Tanzania - Smallholder Tea Consolidation Project

Document of The World Bank FILE Copyv FOR OFFICIAL USE ONLY Report No. 2814-TA TANZANIA SMALLHOLDER TEA CONSOLIDATION PROJECT STAFF APPRAISAL REPORT May 9, 1980 Eastern Africa Region Southern Agriculture Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Current Units = Tanzania Shillings (TSh) US$0.12 = TSh 1.00 US$1.00 = TSh 8.30 US$1,000 = TSh 8,300 WEIGHTS AND MEASURES Metric British/US Equivalents 1 meter (m) = 3.28 feet 1 hectare (ha) = 2.47 acres 1 kilometer (km) 2 = 0.62 mile 1 square kilometer (km ) = 0.39 square mile (sq mi) 1 kilogram (kg) = 2.2 pounds (lb) 1 liter = 0.26 US gallon (gal) = 0.22 British gallon (imp gal) 1 metric ton (ton) = 2,205 pounds (lb) ABBREVIATIONS MDB - Marketing Deveopment Bureau MOA - Ministry of Agriculture NBC - National Bank of Commerce PMO - Prime Ministers Office PPMB - Project Preparation and Monitoring Bureau of MOA RMEA - Regional Mission in East Africa SCOPO - Standing Committee on Parastatal Organization TDM - Tea Development Manager TRDB - Tanzania Rural Development Bank TTA - Tanzania Tea Authority TTSDO - Tanzania Tea Sales and Distribution Organization FISCAL YEAR Government - July 1 - June 30 TTA - July 1 - June 30  FOR OFFICIAL USE ONLY TANZANIA APPRAISAL OF THE SMALLHOLDER TEA CONSOLIDATION PROJECT Table of Contents Page No. I. BACKGROUND .............................................. 1 A. Project Background . ......................... 1 P. The Agricultural Sector ............ . ................. 1 Agricultural and Rural Development Strategy ......... 2 Agricultural Services . ............... ... ........ * * . 3 Agricultural Marketing and Pricing ............... ... 5 Previous Bank Group Assistance ............... ....... 5 TEA SUB-SECTOR ..... ........................................ 6 A. Background ........................... *.. ... ..... .o., 6 B. Processing .. ...-....... . ..... 7 C. The Tanzania Tea Authority ...o .... o........ 8 D. The First Tea Project .......... *...*...* 9 E. Tanzania Tea Markets and Prices ....... ............ 11 lII. THE PROJECT ........ .......... , 12 A. General Description . . . .......... . 12 B. Detailed Features .... . . . .... . o...* .... . 13 C. Project Costs ..... ........ ... .... ... 18 D. Financing oo..o .. .............. .. . ,.... 19 E. Procurement ... . ...................... 20 F. Disbursement . . . .......... . . . .. . . . .. . . . . .. . . . . . . 21 C. Accounts and Audits ........ . . . . . . . ......... ...o... .. . 22 H. Environmental Benefits .... ............ ............... 23 IV. ORGANIZATIONAL AND MANAGEMENT ..... o.................... 23 A. Headquarters .... .............- -............. . .. . 23 B. Branches and Factories .oo ................. 24 This report is based on the findings of a IBRD appraisal mission which visited Tanzania in July 1978, composed of W. Stolber, A. Sidhu, G. Onaba (IBRD), J. Ridler and D. Smith (Consultants) and a subsequent post-appraisal mission which visited Tanzania in September/October 1979, composed of J. Wijnand, A. Klempin, A. Sidhu, B. Bannan and A. Wilson (IDA). Thia documcnt hs 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 - Table of Contents (Con't) Page No. IV. ORGANIZATION AND MANAGEMENT (continued) C. Fuelwood Plantations ...... **................... 25 D. Roads ................................................ 25 E. Monitoring and Evaluation ........................... 25 V. TEA PRODUCTION AND PROCESSING ........................... 26 A. Production - Technical Features ................... 26 B. Production - Famers' Benefits ...................... 26 C. Production - Estimates ..... ................... ... ....... * ... 29 D. Processing - Modifications .......................... 30 E. Processing - Benefits .. ...................... ... ... 30 VI. MARKETS AND PRICES ......................... .. ........... 30 VII. BENEFITS AND JUSTIFICATION .............................. 32 A. Financial Analysis ............... .................... 32 B. Economic Analysis ................................... 35 VIII. AGREEMENTS TO BE REACHED AND RECOMMENDATION ............. 39 SUPPORTING CHARTS, TABLES AND MAPS Chart C-1 Implementation Schedule Chart C-2 Organizational Chart Table T-1 Phasing of Project Costs T-la Factory Development: Project Costs by Factory T-lb Transport - Vehicle List and Cost by Factory and Headquarter T-lc Fuelwood Plantations - Area and Cost by Factory T-ld Planting Program - Area, Requirements and Cost by Factory Region T-le Roads - Equipment, Consultancy and Construction Cost by Factory Region T-lf Staff - List of Factory Staff of the Two New Factories (Mwakaleli and Ukalawa) and Annual Cost T-lg Staff - List of Incremental General STaff of Two New Factories Regions (Rungwe and Njombe) and Annual Cost T-lh Staff - List of Incremental TTA Headquarter Staff and Annual Cost  - iii - Table of Contents (Con't) Table T-2 TTA Consolidated Income Statement (,Without Project) T-3 TTA Consolidated Income Statement (With Project) T-3a Katumba Income Statement (With Project) T-3b Mwakaleli Income Statement (With Project) T-3c Lupembe Income Statement (With Project) T-3d Ukalawa Income Statement (With Project) T-3e Mponde Income Statement (With Project) T-3f Bukoba Income Statement (With Project) T-4 Projected TTA 'With Project' Cash Flow T-5 Government Cash Flow Projection T-6 Estimated Schedule of Disbursements T-7 Foreign Exchange Impact of Project T-8 TTA Comparative Balance Sheets T-9 Assumed yield from year of Planting T-10 Returns to Farmers in Njombe Area T-11 Illustrative Farm Budget (NJombe) T-12 Hectare Budgets for Tea and Maize T-13 Illustrative Farm Labor Profiles (Njombe) T-14 Derivation of Financial and Economic Prices of Made Tea T-15 Breakdown of Financial Selling Costs T-16 Financial Rate of Return on TTA Investments T-17 Economic Rate of Return T-18 Table of Contents of Volume II MAP S TANZANIA - IBRD 14083 Location TANZANIA - IBRD 14084 Rungwe Area TANZANIA - IBRD 14085 Bukoba Area TANZANIA - IBRD 14086R Lupembe Area TANZANIA - IBRD 14087 Lushoto Area   TANZANIA SMALLHOLDER TEA CONSOLIDATION PROJECT I. BACKGROUND A. Project Background 1.01 In June 1978, the Government of Tanzania requested that the Bank consider financing a second phase of the Smallholder Tea Project (Cr. 287-TA) 1/ proposals for which had been prepared by the Ministry of Agriculture in March 1977 and reviewed by the Bank's Regional Mission in East Africa (RMEA) in April 1978. The proposals were appro{sed by a Bank mission, which visited Tanzania in July 1978, composed of Messrs W. Stolber, A. Sidhu, G. Onaba (IBRD), J. Ridler and D. Smith (Consultants). Subsequent analysis showed that the deteriorating financial position of the Tanzania Tea Authority (TTA) would continue "with" the project. A prolonged dialogue with Government to seek ways and means to correct this trend led to a post- appraisal mission visiting Tanzania in September/October 1979 to further explore how the TTA could be strengthened to become a financially self-sus- taining organization. This report is based on the findings of the Bank's post-appraisal mission composed of Messrs. J. Wijnand, A. Klempin, A. Sidhu, W. Bannan and A. Wilson (IDA) and it emphasizes the need to (a) provide additional processing facilities to cater for the increasing green leaf production from existing tea plantings, (b) improve the quality of manufac- tured tea by improving processing standards and facilities, (c) consolidate the present smallholder tea plantings to ensure optimum utilization of factory capacities, (d) further expand and improve existing infrastructural support services and (e) effect changes in TTA's management structure which would assist in making TTA a viable tea organization. B. The Agricultural Sector 1.02 Tanzania's population (about 17 million in 1979) is increasing at a rate of about 3% per annum. Per capita GNP for 1978 is estimated at US$230. Real growth of GDP averaged about 5% per annum over the period 1976-78. Roughly, 50% of GDP is derived from agriculture and related activi- ties, about half of this contribution coming from subsistence production. More than 90% of the population is engaged in agriculture. About 70% of Tanzania's foreign exchange earnings from merchandise exports are accounted for by unprocessed agricultural commodities, and a further 7% by processed farm products. The major export commodities are coffee, cotton, cashewnuts, tea, and tobacco. 1/ For details of Cr. 287-TA see Chapter II-D.  - 2 - 1.03 Large-scale agriculture is confined to a small number of private estates and state farms producing sisal, coffee, tea, wheat, rice and live- stock. The largely traditionally managed livestock herd, estimated at 10 million head, is grazed extensively over the 40% of the country free from tsetse fly. 1.04 The recent performance of the agricultural sector has been sluggish. Over the period 1967-77, the average annual rate of growth of agricultural production was about 2.7%. From the late 1960's onward food production has failed to keep pace with population growth and as a result, Tanzania has become increasingly dependent on rice and wheat imports. The effects of this slow growth were exacerbated in 1973 and 1974 by poor harvests as a result of a severe drought which necessitated large importations of food grains. Since 1975, however, overall agricultural production has recovered, increasing in real terms of an average annual rate of 7%. At the same time there has been a shift from cash crops toward food crop production. Despite food crop production increases, rising demands for food crops has resulted in Tanzania continuing to depend on imports of rice and wheat. C. Agricultural and Rural Development Strategy 1.05 The Government has undertaken a program to support the development of the agricultural sector, in conjunction with efforts to achieve balanced regional growth and more equitable income distribution. Within these objec- tives, the Government is paying particular attention to achieving self-suffi- ciency in food production and to supporting export crops. Greater emphasis is now being placed on the production rather than the social aspects of rural development projects. In 1972, Government administration was decentralized to the regional and district levels in order to plan development programs more closely related to the needs of the new villages. Since Independence, but particularly since 1970, the Government, in order to facilitate the provision of infrastructure and services to the rural population, and to encourage self reliance and a community approach to rural development, adopted a strategy whose key element has been the grouping of dispersed farm families into villages. 1.06 There are at present about 7,700 registered villages, allocated for administrative purposes into 1,828 rural wards, containing over three- quarters of Tanzania's rural population. The village is intended to be the country's primary social, economic and political unit. Basic social services, including health facilities, schools and water supply systems, are to be provided. Economic services, including provision of credit, supply of inputs, organization of extension services and marketing of produce, are to be coor- dinated at the village level. Economic infrastructure, such as storage godowns, processing equipment and small-scale industries, are to be vilage- owned investments.  - 3 - D. Agricultural Services Research 1.07 Agricultural research in Tanzania is undertaken by a number of government agencies but the Ministry of Agriculture (Kilimo) is responsible for overall guidance of the national research effort, and operates a network of crop and livestock research stations. Tanzania's research system, which has deteriorated over the years, has several weaknesses. Kilimo has not been able to exercise effective control and, as a result, priorities have not always been firmly established, the regional emphasis has been unclear, and research resources have not been allocated in accordance with development priorities. There is a need for sharper focus on improving knowledge on Tanzania's agro-economic zones, and on improving the farming systems in these zones through a greater emphasis on field testing. The links between research and extension are weak because of poor coordination between the Regions, who are responsible for extension, and Kilimo who is in charge of research and training. 1.08 The Tanzania research system already receives support under the Tabora Rural Development Project (Cr. 703-TA) and the Mwanza/Shinyanga Rural Development Project (Cr. 803-TA). The proposed IDA funded Agricultural Research Project would strengthen the National Research System and provide effective links with the agricultural extension services. Tanzania is also increasing its links with various international agricultural research insti- tutes under the Consultative Group for International Agricultural Research (CGIAR). Extension 1.09 Responsibility for agricultural extension in Tanzania is divided between Kilimo (which trains extension staff), the twenty regional adminis- trations (which are responsible for the day-to-day management of about half of the country's extension staff) and some crop parastatals (which employ the remaining extension staff). In early 1978, a total of 100 graduates, 3,000 field officers with formal diploma or certificate-level training, and 3,500 field assistances with little formal training, were involved in extension work. Extension efforts have been relatively ineffective. As a result of the weak research base, relatively few proven technical packages are avail- able. Many field staff are inadequately trained and supervised, and receive limited logistical support. The situation was made worse in 1978 by the decision of Government to appoint salaried Village Managers to each registered village. Many of the better trained extension staff were transferred to become Village Managers. The relationship between Village Managers, extension agents and Village Management Technicians 1/ remains unclear, and Kilimo and 1/ For a description of the Village Management Technician Program, see the staff Appraisal Report for the Fifth Education Project (Cr. 607-TA).  - 4 - the Prime Minister's Off'ce (which has overall responsibility for regional administration) hold differing views on how estension should be organized in the future. IDA has made proposals to Government on the reorganization of the extension service, using the principles of the 'training and visit' system adapted to Tanzania conditions, and are being the extension services in Mwanza and Shinyanga regions are being reorganized along these lines as part of the IDA-supported Rural Development Project for these regions (Cr. 803-TA). Kilimo is currently drawing up a comprehensive plan for the overall development of agricultural extension. Progress on the improvement of extension services has continued to be slow. Credit 1.10 The major agencies involved in the provision of credit to the agricultural sector are the National Bank of Commerce (NBC) and the Tanzania Rural Development Bank (TRDB). NBC is the main source of short-term credit to parastatals for produce marketing, and in addition provides about two- thirds of the total production credit, mainly to large estates. TRDB provides long, medium and short-term agricultural credit, administers special funds on behalf of Government, and has been supported by the Bank Group as the major credit channel for funds disbursed for direct use by farmers. A project to strengthen TRDB has been approved by IDA. Rural Transport Services 1.11 An adequate road transport system is needed to ensure the efficient movement of crops to market centers and railheads, and to support timely delivery of agricultural inputs to the farmers. Despite Government's efforts to upgrade the road network, only about 10 percent of the 33,400 km of roads provide reliable, all weather service. The remainder, particularly rural roads, are, in general, little more than earth tracks impassable in the rainy seasons. In addition, the trucking fleet available for use by parastatals (either through ownership or hire) has been limited, thus making crop movement even more difficult. Crop marketing has suffered from high transport costs, and decerioration of crops in villages with adequate storage facilities. Poor transport facilities cause delays in payment to villages and often dictate that villages receive sums large enough to handle crops over extended periods, leading to inadequate supervision and accounting of funds advanced for purchases. Current Government action to address these problems is directed mainly at the public sector, and includes the provision of staff training and equipment under several IDA-assisted projects, and the recent creation of betterment and maintenance units, which are upgrading selected secondary roads in several regions. Assistance to the public trucking indus- try is being provided through the IDA-supported Trucking Industry Rehabilita- tion and Improvement Project (Cr. 743-TA). This has not proved sufficient to overcome transport bottlenecks in the critical areas of crop procurement and the Government, under IDA assisted projects, has provided parastatals with additional transport facilities.  E. Agricultural Marketing and Pricing Marketing 1.12 In May 1976, the Primary Cooperative Societies and Unions, which previously played an important role in agricultural marketing, were dissolved and these functions transferred to other district, regional and national organizations, of which the most prominent are the various parastatal bodies. At present, there are separate parastatal organizations for coffee, tea, sugar, livestock and dairy products, foodgrains, cashewnuts, tobacco, cotton, sisal and pyrethrum. In addition to providing marketing and processing services, most parastatals have development responsibilities as well as their generally ambitious expectations have placed severe strains on manpower resources. Parastatal marketing is normally characterized by lack of com- petition, high cost, poor services and slow payments to farmers. The Govern- ment is aware of these problems. Its Standing Committee on Parastatal Organ- ization (SCOPO) is reviewing the structure and managerial performance of parastatals. There have been transfers of staff from over-manned parastatals. The Bank group is assisting in the reviews through its analysis of parastatals involved in recent and proposed IDA credits; i.e. the Tea Authority, the Cashew Authority, the Tobacco Authority, the Pyrethrum Board (proposed to be renamed the Pyrethrum Authority in future) and the National Milling Corpora- tion. It also intends to start a broader review of Tanzania's agricultural parastatals as a principal focus of its sector work in FY80 and FY81. Pricing 1.13 The control of producer, wholesale and retail prices of major crops is an important tool of the Government's development policy. Producer prices of all principal export crops except sisal and coffee, are controlled as are major food crops except vegetables, fruits, fish and eggs. MOA is responsible for formulating pricing recommendations. Its Marketing Development Bureau (which receives assistance from UNDP and IDA) carries out annual reviews of producer prices for major crops, taking into account production costs and the need for incentives to producers. MOA's recommendations are reviewed by the Agricultural Products Price Coordinating Committee, which consists of repre- sentatives from the major ministries and parastatals and then by the Economic Committee of the Cabinet, which makes the final decision on prices. F. Previous Bank Group Assistance 1.14 Previous Bank Group assistance to the agricultural sector in Tanzania has included IDA credits totalling US$165.2 million and IBRD loans for US$37 million for seventeen agricultural and three rural development proj- ects. Agricultural projects include one each for tea (para. 2.12), sugar, pyrethrum, maize, fisheries, forestry, and cotton, three each for livestock and tobacco, and two for cashewnuts and agricultural credit. Rural Development Projects have been financed by IDA in the Kigoma and Tabora regions, and lately  in Mwanza/Shinyanga region. Project Performance Audit Reports for two pro- jects (the Flue-Cured Tobacco Project and the Smallholder Tea Development Project) have recently been prepared. In both cases, the economic rate of return is satisfactory. However, implementation experience highlighted the weaknesses of the parastatals involved and the consequent need for consider- able investment in institution-building. In particular, balanced development of processing capacity and crop production has been a problem. Processing capacity has tended to outrun crop production in the Tobacco Project. In the case of the Tea Project, however, the reverse has been true. 1/ These lessons have been taken into account in the design of the Project. II. TEA SUB-SECTOR B. Background 2.01 The main tea growing districts of Tanzania are Rungwe, Njombe and Mufindi in the southern highlands, Lushoto, Amani, and Korogwe, in the north-east and Bukoba on Lake Victoria in the north-west. The oldest tea plantings dating from World War I are in the Rungwe and Njombe/Mufindi districts while those in Bukoba are of more recent origin. 2.02 Tea is grown by private estates (8,240 ha), TTA estates (1,245 ha), cooperative and mission estates (540 ha) and smallholders (8,675 ha) giving a total of 18,700 ha. Green leaf produced by private estates is processed mainly in private factories. However, some small private estates, e.g. missions, deliver their production to TTA factories. TTA has established two new estates in Bukoba and Lupembe which also supply TTA factories. In addition TTA has also acquired Bukoba estate and more recently Bulwa estate in Amani. All smallholder green leaf production is processed by TTA's four factories except that from Korogwe in the Usambaras which, because of dis- tance from the TTA factory, is processed in private factories. 2.03 Private estates which cover a planted area of 8,240 ha produced 12,000 M tons (approximately) of made tea in 1978/79 corresponding to a yield of 1,400 kg/ha. Smallholders, TTA estates and the small cooperative and mission estates, together produced 4,780 M tons of tea giving an average yield of 490 kg/ha. In 1978/79, however, only 1,700 ha or 20% of smallholder tea was over ten years old and, therefore, mature. It is expected that smallholder production will increase in the coming years as more of their plantings mature (para. 5.16). 1/ Details of experience gained from Smallholder Tea Development Project are given in Chapter II-D.  2.04 Smallholder tea, although grown as a monocrop, unlike coffee which is frequently grown in conjunction with bananas, is one of the major cash crops that a farmer grows as part of his cropping system. The standard of husbandry generally, is not comparable to estate standards but there are individual grc zrs who practice a high level of husbandry. The overall average tea holding size is estimated to be 0.30 ha but the size ranges from an average of 0.1 ha in Bukoba to 0.4 ha in Rungwe and Njombe. B. Processing 2.05 The conversion of green leaf to black tea is today usually referred to as "processing". There are six main elements in the processing cycle: withering, rolling, fermenting, drying, sorting and packing. When green leaf is plucked from the bush it contains about 77-1/2% moisture and 22-1/2% solid matter. 2.06 The object of "withering" is to remove the surface and some of the internal moisture from the leaves and transform them to a flaccid and pliant state to obviate disintegrating the leaves during rolling. The degree of "wither" varies according to the type of processing and during withering the green leaf weight is reduced to between 55% and 70% of its original weight. The harder witers (55% range) are usual in Sri Lanka, Indonesia and certain parts of India and Assam where "orthodox" rolling is carried out while in most East African countries softer withers (70% range) are used which suit the rolling function known as "rotorvane/CTC". During rolling the leaf cells are ruptured to express the juices. This in turn enables fermentation of the tannin to occur and to reduce the leaves to particles of a shape and size which, when dried, are acceptable to the tea blending trade. "Fermentation" of the juices has to be carefully controlled as it influences the flavor, strength, body and color of the liquors and also the color of the infusions. The object of drying is the extraction of the balance moisture from the leaves whereby fermentation is checked and the fermented juices are fixed to the leaf particles. To suit the requirements of the various buyers and blenders the leaf particles are sorted for size and shape, foreign matter such as fluff and fibre are removed and the finished and graded teas are packed in sealed chests for export. It is essential that factories are equipped with adequate machinery to ensure that each element of processing is in balance. 2.07 To produce teas which command good prices attention to detail at every stage of the process from plucking and transporting the green leaves to the factories right through to packing the finished product is essential. Plucking and transporting is more difficult to control with smallholder production than with estate production for a variety of reasons; distances involved, communications, road conditions, the different approach required to ensure consistent action by farmers as opposed to estate labor. Despite this it has been proven that very high standards of plucking and leaf delivery can be achieved among smallholders.  -8- C. The Tanzania Tea Authority 2.08 TTA was established by the Tea Ordinance Cap. 291 as amended by the Tea Ordinance (Amendment) Act, 1968, as a parastatal corporate body to be responsible for all aspects of smallholder tea development as well as for the functions previously exercised by the Tea Board of Tanzania. Under the guideance of the Minister of Agriculture, who appoints its Board members, TTA is empowered to: promote, supervise and implement programs for the development of the tea industry, including the supervision of planting, cul- tivation and harvesting of tea; inspect plantations and green leaf; negotiate agreements for leaf processing; organize the purchase and transportation of green leaf; participate in the establishment, control and management of tea factories; control tea marketing and act as a national marketing agent; and advise and make recommendations to the Minister on the development of the tea industry. 2.09 TTA has its headquarters in Dar-es-Salaam and four field branches which are identified and based on the four tea factories located in Rungwe (Katumba), Njombe (Lupembe), Bukoba (Bukoba) and Lushoto (Mponde). 1/ The headquarters organization at present is based on two operational departments - production and marketing; and two service departments - administration and finance/planning. Each of the departments is headed by a manager who is directly responsible to the General Manager. Each of the field branches is headed by a Tea Development Manager (TDM) who has overall responsibility for both factory and field production aspects of tea. The TDM is assisted by a staff of officers at various levels who run the administrative, extension and factory units. 2.10 TTA has been responsible for all extension services for tea. The extension staff were mainly seconded officers from the Ministry of Agriculture but working under the direct control of TTA for operational purposes. Under a recent Government ruling, however, responsibility for extension services will revert back to the Ministry but TTA has decided to retain a Senior Tea Extension Officer at each of its branches who will act as a coordinator with Ministry's tea extension staff. 2.11 Tanzania was a member of the Tea Research Institute of East Africa until mid-1978 when it decided to withdraw from the Institute. Under the Institute's research program recommendations for tea husbandry practices were based on information cbtained from trials carried out in Tanzania as well as the other East African countries. The recommendations, with general adapta- tion in Tanzania, have given satisfactory results. There is need, however, to develop specific recommendations, for the different ecological conditions in the tea growing areas within Tanzania. The Ministry of Agriculture has now assumed complete respcnsibility for all research and tea research will there- fore form part of their total research program which is being reorganized and strengthened under a proposed Agricultural Research Services Project. 1/ Names in parenthesis indicate factory locations.  - 9 - D. The First Tea Project 2.12 The Smallholder Tea Development Project (Cr. 287-TA) was part of the overall Government strategy to bring about a rapid expansion in production of selected cash crops by smallholders. The Project became effective in July 1972 and is scheduled to close in December 1980 after completion of the new factory in Rungwe (Mwakaleli). 1/ 2.13 The Project, as appraised, was to include expansion of the existing smallholder tea area of 3,272 ha by 8,300 ha and involving 14,000 smallholders in the four districts of Rungwe, Njombe, Bukoba and Lushoto; construction of two new factories and expansion of three existing factories; extension and leaf collection services; credit facilities for farmers to purchase planting material and fertilizers; construction of about 300 km of all-weather roads; and provision of technical assistance to strengthen TTA. Total Project costs were estimated at US$16.5 million of which IDA financed US$10.8 million, Norway - US$2.0 million (for part of the road program) and the Government US$3.7 million. 2.14 The Project was partly successful in meeting the physical targets set at appraisal. The roads were completed and the factories constructed and expanded although with considerable delay. Factory construction was delayed because of a shortfall in the planting program and hence in the estimated green leaf production (para. 2.15). Only 5,711 ha out of the projected 8,300 ha, i.e. 69% were planted during Phase I. The area planted includes 308 ha which TTA itself established on an estate basis. The ove-al] response in terms of farmers participation however, was well above projections (16,000 as compared to 14,000) but the average tea holding size achieved was only about half, i.e. 0.3 ha, of that envisaged. The smallholder response in terms of numbers participating and area planted varied from district to district reflecting the agricultural and socio-economic differences of the districts. 2.15 Due to a shortfall not only in the total planted area but also in yield per unit of land, the production of made tea over the period 1972/73 - 1977/78 was only about 40% of appraisal estimate. These changes in produc- tion, as compared to original estimates, introduced an element of uncertainty in the factory program which in turn resulted in inequalities in capacities of the various factory processes with a common constraint in all factories being the limited withering capacity. 2.16 The purely administrative aspects of the factories are generally satisfactory but the technical management of the factories poses serious problems due to lack of experienced technical staff. The Tea Development Managers are mostly field men and lack factory experience. There have been no factory engineers over the years and there is a serious shortage of skilled mechanics. Shortage of spare parts has also plagued the factories. The lack 1/ Name in parenthesis indicates factory location.  - 10 - of technical management expertise and supervision together with the growing problem of factory imbalances and under-capacity, has led to TTA tea prices in international markets being lower than their potential. The imbalances in the various factory processes need to be rectified as well as additional factory capacity provided for processing the increasing production of green leaf as the tea plantings mature. 2.17 In the initial years of the Project, TTA's management was weak. Staff were inexperienced and there was a lack of coordination and supervision of branches from headquarters; overstaffing was particularly serious in extension services; there was lack of factory supervision; there was poor supervision and maintenance of green leaf collection vehicles. The capability and performance of TTA has gradually improved as local staff have accumulated experienced and expertise. Expatriate staff have played an important role in bringing about this improvement. There is need, however, to strengthen still further TTA's management capabilities, particularly in factory management and processing. The level of management at the branch levels needs to be raised by providing for staff of a higher calibre and training. 2.18 Until recently, TTA's major sources of funds have been (i) sales of tea planting material, (ii) cess on all made tea manufactured in Tanzania, 1/ (iii) minor income from rents, dividends, etc., (iv) loans from Government and TRDB, and (v) Government grants. Sales of planting material provided a subs- tantial revenue during the start-up phase of the Project but has declined in importance as plantings were completed. Government grants accounted for 65.7% of TTA's total income ,ver the period 1972-77. 2.19 In 1977, the Katumba, Lupembe, Bukoba and Mponde Tea Factory Com- panies were dissolved and their assets and liabilities transferred to TTA. The factories are now operating as TTA branches under TTA management. As all factories have consistently made losses, TTA has not received any income from their operations. While TTA had a retained income of TSh 9.6 million at June 30, 1977, of which TSh 5.7 million was in net current assets, TTA's cash position has in the meantime deteriorated to an overdraft of TSh 16 million. Tanzania's decision in 1977, not to make use of the auction facilities at Mombasa, aggravated TTA's liquidity problems since sales of TTA teas on the London auction take about three to four months longer than at Mombasa. In FY77/78, TTA made a loss of TSh 7.7 million. The main cause for the loss were the poor operating results of the factories which generated a combined operating profit of TSh 1.2 million only, while TTA's overhead costs amounted to TSh 18.3 million. The three major overhead cost items were administrative expenses, extension services, and interest on loans. While possibilities of savings in administrative and interest expenses are rather limited, the transfer of extension service costs (TSh 5.0 million) to MOA will reduce overheads considerably. But the relevant avenue for improving TTA's finan- cial position in the future is to increase the operating profit from its factories. 1/ 2.5% on made tea f.o.b. price on all tea manufactured by private estates (excluding TTA factories) in Tanzania.  - 11 - 2.20 There are serious limitations to carrying out a meaningful finan- cial analysis of TTA's consolidated accounts. The real value of the assets of the former factory companies taken over by TTA in 1977 (para. 2.19) have not yet been fully ascertained and are based only on the book value at date of take-over. TTA is presently revaluing all assets and during negotiations advised that its audited accounts for 1979 would be available by December 31, 1980. E. Tanzania Tea Markets and Prices 2.21 Total Tanzania tea production in 1977 was 16,730 tons or 0.9% of world output. Twelve thousand (12,000) tons were exported, and earned an equivalent of TSh 177.8 million in foreign currency, which accounted for 4% of total export earnings. The major country of destination was the UK, with a share of 78.9%, followed by the Netherlands, Canada, and Pakistan. Total Tanzania tea production for 1985 is estimated at 25,000 tons, which would account for 1% of projected world production of made tea. 2.22 Since Britain is the world's largest tea importer/exporter, the London auction provides the leading price indicator in the world market. In all years from 1974 to 1977 the annual average London auction price for Tanzania tea was above the all tea average. It was only between 0.4% (in 1976) and 7% (in 1974 and 1977) lower than the Kenya tea which realized the highest annual average price of all tea producing countries. As compared to all African countries, Tanzania tea ranked second to fourth among eleven countries. During 1978 and 1979 the position of Tanzania tea has slightly deteriorated, and its annual average price fell almost 1% below the all tea average and 10% below the Kenya price. Although it is difficult to isolate causes, it is obvious that the extremely poor sales performance of individual factories, such as Bukoba, which realized an average price 20% below all London average, contributed strongly to the overall decline. 2.23 TTA's tea production at the project tea factories was 4,000 tons in 1977, which is 24% of the national production. TTA's tea was sold through four different channels: London auctions (51%), Mombasa auctions (9%), direct sales (11%), and local pool sales (29%). Mombasa sales were smaller in 1977 than in previous years, when they ranged between 25% and 40%, because the border to Kenya was closed in mid 1977. Since then TTA had to reschedule its sales by increasing London auction and direct sales. During the 1978/79 season 53% of TTA's tea was sold at the London auctions, 25% were direct sales, and the remaining 22% were supplied to the local pool. As all tea planted under the first phase Project matures, smallholder production will increase to 8,000 tons by 1985, which would account for 35% of the projected national tea production. 2.24 In competition with tea supplies from as many as ten private estates in Tanzania a TTA factory realized the highest price on 30 of 46 weekly London  - 12 - auctions in 1977; on 14 auctions a TTA factory ranked second. However, due to a mixed performance of all four TTA factories (para. 2.22) the annual average price of TTA tea was about 3% below the average private estate price. At the Mombasa auctions, Tanzania tea did not sell comparatively as well as in London. First, the best teas are shipped to the London market where quality is fully recognized while the Mombasa auctions sell more tea of intermediate quality, catering to the needs of countries not buying at the London auctions (Middle East and Persian Gulf countries, for example); prices are, therefore, generally not as high as in London. Second, Tanzania tea on the Mombasa auctions from 1974 and 1977 sold at annual average prices between 9% (1975) and 32% (1977) lower than Kenya tea, a considerably larger price differential between these two countries than on the London auctions. Also in TTA's direct sales, since the closure of the Tanzania-Kenya border, much lower prices than from London sales have continued to be realized. In the 1978/79 season, the Dar-es-Salaam f.o.b. price for direct sales of TTA's two best factories, Katumba and Lupembe, was 18% below the Dar-es-Salaam f.o.b. price for London sales from these two factories. The price for the local pool sales is fixed by the GOT and the retail price by the National Pricing Commission in consul- tation with the Tanzania Tea Blenders (para 6.05). At TSh 10/kg in 1978/79 it was about TSh 2.20 below the export parity price of Tanzania tea. III. THE PROJECT A. General Description 3.01 The Project would, over a five-year period (1980-84), concentrate on consolidating ongoing TTA operations and have the primary objective of providing additional processing facilities to cater for the expected green leaf production from all smallholder tea plantings including those established under the first phase project (IDA Credit 287-TA). The Project activities would aim to (i) strengthen TTA's capacity to handle the increasing amount of green leaf produced; (ii) maximize the production benefits of smallholders in those areas where there are no equally rewarding farming activities available; (iii) put TTA in a financially viable position during the Project period; and (iv) increase Government's export earnings from the tea industry. Contrary to the first phase Project with its major emphasis on tea planting, this Project would finance only a marginal tea planting program of about 200 ha of new plantings to ensure full utilization of the factories. The Project would comprise of the following components: (a) The construction of one new factory at Ukalawa; the completion of the Mwakelili factory as a four dryer factory; extending and re-equipping the existing factories at Kabumba, Lupembe, Bukoba and Mponde 1/ (US$6.3 million); 1/ Location of factories is as follows: Katumba, Mwakeleli-Rungwe district; Lupembe, Ukalawa-Njombe district; Bukoba-Bukoba district; Mponde-Lushoto district (see Maps).  - 13 - (b) Provision of additional green leaf collection vehicles; spare parts to put repairable vehicles in working order; transport facilities for both the factories and TrA Headquarters (US$2.8 million); (c) The establishment of fuelwood plantations to substitute wood for oil to operate the factories (US$0.5 million); (d) A tea planting program of an additional 200 ha in Njombe and a total of 630 ha infilling 1/ in three of the four tea areas, provision of credit to project growers for the purchase of planting material and fertilizers (US$1.2 million); (e) Purchase of two warehouses in Dar-es-Salaam (US$0.3 million); (f) Construction and maintenance of 176 km of tea roads (US$2.9 million); (g) Continued financing of foreign experts already employed under the first phase; additional technical assistance and staff to strengthen engineering and management aspects of factories (US$1.5 million). 3.02 Investment costs in support of TTA's processing capacity would total 73% of Project costs, road construction costs would total 19% and 8% would be designated for production support. TTA would be responsible for the implemen- tation of all Project components except road construction and maintenance, which would be implemented by the Regions. TRDB would provide credit to farmers for purchase of planting material and fertilizers through existing village accounts. B. Detailed Features Factory Construction and Rehabilitation 3.03 In order to process the increasing production of tea green leaf and to rectify the present factory shortcomings, the following specific measures are proposed: 3.04 Katumba: Withering area would be extended. A new ballbreaker, fermenting trolleys, improvement of the steam installation, steam connections for the fourth drier, and electrical transformer and machinery spares would 1/ Filling of gaps in existing planted areas.  - 14 - also be provided. 1/ In years 1 and 2 of the Project a new coal-fired boiler, a monorail conveyor system, additional rolling room equipment and workshop facilities would be provided. TTA has already started to convert the Katumba factory from oil to coal firing though it is still uncertain whether the coal supply from Ilima colliery would be sufficient to meet the total require- ments of the Katumba and Mwakaleli tea factories as well as the Mbeya Cement Plant and other factories. The disbursement of funds for the coal-fired boiler for the Katumba factory is contingent upon the Government having made arrangements satisfactory to the Association to ensure the allocation of sufficient quantities of coal to the factory. 3.05 Mwakaleli. This factory was constructed and only partially equipped under Phase I due to delays and cost over-runs. Additional withering troughs, rolling room equipment, sorting and packaging room equipment and factory tools would be installed. 1/ The remaining machinery including two driers to complete the factory to a four dryer factory would be installed during years 1, 2 and 3 of the Project. It is a condition of disbursement against the funds for the driers that Government ensures the allocation of sufficient quantities of coal to Mwakeleli. 3.06 Lupembe. Because of site and existing building design limitations, expansion would be limited to the construction of a mezzanine floor in the withering section. 1/ Additional withering troughs, fermenting equipment, dryer conveyors, sorting room machinery and workshop equipment would be installed. The sorting room machinery would be rearranged to improve the flow of made tea and relievE the packing room congestion. Work would be carried out in years 1 and 2 oi the Project leaving only a part of the withering section roof to be replaced in year 3. 3.07 Ukalawa. The existing Lupembe factory would be able to process about 5.4 million kg green leaf but production from existing tea areas is expected to reach 8.6 million kg green leaf by 1984/85. A new factory would, therefore, be constructed at Ukalawa to process the excess leaf. This new factory would be constructed during years 1 and 2 of the Project and equipped as a two dryer factory. Space would be available for the installation of a third dryer if this is found necessary at a later date. 3.08 Bukoba. This factory would be improved by installing additional withering troughs and rolling room equipment. The remaining factory improve- ments comprising of additional withering throughs and fans, building extension and spares would be phased over years 1, 2 and 3. 1/ Due to urgent need, part of the requirements, using IDA guidelines, have been procurred for which retroactive financing is recommended (para. 3.33).  - 15 - 3.09 Mponde. The withering facilities would be improved on an urgent basis by the installation of mezzanine floor and additional troughs and fans. Two wood burning stoves purchased in Phase I are now being installed. Another packer would be urgently installed. Additional witheLing troughs, roling room equipment, conversion of existing boilers to operate on firewood, made tea bins, spares and workshop machinery would be provided in years 1, 2 and 3 of the Project. 3.10 During negotiations assurances were obtained that appropriate provision would be made through regular budgetary procedures of TTA for the proper operation and maintenance of the factories. Vehicles, Trucks and Tractors 3.11 Green Leaf Collection. An additional 28 7-ton lorries and 18 tractors with trailers would be purchased to handle the increasing quantity of leaf as plantings mature. The tractors would be used for collection of leaf from centers located near the factory while lorries would cover the more distant routes. TTA, in cooperation with village committees, would work out detailed leaf collection schedules. Assurances were obtained during negotiations that provision would be made for adequate maintenance of vehicles and supply of spares and that TTA would establish sound operating and recording procedures to ensure that the vehicles are used efficiently. TTA staff would ensure that only leaf of the desired standard, i.e. a bud and 2-3 leaves, is purchased, overloading of leaf transport vehicles is avoided, and delivery to the factory is done expeditiously. 3.12 Other Transport. One four-wheel drive vehicle would be provided for each of the two new factories, Mwakaleli and Ukalawa, and one for each of the two expatriate Resident Engineers to be stationed at Katumba and Lupembre (para. 3.23). To improve head office supervision over the factories, nine cars would be provided for the use of the General Manager, his six executive officers, and the two expatriates. To ensure that vehicles operating costs (including maintenance and repair costs) are kept to a minimum, assurances were obtained during negotiations that TTA would establish operating and recording procedures to ensure that the vehicles are used efficiently. TTA's transport officer would provide close supervision to ensure that the procedures would be adhered to. Fuelwood Plantations 3.13 The Bukoba and Lupembe factories already operate on fuelwood and Mponde factory is being converted from furnace oil to fuelwood. In Bukoba firewood is purchased from the Forest Department and neighboring estates. The Lupembe factory purchases wood from a commercial company at Njombe and tran- sport costs are high. The same would apply to Ukalawa when it starts operating. 3.14 The establishment of TTA's own eucalyptus plantations would assist in further Seductions in fuel costs. Based on an estimated firewood require- ment oi 1 m per 150 kg of made tea, and on fuelwood plantation yield of 17.5 m /ha/p.a. on a 8-year coppice cycle, a 400 ha fuelwood planation would be required for each of the factories at Lupembe, Ukalawa and Bukoba, and  - 16 - 500 ha for the Mponde factory giving a total requirement of about 1,700 ha. TTA has already established 100 ha at Mponde, the balance of 1,600 ha fuelwood plantations would be established under the Project. Land for establishing the plantations has been identified in these areas. The establishmert of a fuelwood plantation in Bukoba is, however, subject to a soil survey being carried out to establish the suitability of the proposed site. A full report, on the site or alternative sites, if necessary, would be submitted to IDA for its comments, not later than December 31, 1980 and prior to establishment of the plantation. Planting Program 3.15 The minimum economic size of the new Igoga factory would be a million kg made tea, equivalent to 4.7 million kg green leaf. The existing plantings in the area would provide an estimated 3.2 million kg green leaf, at maturity (para. 3.07). To ensure full utilization of the Ukalawa factory, the Project would, therefore, finance an additional 200 ha which will be planted by smallholders in years 1 and 2. Existing farmers whose tea plantings are less than 0.4 ha and new farmers would participate. TTA would produce plant- ing materials in its own nurseries for sale at'cost plus'to farmers and would ensure that only healthy and vigorous plants are supplied. Fertilizer at the recommended rates would also continue to be supplied on credit by TRDB, for the first two years as capital loan, and thereafter as seasonal credit, and repaid by farmers through the general levy of TSh 0.40 per kg green leaf, while TTA would be directly reimbursed for its nursery costs. 3.16 An infilling program covering an equivalent of 630 ha would be carried out with Rungwe undertaking 450 ha and Njombe and Lushoto doing 90 ha each. Planting material and fertilizer would be provided on the same prin- ciple as for the new planting. 3.17 Present factory and planting investments would result in the most economic utilization of the proposed factory network. Any further expansion of tea areas resulting in additional production would result in either lower- ing of tea quality standards or inability to process the grean leaf. Assur- ances were obtained during negotiations that the Government would not undertake any additional plantings without having made arrangements for additional processing facilities. Warehouses 3.18 To improve storage facilities of tea prior to shipment and to reduce storage costs TTA would acquire two warehouses at Dar-es-Salaam. Road Construction and Maintenance 3.19 The Project would finance the construction and maintenace of 176 km of selected tea roads. Of this, 51 km would be in Rungwe, 19 km in Bukoba, and 53 km each in Lushoto and Njombe. The roads would supplement the road  - 17 - network of 300 km constructed under Phase I, and the same technical specifica- tions would apply: 7.5 m width between centers of side drains; barreled cross-section, center line level minimum 40 cm above invert of side drains, and gravel or crushed stone surface of 3 m width with a minimum thickness of 10 cm. The roads would be maintained to ensure that they are passable in all weather. 3.20 The Regions would be responsible for tea road construction and maintenance. Equipment and technical assistance (para. 3.24), would be provided under the Project to establish a road construction unit at Njombe (Iringa Region). Provision for spareparts would be made to rehabilitate the existing construction unit at Bukoba. At Rungwe (Mbeya Region and Lushoto (Tanga Region) NORAD would continue to provide both technical and financial assistance for road works under an existing agreement between Government and NORAD which includes the proposed tea roads in these two areas in the Region/NORAD work program. 3.21 Assurance were obtained during negotiations that the work program for Njombe would be forwarded to IDA for review not later than March 31 pre- ceding the start of the Government fiscal year to which the work program relates. Technical Assistance 3.22 The Project would continue to finance the present expatriate Chief Engineer position at TTA headquarters for a further three years and the present expatriate Factory Superintendent position for a .'urther four years (Chart C-2). The Chief Engineer would plan and implement the factory cons- truction work program proposed under the Project. In particular he would organize the construction of the Ukalawa factory and complete the construction of Mwakaleli factory. The Factory Superintendent, in liaison with the Market- ing Manager would stipulate the grades of made tea required and supervise the manufacture of tea in each factory. During negotiations assurances were obtained that both positions would remain filled with qualified personnel. In case of a change in staffing the replacement would be appointed after consultation with IDA. 3.23 In addition, two internationally recruited Resident Engineers would be appointed after consultation with IDA, for the full Project period, one for the Rungwe area and the other for the Njombe area (Chart C-2). The Resident Engineers will be responsible for the day-to-day smooth running of the two factories and vehicles in their respective areas. They will also inspect quarterly the maintenance and repairs of Bukoba and Mponde Factories. With respect to the construction of the new Ukalawa factory and the completion of Mwakaleli factory the respective Resident Engineer would report to the Chief Engineer while at the same time keep the Factory and Branch Manager informed. 3.24 Two expatriate engineers, a mechanical engineer and a construction engineer, would be employed for a period of two years each to assist the Regional Authority at Njombe in the road construction and maintenance program. The appointment of the engineers would be made not later than December 31, 1980 and their qualifications, experience, and terms and conditions of employ- ment would be satisfactory to the GOT and IDA.  - 18 - 3.25 The Project would also provide for a total of six man-months of short-term consultancy to assist and advise TTA in reviewing and further improving its management system, organizational structure, standard of tea manufacture and crop husbandry. This proposal was discussed during negotia- tions and an assurance obtained that consultants would be engaged on terms and conditions satisfactory to IDA, if a determination is made by TTA and IDA that such consultants are required. Implementation Schedule 3.26 A Chart showing the anticipated rates of implementation of the various Project components is at Chart C-1. C. Project Costs 3.27 The total costs of the Project would be TSh 166.2 million (US$20.0 million), of which US$11.4 million (57%) represents the foreign exchange costs. The costs include about TSh 2.2 million (US$0.26 million) of taxes and duties on vehicles. The phasing of Project costs is given in Table T-1 and detailed costs for each component are presented in Tables T-la to T-lh. 1/ Project costs are summarized below: Foreign Base Local Foreign Total 1/ Local Foreign Total 1/ Exchange Cost -- ---- TSh '000 ------- ------- US$ '000 ------- % % Factory Construction and Rehabilitation 21,529 30,398 51,926 2,594 3,662 6,256 59 40 Vehicles, Trucks and Tractors 4,720 18,614 23,334 569 2,243 2,811 80 18 Fuelwood Plantations 4,096 216 4,312 494 26 520 5 3 Planting Program 7,269 2,726 9,996 876 328 1,204 27 8 Warehouses 2,500 - 2,500 301 - 301 - 2 Road Construction and Maintenance 5,639 18,295 23,933 679 2,204 2,884 76 19 Technical Assistance 207 3,940 4,147 25 475 500 95 3 Incremental Staff 8,606 - 8,606 1,037 - 1,037 - 7 Total Baseline Cost 54,566 74,188 128,754 6,574 8,938 15,513 58 100 Physical Contingencies 3,467 7,038 10,505 418 848 1,266 67 8 Price Contingencies 13,187 13,725 26,912 1,589 1,654 3,242 51 21 Total Cost 71,220 94,952 166,172 8,581 11,440 20,021 57 129 Total Cost Net of Taxes and Duties 69,090 94,952 164,042 8,324 11,440 19,764 58 127 1/ Differences in totals are due to rounding.  - 19 - 3.28 Project costs have been estimated on the basis of prices expected in March 1980. Factory cost estimates have been based on actual bids. Physical contingencies of 10% have been added to all costs except TTA's technical advisers and incremental staff. Price contingencies have been included at following rates: machinery, equipment, vehicles and fertilizer at 10.5% to 1908/91: 9.0% 1981/92; 8.0% in 1982/83 and 7.0% thereafter. Local equipment and staff costs at 11% in 1980/81, 10% in 1981/82 and 9% thereafter; inter- nationally recruited staff at 10% in 1980/81 and 9% thereafter; civil works at 12% in 1980/81 and 1981/82, 11% in 1982/83, 10% in 1983/84 and 9% in 1984/85. The high price contingencies on civil works are based on the assumption of an increasingly high pressure on construction industry capacity in Tanzania. Price contingencies total 21% of Project baseline costs. 3.29 Included in the costs is a provision for 6 internationally recruited staff (paras. 3.22-3.24) who would provide 252 man-months of service to the Project at an estimated total cost of US$690,000. This estimate is based on a range of salaries (inclusive of basic salary, travel and subsistence) from US$24,000 to US$70,000 p.a. 3.30 In addition, Project costs also provide for a total of six man-months of short-term consultancy at an estimated total cost of TSh 498,000 (US$60,000). The average cost per man-month (salary, fee, travel and subsistence) is esti- mated at TSh 83,000 (US$10,000). D. Financing 3.31 The financing of Project costs, net of taxes and duties, would be as follows: US$ Million % IDA 14.0 71 NORAD 1.6 8 Government of Tanzania 4.2 21 Total 19.8 100 3.32 The proposed IDA credit of US$14.0 million would be on standard terms to the Government of Tanzania. The credit would cover 89% of the foreign exchange costs of the Project (US$10.2 million). NORAD has agreed to finance the road components at Rungwe and Lushoto; this would cover the remain- ing 11% of the foreign exchange costs of the Project (US$1.2 million). In  - 20 - addition, the IDA credit would cover 45% of local costs, which together with the foreign exchange financing gives IDA a share of 71% in total Project costs financing. NORAD's financing of local costs is estimated at 4.8%. GOT would finance the remaining US$4.2 million, net of taxes and duties. 3.33 As the Project is a continuation of an ongoing program, and tea factories are already overloaded due to the delay in expanding processing capacity and increasing green leaf production from tea holdings, retroactive financing to a total amount of US$1.0 million to cover payments made by GOT after July 1, 1979,is recommended for factory construction and equipment to ensure an effective and early execution of the Project so that all green leaf is processed and the quality of made tea improved (paras. 3.04-3.09). 3.34 GOT funds for the supply of fertilizer and planting materials to farmers on credit (TSh 6.5 million, including contingencies) would be channeled through TRDB. Farmers would repay the loan from year 4 onwards out of the levy of TSh 0.40 kg 1/ green leaf, which is being collected from all tea growers. Credit funds and GOT contributions for the road component (TSh 18.1 million, including contingencies) would be channeled to the Regions of Iringa and West Lake through budgetary allocation. The remainder of credit funds and GOT contributions (TSh 125.0 million, including contingencies) would be onlent by GOT to TTA for a period of 28 years, including 8 years of grace, at an annual interest rate of 10%, which is currently the interest charged by GOT to parastatal borrowers. These terms and conditions of the financing plan would be discussed at negotiations. Completion, in a form satisfactory to IDA, of a subsidiary loan agreement between GOT and TTA would be a condition of effec- tiveness of the credit. E. Procurement 3.35 Procurement under the Project would be in accordance with Bank/IDA guidelines. TTA staff are fully conversant with the procurement guidelines and no problems are anticipated in this regard. For specific items, following guidelines would apply: 2/ (a) orders for tea processing machinery and equipment (US$3.5 million), vehicles and spare parts (US$3.5 million), road equipment and spare parts (US$1.2 million), would be bulked as far as practicable, and orders of US$100,000 and above would be procured through international competitive bidding; 1/ TSh. 0.15 towards medium term development loan and TSh. 0.25 towards seasonal funding of inputs. 2/ This includes items for retroactive financing (para. 3.33).  - 21 - (b) orders for machinery, equipment and vehicles below US$100,00 would be procured in accordance with existing local procedures which are satisfactory; however, these orders would not exceed US$300,000 in aggregate; (c) contracts for the construction of buildings (US$4.2 million) would be too small and scattered to attract international interest. Procurement would therefore be by contracts awarded following locally-advertised bidding; foreign firms would be entitled to compete if interested; (d) the nursery program (US$0.7 million), the establishment of fuelwood plantations (US$0.8 million) and the construction and maintenance of roads (US$0.6 million) would be executed by TTA and Regional Authorities on force account. TTA has already acquired the necessary expertise during Phase I and, therefore, would be able to provide efficient and economic execution. The nurseries would be phased out in the fourth Project year; (e) the selection and employment of consultants to provide technical assistance to TTA (US$0.7 million) and to the District Road Engineer at Njombe (US$0.3 million) would be on terms and conditions acceptable to GOT and IDA. Draft tender documents for all contracts expected to cost in excess of US$100,000 would be submitted to IDA for approval before bid invitations are issued, and bid analysis and recommendations for award would be submitted to IDA for comment before contracts would be awarded. In the evaluation of bids for (a) above, bonafide domestic manufacturers would be accorded a preference of 15 percent or the existing rate of duty, whichever is lower. Assurances were obtained during negotiations that the procurement procedures outlined above would be followed. F. Disbursement 3.36 Disbursement of funds from the Credit would be on the following basis: (a) 100% of the foreign exchange cost of tea processing machinery and equipment, vehicles, road equipment, spare parts, and 85% of local costs when these are purchased locally (US$5.0 million); (b) 80% of the costs, of construction of factory buildings, building extensions, and houses (US$3.0 million);  - 22 - (c) 100% of the foreign exchange costs and 85% of the local costs of internationally recruited personnel and consultancy services (US$1.0 million); (d) 80% of the local costs of road construction (other than internationally-recruited staff costs) in Njombe and Bukoba (US$0.5 million); (e) 80% of the salaries of incremental local staff employed by TTA (US$0.8 million); (f) 80% of the costs of establishing fuelwood plantations and tea nurseries (US$1.0 million); (g) 70% of vehicle operating costs (US$1.0 million); and (h) an unallocated amount of US$1.7 million, representing contingencies on the above categories, and transferable to them as required. 3.37 All disbursement under (a), (b) and (c) would be against contracts and hence, fully documented. Disbursements against (d) would be on the basis of certificates of expenditure signed by the Regional Roads Engineers. Disbursements against (e), (f) and (g) would be on the basis of certificates of expenditure signed hy the General Manager of TTA. For disbursements for local costs against (ei, (f), and (g), supporting documents would be retained for inspection by supe.-vision missions. Funds remaining in the Credit at Project completion would be cancelled, unless otherwise agreed to by IDA. A schedule showing the estimated pattern of disbursements under the Project is presented in Table T-6. G. Accounts and Audit 3.38 Separate accounts relating to expenditures under the Project would be kept by TTA. TTA's accounts are presently satisfactorily audited by the Tanzania Auditing Corporation. Audited financial statements for the years up to June 30, 1978, have been submitted to IDA and are satisfactory. Assurances were obtained during negotiations that TTA's accounts would continue to be audited by independent auditors acceptable to IDA, and that such audited accounts would be submitted to IDA within six months of the end of each financial year. The auditors would specifically review and comment on the procedures used for control of disbursement against statements of expenditure. Assurances were also obtained at negotiations that TTA would submit quar- terly financial statements together with a progress report within six weeks of the end of each quarter.  - 23 - H. Environmental Effect 3.39 The Project is not expected to have any measurable adverse impact on the environment. The tea factories will not be discharging any effluents which could pollute the area. TrA and Extension staff will encourage farmers to follow recommended husbandry practices in order to reduce soil erosion to a minimum. IV. ORGANIZATION AND MANAGEMENT A. Headquarters 4.01 TTA has undertaken, at the Bank's request, a study of its management performance and future requirements. The study recommended decentralizing most of TTA's day-to-day management responsibilities to its field Branches and for two main reasons. Firstly, most of TTA activities are carried out at the Branches rather than at HQ. Secondly, the Branches are located in remote areas and this, linked with the country's poor communications system, provides a strong argument for reasonable autonomy at the Branch level. The one exception is the marketing activities which will continue to operate from Headquarters. Subsequent discussions between TTA and the Bank have resulted in an agreement to further improve the TTA management structure. Details of the proposed TTA organizational set up at Headquarters and at the Branch offices is shown in Chart C-2. Assurances were obtained during negotiations that the vacancy created by the transfer of the incumbent General Manager to head another parastatal, would be filled early. The appointment of a new General Manager would be a condition of Project effectiveness. 4.02 With the decentralization, TTA's headquarter operations would become one of policy planning, monitoring and evaluating, marketing, and programming. It is estimated that out of the present 93 staff, 53 would be retained. An incremental 12 staff would be appointed bringing the total number of headquarters staff to 65 (Table T-lh). TTA would continue to manage its operations with two operational departments--the Marketing Directorate and Operations Directorate but with three rather than two service departments Finance Directorate, Manpower Development Division and an Audit Division. 4.03 The Finance Directorate is headed by a Financial Director, and he would have three divisions reporting to him: Administration, Planning and Accounting. The first two divisions require new Heads. TTA indicated during negotiations that they would consult IDA before appointment of the Head of Planning (Senior Economist). The Head of the Administration Division would be the Company Secretary. The financial accounts section within the Accounting Division requires a new head, and as indicated by TTA during negotiations the appointment would be made in consultation with IDA.  - 24 - 4.04 The Marketing Directorate is headed up by a Marketing Director whose appointment was also approved by IDA during Phase I. He has two divi- sion managers reporting to him: The Shipping Manager and the Marketing Manager. Additional key staff are not required. 4.05 The Auditing Division would now be a separate unit with the Head of the Division reporting directly to the General Manager. 4.06 The Manpower Development Section is responsible for recruitment and staff development programs. The manager would report directly to the General Manager. 4.07 The Operations Directorate is to be headed up by an Operations Director. A suitable candidate would be appointed not later than March 31, 1981, after consultation with IDA. The Director would be responsible for (a) all Branch Managers who would report to him direct, and (b) the advisors, i.e. Factory Superintendent and Chief Engineer. B. Branches and Factories 4.08 In order to achieve effective decentralization, it would be neces- sary to upgrade the level of staff particularly at the field level, with particular emphasis on the financial and managerial aspects of Branch opera- tions. It would call for Branch Managers to be supported by Department Heads of sufficient experience to run their activities without too much dependence on headquarters. TTA has submitted an application to SCOPO to upgrade its status, and the salary grades of staff, to enable it to attract staff of a higher caliber particularly at the Branch level. Assurances were obtained during negotiations that Government would take all necessary action so that by December 31, 1980, TTA's status as a parastatal organization shall have been upgraded. 4.09 Factory management, engineering and supervision would be strength- ened. At present the four TTA factories are managed by factory managers who depend on (senior) technicians for the operation of the factories under their control. To ensure that the proposed factory improvements are carried out properly and that factory technicians are properly trained in preventive maintenance procedures, two expatriate Resident engineers would be engaged, one each for the Rungwe and Njombe areas (para. 3.23). C. Fuelwood Plantations 4.10 The establishment of additional fuelwood plantations in Bukoba, Njombe and Lushoto would be under the charge of Tea Extension Managers who are senior agricultural officers.  - 25 - D. Roads 4.11 During Phase one, NORAD was responsible for the construction and maintenance of tea roads in the Lushoto and Rungwe areas. This arrangement would be continued under this Project. 4.12 In Bukoba, the Regional Engineer would be responsible for the construction of the additional 19 km of roads. 4.13 In the Niombe area technical assistance would be provided to strengthen the Regional authorities. Two internationally recruited staff--a Mechanical Engineer and a Construction Engineer--would be engaged for two years to implement the proposed construction and maintenance program (para. 3.24). During negotiations assurances were obtained that the Government would make appropriate provisions through the regular budgetary procedures of the Region to carry out the proposed work program. E. Monitoring and Evaluation 4.14 Monitoring and evaluation of the Project would provide an important management tool to TTA and MOA and form an integral part of the plan to achieve improved performance. The Head of Planning (Senior Economist), in cooperation with PpMB, would be responsible for monitoring and evaluation. The Head of Planning would submit detailed quarterly reports on the physical implementation of the Project and the use of funds, to the General Manager of TTA, and through him to the Principal Secretary of Kilimo, and to IDA. Information on the progress of the roads component would be made available to TTA by the Regional Roads Engineers. Particular attention would be paid in these reports to: (a) the progress of the factory construction and rehabilitation component, in terms of factory buildings constructed and extended, tea machinery and equipment procured and installed; (b) progress in the procurement of vehicles related to green leaf collection; (c) progress in the establishment of fuelwood plantations; (d) progress of the tea planting component, in terms of growers recruitment, nursery development, supply of planting materials and fertilizer; (e) progress in the procurement and delivery of roads equip- ment, and the Region's progress in road construction and maintenance;  - 26 - (f) progress in the recruitment of Project financed staff; (g) analysis of green leaf collection costs, tea manufacturing costs, selling and administrative expenses; (h) analysis of tea sales; (i) analysis of any other financial data, policy or price changes, overdraft facilities, etc. affecting TTA's financial position; (j) progress made by TTA toward becoming financially viable; (k) statistics of crops harvested compared with TTA estimates together with rainfall over the period and comments on any variations from the TTA estimates. Assurances were obtained during negotiations that these reporting procedures would be followed. 4.15 Within six months of the completion of disbursements, TTA would prepare and submit to IDA a Project Completion Report, analyzing the imple- mentation of the Project and its impact in relation to its objectives. During negotiations, assurances were obtained to this effect. V. TEA PRODUCTION AND PROCESSING A. Production - Technical Features 5.01 The main tea growing areas of Tanzania (para. 2.01) are at altitudes of between 1,000 and 1,700 m and are widely separated from one another and differ ecologically as well as socio-economically. 5.02 Rainfall in all areas is generally adequate for tea production. Annual averages range from 1,400 mm in Lus'aoto in the Usambara Highlands to 2,600 mm in Rungwe. Rain normally falls every month although a definite rainy season occurs from November through May. Rungwe and Njombe experience dry season from June through October while Usambara, which has a bi-modal pattern has its dry seasons in July-September and December-January. Leaf production during the drier seasons is considerably lower. Occasional frosts particularly in the Njombe area, cause damage to the tea bushes. 5.03 Soils in all areas are generally suitable but in two areas soil conditions give rise to some difficulty in the establishment of growing tea bushes. In Bukoba the soils are loose and friable with low humus content and consequently period it is necessary to mulch between tea bushes until a cover is formed by the tea bushes themselves. Due to numerous rock out-crops and considerable variation in subsoil depth, careful selection of tea areas is  - 27 - required. In Rungwe, the problem arises from the layer of volcanic pumice to be found at varying depths below the surface. Until the tea roots have penetrated this layer into more fertile soils below, growth tends to be retarded. 5.04 Topography differs markedly among the tea growing areas. In the Usambara mountains and in parts of the Njombe area of the southern highlands, slopes are steep. In Rungwe, although the terrain is mountainous, the cul- tivated hillsides are generally more gently sloping. In Bukoba, the land is gently undulating to flat. Soil conservation measures are necessary in all areas but once the tea bushes are established soil erosion even on the steep- est slopes, is reduced considerably. 5.05 A large number of smallholders have been cultivating tea for some years now, and, therefore, are conversant with the general husbadry practices. All tea growers receive fertilizers as part of the present credit scheme. Certain aspects of tea husbandry, e.g. pruning, could be improved upon but no marked improvements in husbandry practices are envisaged during the Project period. Extension efforts which are now the responsiblity of Kilimo, would be geared to prevent slippage in present husbandry standards. Kilimo would retain the existing extension staff in the tea growing areas and the TTA extension coordinator in each area would work closely with Kilimo staff. 5.06 There has been a gradual improvement in yields largely due to maturing of bushes but also because of improved husbandry. In 1973/74 only 2% of the smallholdings were mature (10 years and over) and by 1980/81, 31% of the holdings would attain maturity. On the basis of age of bushes and current production levels it is estimated that at maturity average yields of made tea would range from 600 kg/ha in Bukoba to 1,000 kg/ha in the Njombe are (Table T-9). B. Production - Farmers' Benefits 5.09 The Project is designed essentially to strengthen the factory aspects of TTA. The small component of 200 ha of additional tea plantings in the Njombe area is included to provide sufficient green leaf to the Ukalawa factory. Each farmer participating in the project would receive material to plant about 0.4 ha. The supply of planting material as well as fertilizer would be on credit and deductions would be made from his grean leaf sales at 40 cents per kg. 5.10 There is a strong demand from farmers to plant tea and the Regional authorities and TTA are highly confident of achieving the planting of the 200 ha. The existing tea growers in all the tea regions would also benefit by the improvements and expansion in factories and their management by being assured of a reliable outlet for their increasing green leaf production.  - 28 - 5.11 The net income that a farmer would earn from his 0.4 ha of tea in the Njombe area is shown in Table T-10. His earnings per manday increase from TSh 2.5 in the third year from planting when plucking first commences to TSh 21.0 at maturity. An average family of 6 persons (4 adult equivalents) would have adequate labor resources to provide the 104 mandays of work per annum required for 0.4 ha of tea, in addition to operating its existing farm enterprise which consists mainly of cultivating subsistence crops like maize and beans (Tables 11, 12, 13). 5.12 The net returns from mature holdings in the Rungwe, Njombe, Bukoba and Lushoto areas are shown below: Rungwe Njombe Bukoba Lushoto Holding size (ha) 1.0 1.0 1.0 1.0 Yield green leaf (kg) 4,500 5,000 3,000 4,000 Net Returns (TSh) 4,910 5,460 3,260 4,360 Returns per manday (TSh) 18.9 21.0 12.5 16.8 5.13 The returns per manday from mature tea are attractive (except in Bukoba) and exceed those from coffee (TSh 12.0) or maize (TSh 7.7) and since all these crops are essentially part of the farmers cropping system there is no serious risk of competition as such. Tea has the additional advantage that it brings in a continuous income to farmers throughout the year and the crop so far has not experienced any serious attackes of disease or pests. 5.14 The present favorable position of tea in terms of net returns per manday per hectare are dependent on the current prices obtained for the individual crops, i.e. tea, coffee, maize. The relative positions could change with changes in crop prices. However, the strong position of tea relative to other crops can also be seen by the fact that tea green leaf prices would have to drop to TSh 0.45/kg or TSh 0.59/kg for net returns per manday to be on part with those from traditional and improved maize respec- tively at the current maize price of TSh 1.0/kg. In comparison with coffee, tea green leaf prices would have to drop to TSh 0.70/kg. 5.15 Green leaf price would be kept constant over the Project period subject, however, to an annual review (para. 7.01). Taking projected infla- tion 1/ into account it is estimated that green leaf price would decrease from TSh 1.10 to TSh 0.65 in year 5 in real terms. This reduction in price would bring the net returns from tea in Rungwe on par with current coffee returns in year 5. However, world market prices of coffee are also expected to decline from their high level (1979-constant) and therefore would limit producer price increases as much as for tea. Even in Bukoba, which is the lowest yielding tea area, the present differences in returns from tea and 1/ At 10.0% p.a. (1979 constant).  - 29 - coffee would continue. In the case of maize, even if the farmers became improved maize growers with yields of 2,000 kg/ha the returns would not be of serious consequence since it is unlikely that tea growers would seriously consider permanently abandoning their tea for maize. 1/ Comparative Returns per Man-Day in Rungwe and Bukoba -------Rungwe ---------- --------Bukoba