Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2400-TA TANZANIA STAFF APPRAISAL REPORT OF A BANK LOAN TANZANIA INVESTMENT BANK (TIB) June 22, 1979 Eastern Africa Projects Department Industrial Development and Finance Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its eontents may not otherwise be disclosed without World Bank authorization. TANZANIA INVESTNFENT BANK CURRENCY EQUIVALENTS Currency Unit = T Shillings T Sh 1.00 US$0.12 US$1.00= T Shs 8.3 TarLzania Fiscal Year -- July 1 - June 30 ABBREVIATIONS ABEDIA - Arab Bank for Economic Development in Africa ADB - African Development Baia BIS - Basic IndustryV Strategy BOT - Bank of Tanzania CFTC - Commonwealth Fund for Technical Cooperation CIDA - Canadian International Development Authority DDC - District De-velopment Corporation EADB - East Africaen Development Bank EEC - European Economic Community KfW - Kreditanstalt fur Wiederaufbau NBC - National Bank of Commerce NDC - National Developmiient Corporation NIC - National Insurance Corporation NORAD - Norwegian Agency for Development NPC - Natibnal Price Commission SIDA - Swedish International Development Authority SIDO - Small Industries Development Organization TDFL - Tanganyika Development 'Finance Company Limited THB - Tanzania Housing Bank TISCO - Tanzanian Industrial Stludies and Consultancy Organizati(:n TPOSB - Tanganyika Post Office Savings Bank TRDB - Tait; .ania Rural Develcpment Bank FOR OFFICIAL USE ONLY TANZANIA TANZANIA INVESTMENT BANK (TIB) STAFF APPRAISAL REPORT Table of Contents Page No. BASIC DATA .... ............................................... - ii I. THE ENVIRONMENT ............................................ I A. The Industrial Sector .... . .......................... . . 1 B. The Financial Sector .................................. 7 II. THE INSTITUTION ............................................. 10 A. Institutional Aspects ...... ........................... 10 Role and Objectives ............... ..................... 10 Ownership and Board .......... .. ..................... .. 11 Management, Organization and Staffing .............. ... 11 Procedures .......................... .......... ...... 13 Investment and Financial Policies .................. ... 13 Interest Rate and Other Charges .................... ... 14 B. Operations and Finance ................................ 15 Operations ............................................ 15 Portfolio ............................................. 16 Resources ............................................. 18 Financial Situation ................................... 18 Financial Results ..................................... 19 C. Economic Impact ..................... ... ........ ....... 19 D. Prospects ............................................. 20 TIB's Strategy ........................................ 20 Projected Operations ............... ................... 21 Resource Requirements ................................. 21 Financial Prospects ................................... 22 III. THE PROJECT .................... 23 Objectives ............................................ 23 Description of the Project ............................ 23 Project Implementation ............... ................. 24 Benefits and Risks ................. ................... 24 IV. AGREEMENTS REACHED AND RECOMMENDATIONS ..................... 25 This report is based on the findings of a mission consisting of Messrs. Zia Ahmed and Yoshine Uchimura, which visited Tanzania in November 1978. 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. TANZANIA INVESTMENT BANK LIST OF ANNEXES ANNEX 1 - Structure of Output and Employment in Medium- and Large- Scale Manufacturing ANNEX 2 - Interest Rate Structure in Tanzania ANNEX 3 - Summary of Operations ANNEX 4 - Analysis of Loans, as of September 30, 1978 ANNEX 5 - Historical Summarized Income Statements ANNEX 6 - Historical Summarized Balance Sheets ANNEX 7 - Actual and Projected Financial Ratios ANNEX 8 - Forecast of Operations ANNEX 9 - Projected Income Statements ANNEX 10 - Projected Balance Sheets ANNEX 11 - Projected Cash Flow ANNEX 12 - Projected Schedule of Disbursements ANNEX 13 - Selected Documents and Data Available in the Project File TANZANIA INVESTMENT BANK BASIC DATA (US$1 = T Sh. 8.3) 1. Date of Establishment: November 1970 2. Ownership Authorized Capital T Sh 200.0 million Paid-up Capital 100.0 million of which Amount % Government of Tanzania T Sh 60 million 60 National Bank of Commerce 1/ 30 million 30 National Insurance Corporation 1/ 10 million 10 100 100 3. Resource Position (April 30, 1979) in T Sh millions Sources Domestic Funds Foreign Funds SIDA 367.0 KfW - 97.5 CIDA - 18.3 NORAD - 148.8 FINLAND _ 4.4 ADB - 41.2 IDA Credit No. 460-TA - 40.2 IBRD Loan No. 1172-TA - 111.8 IBRD Loan No. 1498-TA - 124.5 Paid-in Capital 100.0 18.8 Accumulated Profits 47.7 - Depreciation and Provisions 10.2 Treasury Fund 39.9 _ Total 197.8 972.5 Uses Loans 96.8 405.2 Equity Investments 29.3 16.9 Technical Assistance - 2.9 Fixed Assets 2.5 - 128.6 425.0 Available for Disbursement 69.2 547.5 Undisbursed Commitments Loans 47.5 432.5 Equity 15.0 4.1 Technical Assistance - 1.4 62.5 438.0 Available for Commitment 6.7 109.5 1/ 100% Government-owned. - ii - 4. Summary off Operations and Finance Year ending June 30 1974 1975 1976 1977 1378 Operations Approvals (T Sh million) Loans 97.1 128.5 150.4 309.5 339.7 Equity Investments 7.2 0.7 10.6 5.8 4.5 Total 104.3 129.2 161.0 315.3 54 .2 Commitments (T Sh million) Loans 54.3 131.4 120.8 43.1 221.8 Equity Investments 5.2 0.7 10.6 3.8 _2.0 Total 59.5 132.1 131.4 46.9 '23.8 Disbursements (T Sh million' Loans 39.0 70.3 77.6 142.i 92.6 Equity Investments 4.8 _ 0.5 1.7 5.1 Total 43.8 70.3 78.1 143.8 97.7 Finance 1974 1975 1976 1977 1378 Financial Results (T Sh C000) Total Income 8,484 13,807 20,060 29,365 '7,182 Profit After 'ax 1,166 3,523 4,517 7,110 13,595 Profit After Cax as % of Average Net Worth 1.7 3.0 2.5 7.8 3.6 Financial Situation (r Sh million) Net Worth 78.0 159.0 206.9 302.4 c.66.2 Total Assets 155.9 265.1 336.6 474.2 595.9 Debt/Equity Ratio 1.0 0.6 0.6 0.5 3.4 5. Interest Rate and Other: Chanes Interest Rate on Loans: Minimum of 10.0%. Currently charging 1.0% Commitment Charges: 1% p.a. on undisbursed balarces Commission Fee: 1% on approved loan amount Foreign Exchange Risk: lorne by the subborrowers 6. Status of Bank Group Lines of Credit (Oune 15, 1979) IDA Credit Bank Loan Bank Loan IDA Cred.ct 460-TA 1172-TA 1498-TA 601-TA TechnicO.l Assistanice Date of Effectiveness Apr. 18, 197'4 Feb. 20, 1976 Apr. 3, 1973 Sept. 14, 1176 Amount of Credit S6 million $15 million $15 million S6 milliolL Authorized S6 million $15 million $12 million S3.9 million Disbursed and outstanding $5.4 mil:Lion $13.2 million S3.5 million $2.4 mill:oit Foreign Exchange Risk Borne by Sub-borrower Same Same N.A. .erminal date of project suDmiss4on Dec. 31, 197 Dec. 31, 1977 Dec. 31, 1980 Dec. 31, 199 Closing date for di sburse- n.eats Dec. 31, 1979 Dec. 31, 1980 Dec. 31, 1983 Dec. 31, 1g19 Free limit S100,000 5400,000 S800,000 S50,C00 Afgregate frae limit Si *-illion 53 miil;cn S7 mi liion N. A. I. THE ENVIRONMENT A. The Industrial Sector 1/ 1.01 Industrial Strategy. After gaining independence in 1961, Tanzania adopted an industrial strategy which aimed at increasing domestic production through import substitution, relying mainly on private foreign investment. The Arusha Declaration of 1967 charted a completely new course for Tanzania based on socialism and self-reliance. It involved the transfer of ownership and control of a number of large enterprises from the private to the public sector and sought to increase the rate of employment growth and improve the income distribution between urban and rural areas. Henceforth, most major industries would be publicly owned and most new investments would be in the public sector. 1.02 The Government's present strategy towards the development of the industrial sector is based on the Basic Industrial Strategy (BIS) which was adopted in 1974. The two main goals of this strategy are structural trans- formation and self-reliance. The strategy in its pure form emphasizes the use of domestic resources for domestic needs. Priority will be given to industries which cater for the basic needs of the majority of Tanzanians, such as food, shelter, health, etc. Emphasis is also given to the development of heavy industries, such as iron and steel and engineering. By using local resources and producing for the local market, the BIS envisages a structural transformation of the economy through a system of backward and forward link- ages. Although basically oriented towards the domestic market, the BIS also mentions the need to expand export-oriented, agricultural processing indus- tries to increase the foreign exchange earning capacity of the country. Large-scale national enterprises (in the public sector) will operate heavy industries and produce export goods, whereas consumer goods and other day- to-day items will be produced by medium- and small-scale industries. 1.03 The potential problems with the BIS are that attempts to restructure the economy too quickly during a period of resource stringency may ultimately frustrate both growth and structural change. A too-rapid expansion of the metals sector (especially steel production) may lead to more 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. Moreover, effective implementation of the strategy will require specific changes in the macro policy framework towards a protection and tariff structure which does not discriminate against backward linkage import substi- tution, discourage domestic production of capital goods, nor confer high and widely varying effective rates of protection to the production of consumer goods. ..04 Institutional and Policy Framework. The institutional structure of Tanzanian industry derives from the system of economic management that has been adopted since 1967. This system, with its emphasis on central planning and direct economic controls to guide the direction and level of investment and the distribution of income between the various segments of the community, has necessitated direct public sector ownership and control of large units 1/ A detailed analysis of the sector is given in "Tanzania Basic Economic Report: Annex V" (No. 1616-TA), December 1977. -2- in important economic sectors such as manufacturing, banking, insurance, and wholesale trading. Almost all large scale industrial production in Tan,;ania, therefore takes place in wholly or majority Government-owned companies, operating under the aegis of holding parastatals, which, in turn, are organ- izationa]ly responsible to parent ministWries. 1/ The holding companies are organizecd along product or process lines (e.g., National Textile Corporetion), and serve as planners or advisors to and supervisors of the operating c(m- panies under them. They receive commissions and fees from the operatinE companies to cover their costs of providing these services. I-n additionl :o this parastatal system all District Development Corporations (DDCs) are charged with promoting productive investments in their districts, and may therefore, sponsor and own industrial enterprises. 1.05 As noted, this institutional framework has been designed to enable Government control over sectoral investmTent and production act-Lvities which are considered of national importance. In the investment area,, attempts are made to exercise this control through centralized approval of projects adcl allocation of finance. Thus, although new project ideas in the public snctor may originate from the parent ministry, holding company, operating company or any other national agencies concerned with industrial development, ap:roval of all investments is required at some stage by the Economic Committee o- the Cabinet. In cases where funds for a project would require budgetary alloca- tion, as is the case for all Government equity contribution to projects, parliamentary approval is also required. Project preparation and appraisal is mostly done by the holding parastatals with the aid of external consultants in most cases. 1.06 At the same time that this institutional structure was being set up, policies were introduced to facilitate and reinforce central planning and control. In the macro area, a system of comprehensive import licensing is operated by which Government, through parastatals, determines what indus rial goods are to be imported. A system of annual foreign exchange allocatior-s aims at ensuring that foreign exchange is only available for such approvcd imports. In addition, a system of protective import duties exists to pr(tact local producers. Wage scales are set by the Standing Committee on Parastatals (SCOP) and conditions of service in all parastatals have been standardized, salary levels being similar to those obtained in the civil service. Governl- ment policy also aims at worker participation in management decisions. FrLces of industrial output are controlled, along with all other prices, by a National Price Commission, which has been using a cost-plus price system for setting the ex-factory prices of locally produced goods. This central planning end control system has therefore reduced the role of macro incentive tools typical in free market economies in investment and production decisions in Tanzanian industry. In practice, the system is faced with a series of problems which are detailed below (paragraph 1.13). 1/ As of June 1977, there were 97 operating companies under 17 holding parastatals, reporting to 4 operating ministries involved in industrial development. - 3 - 1.07 Two other institutions are involved with the industrial sector. The National Institute of Productivity, set up in 1967 with ILO's assistance, has been providing consulting and management training services to middle-level managers of parastatal enterprises. In order to provide facilities for industrial studies and consultancy, the Government established the Tanzanian Industrial Studies and Consultancy Organization (TISCO) in 1976, receiving financial and technical assistance from SIDA. Although TISCO has the primary responsibility for carrying out consultancy services in Tanzania, foreign consultants have been engaged in areas where TISCO lacks the necessary expertise. 1/ 1.08 Small-Scale Industries. On the basis of information available, small-scale industries (SSIs) appear concentrated in those areas normally associated with early industrialization, for example grain milling and bakeries, clothing, wood products including furniture, printing and soap pro- ducts. Due to the lack of sufficient data, it is difficult to accurately isolate the performance of SSIs; however estimates show that value added by SSIs 2/ in manufacturing declined from 44% in 1966 to 23% in 1974. This appears to be due to the emphasis placed by the Government on large-scale projects in the public sector and lack of clear policies on the role of private investors. 1.09 The Government has in recent years acknowledged the need to develop SSIs (paragraph 1.02) and established the Small Industries Development Organization (SIDO) in 1973 to have primary responsibility for planning, promoting and providing all kinds of assistance to small-scale industries. SIDO has set up three industrial estates for SSIs and has also set up 11 training-cum-production centers for imparting skill and craft training. Its other activities include preparation of feasibility studies, provision of hire-purchase finance, marketing and other technical assistance. The Govern- ment envisages a larger role for SIDO in the development of the SSI sector and has requested the Bank Group to assist SIDO in the matter. A reconnaissance mission from the Bank visited SIDO last May and another mission visited Tanzania in February-March 1979 to identify and prepare an SSI project. The report is presently under preparation. 1.10 Performance and Structure. Industry in Tanzania grew fairly rapidly compared to the overall economy since independence in 1961. The share of the manufacturing and handicraft sector which accounted for just under 4% of GDP in 1961, increased to 8% in 1965 and has remained around 10% since 1970. Total manufacturing employment increased from about 28,000 in 1965 to about 85,000 in 1977. Value added in manufacturing grew rapidly at an average rate of 10.8% between 1965 and 1969, but averaged 7.4% between 1970 and 1973. While limitations of sector data prevent any firm conclusions about the causes I/ For example, TIB's Feasibility Studies Unit which was created to channel funds under IDA's Technical Assistance Project has engaged foreign consultants for feasibility and other studies. 2/ Defined as enterprises with less than 10 employees. - 4 - of this declining growth rate, indications are that there was an increase in the incremental capital-output ratio, implying a lower rate of growth in relation to investment in the latter years. The evidence further suggests that this decline was due to both a shift toward more capital intensive investment, and a decline in t'he productivity of capital. After virtual stagnation in 1974 and 1975 because of the economic crisis in thcse years and its attendantt supply problems for i'ndustrial inputs and parts, industrial output appoears to have recovered, showing a growth rate averaging about 6.4% in 1976 and 5.4% in 1977. 1.11 Tanzania's industrial structure has undergone a fairly rapid change from the rudimentary structure inherited at independence in 1961 producing a very limited range of goods, to a more diversified structure, producing a larger variety of basic food and non-food consumer goods, inter- mediate goods such as saw-milling and plywood, leather, aluminum re-rolling, chemicals and plastics and some capital goods such as vehicle assembly. Tanzanian manufacturing is still dominated by production of consumer goods for the domestic market. Consumer goods accounted for 71% of output and 68% of employment for manufacturing enterprises with 10 or more employees in 1965. In 1976, the share of consumer goods to total output and employ- ment was 50% and 69% respectively. 1.12 Public Sector. Following the Arusha Declaration of 1967, the Government systematically transferred the control and ownership of a number of large private- and foreign-owned industrial enterprises to parastatals, and also established new enterprises, operating them as parastatals. Para- statals accounted for 53% of the value added and 48% of the employment in the industrial sector in 1976. However, notwithstanding the rapid growth of public enterprises since 1967, the private sector in manufacturing remain::. surprisingly large accounting for 47% of value added and 52% of employmen:. 1.13 Development Issues. As may be expected, the institutional and structural changes that have been taking place in Tanzanian industry over the past decade, have -brought in their wake a number of problems which hai1e affected sectoral performance. First is an apparent decline in labour productivity, particularly in the parastatal sector. This can be traced mainly to a lack of a clear-cut micro-incentive framework for parastatal companies. Clear and unambiguous criteria for judging performance are yet: to emerge, and managers, even if they are competent, have lacked a system of rewards and penalties for stimulating required performance from workers. The cost-plus price system has also tended to work against cost reduction, and has not therefore discouraged overmanning. Second, there have been excess capacity problems in certain industries because of a tendency to overbuild capacity in relation to supply. This gets exacerbated when short- ages of raw materials and spare parts become acute (as is frequent if the foreign exchange situation deteriorates). Third, the real rate of return :r capital invested in parastatals has been falling, with the result that para- statal surpluses have lagged in relation to the growth of output. This is largely attributed to the decline in parastatal labour productivity. Four -, - 5 - the central investment planning system has been ineffective. Originally designed to ensure coordination in the choice of investments to meet overall sector strategy, the system, in practice, has tended to place great focus on the annual budget as a major instrument of control. The planning office has not got the staff to coordinate investment plans of parastatals, and as such most parastatals have been able to plan and undertake investments with- out much central control. Fifth, because of the uncertainty and fear of takeovers, the resources of the private sector have not been effectively harnessed for sectoral needs. Finally, as discussed in paragraph 1.08, the potential contribution of SSIs, especially to employment creation in the sector, is yet to be realized. 1.14 Government is aware of these problems, and is making efforts to resolve them. It has acknowledged the problems of low labor productivity and low capacity utilization, and is stressing the need to increase pro- ductivity through a review of the cost-plus pricing system. While decisions on major policy changes relating to incentives, price and import control systems and the control of parastatals will take time because of the import- ance and breadth of the issues, there are already indications that at the firm level a number of improvements have been made. Some of these improvements are not due to any overall policy directives but are the result of individual initiatives by firms' managers in a more favourable industrial environment. The improvements include some cases of retrenchment in over-manned parastatals, better discipline among workers mainly due to improved relations of the managers with the Labour Union, JUWATA, better worker participation in certain aspects of decision-making, introduction of incentive (in kind) system in a few firms and relaxation of limitations on recruitment of expatriate experts. Regarding capacity utilization, the National Development Corporation (NDC), the largest parastatal holding company, recently implemented the recommenda- tions of a firm of management consultants and has been able to achieve improvement in the operating efficiency of some of its subsidiaries. 1.15 The Bank Group has also raised these issues in its discussions with the authorities both within the context of its general economic work in Tanzania and of specific projects in the industrial sector. It has also provided funds under the IDA Technical Assistance Credit for carrying out studies to improve efficiency in the industrial sector. Among the studies currently in progress are (i) capacity utilization studies initiated by Texco in respect of its subsidiaries and (ii) measurement and improvement of pro- ductivity studies carried out by TIB with assistance from two experts from the International Executive Service Corps. TIB is also contemplating to engage experts to study inventory control practices in Tanzania and to suggest * improvements. 1.16 On the issue of the role of the private sector, the Government has clarified, at the highest level, that the Arusha Declaration did not preclude private investment in industry, and that the private sector would be encour- aged in all areas not specifically reserved for full Government control. This has been followed in practice by greater liberalism in processing of applica- tions for industrial licenses and importation of spare parts and raw materials - 6j - to encourage the growth of private industries. It may however be necessa-y in future, to issue a new Guide to Investors clearly specifying policies on price control, import licensing, dividend transfer restricticns, income taxation, etc. Regarding small-scale industries, Government is aware of the unintended restrictions which its policies have placed on their develiop- ment, and appears responsive to a specific effort by the Bank Group to assist in reviewing such policies. 1.17 Prospects. The Third Five Year Plan (1976-1981), currently undlr implementation, is the first phase of implementation of this Basic Stratel;y. Under this plan, the specific objectives are to improve the efficiency anc. capacity utilization in the existing industries so as to increase output, t expand and establish new industrial capacity for production for basic neecs, and to lay the foundations for the implementation of the Basic Strategy. The targeted growth rate for the sector is 9.3% per annum compared to an overoll targeted growth rate of the economy of 6.0%. In line with the important role which industry plays in the plan, a total of Shs 5,147 million, (24% of tile total investment allocation in the plan), has been earmarked for public investment in the sector. 1.18 The Ministry of Industries will be directly responsible for imple-- menting projects involving T Shs 2,747 million or 53% of the total Governmelnt development budget for the industrial sector projects; the remaining 47% wFill be implemented by other ministries and agencies. The sub-sectoral allocation of the projected investment is as follows: construction and building matErLals T Shs 929 million; metalworking, engineering and chemicals T Shs 820 milli DIL; textile and garments T Shs 600 million; leather and leather goods T Shs 224 million; and Small-Scale Industries T Shs 178 million. 1.19 The Government's emphasis on productivity, work and discipline (para 1.14) has had the effect of increasing investor confidence in the sector and improving the overall investment climate. Following the Presi- dent's statement late in 1977 encouraging private investors to establish medium- and small-scale industries, there has been an upsurge in investmen: activity by the private sector, In addition to the public outlays in the Third Five Year Plan, Government expects considerable private investment, especially in the small- and medium-sca:Le industries, to suppleme!nt the resources it will provide in meeting the investment needs of the sector. 1.20 During the first two years of the plan, the average growth rates achieved were 5.9% for industry and 5.3% for the overall economy. The drop in coffee prices, Tanzania's major export, has resulted in a marked deteri::- ration in t'he country's balance of payments. Due to the lack of foreign exchange, the Government has been forcecd to impose restrictions cn imports and devalued the Tanzanian shilling by 10% in January 1979. Given the low initial growth rates and the constraints presently facing the sector, it w>ll be difficult for industry to achieve the growth envisaged in the plan. 1.21 Bank Group Experience in the Industrial Sector. Apart from finar- cing industrial projects through credit lines to TIB, TDFL and EADB, the B; n& Group presently is fina-ncing four projects for a total amount of $143 million. textile sector through the National Textile Corporation, first a loan of $15 million to expand an existing operation and second, a loan of $25 million and an IDA credit of $20 million to set up a new integrated polyester textile mill. The Bank also approved two loans totalling $23 million for an industrial complex at Morogoro in 1977, wherein a canvas mill and a shoe factory will be set up with the primary objective of exporting their output. Early this year the Bank Group has approved a loan of $30 million and an IDA credit of $30 million for the Mulfindi Pulp and Paper Project. The project consists of the establishment of an integrated 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. IDA has also approved a Small-Scale Industries compo- nent in its Second National Sites and Services Project ($1.4 million) to provide assistance to small-scale industries in Tabora and Tanga. The program, which is being administered by SIDO, would provide infrastructure for industrial clusters, credit for equipment and management and technical assistance to selected small enterprises. IFC has recently approved investments of $3.3 million in two privately owned enterprises involving soap and metal products manufacturing and is also looking at other project possibilities. The Bank Group's experience with these projects, which are under various stages of implementation, is generally satisfactory. Only the SSI component in the urban project is experiencing delays in implementation. B. The Financial Sector 1.22 Institutional Structure. In terms of appropriate institutions, Tanzania's financial system is relatively well developed. In addition to the Central Bank, the Bank of Tanzania and TIB, there are eight other financial institutions: a commercial bank, three development banks, a savings bank, a housing bank, an insurance company and a national provident fund. 1/ All the institutions are state-owned except for the East African Development Bank (EADB), the majority of whose shares are held jointly by the Governments of Kenya, Tanzania and Uganda, and the Tanganyika Development Finance Corpora- tion (TFDL) which is jointly owned by TIB and the bilateral aid agencies of the U.K., West Germany and the Netherlands. Tanzania has no private capital market and the bulk of equity investments is provided by the Govern- ment directly through the budgetary process. 1.23 Six institutions carry out lending operations. TIB, TDFL, EADB, the Tanzania Rural Development Bank (TRDB) and the National Bank of Commerce (NBC) lend to the productive sectors whereas the Tanzania Housing Bank (THB) provides funds for commercial and residential buildings, including low-cost housing. TRDB mainly operates in the rural sector and makes short-term loans for seasonal inputs and also provides medium- and long-term loans for machinery, transport, storage and livestock. Other short-term funds for working capital are provided by NBC. Most of NBC's loans were extended to industry and mining, and to the marketing of agricultural products. 1/ A Summary of the activities of these institutions is available in the Project file. - 8 - 1.24 Medium- and long-term financing for the modern sectors of manufac-- turing, agro-business, tourism, transport, etc. is provided by EADB, TDFL and TIB. Although there is a limited overlapping of functions among these three institutions, their respective roles are well defined and t:here is ro costly duplication of effort. EADB's charter does not authorize it to mak2 more than 38.75% of its investment in Tanzania. Moreover, EADB's role has diminished considerably because of the uncertainty surrounding its future With the dissolution of the East African Community. TDFL has a relatively small equity base and provides funds mainly to medium-size, private enterprises. Although TIB has increased its lending to the private sector, it has concei- trated on large-scale enterprises. In FY 1978 the average size of a TIB loan was T Shs 13 million (for private sector loans, T Shs 10 million) compared to T Shs 2 million (T Shs 2.9 million for both loans and equity investments) for TDFL. Moreover, TIB owns 30% of TDFL's shares and has two directors oni its board and thus helps to coordinate the operations of the two organizat:ons. Resource Mobilization 1.25 'Mobilization of savings from the public is carried out by five institutions, namely, NBC, THB, Tanganyika Post Office Savings Bank (TPOSB, the NationaL Insurance Corporation (NIC), and the National Provident Fund (NPF). NBC, THB and TPOSB, with branch networks, mobilize savings through deposit accounts. NBC is the most important mobilizer of savings in Tanzan.ia. As of December 31, 1977 its total deposits exceeded T Shs 6.2 billion. TH]. had deposits of T Shs 226 million at the end of 1977 and TPOSB had mobilized deposits of T Shs 118 million as of March 31, 1978. 1.26 Tanzania has a high level of savings compared to its income level. The share of domestic savings to GDP has f:Luctuated around 17% since the mid-1960's, except during the economic crisis of 1974/75 when it fell to around 8%. The Government has been able to mobilize domestic resources through a combination of highly progressive direct taxes and proportional or moderately progressive indirect taxes. The share of Government recurrent revenue to GDP averaged about 20% in 1977. With the emergence of public enterprises as a result of the Arusha Declaration, the parastatal sector was looked upon as the major saving entity in the country. The performance of this sector, with the exception of the financial parastatals, has however, not been up to expectations. The Bank's Basic Economic Report concluded that., while interest rates will remain less important in resource allocation in Tanzania's command economy than in less controlled economies, they could still play a role on the mobilization side. It therefore recommended a more actiie interest rate policy to stimulate savings particularly from the private sector. The interest rate on deposits which varied between 4% and 6.5% depending on term, was considered low in the light of the inflation rates which, measured by GDP deflator, ranged between 14.5% and 16.2% during 1975 - 1977. Similarly a case was made for increasing the lending rates of the financial parastatals, which had a proven record of being better savers than other parastatals, to enable the former to generate more surpluses. - 9 - 1.27 The Government's role in allocation of resources is more important than in resource mobilization due to the centralized investment decision- making. Allocations from the development budget are made to parastatals annually in accordance with the Third Five-Year Plan targets. However, the Government is able to influence resource mobilization from the parastatal financial institutions by directing them to invest their surpluses in Govern- ment stocks, bonds and Treasury bills. These institutions play an important role in financing public investment in Tanzania. Medium and long term government security sales to the financial institutions accounted for 27% oF .h- development budget in FY1978. 1/ Furthermore, as of March 31, 1978, the Government's borrowings from the banking system stood at over T Shs 3.1 billion. Interest Rates 1.28 In an effort to revise the overall interest rate structure in the country with a view to influencing resource mobilization and allocation and reflecting Government priorities, the Bank of Tanzania (BOT) directed NBC, THB, TIB and TRDB in May 1978 to adopt a new interest rate structure (see Annex 2) effective July 1, 1978. The new schedule authorizes NBC and THB to increase their deposit rates slightly. It also permits the NBC to increase its rates on loans across the board by 1%. On the other hand, BOT has directed TIB and TRDB to reduce their rates on loans, with the exception of sub-loans made out of foreign credit lines for which the terms and condi- tions of the credit lines would be applicable. While the increase in the deposit rates and the lending rates for NBC are in line with the recommenda- tions of the Basic Economic Report, the reduction in the lending rates of TIB and TRDB is contrary to the Bank's views (para. 1.29). 1.29 Issues. There are two important issues in the Tanzanian financial sector. The first relates to the recent BOT directive to TIB and TRDB to reduce their lending rates to the levels desired by BOT. The Bank's view is that the appropriate lending rate should be determined after taking into consideration the existing and projected inflation rates, the rates charged by other financial institutions for similar loans in Tanzania, the need for an adequate spread and the opportunity cost of capital. 1.30 Secondly, because of the unusual risks involved in financing small- scale industries, the high cost of administering such loans and the uncertainty regarding the Government's policies in the sector, the financial institutions have been reluctant in the past to provide short- and medium-term financing to the sector. In view of the recent Government interest irn accelerating the development of the Small-Scale Industries sector, there is need for the financial institutions to evolve pragmatic policies and delivery mechanisms designed to assist the sector and to coordinate their activities more closely than in the past. This issue is proposed to be handled in the context of a possible IDA Credit for the small scale industries sector in the near future. 1/ Loans and grants from external sources accounted for 55% of the development budget. - 10 - 1.31 Bank Experience in the Financial Sector. The Bank has been extea- sively involved with TIB since 1974. To date the Bank has made one IDA cradit and two loans to TIB for a total amount of $36 million. Progress on these projects has been sati.sfactory and TIB has grown into a well-organized il sti- tution and an efficient allocator of medium- and long-term funds to the productive sector. Furthermore, the Bank has made two loans of $23 millf.ol to EADB, of which equivalent of $9 million has been invested in projects loca:ed in Tanzania. The Bank Group is presently expanding its role in the sectcr; it has recently approved a loan of $11 million for TDFL and is appraising TRDB for a credit of $8 million and is attempting to identify a Small-Scale Industry project. II. THE INSTITUTION A. Institutional Aspects Role and Objectives 2.01 Since its establishment in 1970, TIB has been very ac;:ive in pro- viding mediuim- and long-term financing to enterprises in the directly prc5luc- tive sectors of the economy. TIB's emphasis has been on assisting the medium- and large-scale enterprises, most of which are in the public sector. It aE.s also provided financial assistance to the private sector although this ac2cunts for a relatively small share. Over the years TIB has developed its capabi]ity to make sound investment decisions and has thus been providing an indepeniEnt check on the financial, technical and economic feasibility of projects su:- mitted by parastatal organizations for financing. Its project appraisal 2epa- bility is thus making a useful impact on the quality of resource allocati)r. in Tanzania. Because of its reputation, it has become an import:ant inter- mediary for channelling resources from international and bilateral agencies into productive enterprises. In recent years it has widened the spectrum of its activities to include project identification and promotion, assistance in project implementation and commissioning of a variety of stucdies. As h1.e intermediary for channelling funds under IDA's Technical Assistance Projelt (Credit No. 601-TA $6 million), TIB has been active in assisting parastatals to have pre-investment and feasibility studies carried out by reputed con,ul- tants in respect of several new project ideas developed by them. It has also engaged consultants to carry out capacity-utilization and efficiency studIes in respect of certain on-going projects which were experiencing operationil problems and working at low capacity. 2.02 TIB has also taken initiatives in a few other areas; these are, (i) commissioning a study for measurement and improvement of productivity in public sector industrial enterprises, 1/ (ii) convening a seminar of TIB 1/ The first phase of the study, which is now complete, was undertaken by two volunteers from the International Executive Service Corps. T.e second phase will be undertaken in the near future. - 11 - clients, including senior officials of the parastatal organizations, to explain to them TIB's objectives, policies and procedures and thereby to help expedite the process of project implementation and (iii) planning a study of inventory control practices in a few selected enterprises with a view to suggesting improvements and laying down norms. Ownership and Board 2.03 TIB was established in 1970 as a parastatal organization. It has a paid-in capital of T Shs 100 million which is owned 60% by the Government, 30% by the National Bank of Commerce and 10% by the National Insurance Corporation. 1/ 2.04 TIB's Board consists of nine members including the Chairman who is also the Managing Director. The Chairman is appointed by the President and the other eight members are nominated by the shareholders (five by the Minister of Finance, two by NBC and one by NIC). The Board takes a keen interest in TIB's activities and is quite independent in making decisions on investment proposals and on policy matters. Management, Organization and Staffing 2.05 TIB's Managing Director, who is very competent and dedicated, has held that position since 1972. He concentrates on policy matters and external relations and, with the help of a good management information system, is able to provide dynamic leadership to the institution. He is ably assisted in the day-to-day management of TIB by his General Manager, who was formerly TIB's Director of Operations, and has occupied the present position for about a year. 2.06 TIB has constituted four committees to assist the management in operational and administrative matters. The Loan Committee, which is chaired by the Managing Director, meets weekly and considers all financing proposals before their presentation to the Board. The other Committees are the Manage- ment Committee, Staff Appointment Committee and Housing Allocation Committee, which are chaired by the General Manager. 2.07 TIB's organization consists of four departments: Operations, Plan- ning and Development, Finance and Administration, each headed by a qualified Tanzanian. The organization is appropriate for TIB's requirements. The Operations Department is responsible for project appraisal and follow-up. TIB carries out a thorough appraisal of projects; its capability in this area has shown consistent improvement. The Follow-up Division, although still short of professional staff, has made considerable progress in recent years. Early this year a wood technologist from Sweden joined this Division and is concentrating on evaluating the performance of wood processing projects and I/ Both NBC and NIC are wholly Government-owned. - 12 - also on strengthening pre-disbursement procedures. Another technical exp:ert from Norway is expected to join this Division in the near future. With taese two experts, TIB expects to improve considerably its monitoring of project implementation. TIB's proposed recruitment program (paragraph 2.13) shoi:lf take care of the Department's staffing needs. 2.08 The Planniig and Development Department has the responsibility for project identification and promotion. The Department has so far identifie,d and promoted a number of projects, seven of which have been approved by TIII for financing, two are currently under appraisal, and ten others are beinig studied fcor promotion. TIB is also promoting five sub-sectoral studies on animal feed, building hardware, pharmaceuticals, sisal and raw materials for soap and detergents. 2.09 The Department has also taken over the management of the FeasibiLity Studies Unit, which was set up in 1976 to implement the Technical Assistance Project for which IDA had approved a credit of $6 million. This unit is required to (i) process requests from the parastatal organizations for pra- investment and feasibility studies, and efficiency studies, (ii) prepare terms of reference for consultants to be engaged for carrying out the stuijes, (iii) evaluate the studies and (iv) provide training to the staff of the parastatals. Initially, a consultancy firm was engaged to man this unit, hut the contract with the firm was allowed to lapse in October 1978 as TIB di(d not consider its performance up to expectations. TIB's professional staff, which has gained some experience in this area, should be able to manage this unit adequately with the assistance of the expatriate technical experts present:ly working with TIB. 2.10 The Finance Department has three divisions: Accounts, Controll'irs and Disbursements. The Department is respons:ible for financial planning .nd control, preparation of accounts and financia:L reports, disbursement of lPans and equity investments and collections. 2.11 Trne Internal Audit Unit, although administratively a part of the Finance Department, reports directly to thle General Manager. It provides aa independent: check on T:[B's operating procedures and has helped strengthen accounting records. 2.12 The Administration Department is responsible for personnel manaie- ment, general administrative services and Board secretarial work. 2.13 As of December 31, 1978, TIB had a professional staff of 43, of whom eight were expatriates, funded by UNDP, SIDA, CIDA, NORAD a:ad CFTC. Of the latter, seven are technical experts with specialization in chemical engineering' mechanical engineering, electrical engineering, mining, wood technology and agronomy and one in financial management. Two more expatriat:e engineers are expected to join shortly. In view of the acute shortage of engineers in Tanzania, TIB has on its staff only three Tanzanian engineers; it is making efforts to recruit fresh graduates with technical quallfications, with a view to training them further in various engineering disc.plines. Until it is self-sufficient in technically, qualified Tanzanian personnel, ElB - 13 - will continue to recruit experienced expatriates to fill the vacancies. The professional staff is distributed as follows: Operations Department 18, of whom 4 are expatriates (Appraisal Division - 8 Tanzanians and 3 expatriates and Follow-up Division - 6 Tanzanians and one expatriate); Planning and Development Department - 11, of whom 3 are expatriates; Finance Department - 10 including one expatriate; and Administration Department - 4 Tanzanians. In order to cope with the projected expansion of its operations, TIB is planning to recruit 14 Tanzannian professionals and two expatriate technical experts in the near future. These professionals will be assigned as follows: Operations 5 (including two expatriates), Planning and Development 4, Finance and Accounts 5, and Internal Audit 2. 2.14 Staff Development. TIB runs a very well organized staff development program which has enabled it to upgrade the levels of skill of most of its professional staff and to man all its key middle-level management positions by internal promotions. The program involves a one-year in-house training followed by one year's training in project appraisal at the local Institute of Finance Management. Thereafter the staff spends another year at TIB and finally is sent abroad to one of the recognized training institutes in Massachusetts or the Hague. Procedures 2.15 Operations. Over the years TIB has evolved adequate procedures covering all aspects of its operations. It has an Operations Manual which provides guidelines for appraisal and supervision of projects. TIB's appraisal of projects is thorough. In recent months TIB has improved the quality of its project supervision by strenghthening its staff and by paying special attention to its problem projects. It is in the process of tightening its pre-disbursement conditions to ensure that the project sponsors (mostly parastatals) are in a stage of readiness to implement projects before dis- bursements are made. 2.16 Procurement and Disbursement. TIB requires competitive quotations for all procurements involving T Shs 100,000 or more. It also insists on consultations prior to awarding contracts for goods and services to be financed by TIB. Both procurement and disbursement procedures are satisfactory. 2.17 Legal. TIB is required to use the services offered by the Tanzania Legal Corporation, owned by the Government. The Corporation provides legal services timely and adequately. TIB's loan agreement is also satisfactory. 2.18 Audit. TIB's accounts are required by statute to be audited by the Tanzania Audit Corporation which is a parastatal agency. The audit of TIB's accounts continues to be satisfactorily conducted. Investment and Financial Policies 2.19 The following are the important provisions in TIB's Statement of Investment and Financial Policy which has remained unchanged since its approval by the Bank at the time of first TIB appraisal in 1974: - 14 - (a) TIB will only finance projects which are technically and finan- cially viable, economically justified, and which are consistent with national priorities as set out in the national development: plans. (b) TIB's minimum commitment is set at T Shs 100,000 (US$12,000). The maximum financial commitment in any project is set at 75% of the project's total capital cost sC) long as it does not exceed 20% vf TIB's net wcrth. (TIB's net worth as of December 31, 1978 was T Shs 530 million). In addition, TIB's total commitments in eqaity investments should not exceed its own net worth. (c) TIB should under no circumstances assume the exchange risk on i:c foreign borrowings. 2.20 TIB's policy statement has not set any limit on its borrowing capacity. However, in our loan agreements with TIB we have set a debt-eqllity limit of 3:1. Interest Rate and Other Charges 2.21 It is TIB's policy to charge an interest rate which substantially reflects the cost of capital in Tanzania. Its policy statement has set this rate at a minimum of 10% per annum. The general aim of TIE's financ>al policy is, inter alia, to maintain the value of its capital and to achievl:} a profit margin which would enable it to cover its administrative costs, build up adequate provisions and reserves and remunerate its share capital. FoI1Dw- ing these policy guidelines, TIB increased its lending rate three years ag-o to 11% for all its ordinary operations. Recently TIB has even charged 12: Dn some of its loans to the private sector. TIB also charges a flat 1% comm:s,ion on the loan amount and another 1% on the u-ndisbursed commitments. Furthel:mjre, since TIB passes on the exchange risk on its foreign borrowings to the sub-borrowers, the effective rate on its loans is somewhat higher than 11i'. 2.22 TIB's rates are among the highest on medium- and long-term loans -o productive sectors in Tanzania (See Annex 2). Although these rates were Uo: positive during the last three years, given Tanzania's inflation rate which ranged between 14.5% and 16.2% during 1975-[977, they were considered by the Bank Group to be adequate because (i) they provided an adequate spread to TFB, (ii) the effective cost of capital to the ultimate borrowers (including the unquantified exchange risk) was reasonable, (iii) other development banks were charging similar rates on medium/long-term loans, and (iv) there were indica- tions of a substantial decrease in the inflation rate in the foreseeable future. According to present estimates, the domestic inflation :-ate, measnred by the GDP deflator, during 1979-1981 is projected to be 12%, 10% and 9% 1, respectively. Furthermore, since about 70% of TIB's operations are in foraign currency and as TIB passes on the foreign exchange risk to the ultimate borrower, TIB's interest rates, given the projected international inflatic.i rates of 7% to 6% for 1978-81, are considered positive. 1/ The increase in the consumer price index for 1978 is estimat:ed to be L2%. Estimates for the GDP deflator are not available. - 15 - 2.23 The Bank of Tanzania (the Central Bank), as part of a general directive, asked the Tanzanian banking institutions to modify their interest rates effective from July 1, 1978, in accordance with a schedule prepared by it (Annex 2). However, as this directive specifies that sub-loans out of foreign lines of credit would be governed by the terms and conditions of the credits, it was agreed at the negotiations that TIB will charge 11% on all sub-loans out of the proposed loan of $25 million and the EEC Special Action Credit of $15 million. In accordance with its policy, TIB will continue to pass on exchange risk on all these sub-loans to the ultimate borrowers. An understanding was also reached with the Tanzanian delegation that TIB's interest rate structure will be determined by the relevant authorities in Tanzania in consultation with TIB and that the latter's analysis will continue to be based on the principles laid down in its policy statement. As in the past, TIB will review this analysis with the Bank's supervision missions. B. Operations and Finance Operations 2.24 Annex 3 provides a summary of TIB's operations through March 31, 1979. As of that date TIB had approved, net of cancellations, 137 loans aggregating T Shs 1,119.5 million. It had also approved net equity invest- ments of T Shs 64 million in 13 enterprises, including an equity investment of T Shs 30 million and income notes of T Shs 20 million in TDFL, another development finance company. Considering the volume of its operations, TIB's level of equity investments is low reflecting its major involvement with financing parastatal enterprises which are provided with equity funds from the Treasury and the decision not to tie up sizeable amounts in investments which are difficult to turn over. The level of TIB's loan approvals has increased rapidly from 9 loans for T Shs 29 million in FY 1972 to 23 loans for T Shs 285 million in FY 1978. The real rate of growth of TIB approvals averaged 26% during 1972-1976 after which it showed a dramatic increase of 85% per annum in FY 1977.. However, it levelled off in FY 1978. The growth of commitments and disbursements has also kept pace with approvals. As of March 31, 1979, about 73% of TIB's net approvals by amount and 91% by number had been committed and over 70% of the committed amount had been disbursed. Due to streamlining of TIB's loan administration procedures, the pace of commitments and disbursements has improved significantly in recent months. 2.25 An analysis of TIB's loan operations by size, terms and sub-sector is shown in Annex 4. A majority of the loans (54% in number) is for T Shs 5 million or less, but 32 loans (23% in number) for over T Shs 10 million each account for about 65% of the loan approvals by amount. The average size of the loan has increased from T Shs 6.2 million in FY 1977 to T Shs 8.2 million and the median size is around T Shs 5.8 million. About 67% of the loans by number (66% by amount) have maturities between 5 and 10 years. Over 71% of the loan amount carries interest at 11% and above; the mean interest is 10.7%. TIB's operations are spread out over a wide variety of sectors, with manufac- turing and agricultural processing accounting for 70% of the loan amounts, - 16 - tourism 7%, engineerirng 7%, transport and storage 6% and forest and wood industries 3%. Other sectors which have also benefited from TIB financinig are fish processing, miining, construction, power and communications. Because of the lack of adequate infrastructure in many parts of the country, TIB's projects are mostly located in urban areas, the largest concentration being in Dar es Salaam and its vicinity. Portfolio 2.26 As of December 31, 1978, TIB had a loan portfolio of T Shs 476 uil- lion outstanding in 81 projects, owned mostly by parastatal organizations. (This is a substantial increase over the portfolio of T Shs 298 million oIt- standing in 58 projects as of June 30, 1977.) A breakdown of the loan po--t- folio according to the status of the projects, and arrears is provided beLcw: Portfolio Arrears over Three Months Total Affected Interes': and Principal by Arrears over Commitnent Outstanding Three Months Principal Charles Number Amount Number Amount Number Amount Number laount (Amount in T Sh million) Operating Projects Serioujs Problems 5 23.0 5 23.0 5 7.6 5 6.8 Moderate Problems 5 33.0 5 33.0 5 9.3 5 14.6 Other Projects 40 234.6 16 40.7 15 9.6 11 __7 SubtotaL 50 290.6 26 96.7 25 26.5 21 25.1 Projects Under Implementation On Schedule 14 71.2 - - - - - - Behind Schedule 17 114.2 6 38.7 4 3.2 6 .7 Subtotal. 31 185.4 6 38.7 4 3.2 6 1-7 TOTAL 81 476.0 32 135.4 29 29.7 27 ?J'.8 2.27 As of December 31, 1978, about 28% of TIB's loan portfolio was afferted by arrears of over three months. (This is an improvement over the position in June 1977 when this percentage was 39.) Of the 50 operat- ing projects, 40 involving about 81% of the portfolio outstanding in these projects were making satisfactory progress and 10 were experiencing moderai:e to serious problems. However, the size of the arrear-affected portfolio does not reflect the quality of TIB's loans because 30% of the portfolio affect!d by arrears was in projects which were experiencing temporary problems and 18% was in projects under implementation which were behind schedule for reason: beyond the borrowers' control. The overall quality of TIB's portfolio is satisfactory. - 17 - 2.28 TIB's experience with project implementation by parastatals has not been satisfactory. Of the 31 projects under implementation, 17 (mostly sponsored by parastatals) were behind schedule due to delays in starting civil construction and in ordering machinery and equipment. Although in some cases the delays are due to factors beyond the control of the sponsors, in many cases they are due to parastatals' inadequate project management capabilities. In order to improve the situation TIB has taken certain actions in recent months which, in due course, should go a long way towards more efficient project implementation. It organized a seminar of TIB clients including key officials from the concerned parastatals to explain to them TIB's objectives, policies and procedures; this seminar resulted in a better appreciation by the clients of TIB's requirements. It has also tightened pre-disbursement conditions with a view to ensuring that appropriate project planning and management expertise is available before TIB disburses funds. Consultations with the clients (mostly parastatals) have also become more frequent with the result that actions on problems are taken more rapidly than in the past. 2.29 TIB's improved project supervision capabilities and intensive follow-up of chronic problem projects have yielded good results. Of the six projects which had been identified as chronic problem projects in 1977 at the last appraisal, one is already profitable and three have shown marked improve- ments in their operating results. As regards the remaining two, the loan to one of them is being taken over by the Government whereas the sixth project is still having serious problems arising out of originally poor project conception and design. During the last year five other projects, four involving fishing operations and a motel, were categorized as problem projects. Since all the problem projects are owned by parastatals or the District Development Corpora- tions, there are fair prospects of TIB recovering its dues although salvaging of these projects may take a little time. Meanwhile, based on an annual review of the recovery prospects of its dues, TIB increased its provisions against doubtful debts from T Shs 5 million to T Shs 7 million, which is considered adequate. 2.30 As of December 31, 1978, TIB's equity portfolio amounted to T Shs 37.8 million, of which T Shs 12.8 million was in common shares of 5 companies and T Shs 25 million in preferred shares of 9 companies. About 77% (T Shs 10 million in common shares and T Shs 20 million in income notes) was outstanding in the Tanganyika Development Finance Company Limited, another development bank in Tanzania where TIB's investment represents the Tanzanian participation (30%) in that institution which is owned 70% by foreign institutions. 1/ While TIB has been receiving interest on its income notes and preference shares, it has so far not received dividends on its investments in ordinary shares (except very small amounts from TDFL) partly due to the poor financial performance of some of the companies and partly to the fact that some of the projects are still under implementation. TIB has also made a provision of T Shs 1.2 million against possible losses on equity investments; this is considered adequate. 1/ TDFL is owned 70% by: DEG (30%) , FMO (30%) and CDC (10%). - 183 - Resources 2.31 TIB has been quite successful in mobilizing resources from a r.unber of foreign countries; the main donors are SIDA, NORAD, CIDA, KfW, Goverr'nents of Finland and Netherlands, ADB, IDA andl the Bank. As of Apri:L 30, 1979, TIB's foreign resources amounted to the equivalent of T Shs 972 million. SIDA, which traditionally has been the largest donor, had provided T Shs 367 million (38%), the World Bank Group T Shs 276 million (28%) 1/, NORAD T Shs 149 millioi (15%), KfW T Shs 97 million (10%), and others (ADB, CIDA, Netherlands an,1 Finland) the remaining T Shs 83 million. With the exception of the crediLt lines from the Bank Group and ADB, which were made available at: rates be :een 7.25% and 8.5%, TIB's foreign currency resources are on soft terms (repa7able over long--terms and interest from 0.75% per annum to 4% per annum). TIB s local currency resources amounted to T Shs 198 million, of which T Sh; 148 million represented TIB's capital and reserves, T Shs 40 millicn treasurr and special funds and T Shas 10 million depreciation and provisions. Financial Situation 2.32 TIB's audit(ed balance sheets for the years ending June 30, 197i1 1978 reflect rapid growth in its operations. Despite this growth, TIB's financial situation has remained very sound. Its long-term assets, cons-.s:ing mainly of portfolio investments, have more than tripled during this pericd, from T Shs 124 million as of June 30, 19,74 to T Shs 404 million as of Junie 30, 1978. This increase has been financed mainly out of grants from SIDA ancl NORAD and long-term foreign loans from a number of bilateral and multilater:al donors, including the World Bank Group. The grants have contri1uted to a. remarkable increase in TIB's net worth from T Shs 78 million at the end cf June 1974 to T Shs 466, million as of June 30, 1978. TIB's long--term debt equity ratio which was already sound at 1.0 in 1974, further improved to ).4 by end FY 1978. TIB has all along maintained a sound liquidity position, its net current assets improving from T Shs 30 million in 1974 to T Shs 25E million in 1978. The bulk of the current assets (T Shs 259 million as of June 30, 1978) was in cash and short-term investments. 2.33 As of June 30, 1978 TIB had provided T Shs 8.4 million for doub:ful debts and investments (T Shs 7.2 million for debts and T Shs 1.2. million :cr equity investments) based on an annual review of the status of projects il difficulties. This represents 2.2% of the total outstanding portfolio, c:m- pared to a level of provisions of 0.5% at the end of 1975 and 1.7% at the end of 1977. A review of TIB's statement of provisions for losses indicates t:hat the level of provisions is adequate. 1/ Reflecting an increase in the proportion of foreign currency resourc's provided by the Bank Group which amounted to 23%, as of June 30, 197. - 19 - Financial Results 2.34 Annex 5 shows TIB's audited income statements for FY 1974 through FY 1978 and Annex 7 shows selected financial ratios. While TIB has progres- sively increased its spread on borrowed funds from 4.4% in 1974 to 5.4% in 1978 and has been able to hold down its administrative expenses at an aver- age 1.5% of the average total assets during the last four years, its profit- ability during this period has remained modest at around 3% of average net worth because of the remarkable expansion of its equity base. This level of profitability has not been adequate for TIB to consider declaring dividends. Furthermore, TIB is prevented by its statute from declaring dividends unless its retained earnings grow to half the size of its authorized capital, which is presently T Shs 200 million. However, being a Government-owned insti- tution, failure to declare dividends has not come in its way to mobilize resources. C. Economic Impact 2.35 An assessment of the actual economic impact of projects financed so far by TIB has not yet been made but all projects were estimated at the time of their appraisal to be well justified. The projects approved during the last fifteen months have average forecast financial and economic rates of return of 20% and 23% respectively. These projects involve a total fixed investment of about T Shs 1.5 billion and are estimated to create approxi- mately 9,135 jobs at an average cost per job of about $13,400. 2.36 The improvement in the investment climate in Tanzania during the last year or so as a result of the pronouncements of the Government leaders urging the private sector to make investments in small- and medium-sized industries also led to an increase in applications with TIB from the private investors for term finance. During FY 1978, 44% of TIB's gross approvals by number and 33% by amount were made in favour of manufacturing enterprises which were majority-owned by the private sector. The average size of these approvals is T Shs 10 million (as compared to TDFL's average loan approval of T Shs 2 million). TIB approved T Shs 106.4 million in loans and T Shs 4.5 million in equity investments in these enterprises helping mobilize another T Shs 87 million from the private investors in these projects. 2.37 Performance under Previous Credits/Loans. The Bank Group has so far provided three lines of credit to TIB aggregating $36 million for its lending and investment operations, of which about $33 million was committed as of June 15, 1979. The first two lines of credit are fully committed and the third is committed to the order of $12 million. The first IDA credit of $6 million is likely to be fully disbursed by the end of December 1979. Under these lines of credit TIB has so far financed 26 sub-projects involving manufacture of textiles, garments, soap, cement, plastics, glassware, car spares, aluminium, soft drinks, tanning, processing of navy beans, cashew nuts and oilseeds, hotels and transportation. On completion, these sub-projects are estimated to create 9,500 new jobs at an investment cost of $14,000 per job. Their average forecast financial and economic rates of return are 21% - 20 - and 31% respectively. Eight of these projects have been completed and, vith one exception, are operating satisfactorily. Our experience with TIB reRe.rd- ing commitments and disbursements under these credit lines has been very satisfactory. D. Prospects 2.38 Tanzania's Third Five-Year Development Plan (1976-1981) involvis an investmnent outlay of T Shs 21 billion, of which T Shs 5.1 billion (249') is earmarked for the industrial sector. TIB's financing has historicall' constituted about 20% of the outlay, but it is now contemplating to incrl-ase its share of financing to 25% of the proposed investment in the industriLl sector. TIB's Strategy 2.39 In formulating its strategy for the medium term, TIB has follov;e1 the priorities and the guidelines in Tanzania's Third Five-Year Developmen: Plan (1976-1981). TIB's strategy is as i-ollows: (i) to increase its share of financing the industrial sector from the historical 20% to 25% of the planned investment, particularly by financing projects recommended in the Basic Industrial Strategy; (ii) to commission capacity-utilization and efficiency- improvement studies in respect of problem projects in its portfolio as well as those under the control of other parastatals. (iii) to take steps to improve project implementation by parastatal borrowers by stressing adequate project preparation and administration capability at the appraisal stage; (iv) to reduce the portfolio's arrears situation by improv- ing debt collection mechanism as well as by improving communications with the parastatal clients and the respective ministries. (v) to place special emphasis on technical manpower develop- ment by recruiting technically qualified staff and training them in appropriate institutions abroad in diverse disci'plines such as forestry, agriculture and transportation in addition to conventional training in business nianagement, finance and economics. (vi) to mobilize resources from commercial sources abroad to meet TIB's; growing financial requirements. - 21 - We consider the above strategy to be appropriate for TIB, and within its capability to accomplish. Already TIB has taken certain actions towards achieving these goals. Projected Operations 2.40 TIB's existing pipeline of projects, as of March 31, 1979, consisted of 19 projects needing financing amounting to T Shs 215 million, of which 8 projects needing TShs 37 million are sponsored by private investors. Having achieved an approval level of T Shs 344 million in FY 1978, TIB is projecting a modest increase of 2% in FY 1979 and an increase of 15% (over FY 1979 level) in FY 1980; thereafter a constant level in nominal terms is projected until FY 1983. In real terms TIB is projecting a growth rate of 6% in FY 1980 and negative rates for the remaining years. The reason for the latter is that due to the country-wide shortage of qualified manpower, TIB is uncertain about the availability of staff with the necessary background. It has therefore decided to base its operations on a conservative basis. Annex 8 shows TIB's projected operations through FY 1983. During this period the approvals are projected to amount to T Shs 1.95 billion, of which T Shs 1.94 billion will be in loans and T Shs 10 million in equity investments. This is in line with TIB's policy to have a low exposure in equity investments, as prospects of turning them over are virtually non-existent. Some 70% of loans approved would be in foreign exchange and all equity investments in local currency. Commitments during this period are projected to exceed T Shs 2 billion and disbursements T Shs 1.7 billion. These targets are reasonable in the light of the country's invest- ment plans and TIB's administrative capability. Resource Requirements 2.41 In order to finance its projected operations for the period May 1, 1979, through June 30, 1981, TIB will need to raise considerable amounts of foreign and local currency resources. The projected resource requirements and financing plan are as follows: Estimated Commitments (Amounts in T Shs million) Local Currency Foreign Currency Loans 361 703 Equity Investments 4 - Total 365 703 Financing Plan Existing Uncommitted Resources (as of April 30, 1979) 7 109 Internal Cash Generation (net of debt repayments) 244 New Resources - 110 TOTAL 251 219 Resource Surplus (Gap) (114) (484) - 22 - 2.42 TIB proposes to finance its foreign currency needs (about $58 million) by borrowings from its conventional donors as well as by tappin.; new commercial sources for which it is beirig encouraged by the Tanzanian Government. TIB has been assured of foreign resources equivalent of T Sls 110 million from (a) NORAD (T Shs 42 mil:Lion), (b) CIDA (T Shs 28 millior) and (c) the Nordic Investment Bank (TShs 40 million) during the projectiR:n period. In its efforts to further diversify its sources of foreign currency funds, TIB is planning to contact ADB, ABEDIA, the OPEC Special Fund, the Saudi Fund and some European commercial banks. TIB's prospects in this regard appear good. The size of the operation proposed in this appraisal, a Bar.k loan of $25 million and an EEC Special Action Credit of $15 mil:Lion (for -;hich IDA is the administrator), reflects a good pipeline of projects with TIB arLd its institutional capability to handle large resources. These resources -7ill together cover about 47% of TIB's projected foreign currency conmitments. 2.43 TIB's projected local currency resource gap on a commitment bas-is is quite large (T Shs 114 million) altlhough on a disbursement basis it would still have substantial liquid resources. At the negotiations, both the Government and TIB confirmed that the latter could establish credit lines with the Bank of Tanzania to cover its local currency needs. The BOT charter was amended some time ago to enable it to provide credit lines to locally established development financing institutions. Financial Prospects 2.44 TIB's projected financial statements and ratios for 1979-1983 are shown in Annexes 7, 9, 10 and 11. TIB's return on average net worth is projected to improve from 3.6% to 5.6% by the end of 1983. Although modest, it would enable TIB to maintain to some extent, the value of its equity. Since TIB retains all its after-tax profits, TIB's reserves are likely to exceed T Shs 100 million in 1981 which would entitle it thereafter to declare dividends, if the shareholders so desired. 1/ TIB's administrative expenses are expected to stay below.1% of average total assets during the period of projections. As TIB resorts to increased borrowings from more expensive sources, its financial expenses as a percentage of average total assets increase from 1.9% in 1978 to 2.8% in 1983. The cost of debt as a percentage of average total debts also increases from. 6.1% to 6.3% and although incomle from loans increases from the average 9.7% during the last five years to alout 11.3% during the projection period, the interest spread progressively decl:.nes from 5.4% in 1978 to 4.8% in 1983. While TIB expects to receive interest :n TDFL's income notes and other preference shares, it has not projected any dividend income as the few companies in which it has made equity investmeni:s have not had a dividend payment record in the past. TIB's debt service coverage remains very satisfactory throughout the period improving from 2.,i times in 1979 to 4 times in 1983. This provides adequate cushion against i.ny unforeseen shortfalls in collections. 1/ TIB's statute requires that its reserves should be at least 50% of its authorized capital before it can declaEre dividends. - 23 - 2.45 TIB's long-term debt-to-equity ratio which has been around 0.5 since 1976, is projected to stay below 1 even by 1983. This is due to a massive build-up of its equity base by grants from SIDA and NORAD and a satisfactory growth of its profitability. TIB's liquidity is also expected to remain very sound because its donors, mainly SIDA and NORAD, advance funds to TIB well in advance of disbursements to projects resulting in accretions of substantial cash and short-term investments. Although these items decrease gradually over * the projection period, they are still expected to result in a current ratio exceeding 2 by 1983. TIB is projecting to make provisions against doubtful debts and investments at 3% of annual disbursements which would increase their level to over 3% of TIB's loan and equity portfolio from 1981 onwards. III. THE PROJECT Objectives 3.01 The main objective of the project is to provide TIB with a part of its foreign currency requirements for investments in projects in various productive sectors of the economy. TIB is probably the most important develop- ment financing institution in Tanzania. Under the dynamic leadership of its management and with assistance from the Bank Group and other donors, it has developed into a mature institution pursuing sound financial and investment policies. Apart from expanding its volume of operations, TIB is also having a qualitative impact on implementation of projects by parastatals and their performance. The Bank's continued association with TIB will enable the Bank to influence the channelling of funds into financially sound and economically viable projects and to the improvement of their overall performance. Description of the Project 3.02 The project involves a fourth credit line from the Bank Group of $25 million and an EEC Special Action Credit of $15 million in favour of TIB to be used by it for meeting a part of its foreign resource gap in making investments in projects in the various productive sectors of the economy, in accordance with the provisions of its charter. 3.03 Terms and Conditions. The Bank loan will be on the Bank's usual terms and conditions for a loan to a DFC. Interest would be charged at the appropriate rate and commitment fee at 3/4 of 1% on the undisbursed amount of the loan. The loan will be for a maximum period of 15 years including an appropriate grace period, with a flexible amortization schedule conform- ing substantially to the aggregate amortization schedules of the sub-loans financed under the loan. In view of the continuing improvement in the quality of its appraisals, it is recommended that its free limit for approval of individual sub-projects be increased from the present $800,000 to $1 million with an aggregate free limit of $8 million. This would still enable the Bank to review sub-projects involving more than 2/3 of the amount of the loan. The foreign exchange risk on the sub-loans would be assumed by the ultimate beneficiaries. It is expected that the sub-loans will be made by TIB at its present interest rate of 11% or higher. - 24 - 3.04 The EEC Special Action Credit will be made available to the Tanzanian Government on IDA terms for on-lending to TIB on the terms and conditions spelled ouit in paragraph 3.03 with two exceptions: (a) procurement will be limited to countries mentioned in paragraph 3.07 below and (b) the aggre,;ate free limit under this credit will be $5 million. Project Implementation 3.05 TIB would have the sole responsibility for the implementation cf the project. Requests for withdrawals would be made for financing free .imit sub-projec:ts approved by TIB or sub-projects approved by the Ba-nk. TIB's record of implementation of projects in the past three credit lines has been very satisfactory. 3.06 Reporting Requirements. The Bank has established with TIB an adequate system of reporting progress of operations, the status of the port- folio and financial condition. TIB's submissions in this regard have beea very regular, thorough and comprehensive, reflecting the existence of an efficient management information system. 3.07 Procurement. Procurement for the sub-projects finance!d under the Loan and the EEC Special Action Credit would be in accordance with the standard DFC practices. With respect to the latter, procurement will be permissible only from the member countries of EEC and from developing cou:i- tries which are members of IDA and which could themselves be the recipients of a Special Action Credit (paragraph 2.16). 3.08 I)isbursement. The proceeds of the proposed Bank loan and the Special Action Credit would finance 100% of the foreign cost of imported ioods and services, 60% of the local cost for goods previously imported and 40% of the total cost for civ.l works. Benefits arLd Risks 3.09 Economic Justification. TIB is planning to enhance its role in the financing of the industrial and other productive sectors during the Third Five-Year Development Plan. Having built up a sound orgaliza- tion with adequate policies and procedures, TIB is in a position to alloca-E resources to financially sound and economically viable projects. Since TI3, through its improved project supervision procedures, is able to (i) monito- the progress of project implementation by its borrowers more closely than before and (ii) assist in identifying causes of low capacity utilization, :.ts impact on project implementation by parastatals which are TIB's major clie its, and on improvement of their operational efficiency is likely to be substantial: financial assistance to TIB will, therefore, result in an efficient allocaiAon of resources and improved performance by the industrial sector in Tanzania, Through its increasing involvement with the financing of private enterpris:s in recent months, TIB is also likely to play a significant role in mobilizctLon of private savings in the country. - 25 - 3.10 Risks. There are no major risks associated with this project. TIB is a mature and creditworthy development financing institution, having the support of the Government and a number of bilateral and multilateral financing institutions, performing a well-charted role within the framework of the country's development plan. The only risk is that it may not be able to mobilize in time all the needed foreign resources, on acceptable terms and conditions, to meet its operational targets. This could somewhat reduce TIB's level of operations and projected profitability in the near future. IV. AGREEMENTS REACHED AND RECOMMENDATIONS 4.01 This report recommends a Bank loan of $25 million and an EEC Special Action credit of $15 million in favour of TIB on the terms and conditions specified in paragraphs 3.03 and 3.04 respectively. 4.02 During negotiations the following agreements and understandings were reached: (a) it was agreed that TIB will charge an interest rate of 11% per annum on all sub-loans made out of the proceeds of the Bank loan or the EEC Special Action credit (paragraph 2.23); (b) an understanding was reached with the Tanzania delegation that, as in the past, TIB would continue to review its analysis of the interest rate structure with the Bank's supervision missions (paragraph 2.23); and (c) an understanding was reached with the Government and TIB that the latter could mobilize local currency resources through facilities provided by the Bank of Tanzania (paragraph 2.43). ANNEX ;L - 26 - TANZANIA Structure of Output and Employment in -qedium- and Large-Scale Manufas>. g In Tanzania 1972-1976 Absolute Amount (in current terms) (Shs LH1llion) Share Total (,_ I. Output 1972 1974 1976 1972 1974 197' Consumer Goods 1.533.1 2.044.9 2.639.4 61.3 53.0 50.3 Food Proces-ing 752.9 925.5 1,057.6 30.1 24.0 20.2 Beverages 128.7 178.6 277.5 5.1 4.6 5.3 Tobacco K-nufacturing 1.07.6 162.4 232.4 4.3 4.2 4.4 M1anufacture of Textiles 429.9 599.9 816.1 17.2 15.6 15.6 Manufacture of Footwear and Other Apparel 114.0 178.5 255.8 4.6 4.6 4.8 Intermediate Goods 711.4 1,406.9 2,026.7 28.4 36.5 38.6 Wood (except furniture) 49.3 63.9 93.2 1.9 1.6 1.7 Furniture & Fixtures 22.8 28.6 34.4 0.9 0.7 0., Paper Products, Printing and Publishing 77.3 173.9 239.1 3.1 4.5 4.6 Leather Products 29.6 48.5 61.8 1.2 1.3 1.2 Rubber Products 65.3 141.1 189.3 2.6 3.7 3.6 Chemicals, Chemical Products, Petroleum 230.0 519.9 773.9 9.2 13.5 .4.7 Non-metallic Mi.neral Products 61.6 92.6 119.8 2.5 2.4 2.3 Basic Metals, & Metal Products 175.5 338.4 515.2 7.0 8.8 9.8 Capital Goods 187.8 296.0 428.5 7.5 7.7 8.2 Manufacture & Repair of of Machinery 72.2 102.5 169.0 2.9 2.7 3.2 Assembly & Repairs.of Transport Equipment 115.6 192.5 259.5 4.6- 5.0 5.0 Other Manufacturing 70.1. 108.7 151.6 2.8 2.8 2.9 TOTAL .2,52.5 3o56.5 5 246.2 100.0 100.0 ICO.0 II.. Employment Number (in 000's) Shar,- Total (Z) Consumer Goods 44.7 48.7 52.4 71.1 69.3 69.4 Intermediate Goods 14.6 17.,2 18.5 23.2 24.5 24.5 Capital Goods 2.3 3.1 3.3 3.6 4.4 4.4 Other Manufacturing 1.3 1.3 1.3 2.1 1.8 1.7 TOTAL 62.9 70.3 75.5 1;00.0 10'0.0 .03.0 Source: covernment of Tanzania Economric Surveys: 1975-76.and 1977-78 1/ Enterprises with 10 or more employees 2/ Provisional EAPID June 1979 ANNEX 2 - 2;7 - TAN ZANIA Intere.st R_ate_Structure ims T_nziIl ia 1976 1977 July 19h7 1. Bank of Tanzania Rediscosuts _and Addvances Cormecrci al Bills Crop: 90 days 5.00 5.00 5.00 91 - 180 days 5.00 5.50 5.50 Other: 90 days 5.25-6.00 5.25-6.00 5.25-6.00 91 - 180 days 5.75-6.50 5.75-6.50 5.75-6.50 Treasury Bills (35 days) Rcdiscoants 4.27 4.27 4.27 Advances 4.77 4.77 4.77 2. National Bank of Commerce Deposits Sa in_s 4.00 4.00 5.00 Fixed up to 91 days - 3.50 3.50 3 - 6 months 4.00 4.00 4.00 6 - 9 months 4.25 4.25 4.25 9 - 12 months 4.50 4.50 4.50 1 - 2 years 5.00 5.00 6.00 2 - 3 years - - 6.50 3 years and above - _ 7.00 Lending 6.00-10.50 6.50-10.50 7.5-11.50 3. Post Office Svings Bank Deposits _Sv3n 4.00 4.00 5.00 Fixed 1 - 2 years - - 6.00 2 - 3 years - - 6.50 3 years and above _ _ 7.00 4. Tanzania_ousing Bank Deposits Savings 4.50 4.50 5.00 Deposit Accou2t 5.50 5.50 5.50 Fixed 1 - 2 years 5.50 6.00 6.00 2 - 3 years 5.50 6.50 6. S 3 years and up - - 7.00 Lending 5.00-10.00 5.00-10.00 5.00-11.00 5. Tanzania Rural DeveLopment Bank Short Term Lending 8.50 8.50 7.50 -/ Long Tertm Lending 7.50 7.50 7.50 - 6. Tanzania Investment Bank j0.00 10.00-11.00 7.5-12.00V 7. Past African Development Bank 10.00 11.00 11.00 8. _nganYika Development Finance Co.Ltd 9.00-9.50 10.00-11.50 11.00-12.00 1/ The July 1978 rates were mandated by the Bank of lanzania, and are the subject of dispute between it and TRDB and TIB. 2/ The rates set by the Bank of Tanzania are as follows: SSI (rural) 7.50 SSI (urban) 8.00 Commercial Farms and Agrobusiness 9.00 Plantations, Medium- and Large-Scale Industries 10.00 However, TIB is still continuing to charge 11.0% to 12.0% on its loans. EAPID June 1979 TANZANIA IN9F.SIHIT BANK Sou.ourv o i pperotlaus 1971 - 131 8 (A,mo...ts ie T Sh. millio-s) NI77e mouthsn 'Ce 979 u1~ 1975 - ..1(........ 1977 - 1978 C,miulstlve Of which ~r1976l19r7r1oas eh,e N0mh er L ouqnt Nisehit hount Number hnoLer Ntumber M ouser lumber Annuo Number 978 cut NUmber lemoume Number C lAmo_ 0 Ibmimt mL_-t- I.oales 33 95.0 25 97.1 22 128.5 20 151.4 23 109.5 26 339.7 22 211.b-/ 171 1 335.0 13 5, EqlIty _1 _1.6 4 7.2 2 _. 3 10.6 4 5.8 4 4.5 L .32 _2t 33.4 - Tot-S i6 96.6 29 004.3 24 129.2 23 164.4 27 315.3 30 344.2 23 215.3 192 1,316.39 1 52.11 co-et lin- - I os 18 54.9 10 54.3 31 131.4 17 120.8 6 43.1 16 226.8 6 53.2 104 684.5 5 47.6 IquIty 3 1.6 3 5.2 2 0.7 3 10.6 4 3.8 3 2.0 1 2.5 19 26.4 - _ Total 21 56.5 13 59.5 33 132.1 20 131.4 10 46.9 19 228.8 7 55.7 123 710.9 5 41.6 tLuber-eumeers torusl . . 18.7 ... 39.0 .. . 70.3 77.6 ... 142.1 ... 92.6 ... 70.1 ... 510.4 5 33.4 :quiLy 1.8 .. 4-8 ... 0.5 !.7 .. 5.1i - _ 13.9 -
Группа Всемирного банка · Staff Appraisal Report
Tanzania - Tanzania Investment Bank (TIB) Project
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