Tanzania - Tobacco Handling Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P- 2 31 3-TA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A tOBACCO HANDLING PROJECT May 1, 1978 Thbis doument ka a resteted disbatlio and may be used by recipients only In the performance of their odic duties. Ils eontnts may not otherwie be dislosed witiout Wodd Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Tanzania Shilling (TSh) US$ 1.00 = TSh 8.3 TSh 1.0 = US$ 0.12 (As Tanzania 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. Conver- sions in this Report were made at US$1.00 to TSh 8.3 which is close to the 1977 average exchange rate.) GLOSSARY OF ABBREVIATIONS CCM - Chama Cha Mapinduzi EAC - East African Community ERB - Economic Research Bureau KILIMO - Ministry of Agriculture NADP - National Agricultural Development Program PMO - Prime Minister's Office TANU - Tanganyika African National Union TAT - Tobacco Authority of Tanzania TRDB - Tanzania Rural Development Bank FISCAL YEAR Government - July 1-June 30 TAT - March 1-February 28  FOR OFFICIAL USE ONLY TANZANIA: TOBACCO HANDLING PROJECT CREDIT AND PROJECT SUMMARY BORROWER: United Republic of Tanzania BENEFICIARIES: Tobacco Authority of Tanzania and the Tanzania Rural Development Bank AMOUNT: US$14 million equivalent TERMS: Standard RELENDING TERMS: About US$2.6 million equivalent in IDA funds would be relent to the Tobacco Authority of Tanzania (TAT) at 10% interest per annum for 10 years including five years of grace; about US$2.4 million equivalent in IDA funds would be relent to the Tanzania Rural Development Bank (TRDB) at 4% interest per annum for 20 years including five years of grace for onlending to project villages. The balance of US$9.0 million in IDA funds equivalent would be passed on by the Government to TAT as equity. PROJECT DESCRIPTION: The proposed project would, over a four-year period, aim to reduce the losses presently suffered by smallholder tobacco producers during tobacco handling. It would signifi- cantly raise snmallholder incomes and increase Tanzania's foreign exchange earnings. Speci- fically, the project would finance bulking bags, grading/baling centers, marketing centers, vehicles and related maintenance equipment, storage warehouses and ancillary facilities, and incremental staff and tech- nical assistance for TAT. The project faces no special risks. While implementation could proceed at a slower rate than anticipated as a result of institutional deficiencies, this risk has been minimized through the provision of technical assistance. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - ESTIMATED COST: US$ Nillion Local Foreign Total Bulking Bags 0.2 0.5 0.7 Building Construction Grading/Baling Centers 1.8 0.4 2.2 Market Centers 1.8 0.4 2.2 Warehouses and ancillary facilities 2.7 1.8 4.5 Other 0.3 0.2 0.5 Vehicles and Equipment 0.5 3.4 3.9 Staff & Consultants 0.5 0.8 1.3 Base Cost Estimates 7.8 7.5 15.3 Physical Contingencies 0.8 0.4 1.2 Price Contingencies 2.4 1.8 4.2 Total Project Cost 11.0 9.7 20.7 of which taxes and duties 0.2 - 0.2 Project cost net of taxes & duties 10.8 9.7 20.5 FINANCING PLAN: Local Foreign Total % IDA 4.3 9.7 14.0 68 Government 6.7 - 6.7 32 11.0 9.7 20.7 100 ESTIMATED DISBURSEMENTS: US$ Million IDA Fiscal Year FY79 FY80 FY81 FY82 FY83 Annual .2 4.6 4.0 3.4 1.8 Cumulative .2 4.8 8.8 12.2 14.0 RATE OF RETURN: 24% APPRAISAL REPORT: Report No. 1866-TA dated April 24, 1978  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A TOBACCO HANDLING PROJECT 1. I submit the following report and recommendation on a proposed credit to the United Republic of Tanzania for the equivalent of US$14 million on standard IDA terms to help finance a project to improve tobacco handling in Tanzania. Approximately US$2.4 million equivalent would be relent to the Tanzania Rural Development Bank (TRDB) at 4 percent interest per annum for 20 years including 5 years of grace for onlending to project villages. Approxi- mately US$2.6 million equivalent would be relent to the Tobacco Authority of Tanzania (TAT) at 10 percent per annum for 10 years including 5 years of grace for project investments. The balance of US$9.0 million equivalent would be passed on by the Government to TAT as equity. PART I - THE ECONOMY 7! Introduction 2. A Basic Economic Mission visited Tanzania in August 1976. The Basic Economic Report was distributed in December 1977 (Report No. 1616-TA). 3. Tanzania has experienced a degree of continuity and stability in political structure, leadership and objectives which is unrivaled in Africa. The TANUZ/ party, under the leadership of President Nyerere, has been the unifying force in Tanzania's political evolution since the early 1950s. For the past decade, following the Arusha Declaration in early 1967, Tanzania has pursued the objectives of social equality, self-reliance, the eradication of poverty and economic and social transformation. The Government has emphasized rural development, social ownership of the principal means of production, and full participation of all regions and population groups in the development process. Economic growth has been an important objective but the leadership has been willing to forego short-term income gains for longer-term structural change and more equitable distribution. In restructuring the political, eco- nomic and social life of the country the leadership has introduced a series of far-reaching institutional reforms: most large-scale units in manufacturing, finance and wholesale trade have been nationalized; the Government has sharply increased its share of revenue in GDP through progressive taxation; a signi- ficant portion of public sector expenditure control has been delegated to the regions and districts and a massive campaign of villagization has been ini- tiated to bring the rural population together into viable long-term development units. 1/ This section is substantially repeated in President's Reports on the proposed Second Cashewnut Development Project dated May 1, 1978 and the proposed Mwanza/Shinyanga Rural Development Project dated May 1, 1978. 2/ TANU (the mainland political party) was merged with the Zanzibar political party (the Afro-Shirazi Party) in February 1977. The new party is now called Chama Cha Mapinduzi (CCM).  - 2 - 4. With a per capita income of US$180, Tanzania is classified as one of the least developed countries as defined by the United Nations (country data are provided in Annex I). Between 1967 and 1973 Tanzania's GDP at factor cost was growing at an annual rate of 4.5 percent. With population growing at 2.7 percent per year, per capita output was rising at only 1.8 percent per year on average. Domestic savings reached 18 percent of GDP while gross investment was sustained at between 20 to 25 percent of GDP, extremely high rates for a country at Tanzania's low level of per capita income. However, the growth rate in GDP was not commensurate with the magnitude of the investment effort, in part because of the high proportion of investment which was directed into slow-gestation infrastructure and social services projects but also because of sluggish growth in the agri- cultural sector and stagnant or declining productivity in parastatal enter- prises. During this period Tanzania's overall balance of payments situation was generally satisfactory, despite the disappointing performance in the export sector. The rapid growth in imports was more than compensated by increasing capital inflows, largely from bilateral sources on soft terms. The overall balance of payments was in surplus in most years during 1969-73, resulting in a modest buildup in net foreign exchange reserves to slightly over US$150 million at the end of 1973, the equivalent of almost four months imports. The Economic Crisis of 1974 and the Government's Response 5. In 1974 Tanzania was suddenly confronted with a severe economic crisis. Failure of rains in late 1973 and early 1974 caused a massive decline in production and marketing of the major foodgrains and the Govern- ment was compelled to import large quantities of grain. Tanzania's main export crops were also affected by the drought, and the resultant declines in export volumes prevented Tanzania from taking advantage of the commodity price boom of 1974. These agricultural problems were compounded by the disloca- tion resulting from the rapid expansion of the villagization program (para. 22). On the import side, total cost of merchandise imports rose by over 50 percent between 1973 and 1974, despite a slight decline in volume. As a result of these factors the trade deficit widened from US$158 million in 1973 to US$340 million in 1974 while the overall balance of payments moved from a surplus to a deficit of US$140 million. This balance of payments gap was financed largely through drawings from the IMF and a rapid depletion of reserves. Net reserves fell to US$60 million at the end of 1974, equivalent to only one month's import requirements. Industrial production also stagnated in 1974 due to shortages of imported raw materials and interruptions in power and water supplies. While production declined, domestic demand increased rapidly because of expansionary fiscal, monetary and wage policies. The imbalance between domestic demand and supply, combined with the sharp escalation in import prices, resulted in severe pressure on the domestic price level. 6. Once the extent of the problems facing the country was realized, the Government formulated a comprehensive package of policy actions to bring the balance of payments under control while maintaining the pace of its development effort. The principal elements of the package included a  - 3 - reallocation of investment in favor of directly productive sectors, measures to raise agricultural output, and constraints on wages and on public and private consumption. Government budget allocations to agricul ,ure and industry were substantially increased; significant increases were approved in agricultural producer prices; tight import controls were implemented; indirect taxes on consumer goods increased; user charges for water and electricity were raised and an extremely restrictive wage and salary policy was followed. This package was reviewed with the Bank at the time of appraisal and negotiation of the Program Loan in late 1974, and approval of that Loan was based on the Bank's agreement with and support of the policy package. Approval of the subsequent Program Credit in 1977 was based on the Government's overall performance in implementing the agreed upon program. Economic Performance since 1974 7. The major macroeconomic indicators have generally improved since 1974, reflecting both improved weather conditions and the effects of the policy measures introduced to deal with the crisis. Agricultural production increased by 6.5 percent in 1975 compared to a decline of 3.3 percent in 1974, while total GDP grew by 4.6 percent compared with only 2.2 percent in 1974. This was despite the fact that during 1975 production of cotton and some other cash crops still suffered from disorganization due to villag- ization. In 1976 some of the problems of villagization were being rectified through "operation correction," and since rains were once again favorable, agricultural production was generally good. Agricultural production increased by about 4.5 percent in real terms in 1976, industrial production expanded 6.2 percent and GDP grew 5.2 percent. Preliminary estimates are that agriculture and total production expanded by about 5 percent again in 1977. 8. The goods and services account of the balance of payments con- tinued to deteriorate in 1975 due to continuing production difficulties, declines in some agricultural export prices and the continuing need to import food for part of the year. The trade deficit increased from US$340 million in 1974 to US$400 million in 1975. Even after allowing for a high level of project-related capital inflows and a huge increase in grant assistance and concessional food aid, there was a residual deficit of almost US$75 million. Whereas the 1974 residual deficit was filled almost entirely through the combination of IMF assistance and reserve depletion, the 1975 deficit was met through foreign assistance from a variety of sources, including the US$30 million Program Loan from the World Bank (para. 6). In-1976 and 1977 the balance of payments picture improved. The trade deficit declined due to strong export performance, especially for coffee and cotton, and to a slight fall in the value of imports occasioned by a greatly lessened need for foodgrain imports and continuing tight restrictions on all other categories of imports. The overall balance of payments surplus was about US$35 million during 1976 and continued in surplus throughout 1977. Gross foreign exchange reserves at the end of 1977 amounted to US$280 million, or about four months imports.  - 4 - Because of the very concessional terms on which aid has been given to Tanzania and the Government's caution in using higher cost commercial loans and suppliers' credits, the overall debt service ratio has remained low. Including a notional 40 percent share of the debt of the East African Com- munity Corporations, it was less than 8 percent in 1977. While the favorable terms of much of Tanzania's foreign assistance (particularly the increasing proportion of grants) significantly reduce the debt service burden, they also increase Bank exposure. Debt service payments to the Bank Group were about 28.6 percent of Tanzania's total debt service payments in 1977. This is projected to rise to approximately 30 percent in 1980. 9. Tanzania has a suitable development program which will require substantial 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 need not to aggravate the local funds shortage, local cost financing is justified on country grounds. East African Community (EAC) 10. The recent developments in the East African Community were outlined in a report to the Executive Directors dated December 29, 1977. Dr. Victor Umbricht, the independent mediator recently appointed by the Partner States, visited East Africa in February and has begun work on the questions involved in appraising the assets and liabilities of the EAC Corporations and making recommendations on their allocations. The de facto breakup of the Community is expected to have some impact on Tanzania's budget as new national corpo- rations take over the services formerly provided by the EAC Corporations. While substantial initial investments are required (particularly in the formation of the airways corporation and the rehabilitation of the railways), the burden on the Government budget will hopefully be temporary as the new corporations should become self financing. A major development related to the EAC difficulties was the closure of the border with Kenya. Kenya was a major trading partner of Tanzania and in the short run considerable adjust- ments have had to be made in locating new suppliers for some items and developing outlets for some manufactured goods and agricultural products. PART II - BANK GROUP OPERATIONS IN TANZANIA 11. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1962, 30 IDA credits, 13 Bank loans and two Third Window loans amounting to $506.0 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 10 loans totalling $244.8 million which have been extended for the development of the common services and development bank operated regionally by Tanzania, Kenya and Uganda through their association in the East African Community. The only IFC investments in Tanzania to date, totalling $4.7 million, were made to the Kilombero Sugar Company in 1960 and 1964. This Company encountered financial difficulties and in 1969 IFC and other investors  - 5 - sold their interest in the Company to the Government. A proposal for an IFC investment in soap manufacturing is now under consideration. Annex II contains summuary statements of Bank loans and IDA credits to Tanzania and the East African Community organizations as of March 31, 1978 and notes on the execution of ongoing projects. 12. In keeping 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 productive projects. Furthermore, a number of Bank Group supported infrastructure pro- jects have been closely linked with specific productive activities. For example, the Urban Water Supply Project (Loan No. 1354-TA) approved in December 1976, will support the recently approved Industrial Complex in Morogoro (Loans No. 1385-TA and 1385-T-TA) and the proposed Morogoro Textile Project. Other directly productive projects are supporting both the agricultural and industrial sectors, including the Kigoma Integrated Rural Development Project (Credit No. 508-TA), the National Maize Project (Credit No. 606-TA), the Fisheries Develop- ment Project (Credit No. 658-TA), the Tabora Development Project (Credit No. 703-TA), three Tanzanian Investment Bank Projects (Credit No. 460-TA and Loans No. 1172-TA and No. 1498-TA), and the Mwanza Textile Project (Loan No. 1128-TA). The first Bank Group assisted project in the forestry sector, the Sao Hill Forestry Project (Loan No. 1307-TA), approved in July 1976, will provide the raw materials for Tanzania's first paper and pulp plant, also under nreDaration for consideration hv the Bank GrouD for financine. A Trucking Industry Rehabilitation and Improvement Project (Credit No. 743-TA) and a Second National Sites and Services Project (Credit No. 732-TA) were also recently approved by the Board. Three other projects are scheduled for pre- sentation to the Executive Directors before the end of this fiscal year--the Mwanza Shinyanga Rural Development Project, the Second Cashewnut Development Project and the Morogoro Textile Project. Projects which have been appraised include a Tourism Project, a Second Urban Water Supply Project and a Fifth Highway Project. A Rural Development Project in Mara, an Agricultural Services Project, a line of credit to the Tanzanian Rural Development Bank and a Harbours Project are also under preparation. 13. Although the comparatively high proportion of undisbursed loans and credits, detailed in Annex II (page 27), 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 was projected. It is clear in retrospect that both the Bank and Tanzania have been optimistic regarding 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--though potentially the source of long-term benefits-- have certainly disrupted orderly execution of projects and made parts of earlier project concepts obsolete. In general, these difficulties have been  - 6 - 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 and severe. By contrast, the "modern" sector projects have tended to fare better. The Tanzania Investment Bank, Mwanza Textile, and Cashewnut Processing Projects, for example, are proceeding well. 14. As the Bank's lending program has expanded, increasing attention has been given to measures designed to improve project implementation. A course was conducted in Dar es Salaam in 1973 on the Bank's procurement policies and procedures with the relevant Government officials. A special project imple- mentation unit was set up in the Ministry of Agriculture and nine Agricultural Development Service staff have been assigned to Bank projects. The need to establish a close and continuous working level dialogue between responsible Tanzanian officials and Bank staff on following-up implementation problems was one of the prime reasons for the expansion of the Resident Mission to two professionals in October 1976. In February 1977 a regular Government/Bank review of project implementation was established. Discussions, chaired by the Ministry of Finance and attended by Bank staff and officials from implementing agencies, were held in Dar es Salaam on the entire Bank Group program. Steps to strengthen this review proceduxe were taken in August 1977 when those meetings were shifted to a monthly basis. The Government also agreed that periodically these reviews will 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 of the actions agreed to during the reviews have been completed. In addition, the reviews have significantly improved coordination and communication by providing an oppor- tunity for project agencies to discuss their problems with all ministries involved and with high level officials in the Ministry of Finance. During the two in-depth reviews in October 1977 and January 1978 a series of general implementation issues were discussed with senior Tanzanian officials and follow-up actions or investigations agreed upon. 15. The Government has also become increasingly conscious of imple- mentation. In addition to fully supporting the project implementati.on 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 suggestions and a willingness to openly discuss project problems raised by Bank staff. As a consequence, the project disbursement record has improved somewhat over the last two years and a recent analysis indicated that the Tanzanian disbursement performance is about equal to the Bank-wide average. However, it should be noted that significant potential for further improvements exists as a wide range of serious long-term bottlenecks remain. This is particularly true in the agriculture and rural development sector where individual projects face a considerable number of constraints in trying to increase the incomes of smallholders (the lack of proven technical packages, a weak extension system, problems in input distribution and output collection, etc.).  - 7 - PART III - THE AGRICULTURAL SECTOR General Background 16. Agriculture and related activities constitute the largest single sector in the Tanzanian economy. About 94 percent of the population lives in rural areas, and 90 percent of the economically active population is engaged in agriculture. Roughly 40 percent of GDP is derived from the sector, of which about half constitutes subsistence production. In addition, agricultural exports (processed and unprocessed) account for about 80 percent of total exports. The major export commodities are cotton, coffee, sisal, cashewnuts, tea and tobacco. 17. Most agricultural production is from smallholdings using family labor. Large-scale agriculture is confined to a small number of private estates and state farms producing sisal, coffee, tea, sugar, wheat, rice and livestock. Estate production has diminished in importance since inde- pendence and the state farm program remains small. Tanzania's national livestock herd, the second largest in Africa, is grazed extensively over the 40 percent of the country wnich is free from tsetse fly infestation. It is largely managed along traditional lines. 18. Recent performance of the agricultural sector has been disappointing. The long-term growth rate of agricultural output between 1967 and 1976 was only 2.8 percent per annum--about equal to population growth. Moreover, food crop production has failed to keep pace with the expanding population and Tanzania has become increasingly dependent on imports of maize, rice and wheat. This deteriorating food balance position was seriously aggravated by the poor drought-affected harvests of 1973 and 1974 which necessitated large foodgrain imports. While real agricultural production increased by 6.5 percent in 1975 and by a further 4.5 percent in 1976, these increases represent primarily a recovery from the drought and only return agricultural expansion to its long-term growth path. Concern with increasing the historical long- term growth rate remains central to the Bank Group's investment strategy in Tanzania. Agricultural Development Strategy 19. The Government has undertaken a comprehensive program to support the development of productive activities in the agricultural sector, in conjunction with efforts to achieve balanced regional growth and more equitable income distribution (para. 3). While there has been a major emphasis on improving the availability of social services (particularly in health, water supply and education), in the aftermath of the drought and the balance of payments difficulties the Government has made increased output the major focus of its investments in rural areas. Specifically it has placed considerable attention on those crops which represent sources of foreign exchange earnings. The proposed project fits into this strategy, and, although tobacco generates only about 6 percent of current foreign exchange earnings, the potential for expansion of output and exports is significant. In addition to according  - 8 - priority to the expansion of selected export crops, the Government has given greater emphasis to its program of self-sufficiency in food production, assisted "-- an IDA Credit of US$18.0 million for a National Maize Project (Credit No. 606-TA). 20. Lo-Cg-terin support for the Government's focus on increasing production was expected to be channeled through the National Agricultural Development Program (NADP), a series of projects identified in the Agricultural Sector Report (No. 541a-TA dated December 10, 1974). These projects were expected to involve the development of "national" programs designed to concentrate and coordinate development efforts on the 40 or so agro-economic zones of the highest potential. In fact, as noted below (para. 31), the proposed project was a component of the first phase NADP. However, recent developments in the sector, particularly in Bank-supported projects, have raised serious questions as to the feasibility of this approach. While "national" projects oriented toward production were expected to be consistent with Tanzania's decentralized Government structure, this has not been achieved. The regions have not in practice felt responsible for implementing "nationally" conceived and directed programs. At the same time the regions have complained that many of the central services which they require (e.g., research, input delivery and marketing), and clearly accept as national responsibilities, are not being effectively provided. As a result of these developments, a new Bank strategy for agri- culture has emerged. In order to ensure regional responsibility and the development of locally appropriate technical packages (particularly those required by the more intensive cultivation practices in the new villages), a number of regional projects have been approved or are being prepared (para. 12). While these projects will focus on production efforts, we will not hesitate to support regional infrastructure when its absence is constraining production. At the same time, attempts to strengthen the ability of central ministries to provide essential support services to the regional "production units" will be made via national projects, e.g., in processing, marketing, and storage. The proposed project fits into this latter category. With this revised and consistent strategy, we expect a basis will be established for improving the disappointing growth rate in agriculture (para. 18). Rural Organization 21. In order to improve the design and execution of development projects and programs and to mobilize local resources, the Government, in 1972, adopted a decentralized administrative structure. Regions (20 in all) and Districts (80) were granted primary responsibility for the planning and implementation of development activities within their jurisdictions, and were given a high degree of administrative autonomy. The Prime Minister's Office provides overall policy direction, coordinates regional plans and budgets and assists Regions as appropriate in preparing their development programs. While it is clear that this decentralization of authority has improved communication between the Government and the villages (as the civil service operating at the district and regional levels are directly involved in integrated rural development efforts), problems of manpower, and of ill-defined division of responsibility between the regions, central ministries and parastatals persist.  22. In order to facilitate the provision of infrastructure and services to the rural population and to encourage self-reliance, the grouping of farm families into villages, villagization, is a key element of Government strategy. The acceleration of the Government's villagization program was given high priority in 197-- 74 and at present, over three-quarters of Tanzania's rural population are contained in about 7,700 registered villages. These registered villages, each containing between 250 and 650 families,elect a village Council which exercises wide judicial and administrative powers over the political, economic and social development of the village. It is too early to judge how effectively the villages will be able to meet their ambitious goals. However, it has been established that more attention to village siting and size is needed to overcome problems of overgrazing, soil depletion, and of increased travel to water, firewood and fields. Agricultural Services 23. The Ministry of Agriculture (Kilimo) is responsib2e for the cverall planning and monitoring of the sector as well as coordinating agricultural research, training of extension staff, pricing policy in the sector, seed multirlication and supervision of agricultural parastatals. Agricultural research is undertaken by a wide variety of government agencies and while Kilimo has been given the responsibility of overall coordination, research resources have not always been allocated in accordance with development priorities. Agricultural extension services are provided by staff trained by Kilimo, and are under the control of the regional administration. The links between research and extension are weak, and field staff are often poorly trained and inadequately supervised. A major review of the extension system has been underway in Tanzania for about two years, and IDA has agreed to work with the Government on a survey of the needs in this area with the intention of subsequently preparing a research and extension training component in the proposed Agricultural Services Project (para. 12). Pricing policy is an important tool of the Government in the agricultural sector. Since 1974, Government has accorded greater recognition to the need to give farmers production incentives; crop and livestock prices are now reviewed annually and substantial producer price increases have been made in recent years. A related issue which Kilimo is involved with is that of input pricing. In recent years, Government has encouraged the use of inputs (in particular fertilizer) through subsidization. In 1974 fertilizer was distributed at no charge; the subsidy is now 50 percent. However, because of ensuing problems (wastage, use on areas where inputs are uneconomical, etc.), greater attention is being paid by the Government to en- suring that inputs are distributed for use only where their use is profitable. In the past, Tanzania has suffered from a shortage of good quality seed, and bilateral aid has been directed at attempting to improve this situation. Consideration will be given to supplementing these efforts under the proposed Agricultural Services Project. Agricultural Marketing Parastatals, which exist for major crops and livestock, play a key role in agricultural marketing. The tendency has been for progressive enlargement by Government of the role and scope of these institutions, and this has, in many cases, placed a severe strain on their manpower resources. Overall operational efficiency is low, with correspondingly high trading margins. The Government is aware of the problems and must now begin to develop a comprehensive program for addressing them.  - 10 - 24. The Tanzania Rural Development Bank (TRDB) was established in 1971 to provide long- and medium-term finance and technical assistance for the promotion of rural development. At its founding, it was stressed that TRDB was intended to be a sound financial institution and therefore would only extend credit to economically viable activities. TRDB is wholly Government- owned with an authorized capital of TSh 300 million. Its management is vested in a Board of Directors, including a Chairman and Managing Director (appointed by the President) and eight other Directors appointed by the Minister of Finance from among persons with knowledge and experience of economic and financial matters, rural development, agriculture, small-scale industries, ujamaa villages or cooperatives. TRDB has its head office in Dar-es-Salaam and 20 regional offices. The Association was consulted during the establishment of TRDB and has been extensively involved with its develop- ment. TRDB has played the role of financial intermediary in a considerable number of Bank Group agricultural and rural development projects and, as noted above (para. 12), a separate line of credit for TRDB is being prepared for consideration for Bank Group financina. Since its founding, TRDB oper- ations have been complicated by villagization, decentralization, the elimina- tion of the regional cooperative unions (its largest group of borrowers), as well as the drought. All these deveLopment:- tve .eated special prc-.ems for TRDB, and weaknesses in its portfolio reflect these difficulties. Yet throughout this period, TRDB has increased its level of operations and signi- ficantly upgraded its staff. Bank Group missions have noted TRDB's ability to deal with its problems and expansion and have been particularly impressed by its management. In respect to the proposed project, TRDB will serve as financial intermediary for two major components (bulking bags and grading and baling centers). The Tobacco Subsector 25. The Tobacco Authority of Tanzania (TAT) was established as a statu- tory body under the Tobacco Industry Act of 1972. TAT's functions include supervision of growers, control of tobacco transport, processing and export, and the regulation of tobacco marketing. The Minister of Agriculture has direct responsibility for overseeing the activities of TAT which is headed by a Board of Directors representing concerned government ministries, regional authorities and tobacco growers. Day-to-day control over TAT activities rests with the full-time General Manager. TAT is organized into four functional Departments at headquarters (Manpower Development and Administration; Finance; Marketing; and Development and Planning), and has eight regional offices. In the past, TAT has experienced serious organizational and management problems, but the situation has improved since the appointment of the present General Manager in 1975. TAT is still hampered by lack of specialist staff, particularly in the Finance Department. Technical assistance to strengthen TAT's Finance, Manpower Development and Administration and Development and Planning Departments would be provided under the proposed project. 26. In the last three years (1975/76 to 1977/78), TAT has recorded large cash deficits, partly as a result of being required by Government to subsidize the sale of fertilizer to farmers (para. 23), and partly as a result of being required by Government to finance a considerable portion of tobacco develop- ment expenditure, As a result, at the end of February 1978, TAT had a bank  - 11 - overdraft of about TSh 80 million. Projections of TAT's financial position show that, as a result of meeting its development committients, including contributing to the costs of the Tobacco Processing Project (Credit No. 658-TA), TAT's bank overdraft would rise to TSh 178 million by 1982 (about 40 percent of gross TAT sales revenues). To attempt to rectify this situation, measures for the resolution of TAT's financial problems have been agreed with the Government (para. 51). 27. Tobacco Production. In the last 13 years, the production of tobacco in Tanzania has increased from 5 million kg to over 18 million kg. Most of this expansion in production was achieved in the smallholder subsector, where 75 percent of Tanzania's tobacco is grown by about 54,000 families cultivating an average of 0.5 ha of tobacco each. Thus, tobacco has proven to be the one area where smallholder production performance has improved consistently over the past decade. The average smallholder pro- duces a crop with a potential marketed yield Of over 1100 kg of cured leaf per hectare. It is, however, estimated that up to 45 percent of this crop is lost due to shortage of barn capacity, poor curing techniques and in- efficient bulking and grading operations. Consequently, the average small- holder produces only 550 to 600 kg per hectare of saleable tobacco. There is, therefore, considerable potential for an increase in marketed production through reduction of these losses. 28. The main tobacco growing areas are Tabora, Iringa and Mbeya Regions for flue-cured tobacco, and Ruvuma Region for fire-cured tobacco. Smaller quantities of tobacco are produced in the Shinyanga; Rukwa, Singida, West Lake and Kigoma Regions. For the next few years, TAT has adopted a policy of consolidation, during which efforts will be concentrated on raising production in existing villages, through recruitment of new farmers and through increases in areas and yields. With this program, TDA staff estimate production will grow at a rate of 7 percent per annum. On this basis, production would increase from 18.,3 million kg in 1976/77 to about 30 million kg in 1982/83 and to about 39 million kg in 1986/87. 29. Previous IDA Tobacco Projects. An IDA credit for US$9.0 million (Credit No. 217-TA) was extended in October 1970 for a project designed to increase the production of flue-cured tobacco. The project aimed at settling some 15,000 new tobacco growers in villages of 100 families each. The project provided for on-farm credit, extension services, construction of curing barns and grading sheds, access roads, water supplies, a minor expansion of processing facilities and additional storage. Progress has been slower than expected, re- flecting delays in construction of water supplies, slow recruitment of farmers (due to the early emphasis on communal production) and low participation in tobacco growing by settled farmers (who chose to devote most of their efforts to maize production). A full review of the project was carried out in 1972, resulting in the rephasing of both physical devrelopment and of project costs, and the establishment of more realistic production targets. Tobacco production  - 12 - from the project remains disappointing, with production reaching only 30 percent of the revised estimates. However, the project has established settled farming in an area of previously largely unoccupied land and has contributed suivstantially to foodgrain production. It is anticipated that, over the next few years, tobacco production from the project should repre- sent an increasingly significant part of total national production. 30. An IDA credit of US$8.0 million (Credit No. 658-TA) was approved in September 1976 for a project which provided for improvement and enlarge- ment of existing processing facilities at Morogoro, for construction of storage and offices at Dar-es-Salaam, for technical assistance and training and for a study of the need for further tobacco processing investments. Somae contracts for project equipment have already been awarded, and machinery installation commenced in November 1977. However, it has become apparent that more storage space is required at Morogoro than is provided for under the project, hence the proposed project contains provision for the con- struction of additional storaae facilities at Morogoro (Dara. 40). PART IV - THE PROJECT 31. The project was prepared by the Government of Tanzania, with the assistance of the Regional Mission in East Africa, as one component of Phase T of the National Agricultural Development Program (NADP). As such, its appraisal was partially completed in June/July 1977 during the NADP appraisal mission. However, following the return of the NADP I appraisal mission, it was decided that the tobacco handling component of that project should be treated as a separate project. At the same time it was concluded that of the remaining com- ponents of the Phase I NADP project only those involving central services should be done on a "national basis"; production elements should be left to the regions. As a result, further preparation work on the service components of the Phase I NADP is being completed as an Agricultural Services Project (para. 12). The appraisal of the Tobacco handling Project was then completed in October 1977. Negotiations were held in April 1978 and the Tanzanian delegation was led by Mr. E. Mulokozi, Principal Secretary of the Ministry of Finance and Planning. A Staff Appraisal Report on a Tobacco Handling Project is being distributed separately and a credit and project summary is at the front of this report. Project Objectives and Description 32. The proposed project would, over a four-year period, aim at significantly reducing the losses (totalling perhaps 25 percent of the value of smallholder production) which occur during tobacco handling from curing barn to processing factory. It also continues and expands the Bank Group's efforts at increasing the capacity of TAT to encourage and support develop- ment of Tanzania's tobacco subsector. In fact the project continues the cycle of Bank Group involvement in tobacco -- in the ongoing projects financing production and processing, the tobacco handling problem has been identified as a major bottleneck requiring further investment. Specifically, the project would include financing for: (a) the supplv to tobacco farmers of polythene bulking bags; (b) the conctrnuction of about 80 village grading/baling centers;  - 13 - (c) the const-ruction of about 40 permanent marketing centers in strategic locations; the supply to TAT of tractors, trailers and seven- and ten-ton trucks for the transportation of tobacco and tobacco inputs; the supply of four-wheel drive vehicles and motorcycles for use of TAT extension and marketing staff; and the expansion of TAT vehicle maintenance facilities; (e) completion of an adequate master plan for and provision of additional wet-leaf and processed leaf storage warehouses and packing materials storage at the Songea fire-cured tobacco processing factory; (f) the construction of storage warehouses and ancillary facilities (offices, yards, etc.) at the important road/rail junctions of Itigi and Makumbako; (g) the construction of 11,000 m2 of additional storage at the Morogoro flue-cured tobacco processing factory; and (h) technical assistance for project implementation and studies needed for the tobacco subsector. Detailed Features 33. Bulking Bags. Under present Tanzanian smallholder conditions, tobacco is stored either in the farmer's house or in makeshift temporary storage, where it is often damaged while the farmer accumulates sufficient cured leaf to enable him to complete bales. It has been estimated that total losses occurring in this way amount to as much as 200 kg per hectare of production. In addition to these losses, the quality, and hence the sales value, of the tobacco is lowered. Experience with smallholders in Nlalawi and Zambia has shown that the use of large polythene bags for the bulking of tobacco enables a considerable reduction of wastage and improve- ment of tobacco quality. Provision would be made under the project for the supply to tobacco producers of polythene bags each permitting the storage of about 30 kg of tobacco. These bags would be procured by TRDB and made available to farmers on seasonal credit, with the cost, plus interest charges, being deducted from the farmers' sales receipts, in the same way as for other tobacco inputs. The credit would finance the total cost of bags purchased in the first year of the project and the incremental annual cost of bags purchased thereafter (Schedule 1 of the draft Development Credit Agree- ment). 34. Grading/Baling Centers. After tobacco has been cured and bulked, it is graded and baled. At present, Tanzanian smallholder tobacco farmers grade their crops on farm, and bring their tobacco to a central baiing point wheni sufficient quantities have been accumulated. Baling is largely con- ducted in the open air, cr i-r. small temporary structures which have been  - 14 - built by villages or TAT for that purpose. Under these circumstances, the condition of the tobacco deteriorates and consistent grading is difficult to achieve. To address this, the project would provide for the construction of village grading and baling centers in all villages achieving annual production in excess of 100,000 kg of cured tobacco. Based on a detailed study of village production data, it is estimated that about 80 villages would qualify for provision of grading/baling centers during the project period. These centers would be of four sizes, ranging from 360 mZ to 630 m2. Specific criteria for minimum village production, and for relating production to center size, would be applied (Section 2.06(a) of the draft Project Agreement). TAT and TRDB, in conjunction with the regional authorities and villages,would prepare by December 31, 1978 and each subsequent December 31 a program of the proposed annual construc- tion of grading/baling centers. Such programs would be submitted to the Association for its information by January 31, 1979 and each following January 31 (Section 2.06(b) of the draft Project Agreement). 35. Marketing Centers. TAT has only 18 permanent market centers where it can classify smallholder tobacco bales before purchase. Substantial classification therefore has to take place in the open air. As a result, there is some loss of tobacco quality and the marketing process can be disrupted and delayed by inclement weather. Analysis of production pro- jections indicates that about 40 additional permanent market centers would be required over the project period to ensure that all of the tobacco crop would be classified and stored in satisfactory market facilities. Accord- ingly, provision is made under the project for the construction of 40 centers. Each of these centers would have an annual throughput of at least 300,000 kg. The size and range in area are from 540 m2 to 720 m2. The location of market centers would be according to marketing master plans for each tobacco pro- ducing region, drawn up by TAT. The master plans would be submitted to the Association for comment by December 31, 1978, and each annual construction program would be provided to the Association for information not later than January 31 of the calendar year in which construction would take place (Section 2.07(a) and (b) of the draft Project Agreement). 36. Transport and Maintenance. The project would provide for improved transport of tobacco from the villages to market centers, from market centers to the processing factories and, in the case of the Songea factory, from the factory to Makumbako, the railhead for the port of Dar-es-Salaam. Reduction of delays in tobacco transport would minimize the risk of deterioration of tobacco quality, and would, in addition, enable the acceleration of payment to the farmer. The additional transport facilities would also improve the delivery of tobacco inputs to the villages. While the tractors and trucks provided under the project would mostly be utilized for the transportation of tobacco and tobacco inputs, TAT presently provides vehicle hire services on a subsidized basis and it would be in a position to continue to provide vehicles for hire during slack periods. After June 30., 1979, TAT would provide transport services on an unsubsidized basis; a list of TAT hire charges would be submitted to the Association by April 30, 1979, and a revised list updating the charges to reflect cost  - 15 - changes would be prepared periodically and submitted to the Association (Section 2.08(a) and (b) of the draft Project Agreement). Transport facilities for TAT regional staff are inadequate, particularly 'i the fire-cured tobacco producing areas. This severely limits the ab-lity of TAT management to exercise effective control and supervision, and makes it difficult for tobacco classifiers to establish and maintain a regular marketing schedule. The project would provide for the pur- chase of 45 four-wheel drive vehicles and 100 90-cc motorcycles to address this problem. 37. In order to operate its transport fleet efficiently, TAT needs the capability to carry out day-to-day servicing, repairs, preventive maintenance and vehicle overhauls. The project would provide for the construction of a new workshop in Songea, mobile workshops for the main tobacco regions, and for the improvement of existing workshops through the purchase of additional machinery and hand tools. Assurances were given that TAT would operate, maintain, repair and replace all vehicles financed under the credit in accordance with appropriate administrative, financial and engineering practices (Section 3.03 of the draft Project Agreement). 38. Improvements to the Songea factory; Construction of Warehouses at Itigi and Makumbako; Completion of Storage at Morogoro. While no accept- able master plan is presently available for the development of the Songea factory, additional storage facilities are required for both wet-leaf and processed tobacco in order to handle the projected throughput of tobacco there. Facilities for storage of packing materials are also required. The project would therefore provide for the financing of consultants to carry out an accurate site survey and draw up a detailed master plan for the development of the factory. This master plan would be submitted to the Association for review and approval (Section 2.09 of the draft Project Agreement). Once an acceptable master plan has been drawn up, the project would provide for the design and coestruction of about 3,600 m2 of additional wet-leaf storage, and about 4,300 m of additional dry-leaf storage and packing materials storage. 39. The proposed project would facilitate the movement of flue-cured tobacco from the Chunya area to Morogoro for processing through the construction of storage warehouses at the Itigi railhead. It would also facilitate the transport of tobacco from Songea to Dar-es-Salaam for export by providing for the construction of warehouse facilities at the Makumbako railhead. Analysis indicates that rail transport is a more efficient transport solution than the present practice of road shipment from Songea to Dar-es-Salaam. The project would finance the design and construction of about 2,600 m2 of storage and 300 m2 of office space at each site, together with ancillary facilities. In the case of Itigi, this would include a railway siding, while at Makumbako the railway siding will be constructed jointly by the Government and the Tanzania-Zambia Railway as part of their long-range development program. Assurances were given that the expected completion date of the Makumbako siding would coincide with the completion of the TAT warehouse there (Section 3.03 of the draft Development Credit Agreement).  - 16 - 40. Funds were provided under the Tobacco Process ing Project (Credit No. 658-TA) for the construction of a total of 10,700 m of tobacco storage at the Morogoro flue-cured tobacco processing factory. However, this has proved to be inadequate primarily as a result of the more rapid deterioration than anticipated in the existing temporary storage and the fact that the new processing equipment will take up more space than expected. Therefore, approximately 11,000 m2 of additional storage would be constructed under this project. 41. Technical Assistance. In order to strengthen TAT's ability to implement the project, funds would be provided for the employment of the following: a Building Engineer, eight additional Building Supervisors, a Transport Officer, a Financial Systems Development Accountant, five Regional Accountants and a Procurement Officer. In addition to the use of consultants for the preparation of the Songea factory master plan, and to draw up designs for the grading/baling centers, market centers and storage facilities, the project would provide for the employment of consultants to design a complete and appropriate financial and management accounting system for TAT, and assist TAT in the implementation of the system (Schedule 2, Part F of the draft Development Credit Agreement). Project Costs and Financing 42. The total cost of the project would be US$20.7million (TSh 171.8 million), including about US$0.2 million (TSh 2.0 million) of taxes and duties. The foreign exchange component would amount to US$9.7 million, or 47percent of total costs. Details of project costs are included in the credit and project summary. The proposed IDA credit of US$14.0 million would finance about 68 percent of total project costs net of taxes and duties--all the foreign exchange costs and 40 percent (US$4.3 million) of local costs. Local cost financing is justified on country grounds (para. 9). The Government would provide the remaining US$ 6.7million (US$6.5 million net of taxes and duties), and would bear the foreign exchange risk. IDA and Government funds for bulking bags (US$0.8 million including contin- gencies) and for the construction of grading/baling centers (US$3.2 million including contingencies) would be relent to TRDB for 20 years including 5 years of grace at an annual interest rate of 4 percent (Section 3.01(c) of the draft Development Credit Agreement). TRDB would onlend the funds for bulking bags as seasonal credit at 8.5 percent per annum. It would onlend the funds for grading/baling centers to villages at an annual interest rate of 8.5 percent for 8 years including one year grace in the case of flue-cured tobacco producing villages and for 12 years including one year grace for fire-cured tobacco producing villages (Section 3.01(d) of the draft Development Credit Agreement). TRDBts interest spread was calculated to cover its administrative costs'and risks and allow some build-up in its capital base. The villages would levy a cess on tobacco sold in order to repay loans for the grading/baling centers and cover maintenance costs. 43. Funds provided to TAT under the project would be passed on partly as equity and partly as loan. An amount of US$12.5 million, made up of  - 17 - US$9.0 million in IDA funds and US$3.5 million in Government funds, would be provided to TAT as equity to finance construction, equipment for marketing centers and venicle maintenance, consultant services, and vehicles for exten- sion services. The remainder of credit and Government funds (US$4.2 million) to be provided to TAT would be lent by the Government to TAT for a period of 10 years including 5 years of grace at an annual interest rate of 10 percent,the current borrowing rate for parastatals (Section 3.01(b) of the draft Develop- ment Credit Agreement). Execution of the Project Agreement and two subsidiary loan agreements (between the Government and TRDB and between the Government and TAT) would be conditions of credit effectiveness (Section 5.01(b)-(d) of the draft Development Credit Agreement). Procurement and Disbursements 44. Vehicles, spare parts, equipment and bulking bags financed under the project would be bulked as far as possible and procured on the basis of international competitive bidding in accordance with Bank Group guidelines (Schedule 3, Part A of the draft Development Credit Agreement). In the evaluation of bids, qualified domestic manufacturers would be awarded a pre- ference of 15 percent or the existing rate of duty, whichever is lower. Pro- curement of goods and equipment which could not be bulked in packages of US$100,000 equivalent or more would be in accordance with the Borrower's com- petitive bidding procedures which are acceptable to the Association (Schedule 3, Part B of the draft Development Credit Agreement). Materials to be used in the construction of village grading and baling centers(which would be con- structed on a self-help basis) would be procured by TAT on the basis of local competitive bidding, to ensure maximum use of locally available materials (Schedule 3, Part B of the draft Development Credit Agreement). Civil works contracts for the construction of market centers and storage facilities would be too small and scattered to attract international interest. Procurement would therefore be by contracts awarded following locally advertised competitive bidding, but foreign firms would be entitled to compete (Schedule 3, Part B of the draft Development Credit Agreement). The cost of consultant services under the project is estimated to be about US$325,000 and all consultants would be hired on terms and conditions acceptable to the Association (Section 2.02(d) of the draft Project Agreement). 45. Disbursements from the credit would be on the basis of 100 percent of the incremental annual cost of bulking bags; 60 percent of amounts dis- bursed on TRDB loans for village grading/baling centers; 57 percent of the total cost of all other buildings; 100 percent of the foreign expenditures and 85 percent of the local expenditures on vehicles, equipment and materials; and 100 percent of foreign expenditures and 80 percent of local expenditures on technical assistance and consultants (Schedule 1 of the draft Development Credit Agreement). Retroactive financing up to an amount of US$200,000 is recommended for expenditures incurred after February 1, 1978 for certain high priority consultant services and for procurement of vehicles and equipment needed early in the life of the project (Schedule 1, para. 4(a) of the draft Development Credit Agreement).  - 18 - Project Implementation 46. TAT would have overall responsibility for implementation of the project. TRDB would have specific responsibility for the administration of seasonal credit for bulking bags and of long-term credit for the construction of grading/baling centers; it would be able to handle these responsibilities without direct assistance under the project. In view of the size of the building components in this project it is critical that thorough reviews be made of all proposed building designs and contracts. Therefore, appointment by TAT of a suitably qualified Building Engineer would be a condition of project effectiveness (Section 5.01(a) of the draft Development Credit Agreement). The appointment of a Transport Officer would be a condition of disbursement of credit funds for vehicles financed under the project (Schedule 1, para. 4(b) of the draft Development Credit Agreement). TAT's Finance Department would be strengthened by the recruitment, prior to April 1, 1979, of a Financial Systems Development Accountant and five Regional Accountants, all likely to be inter- nationally recruited (Section 2.02(c) of the draft Project Agreement). In addition, TAT would agree to retain a suitable Financial Manager throughout the period of project disbursements (Section 4.03 of the draft Project Agree- ment). The above-mentioned posts would remain filled during the period of credit disbursement and the Association would be consulted on the qualifications and experience of the Government's candidates for the Building Engineer, Transport Officer and various Accountant positions (Section 2.02(a), (b) and (c) of the draft Project Agreement). Accounts, Auditing, Monitoring and Reporting 47. Separate accounts relating to expenditures would be kept by TRDB and by TAT (Section 3.05(b) of the draft Development Credit Agreement and Section 4.01(b) of the draft Project Agreement). Accounts maintained by TRDB and TAT would be audited by independent auditors acceptable to the Association within six months of the end of each financial year (Section 3.06 of the draft Development Credit Agreement and Section 4.02 of the draft Project Agreement). At present, TRDB accounts are up-to-date. While TAT accounts are in arrears, this situation is expected to improve as a result of the employment by TAT of consultants to desigr. improved financial procedures (para. 41). 48. Detailed quarterly progress reports of physical progress anid the use of funds under the project would be prepared by the Development and Planning Department Head (with some input from TRDB) for the General Manager and Board of TAT. In addition, during the course of the project, TAT would engage the services of the Economic Research P,ureau (ERB) of the University of Dar-es-Salaam to assistin the monitoring and evaluation of the project. ERB would attempt to assess the impact of the various project components on marketed production and at the end of each crop year would. provide T-T  - 19 - and the Association with a summary report of its findings. At the end of the disbursement period, ERB would prepare a detailed final report. In addition, within three months after project completion, TAT would prepare and submit to the Association a project completion teport (Sectio.i 2.11(d) of the draft Project Agreement). Markets and Prices 49. Out of the total Tanzanian production of tobacco (18.3 million kg in 1976/77) the domestic market takes around 3.5 million kg annually. The remainder is exported, mainly to the United Kingdom and other European Economic Community countries. Tanzania is well established in the U.K. market where it receives a duty preference. Export potential is also growing in other EEC countries, where Tanzania's Associate status gives it duty preferences. Overall, the outlook for Tanzanian flue-cured tobacco exports is good. Increased Tanzanian flue-cured exports are unlikely to affect inter- national prices, as total Tanzanian flue-cured exports are only about 1 percent of total world exports. The world market price for flue-cured tobacco is expected to increase in real terms at a rate of about 2 percent per annum until 1985. For fire-cured tobacco, the outlook is less favorable, since Tanzanian production is already about 7 percent of world production, and the share of fire-cured tobacco in total world consumption is steadily declining. However, in view of the continuing decline in fire-cured tobacco production in developed countries, Tanzania is not expected to encounter market constraints to increased production of fire-cured tobacco. The less favor- able market situation for fire-cured tobacco is reflected in a projected export price that remains constant in real terms. Projects Benefits and Financial Results 50. The main benefits of the project would be an increase in the volume of marketed tobacco production as a result of reduction in the level of physical losses of tobacco now incurred during handling and storage; an increase in the quality (and hence in the average sales values) of the marketed tobacco crop as a result of a reduction in the degree of deterio- ration of tobacco during handling, marketing and storage; and reduction in the cost of transporting tobacco and tobacco inputs as a result of the greater use of rail transport that would be made possible by the construction of the storage warehouses at Itigi and Makumbako. In addition, the provision under the project of additional marketing, transport and storage facilities would enable a more even flow of tobacco through the marketing system, and improved delivery of tobacco inputs. There should also be an improvement in the quality of TAT marketing and extension services, as a result of the improved transport for TAT field staff. The quantifiable benefits from the project (which exclude the last two benefits, for which no attempt at quantification is made) in 1987/88 would be incremental marketed tobacco production of 3.3 million kg of flue-cured tobacco, and 1.3 kg of fire- cured tobacco (equal to, respectively,10 percent and 13 percent of the 'without project' marketed crop), and an increase in average crop value of 3.8 percent for flue-cured tobacco, and 4.8 percent for fire-cured tobacco.  - 20 - The benefits of the project would accrue partly to tobacco growers, most of whom have per capita incomes below the absolute poverty level for Tanzania, through higher levels of marketed production and crop value, and partly to TAT, as a result of reduced handling losses and lower transport costs. TATts resultant increased profits could be appropriated by Government for investment elsewhere, or could be passed on to tobacco growers in the form of increased producer prices or further investment in the provision of services to tobacco growers. This issue will be addressed in the context of the Bank's study of agricultural parastatals, the pilot stage of which is expected to begin within the next twelve months. 51. The project would have a positive effect on TAT's cash flow over the period 1979/80 to 1982/83, but there would be a negative outflow during the period 1983/84 to 1988/89, when TAT is repaying the Government loan. The effects on TAT's cash flow become increasingly positive after 1988/89. In order to improve TAT's financial position, the bulk of funds provided to TAT under the project (about 80 percent) would be passed on as equity (para. 43). In additon, Government would provide funds to cover the costs of operation of TATts extension services, and would take all steps necessary to enable TAT to reduce its overdraft and maintain overdraft facilities at reasonable levels (Section 3.04 of the draft Development Credit Agreement). 52. The economic rate of return is estimated to be 26 percent for the flue-cured tobacco component, the cost of which is US$11.6 million; and 22 percent for the fire-cured tobacco component, the cost of which is US$7.4 million. The economic rate of return for the entire project (including technical assistance costs) of 24 percent is fairly robust with respect to changes in benefits and costs. A 10 percent reduction in benefits or increase in costs would reduce the rate of return to about 20 percent, and both these events occurring simultaneously would result in a rate of return of about 15 percent. There are expected to be no negative environmental effects from this project. 53. A major risk of the project is that implementation would proceed at a slower rate than anticipated, as a result of institutional deficiencies within TAT or if villages were not able to adjere to the construction schedules for completion of grading/baling centers. Our concerns in this area have been addressed by the inclusion of appropriate technical assistance to TAT to address technical manpower shortages and enable it to assist the villages during procurement of materials and construction. A second potential risk is the possible spread of virus bushy top disease in tobacco growing areas of Tanzania. The spread of this disease can be limited by the prompt destruction of all tobacco plant residues but this is not being done pre- sently (primarily because the incidence of this disease has been limited). Therefore TAT would mount a campaign directed at ensuring that farmers carry out the destruction of crop residues, and after July 31, 1980, no seasonal or medium-term credit for tobacco production would be extended by TRDB to villages with an unsatisfactory standard of crop hygiene (Section 3.02 of the draft Development Credit Agreement, and Section 2.05 of the draft Project Agreement).  - 21 - 54. Since tobacco production is well established, and since invest- ment is related to production, there is little risk that project investments would be underutilized. The projected level of production increases on which the analysis of the project is based is considered within Tanzania to be very conservative and is based on a slower rate of expansion than has been achieved over the last decade. In view of this we feel the project is fully justified. PART V - LEGAL INSTRUMENTS AND AUTHORITY 55. The draft Development Credit Agreement between the United Republic of Tanzania and the Association, the draft Project Agreement between the Association and TAT and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement are being distributed to the Executive Directors separately. 56. Features of the Credit and Project Agreements of particular interest are referred to in the text and listed in Section III of Annex III. Condi- tions of effectiveness include: (i) conclusion of subsidiary loan agreements between the Borrower and each of TAT and TRDB (Section 5.01(c) and (d) of the draft Development Credit Agreement); and (ii) appointment by TAT of a Building Engineer (Section 5.01(a) of the draft Development Credit Agreement). A condition of disbursement for vehicles would be the appointment by TAT of a Transportation Officer (Schedule 1, para 4(b) of the draft Development Credit Agreement). 57. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 58. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments Washington, D.C. May 1, 1978  - 22 - ANNEX I TABLE 3A TANZANIA - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) -- TANZANIA REFERENCE COUNTRIES (1970) TOTAL 945.1 MOST RECENT AGRIC. 508.3 1960 1970 ESTIMATE KENYA KOREA REP. OF MALAYSIA** __ __ __ __ __ __ _ - _-- -- - -- - -___ GNP PER CAPITA (US$) 60.0*/a 100.0*/a 180.0*/a 140.0* 280.0* 440.0* POPULATION AND VITAL STATISTICS _______________________________ POPULATION (MID-YR, MILLION) 9.6/a 12.9/a 15.1/a 11.2 32.2 10.8 POPULATION DENSITY PER SQUARE KM. 10.0 14.0 16.0 19.0 327.0 33.0 PER SQ. KM. AGRICULTURAL LAND 20.0 26.0 8n.0 113.0 1371.0 185.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 51.5 50.5 47.0 49.0 35.0 42.2 CRUDE DEATH RATE (/THOU,AV) 27.1 23.0 20.1 17.0 11.4 12.9 INFANT MORTALITY RATE (/THOU) 190.0 160-165/b .. .. .. 40.8/a LIFE EXPECTANCY AT BIRTH (YRS) 36.7 41.6 - 44.5 49.1 65.0 56.7 - GROSS REPRODUCTION RATE .. 3.2 3.2 3.4 2.6 2.6/a POPULATION GROWTH RATE (%) TOTAL 2.3/a 3,0/a 2.7/a 3.1 2.3 2.9 URBAN 5.0 5.6 7.5/b 6.3 6.4 3.0 URBAN POPULATION (% OF TOTAL) 4.6 5.5/b 7.3 9.9 41.2 26.9 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 42.5/am 44.4 /b .. 48.4 42.1 44.7/a 15 TO 64 YEARS 5S.5/a,b 53.0/b .. 48.0 54.5 52.1 /a 65 YEARS AND OVER 2.0/a,b 2.6/p *- 3.6 3.4 /a AGE DEPENDENCY RATIO 0.8 /ab n.9/b 1.1 0.8 0.9/a ECONOMIC DEPENDENCY RATIO 1.1 /b > t*-/a 1.4 1.6/a FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) .. .. .. 66.1 4424.7 222.2 /a USERS (% OF MARRIED WOMEN) .. .. .. .. 42.0 a. 0/a EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 4900.0/d 5600.0/ab6300.0/c 5100.0/b 10200.0 3600.0 LABOR FORCE IN AGRICULTURE (%) 96.0 / 91.0 /ab 83.1 90.0