Tanzania - Telecommunications Project

Document of The World Bank FILE CuOPY FOR OFFICIAL USE ONLY Report No. P-3081-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 TELECOMMUNICATIONS PROJECT June 1, 1981 This doement has restrited distribuion and may be used by recipients only in the performnce of | their official duties. Its Contents may not otherwise be disclosed without World Bank autborization.  CURRENCY EQUIVALENTS Currency Unit = Tanzania Shilling (TSh) TSh 1.00 = US$0.12 US$1.00 = TSh 8.30 US$1.00 = SDR 0.817472 SDR 1.00 = US$1.223283 (As the Tanzania Shilling is officially valued in relation to a basket of the currencies of Tanzania's trading partners, the US Dollar/Tanzania Shilling exchange rate is subject to change. Conversions in this report were made at US$1.00 to TSh 8.30 which is close to the 1979/80 average exchange rate. The US$/SDR exchange rate used in this report is that of February 27, 1981. ABBREVIATIONS AND ACRONYMS DELs - Direct Exchange Lines EAC - East African Community EAPTC - East African Posts and Telecommunications Corporation km - Kilometer (1,000 meters) MOF - Ministry of Finance MOP - Ministry of Planning and Economic Affairs MCT - Ministry of Communications and Transport TPTC - Tanzania Posts and Telecommunications Corporation UHF - Ultra High Frequency Radio Circuit VHF - Very High Frequency Radio Circuit FISCAL YEAR Government: July 1 - June 30 TPTC: January 1 - December 31  FOR OFFICIAL USE ONLY TANZANIA TELECOMMUNICATIONS PROJECT Credit and Project Summary Borrower: United Republic of Tanzania Beneficiary: Tanzania Posts and Telecommunications Corporation (TPTC) Amount: SDR 22.1 million (US$27 million) equivalent Terms: Standard Relending Terms: The proceeds of the credit would be onlent by the Govern- ment to TPTC at 10% interest per annum for 20 years, including 5 years of grace. TPTC would bear the foreign exchange risk. Project The project would cover part of TPTC's current investment Description: program (1980-84). It would improve telecommunications services through extending local services and providing reliable urban and long distance networks. It would also provide basic telecommunications facilities to rural areas and to Zanzibar. Specifically, the project would finance: (a) construction of about 550 km of overhead line routes; of about 12 VHF or UHF radio links and of 4 microwave links; installation of power supply equipment and of about 850 channels of rural carriers; of about 600 additional channels of multiplex equipment in broadband transmission systems; and of a digital telephone exchange in Zanzibar; (b) expansion of the local cable network at about 90 urban and rural centers; provision of dropwire and of about 700 teleprinters; (c) importation of cement and other construction materials; (d) provision of an air-conditioning plant, vehicles, training equipment and spare parts; and (e) provision for studies, overseas training and fellowships. The project faces limited risks. TPTC is capable of imple- menting the project satisfactorily, and as the project comprises a relatively large number of independent activities, delay in the completion of a few works is not expected to prevent the use of other newly created assets. The project also includes features designed to reduce, if not eliminate, causes of delay. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization  Estimated Project Costs: Local Foreign Total 1/ -US$ Million------- Local Network Facilities 8.7 10.4 19.1 Inter-urban and Rural Network Facilities 2.8 6.7 9.5 Telex and Gentex Network (Teleprinters) 0.2 2.0 2.2 Vehicles, Spare Parts, and Imported Building Materials 0.4 2.1 2.5 Training Facilities, Fellowships and Consultancy Services 1.3 1.0 2.3 Sub-Total 13.4 22.2 35.6 Physical Contingencies 0.6 1.0 1.6 Price Contingencies 6.0 3.8 9.8 Total Project Cost 20.0 27.0 47.0 Financing Plan: Local Foreign Total 1/ -----US$ Million------ IDA - 27.0 27.0 TPTC 20.0 - 20.0 Total Project Cost 20.0 27.0 47.0 Estimated Disbursements: IDA Fiscal Year 1982 1983 1984 1985 1986 ---------US$ Million----------- Annual 0.8 5.0 8.7 11.0 1.5 Cumulative 0.8 5.8 14.5 25.5 27.0 Rate of Return: 24% Staff Appraisal Report: Report No. 3133-TA dated April 2, 1981. 1/ The project is exempted from identifiable taxes and duties.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMNENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A TELECOMMUNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed credit to the United Republic of Tanzania of SDR 22.1 million (US$27.0 million) equivalent on standard terms to help finance a telecommunications project. The proceeds of the credit would be relent by the Government to the Tanzania Posts and Telecommunications Corporation (TPTC) at an interest rate of 10% per annum for 20 years, including 5 years of grace. TPTC would bear the foreign exchange risk. PART I - THE ECONOMY 2. An economic mission visited Tanzania in March and again in June 1980. Its report (3086-TA) dated January 23, 1981, has been distributed to the Executive Directors. A summary of social and economic data is given in Annex I. Background 3. At Independence in 1961, Tanzania (then Tanganyika) was one of the poorest countries in the world. Almost solely dependent on subsistence agriculture and a few estate crops, the country had a very modest industrial base (less than 5% of GDP), and a very small number of educated and trained personnel. For the first six years after Independence, the Government's development objectives resembled those of many other less developed countries, stressing growth in per capita income and national self-sufficiency in skilled manpower, based on market forces and capital-intensive agricultural projects. This approach had a number of drawbacks, such as high investment costs in the agricultural sector, and led in the Government's view to unaccept- able economic and social conditions, such as widening income differentials and unequal opportunities for advancement in the rural areas. In response to this situation, the national development strategy was reassessed in 1967. The new priorities, enunciated in the Arusha Declaration and related policy statements, were directed towards establishing a socialist society, with greater emphasis on broad-based rural development, self-reliance in development efforts, and the development of mass education. To accomplish these ends, the State, with guidance from the Party 1/, was expected to play the leading role, especially in the reform and creation of appropriate institutions. This led in the late 1/ The single mainland political party at the time was TANU, but in February 1977, it merged with Zanzibar's Afro-Shirazi Party to form the Revolu- tionary Party, or Chama Cha Mapinduzi (CCMi).  - 2 - 1960s to the nationalization of large-scale industry, commerce and finance; the creation of numerous parastatal bodies, the formation of ujamaa (coopera- tive) villages, the decentralization of government (1972); and the mass campaign of villagization (1974-76). 4. Despite some disruption arising from these major institutional changes during the period, Tanzania managed to show improvements both in social welfare and in macroeconomic performance. Primary school enrollments increased by more than 50%, life expectancy rose by almost 5 years, and access to safe water increased in both the rural and urban areas. GDP grew by 4.4% per annum from 1966 to 1973, investment averaged 24% of GDP from 1970 to 1973, and domestic resource mobilization improved with recurrent revenues rising from 15% of GDP in 1967/68 to 19% in the mid 1970s. However, the productive sectors grew slowly and the rate of return on new investment (which was centered on the industry and transport sectors) was poor. Perhaps the princi- pal disappointment was in agriculture, the dominant sector in the economy, which grew by only 2.3% per annum from 1966 to 1973. This growth was also uneven among regions and precluded any narrowing of rural-urban income differ- entials. Tanzania made rapid progress towards localizing key posts in the economy, but large gaps in manpower requirements remained. Dependence on foreign aid to finance both domestic investment and the widening balance of payments gap also increased. By 1973, the issues which were to be so important for Tanzania throughout the 1970s were becoming clear: How quickly could a country with limited trained personnel develop a strong and efficient centrally administered economy? The Government's emphasis on equity was often at the expense of efficiency and incentives; how long would the country afford these costs? What could be done to improve the growth rate of the monetized, productive sectors? 5. The oil price increases and world recession of 1973-74 coincided with two years of below average rainfall in Tanzania. Also affected by disruptive changes in the rural areas at this time (decentralization and villagization), agricultural production plummeted and there was a serious shortfall in foodgrain production. The Government was forced into the world market, making large purchases of foodgrain for cash. Food imports rose from US$39 million in 1973 to US$149 million in 1974 and US$136 million in 1975. Export crop production also fell during this period and the barter terms of trade dropped by 22.5% from 1974 to 1975. Combined with the drop in export volumes, the income terms of trade fell by about one-third during these two years. As a result, the current account deficit rose from US$118 million in 1973 to around US$340 million in both 1974 and 1975. Domestically, the recurrent budget fell into deficit and Government bank borrowing rose from TSh. 416 million in 1973/74 to TSh. 753 million in 1974/75 and TSh. 1,061 million in 1975/76. 6. The Government prepared a program to deal with at least the short- term effects of the crisis and was able to receive some assistance from the IMF and a program loan from the Bank. Under this program, import levels were tightly restricted, wages were frozen, government development expenditures 1/ 1/ Government development expenditures account for about two-thirds of public sector investment, which in turn accounts for 50-60% of total investment.  - 3 - were redirected towards the productive sectors, and the Tanzania shilling was devalued by 10% against the SDR. Producer prices for food crops were substan- tially increased and at the same time, the National Milling Corporation was instructed to purchase a number of drought-resistant crops such as cassava, sorghum, and pigeon peas in addition to the usual foodgrains like maize. While these steps were taken to increase food production, they also discour- aged the production of export crops, weakened the financial position of NMC and required the banking system to extend large amounts of credit to NMC. Aside from the devaluation, little scope was given to market forces and Tanzania made no basic changes in its system of administered prices and government controls. Indeed, the Government introduced more controls and administered prices after the Crisis. The basic weaknesses of the economy persisted: declining export volumes, limited trained manpower, disappointing growth in the monetized and productive sectors, and poor maintenance of existing capital stock and infrastructure, especially in agriculture and transport. 7. The Government program, boosted greatly by the coffee boom of 1977, increased foreign assistance and reasonable weather for agriculture, was able to keep the economy in balance until 1978. The current account deficit fell to less than US$100 million in 1976 and less than US$175 million in 1977 well below the 1975 deficit of US$340 million. The Government made a net repayment of TSh. 24 million to the banking system in 1976/77. During 1978, the overly stringent import controls were relaxed at the same time as the terms of trade began to deteriorate again. The balance of payments went into deficit and foreign reserves were drawn down. Then, in October 1978, the country was invaded by forces from Uganda. The resulting war, the oil price increases of 1979 and flooding and drought in different parts of Tanzania led to a worsen- ing balance of payments deficit and the Government built up major arrears on its import payments for the first time since Independence. The domestic budget fell heavily into deficit as expenditures (led by defense) rose by 50% from 1977/78 to 1978/79 and revenues improved by only 10%. As a result, government borrowing from the banking system increased from TSh. 600 million in 1977/78 to more than TSh. 3,000 million in 1978/79. Such borrowing was the major factor in money supply growth, which exceeded 53% in this period. 8. According to the official National Accounts statistics, GDP in constant prices has risen by 4.7% per annum since 1966, and by a slightly higher rate of 5.1% per annum over the past six years. However, this latter trend assumes an 8.6% per annum increase in subsistence agriculture, which seems somewhat overstated in the light of Bank Group project experience and the known marketed surpluses of food. Assuming a more realistic growth rate of 4.0% per annum for subsistence agriculture, overall GDP growth since 1973 would also be reduced to 4.0% per annum. With population growing by around 3.3% per annum, this implies an increase in per capita GDP of only 0.7% per annum. There also has been a change in the structure of the economy over the past six years, away from the productive monetary sector and towards subsistence and service activities. Excluding public administration, commer- cial services and trade, the monetary sector has grown by only 2.3% per annum over the past six years, well below the population growth rate. This change in the structure of the economy has been a major factor hampering the Govern- ment's efforts to mobilize domestic resources.  - 4 - 9. Although Tanzania has sustained a high investment ratio, this has not been matched by a similar success in the mobilization of domestic savings or in the return on investments. Up to the mid-1970s, foreign savings had financed 20%-40% of domestic investment. However, the dependence on foreign savings rose sharply to more than 60% of domestic investment during the crisis years of 1974-75 and again from 1978. The major shortfalls in domestic savings have occurred in the Government sector, where they have actually been negative in some years since 1975. The low return on investments is reflected in the incremental capital-output ratio (ICOR) for the monetary sector, which was around 4.5 at the start of the decade and rose to between 6 and 7 by the end of it. 10. Agriculture remains the most important sector in Tanzania, account- ing for 90% of total employment, 50% of GDP and 80% of exports. The long term trend growth rate of agricultural production has hardly kept pace with popula- tion growth and if anything has fallen in more recent years as the initial expansion of export crop production (through the mid-1960s) has been reversed. This poor performance cannot be adequately explained by the limitations of the natural environment. Although the importance of rural development has con- tinuously been highlighted in Government statements, including the Arusha Declaration and successive plans, this has not always been reflected in the allocation of resources to the agricultural sector or in policy formulation and implementation. The general direction of the Government s post-Arusha agriculture strategy has also tended to emphasize the transformation of the institutional structure of rural development (through the formation of villages and increasing public involvement in the sector) over measures designed to improve agricultural production directly. Many of these institutional changes were introduced too rapidly, without careful planning or sufficient recognition that by themselves they could not compensate for inadequate incentives and shortages of skilled manpower and managers. More recently there has been a greater awareness of the role of incentives, and recent price adjustments attest to the Government's willingness to use them to influence the pattern of agricultural production. The trend towards greater public involvement in agriculture has also continued and with the resultant proliferation of para- statals and increasingly complex structure of administration, the available manpower has been stretched even more thinly. This has resulted in weakened capacity for policy planning and implementation, especially in the areas of research and extension, and deficient distribution of fertilizers and other on-farm supplies and equipment. Also related to the poor performance of agriculture has been the deterioration of transport services. Roads, railways and water transport have deteriorated owing to a lack of spare parts, poor maintenance and inadequate planning and management. The Current Balance of Payments Crisis and Medium Term Prospects 11. The decline in agricultural production, transport bottlenecks, and external shocks described above have all contributed to the severe deterioration in the balance of payments over the past two to three years. Export volumes are estimated to have fallen by 7% during 1980, to a level one-third below the peaks of the mid-1960s and early 1970s. Furthermore, the terms of trade have declined by 27% since the coffee boom of 1977, due to a sharp increase in import costs, especially for petroleum, at a time when the overall level of export prices has been rising very slowly. Owing to these  - 5 - adverse developments, the purchasing power of Tanzania-s exports ii. 1980 was one-third lower than in 1977 and only one-half of the 1966 level. Part of this shortfall has been made good by additional external resources, including a sharp increase in commodity and program aid to more than US$200 million in 1980, as well as by drawings under the IMF standby program concluded in September 1980. But Tanzania has also had to utilize large amounts of excep- tional financing, including suppliers credits and an increase in import payment arrears. Despite this, the volume of imports has had to be severely curtailed, and in 1980, was still no higher than in the mid-1970s. 12. Given the recent negative developments on coffee prices and oil supplies, as well as the limited scope for further exceptional financing, there is little prospect for any immediate improvement in the balance of payments, and present indications are that the situation will continue to deteriorate during 1981. This continuing balance of payments constraint is inevitably having a debilitating effect on the economy, with lower imports reducing production and maintenance of existing assets, resulting in further falls in exports and available foreign exchange. This vicious circle will be difficult to break, unless there is a substantial injection of foreign exchange and major changes in domestic policies designed to improve producer incentives, parastatal operations, import allocations, the promotion of non-traditional exports, and overall government planning and budgeting. The Government has recently introduced a number of significant measures -- such as higher producer prices for coffee, sisal and tobacco and the establishment of a Special Agricultural Account at the Bank of Tanzania to ensure a substantial proportion of foreign exchange for food and export crop production. This Export Rehabilitation Program is to be supported by a recently approved credit from IDA (See Report No. P-3009) and could stem and then reverse the decline in Tanzania-s export earningsz 13. Even with a much improved export performance, Tanzania will continue to face a very difficult balance of payments situation, especially over the next two to three years. To sustain an increase in per capita GDP will require increasing amounts of aid in real terms and a careful review of import require- ments, especially those for low-priority projects with long gestation periods and high foreign exchange costs. Otherwise the prospects would be for generally stagnant economic activity over the 1980s as a whole, with a substantial decline in per capita incomes. To avoid this, there will need to be continued emphasis on export performance and a concerted effort to improve the level of capacity utilization and efficiency in the economy. Furthermore, this must be done without jeopardizing vital food production. 14. Although it may be possible to finance a small portion of the current account gap through commercial borrowings, the scope of this is clearly limited; in addition to the difficulties of raising commercial credit during a period of balance of payments problems, Tanzania simply cannot afford the heavy burden of debt service payments. Therefore, the bulk of the financing requirement will have to be met by additional foreign assistance. Possible sources for this include further drawings from the IMF (which could add US$100  -6- million per annum), deferred payment arrangements and other concessional financ- ing from oil-supplying countries, additional new commitments from traditional bilateral and multilateral sources, and a continued movement towards non- project assistance. 15. Owing to the very concessional terms on which past aid has been given to Tanzania and the Government's previous reluctance to use higher cost commercial loans and suppliers credits, the country s overall debt service ratio has historically been less than 10%. However, the debt service burden is expected to increase as past loans fall due for repayment and new borrowings, including some on commercial terms, are required to meet the widening balance of payments gap. Such borrowings, together with very poor export prospects, could raise the debt service ratio to 15%-20% during the 1980s. In 1980, it is estimated that the Bank held 14% of Tanzania's external debt outstanding and disbursed (for the Bank Group, it was 28%) and received 25% of Tanzania's debt service (27% for the Bank Group). This relatively high level of Bank exposure reflects in part the impact of recent debt write-offs, totaling US$277 million in 1978 and 1979. We are projecting the Bank Group's share in debt service to fall over the coming decade owing to the reduced IBRD component in the lending program and the continued need for Tanzania to borrow funds on less conces- sional terms from other sources. PART II - BANK GROUP OPERATIONS IN TANZANIA 16. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with an IDA credit for education in 1963, 48 IDA credits and 19 Bank loans, two of these on Third Window terms, amounting to US$949.3 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 10 loans totalling US$244.8 million which were 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 diffi- culties 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 manufacturing 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 Commmnity organizations and notes on the execution of ongoing projects. 17. In support of Tanzania's overall development strategy, Bank Group lending operations have assisted a wide spectrum of activities. Nearly every sector in which the Bank Group has operational capacity has received some attention. While this broad involvement in Tanzania's development efforts will be continued, future work is expected to concentrate on: (i) agriculture; (ii) transport and communications; (iii) industry; and (iv) education and manpower development. As agriculture and related activities constitute the largest single sector in the economy, it has received 30% of  - 7 - the Bank Group's direct lending to Tanzania. The lending program in agricul- ture has featured three main types of projects. A series of regional rural development projects are focusing on production and the development of regional infrastructure needed to remove production constraints. The Kigoma Project (Credit No. 508-TA) was the first of these, and similar projects have been approved for Tabora (Credit No. 703-TA) and Mwanza/Shinyanga (Credit No. 803-TA). Another group of projects is centered on specific crops (such as maize, tea, tobacco and pyrethrum) and are the responsibility of the Ministry of Agriculture or one of its parastatals. A third set of projects, such as the Tanzania Rural Development Bank Project (Credit No. 987-TA) is designed to improve general support services for the agricultural sector. However, in view of growing evidence of persistent underfinancing of capital maintenance and replacement in the sector, new Bank Group lending in agriculture is likely to focus increasingly on the rehabilitation and fuller use of existing produc- tion and processing capacity, rather than on expansion of such capacity. 18. Alongside agriculture, there has been a major focus in Bank Group work on transport and communications. Transportation difficulties are con- tinuously cited as critical constraints to development in Tanzania. Indeed, the Government's inability to ensure the timely availability of inputs or the regular collection of crops has been a major bottleneck to increased produc- tion in the agriculture sector. Furthermore, during the seventies, transport investments were primarily concentrated around the Tanzania-Zambia Corridor and since 1977, no systematic investment program has been prepared for the subsectors which were overseen by EAC Corporations. The major objectives of the proposed Bank Group activities are to develop a more balanced investment program in transport and communications and to strengthen the ministries and newly established national corporations responsible for railways, ports, and telecommunications. In industry, future lending is expected to provide further support to well developed financial intermediaries like the Tanzanian Investment Bank (TIB) which are intending to consolidate their portfolio and place stress on capacity utilization and export promotion. Shortages in skilled manpower are also a worsening bottleneck to development. Bank Group involvement in education has supported and is expected to continue support for specialized training and the development of the secondary education sector to assist the Government in meeting its manpower needs. 19. Projects which have been recently approved or appraised reflect the above outlined priorities. Those approved include a Pyrethrum Project (Credit No. 1007-TA), a Foodgrain Storage and Milling Project (Credit No. 1015-TA), a Tea Processing Project (Credit No. 1037-TA), the Dar es Salaam Port Engineering Project (Credit No. S-24-TA), a Seventh Education Project (Credit No. 1056-TA), a Second Technical Assistance Project (Credit No. 1060-TA) and an Export Rehabilitation Program Credit (Credit No. (1133-TA). Projects which have been appraised include a rural development project for Mara Region, a second line of credit to the Tanganyika Development Finance Corporation (TDFL) and a small scale industries project. 20. In addition to financing specific projects, the Bank Group has on several occasions provided non-project credits in support of the Government's  - 8 - efforts to deal with its balance of payments difficulties. The first such credit was made in 1974, the second in 1977, and the most recent in April 1981 (Credit No. 1133-TA). 21. Although the comparatively high undisbursed proportion of loans and credits, detailed in Annex II, is to some extent the result of the recent approval of many of these projects, it also reflects mounting problems in project implementation, particularly in agriculture and rural development. The causes of these difficulties are varied. To a large extent they arise from the scarcity of suitably trained and experienced manpower, which call for stepped-up efforts in higher education and specialized training, as well as for sustained high levels of technical assistance in future project design. Other implementation problems reflect the difficulty of identifying and disseminating agronomic input packages appropriate to the needs of smallholder farmers or result from administrative overextension in the undertaking of a far-reaching development program. These problems have been compounded by frequent and fundamental administrative changes, which--though potentially the source of long-term benefits--have disrupted orderly execution of some projects and made aspects of other project designs obsolete. The Uganda war had some early impact on project implementation by diverting equipment and manpower away from development purposes; however, by contributing to the current economic crisis, the temporary logistical problems caused by the conflict have been superseded by deeper and more lasting difficulties arising from a criti- cal shortage of essential goods and services. During the last half of 1980, the direct and indirect effects of prolonged under-financing of essential import requirements became painfully obvious. Most industrial facilities were working at less than half their installed capacity and the lack of maintenance and operations funds (particularly for replacement equipment, spare parts, and fuel) was compounding the already serious effects of deferred maintenance of capital stock, especially in the agricultural sector. Until the general economic situation improves, the outlook is for continued and sometimes unforseen interruptions in project disbursements. 22. As the Bank Group's lending program has expanded, increased atten- tion has been given to measures designed to improve specific aspects of project implementation. Courses on Bank Group procurement have been held in Dar es Salaam for relevant Government officials. A special project implemen- tation unit has been set up in the Ministry of Agriculture and eleven Agricul- tural Development Services staff have been attached to Bank Group financed projects in agriculture and rural development. The Government has assigned responsibility for the monitoring of project performance to the Sectoral Planning Department of the Ministry of Planning and Economic Affairs. Since February 1977 there has been a Government/Bank Group review of implementation problems on a project-by-project basis. In October 1980, a major Country Implementation Review was held in Arusha at which all Bank-financed agricul- tural projects were examined, with a view to discussing sectoral issues in addition to project-related matters. Consideration is being given to obtaining technical assistance for the central economic authorities (such as Finance and Planning) and for key operating Ministries (such as Agriculture) to improve  - 9 - their project monitoring and implementation capacity. As a result of such steps - and a necessary slowing of the growth rate of the country's overall development program during the next three years - we expect some gradual improvement in project implementation. East African Community (EAC) 23. Major developments affecting the East African Community were out- lined in a report to the Executive Directors dated December 29, 1977 (R77-312) and more recent developments were reported in a statement to the Executive Directors during their meeting of May 6, 1980. The three former Partner States have employed Dr. Victor Umbricht as an independent mediator to recommend an appropriate disposition of the assets and liabilities of the Community corpora- tions and the General Fund Services. Dr. Umbricht has visited East Africa on numerous occasions, has employed consultants to assist in the appraisal of Community assets and liabilities, and has in March 1980 made formal recommenda- tions on the allocation of these assets and liabilities. Meetings at minis- terial level to discuss the Mediator's proposals were held in Arusha in May 1980, and in Kampala in February 1981, and a follow-up meeting in Nairobi is scheduled for July 1981. Meanwhile, the Mediator-s report and recommendations on the future structure of the East African Development Bank (EADB) have been accepted by the Partner States and the revised EADB Charter, along with the Treaty to enact the new Charter, have been ratified by the three Governments. PART III - THE TELECOMMUNICATIONS SECTOR Background 24. Tanzania, with land area of about 945,000 km , has an uneven popula- tion density. About 5% of the total population live in Dar es Salaam and another 5% in the twenty other biggest urban centers. The rural population, about 90% of the total population, is spread over the territory, with higher densities near the Indian Ocean ports of Tanga and Mtwara, the Lake Victoria area, and the highlands around Kilimanjaro and near Lake Nyasa in the south. Poor road conditions and limited transport facilities slow down the impact of administrative and social reforms, and adversely affect the marketing of agricultural products and the timely delivery of inputs. In view of these transportation difficulties, telecommunications services are increasingly becoming the least cost means of communication for a growing proportion of the population. The Tanzania Posts and Telecommunications Corporation-s (TPTC) 1980-84 development program for the telecommunications sector is designed to continue the expansion of services to regions outside Dar es Salaam, and increase access of isolated rural areas to telecommunications services by expanding the capacity of the system, and upgrading the quality of local and long distance telephone service. Organization 25. With the breakup of the East African Community (EAC), including the East African Posts and Telecommunications Corporation (EAPTC), the Government  - 10 - of Tanzania established TPTC in 1977 as an autonomous government-owned corpora- tion under the Ministry of Communications and Transport (MCT). TPTC has to handle the postal and the telecommunications services which are sufficiently separated. TPTC has the absolute monopoly for handling the telecommunications systems in Tanzania which means TPTC is responsible for the establishment, expansion, operation, and maintenance of all local, national and international telecommunications services. These services are adequately organized. By agreement with TPTC, the military organizations, the Ministry of Home Affairs, and the Aerodromes Department operate some telecommunications services for their administrative needs. Private users can also operate point-to-point telecommunications services after obtaining a license from TPTC. These licenses are issued only when TPTC is not in a position to provide such services adequately; they are renewed on an annual basis. Tariffs for tele- communications services are fixed by MCT upon recommendation by TPTC's Board. The country has no significant industry to manufacture telecommunications material and equipment. Access to and Usage of Service 26. In Tanzania, the number of direct telephone exchange lines (DELs) in service per 100 population, about 0.21, is among the lowest in the world. For Africa as a whole, except for the Republic of South Africa, the corresponding average figure is 0.4; for Asia, except for Japan and the People s Republic of China, it is 0.9; for Latin America 3.2 and for North America 32.0. Existing services are concentrated in Dar es Salaam (44% of the DELs) with 5% of the population, that is, 1.8 connections per 100 inhabitants. Another 42% of the DELs are installed in the other 24 regional capitals, making the average telephone density there about 1.4 connections per 100 inhabitants. This leaves 14% of the DELs for the rural areas with 90% of the population; an average density of only 0.04 connections per 100 inhabitants in the country- side, including district and other development centers. While all the regional capitals (20 on the mainland and 5 on Zanzibar and Pemba) have some telephone service, 60 of the 100 districts are not yet satisfactorily connected to the telecommunications network. About 60 other towns have manual telephone service of varying quality and, in addition, about 200 remote centers are equipped with radio call service, 1/ but most towns and villages have no access to telecommunications facilities. 27. No precise figures are available in regard to categories of sub- scribers or users. However, provision is made under the project to support TPTC-s efforts to find out more about users and usages of its telecommunications services (see para. 61). Up to now, it is known that 60% of telecommunications revenues comes from government users, including the parastatal entities. This category dominates the number of subscribers in the regions outside Dar es Salaam, whereas private business and residential subscribers account for nearly one-half of the total number in that city. It is also known that due to the prevailing shortage of lines, a telephone is used mostly for business transactions, even when it is installed in a residence. This is reflected in 1/ a shortwave radio facility for emergency and specialized purposes, but unsuitable for public communications.  - 11 - the pronounced peaks in the traffic load of both local and long distance facilities during working hours. 28. As of December 31, 1979, Tanzania had about 38,300 DELs to which about 88,700 telephones were connected. The current ratio of telephones to connections, about 2.3 for the whole country, is abnormally high, particularly in Dar es Salaam. This situation is detrimental to good service in a network of the Tanzanian type. The high degree of utilization of the available exchange equipment and facilities, has left TPTC with little flexibility for new connections and has hampered growth during the last two to three years. However, for the few lines that can still be connected, TPTC has an allocation system which gives priority to essential services; this system is being implemented satisfactorily. With some adjustments in the present tariff structure (para. 55), it is expected that cost considerations would, to some extent, help allocate telecommunications services to priority uses. 29. There are 426 telex subscribers in the country, of which 110 are outside Dar es Salaam and connected to either of the two telex exchanges in Arusha and in Dar es Salaam. Only 15 of the regional capitals have telex connections, and in these regions TPTC uses teleprinters connected to the telex network for telegram transmission. Quality of Service and Existing Facilities 30. Heavier demand for services than the network was designed to handle has led to poor service, and all systems are heavily congested during daytime (peak period). Due to lack of spare parts and inadequate maintenance, the transmission lines are frequently out of order, reducing the number of avail- able channels and further aggravating the congestion problem. Also, the high number of telephones (an average of 2.3, see para. 28) on each connection necessitates numerous attempts to complete calls during peak business hours; according to sample studies, only 5.5% of call attempts are successful. More than 80% of the telephones are connected to local automatic exchanges, the rest to manual exchanges. About 95% of local and inter-urban traffic is automatic. The long waiting time for manually connected long distance calls makes the service of little value and discourages clients. Despite the fact that underground cables are old and cause faults, especially by leakage during the rainy season, the quality of the service from the local cable networks is relatively satisfactory. TPTCGs performance in rectifying faults and reducing telephone failures is reasonable. 31. Access to international services (telephone and telex) is operator- handled and channelled through an earth satellite station operating since September 1979, and through very high frequency (VHF) and ultra high frequency (UHF) radio circuits, or openwire systems to neighboring Uganda and Kenya. The quality of service through the earth satellite portion of the system is fully satisfactory. Demand for Service 32. As of December 31, 1979, the official waiting list contained 18,000 registrations, most of them for more than two years, and there is a latent  - 12 - demand of at least the same size. It is difficult to forecast accurately the future demand for services since the official waiting list does not necessarily reflect the demand because of frustration and discouragement by the long waiting time. Furthermore, after the villagization program, there are now over 8,000 villages containing more than three-quarters of Tanzania's rural population almost all without access to any telecommunications services. Satisfying this demand is a task which has to be undertaken in addition to the more urgent one of meeting the unsatisfied requirements in regional and district centers and urban areas. 33. TPTC's investment program (1980-84) would make about 60,000 addi- tional telephone connections available; however, it is projected that by 1984 TPTC would still have an unsatisfied demand of about 12,000 (66% of the 1979 level). It is also projected that this situation will continue for the next few years as TPTC does not have the traffic handling and investment implemen- tation capacity to meet the demand. 34. During 1979, the number of telex subscribers increased by 22% to 426, while the waiting list was extended by 76 to 314. The reasons for the relatively large increase (32%) in the waiting list is the shortage of exchange lines and teleprinters. It is projected that once the present waiting list has been eliminated through new installations under TPTC's investment program, the unsatisfied demand for new telex subscriptions would stabilize at around 150 a year. Sector Goals and Constraints 35. The objectives established by the Government of Tanzania for the telecommunications sector are: (a) to improve substantially the functional efficiency of the present installations; (b) to improve communications with the rural areas and estab- lish an infrastructure enabling such improvement; and (c) to expand and improve Tanzania's international telecom- munications. These telecommunications development objectives are consistent with those of the national development plans which give priority to rural development and equitable regional distribution of the development efforts. Rapid two-way communication is seen as an important means of achieving this goal. 36. TPTCGs autonomy, responsibility, and organization are adequate for the operation and expansion of the Tanzanian telecommunications services. Its present management is well qualified, and experienced staff is available at all levels in the organization. However, the number of trained and expe- rienced staff is not adequate for increased efficiency in the utilization and maintenance of the existing installations and in expansion work. Realizing this short-coming, TPTC established a strong training department. Training facilities, however, are extremely inadequate.  - 13 - 37. TPTC is expected to finance the local cost of its expansion program from its internally generated funds without financial support from the Govern- ment or any significant local borrowing. However, the lack of secured long-term foreign exchange financing has up to now been a major constraint which has impeded progress in the telecommunications sector. It caused slow and somewhat erratic expansions, and resulted in an inability to implement longer term planning, and in a failure to sustain an adequate maintenance program. The proposed credit would help to alleviate this bottleneck at least partially. TPTC's Investment Program Objectives 38. After considering the present shortcomings in its services and sector objectives, TPTC established targets for its 1980-84 investment program. These targets, which have been endorsed by the Government, are: (a) to install manually operated facilities in unserviced district centers and in other towns of major rural development importance; (b) to provide satisfactory telecommunication channels to all neighboring countries and to install manually operated telephone facilities in all border towns; (c) to provide subscriber long distance dialing between all regional capitals; (d) to increase the extension, reliability, and capacity of the long distance network to ensure acceptable levels of call completion; (e) to increase the reliability and capacity of the local switching and cable networks at various cities and towns, to decrease the present number of outages, and to reduce the unsatisfied demand for connections registered on the waiting lists (including the additions up to the end of 1984) to two-thirds of the present level; (f) to install at least one public call box at all places with a telephone switchboard installation; and (g) to provide teleprinter installations at all district centers and at some other towns with major rural develop- ment importance for rapid and reliable transmission of telegrams, and for public access to the telex network. These targets appear to be well conceived, with a view to developing a technically and economically balanced telecommunications network which can support the country's economic and social development. 39. The main components of the investment program are: (a) to increase the country s total telephone switching capacity by about 54,000 automatic and 7,000 manual lines and the local cable networks by about 75,000 lines;  - 14 - (b) to install about 30,000 new DELs, 700 private branch exchanges, and 60,000 telephones; (c) to construct about 70 VHF, UHF, or microwave radio links for reliable long distance circuits, and to increase the capacity of existing links by adding equipment for channel- ing and switching; (d) to increase the capacity of the telex central office in Dar es Salaam by 900 lines and adding about 1,400 tele- printers and telegraph transmission equipment as needed; (e) to improve the reliability of power supply facilities for telecommunications installations; and (f) to complete the construction of TPTC's new training center. The cost of completing this investment program is estimated at US$204 million of which US$133 million in foreign exchange. This investment program has been reviewed in the context of Tanzania's prevailing foreign exchange crisis. First, the program is a long-term one, and is subject to annual reviews to adapt it to the prevailing economic situation, including the availability of foreign exchange. TPTC is aware that its investments program is likely to be stretched over a longer period of time than originally anticipated. However, there would be no repercussions of such a longer investment period on the investments financed through this credit as outlined below (para. 65). Second, TPTC is actively trying to secure its foreign exchange requirements with Government assistance from bilateral donors and through suppliers' credits. Additional recurrent foreign exchange requirements generated by the new investments are expected to be negligible. Bank Group Role and Previous Lending in the Sector 40. Prior to 1977, the telecommunications services in the EAC were managed by EAPTC (para. 25). The Bank Group has been associated with these services since February 1967, when it approved a US$13.0 million loan (No. 483-EA) to EAPTC to help finance a project designed to expand local and long distance facilities. The project was satisfactorily completed in early 1974. A second loan (No. 675-EA) for US$10.4 million was approved in 1970 to finance a project to further extend the telecommunications services. This project was satisfactorily completed in June 1975. The combined Project Performance Audit Report on these two projects (No. 893 dated October 21, 1975), while generally positive in its view of the achievements of EAPTC under these projects, points to (i) long delays in project implementation caused by inadequate planning and project management; (ii) problems in procurement; and (iii) failure to meet the demand for service. A third loan (No. 914-EA) was approved in May 1973 for US$32.5 million; due to problems in the EAC leading to its breakup, the works to be undertaken under this project have been delayed. The Tanzania part of the project is now expected to be completed in 1981, about five years behind schedule.  - 15 - 41. The Bank Group first became involved with the telecommunications sector in Tanzania through a sector mission in January 1979, followed by a project identification mission in September 1979. These missions focused on institutional development and staff training, provision of independent technical and economic advice, promotion of an improved tariff structure, and provision of a sound long-term foreign exchange base on which realistic and cost effective plans could be prepared and implemented. While EAPTC's management of the three EAC projects was not completely satisfactory, it is expected that TPTC would after further training of some of its staff have the ability to implement the project satisfactorily. TPTC now has significant experience in planning, engineering, and in construction of telecommunications installations, gained during execution of the Tanzanian part of earlier projects. PART IV - THE PROJECT 42. The project was prepared by TPTC, and appraised in April/May 1980. A Staff Appraisal Report entitled "Tanzania Telecommunications Project" (Report No. 3133-TA) dated April 2, 1981, is being circulated separately to the Executive Directors. Negotiations were held in Washington in March 1981; the Tanzanian delegation was led by Mr. Kazaura, Principal Secretary in the Ministry of Finance. A Credit and Project Summary is at the beginning of this report. Annex III contains supplementary project data. Project Objectives and Description 43. The project has been designed to support TPTC's current investment program (1980-84) which is considered to be technically and economically balanced. The project would comprise works to be undertaken during 1981, 1982 and the first half of 1983. In addition to providing physical facilities, the project would help TPTC to improve its services to generate significant amounts of local funds. It would have a number of broad objectives. It aims at strengthening TPTC as an institution, increasing its capacity for training of staff, expanding services in rural areas, and spreading the network to presently unserved or insufficiently served areas, both urban and rural. Specifically, it would include: (a) construction of about 550 km of overhead line routes and of 12 VHF or UHF links, as well as installation of about 850 channels of rural carrier equipment and power supply equipment for telecommunications facilities in approximately 90, mostly rural, centers. (These facilities will be used to connect district centers and other rural towns, as well as border towns, to the telecommunications networks, and to ensure reliable services); (b) construction of four microwave links and installation of about 600 channels of multiplex equipment in new and existing broadband transmission systems. (This equipment is essential to the development of the principal long distance network);  - 16 - (c) expansion of the local cable network at about 90 urban and rural centers, pressurization of junction cables in Dar es Salaam, and provision of dropwire for about 23,000 new DELs. (The local cable and the dropwire correspond to outside network plant and subscriber installations. The necessary switching equipment and telephone instruments are partly available or under installation; the supply of the remainder is being secured under bilateral financing); (d) provision of about 700 teleprinters required during the first two years of the project for the connection of telex sub- scribers (about two-thirds), leased circuit terminals, and installations in district and major rural centers to increase public access to the telex networks, and to facilitate transmission of telegrams; (e) provision of cement and other construction materials. (The local production of these materials does not adequately satisfy the needs of the country; the balance has to be imported. The quantities included under the project are intended to meet the requirements for construction of antenna tower foundations, cable ducts, and operational buildings); (f) provision of spare parts for existing power supply and telecom- munications installations, for air-conditioning installations in equipment rooms, and for vehicles used in the installation of project items and in the operation of telecommunications facilities. (The general shortage of foreign exchange has caused extreme difficulties for TPTC's ongoing activities. Thus, about one-third of TPTC's vehicle fleet is not used, waiting for spare parts. About 30% of the long distance network is out of use, due to lack of spare parts. Some equipment installed in the coastal areas will have its life reduced by corrosion, because the air-conditioning does not work for lack of spare parts); (g) provision of an air-conditioning plant and of training equip- ment. (These items are critical in the completion of the new training center now being built near Dar es Salaam); (h) provision of 40 vehicles. (These vehicles are specialized or four-wheel-drive vehicles required for handling cable drums and other heavy or bulky items, and for other installation and maintenance work. In computing the number of vehicles needed, it has been assumed that practically all of the repairable vehicles would be brought back into service after procurement of required spare parts); and (i) equipment for a digital telephone exchange in Zanzibar as a pilot project. (Because of its geographical situation, Zanzibar would be an ideal place to study the best arrange- ments for utilizing this kind of equipment in the Tanzanian environment as such equipment has to be installed in a few years on the mainland on a large scale); and  - 17 - (j) provision for training fellowships, overseas study tours, and studies. (The training is intended to specialize staff in outside plant engineering, construction and operation, stores and supplies management, etc. and would complement the locally available training. TPTC would study the appropriate- ness of its tariff structure and the impact of its telecommunications services on national economic development). Project Costs and Financing Plan 44. The total cost of the project is estimated at TSh 390.0 million (US$47.0 million equivalent). TPTC is exempted from taxes and customs duties on imported goods. The foreign exchange component would amount to US$27.0 million equivalent or 57% of total cost. Details of project costs are in- cluded in the Credit and Project Summary. The proposed IDA credit of SDR 22.1 million (US$27.0 million) equivalent would cover the entire foreign exchange cost of the project; the local cost (US$20.0 million) would be provided by TPTC. 45. The proceeds of the credit would be onlent by the Government to TPTC for a period of 20 years, including 5 years of grace, at an annual interest rate of 10% (which is the current borrowing rate for parastatal organizations) and TPTC would bear the foreign exchange risk (Section 3.01(b) of the draft Development Credit Agreement). Execution of a subsidiary loan agreement between the Government and TPTC, acceptable to the Association, would be a condition of credit effectiveness (Section 5.01 of the draft Development Credit Agreement). Procurement and Disbursement 46. All equipment to be financed under the project would be bulked as far as possible and would be procured on the basis of international competi- tive bidding (ICB), in accordance with Bank Group Guidelines, except for a few items costing a total of about US$1.5 million equivalent. In the evaluation of bids, qualified domestic manufacturers would be accorded a preference of 15% or the existing rate of duty, whichever is lower. Items excluded from ICB and proposed for negotiated purchase on the grounds of compatibility are spare parts for existing vehicles, and existing telecommunications and auxili- ary equipment with an aggregate cost not exceeding US$0.75 million equivalent. The procurement procedures to be followed and the prices paid for the nego- tiated purchases would be subject to the approval of the Association and would have to be reasonable in terms of ICB prices offered on similar items. Contracts for vehicles, construction materials, sundry maintenance equipment and other spare parts costing less than US$150,000 each, but not exceeding an aggregate of US$0.75 million equivalent, would be awarded following TPTC-s procurement procedures which are satisfactory. Except for construction materials, none of the material and equipment to be financed under the project are manufactured in Tanzania, and are expected to be imported.  - 18 - 47. Disbursements under the credit would be on the basis of 100% of foreign expenditures and 85% of local expenditures for all goods and services to be financed under the project. Where necessary, disbursements would include the foreign cost of installation of equipment. All disbursements would be fully documented. Project Implementation 48. TPTC would be responsible for project implementation. TPTC staff would (i) prepare engineering designs for all equipment, prepare bidding docu- ments, evaluate bids, and prepare contract documents; (ii) lay and commission all local and junction cables, and install subscriber facilities both in rural and urban areas; and (iii) install the microwave, multiplex, and radio equip- ment. TPTC's management and staff are sufficiently experienced and capable of managing the above work satisfactorily. TPTC's staff is preparing bid docu- ments and technical specifications for nearly all the goods to be financed under the project. Implementation and operations within TPTC have been hampered by lack of spare parts for vehicles; TPTC would monitor closely the use of spare parts and tools provided under the project, the maintenance of the vehicles and the deployment of equipment to avoid bottlenecks in its operations. The design of the telecommunications network is based on appro- priate technology to minimize capital and recurrent costs, and appropriate intervals for the extension of the various plants have been adopted. Subscriber dialing instead of operator-handled calls for traffic between regional capitals is desirable, though somewhat less labor intensive and slightly more expensive, to improve reliability and efficiency on these routes. Tanzania Posts and Telecommunications Corporation (TPTC), the Beneficiary 49. Established in 1978 by the Tanzania Posts and Telecommunications Corporation Act, TPTC, the project implementing agency, is an autonomous government-owned public corporation responsible for all domestic and interna- tional postal and telecommunications services in Tanzania. The Ministry of Communication and Transport (MCT) has direct responsibility for overseeing the activities of TPTC, which is headed by a Board of Directors representing concerned Government ministries and regional authorities, together with a member representing the employees' union. TPTC's day-to-day operations are controlled by a Director General; a Director of Research and Corporate Planning, and two Assistant Director Generals in charge of Operations and Development, and of Finance and Administration respectively report to him. Postal and telecommunications activities share the common services of research and corporate planning, finance and administration, and buildings. From an accounting point of view, the operations of postal and telecommunications services are separately identifiable. 50. TPTC-s telecommunications staff consists of 155 engineers, 911 technicians and specialist workers, 962 operators, 724 laborers, and 402 administrative staff, a total of 3,154. These numbers are high when compared with the number of telephones in service (77 per 1,000 DELs). Despite the introduction of more sophisticated systems during the project period, TPTC does not anticipate expanding its staff at the same rate as in the past (about  - 19 - 7% p.a.) and expects that by end 1984, staff density would be reduced to about 58 per 1,000 DELs, which is close to the average of similar telecommunications systems. Training 51. TPTC-s needs to expand and improve the training of its staff, both in order to improve operation and maintenance of existing installations, and to cater for expansion. Currently, TPTC has two training campuses in Dar es Salaam. In addition, for managerial and administrative training, TPTC has access to a multinational training institution in Arusha. The available facilities are, however, inadequate, and a new training center is being built on the outskirts of Dar es Salaam. Completion is expected in early 1983, at which time the activities at all the campuses would be consolidated. The major part of the training would be done at the new center, although some would still be undertaken at the present centers and some trainees would be sent to the management institute in Arusha. 52. TPTC's instruction and training programs cover the significant aspects of its business (engineering, maintenance, finance, civil works, etc.). There is both in-house and on-site training, with instructors having formerly worked on site. Maintenance personnel are given a two week refresher course every year. Middle- and senior-level technicians are sent overseas for short- and medium-term courses. SIDA, the Swedish aid agency, has provided a number of instructors for the training centers and this aid is expected to continue. Several small items of equipment as well as air conditioning for the machinery rooms are required; the project would provide for these items to ensure optimum benefits. TPTC's present training plans foresee a successive increase from 6,000 student-weeks in 1979 -o 14,000 student-weeks in 1984, which corresponds to the needs of the organization. TPTC-s Finances 53. Historically TPTC's financial performance has been good, both in terms of financial returns, and internal cash generation. TPTC's financial position is sound and its capital structure is adequate. To ensure the financial viability of its operations, TPTC is required to achieve a rate of return after taxes of not less than 12% on revalued net fixed telecommunica- tions assets in operation. For purposes of the rate of return calculations, TPTC would propose to the Association by September 30, 1981, a method for the revaluation of fixed assets and would revalue annually its fixed assets on the basis of the agreed method, starting with the financial statements for the year ending December 31, 1981 (Section 4.03 of the draft Project Agreement). TPTC-s net internal cash generation finances about 54% of its development program. TPTC's projected financial performance is satisfactory and the average operating ratio is 52%, which is acceptable. Settlement of EAPTC's Assets and Liabilities 54. The final division of EAPTC's 1/ assets and liabilities among the former partner states, after the breakup of the EAC in 1977, is still pending 1/ and its subsidiary, the East African External Telecommunications Company Limited.  - 20 - and settlement may take some time (para. 23). The Government has authorized TPTC to operate EAPTC s assets in Tanzania. However, these assets cannot be declared the property of TPTC until final agreement is reached. This situa- tion implies that historic and projected financial statements presented for TPTC are provisional and may be adjusted to take account of a future final settlement of EAPTC-s assets and liabilities. Pending the final settlement, TPTC's audit reports would be qualified by the Auditors to reflect the esti- mated share of TPTC in these assets and liabilities, and revaluation of assets would be based on the provisional accounts and financial statements (Section 4.02(b) of the draft Project Agreement). According to TPTC's esti- mated balance sheet as at December 31, 1979, the book value of EAPTC-s Tanzania based assets represents less than 10% of TPTC's current net fixed assets. Tariffs 55. The allocational aspects of tariff policy have not in the past been a prime factor in determining the level or structure of tariffs; the last tariff increase was in February 1975 under EAPTC management. Currently, installation, rental, and call charges are uniform across the country. In the higher demand areas, telephone installation and rental charges seem to be relatively low. Inter-urban tariffs, on the other hand, seem to be relatively high. In order to promote overall national equity and to balance the tariff level and structure, TPTC would review its tariff structure by December 31, 1982, under terms of reference acceptable to the Association and would by June 30, 1983, submit for the Association-s review and comments, the results of the study along with TPTC's recommendations (Section 4.04(a) of the draft Project Agreement). The tariff structure study would be carried out by TPTC's Tariff Review Committee which includes the Director General, the two Assistants Director Generals and the Directors of Finance and Accounts, and Research and Corporate Planning. Billing and Collection 56. The billing system is computerized and its cycle is on a monthly basis, which is adequate for the current level of activities--rentals are billed in advance and call charges after they have been incurred. At present, bills are issued about three-and-a-half months after the period to which they relate. Two months of this delay occurs prior to receipt of billing informa- tion by the centralized computer center, located in Dar es Salaam. Subscribers can pay in any post office and are expected to do so within two weeks of receiving their bill. If a subscriber has not paid within one month after receipt of the bill, the telephone is disconnected. Accounts receivable at December 31, 1979, are estimated to be TShs 170 million, equivalent to over 50% of the telecommunications revenues, which is rather high. In order to clarify and improve the accounts receivable situation, every six months, TPTC would prepare and forward to the Association a receivables aging analysis by type of user and would institute procedures to ensure that the level of out- standing receivables compared with gross telecommunications revenues would not exceed 35% by December 31, 1982, and 25% by December 31, 1984. To assist in this improvement, TPTC would investigate and suggest methods of improving the  - 21 - three-and-one-half months delay in bill issuance and forward such report and analysis along with its recommendations to the Association by December 31, 1981 (Section 4.05 of the draft Project Agreement). TPTC's Board has recently instructed its management to take strong actions against all defaulters, including Government parastatals, and improvements in the billing system, has reduced the delay from 14 to 10 weeks. Accounts, Auditing, Monitoring and Reporting 57. TPTC enjoys a considerable degree of financial autonomy, prepares its accounts on a commercial basis, and is required by the TPTC Act to present its audited accounts within six months of the end of the financial year. TPTC prepares annual budget forecasts which are presented to the Board of Directors for its review, comment, and approval, in September of each year (three months in advance of the concerned fiscal year). Capital development budgets are forwarded to the Government for final approval and as the Govern- ment controls the foreign exchange allocation to TPTC, it determines the size and scope of expansion. 58. TPTC has an internal audit section which was recently expanded. This section operates with an audit program which covers both routine account- ing and management control procedures. An internal audit report is issued to management every two months. The Tanzania Audit Corporation (TAC) is TPTC's external auditor. The audit of the 1978 accounts has been recently completed; delays have occurred in the presentation of draft accounts and in auditing work. However, TPTC has agreed to furnish to the Association the audited financial statements and the audit reports as soon as available, but not later than eight months after the end of the fiscal year in 1981, seven months in 1982, and six months in subsequent years (Section 4.02(a) of the draft Project Agreement). These arrangements are satisfactory to the Association. Also, in order to improve management control TPTC is working on a management information system expected to be completed during the next 12 months. 59. TPTC would maintain separate accounts of expenditures under the project and would closely monitor project implementation. Detailed progress reports would be submitted by TPTC to the Association on a quarterly basis. Performance indicators have also been established to assist TPTC in monitoring the project's progress. Within six months of the completion of the project, TPTC would prepare and submit to the Association a project completion report, analyzing the implementation of the project and achievement of its objectives (Section 2.05(d) of the draft Project Agreement). Project Benefits and Risks 60. The Government s development efforts, which are focused on rural areas where 90% of the population lives, have an indispensable need for a countrywide network of reasonably well functioning telecommunications services. These efforts are being seriously hampered by the inadequacy or unavailability  - 22 - of communications channels. Lack of access to rapid and reliable communica- tions coupled with a poor transportation system have created significant problems or aggravated existing problems in the coordination and management of all sectors. In the transport sector, trucks often return to base empty even though there are cargoes waiting to be picked up, breakdowns are not quickly reported, and there are delays in analyzing mechanical problems and sending repair teams. Agricultural development efforts also suffer; supplies are not ordered or provided on a timely basis, and information on prices, transport, and administrative problems is either untimely or unavailable resulting in a reduction in the quantities of agricultural products exported and reducing the quantities and the timeliness of locally produced food available in the domestic markets. This in turn adversely affects the producers, and the country-s economy at large. Government officials, responsible for project implementation, who require daily information from parastatals and other ministries, spend hours travelling due to inadequate telecommunications links. Other government officials and private businessmen must make costly, time- and fuel-consuming trips on a monthly or even weekly basis because of the absence of adequate long distance telephone connections. Instead of a situation where adequate telecommunications services contain the pressure on the strained transport system, the present inadequacy of these services exaggerates the burden on the system. 61. In order to obtain a basis for appreciation of the impact of the availability and quality of telecommunication services on the economic develop- ment in Tanzania, it has been agreed that a study be undertaken to this effect (Section 4.04(b) of the draft Project Agreement). The cost of consultancy services for the study would be covered within the framework of the project; consultants would be employed whose qualifications and experience would be satisfactory to the Association. The study would be completed by December 31, 1982. 62. TPTC's 1980-84 investment program has been designed to improve the reliability and efficiency of the present telephone installations to more acceptable levels. It would also increase the capacity of the local and long distance networks, so as to enable automatic and manual calls to be estab- lished without excessive delays. It would expand the network to about 42 presently unserved towns, enabling access both from public telephone booths and subscriber installations. Although the program would not eliminate unsatisfied demand for subscriber connections or immediate access, it would significantly improve the present situation, thus alleviating some of the difficulties indicated above. 63. The completion of the program would contribute to greater efficiency in business, transportation, and Government administration as well as rural development, health, and educational programs. By the end of 1984, the telephone density would have increased from 1.80 DELs per 100 inhabitants to 2.00 (an 11% increase) in urban areas and from 0.04 to 0.09 (a 125% increase) in rural areas; the long distance network would have been improved, and additional public call boxes installed.  - 23 - 64. The project would have a favorable financial impact on Government development programs in other sectors and would generate significant public savings. Over the project period, it is estimated that TPTC would pay corporate tax of US$84 million equivalent in local currency. The project's financial rate of return is estimated at 17%, but this significantly under- states the economic benefits from the investment program because the benefit stream used in the calculations does not include a major portion of the indirect and external benefits to be gained by the non-users of the service. It also does not include much of the consumer surplus which telephone users receive. By estimating the consumer surplus on the basis of the prices now paid by existing subscribers and the registered applicants are willing to pay, the economic rate of return would be 24%. 65. The project presents limited risks. The main risk is that physical implementation of some components might be delayed. However, as the project comprises a relatively large number of independent works, a delay in the implementation of a few works would not generally prevent the use of other newly created assets. Furthermore, where delays do occur, the costs and benefits would be delayed in roughly the same proportion; hence, the impact on the rate of return would not be significant. In addition, the project includes features designed to reduce, if not eliminate, causes of delay. The project would not have any adverse effect on the environment as telecommunica- tions presents a substitute for physical movement thereby reducing pollution, and has potential to conserve energy. PART V - LEGAL INSTRUMENTS AND AUTHORITY 66. The draft Development Credit Agreement between the United Republic of Tanzania and the Association, the draft Project Agreement between the Association and Tanzania Posts and Telecommunications Corporation (TPTC), 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. 67. Specific conditions of the project are listed in Section III of Annex III to this Report. In addition, execution of a subsidiary loan agree- ment between the Government and TPTC is a condition precedent to the effective- ness of the Development Credit Agreement (Section 5.01 of the draft Development Credit Agreement). 68. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association.  - 24 - PART VI - RECOMMENDATION 69. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments Washington, D.C. June 1, 1981  -25- Annex I TABLE 3A Page 1 of 6 TANZANIA - SOCIAL INDICATOPS DATA SHEET TANZANIA RFFFNF?CF GROCPE tWFIC"TFI AVFPA' FC ASPNl_ sIi.A IKCtA S- . A SI.: _ HOST RECENT ESTIMATE)- * 9~~~~~~'4 5. 1 '.6l r hAL 49. ,- MOST RECENT LOW INCOME MIDDlF INrOSF 1960 /b 1970 /b ESTIMATE lb AFRICA SOI'TH OF SAPAPA AFRICA S97TI' OF SAHAPA NI N C LAPIIA (US$J 70.0 1 30.0 270.0 260.0 n68 P. *NLK(lT -SSUFi IfIN P'ER CAPITA ---'I: S 7 fN,I'I! (CUAL iOlIVALENTI 41.0 62.0 65.0 80.r 6q9.4 .ViL.ATUON AND VITAL STATISTICS MPIA1 A ION, MID-YEAP (MILLIoNS) i C. 2 :3. 3 1 7. 4 SI PAN M. K.1ATION (PERCENT OF TOTALi 4.8 6.9 10. 8 17. 3 2F.9 '