Tanzania - Grain Storage and Milling Project

Document of The World Bank FILE CO PY FOR OFFICIAL USE ONLY Report No. P-27 75-TA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A GRAIN STORAGE AND MILLING PROJECT April 15, 1980 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.  CURRE]NCY EQUIVALENTS Currency Unit = Tanzania Shilling (TSh) US$1.00 = TSh 8.3 TSh 1.0 = US$0.12 (As the Tanzania Shilling is officially valued in relation to a basket of the currencies of Tanzania's trading partners, the IJS Dollar/Tanzania Shilling exchange rate is subject to change. Conversions in this report were made at US$1.00 to TSh 8.3 which is close to the 1979 average exchange rate.) ABBREVIATIONS AND ACRONYMS EAC = East African Community EADB = East African Development Bank FAP = Financial Action Program ICB = International Competitive Bidding MDB = Marketing Development Bureau MOA = Ministry of Agriculture MOF = Ministry of Finance MT = Metric Tons NMP = National Maize Project NMC = National Milling Corporation PPF = Project Preparation Facility PPMB = Project Preparation and Monitoring Bureau SGR = Strategic Grain Reserve FISCAL YEAR Government: July 1 - June 30 NMC August 1 - July 31 ?  FOR OFFICIAL USE ONLY TANZANIA GRAIN STORAGE AND MILLING PROJECT CREDIT AND PROJECT SUMMARY BORROWER: United Republic of Tanzania. BENEFICIARIES: National Milling Corporation (NMC). AMOUNT: US$43 million equivalent. TERMS: Standard. RELENDING TERMS: US$36.0 million of the proceeds of the credit would be passed on to NMC on a grant basis. PROJECT The project would primarily aim to improve NMC's capacity DESCRIPTION: to procure, transport, store and mill foodcrops. Specific- ally, the project includes the rehabilitation of 40% of NMC's existing godowns and all its existing silos; the construction of 40-50,000 metric tons (MT) of additional storage capacity; the financing of tarpaulins and polythene sheets for open storage; the implementation of pilot programs involving controlled open storage and dryers; the expansion of maize milling capacity by the extension of the Dar-es- Salaam mill by 70 MT/day and construction of a new mill at Dodoma with a capacity of 120 MT/day; the rehabilitation of existing mills; a central laboratory and satellites for grain and flour analysis; transport for NMC; training for NMC staff at all levels; and technical assistance, incre- mental staff, and consultants' services to NMC. The project would also provide financing for the Marketing Development Bureau (MDB) and the Project Preparation and Monitoring Bureau (PPMB) in MOA in order to ensure their continued involvement in policy analysis in the agriculture sector in Tanzania; this work will include,but not be limited to,policy issues involving NMC. The major risks of the project include the possibility that the policies affecting NMC will not be changed enough to ensure that NMC can achieve financial viability, the question of whether NMC will be able to alleviate its oper- ating inefficiencies, and the ability of NMC to effectively implement the investment program. The first area is being addressed through development of a Financial Action Program while the latter two are being addressed with increased technical assistance and training; in view of these efforts the level of risk is viewed as acceptable. 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.  ESTIMATED COST: Local Foreign Total --- US$ Million ----- Component Rehabilitation-Stores and Silos 5.3 4.4 9.7 New Stores 6.5 5.8 12.3 Tarpaulins and Polythene Sheets for Open Storage .5 2.0 2.5 Pilot Programs .1 .1 .2 Mill Construction and Expansion 1.5 2.3 3.8 Mill Rehabilitation .4 1.6 2.0 Laboratories .3 .7 1.0 Vehicles .5 3.0 3.5 Training .1 .6 .7 Staff & Consultants .9 2.8 3.7 MDB .4 2.7 3.1 PPMB .3 2.7 3.0 Total Base Cost 16.8 28.7 45.5 Physical Contingencies 1.0 1.2 2.2 Price Contingencies 4.6 6.1 10.7 Total Cost 22.4 36.0 58.4 Total Cost Net of Taxes and Duties 21.4 36.0 57.4 FINANCING PLAN: Local Costs Foreign Costs Total -------------US$ million----------- IDA 7.0 36.0 43.0 Government of Tanzania 15.4 0.0 15.4 Total 22.4 36.0 58.4 ESTIMATED DISBURSEMENTS: FY80 FY81 FY82 FY83 FY84 FY85 FY86 (US$ million) Annual .5 4.2 12.3 12.9 8.9 3.7 .5 Cumulative .5 4.7 17.0 29.9 38.8 42.5 43.0 RATE OF RETURN: 38% APPRAISAL REPORT: Report No. 2639a-TA, dated April 15, 1980 East Africa Region  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A GRAIN STORAGE AND MILLING PROJECT 1. I submit the following report and recommendation on a proposed credit of US$43.0 million equivalent to the United Republic of Tanzania to help finance a proposed grain storage and milling project. The credit would be on standard IDA terms. US$36 million in credit funds would be passed on to the National Milling Corporation (NMC) on a grant basis. The remaining credit funds would be utilized by the Marketing Development Bureau (MDB) and the Project Preparation and Monitoring Bureau (PPMB) in the Minis- try of Agriculture (MOA). PART I - THE ECONOMY I/ 2. A Basic Economic Mission visited Tanzania in August 1976 and the Basic Economic Report was distributed in December 1977 (Report No. 1616-TA). A new Country Economic Memorandum is expected to be issued later this year. A summary of social and economic data is in Annex I. Profile of the Economy 3. Tanzania is one of the 30 least developed countries in the world with a per capita income in 1978 of US$230. The economy is still heavily dependent on agriculture: 90% of the labor force is engaged in agriculture and approximately 50% of GDP and over 70% of total exports are derived from agricultural production. The industrial sector is still small, producing about 10% of GDP, approximately the same percentage as 11 years ago. The service sector produces about 40% of GDP. Overall population density is low, though a few areas are considered overpopulated. Population growth is estimated at 3.0% per annum with both fertility and mortality at relatively high levels. 4. Since the Arusha Declaration in 1967 Tanzania has pursued a socialist development strategy. Banking, insurance, and most large-scale enterprises in manufacturing, plantation agriculture, transportation, and wholesale trade are under state control. There is extensive state intervention in economic activity, including import licensing, foreign exchange controls, price control, the reservation of some activities to the state or cooperative sector, and detailed Government investment planning. The second major feature of Tanzania's development strategy is its strong emphasis on rural development and social programs to benefit the poor and reduce inequalities in income 1/ This section is essentially the same as that of the President's Report on the Tanzania Rural Development Bank Project, dated February 13, 1980.  distribution. This is reflected in ambitious Government programs for the provision of rural water supplies, health services and universal primary education. Long Term Economic Trends 5. In the decade 1968-78 real GDP at factor cost grew at an annual average rate of 4.8%, or about 1.8% per annum per capita. While economic growth was severely disrupted by the economic crisis following the failure of rains and large increases in imnport prices in 1973 and 1974, the economy recovered with annual growth of 5 to 6% for 1976 through 1978. During the 1970's services was the fastest growing sector in the economy at 6.3% per year. 6. The Government has a good record of domestic resource mobilization. Between 1967-68 and 1977-78 the share of recurrent revenues rose from 15.1% to 19.3% of GDP. However, most of- this increase occurred before 1975-1976; in 1974/75 revenues peaked at 22% of GDP. The increase was achieved through a combination of highly progressive direct taxes and proportional or moderately progressive indirect taxes. Except during the economic crisis in 1974-75, the rate of national savings has also been high: gross national savings fluctuated at around 16-17% of GNP from the mid-1960s through 1973, fell to half that level during the crisis years and recovered to the pre-crisis level in 1976 and 1977. These are high levels of savings for a country at Tanzania's income level. 7. Some progress has also been made in achieving the Government's objective of more equitable income distribution. Between 1969 and 1975 the average urban-rural gap remained approximately constant, halting the trend of an increasing gap in the early 1960s. Moreover, it is likely that this gap has been slightly reduced since 1976 due to continued recovery of agri- cultural production and higher producer prices. However, regional income differentials in rural areas have tended to widen slightly. Within the formal urban sector there has been a dramatic narrowing of the post-tax income differential between the highest-paid government officials and minimum wage earners, from 50 to 1 in 1961 to 8 to 1 in 1975. However, a large informal sector has emerged comprising large numbers of unemployed and underemployed workers with earnings significantly below the official urban minimum wage. The policies of wage restraint and higher producer prices pursued since 1975 should have a beneficial impact on almost all dimensions of income distribu- tion, and the basic needs oriented programs in rural water, health and primary education (para. 4 above) are resulting in a significant redirection in public expenditures toward the rural poor. 8. Despite this impressive overall record of development, some pro- blems have begun to manifest themselves in recent years. Exports have failed to keep pace with the growth of the rest of the economy: the overall export index is down almost one-third since 1966. This poor performance in exports is due to the poor growth rate of agricultural cash crops. While agricul- tural output has increased impressively in recent years (by an average of about 7%), most of this growth has been in the hard-to-measure subsistence  - 3 - sector; the monetary sector has lagged well behind. This failure of export growth has led to increasing dependency on foreign loans and grants to pay for imports. 9. A second increasingly serious problem is the deceleration of the growth of government revenues. While still at a high ratio to GDP compared to most other developing countries, government revenues have been growing more slowly than GDP in recent years. At the same time recurrent expenditures have been higher than budgeted. As a result, public sector savings have been well below expectations and the Government has had to increasingly rely upon borrowing (both foreign and local) and external aid for financing its devel- opment program. Recent Economic Developments 10. During 1975-77 the Government adhered to the program agreed to at the time of the Program Loan (No. 1063-TA) in late 1974. This program included redirecting investment to the directly productive sectors of industry and agriculture, higher agricultural producer prices, constraints on wages and salaries, price and tax increases to restrain consumption and tight control of imports. These policies, aided by the boom in coffee prices, succeeded in keeping government spending under control, with low levels of borrowing from the banking system, and led to a balance of payments surplus of almost US$150 million in 1977. Food production increased and government stocks of most foodgrains reached record levels. In 1978 the Government was able to ease import restrictions and begin to import the spares and raw materials needed by all the major sectors in the economy. 11. Unfortunately, the price of coffee, Tanzania's major export, began to fall at the same time that imports were liberalized. Also, in October 1978 war broke out with Uganda and the resulting imports of military equipment and other resources required for the war effort put an increasing strain on the balance of payments and the domestic budget. Consequently, the current account showed a deficit of more than US$450 million in 1978 and the overall balance of payments was almost US$300 million in deficit. The Government's foreign reserves were rapidly drawn down and the country was forced to delay payment of about US$60 million in import bills. 12. The situation deteriorated further in 1979. The overall balance of payments for 1979 was expected to be almost US$200 million in deficit and arrears on import payments were estimated at about US$200 million by the end of the year. At the same time the domestic budget deficit has increased substantially. A recurrent budget deficit of almost TSh 1 billion (US$120 million) was estimated for FY1978/79 and government borrowing from the banking system was estimated at about TSh 3 billion (US$360 million), a major component in the increase in the money supply of about 35%. In an effort to deal with the increasing balance of payments deficit, import licenses were reduced by almost 40% in real terms from the 1978 level and the Government announced a 10% devaluation in January of 1979. In addition the FY1979/80 budget called for a reduction in the level of recurrent expenditure and borrowing from the banking system of Tsh 1.67 billion; however, through the  -4- first quarter of the fiscal year borrowing was already TSh 1.4 billion as spending agencies were able to exceed their budgetary allocations. In early 1979 the Government was able to arrange for almost US$75 million in funds from the IMF from a first credit tranche, the Trust Fund and the Export Compen- satory Fund, but negotiations for further assistance from the IMF have so far been unsuccessful. To deal with the increasing economic problems as well as provide a framework for IMF assistance, the Government urgently needs to develop a comprehensive program to deal with the emerging crisis, as it did in 1974; the Bank has offered to help the Government in developing such a program. 13. Tanzania continues to attract large amounts of foreign assistance on concessional terms. Because of the very concessional terms on which aid has been given to Tanzania and the Government's reluctance in the past to use higher cost commercial loans and supplier's credits, the overall debt service ratio has historically been less than 10%. However, the recent balance of payments crisis has forced the Government to utilize commercial loans and suppliers credits and as a result the debt service ratio is estimated at 12% in 1979 and projected at 15% in 1980. We expect it will remain in the range of 15-20% throughout the 1980's. In 1978 the Bank held 12% of Tanzania's external debt (for the Bank Group, it was 28%) and received 37% of Tanzania's debt service (40% for the Bank Group). We are projecting this debt service share to fall to about 21% in 1980 and to remain around 25% for the coming decade. 14. Tanzania's development program will require resources in excess of domestic savings and external capital made available to finance the foreign exchange costs of projects. Given the Government's efforts to mobilize domestic resources and in view of our support for its increased emphasis on local cost intensive rural investments, the Bank Group will continue to finance a high proportion of total costs including, in appropriate cases, a portion of local costs. East African Community (EAC) 15. The recent developments in the East African Community were outlined in a report to the Executive Directors dated December 19, 1977 (R77-312). Dr. Victor Umbricht, the independent mediator appointed by the Partner States, has visited East Africa on numerous occasions and has now prepared reports on the results of his fact-finding work on the EAC Corporations and the General Services, and the methodology adopted in appraising the assets and liabilities. The next phase of the mediator's work will be to make recommendations on the allocation of these assets and liabilities. The mediator's report and recom- mendations on the future structure of the East African Development Bank (EADB) have been accepted in principle by the Partner States and the revised EADB Charter along with the Treaty to enact the new Charter have been submitted to the three Governments for signature. 16. The de facto breakup of the Community has had some impact on Tanzania's budget as new national entities take over the services formerly provided by the EAC Corporations. A major development related to the EAC  difficulties was the closure of the border with Kenya. Kenya was a major trading partner of Tanzania and considerable adjustments have had to be made in locating new suppliers for some items and developing alternative outlets for a range of manufactured goods and agricultural products. PART II - BANK GROUP OPERATIONS IN TANZANIA 1/ 17. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1962, 40 IDA credits and 19 Bank loans, of which two were on Third Window terms, amounting to US$759.5 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 10 loans totalling US$244.8 million which have been extended for the development of the common services and development bank operated regionally by Tanzania, Kenya and Uganda through their association in the East African Community. IFC investments in Tanzania, totalling US$4.7 million, were made to the Kilombero Sugar Company in 1960 and 1964. This Company encountered financial difficul- ties and in 1969, IFC and other investors sold their interest in the Company to the Government. A new IFC investment of US$1.7 million in soap manufactur- ing in Mbeya was approved by the Executive Directors on June 8, 1978 and an investment of US$1.5 million in metal product manufacturing was approved on May 10, 1979. Annex II contains summary statements of Bank loans, IDA credits and IFC investments to Tanzania and the East African Community organizations and notes on the execution of ongoing projects. 18. To support Tanzania's overall development strategy Bank Group lending operations are increasingly focusing on the rural sector and directly productive projects. While up to the end of FY1972 Bank Group operations were directed mainly to infrastructure, the overwhelming majority of the operations approved by the Executive Directors since FY1973 have been for directly produc- tive projects. Furthermore, a number of recent Bank Group supported infra- structure projects have been closely linked with specific productive activi- ties. For example, the Urban Water Supply Project (Loan No. 1354-TA) approved in January 1976, will support the Industrial Complex in Morogoro (Loans No. 1385-T-TA and 1386-TA) and the Morogoro Textile Project (Loan No. 1607-TA and Credit No. 833-TA). Directly productive projects recently approved include the Second Cashewnut Development Project (Credit No. 801-TA), the Tobacco Handling Project (Credit No. 803-TA), the Mufindi Pulp and Paper Project (Loan No. 1650-TA and Credit No. 875-TA) and the Tanganyika Development Finance Company Limited Project (Loan No. 1745-TA). In addition, a Tourism Rehabilita- tion Project (Credit No. 860-TA), a Sixth Education Project (Credit No. 861-TA) and a Fifth Highway Project (Credit No. 876-TA) were approved by the Executive Directors in FY1979. A fourth line of credit to the Tanzania Investment Bank (Loan No. 1750-TA), an Engineering Credit for the Dar-es-Salaam Port (Credit No. S-24-TA) and a line of credit to the Tanzania Rural Development Bank 1/ This section is essentially the same as that of the President's Report on the Tanzania Rural Development Bank Project, dated February 13, 1980.  -6- (TRDB), have been approved this fiLscal year. Projects which have been ap- praised include a Second Urban Wal:er Supply Project, a Coconut Project, a Tea Processing Project, an Education P?roject and a Rural Development Project in Mara Region. A small scale industries project, an urban project, a harbours project, and a railway project are also under preparation. 19. Although the comparatively high undisbursed proportion of loans and credits, detailed in Annex II, is in large part a result of the recent approval of many of these projects, it also reflects the fact that overall project implementation has been slower than was projected. It is clear in retrospect that both the Bank Groiup and Government have been optimistic re- garding Tanzania's absorptive capacity. The causes of the difficulties in implementation are varied. Some stem from the scarcity of suitably trained and experienced manpower, some reflect the problems in identifying agronomic input packages appropriate to the needs of smallholder farmers while others result from the strains associated with attempting a "frontal attack" on poverty. These problems have been compounded by frequent and drastic admin- istrative changes, which -- although potentially the source of long-term benefits -- have disrupted orderly execution of projects and made parts of earlier project concepts obsolete. Also, the Uganda war (para. 11) has had some impact on project implementation. In the early stages of the war there was some diversion of equipment and manpower; however, most of these problems have been solved. The more serious medium term problems involve the financial and foreign exchange implications of the war. If these problems are not resolved, the availability of adeqluate local funds and the shortage of foreign exchange could become major constraints to project implementation and oper- ating performance. In general, implementation difficulties have been most severe in agriculture, particularly in the smallholder rural sector. As our lending program has increasingly concentrated on this sector, these problems have become correspondingly more apparent and severe. By contrast, the "'modern" sector projects have tended to fare better: the Tanzania Investment Bank, Mwanza Textile and Morogoro Industrial Estate Projects, for example, are proceeding well. 20. As the Bank Group's lending program has expanded, increasing attention has been given to measures designed to improve project implementa- tion. A course was conducted in Dar es Salaam in 1973 and again in 1978 on Bank Group procurement with the relevant Government officials. A special project implementation unit was s(et up in the Ministry of Agriculture and 11 Agricultural Development Services staff have been assigned to Bank Group financed projects in agriculture iand rural development. In addition, a number of EDI-supported courses on the transport and industry sectors have been held at the East African Management Institute in Arusha, Tanzania. Furthermore, the need to establish a close and continuous working level dialogue between responsible Tanzanian officials and Bank Group staff on implementation problems was one of the prime reasons for the expansion of the Resident Mission to two professionals in October 1976. Finally, in February 1977 a regular Government/ Bank Group review of project implementation was established. Discussions on the Bank Group financed projects, chaired by the Ministry of Finance (MOF) and attended by Bank Group staff and officials from implementing agencies,  -7- deal in detail with individual problem projects and problems which are affecting project implementation across a number of sectors. As a result of these efforts, there has been some improvement in project implementation. Actions agreed to during the reviews have been completed relatively quickly and coordination and communication between MOF and the various ministries and agencies responsible for project implementation have improved. 21. The Government has become increasingly conscious of the importance of effective implementation. In addition to fully supporting the project implementation review system, MOF has set up a unit to oversee project per- formance. As a consequence of these efforts, the disbursement record of Bank Group financed projects have improved somewhat over the last two years, and a recent analysis indicated that the Tanzanian disbursement performance is about equal to the Bank-wide average. While there is still a potential for further significant improvements, the Government is implementing its investment program, including Bank Group and other foreign aided projects, more effec- tively than in the past. PART III - THE AGRICULTURAL SECTOR General Background 22. Agriculture and related activities constitute the largest single sector in the Tanzanian economy. Most agricultural production is from small- holdings using family labor. Large-scale agriculture is confined to a number of private estates and state farms producing sisal, coffee, tea, sugar, wheat, rice and livestock. Estate production has diminished in importance since independence and the state farm program remains small. Tanzania's national livestock herd, the second largest in Africa, is grazed extensively over the 40% of the country which is free from tsetse fly infestation. It is largely managed along traditional lines. 23. The recent performance of the agricultural sector has been mixed. Over the period 1967-77, the average annual rate of growth of agricultural production was 2.7%, somewhat below the population growth rate. Particularly in the early 1970's food crop production failed to keep pace with popula- tion growth; as a result, Tanzania became increasingly dependent on imports of maize, rice and wheat. In addition, the drought in 1973 and 1974 resulted in poor harvests and large imports of foodgrains. Following this, the Govern- ment implemented a number of policies to increase food crop production; along with favorable weather conditions, these had some stimulating effect on production. Since the drought, total agricultural production has recovered, increasing in real terms by an average of above 5% per year. However, these production increases have only returned agricultural expansion to its long-term growth path. In addition, there is the problem of declining export crop production as discussed in para. 8. Increasing the long-term growth rate in agriculture and ensuring balanced growth are two of the key objectives of the Bank Group's investment strategy in agriculture.  -8- Rural Organization 24. In order to improve the design and execution of rural development projects and programs and mobilize lcocal resources, in 1972 the Government adopted a decentralized administrative structure. Regions and districts were given primary responsibility for the planning and implementation of development activities within their jurisdiction and were given a high degree of administrative autonomy. The Prime Minister's Office was established to provide overall policy direction, coordinate regional plans and budgets and assist the regions in preparing their development programs. While it is clear that this decentralization of authority has improved communication between the Government and the villages (as the civil service operating at the district and regional levels are directly involved in rural development efforts), problems of manpower availability and the ill-defined division of responsibility between the regions, central ministries and agricultural parastatals persist. 25. Since independence, but particularly from 1970, the grouping of dispersed farm families into villages (villagization) has been a key element of Government strategy for the rural areas. The objective of this program is to facilitate the provision of infrastructure and services to the rural population and encourage self-reliance and a community approach to rural development. During 1974, the emphasis shifted from creating additional ujamaa 1/ villages to forming "development" villages, which place less stress on communal production. At the same time, the pace of villagization was accelerated; as a result there are now about 7,700 registered villages, containing over three-quarters of Tanzania's rural population. While disrupt- ing production somewhat in the short term, it is still too early to judge how effectively the villages will be able to meet their goals over the medium and long term. Agricultural Services 26. The MOA is responsible for the overall planning and monitoring of the sector as well as coordinating agricultural research, training of exten- sion staff, pricing policy, seed multiplication and supervision of agricul- tural parastatals. Agricultural research is undertaken by a wide variety of government agencies and while MOA has been given the responsibility for overall coordination, research resources have not always been allocated in accordance with development priorities. Agricultural extension services are manned by staff trained by MOA but under the control of the regional administrations. The links between research and extension are weak, and field staff are typically poorly trained and inadequately supervised. A major review of both the research and the extension systems is underway, and the Bank Group has agreed to work with the Government to survey the needs in these areas with the intention of subsequently preparing research and exten- sion projects. Pricing policy is an important tool of the Government in the agricultural sector. Since 1974, the Government has accorded greater recog- nition to the need to give farmers production incentives; crop and livestock 1/ "Ujamaa" is a Swahili word meaning "familyhood".  - 9 - prices are now reviewed annually and, within the context of panterritorial pricing, substantial producer price increases have been made in recent years. Agricultural parastatals, which exist for major crops and livestock, play a key role in agricultural marketing and processing. The tendency has been to progressively enlarge the role and scope of these institutions, and this has frequently strained their capacities to efficiently provide the services for which they are responsible. Overall operational efficiency is low, with correspondingly high costs for services. The Government is aware of these problems but has not yet developed a comprehensive strategy for addressing them. The Bank Group, in the course of its appraisals of agricultural projects, has been analyzing the parastatals involved and also intends to initiate sector work involving a broader review of Tanzania's agricultural parastatals. The Food Crop Subsector 27. Production. Estimates of food crop production in Tanzania are unreliable, as most production goes for subsistence consumption and, of the surplus that is marketed, a substantial but unquantified portion goes into unofficial channels. Food crop production is characterized by large year to year variations, although over the past fifteen years there has been a slight upward trend. The food crop sector is generally characterized by traditional cultivation methods, low yields and vulnerability to change in weather. Maize, rice and wheat have been the most important commercial food crops. In addi- tion, cassava, white sorghum and bulrush millet have traditionally supplied an important source of subsistence food in semi-arid areas. 28. Consumer Demand. Tanzania has been able to export maize in some years, although it has also imported large quantities in years of bad weather. The country has consistently been a net importer of rice and wheat. Projec- tions of demand indicate that if present price relationships continue Tanzania will probably continue to be an exporter of maize in some years and an importer in others, while, for rice and wheat, it will continue to rely on imports to satisfy about half of domestic demand. 29. Marketing and Processing. The minority of marketed food crops passes either through informal private channels or through the official channel of the NMC; of the total quantities marketed roughly 50-70% of the maize and about 50% of the paddy and wheat pass through informal markets. The amounts of these crops bought and sold by NMC vary greatly from year to year. Purchases of other food crops, including sorghum, bulrush millet, finger millet and cassava, have only recently came under NMC's mandate. About one third of the total milling activities are carried out by official parastatal organizations (including NMC) and the remaining two thirds by smaller-scale private groups or individuals. Milling activities in the private sector are carried out in village mills in rural areas and custom mills in urban areas. 30. NMC, the entity responsible for managing the proposed investments in storage and milling, was established in 1968 as a manufacturer and processor of agricultural products. In 1975, these functions were expanded to include  - 10 - the purchase, procurement, transportation and storage of general grains and staples offered for sale by farmers and other parastatals. As this increase of NMC's responsibilities occurred at the time of drought and crop failures, NMC became involved in distributing large quantities of imported grain on an emergency basis as well as being confronted with the enormous task of carrying out its broad mandate. With the abolition of all primary cooperatives in May 1976, NMC also became responsible for direct procurement from villages. While NMC has coped with these increasing demands reasonably well, its organization, staff and physical facilities have not been adequate to deal efficiently with the simultaneous expansion of responsibility and logistical problems. As a first phase of a long-term development program for NMC, the project would begin the process of upgrading NMC's capacity to carry out its mandate effectively. 31. NMC is a wholly government-owned parastatal headed by a Board of Directors. Responsibility for its day to day operations rests with the General Manager, a Presidential appointee. NMC is organized at headquarters along functional lines into eight departments: Planning, Internal Audit, Maintenance, Manpower Development and Administration, Procurement and Storage, Transport, Production and Sales, and Finance. There are 24 branch offices; one for each region and four in Dar-es-Salaam. Each department and branch office is headed by a manager, who reports to the General Manager. There are about 4,200 staff at NMC, of whom 400 are at headquarters, 1,200 in Dar-es-Salaam branches, and 2,600 at other branches. A number of interrelated problems affect NMC's operations. NMC is hampered by lack of specialists, particularly in storage and accounting practices (however, it is overstaffed at non-managerial levels). Furthermore, a large number of people report directly to the General Manager and there is insufficient communication between departments and branches. In addition, effective control or planning is difficult because there is insufficient use of available information and NMC's financial monitoring and control has been weak. NMC has made some progress in addressing these problems through a recent reorganization and the project would aim to further address them through the provision of technical assistance, establishment of a management information system, introduction of systematic planning, and a training program. 32. NMC has procured up to 500,000 metric tons (MT) of crops in one year. Crop procurement is hampered by inadequate communication between villages and NMC, insufficient transport facilities, poor roads, a dearth of village infrastructure to store crops, and lack of quality control at the time of procurement. Storing crops in warehouses and in the open result in heavy losses, due in part to poor management and in part to the poor condition of the facilities. In addition, there is insufficient capacity to meet demand for storage. The project would seek to improve the procurement and storage of crops by the rehabilitation of existing facilities, construction of new facilities, provision of transport facilities, and provision of technical assistance and training.  - 11 - 33. NMC's milling capacity for wheat is sufficient to meet demand through 1982/83; for paddy there is excess capacity. However, for maize milling, NMC has to make use of hammer mills and private contractors which are not always reliable or available. The project would provide additional maize milling capacity, rehabilitate NMC's existing mills and improve mill management through technical assistance and training. 34. As discussed below (para 54), NMC's financial situation is poor, with increasing annual operating losses and reliance on overdraft facili- ties from the National Bank of Commerce to finance operating costs. As of November 30, 1978, NMC had an overdraft of approximately TSh 1.8 billion (US$217 million), backed primarily by its inventory (valued at the cost of procurement, handling and storage). However, the quality of this inventory is questionable and this valuation does not take into account the considerable deterioration of crops. In addition, some of the remaining good stock can be sold only at prices much lower than its valuation, which is based on cost. Addressing NMC's financial problems is the major focus of the comprehensive Financial Action Program (FAP) which will be implemented in parallel with project investments (paras. 54-62 below). Previous Bank Group Experience in Agriculture 35. Previous Bank Group assistance to the agricultural sector in Tanzania has included IDA credits totalling US$145.2 million and Bank loans totalling US$37.0 million for fifteen agricultural and three rural development projects. Agricultural projects include one for agricultural credit, three each for livestock and tobacco, two for cashewnuts, and one each for production of tea, sugar, maize, fish, forestry products and cotton. Rural development projects have been financed by IDA in the Kigoma, Tabora, and Mwanza/Shinyanga regions. Project Performance Audit Reports for two projects (the Flue-Cured Tobacco Project and the Smallholder Tea Development Project) have recently been prepared. In both cases, the economic rate of return was satisfactory, but implementation experience highlighted the weakness of the parastatals involved, and the consequent need for considerable investment in institution- building. These lessons have been taken into account in the design of the Project, where the development of NMC is a central objective. PART IV - THE PROJECT 36. The need for additional milling and crop storage facilities was recognized in 1975 at the time of appraisal of the IDA-financed National Maize Project (NMP) (Credit No. 606-TA). Accordingly, NMP provided financing for construction of about 500 village stores, about 80,000 MT of storage for NMC and a preparation study for future investment in storage and milling to meet requirements up to 1985. The study was carried out by Coopers and Lybrand and in July 1977 a proposal was submitted to IDA for financing. IDA discussed the proposal extensively with Government and raised a number of issues with respect to pricing policies, NMC's purchasing mandate, foodcrop export poli- cies, NMC's finances and financial viability, the need for long-term institu- tional development within NMC, and projected levels of crop production and  - 12 - their implications for investment in expansion of facilities. After com- pletion of the additional preparation work required, the project was appraised in January 1979. In order to finance some of the activities needed to provide a basis for project start-up and implementation, an advance of US$924,000 under the Project Preparation Facility (PPF) was approved in May 1979. A Staff Appraisal Report entitled "'Tanzania - Grain Storage and Milling Project", Report No. 2639a-TA dated April 15, 1980, is being circulated separately to the Executive Directors. Negotiations were held in Washington in February 1980; the Tanzanian Delegation was headed by Mr. E. Mulokozi, then Principal Secretary of the Ministry of Finance (MOF), and included representatives of MOF, MOA and NMC. A Credit and ]?roject Summary is at the front of this report; Annex III contains suppliemental project data. Project Oblectives and Description 37. The project would be the first phase of a long-term program to improve NMC's management practicess and strengthen its capacity to procure, transport, store and mill foodcrops. The investments financed under the project would address NMC's projsected storage and milling requirements up to 1983. They will be supplemented by the FAP whose objective would be to re- establish NMC's financial viability. Specifically, the project includes provision for the following investments in NMC: (a) rehabilitation of about 40% of NMC's existing godowns and all its silos, involving about 135,000 MT of storage capacity; (b) construction of about 13,000 m or 20-25,000 MT of storage capacity2in Dar-es-Salaam, Mtwara and Dodoma regions and about 13,000 m or 20-25,000 MT of storage capacity in unspecified locations; (c) tarpaulins and polythene sheets for existing open storage; (d) implementation of a pi:Lot program for controlled open storage and dryers; (e) expansion of maize milLing capacity by extension of the Dar-es-Salaam mill by 70 MT/day and construction of a new mill at Dodoma with a capacity of 120 MT/day; (f) rehabilitation of existing NMC mills; (g) central laboratory and satellites for grain and flour analysis; (h) about 55 lorries for transport of grain and a radio communication network; fumigation teams and mobile workshops; about 88 utility vehicles and passenger cars; and about 45 motorcycles; (i) training for NMC staff at all levels; and (j) technical assistance, staffing, and consultants' services for NMC to improve its management, information systems and planning.  - 13 - 38. The project also includes financing for MDB and PPMB, two units within the MOA responsible for giving policy advice to Government in respect to pricing, project development, supervision and evaluation. Detailed Features: NMC Investments 39. Rehabilitation of Storage Facilities. About a fifth of the exist- ing NMC godowns need major repairs and improvements and a further fifth need minor repairs and improvement. All NMC's silos need repair or improvement. Investment in rehabilitation would provide Tanzania with the most economic means of increasing storage capacity. The project therefore includes the drawing up of a detailed program of rehabilitation and its subsequent imple- mentation. Funds have been provided under the PPF to initiate this work. 40. New Storage Facilities. After the rehabilitation investments, analysis shows that on a global level NMC will have almost sufficient per- manent storage facilities through 1982/83. However, a regional analysis indicates that NMC needs additional permanent storage in a number of spe- cific areas. Ihe project therefore makes provision for the construction of about 26,000 m of permanent flat storage (40-50,000 MT) which would meet this need. Funds had been provided under the PPF for the relevant design work. 41. Tarpaulins and Sheets for Open Storage. NMC will continue to store food crops in the open throughout the project period because of wide unpredictable year to year variations in storage requirements which cannot be economically handled in closed storage. As the tarpaulins currently used in open storage need to be replaced, the project would provide replacement tarpaulins through 1982/83, sufficient to cover about 100,000 MT of open storage. PPF funds have been allocated to purchase urgently needed tarpaulins. The project would also provide technical assis- tance to improve the open storage practices of NMC. 42. Controlled Open Storage. Technical opinions vary on the feasi- bility of expanding controlled open storage in Tanzania to substitute for more expensive investments in permanent closed storage. Analyzing this issue requires a close assessment of the management requirements and the likely reductions in losses under each alternative. Recognizing the need for further storage, and in view of the potential savings of an effective low cost program of controlled open storage, a pilot program would be carried out in three locations to evaluate this technology under different climatic conditions and for different crops. 43. Dryers. To test the effect of mechanical drying on storage losses, three dryers each with a capacity of 5 MT/hour would be placed at different NMC locations. 44. Maize Mill Construction. The project would provide for the construc- tion of new maize milling capacity, so that NMC can meet the projected demand  - 14 - for maize flour. Specifically, t:he project provides for the extension of the maize mill in Dar-es-Salaam from its current 50 MT/day to 120 MT/day, and the construction of a new mill at Dodoma with a capacity of 120 MT/day. Added to existing capacity, these investments should be sufficient to meet demand projected for 1982/83, provided NTMC can raise its capacity utilization from the current average of about 75-830% to something over 80%. Funds for the design work for this component have been provided under the PPF. 45. Rehabilitation of Mills. The project would provide funds for rehabilitation of existing mills, consisting of the replacement of parts and equipment for small laboratories to be established at each maize mill for routine analysis of grain and flour. Funds for the detailed preparation of the mill rehabilitation program have been provided under the PPF. 46. Central Laboratory. A central laboratory would be constructed at NMC's Pugu Road maize mill in Dar-es-Salaam for analysis of grain and flour for nearby branches. For outlying branches, four smaller satellite laboratories would be set up. 47. Transport. To supplement NMC's current trucking fleet of just over 200 trucks, the project would provide 46 four to seven ton trucks (and related radio communications equipment) f-or procurement of crops from villages. In combination with NMC's existing truck fleet, these additions would permit NMC to cover its baseload requirement:s plus about 25-30% of peak procurement needs. NMC would rely for the rest of its transport requirements on private transporters and, in those regions covered by the IDA-assisted Trucking Industry Rehabilitation and Improvement Project (Credit No. 743-TA), on public sector trucking companies. In adldition, a number of special purpose lorries would be provided (four fumigation trucks, one wrecker, and six mobile work- shops). To improve transport facilities for NMC personnel, the project would also provide 56 four-wheel drive vehicles and 34 passenger cars. In addition, provision of 45 motorcycles would allow for use of two per branch by quality control teams. To ensure the proper utilization of these motorcycles, NMC would establish a credit scheme whereby its staff can purchase them and receive a mileage allowance (Secl:ion 2.04 of the draft Project Agreement). 48. Training. NMC needs to develop an in-service training system capable of identifying and meeting the training needs of its staff at all levels in all operations. The training component included in the project is designed to address this need; its costs are based on a preliminary program drawn up at the time of appraisal which includes staffing, transport for mobile teams, training facilities; and equipment (such as films and manuals) as well as expenses incurred for local and overseas courses and visits. A more detailed training program would be drawn up by NMC and submitted to IDA by April 30, 1981 (Section 2.11 of the draft Project Agreement). 49. Technical Assistance/Staffing and Consultants. In order to strengthen NMC's ability to implement the Project, funds would be provided for employment of a range of experts for a number of years; funds are also provided for technical assistance on a short-term basis to address specific issues.  - 15 - Detailed Features: MOA Investments 50. MDB and PPMB. Tanzania's annual agricultural pricing policy reviews are carried out by MDB; it also advises the Economic Committee of the Cabinet on pricing issues. It was established in 1970, but since 1975 MDB has been strengthened by provision of technical assistance by FAO. MDB's pricing studies have been steadily improving to take account of the complex considera- tions that enter such analysis, including the changing world market situation, domestic producer incentives and equity. PPMB was established in MOA in 1978 to prepare, supervise and monitor projects being implemented under that Ministry. As both these units are expected to provide significant policy advice to the Government on a wide range of agricultural issues, funds are included under the project to support them for a five-year period. In the past financing for MDB was provided by UNDP but funding constraints forced its reduction over time; presently interim financing for both MDB and PPMB is being provided under the National Maize Project (Credit No. 606-TA) to sup- port these two agencies through June 1980. Funds provided under this Project will meet the ongoing requirements for international staffing, vehicles, operating costs, surveys, studies, analysis, as well as an office building for PPMB. As part of their work program, both MDB and PPMB are expected to analyze a number of issues for NMC, thereby also playing a direct role in the successful completion of the NMC components of the project (paras. 59 and 68 below). Project Implementation 51. NMC would have responsibility for overall implementation of the project components involving storage and milling. Implementation of the FAP would rest with NMC and MOF. The MDB and PPMB investments would be overseen by MOA. 52. NMC: Day-to-day responsibility for the project would rest with NMC's Planning Manager. To assist him NMC's Planning Division will be strengthened by increased staffing: a Planning and Management Expert and a Supervising Engineer will be financed under the Project (Section 2.02(g) and (e) of the draft Project Agreement). Furthermore, given the present staffing of NMC and its major weaknesses in a number of areas, additional staff for a range of NMC's other divisions are being financed under the project. These include a Training Expert, a Silos Expert, a Fumigation and Quality Control Expert, a Storage and Grain Handling Expert, a Maintenance Engineer, a Transport Manager, a Chief Accountant, a Cost Accountant and five Staff Accountants (Section 2.02(a)-(d), (f) and (h)-(k) of the draft Project Agreement). Recruitment has already been initiated for this staff and the PPF is available for financing of those individuals hired. All these experts would be qualified and experienced, employed under terms and conditions satisfactory to the Association and appointed before October 31, 1980 (Section 2.02(1) of the draft Project Agreement). In addition, NMC would take all actions necessary on its part to ensure the prompt employment of all its key staff, including the Planning Manager (Section 3.04 of the draft Project Agreement). In total, an estimated 900 months of technical assistance would be provided to NMC under  - 16 - the project. The estimated cost per month ranges from US$700 to US$6,600. This estimate includes all fees, international travel and subsistence. 53. A detailed program for rehabilitation of NMC's storage and silo facilities would be furnished to the Association by NMC by December 31, 1980; it would include an economic analysis of each facility with estimated costs of above US$100,000 and it would be implemented as agreed between the Association and NMC (Section 2.07 of the draft Project Agreement). For the construction of the new storage facilities in identified locations, NMC would prepare and by December 31, 1980, furnish to the Association a construction program including detailed designs (Section 2.08 of the draft Project Agreement). For the con- struction of new storage facilities where locations have not yet been estab- lished, NMC would prepare and submit to the Association a master plan which includes a technical, financial and economic justification for each facility (Section 2.09 of the draft Project Agreement); disbursements on these facili- ties would not commence until a satisfactory plan is submitted (Schedule 1, para 4(c) of the draft Development Credit Agreement). With respect to the rehabilitation of mills, NMC would prepare and furnish to the Association not later than December 31, 1980 a detailed rehabilitation program (Section 2.10 of the draft Project Agreement). It would be a condition of disbursement against civil works that the Storage and Grain Handling Expert and the Plan- ning and Management Expert be in post, and against the transport component that the Transport Manager be appointed (Schedule 1, para 4(b) and 4(d) respectively of the draft Development Credit Agreement). 54. Financial Action Program: While the physical and technical assist- ance components of the project would have a substantial positive impact on NMC's finances as a result of the reductions in storage losses and improve- ments in operating efficiency (the cumulative positive impact is estimated to be about TSh 1.6 billion, US$190 mi'llion, by 1985/86), NMC would continue to incur large annual losses unless there are changes in the policy framework within which it operates. Rough estimates indicate that with no policy changes, NMC's annual losses would rise to TSh 1.2 billion (US$150 million) by 1985/86, and the total bank overdraft required to finance the aggregate losses would reach untenable levels of above US$1 billion. As losses of this magni- tude cannot be sustained by the Government either through direct subsidies provided by MOF or indirectly through bank overdrafts, over the next few years Government will have to address more systematically the question of how NMC can carry out its mandate and retain its financial integrity. The project attempts to address this issue, including the correction of NMC's presently misleading balance sheet (para 34 above), through the development of the FAP. This program would involve improving the framework within which NMC operates either by adjusting those policies which make it impossible for it to be financially viable or by ensuring that it is compensated by Government for the losses that result from financially, costly policy decisions. The major issues to be focused on through the FAP are reviewed below. 55. First, the FAP would involve the correction of NMC's capital structure. As noted above, NMC's present inventory is seriously overvalued.  - 1 7 - Therefore under the FAP, a team of experts would value NMC's inventory and prepare a corrected balance sheet not later than January 31, 1981; after this is completed MOF would,by June 30, 1981,draw up a proposal setting forth actions to be taken by the Government to assist NMC in correcting its balance sheet so that it accurately reflects an appropriate capital structure (Section 5.02 of the draft Project Agreement and Section 4.02 of the draft Development Credit Agreement). 56. Secondly, the program would involve a package of policy measures to be taken by the Government to improve NMC's performance. It is already agreed that while NMC would continue to maintain a Strategic Grain Reserve (SGR), the operation of this would be separated from its normal operations. Thus the crops stored to protect the country against crop failure would no longer be NMC's financial responsibility: by December 31, 1980, and every year thereafter, Government would determine the nature, size and type of crops, and costs of maintaining the SGR in consultation with NMC, and would assume full and direct financial responsibility for any costs or obligations to NMC of operating it (Section 4.04 of the draft Development Credit Agreement). 57. Other policies which need to be considered in order to strengthen NMC's financial situation are panterritorial pricing, appropriate pricing margins for NMC and the range of crops handled by NMC. However, it must be emphasized that actions taken on these policies within the framework of the FAP are not intended to cover indefinitely the losses of an inefficient NMC: under the Project it is expected that NMC's operating performance will improve considerably. To ensure that appropriate actions are taken in this respect, a team of experts would carry out,not later than January 31, 1981,a cost- criteria study to establish criteria against which NMC can measure its increase in efficiency, with specific recommendations on changes in NMC's operations (Section 5.03 of the draft Project Agreement). The Government would review this Study and cause NMC to implement any recommendations deemed necessary to improve NMC's operations (Section 4.03 of the draft Development Credit Agreement). 58. The Government follows a policy of uniform prices known as pan- territorial pricing, where prices do not reflect the costs of transport. While having some impact on equalizing incomes, this policy has also placed a financial strain on parastatals, particularly on NMC. Producers in remote areas who would receive a lower price if transport costs were deducted from the producer price find it more profitable to sell to NMC; similarly, con- sumers in distant areas do not pay the full cost of transport. The situation is the reverse in the nearby areas where producers and consumers find it profitable not to use NMC. This encourages relatively greater purchases and sales in distant areas where transport costs are higher and discourages those in nearby areas, thus substantially raising overall costs of transport to NMC. The costs of paterritorial pricing need to be examined within the framework of the FAP. 59. Another pricing issue involves the margins allowed NMC. NMC has little financial autonomy since producer prices and consumer prices are fixed by Government. Since the drought in 1973/74 producer prices have played an important role in providing incentives to increase production: producer prices of food crops relative to export cash crops and in particular the  - 18 - relative producer prices of drought-resistant food crops (cassava, sorghum, millets) have been raised considerably. At the same time consumer prices for the processed food grains have been kept low relative both to general price increases and to the rising costs of handling and processing them: in real terms the retail prices of sembe, rice and wheat flour have risen only slightly since 1973/74. As a result, the margins between the producer and consumer prices have been insufficient to cover NMC's costs and NMC has been incurring losses on the milled food crops it sells. To analyze pricing decisions and their effect on NMC, MDB would prepare an analysis on an annual basis, which would show the impact of different producer and consumer prices on NMC's finances and on the level of Government subsidies required to make NMC finan- cially viable (Section 4.05 of the draft Development Agreement). In addition, as noted above, the range of crops to be procured by NMC has been increased by the Government in recent years. Combined with substantial producer price increases for the crops which were added to NMC's mandate, this has resulted in a situation where the official purchases of a number of these drought resistant crops has increased dramatically. These have become non-commercial crops as NMC has been unable to sell most of them (some were sold for export at substantial losses) which has in turn created two serious problems for NMC: the accumulation of low value crops taking up valuable storage space and significant financial losses. 60. Until Government has made decisions on pricing, NMC's purchase and sales mandate, and has assumed financial responsibility for the SGR (para 56), Government would provide NMC with financial subsidies, in order to prevent accumulation of another unsound overdraft. NMC's planning division, with input from MDB, would submit to MOF by April 1 of each year, beginning in 1981, a procurement plan which would include the quantity of each crop it expects to purchase in the following year and the net losses or profits anticipated as a result of these activities (given the policy framework within which it operates); the costs used in this exercise would take into account the recommendations of the cost criteria study (Section 5.04 of the draft Project Agreement). 61. After reviewing the procurement plans, and making appropriate adjust- ment based on payments made to NMC and profits realized by NMC in the previous year, MOF would finance NMC's expected net losses, as estimated in the procure- ment plan. Payments would begin in fiscal year 1982 (Section 4.06 of the draft Development Credit Agreement). 62. The combination of steps outlined above would ensure that by June 30, 1982 and every June 30 thereafter, NMC's overdraft with commercial and agricultural development banks would not exceed 25% of the value of projected annual crop sales for the following year (Section 5.01 of the draft Project Agreement). The Government would take or cause to be taken whatever measures are required to enable NMC to achitsve thisobjective (Section 4.07 of the draft Development Credit Agreement). 63. MDB/PPMB: MDB and PPMB will analyze a wide range of policy issues under the supervision of MOA. With this in mind both MDB and PPMB would prepare and submit to the Association, for its review and comment, an annual  - 19 - work program, including staffing requirements and how they propose to address these requirements (Section 3.02(b) and 3.04(b) of the draft Development Credit Agreement). In total, an estimated 650 months of technical assistance will be provided to MDB and PPMB under the project. The estimated cost per month averages US$4,500; this includes salaries, international travel and all subsistence costs. Project Cost and Financing 64. The total cost of the project would be US$58.4 million (TSh 484.6 million), including about US$1.0 million (TSh 8.3 million) of taxes and duties. The foreign exchange component would amount to US$36 million (TSh 299.3 million) or 62% of total costs. Detailed project costs are in- cluded in the Credit and Project Summary. The IDA credit of US$43 million would finance about 75% of project costs net of taxes and duties and this would cover all foreign exchange costs and 31% of local costs. The Government would provide the remaining US$14.4 million (US$15.4 million including taxes and duties). In view of NMC's financial condition, IDA and Government funds would be provided to NMC as equity (Section 3.01 (c) of the draft Development Credit Agreement). As noted above a PPF of $924,000 was approved for the project. As of February 29, 1980, US$121,000 of the PPF had been disbursed; the PPF advance would be refinanced under the project. Procurement and Disbursements 65. Vehicles, spare parts and equipment financed under the Project would be bulked as far as possible and orders of US$100,000 equivalent and above would be procured on the basis of international competitive bidding (ICB) in accordance with Bank Group Guidelines (para A of the Schedule to the draft of the Project Agreement). Construction of new closed flat storage facilities, the new mill, the mill extension, silo rehabilitation and houses would be bulked as far as possible, and contracts of US$500,000 and above would be procured on the basis of ICB in accordance with Bank Group Guidelines (para A of the Schedule to the draft Project Agreement). In the evaluation of bids under Bank Group Guidelines, qualified domestic manufacturers and con- tractors would be allowed a preference of 15%, and 7-1/2% respectively, or the prevailing rate of duty, whichever is lower (paras B and C of the Schedule to the draft Project Agreement). Procurement of goods and equipment which could not be bulked in orders of US$100,000 equivalent or more and construction of new stores and milling facilities, rehabilitation of silo facilities, and housing at a cost of less than US$500,000 equivalent would be in accordance with the Borrower's competitive bidding procedures which are acceptable to the Association (para D of the Schedule to the draft Project Agreement). Civil works contracts for training facilities, pilot open storage plynths, labora- tories, office buildings, and closed storage rehabilitation would be too small and scattered to attract international interest and procurement would there- fore be by contracts awarded following locally advertised competitive bidding; foreign firms would be entitled to compete (para D of the Schedule to the draft Project Agreement). The detailed designs for the new storage facili- ties, mills and central laboratory would be submitted to the Association prior to the solicitation of offers for construction (para A(3) of the Schedule to the draft Project Agreement).  - 20 - 66. Disbursements from the credit would be on the basis of (a) 80% of all civil works; (b) 100% of foreign expenditures and 80% of local expendi- tures on equipment, (c) 100% of foreign expenditures and 85% of local expendi- tures on vehicles, spare parts, technical assistance, consultants, studies, and training; (d) 100% of foreign and 85% of local expenditures for MDB; (e) 100% of foreign and 90% of local expenditure for PPMB; and (f) 100% of the costs of refunding the PPF advance. Disbursements would be fully documented except for local expenditures for training which would be made against state- ments of expenditures signed by the General Manager of NMC. Accounts, Auditing, Reporting, Monitoring and Evaluation 67. Separate accounts relating to project expenditures would be kept by NMC (Section 4.01(b) of the draft Project Agreement). NMC's accounts would be audited by independent auditors acceptable to the Association and would be submitted to the Association within six months of the end of each financial year (Section 4.02 of the draft Project Agreement). At present NMC accounts are in arrears, but the situation is expected to improve as a result of NMC's employment of additional accounting staff under the project. NMC would also establish and maintain separate accounts for the Strategic Grain Reserve (SGR) (Section 4.01(a) of the draft Project Agreement). 68. NMC would define and establish baseline data against which subse- quent data would be compared; the results of the baseline survey would be submitted to the Association by April 30, 1981 (Section 2.12 of the draft Project Agreement). In addition, a management information system would be established in NMC to improve the information available to management on the critical variables effecting NMC's operations. PPMB would prepare and submit to the Association a monitoring and evaluation program for the project by August 31, 1980; PPMB would then assist in implementing this program (Section 3.03 of the draft Development Credit Agreement). Within six months of completion of disbursements, NMC would prepare a project completion report, using the reports of PPMB as the basis of its analysis (Section 2.06(c) of the draft Project Agreement). Justification and Risks 69. The main benefits of the NMC components of the project would be the improvement in NMC's capacity to procure, transport, store and mill foodcrops. It is also expected that the continued support of MDB and PPMB under the MOA component will improve the capacity of Government to properly analyze a range of important policy issues and improve project preparation and monitoring. 70. The quantifiable economic benefits from the NMC investments would come from reduction in storage losses resulting in larger quantities of crops, both for domestic consumption, and, if NMC continues to purchase other crops, for export. There would also be a larger supply of milled maize available for domestic consumption from expansion in milling capacity and  - 21 - rehabilitation of existing facilities. It is estimated that by 1985/86 the quantities saved through the reduction in storage losses would represent about 6%, 12% and 15% of total estimated domestic production of maize, rice and wheat, respectively. The project benefits would accrue to both producers and consumers of crops marketed by NMC, from improved marketing services and reduced margins between producer and consumer prices. 71. The economic rate of return is estimated to be 38% for the entire project (19% for new storage; 41% for storage rehabilitation; 140% for tarpaulins; and 20% for milling). The high rate of return reflects the large benefits expected from reductions in losses on all crops as a result of improvement in management and operating practices. The rate of return on the milling component should be regarded as the lower limit, as it depends on the economic value attached to the milling, which is difficult to estimate and has been estimated conservatively. Sensitivity analysis shows that a 20% reduction in benefits or increase in costs would lower the rate of return to about 31%, and if both occurred simultaneously, the rate of return would drop to about 26%. No negative environmental effects from this project are expected. 72. One risk of the project is that policies affecting NMC's finances and scope of operations would not be changed sufficiently to reverse NMC's financial losses. As noted above, it is expected that the FAP will provide a framework for dealing with this risk. A second risk of the project is that NMC's management and technical practices might not improve significantly, which would be a function of the scope and complexity of NMC's operations and associated problems. Although technical assistance and training have been provided, the project should be seen as the first phase of a long term program to deal with these problems. Finally, there is the risk that implementation of the construction program, and especially of the rehabilitation component, would lag behind schedule. This would be the result both of management difficulties within NMC and of the scattered and piecemeal nature of the rehabilitation. The risk has been reduced by the provision of substantial technical assistance and by providing funds through the PPF which will permit early recruitment of technical assistance and an early start to the design work for the rehabilitation and construction. PART V - LEGAL INSTRUMENTS AND AUTHORITY 73. The draft Development Credit Agreement between the United Republic of Tanzania and the Association, the draft Project Agreement between the Association and NMC and the recommendation of the Committee provided for in Article V, Section l(d), of the Articles of Agreement of the Association are being distributed to the Executive Directors separately.  - 22 - 74. Features of the draft Development Credit and Project Agreement of special interest are referred to in the text and listed in Section III of Annex III to this report. 75. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 76. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments by Ernest Stern Washington, D.C. April 15, 1980  - 23- Annex I ?&as t Of 6 TABLE 3 TANZANIA - SOC'AL 'MICAOC0S OATA SNiEE7 'AN 7,. if 7F~3EISB.C3I ;20U?S (.613200.'D AOlSE LAsD AREA (2HOUS&S3D SQ. E ? - 0S1.) 7AZA oS.IoA.., - W7SAL 9"M. I E SAME 1 SECa 4rasd. ACIICULtURL 510. L !IT RECENT GEOGRAPSIC 34COME i2COfl t 960 /b !970 b ESl2.A2E REGION SZ lO 5010? rd rO0Up ,e 024p ?ER CAP'TA (0s S) 70.3 120.0 230.0 306.1 109.6 .67.5 4ERGT CONSL4'TION ?SR CAPITA1 (IOG&A8S OF COAL EOGIV.LS) 41.0 S2.0 68.0 30.6 83.9 262. 1 pFP,Aots AND V1ZA-.AL STATlSTICS FoPULA:Oti, mID-TS&A (51fLIONS) LO.12 13.3 16.4 OUa6 ?OFULArlo* (?PCET Or r0-.AL) 4.3 6.9 9.2 i7.1 i6.2 24.6 POFULAUON P3OJECTIONS POFPOtZI0I a TEAR 2000 (MILLIONS) 32.0 STATlONART POPUIAMON 0 (`fLL7.L0NS) 94.0 TEAR STATIONAR! POFOLATION ES UAC=D 2145 POPULATION DENS'rT PER SQ. 102. 11.0 .4.0 17.0 L6. '.9.4. .5.3 ?3 SQ. Qt. AGZZCOLI=U. LAND 21.0 26.0 32.0 50.a 252.0 i4i.3 POPU3lATEOt AGE STRUCTORe (PRCENT) 0-14 YRS. 46.4 86..5 46.0 44.I 43.1 45.2 15-64 Y1S. 51.0 51.1 51.0 52.9 53.2 51.9 65 1S5. A.D ABOVE 2.6 2.4 3.0 2.8 3.0 2.d POPtIlACtON GROWM 2AZE (PRCENT) TOTAL 2.2 2.7 3.0 2.7 2.14 2.7 URS.N2- 5.0 6.3 a.5 5.7 4.6 4.3 CRUDE 31rTr RArE (ER THOUSAN4D) 47.0 47.0 46.0 .6.53 42.' 39.4 CRUDE DLiAd RATE (MR TO4U0SAND) 22.0 19.0 16.0 17.2 1,5.9 !1.7 cROSS REPROIDUCTION L6rE .. 3.a 3. 2 3.1 2.9 2. 7 FAXILY ?LA710NG ACCEPTORS, ANNUAL (ThOUSADS) .. .. 93.6 USERS (P?1tCVr OF OARRIED W04fN) .. .. .. .. 12.2 13.2 FOOD AYD NUTRITION =tEX OF FOOD ?.ODUCTION ?. CAJTA (1969-71-100) 95.3 104.0 93.0 94.3 9s.2 99.6 PSP CAPITA SUPPL' Of CALORIES QERCCENT OF 3EQUIRSE3DTS) 69.0 68.0 36.0 a9.5 93.3 94.7 PROTEINS (GRXS PER DAY) 42.0 43.0 L7.1 55.a 52.1 54.3 Or WEICa AnIbL AND wPLSE 22.3Lh 23.0 20.0 17.9 13.6 17.4 CHILD (ACMS 1) MORTALITY RiT 22.0 25.0 20.0 22.3 18.5 11.4 1EALT'H LOPE RXPECTANCT AT 3R1S (TEARS) 42.0 47.0 51.0 47.0 19.3 54 7 1N?J7R 0 AoRTLlOYT kATE (PER IHOUSAND) .. I55.0/ 125.0 .. :05.4 sa.. ACCESS TO SA!E VArrR (PVERCENT Of npO?TlON ) TOTAL L i 3.0 39.0 2 0.3 16.1 34. 4 UR.BAN .. 6L.0 36.0 53.9 58.5 57.9 RURAL 9.0 36.0 10.1I 1. L 21.2 ACCESS sO 2eZUTA DISPOSA-L (PERCE OF ?OPULATION) -OTAL 17.0 22.5 16.0 a 1.?. URBAN -- . .. 38.0 62.5 65.1 71.3 RURAL .. .. 14.0 13.9 3.5 '7.7 0PPAT:Om PER PST-ICCLAS 1C100.0/t Z0677.3 16490.0/1 17424.7 11396.4 6799. ?OFCtXII0t4 PD. .?_R .YU.SYG 0 ?ON 33c0.0/i, 4641.0 3300. i1 2506.6 5552.' 1522.1i POPULATION ?ER 9OSPITAL 3?D CTTAL 575-0Li 664.0 . 502.3 1417.1 726.5 U3RAN .. .. .. 701.S 197.3 272.7 IURAL .. .. .. L403.6 2445.9 1404.4 ADMISSIONS ?E HYOS?PTAL SED .. .. . 23.4 14.8 27.5 60050240 AVERA5E SIZZ Of -cusEHaLD -)TAL i-44-9 5. 3 5- 4r RSA.N 3.2t .. .9 .9 5. 1 ?URAL * 4.-ii 5.3 5.33 5 5.5 AVE9ACG :,SER OF PERMSONS ?ER RCO0 TOTAL .. .. .. M09AN .. .. .. ACCESS .O ELECERICI-T '?ERCENT F ".UL.INGS) =-AL .. .. .. 2s."5 s. sLRAL . . ,. .. .. 3.9  - 24 - Annex I page 2 of 6 TASLZ 3A _ ANA2NIA - SOCt.AL N!:D:CATORS 3ATA s2 . 'ANZAKfIA - 't05 zc!YSr tStMAT- SAt:E M A.' NEXT MICHSP MOST RECZNT CDOG3A.PH7C UNCCE 24COtC L960 /b 1970 lb ZStIIATZ /b REC;ON /c GROUP /d GROP? /a CDUCATtON ADJUSTED MOLLSENT U7I1OS FRIMAAY: TOTAL 28.0 38.0 70.0 59.0 o3.3 d2.7 MALE 37.0 46.0 79.0 64.2 79.1 87.3 FtQALE 20.0 30.0 60.0 44.2 4.8. 4 75.8 SECO.NDARY: TCtA:. 2.0 3.0 3.0 9.0 16.7 21.4 MALE 2.0 4.0 5.0 12.0 22.1 33.0 FEMLZY 1.0 2.0 2.0 4.4 10.2 15.5 VOCATIONAL E.NPOL. (8 07 SECONDARZ) 23.0 .. .. 7.0 5.6 9.8 PJ?I-7-TZAclKEa RATIO ?R1tARY 45.0 56.3 50.0 42.2 41.0 34.1 SECONDARY 20.0 19.0 20.3 22.9 21.7 23.4 ADrLT LITERACY RATE (?'RC!YT) 9.5/i 28.1/q 66.0 20.8 31.2 54.0 CONSUFI?TTON ?ASSE2cER CARS ?EE IaOUSANO POPLATION 3.0 2.5 2.8 4.0 2.8 9.3 RAntO RECEIVEiRS 7! MHOUSASNO POPULATION 2.0 11.0 19.0 64.3 27.2 76.9 TV RECEIVERS 7!! THOUSAIO POPULATION . 0.3 .. 2.9 2.4 13.5 YEwSPA?X ("oAZLY CZNEA.L nmR