN 5.0 5.6 7.5 /I 5.8 4.0 3.8 CRUDE 311Rr1 RATE (PER THOUSAND) 51.5 50.5 47.0 46.9 44.3 42.2 CIRUDE DEATH RATE (PER -THOUSANID) 27.1 23.0 20.1 20.6 19.7 12.4 GROSS REPRODUCTION RLAIE 3.2 3.3 3.1 2.9 3.2 FAMILY PLANIOING ACCEPTORS. ANNUAL (TEoOSANDS) . . . USERS (PIRCEU;T OF KARRIZD WVNMEI) ....2.5 14.6 14.2 INDEX OF FOOD PRODUCTION PER CAPITA (1970-100) 91.6 100.0 107.5 94.2 96.4 104.3 PUI CAPITA. SUPPLY OF CALORIES (PERCENT OF RIWUI73ziTS) 69.0 88.0 86.0 "0.1 92.3 99.5 PROTEINS (GEJARS PER DAY) 42.0 43.0 47.1 55.2 50.0 36.8 Of WHICH ANIMA&L AND PUlLSE 22.0 LI 23.0 20.0 17.1 13.9 17.5 CNEW (ACES 1-4) MORTALITY RATE .. . .. 7.5 HEAL-T! LIFE EXPECTANCY AT BIRTH (YEARLS) 3S.7 41.8 44.5 43.7 45.8 53.3- INFANT MORTALIT-Y RAT! (PER ThOUSAND) 190.0 160.0 1 .138.4 102.7 82.5 ACCESS TO SAFE WATER (PEIG73I oF POPULATIONI) MOTAL .. 13.0 39.0 22.4 26.4 31.1 URLBA .. 1.0 88.0 66.3 63.5 68.5 RURAL .. 9.0 36.0 10.4 14.1 18.2 ACCESS TO EXCRErA DISPCSAL (PERCE3IT OF PQPULATION) TOTAL . . 17.0 23.9 16.1 37.5 URBAN .. . .0 70.3 65.9 69.5 NUIRAL ... 14.0 14.2 3.4 25.4 POPULATION PER PHYSICIAN 21750.0/jk 21570.0 ff0760.0 14 21757.5 13432.7 9359.2 POPULATION PER NUESUIG PERSONA 9240.0f--kl 4690.0 7? 3180.0 /f 3473.8 6583.3 2762.5 POPUL.ATION PER WSPL TAL BED TOTAL 570.0LELk 700.0 14f . 645.4 1157.6 786.5 URBAN ... . 172.9 133.3 278.4 RURAL ... .1292.6 1348.6 1358.4 ADMISSIONS PER WOSPITAL 3ED MT.. 1. 19.5 19.2 ROUSING AVERAE SIZE Ot IIOVSEIOLD TOTAL .. 4.4 14h . 4.9 5.2 AVERAE NUXIER OP PERSCNS PER ROOM URLBAN 18g . .. 1.8 2.3 ACCESS TO ELECTRICITY (PERCENT OP M~ELLL%ZS) TOTAL . . ... 25.9 28.3 U.RRAN . . . RUAlJ. lo:;. . . 1.  -25- ANNEX I TAiLI 3A Page 2 of 6 TpmZAIA - SOCIAL 1WD1CAEORS ODTA Sn?ZT IZPERLNCE GRLOUPS (ADJUSTED ALKRAGES A- MOsT ,CaNT ESTIMAt)R SAME SAMfE NElXT HIGIER IQDST BENer CROGRAPUC INCOME INCOME 1960 h 1970 A ESIfLT! /b R1GION GROUP /d GROUP /e EDUCATION ADJUSTED ENROLLMENT RAnOS PR IART: TOTAL 24.0 35.0 57.0 52.1 62.9 75.8 FEMALE 16.0 28.0 46.0 37.6 45.9 67.9 SECONDARY: TOTAL 2.0 3.0 3.0 8.0 14.4 17.7 FEIALE 1.0 2.0 2.0 5.0 8.8 12.9 VOCATIONAL (PERCENT OP SEODNDARY) 23.0 .. .. 7.2 6.6 7.4 IPUPIL-TEAChEP RATIO tlD7RY 45.0 47.0 53.0 4342 38.5 34.3 SEODNDARY 20.0 19.0 20.0 22.8 19.8 23.5 ADULT LITsRACY RAT! (PERCENT) 9.5 28.1 A 49.0 /j 20.3 36.7 63.7 CONSUMPTION PASSENGER CARS PER TEORUSAD POPULATION 3.0 2.5 2.6 3.9 3.1 7.2 tADIO RECEIVERS PER THOUSAND POPULATIOIN 2.0 11.0 16.0 40.1 31.1 71.1 SV RECEIVERS PER THOUSAD POPULATION .. 0.3 .. 2.2 2.8 14.1 UEWSPAIPER (:AILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION - 3.0 5.0 3.0 3.9 6.0 16.3 CIDNA ANNUAL ATTENDASCE PER.C&PITA 0.5 .. .. 1.2 1.4 1.6 DaLOYKENT TOTAL LASOR FORCE (THOUSANDS) 4900.0 IQ 5600.O0LL6300.0 /n FrEALE (PERCENT) 37.1 36.6 36.3 312.6 24.2 2S.0 AGRICULTURE (PERCENT) 96.0 to 9t.Ot/.h 83.1 73.3 60.7 54.1 INTMSTKY (PERCEST) 3.S 5.0 .. PARTICIPATION RATE (PERCENT) TOTAL "4.7 43.5 42.2 42.0 39.8 37.8 MALE 56.9 55.7 54.3 54.8 53.3 50.3 SEoLE 32.5 31.5 30.3 27.3 19.6 20.9 ECONOMIC DEPEHDENaC LRATIO 1.1 Lo 1.2L/, 1.2 1.2 1.3 1.3 INCOME DISTRITU'TON PERCENT OF PRIVATE INCOIME RECEIVED BY - HICHEST 5 PERCENT OF ROUSEHOLDS .. 33.5 *- 25.7 20.3 19.5 RICHEST 20 PERCENT OF MJUSEHOLDS .. 63.3 .. 53.1 45.1 48.9 LOWEST 20 PERCENT OF POUSEHOLDS .. 2.3 .. 5.8 5.7 5.9 LOWEST 40 PERCENT OF HOUSEHOLDS .. 7.8 .. 14.5 16.8 15.7 POVERTY TARGET GROUPS ESTIMATED AiSOLUTE POVERTY INCOS LEVEL (US$ PER CWPITA) URZA .. .. 117.0 108.8 8.5 155.9 tDRAL .. .. S89.0 74.1 71.9 97.9 tSTIMATED RELATIVE POVERTY INCCME LEVEL (US$ PER CAPITA) UILBAN .. .. 144.0 124.4 100.8 143.7 AL .. .. 45.0 59.6 42.0 87.3 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) DRBAN .. .. 25.0 26.8 46.0 22.9 IURAL .. .. 65.0 47.6 '8.0 36.7 . Not avilable Not applicable. /e The adjusted group aversgae for each indicator are populston-wvelghted geometric mane excluding the extrem values of the indicator and the most populated country it each group. Coverage of countries aeong the Indicators depends on availability of 4ata end to not unitor. 2 Unless otherwise noted, data for 1960 reter to any year betveen 1959 and 1961; for 1970, betweent 1969 and 1971; and for M.st Recont esti=te. between 1973 and 1977. /s Africa South of Sahara; td Low lacom (t280 or less per capita, 1976); /e Lower middle Income (S261-SSO par capita. t976); it Mailand Tana; nt); L 1957; /h t967; /I t967-71; LI 1961-63; A 1962; LI ReStietered. not all prectice In the couetry; /a 1958, Zansibar only; /jt 1972; Lo 1963. September 1978  -26- ANNEX I pe e~ Of Vy*;.!prto Page 3 of 6 Notes -ILL"- a,, t,o 0avo are demon fr'n q0m . garsfly Judged the oseas eerhorlcatl,a end Lote It tel o- to .( a note tlict then *- not be Itetr- SWIltalt tttr.l nnaoon1 of (tocv -f araedordlnad d.fltn tdot*t et7yttrn ooctaC ,'Ilotttnn1. eCce 44.. The dare are. OAe.tCe.Le.9 stil todat. .atr L tant. Cd,ittt ercs . ed tctr*.Clt SCertI - ol di fe.Ce nntcrIa ee'-.. u'neoe for nooN 1 tiCaSar an. napnlottoe-esi4hed -oti "OO. noe,l,d, tr ore ulta o t1. todleator and chee eat LASP0E 't:-Aod ee o oaattnortn-o , otl itn a,,d Cral 1 Pocalatloo (toal1. .o:a. - .t:c. *:cfco acts oooact."I lootarea In bot .eo..r. ...oo.. en ua:'! :dto ly cecr tepaclsoctr of : '.tto bed At:ltc - tto ctEeciaate aIgricultral are iced cr,oorarisatal tepoiltdpriate SoLI Laal aco npnvaltoa Lsy.al.cedra- Ct?Elt cAP:l7k 7 :.PI ;nr capita. animate, at .rseetc ecket prices. Aa etosnnCS-tr I tiftbapttco 1cc!l by a ndial o ttltolatel ayso co "rt; cretno an 9orld La-a Atlas (1275-7? hbalsi; altu.'rt .01O t. tih Offe,r,ot-pacbtot cntstansad 1140, 9. lutI, - o'ot. rvd (atotu. ftdCl otli 51127 CC0SC~~1C~N *t~ ;APttoA Aetol_ ..eotia. Of chonetll neg fro doapto --idel y the -o.or ofte- theroial CaSctricot -A .10 s34roo of c051 equ