Report Nc 7559-TA Tanzania Public Expenditure Review (In Three Volumes) Volume II: Technical Report May 22, 1989 Country Operations Division Southem Africa Department FOR OFFICIAL USE ONLY Documet of the World Bank 'This document has a restricted distribution and may be used by recipients only in the-performance of their. oficial duties. Its contents may riot otherwise be dlisclosed without World Bank autlp4!ization. ) ( ~~~~ CURRENCY E(JIVALENTS Currency Unit The Tanzanian Shilling (Tsh) Exchange Rates 1960 - 1974 US$1 - Tsh 7 1975 - 1981 US$1 = Tsh 8 December 1983 US$l = Tsh 12 December 1985 US$1 Tsh 17 June 1986 US$1 = Tsh 40 December 1986 US$l = Tsh 52 December 1987 US$l = Tsh 84 December 1988 US$1 = Tsh 120 April 1989 US$1 = Tsh 132 Fiscal Year July 1 - June 30 This joint World Bank/Government of Tanzania Report is based on the findings of a mission to Tanzania in October-November 1987. The Bank mission comprised Mike Stevens (mission chief and principal author), Guttorm Schelderup, Maria-Theresa Benito of AF6CO, and Andrew Bird, Stephen Lister and Ron Vogel (consultants). On the Tanzania side counterpart staff from the Ministry of Finance, Economic Affairs and Planning (MFEAP) were led by Mr. Solomon Odunga and Mr. Raphael Mlolwa. A special study on the standard costs of key Government programs was prepared by Dr. Nathaniel Osoro of the University of Dar-es-Salaam, and the mission also drew on valuable coitributions from Professor Wangwe and other members of the Department of Economics. The initial draft of this report was discussed with MFEAP colleagues in May - June 1988, and the final draft in March- April 1989. FOR OFFICIAL USE ONLY TANZANIA: PUBLIC EXPENDITURE REVIEW TABLE OF CONTENTS Page No. EXECUTIVE REPORT (Volume I) TECHNICAL REPORT (Volutme II) CHAPTER 1 - Introduction - Public Expenditure under Stress . . . . . . . 1 CHAPTER 2 - Economic Performance and Trends in Public Expenditure . . . 10 Characteristics and Performance of the Tanzanian Economy ...................... 10 Structure of Public Finance . . . . . . . . . . . . . . . 18 Economic Prospects and Resource Availability . . . . . . . 33 CHAPTER 3 - Public Expenditure Strategy and Issues . . . . . . . . . . 39 Introduction and Main Themes . . . . . . . . . . . . . . . 39 Medium Term Financial Framework . . . . . . . . . . . . . 40 Balance between Recurrent and Development Expenditures . . 47 Balance between Sectors and Activities . . . . . . . . . . 54 Public Sector Manpower, Pay and Productivity . . . . . . . 56 Revenue Trends and Prospects . . . . . . . . . . . . . . . 71 Cost Recovery ........ .............. 79 Utilization of Aid .......... .......... 83 Parastatals ........ . ............. 91 Local Government ............. . 101 Planning and Management of Public Expenditure . . . . . . 108 CHAPTER 4- Sector Programs . . . . . . . . . . . . . . . . . . . . . 120 Introduction .............. . 120 Agriculture ...................... . 121 Natural Resources . . . . . . . . . . . . . . . . . . . . 130 Industry .. . . . .............. . 133 Energy and Mining ........... .... ... .136 Transport, Commutications and Works . . . . . . . . . . . 141 Education ........... .. ......... 150 Health ............... . . . . . .157 Housing, Water Supply and Sanitation . . . . . . . . . . . 165 Other Government Services ...... ......... . 171 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii CHAPTER 5 - Implementing the Public Expenditure Strategy . . . . . . . 178 Main Elements in Public Expenditure Strategy . . . . . . . 179 Scenarios for a Restructured Budget . . . . . . . . . . . 193 STATISTICAL APPENDIX (Volume III) A - Macroeconomic tables B - Public Expenditure tables C - Employment tables ANNEXES Annex I - Decentralization Annex II - Pay Differentials Annex III - Pay Adjustment Strategies Annex IV - Recurrent Arising from the Development Budget - iii - SUMMARY OF MAIN CONCLUSIONS Economic Recovery Program (ERP) policies have been beneficial to the economy as a whole, and a strong supply response is building in the private sector. But critical improvements in the delivery of public services are needed if the recovery in economic activity is not to remain predominantly outside formal channels, and the social costs of a decade of economic decline are to be alleviated. The manifestations of strain are easily identified: low public service pay, neglected maintenance, deficient operating funds, and high levels of parastatal recourse to the banking system and the budget. The PER analyses the causes of fiscal strain and identifies the trade-offs facing policy-makers. It concludes that increased aid flows, improved domestic revenue collection efficiency and the continued growth of output should provide the Government some leeway within which to address these problems. However, in the face of multiple pressures on the budget and Tanzania's rapidly growing population, an incremental approach will not yield the improvements the Government desires within an acceptable timeframe. This points to a more fundamental restructuring of public expenditure than has hitherto taken place. Some of the building blocks of this restructuring are in place or under consideration, others need to be developed afresh. As seen by the PER, the main components of a public expenditure strategy for Tanzania are the followings 1. Continuation of current macroeconomic policies including further downward adjustment of the real exchange rate, and the implementation of reform programs in industry and agriculture. 2. Further revenue strengthening by simplifying the rate structure and broadening the tax base, and greater cost recovery through user charges and parastatal pricing policies. 3. Restructuring of parastatals to reduce the long-term budgetary burden of subsidies, capital transfers and overdraft guarantees. 4. A program to strengthen local government finances, management and manpower. 5. A package of reform measures to restore civil service productivity through retrenchment with appronriate compensation, salary decompression, reduction in non-wage benefits, monetary pay increases, and management strengthening. 6. Measures to improve the planning and management of public expenditures and to strengthen aid coordination. 7. Restructuring of the Recurrent and Development Budgets, modifying the relative shares of ministries to better reflect recovery program priorities, including social development objectives, and the changing role of the Government and to reduce the number of projects in the PIP to sharpen its focus and improve implementation. - iv - ABBREVIATIONS ATC - Air Tanzania Corporation BIS - Basic Industries Strategy BOS - Bureau of Statistics BMDP - Budget Management Development Program CCM - Chama cha Mapinduzi (Party, formerly TANU) CFS - Consolidated Fund Services cMS - Central Medical Stores CTB - Central Tender Board DB - Development Budget DCA - Directorate of Civil Aviation DE - Development Budget Expenditure DEVPLAN - Planning division of MFEAP (now being transferred to State Planning Commission) EDP - Essential Drugs Program EC - European Community ERP - Economic Recovery Program GDP - Gross Domestic Product DMF - International Monetary Fund IPR - Investment Prcgram Review IRTAC - Industrial Rehabilitation and Trade Adjustment Credit MALD - Ministry of Agriculture and Livestock Development MCW - Ministry of Communications and Works MFEAP - Ministry of Finance, Economic Affairs and Planning MHA - Ministry of Home Affairs MIT - Ministry of Industry and Trade MLG - Ministry of Local Government, Cooperatives and Marketing MLNRT - Ministry of Lands, Natural Resources and Tourism MMLD - Ministry of Manpower and Labour Development MOD - Ministry of Defense MOH - Ministry of Health and Social Welfare MRC - Multisector Rehabilitation Credit NHC - National Housing Corporation NMC - National Milling Corporation NTC - National Transport Corporation NUWA - National Urban Water Authority O&M - Operations and Maintenance Expenditures PE - Personal Emoluments PER - Publie Expenditure Review PIP - Public Investment Program PMO - Prime Minister's Office RADO - Regional Agricultural Development Officer RB - Recurrent Budget RCER - Revenue Collection Efficiency Ratio RDD - Regional Director of Developmert RE - Recurrent Budget Expenditure SAP - Structural Adjustment Program SGR - Strategic Grain Reserve SIDA - Swedish International Development Agency SSA - Sub Saharan Africa STAMICO - Tanzania State Mining Corporation TAFICO - Tanzania Fisheries Corporation - v - TANESCO - Tanzania Electricity Supply Corporation TANZAM - Tanzania-Zambia Highway TAZARA - Tanzania-Zambia Railways Authority TEC - Total Estimated Cost TRA - Tanzania Harbours Authority TUB - Tanzania Housing Bank TPDC - Tanzania Petroleum Development Corporation TRC - Tanzania Railway Corporation TRE - Total Recurrent Expenditure TS - Total Supply UDSM - University of Dar-es-Salaam UNDP - United Nations Development Program UPE - Universal Primary Education URWS - Universal Rural Water Supplies WFP - World Food Program CHAPTER I: INTRODUCTION - PUBLIC EXPENDITURE UNDER STRESS Origin and Scope of the Study 1.1 In June 1986 the government of Tanzania launched its Economic Recovery Program (ERP), a comprehensive program of measures aimed at arresting the decline of the Tanzanian economy, checking inflation, channeling resources to key rehabilitation priorities, and improving producer incentives, with the overall objective of achieving sustainable growth over the medium terr. The principal measures adopted were a substantial devaluation of the exchange rate, followed by continued gradual adjustment, the adoption of tight fiscal and monetary targets, large increases in the producer prices of the country's main export crops, and a timetable for the progressive reduction in price and distribution controls. 1.2 In August 1986. the Government of Tanzania reached agreement with the IMF on an eighteen month stand-by arrangement, and in November 1986 the Bank approved a multisector rehabilitation credit (MRC) comprising $13C million of IDA and Africa Facility monies, for general balance of payments support. The * -pose of the credit was not only to provide highly fungible and quick disbkrsing foreign exchange to support the program in its initial period, but also to strengthen it by providing for studies in the key areas of government policy, to assess the alternatives open to the Government and to assist in the deepening of the recovery process. First, a series of marketing studies on the principal export crops were commissioned from local consultants, to support the work of a government task force on agricultural marketing. Secondly, a review of the parastatal sector was undertaken, and a report prepared for the Government. Thirdly, agreement was reached on a review of public expenditures to be carried out jointly by Bank staff and officials of the Ministry of Finance, Economic Affairs and Planning (MFEAP). This report describes the results of the review. 1.3 Agreement on the scope of the PER was reached in December 1986, and a reconnaissance mission visited Tanzania for collection of data and preliminary discussions in April 1987. The full review took place in the latter part of 1987, and comprised a core mission working alongside staff of the National Economic Policy Division of MFEAP, assisted by inputs from Bank sector missions visiting Tanzania between September and December 1987. The initial draft of this report discussed with MFEAP colleagues in May - June 1988, and the final draft in March - April 1989. The Importance of Public Expenditure. 1.4 There can be few countries in the developed and developing world, where public expenditures are not an essential component of the adjustment process. They have a major macro-econcnic impact, through both their revenue and expenditure aspects, on aggregate demand, on monetary conditions and the balance of payments, and on consumption and investment through their resource allocation aspects. The Goverment is a major producer of services in the social sectors, and is usually the sole producer of physical infrastructures such as roads, bridges, railways and harbors, without which the economy could not function. Finally, public expenditurus are responsible for supporting the administrative and policymaking functions of the Government, without which there can be no management of the economy. 1.5 These observations are true for all countries, especially so for countries like Tanzania which have assigned the public sector the leading role in the economy. Since the Arusha Declaration in 1967, the public sector has had a special prominence, and public expenditures have been seen as the principal means for transforming the economy. The state has played a central role in forging a sense of national identity. It has intervened at all levels in the economy in fulfillment of the Government's objectives, provided a range of vital economic and social services to the people of Tanzania, and created an extensive array of government and semi-government bodies. Manifestations of Strain. 1.6 In Tanzania, as in many SSA countries, a combination of external shocks, inappropriate domestic policies and long-run under-performance since the early 1970s has produced chronic economic disequilibrium. This has been manifested in many aspects of the economy, not least in public expenditures where a large gap has opened up between the aspirations of policymakers and the capacity of the public sector to translate aspirations into effective programs. Evidence of strain in public expenditures in Tanzania is widespread. Particularly notable are the following: (a) Underfunding of Government Operations. Most programs of the Government are seriously underfunded, typically receiving, in the view of program managers interviewed by the PER, about one third of the supply vote needed to perform functions at the level they were designed. Agricultural extension workers are ineffective because they lack the transport to reach farmers, and even if they did, they have no message to extend and no materials with which to demonstrate it. Schools are seriously short of text and exercise books and the education system, which bravely embraced new challenges in the 1970s, is now in danger of producing illiterates. Hospitals are frequently without essential drugs and medical supplies, and thus unable to fulfill their curative mission. Office workers, short of basic stationary and equipment, have seen their productivity plummet. All departments are short of transport, or if vehicles exist, the necessary recurrent funding to keep the vehicles on the road, inhibiting the delivery of government services and the supervision of staff. (b) Declining Real Salaries. The purchasing power of public sector salaries is now far below the level of the early 19708. The real value of the minimum wage is now about one - 3 - third that prevalling in 1970, and that of middle and senior civil servants even less, with an average valve across the range ot about one fifth, the result of pay freezes during years of high inflation and awards skewed towards the lower scales. The compression of differentials has been exacerbated by a steeply progressive system of personal taxes, with high marginal rates applied to quite modest salary ranges. Current public service pay levels are for most people far below household living expenses, resulting in a serious decline in public service morale and discipline. Intervals between scales no longer reflect increased responsibilities, and inadequate monetary pay has increased the importance of fringe benefits, particularly housing, which, because of limited availability, is unequally distributed. The net result of this erosion of real pay has been a serious decline in public service morale, motivation and discipline. Absenteeism is common, frustration levels are high, and there has been an increase in corruption that is of deep concern to authorities. (c) Social Services Under Pressure. Basic social services, such as health, education and water supplies, which were extended to the bulk of the population in the 1970s, are now under tremendous pressure. Most water supply schemes have broken down or oparate with frequent interruptions. Schools at all levels are deficient in essential supplies and equipment and the quality of education has fallen sharply. Without the provision of key recurrent support by donors, basic health services in Tanzania would probably collapse. (d) Neglected Maintenance. Allocations for maintenance have failed to keep pace with inflation and virtually all programs have broken down, illustrated by deteriorated roads, blocked drainage systems, broken water supplies, unserviceable equipment and collapsing buildings. In times of economic stress, maintenance may be neglected for a period without visible effect. But the situation in Tanzania has long since passed this point, and capital invested in infrastructure, worth many times more than the cost of foregone maintenance, is now being lost. The greatest deterioration has been in Tanzania's road network, which now constitutes a crippling bottleneck to the recovery of production. (e) Stagnant Development Programs. All projects now experience severe implementation delays, and few projects in the Public Investment Program (PIP) reach completion and make the transition to eifective operation. Some of these delays are the result of financial insufficiency, some the result of the breakdown of administration routines and the malfunctioning of control mechanisms like the Central - 4 - Tender Board (CTB), and some are the compounding of many factors. Delays raise the cost of projects, engender contract administration problems, discourage the private sector from seeking government contracts and postpone benefits. Even when completed, departments lack the funds to operate them properly. (f) Burden of the Parastatal Sector. Instead of generating resources, the parastatal sector has drained them. Only a handful of enterprises are consistently profitable and the most prominent of these owe their profits to a protected environment. Cooperatives (which in Tanzania are as much creatures of the public sector as they are of spontaneous grass roots mobilisation) have required over the years substantial subsidies, commercial parastatals pay meager dividends, and a significant proportion of the 425 or so parastatals of all types in Tanzania are dependent on the Government's budget, in one way or another. The 1988/89 budget shows 71 parastatal agencies receiving regular recurrent subventions from Central Government ministries; a further number are in receipt of special transfers from the Ministry of Finance. Furthermore, parastatal demands on the banking system have crowded out private sector borrowers. (g) Financial and Management Weakness of Local Government. Local Government, which is responsible for the delivery of basic services in the social sectors, is in dire financial straits, with programs funded at even lower levels than Central Government. Urban councils and district councils were re-established in 1983 after a period of experimentation with "deconcentrated" central government, but have not yet been able to generate adequate independent sources of income, and are heavily dependent on transfers from Central Government. Management is weak, operating procedures are unclear, staffing is excessive, pay scales are eroded and morale low. In many councils there is widespread misuse of funds and people have little confidence in the capacity of councils to deliver services effectively. (h) Rising Government Indebtedness. The indebtedness of the Government, both external and domestic, has been rising sharply, and debt servicing is now a major component of the Government's budget, reducing the resources available for program expenditures. In 1972/73 Consolidated Fund Services (the statutory expenditure component of the budget, the bulk of which is debt servicing) comprised 10.7 percent of total expenditureE. The corresponding figure in the 1988/89 Estimates is 27.6 percent. Initially, the rise was due to increased volume of external debt, a significant proportion obtained on non-concessional terms to finance - 5 - the Basic Industries Strategy (BIS). More recently, the rise has been due to devaluation unmasking the real cost of external borrowing. (i) Increased Dependence on External Financing. External funding of the Development Budget has been rising steadily since the early 19709 as recurrent budget surpluses have turned into deficits. Donors now contribute to recurrent budget programs, through direct supply of consumable materials such as essential drugs and school textbooks. Commodity aid, extended primarily to support the Balance of Payments, has now become a crutch with which the Recurrent Budget cannot dispense. Due to recording deficiencies (for which the donor community shares responsibility), the magnitude of the dependence of public expenditures on external financing is understated in the Government accounts. (j) Weak Domestic Revenues. Poor economic performance has affected the tax base, particularly sales tax on local manufacturers, where capacity utilization has fallen to around 25Z. There is widespread import duty erosion with "own funds' imports, and personal and company tax is heavily reliant on collections in the public sector, and a small number of companies in the formal private sector. Tax rates have been increased to make good collection deficiencies, but the burden has fallen disproportionately on individuals and companies in the formal sector, leaving the burgeoning informal sector largely untaxed. In the formal sector there is avoidance of taxation through the excessive granting of exemptions and widespread evasion. 1.7 The above recitation of fiscal woes would be bad enough. But there is also a compounding effect at work, which serves to lower further the productivity of Government resources. Bad roads lead to higher repair bills and a requirement for more costly 4-wheel drive vehicles. Malfunctioning hospital equipment increases the wastage of drugs and vaccines. Low salaries result in loss of skilled personnel to the parastatal and private sector and undermine the morality of the public service. Absenteeism reduces the value of complementary inputs when they are available. The breakdown of information systems makes it difficult to manage expenditure programs. Lack of transport and cadastral equipment delays the updating of valuation rolls on which the long-run financial viability of urban councils depends. Methodology and Issues to be Addressed. 1.8 If the crisis of Tanzania's public expenditure is to be resolved, the direction of these compounding effects has to be reversed and the fundamental causes of the strains in the public finances of Tanzania have to be addressed. To some extent the latter are the inevitable outcome - 6 - of disappointing economic performance, particularly in the late 19708 and early 1980s, when there were severe external shocks, the revenue base contracted and inflation eroded most categories of revenue. But this appears to be only part of the explanation. Recovery of output, which has been gathering pace since 1985, has strengthened revenues somewhat, deficits have been controlled within program targets and the ratio of domestic revenue to GDP has been rising. Even so, public expenditure problems remain as deepseated as ever, suggesting there is a more fundamental imbalance between what the Government is seeking to carry out in its expenditure programs and the financial means at its disposal. The PER has therefore been concerned with exploring the nature of the mismatch between resources and commitments. To ensure consistency all the various public expenditure issues are analysed within a common framework of present and potential resources available. The conclusion of the PER is that Tanzania can break free from the vicious circle of declining public sector performance, but that action is necessary across many fronts, coordinated in a comprehensive public expenditure strategy that iDtegrates both administrative and financial reforms. 1.9 The issues to be addressed by the PER include the followings (a) An assessment of the overall economic prospects of Tanzania, and the implications for public expenditures. Recovery of output will strengthen revenues. A crucial question is whether the resulting revenue growth will be sufficient to restore effectiveness to government programs, without more drastic measures to curtail and reshape government commitments. The converse also holds true. The nature and pace of the recovery is likely to be affected by the scale, composition and effectiveness of government expenditures. Thus the relationship between public expenditure and growth needs to be explored, particularly over the longer run. All the evidence suggests that Tanzania cannot through revenue strengthening alone grow into public expenditure balance. (b) How public expenditure is financed is also important. The Government's overriding requirement will be to operate an effective, nondiscriminatory tax system and to contain the overall budget deficit, in particular, its financing through the domestic banking system, in order to reduce inflation and increase the share of credit available to private sector producers. Within such a framework, there are issues of tax policy, cost recovery, and external financing strategy which need to be explored and discussed. (c) Next, there is the question how public expenditures are allocated. In the short run, the scope for altering significantly the pattern of public expenditures is limited. Over the longer run, the scope for alternative expenditure strategies widens. It is necessary to examine 7- both the effectiveness and priority of existing interventions, and the extent to which degrees of freedom increase as the time perspective lengthens. This requires looking at the present functions of government, how resources are absorbed by them, and their contribution to economic recovery and the country's social and political goals. (d) The fourth overall issue is the efficiency of public expenditures, which is different from allocation and applies both between and within sectors. Tanzania is operating well within its efficiency frontier in most areas of public expenditure, suggesting that significant improvements could be made in the manner in which inputs are combined to produce services. A case in point is the adequacy of present pay scales and the extent to which the resulting incentive structure distorts expenditure in other areas. Another is the way in which critical inputs are not made available in sufficient quantity to make programs effective. By spreading resources thinly over a wide range of activities and subjecting them to considerable budgetary uncertainty, productivity may suffer disproportionately. (e) The final set of issues to be addressed are the institutional and management aspects of public expenditure. These include planning, budgeting and aid coordination, pay and manpower policy, and such matters as the distribution of resources and responsibilities among the different tiers of government. Also included are policies toward Tanzania's large and highly differentiated parastatal sector, and their impact on public revenues and expenditures. 1.10 These five sets of issues are complex and far reaching. In some areas the Government has begun addressing the critical problems and incorporated them into its reform agenda. In other areas responses have not been formulated. Here, the concern of the PER is to delineate the problem, point out interrelationships and suggest avenues of advance for the Government to consider as part of the continuing process of policy adaptation and reform under the Economic Recovery Program. Organization of the Report. 1.11 Chapter 2, which follows, has three main components. Firstly, it describes the economic context. It traces the evolution of Tanzania's current economic situation and the Government's responses to it. Because Tanzania's current economic problems are deep-seated, and not of recent origin, this involves tracing events over an extended period. It is also necessary because the structure of public expenditures, and to some extent the composition of revenues as well, is the result not so much of the random growth of spending, but the conscious implementation of programs of expenditure with well-defined targets of national coverage. It is also the result of exogenous events over the past fifteen years to which the Government has responded. Secondly, it examines public expenditure performance against this background, both in aggregate and in terms of the sectoral, functional and economic composition of expenditures. The third part of Chapter 2 is an examination of Tanzania's economic prospects, and their implication, in indicative terms, for public expenditure resource availability. 1.12 Chapter 3 draws on Chapter 2 to identify and examine in ->ore detail some of the key public expenditure issues that need to be addressed, and suggests a public expenditure strategy. Subjects reviewed are the appropriate aggregate level of expenditure, the balance between the recurrent and development budgets, sectors and activities that should be given greater priority and those which should receive less resources, public service manpower and pay, revenue strengthening, cost recovery, the utilization of aid, parastatals, local government, and the planning and management of resource allocation. 1.13 Chapter 4 is a concise examination of public expenditures issues sector by sector. It describes the main issues of sector expenditure and discusses current programs in the light of ERP objectives, the sustainability of expenditures and the magnitude of the rehabilitation effort. The discussion of each sector concludes with a summary of policy and expenditure priority recommendations. 1.14 Chapter 5 draws together the Report's main recommendations and suggests how they might be implemented. It discusses how planning, budgeting and aid coordination can be strengthened, in the context of current initiatives, and suggests a process by which priorities may be established for core programs in the Recurrent Budget and the Development Budget. It also includes recommendations on i.anaging the budgetary implications of parastatal reform and the strengthening of local government. Some steps may be taken immediately. Others, including a process of review and resources redeployment, will take some time to implement. A premise of the PER is that resolving Tanzania's problems of public expenditure is a medium-term process, which cannot be completed in a single year. Furthermore, a public expenditure strategy is not a fixed concept, but requires continual evolution as circumstances change, and the Report recommends further work to develop the strategy. As a starting point, Chapter 5 concludes with a budget restructuring scenario, which illustrates how the budget might look in 1993/94. 1.15 Finally, a set of annexes presents in more detail the data assembled during the PER, a fuller account of local government issues and financing problems, and some of the calculations underlying pay and employment recommendations. CHAPTER II - ECONOMIC PERFORMANCE AND TRENDS IN PUBLIC EXPENDITURE A. CHARACTERISTICS AND PERFORMANCE OF THE TANZANIAN ECONOMY. Introduction 2.1 Financial pressures as profound as those now confronting the Tanzanian Government take a long time to build up. The present configuration of the budget is the result of policies, programs and economic events that go back over many years. If the present situation is to be properly understood, an historical perspective is a necessary starting point. 2.2 -anzania's economic development, and the evolution of its piblic expenditures, can be described in terms of five periods: (i) the period from independence in 1961 to the Arusha Declaration in 1967; (ii) from the Arusha Declaration to the balance of payments of crisis brought on by the first oil crisis and several years of drought in the early 1970s; (iii) the middle seventies when Tanzania enjoyed temporary respite from balance of payments difficulties with the coffee price boom and embarked on the Basic Industries Strategy; (iv) the late seventies and early eighties, when the economy stagnated, output in many sectors fell and there were crippling shortages; and (v), the period since 1984, when adjustment measures began to take effect and the present recovery, slow and uneven at first, started to occur.1 The Early Years (1961/67). 2.3 The years immediately after independence were ones in which local control over the administrative machinery was consolidated. For the Government, the maln emphasis was on completing the localization of senior and middle level positions in the public service and the relatively compact parastatal sector (es-imated to number about 45 entities in 1965), laying the foundations for social services, and on accelerating training programs for the skills needed for an expanding economy. The first Five-Year Plan, covering the period 1965 to 1969, put forward a balanced program of investment in infrastructure, the social sector and in government administration in line with its expanding responsibilities, in the context of a mixed and relatively open economy. The size of the investment program 1/ For a more detailed account of the evolution of public finance over the period, see: F.P. Mtatifikolo *The Fiscal Sector: Government Revenues and Expenditures (Tanzania)" (Paper written for the Presidential Salaries Review Commission, February 1986). Developments in public finance and their context are also discussed in a series of Bank economic reports dating over the past two decades. - 10 - was commensurate with the domestic resource mobilization capacity, plus the relatively modest amounts of external aid inflows Tanzania at that time was receiving. The recurrent implications of investments were matched to expected domestic revenue growth 2 and the Development Budget averaged about one third of the Recurrent Budget. QDP growth during the initial period averaged 5.5 percent per annum, with moderate levels of capital formation. The domestic savings effort was quite satisfactory, with the government budget throughout the period in recurrent surplus. Revenues averaged 14.5 percent of GDP over the years 1965166 to 67/68 and total expenditures 17.0 percent. Inflation was modest, the terms of trade generally positive and the balance of payments stable, with exports equalling or slightly exceeding imports. Education and health coverage was restricted, infrastructure was rudimentary and there were few indigenously owned and managed businesses of any size. Arusha to the First Oil Shock (1967-1974). 2.4 The Arusha Declaration on Socialism and Self-Reliance, announced by the ruling party TANU in February 1967, marks a watershed in the role of Government in the Tanzanian economy. With the Second Five-Year Plan introduced in 1970, it was to profoundly influence the structure of public finances. The most immediate result was the nationalization of the major means of production, comprising banks and insurance companies, import and export trade, wholesale businesses, major manufacturing industries and large agricaltural plantations. Rental housing was also taken into national ownership, and all land vested in the state. This large-scale transfer of ownership resulted in an immediate increase in the number of enterprises under part or full public ownership. But since they were expected to contribute strongly to government revenues, the increase in the number of parastatals, augmented by the creation of public enterprises in new areas, was not viewed as inconsistent with the government's fiscal objectives. 2.5 The Declaration also laid stress on the elimination of poverty, ignorance and disease, and on self-reliance, rural development and popular participation in decision-making. This provided the impetus for the formation of Ujamaa (communal) villages (and later the mass campaign of villagization), the expansion of basic social services such as primary education and health, and rural water supplies. Emphasis was also placed on the creation of economic institutions and structures for participatory decision-making, and for the management of geographically diversified government programs, in connection with which a major decentralization of 2/ Tanzania was one of the first countries in Sub-Saharan Africa to develop a system of recurrent budget guidelines, broken down by ministry, that provided sector planners a framework within which the recurrent costs arising from development projects could be considered. Unfortunately, this system broke down in the 1970s, and the institutional memory of it has been lost. - 11 - government ministries to the regions was effected in 1972. The period was one of rapid economic transformation, with the taking into public ownership of many firms, the creation of new parastatals, and the expansion of recurrent and capital expenditure programs. 2.6 Economic growth during the period fell slightly, but still averaged 4.5 percent for the period 1967-73. In 1974, the country experienced a serious economic crisis with an increase in international oil prices and a severe drought affecting maize, paddy and wheat production, requiring the Government to import large quantities of food grain at steeply rising international prices. The drought also affected export crops, preventing Tanzania benefitting from higher international commodity prices. At the same time, the crisis made more evident emerging structural weaknesses in the economy, namely the disappointing performance of export volumes, and a declining savings ratio. Fiscal strains also began to emerge caused by expenditures outrunning revenues. Between 1968/69 and 1972/73 recurrent expenditures grew at 18 percent per annum and recurrent revenues at 16 percent per annum. Between 1972/73 and 1974175 expenditures grew at 39 percent per annum, the result of subsidies to NMC, pay increases and the general expansion of programs. Revenues also rose, but less than expenditures. As a result the Recurrent Budget moved into deficit for the first time, in 1974/75. Development expenditures increased even more rapidly than recurrent expenditures (31 percent per annum over the period 68/69 to 74/75), and the Development Budget rose to over half the size of the Recurrent Budget. This expansion was due mainly to large scale infrastructure investments. Associated with these developments was a sharp increase in inflation, partly of international origin, partly due to domestic monetary expansion. The Coffee Boom and the Expansion of GovernAment Commitments (1975-1978)3. 2.7 The Government took a number of measures in response to the economic crisis. Firstly, it addressed short-term stabilization priorities by wage restraint, sharp cuts in Supply votes, increases in indirect taxation, a tightening of controls on imports and dividend remittances, and a ban on Sunday driving. Next, to improve the performance of the economy over the longer-run and lessen its vulnerability to climatic shocks, the Government launched the Basic Industry Strategy, thereby inaugurating a major expansion in public sector investment in industry. Allocations to the directly productive sectors of agriculture, mining and industry were sharply increased (rising from an average of 23 percent of the Development 3/ This period has been analyzed in detail by P. Collier, D. Buchan and J. Ganning in "Economic Consequences of the Coffee Boom in East Africa: A Comparative Analysis of Kenya and Tanzania", 1987. In Tanzania the bulk of the incremental coffee income accrued to the Government through taxes and producer price policies. In Kenya the incremental income went mainly to smallholders. Both countries, however, expanded public expenditures at an unsustainable rate. - 12 - Budget in the period 1970-74 to 38 percent in 1975-76 and 42 percent in 1976-77). 2.8 At the same time, policies were announced that would have significant long-term impact on the level of social expenditures in the budget. In 1974, the villagization program, previously voluntary, became the main thrust of Government settlement policy, and towards the end of that year, in response to the villages' demands for imprcved social services, TANU announced the advancement of the target date to achi.ving universal primary education (UPE) from 1989 to 1977. Early the following year, the target for universal rural water supplies (URWS) was likewise advanced from 1991 to 1984. 2.9 While these social programs had always been part of the Government's objectives, the confidence to accelerate them came from several favorable developments. Firstly, in the course of 1975 the weather improved, and in response to a national campaign to grow more food, domestic production recovered. This removed the requirement for large- scale food imports. Secondly, the international price of coffee quadrupled, as a result of serious frost damage in Brazil. Thirdly, external flows to Tanzania were rising, initially in the form of DMF compensatory finance, but also bilateral aid flows and, in the context of the BIS, commercial lending. Expenditure on both the Recurrent and Development Budgets grew in 1976 and 1977, but due to the conversion of the coffee windfall to government revenue by export taxes, and inczeased external funding, recourse to domestic bank borrowing moderated and inflation eased. The Rrecurrent budget returned to surplus for the three years 1975176 to 1977178, and the DEIRE ratio (the ratio of development to recurrent budget expenditure rose to an average level of 60 percent. Foreign exchange reserves strengthened, and the Government was encouraged to liberalize imports at the end of 1977. Foreign exchange allocations for inputs to the manufacturing sector were increased, and in 1978 imports were more generally liberalized. 1978-1982 Crisis and Stagnation. 2.10 These apparently favourable trends were abruptly terminated by a sequence of external events that propelled the Tanzanian economy into a much deeper crisis than it had hitherto experienced, and production in many sectors collapsed. Firstly, Tanzania's terms of trade sharply deteriorated. In 1977 coffee prices had started to fall, as Brazil resumed exports. By 1978, they were at a level below that prevailing before the boom. The same year international oil prices abruptly increased. Secondly, the breakup of the East African Community in 1977 obliged Tanzania to create national facilities to replace the common services of the Community. Services disrupted by the break-up were: customs, income tax, telecommunications, rail and air transport. Thirdly, in 1978, the West Lake region of Tanzania was invaded by the army of the Ugandan President Idi Amin. The Government's response was a rapid build-up in defense expenditures, which grew from Tsh 629 million in 1977/78 to Tsh - 13 - 1288 million in 1980/81 (18.9 percent and 22.8 percent respectively of the total recurrent supply vote). Compounding these adverse external factors was the disappointing performance of the productive economy. The industrial sector showed poor returns to the massive investments being made in the sector. Agricultural output stagnated in response to a growing shortage of inputs and declining real producer prices. Declining coffee receipts revealed the weakness of Tanzanian export performance in volume terms. 2.11 The Government's response to this changed external environment was to terminate the liberalization of imports and resort to increased administrative controls on economic activity and an exchange rate policy that allowed the shilling to rapidly appreciate in real terms. The economy lost flexibility and the productive sectors became less dynamic. In addition, the external debt of Tanzania was rising. The combined effect of these pressures was to weaken revenues and return the recurrent budget to deficit in 1978/79, a condition in which it has remained ever since. Propelled by the build-up of expenditures on the BIS, the DEIRE ratio continued to rise, reaching 70 percent in 1979/80, before falling sharply to 31 percent in 1982/83 in the face of declining external finance and cutbacks in the number of new projects. At the same time as the Government's revenue base was weakening, its social programs were causing its payrolls to expand, and pay awards failed to keep pace with inflation. Policy Reform and the Beginning of Recovery (1982-86) 2.12 The final phase, prior to the launch of the ERP was the period from 1982, which began with the Structural Adjustment Program (SAP) in June 1982, a program of macroeconomic and sector measures more comprehensive than those that had preceded it, aimed at stabilizing the economy and addressing structural constraints to better economic performance. In the following three years a number of important measures were taken. Mo.st prominent weres (i) two devaluations of the exchange rate; (ii) reductions in the scope of price control; (iii) liberalization of domestic tradef (iv) introduction of an export retention scheme and an Own Funds Import scheme; (v) higher agricultural producer prices and the reintroduction of cooperatives; and (vi) measures to strengthen public finances. 2.13 Initially, GDP continued to decline, by 0.5 percent in 1982 and 2.4 percent in 1983. In 1984 the economy began to recover, rising by 2.6 and a further 3.6 percent -n 1985. Two factors in particular were instrumental in the recovery. The first was the easing of restrictions on domestic food grain marketing coinciding with the onset of a period of favourable weather, which led to significant increases in agricultural output and stable food prices. The second was the success of the own funds import scheme through which a growing volume of imported consumer and intermediate goods became available in the economy, providing the private sector with spare parts and incentive goods that were generally unavailable through the official system of rationing. As a result, a supply response began to slowly build. - 14 - 2.14 In terms of public finances, the most important measures taken under the SAP weres (a) General cutbacks in the budget, to reduce the overall deficit. (b) A substantial reduction in development expenditures, eliminating most new projects and a number of old ones. tc) A shift of budgetary resources, especially capital, to the productive sectors, notably agriculture. (d) Attempts to reduce the share of defense t.zpenditures and increase maintenance allocations. (e) Higher taxes on beer and cigarettes and increased tax collection efforts. 2.15 In addition, local government councils were re-established, and cuts were made in the public service. A commission was appointed to review the parastatal sector, following which several inefficient parastatals were closed, managers were urged to become more efficient, and recurrent subsidies to productive enterprises were eliminated. These steps were important in that public expenditure were brought under better control, but iaany of the structural problems remained, and some were to get worse. Evidence of a Commitments/Resources Gap 2.16 In terms of public expenditures, wh&t is most striking about the past decade and a half is the rapid accumulation of expenditure commitments set alongside a relatively lacklustre performance by the overall economy, and thus government revenues. On the resources side, GDP grew at an average rate of 3.2 percent for the period 1970-85, the same as estimated population growth. Government revenues' share of GDP at the end of the period, 16 percent, was little different from the beginning. Government commitments, however, appear to have grown substantially faster, leading to a serious imbalance with resources, and the visible mismatch between present budgetary allocations and current programs. Pay restraint, budget cutbacks and restrictions on the release of funds averted a complete loss of control of the fiscal aggregates, but did little to tackle policy commitments rnmning ahead of the available resources. Two different sets of data confirm this: (i) public service employment trends and (ii) analysis of the size of the Development Budget and the operations and maintenance expenditure implications on later recurrent budgets. 2.17 Public Service Employment: The two most consistently reported data series of public service employment are those compiled by the Bureau of Statistics (BOS) and those published in the Economic Surveys. (See Table Cl in the Statistical Appendix). - 15 - Table 2.1s Public Ser*ice Employment 1970-1984 ('000) Avg. Ann. Growth 1970 1975 1980 1984 Rate (X) BOS Data: Total Government Employees 135 148 224 302 5.9 Economic Survey Data Public Admin & Other Services 93 103 182 259 7.6 Thus, over an extended period (and particularly in the second half of the period) public service employment was expanding at roughly twice the rate the Government's domestic revenues were growing. Had the expansion of the Government's payroll been held to the same rate of growth as the revenue base, instead of reaching 302,000 in 1984, the public service would have employed only 210,000 persons.4 2.18 Recurrent arising from the Development Budget: Further evidence of the overcommitment of public resources comes from analyzing the recurrent arising from development programs. It has been possible for the PER to analyze recurrent implications only for selected years. The results, shown in full in Annex IV, suggest that in the middle of the 1970's, when the Tanzania Government was implementing a development program approximately two thirds the size of its Recurrent Budget, the latter would have needed to have grown by around 6.4 percent per annum simply to accommodate the rise in operating costs of completed projects. Given that the development program is not the only source of pressure on the Recurrent Budget, the underlying growth of the economy would have had to have been several percentage points higher if adequate revenues were to be generated to meet recurrent costs. Later in the period both the composition and the relative size of the development program changed, exerting less pressure on the Recurrent Budget. However, for much of the 1970's Tanzania's ambitious expansion of social programs were a source of strong pressure on the Recurrent Budget.5 4! Thus by the criterion of matching public service growths to economic performance, the public service appears to be 44 percent too large relative to 1970, indicating staffing reductions of about 30 percent. See Chapter 3 Section E for a fuller discussion of the topic. 5/ The calculations in Annex IV suggest that merely to accommodate the recurrent arising from education and health programs alone, the Recurrent Budget would have had to have grown by at least 2.7 percent per annum in real terms. - 16 - B. STRUCTURE OF PUBLIC FINANCE Data * -rces 2.19 Tanzania's budget has adhered to a consistent format over the years and this has been invaluable to the PER. However, although timely preparation and publication of Budget Estimates has been maintained, there has been a deterioration in expenditure accounting, so that figures of actual expenditure are harder to ascertain. Comprehensive government accounts reconciling expenditures have not been published for many years. The Auditor-General's annual reports provide some summary data, but the main source of expenditure figures in any detail is the Estimates documentation. The Estimates documents "as approved by the National Assembly" often give summary tables showing previous years' actual expenditures (and revenues) alongside the present year's Estimate, and have been the main source of data for the PER Report. 6 2.20 Each year's Estimates are published in four volumes which cover Revenues (Volume I), Consolidated Fund Services and Ministerial Supply (Volume II), Regional Supply (Volume III) and the Development Budget (Volume IV). The Annual Plan, which is published in parallel with each year's budget, gives some additional information about the Development Budget. Although the Estimates provide a detailed, agency-by-agency, breakdown of proposed Central Government expenditures, the summaries of actual expenditure are less detailed, and not all the main analyses are available for every year. Grants and subventions (e.g. to Local Government) are significant, as are the flows between the Government and the large parastatal sector, but in neither case is expenditure information so systematic or detailed as for direct Government expenditures. Unfortunately, the Development Estimates have not since 1980181 included information on actual expenditures in previous years, and almost all the PER's analyses of the Development Budget have therefore had to be based on estimates rather than actual expenditure.7 A fuller note on the Estimates and other sources used for the PER, their composition and the terminology used in the budget is given at the beginning of section B of ths Statistical Appendix. 61 For snme vear only, Estimates documents "as submitted to the national assembly" were available to the PER. Since changes made following parliamentary scrutiny tend to be small by comparison with the wealth of information provided by the Estimates, the distinction vas overlooked. 71 Since the Development Budget characteristically underspends, use of estimates rather than actuals is a source of bias. However, this is greatly outweighed by currency overevaluation and aid recording deficiencies. - 17 - Chart I TANZANIA STRUCTURE OF THE GOVERNMEW BUDGET Expendtue Revenue/Flnoncing (1988/89) (4988/89) 40 35 1% 351% ; __. ~~~~~~~~~~~~~~~~~~~~~~~~LxOns(1 8%) "OeveloQtent Gionts (3 0%) EKpendlture 30 .84) Dev(opment Finmong Revenue (2 1%) (14.5%) Domestic 267% Bonow ng ( 5%) ; ~~~ ~ ~ ~~~~~~~~~~~~~Debt Other Dent ~~~~~~~Program Reden'DptI A m4 Cor~Sld,allea (54%) (60%) FuflO Serwces |9 7%_ _ d 20.8% 20Detipr ( t 20 , ~~~~~~~ ~~ ~~~~~interest Duhes (3 t%) (02%) Grants (4 3%) Consumrtion & Excise Dutes (10 7%) Contractua & Do(thc Contngent Revenue Minifenal udeiitiw (2 97) (208%) 10 Sugl (t59S) Perwol Emolument (22%) incorne Tax Omer ~~~~~~~(46%) (66%) t O rTaoxes & Fees (24%) O, r Regonial SUgtV (t 1%) Oerll bu t deficit Is 8 9 gloefnt of GDP LOANS and, GRANTS ore ow roech DEVELOPMEN REWNUE and OTHER PROGRAM ASSISTANCE twesent coulntetPOt funds tnm 0OIOn Ce Ot DayYTnenit Support wanxd Bark - 44i1711 - 18 - Budget Management and Expenditure Control 2.21 The Ministry of Finance (MFEAP) - which is currently merged with Economic Affairs and Planning (DEVPLAN)- has the pivotal role in budgetary affairs. MFEAP has primary responsibility for revenue collection, for the preparation of the Estimates and for the control of expenditure. In regard to the Development Budget, responsibility for its preparation rests largely with DEVPLAN. There are thus two separate budget units in the Ministry. 2.22 Years of financial stringency have put an increasing strain on public financial management, but the system of financial administration has proved quite robust and financial routines have for the most part been maintained. The Auditor-General's annual reports provide a revealing commentary on the stresses to which the system is subject. The PER returns to this issue in Chapter 3, Section K, but for the present it is sufficient to note that the Government's official records, as far as they go. provide a reasonably accurate picture of public finances. In this regard, Tanzania is better placed than many other Sub-Saharan Africa countries. The country possesses a functioning framework on which to base the restructuring of public expenditures. Public Expenditure Aggregates 2.23 Table 2.2, which is based on Table B4 in the Statistical Appendix, summarizes Central Government revenues (excluding grants and borrowings) and expenditures for selected years, in current prices. Other than in 1976/77 and 1977/78, when revenues were boosted by the coffee boom, the recurrent budget has been in continuous deficit since the first oil crisis. Over the ten year period to 1984185 current revenues averaged about 19 percent of GDP, falling sharply in 1985/86 and 1986/87 to 15.4 percent and 16.1 percent of GDP respectively. Since then revenues have recovered, to an estimated 19.7 percent in 1987/88 and 21.1 percent in 1988/89, due principally to a more buoyant economy, tax adjustments such as the conversion of specific tax rates to an ad valorem basis, and increased collection effort.8 2.24 Between 1975/76 and 1984/85 recurrent expenditures have averaged just over 20 percent of GDP. However, since the launch of the ERP in 1986, recurrent expenditures have been rising, amounting to 22.1 percent in 1986/87 and an estimated 23.1 percent in 1987/88 and 27.2 percent budgeted for 1988/89. As indicated below, the reason for the increase is extemnal 8/ Budget magnitudes expressed as a share of GDP should be interpreted cautiously, particularly in recent years due to the effect of exchange rate changes on the measurement of GDP, and the fact that considerable economic activity occurs outside normally recorded channels. - 19 - debt servicing, which has risen sharply in local currency terms, as the shilling has been devalued. 2.25 Development Budget expenditures, on the other hand, have been on a ielative decline. From 1975176 to 1980181 the level of development expenditure was high, averaging nearly 12 percent of GDP, reflecting heavy expenditures on the Basic industries Strategy and on social infrastructure. Thereafter, expenditures sharply declined, falling to 4.3 percent of GDP in 1985/86, before rising again, to an estimated 8.6 percent in 1988189. However, this increase is primarily exchange rate related, as devaluation caused the relatively high foreign exchange component of development spending to be revalued in local currency terms. Table 2.2 Central Government Operations - Selected Years 75/76A 80181A 85/86A 86/87A 87/88AE 88189E Aggregate Amount (TSh billion) Current Revenue 3.85 8.53 20.63 31.10 51.15 70.14 Current Expenditure 3.93 9.53 26.38 42.79 60.07 90.27 Current Deficit .85 1.00 5.75 11.69 8.92 20.13 Development Expenditure 2.25 4.76 5.82 11.83 17.26 28.40 Overall Deficit (Gross) 2.34 5.76 11.57 23.52 26.18 48.53 Share of Total Expenditure (Z) 37.8 40.3 35.9 43.1 33.9 40.9 Share of GDP (2) Current Revenue 17.7 18.7 15.4 16.1 19.7 21.1 Current Expenditure 18.1 20.9 19.7 22.1 23.1 27.2 Current Deficit 0.4 2.2 4.3 6.0 3.4 6.1 Development Expenditure 10.4 10.4 4.3 6.1 6.6 8.6 Overall Deficit (Gross) 10.8 12.6 8.6 12.1 10.0 14.7 Source: Table B5, B7 Notes Grants and commodity aid counterpart receipts (TSh 8.85b in 1987/88 and TSh 20.06b in 1988/89) have been excluded from current revenue. Subtracting debt redemption from the Overall Deficit (Gross) gives the Net Deficit (8.9 percent of GDP in 1988/89) 2.26 The overall deficit (on a gross basis) was on a rising trend until 1981/82, when it reached nearly 16 percent GDP (See Table B7) but then fell sharply to an average of 8.5 percent, between 1982/83 and 1985/86. Since the ERP the overall deficit has widened, but as indicated above, this is mainly attributable to the effect of devaluation on the - 20 - Government's debt servicing, and does not constitute an increase in domestic expenditures. Financing of the Deficit 2.27 Accompanying the tightening of the budget has been a progressive reduction in the extent to which the budget has been financed domestically. In the 1988/89 budget framework total expenditures exceed domestic revenues by Tsh 48.5 billion, equivalent to 14.7 percent of GDP (or 8.9 percent after netting out debt redemption). As chart 4 shows, the bulk of this deficit (8.3 percent of GDP) was financed by commodity aid/import support counterpart revenues. Loans and grants comprised 1.8 percent and 3.0 percent of GDP respectively, with domestic borrowing (Tsh 3.1 billion or 1.6 percent of GDP) comprising the remainder. Of this total, Tsh 2.5 billion comprises non-bank borrowing and Tsh 0.6 billion bank borrowing. This is consistent with the Government's policy of limiting government recourse to bank financing to restrain monetary growth and increase the share of credit available to the private sector. Composition of Domestic Revenues 2.28 Table 2.3 shows the breakdown of domestic revenues by source for selected years, in actual amounts collected, and by shares. As already noted, domestic revenues, although they dropped in the early 1980s, have remained a stable proportion of GDP, showing much less variability than expenditures. Table 2.3 - Central Government Revenue, by Share (2) 76/77 80/81 85/86 86/87 87/77 88/89 -----------------------------------------------------------------__------- Import Duties 6.2 7.7 7.5 13.0 12.7 15.0 Export Duties 16.1 2.5 - - - - Consumption and Excise Duties 33.6 51.3 52.1 53.4 53.2 51.3 Income Tax 26.8 32.2 30.9 23.0 18.1 22.3 Others 17.2 6.2 9.5 10.6 16.0 11.4 -------------------------------------------------------------------__----- 100.0 100.0 100.0 100.0 100.0 100.0 2.29 There have nevertheless been substantial changes in the composition of domestic revenues. In particular: (a) Export duties were phased out in the early 1980's; - 21 - (b) There has been a corresponding increase in the contribution of consumption and excise duties; (c) The contribution of income taxes has weakened in recent years; (d) As the exchange rate became progressively overvalued, the share of import duties in total revenue fell. Since 1986/87 this situation has been reversing itself. The domestic revenue effort and how it might be improved is examined in more detail in Chapter 3 Section F. Composition of Current Expenditures 2.30 The pressure on expenditures in real terms (using the GDP deflator) is visible in Table 2.4 which shows aggregate expenditure in 1985/86 nearly 10 percent lower in real terms than in the base year of 1976/77 and almost 25 percent below the peak of 1981/82. Table 2.4 Index of Revenue and Expenditure Trends 76/77 81/82 85/86 86/87 87/88 88/89 Current Revenue 100.0 101.4 92.5 97.7 124.3 139.5 Current Expenditures 100.0 140.0 122.5 134.4 151.4 186.2 o/v Consolidated Fund Services 100.0 142.3 243.8 320.8 434.1 571.1 Ministerial Supply Votes 100.0 142.2 132.7 146.7 145.5 174.4 Regional Supply Votes 100.0 133.2 37.8 33.6 31.0 31.8 Development Expenditures 100.0 86.2 41.8 59.6 67.2 90.6 Total Expenditures 100.0 118.9 90.8 108.1 118.4 148.7 Sources Table B9 2.31 The distribution of expen4iture reduction was uneven. Debt service had doubled by 1984185 and was still rising fast. Expenditure on Supply was above the base year level in 1985/86 but well below levels achieved in intervening years, while development expenditure was on a steeply downward trend, falling to only 42 percent of its 1976/77 level by 1985186. In summary the main changes in the composition of the Government expenditures in recent years have been as follows: (a) Debt service has become an increasing burden, growing nearly sixfold in twelve years, and the share of CFS in total expenditure has risen to around 28 percent. - 22 - (b) Non-CFS expenditures rose somewhat in real terms during the late 19708 but have declined sharply since 1981/82 and are now no higher than a decade ago. (c) There has been a secular decline in Regional Supply expenditure, reflecting institutional changes and the re- introduction of local government (this is discussed in Chapter 3, Section J and more fully in the Annex on Decentralization). (d) Development expenditures have been much more sharply cut back than supply votes, and are now down to about half their 1975/76 level in real terms. (e) Nevertheless, development expenditure has been a remarkably high proportion of discretionary expenditures during the period as a whole. The PER discusses later the implications of such a high level of development expenditure in terms of its implications for recurrent costs, and examines the extent to which the components of the Development Budget are really investment expenditures as opposed to recurrent services. Actual vs. Estimated Expenditures 2.32 The relationship between Actual and Estimated expenditures (depicted in Table B2 in the Statistical Appendix) may be an indicator of the effectiveness of budgetary control and/or the Government's degree of financial foresight. The overall picture seems to be one of effective aggregate financial discigline, with actual expenditure quite closely related to the Estimates. Over the period 1982/83 to 1986/87, the latest year for which accurate outturn figures are available, the outturn on the two budgets combined averaged 101.7 percent of the Estimate presented to the National Assembly at the beginning of the year. However, this disguises a tendency to overspend on the Recurrent Budget (principally ministerial and regional supply) and to underspend on the Development Budget. 2.33 The average ratios for the two budgets are 108.6 percent and 86.4 percent, respectively. This pattern does not come as a surprise. In a period of high inflation, changing exchange rates and extreme fiscal pressure, the tendency of recurrent votes to overspill will be 9/ Note, first, that expenditure in excess of 10OZ of Estimate does not necessarily indicate any impropriety, since such expenditures may be validated through Supplementary Estimates during the course of the financial year, and, second, that the degree of coincidence between actual and estimated expenditures may be exaggerated to the extent that the budget process under-anticipates inflation. - 23 - considerable. To a lesser extent the same factors are at work on the Development Budget, but they are offset by the inbuilt tendency for development programs to run slower than projected. 2.34 It is not universally recognized that the implementation of an investment programme is inherently different from the recurrent activities of the government. Expenditure on projects is "lumpy3 and, given the multiplicity of funding sources, it is quite normal for development budgets to be underspent in aggregate in any given financial year. But contrast the observations of the Auditor-Ger.eral in his report for 1985186: 'In the case of Development Votes, however, almost all the Ministries and Regions ended with large surpluses (unspent provision)...representing over one fourth of the approved provision for these votes. I have to repeat that the huge savings in the Development Votes year after year indicate that either the estimates are not being framed on a realistic basis or that the projects are not progressing according to schedule." From the budget manager's standpoint, the culprit is not the realism of the estimates or the variability of implementation schedules, but also the fact that unlike the Recurrent Budget which is funded from a homogeneous and therefore fungible source, the Development Budget is funded from a mix of external sources which cannot easily be shifted between projects (or even within them. If one project encounters unexpected implementation delays (which will inevitably happen to a PIP under far less stress than Tanzania's), only the local component of its funding may be shifted to a faster running alternative project. But if the finance ministry were to scale back all project allocations in proportion to the expected underspend, implementation would be held back and further underspending would occur. Two devices may be employed to ease the problem of uneven project implementation. Firstly, the overcommitment inherent in the Development Budget may be made explicit by presenting as part of the budget a figure for the expected outturn, say 80 percent of the aggregate figure for project allocation. Secondly, prominence can be given to the five year Total Estimated Cost (TEC) of a project, permitting ministries to commit against the total cost of the project, rather than the annual allocation, thereby allowing projects with the prospect of faster impleme-tation to realize that potential. The first is a device to make the budget framewock more realistic. The second is a device to facilitate project management, and thus speed up implementation. 2.35 The picture of financial discipline at micro level is not so reassuring. The Auditor-General's Report for 1985/86 (in a refrain that recurs with increasing urgency in successive Annual Reports) is highly critical s 'Despite repeated adverse comments by me, unvouched and improperly vouched expenditure has been assuming alarming proportions with each passing year.... During the financial year 1985/86, unsupported expenditure amounted to TSh. 424.09 million..." '[Concerning Advances and Imprcsts] the situation has been deteriorating each successive year. As at the end - 24 - of 1985186 a total sum of Shs. 1,002.24 million was outstanding ... the bulk of which comprised Personal Advances and Safari Imprests.81O 2.36 This depicts another characteristic of a budget system under stress. Maintaining expenditure control, never an easy task, becomes increasingly difficult when Government comditments outrun resources, accounting systems breakdown, the real pay of public officers deteriorates, and vote managers have to increasingly rely on expedience to keep programs going. Audit queries are unanswered, financial regulations are ignored, and disciplinary sanctions such as surcharges become impossible to apply. Sectoral Allocation of Expenditure 2.37 Tables 2.5 and 2.6, which are modified forms of more detailed tables in the Statistical Appendix, which in turn are derived from BOS analysis of expenditure by purpose, summarize the main trends in sector allocations in recent years. Table 2.5: Recurrent Expenditures by Purpose (Z) 81/82 82/83 84185 86187 (E) Recurrent General Public Services 21.2 20.1 26.3 15.1 Defense 15.7 14.8 15.7 5.9 Education 15.4 15.7 14.8 15.0 Health 7.5 6.2 6.7 6.3 Agriculture 4.6 4.2 4.3 3.1 Mining & Manufacturing 1.2 1.3 1.1 0.7 Water Supply & Electricity 2.6 2.1 1.9 2.1 Roads & Bridges 3.2 2.1 2.0 1.4 Public Debt 17.2 26.2 19.9 37.1 Other 11.4 7.3 7.3 3.3 ---------------------------------------------------------------------__--- TOTAL 100.0 100.0 100.0 100.0 10/ The aggregate overdraft on the Paymaster-General's Account stood at over Shs. 4,000 million at the end of 1985186, (20 percent of the combined ministerial and regional supply for that year) partly accounted for by outstanding imprests and advances. - 25 - Table 2.6: Development Expenditures by Purpose (Z) 80/81 82183 84/85 86/87 Development General Public Services 7.4 7.1 14.2 11.6 Defense 6.7 8.0 7.7 7.1 Education 5.7 4.8 6.1 10.1 Health 1.6 1.3 1.6 1.8 Agriculture 17.1 13.7 12.8 20.7 Mining & Manufacturing 25.3 27.4 20.7 15.2 Water Supply & Electricity 6.0 7.4 11.8 11.3 Roads and Bridges 10.3 14.5 8.7 6.7 Other 19.9 15.8 16.4 15.5 -------------------------------------------------------------------__-------- TOTAL 100.0 100.0 100.0 100.0 Sources. Statistical Appendix, Tables B14, B15, modified by data subsequently provided by Devplan on indirect expenditures on Health, Education and Water Supply through transfers to Local Government. 2.38 The sector shares shown in these tables, which are derived from the Government's annual Economic Survey, illustrate some of the balance issues noted above: (a) The squeeze on sector recurrent programs caused by the high level and rapid growth of Public Debt. The adjustment of the exchange rate has caused debt servicing to rise sharply, even though the bulk of the Government's external funding is on grant or highly concessional terms. (b) The importance of General Public Services in both recurrent and development expenditures. (c) The robustness of Defense allocations, which are significant in size and have withstood the crowding out by debt service better than most other sectors. (d) The relatively constant recurrent and development shares of Education and Health, once Economic Survey data are modified to incorporate transfers through Local Govvernment. (e) The high share of development spending on Agriculture, much of it on directly productive activities such as irrigation schemes and state farms. - 26 - (f) The very large share of development expenditure (though declining as BIS projects are completed) enjoyed by manufacturing, again expenditure on directly productive activities. (g) Moderate and declining recurrent and development expenditures on Roads and Bridges (about half the level of the agricultural sector). Personal Emoluments, Grants and Contractual Liabilities 2.39 In a country where budgetary pressure has led to severe salary compression and other forms of underprovision, it is useful to analyze recurrent expenditure in terms of categories of budgetary expenditure. The long-established coding system employed in the Tanzanian budget makes such analysis possible. Table 2.7 shows the Ministerial Supply (Total recurrent expenditure minus debt servicing and excluding Regional Supply) broken down by four categories of expenditure: (a) Grants: comprising internal grants, mainly to local councils and directly funded parastatals, and external grants, chiefly Tanzania's subscription to international organizations; (b) Contractual and Contingent Liabilities: claims on government arising from loan guarantees, contingencies and other special payments; (c) Personal Emoluments: the Government's wagebill, amounts paid directly to Government employees as wages and salary; (d) Other Charges: the residual left to fund the general operating costs of departments, such as travelling, maintenance and vehicle rur.ning costs, office supplies, conferences and training. - 27 - Table 2.7 Analysis of Ministerial Supply Expenditure by Vote Category 75/76 80)81 85/86 86187 87/88 88/89 Share of Total Ministerial Supply ( percent) Grants 11.0 21.4 32.0 25.8 31.1 26.8 Contractual & Contingent Liabilities 0.5 9.3 5.4 12.5 15.1 18.1 Net Supply 88.5 69.3 62.6 61.7 53.8 55.1 Personal Emoluments 37.6 27.4 19.4 15.2 15.6 14.0 Other Charges 50.9 41.9 43.2 46.5 38.2 41.1 Source: Table 310 2.40 The relationship between PEs and other charges is of particular interest given the obvious fact that government staff have in recent years been poorly provided with support facilities. However, no unambiguous budgetary manifestation of this problem can be expected, since declining capacity to pay for support services has been accompanied by declining real salaries (this is documented further in Chapter 3, Section E). The picture is potentially distorted by the allocations to internal grants and to 'contractual and contingent liabilities": grants have become an increasing proportion of total supply, mainly reflecting the resurrection of Local Government (and thus transfers for teachers and health workers salaries), while 'contractual and contingent liabilities', which were negligible in the 1970s, have taken a substantial share of resources during the 1980s--mostly, it appears, as emergency finance for parastatals. PEs are currently well below their peak proportion of the net supply vote (appr_..ximately 25 percent compared with a high of 42 percent in 1981/82). Further information on Personal Emoluments is given in the Statistical Appendix. Table B26 shows the share of Personal Emoluments in direct expenditures ministry by ministry for 1988/89 and Table B24 shows the breakdown between Personal Emoluments and other charges in the Regional Supply votes over the past decade. The issues of salaries and public sector manpower strategy are further discussed in Chapter 3. - 28 - Chart 2 TANZANIA COMPOSITION OF GOVERNMENT WDGET BY MINISTRY EXPENDITURE SHARES Recurrent Budget Opewipment Budget (1988/89) (1986/89) 100 Regions (66%) (o/wHeoItm 26% Worms09%) reglons (78%) go O_ oee (70%) Ome (6 5%) PnrreMnisfef (23%) PMO-COP Dev (08%) NC, Sevce (23% Eaucaton (31%) 80 _ Agnculture (33%) Det e& NOhOnoI _ __ ce (34%) Cor~mmu-ications Land~$ Nat ReoSuresS &Wco(s (4 6% &Tounsm (35%) 7Fxeign Affairs (48% Hoc" (40%) 70 H8olt (48%) Water (55%) 60 -O_ Eaucation (8 3%S Tro*M (5 7%) Finonce 72$) o _ Horre AftOirs (89%) 'i ________________ _ .zLSocal Govd (83%) Def-en (11 9%) 40 - Communcaton &works (100%) 30 - LocaC Govefnrnent (152%) 0/w EduCaion (10 2%) HeOlTi (3 7%) Erergv & Minerals (1164%) 2C 10 - Fianrce (200%) 10 ~~~~~~~~~~Agrcui?te (168%) 10 _ Wood Bak- 1 71 2 - 29 - Composition of Development Expenditure 2.41 Table B16 in the Statistical Appendix includes a breakdown of the sectoral allocation of development expenditure in recent years. In the absence of published government accounts, this is the only detailed set of actual expenditure data relating to the Development Budget, and further analyses have to be based on ex ante Estimated expenditures (Tables B17 - B19). These are not perfectly comparable with Table B16 because tbe classification is by spending ministry, not sector, and the figures relate to spending allocations, not actual expenditures, but the general picture they produce is consistent. 2.42 Table B17 shows trends in the allocation of development expenditure as reflected in the Estimates. The figures must be treated with some caution because there seems to have been an increasing tendency for the Government budget to fail to capture foreign capital aid flows. In real terms Tanzania's Development Budget Expenditure fell by half between 1980/81 and 1986187 (Table B9), reflecting both the increasing scarcity of domestic resources and the decline in aid flows during the first half of the 19808. The decline in new investment was even greater as Development Budget resources were increasingly diverted to rehabilitation and to meeting the operational costs of ongoing development projects. 2.43 Against the background of an overall reduction in the Development Budget since 1980181 there have been significant changes in its sector ministry composition: (a) The proportion allocated to the industrial and trade sectors has declined from 21.1 percent in 1980/81 to 6.3 percent in 1987/88. This reflects both the lack of new investment in the sector and the later policy referred to above that parastatal enterprises should rely more on the banking sector for their investment resources. (b) The increase in the allocation to agriculture and natural resources (forestry, fisheries and wildlife) from 12.5 percent to 19.1 percent of the programme. (c) The relatively constant proportion of the Development Budget, around 27 percent, allocated to the infrastructural and social sectors (communications and works, education, health and water). Activity in these sectors is heavily dependent on government infrastructure and given the decline in the budget in real terms there has been considerable deterioration in physical infrastructure. - 30 - Chart 3 THE CHANGING STRUCTURE OF THE WDGET COMPOSMON OF PUUIC EXPENDITURE 4974/75 - 1988/89 100- 80- "___- Consolidated Fund Services - 70- (Debt Senvcing) 600 50- riegionl Suppiv MinisterIa SLPphs 0-rDevenopmentan_ 20- EvVencliture 80 - 70 io~~~~~~~~~ ~c co ~~~~~~~~~~60~~~~~~~~~~~~~~~~~ COMPOSMON OF MINISTERIAL SUPPLY 4974/75-5988/89 ,0 soUabllimes 40- 70- 60- ~ ~ -- ao -0' _^ _ _ OlherCharge 20- 10 Personal Emoluments O' , , , , . , , , , i A , - 31 - 2.44 Regional and district level programmes handled through Prime Minister's Office and the District and Urban Councils account for around 14 percent of the Development Budget. In some sectors Regional and Council programmes are especially significant, so that central government investment presents an incomplete picture of sectoral developmert. For example almost half of the health sector investment programme is handled through the regional and local goqernment budgets while the proportion for the water supply sector is over 20 percent. Table B27 shows the sectoral breakdown of the 1987/88 Development Budget adjusted to reflect the sectoral composition of regional and local government investment programmes. 2.45 Following the Arusha Declaration in 1967 an increasing proportion of the Development Budget was devoted to investment in the parastatals. However, during the 19809 investment in commercial parastatals in five main sectors (agriculture, natural resources, industries and trade, energy and mining and communications and works) fell from 41.0 percent of the total Development Budget in 1980/81 to 29.0 percent in 1987/88 (Table B19) reflecting the generally unfavorable investment environment in the early 1980s and more recently the policy decision that parastatals should rely more on the banking sector for their investment resources. The reduced level, nevertheless, still represents a high share of the Development Budget. The most significant changes are in agriculture where parastatal investment fell from 71.4 percent to 42.6 percent of the ministry's budget and in industry where, although parastatals continued to account for over 90 percent of the ministry's budget, investment levels in the sector fell by two thirds. Local and Foreign Financing of the Development Budget 2.46 Assessing the extent to which Tanzania's development expenditure is externally financed is complicated by two factors: (a) Government financial documents express aid funds in Tanzanian shillings converted at the official rate of exchange; they thus tend to undervalue aid receipts, in some years seriously. (b) Much aid does not pass through the Government budget, although the Government rightly tries to minimize the extent to which this happens. - 32 - 2.47 According to the Development Estimates, foreign funding has ranged between 46 percent and 59 percent of the development budget during the 1980s (Table B25). Measuring the extent of the divergence between actual aid flows and the budgeted figures in the Estimates is made difficult by the non-compatibility of information provided by the aid agencies on disbursements and the accounting categories used by Government. Thus the 1987188 Development Budget included a foreign funded component of Tsh 9,382.0 million, representing $187.6 million at the then exchange rate of Tsh 50 = $1. This compares with total foreign assistance for 1986 reported by UNDP of $668 millionll. Unfortunately a direct comparison is not possible since the UNDP figures also include technical assistance and commodity aid flows which would not appear in the Development Budget. However a conservative estimate would put capital assistance at around $250 - $300 million, suggesting a considerable under reporting in the Development Budget.12 2.48 Aid funds that appear in the budget are classified according to the mode of disbursement. Credit funds are advanced to the Government, Reimbursement funds are paid in arrears against documentation of expenditure, and Direct funds are administered directly by the aid agency, although the Government tries to bring them to account as a matter of record. Table B25 also shows the breakdown of budgeted aid according to the mode of disbursement. During the 1980s direct disbursement has become the norm, rising from 70 percent of all budgeted development expenditures to over 95 percent. Given that a significant proportion of aid is unrecorded in the Development Budget, it would seem that the proportion of aid funds being administered directly by the Government is negligible. C. ECONOMIC PROSPECTS AND RESOURCE AVAILABILITY Introduction 2.49 There are clear indications that the combination of the liberalization measures taken in the 1984/85 budget and expanded into a comprehensive adjustment program in 1986/87, increased donor flows and the end to years of poor rainfall in the early 1980s, are having an impact on output. Over the period 1980-84 official statistics show the economy stagnant, with an average growth in GDP of 0.5 percent per annum, implying 11/ Source: UNDP Dar es Salaam - Development Cooperation Report 1986. 12/ The UNDP report divides total assistance into capital assistance ($410 million) and technical assistance ($259 million). However the capital assistance category includes two general sector items entitled General Development and International Trade ($267 million) a large proportion of which would be commodity aid, while the item of bilateral technical assistance ($213 million) would appear to include some bilateral capital aid flows. - 33 - TAS 9.6 K0 A cro nola DIndeuto e9i t s1 u SWs i11 io 111 19i9 1990 i 4 1991 19 19E 199n MP Oroeth rate -.5 -2.4 q.e s.c s.s 4.0 4.5 4.5 4.8 4.8 4.5 4.5 U'w Orrath rate 1/ -2.2 -1.7 2.6 4.5 2.4 4.8 4.3 4.6 4.8 4.3 4.5 4.5 WY/capIta Grano rate -4.9 -4.7 -0.7 1.2 -0.9 1.2 1.2 1.5 1.4 1.5 1.5 1.0 Cone lio/caite grmth rate 4 -0.9 1.8 2.1 0.2 0.3 0.8 0.4 0.5 0.6 0.8 1.0 Oet "Ic(InCl Us so)2V 77 87 o s 6 se 7 t 74 371 StO Sti S t Dut _nrvico/M 2 10.0 11.6 18.5 16.0 16.7 76.6 64.7 85.2 49.4 57.9 86.2 87.0 Debt *arvice/6 2W 1.8 0.9 0.9 1.4 2.4 14.a 13.0 12.2 11.5 17.2 1S.5 11.2 Gre_ investment/U 20.6 15.7 15.7 15.9 15.6 15.6 15.6 15.7 15.9 16.2 16.2 16.8 Dometiac ma.icgU S/ 12.1 7.4 5.6 2.5 -4.4 -1t.7 -15.1 -13.4 -10.1 -5.9 -4.9 0.1 National avinseUP 3/ 12.1 7.2 6.s 5.2 -1.5 -12.6 -15.2 -10.6 -4.5 -4.9 -2.2 0.7 jblidc Inveetmmnt/OP 10.1 0.8 4.9- 5.5 7.0 6.9 6.8 6.7 6.7 S.8 6.6 6.6 Private Iestment/lP 10.5 7.2 10.6 9.4 6.6 6.9 9.0 9.0 9.2 9.4 9.4 9.5 Rtile of pub/pit invetment 96A. 90.2 45.0 6.5 76.0 76.7 76.8 75.7 75.2 74.6 74.5 74.5 aOs. /revomoes/UP 15.5 19.6 16.6 15.1 16.2 19.6 22.0 22.6 25.2 25.5 25.4 23.8 Oovt.eaeenditures/UP 82.7 25.2 2.4 28.0 24.5 25.8 01.9 81.6 81.1 80.8 29.4 26.9 DeficitC-) or 4urIua(*)/UP -14.2 -4.4 -4.6 -7.9 -4.0 4.7 -9.9 -9.0 -7.9 -7.0 -8.0 -5.4 Eapoit greatl rat. 4/ 19.7 -12.0 -1t.5 -4.6 15.7 6.2 8.9 11.5 10.5 5.0 7.6 7.0 Epo"t/UP 3/ 12.6 7.7 5.7 6.S 12.5 15.4 20.0 21.5 22.7 24.7 25.8 29.8 Ipert growth rate 4/ -2.1 -25.5 1t.7 5.1 0.7 0.9 1.6 2.1 2.5 2.9 5.6 4.0 leprts/UP S/ 21.2 14.0 1l.6 25.8 25.6 46.0 49.8 47.9 46.9 45.0 48.7 a!.7 Curprt account Cm1 U1 *.) 5/ -am -420 -491 -47 -596 -79 - -616 4812 -671 -925 -970 Currept eccout/P S/ -4.5 -4.5 4.8 -s.7 -17.1 -25.5 -29.0 -26.5 -24.4 -21.1 -1.5 -1S.7 oom item3 UP Ccurret 16 a) 87 66 69 492 2M6 27t8 265 8048 2201 a679 48n1 526 echag Rats 6/ 6.8 1.1 17.5 8.7 64.8 102.2 137.8 155.5 169.5 185.2 197.6 214.2 moestic Inflation Rabt 26.7 27.s 36.S 82.4 80.0 25.4 19.6 14.9 10.4 10.1 10.0 10.0 Note.t 1/ WVeWP adjusted for chanese In term Of trade. 2/ 1961-_967 figtre are actal debt gervice pW_int. while tIr 19iS ord- scheduled paymnts beforn debt relief are ehOn. The debt service ratio W_ce debt PWaente ;' relation to eaports .f owde end aervicee. seulwing Private treader.. S/ Ratlce ore calculated in current trn. Tbe larg going in the ratios of exporte, leport, current accunt deficit and notional aevinme to 0P in the period 1966 - 19i6 are prilerily related to the adjuetment In tih sechange rate.In earlier eer, the overvalustion ot the Tanzania ehillin caused eaternl floee to be unrriuel in local currewcy ter. Simllarly. tho US dollar value of UP kae ben overvluw in tie Pat, when converted .4 she official exchange rate. 4/ Export sad Import growth rate, pre In volum. term, and relate to goods and eervicee. S/ Unti I 1. currant accwnt deficit la b_am on acual Interet payeente ades, whiId projetions are based an acheduled paponte befo debt relief. 6o Yearly average. From 1*9 ommrd. seed projeeicn bhead on differentiel inflation. aeming ont0nt rel efect;ive echan rate. Hatese Growth rate are expressed iZ constat term, ratios to UP In current term. Sore": Central Bank at Teanmia en aisslon e*tintel. November Is. 19". - 34 - sharp falls in per capita output and consumption. In 1985 and 1986 the economy grew by a record 2.6 and 3.6 percent respectively, and by an estimated 3.9 percent in 1987. Statistical evidence of recovery is corroborated by visual signs of increased output in agriculture, a greater availability of goods of all kinds, and a surge in informal sector activity, particularly in the major urban centers. 2.50 To provide a basis for public expenditure planning two key questions r.eed to be addressed. The first is the likely future course of the economy. Tne second is what this implies for Government revenues and expenditures. By their nature these questions can never be precisely answered. However, some orders of magnitude can be indicated, and these are sufficient to provide a frame of reference for the purposes of restructuring public expenditures. Economic Growth Prospects. 2.51 Table 2.8 sets out the economic scenario on which the PER has been based. It has been derived through the Bank's Revised Minimum Standard Model (RMSM), adapted for Tanzania data and conditions, and the figures are identical to the projections contained in the joint IMP/World Bank/Government of Tanzania Policy Framework Paper, and used in the preparation of the Bank's Industrial Rehabilitation and Trade Adjustment Credit. Earlier versions of these projections have formed the basis of the Bank's reports to recent Consultative Group meetings for Tanzania. Essentially, RMSM is a national accounts identity model. The validity of the projections rests on the performance assumptions made for the leading sectors of the economy. The principal features are: (a) Over the next decade GDP is expected to grow at an average real rate of 4.5 percent per annum, on the twin assumptions that the Government will continue its economic reform program and that donors at minimum maintain existing real aid levels. (b) Income per capita is expected to grow at about 1.5 percent per annum. Consumption per capita grows initially at 0.4 percent, accelerating to 1.0 percent as exports improve. (c) Agriculture is expected to grow at 4.5 percent, in response to improved farmer incentives, more responsive marketing systems and, gradually, the reduction in transport and crop processing bottlenecks. (d) Industry is expected to grow aL over 6 percent per annum. The high rate arises from improved capacity utilization (currently around 25 percent), and structural adjustment within the sector as the changing macroeconomic framework causes resources to shift from inefficient to efficient production lines. - 35 - (e) The services sector is expected to grow at 4.0 percent per annum, deliberately constrained growth in the Government sector being offset by more rapid growth in private service sector activity. (f) Exports are projected to grow at about 8 percent in real terms, and imports initially at about 2 percent, expanding to about 4 percent later. The fast rate of export growth reflects improved incentives, greater liberalization of export marketing and, to s-m extent, a shift back to official channels of smuggled exports at present unrecorded. Restrained import growth reflects higher resource use efficiency stemming from structural adjustment and the need to meet payments on rescheduled external debt. Over the longer term, import growth converges with GDP growth, as efficiency gains are absorbed. (g) Inflation, in recent years 30 percent, is expected to decline progressively, falling to 10 percent per annum by 1991, consistent with the Government's fiscal and monetary targets. (h) The exchange rate of the Tanzania shilling, in accordance with the objectives set out in the Policy Framework Paper, will be further moved downwards in real terms in 1989, thereafter it will be adjusted in line with differential inflation. (i) The ratio of government revenue to GDP rises in 1988 and 1989, to reflect increased collection efficiency and the effect of exchange rate changes on customs receipts, as provided for in the Government's 1988/89 budget. The ratio of government expenditures to GDP similarly rises because of exchange rate changes, affecting the shilling value of debt servicing and externally financed recurrent and development expenditures. Thereafter the revenue ratio increases very slightly, to reflect further marginal improvements in collection efficiency and the faster growth of the taxable modern sector in relation to the rest of the economy. The expenditure ratio falls slightly over time to reflect the - 36 - Government's goal of a gradual reduction in the overall fiscal deficit.13 Implications for Public Expenditure. 2.52 Table 2.9 sets out, in overall terms, the fiscal implications of this macro-economic framework, using the GDP deflator to express revenue and expenditures levels in real terms. After the exchange rate adjustments have worked through in 1988 and 1989, revenues are seen to grow at around 5 percent per annum, slightly faster than GDP growth. Expenditures, on the other hand, grow slower over the medium term, averaging just over 3 percent per annum. Were the Government to maintain the deficit at its present share of GDP (8.9 percent) and be able to finance it without increasing borrowing from the banking system, expenditures would be able to grow at approximately the same rate as revenues.14 2.53 In operational terms this means that after 1988/89, when both revenues and expenditures rise as a result of exchange rate changes, Central Government expenditures will have to be planned within a growth framework of between 3 and 5 percent. Under the present structure of public expenditure, this is sufficient for marginal improvements in areas 131 Note, however, that in conditions of large scale exchange rate correction, ratios expressed in terms of GDP may fluctuate widely, and do not necessarily imply a real expansion or contraction of the underlying variable. For example, the rise in the share of the current account deficit (and as a corollary the fall in the savings ratio) between 1986 and 1989 is a phenomenon of the exchange rate changes, as Tanzania moves from a position where the external deficit was masked by a greatly overvalued currency. A similar phenomenon occurs with the savings ratio which appears to turn negative as the devalu.ition reveals the true magnitude of the current account deficit, though in reality the underlying savings performance is probably improving. A further factor complicating macroeconomic analysis is the significant, but unknown, share of economic activity taking place through unofficial channels, probably causing GDP to be understated. There is a strong possibility that official GDP statistics do not reveal the full magnitude of the economic crisis in the late 1970s and early 1980s, while at the same time underestimating the strength of the recovery since 1984185. 14/ This is an option that would require further study, and lies beyond the scope of the PER. It should be addressed as part of the work on the medium-term financial framework. Involved are issues such as the long-term balance between project aid and import support and the extent to which the share of recurrent expenditures uncovered by domestic revenues should be allowed to grow, monetary policy and the balance between the public and private sectors. - 37 - Table 2.9: Tndleative Flcal Parmst.re 106? 106 1"0 1000 1001 1002 1008 1004 1995 GOP * mIllion 508 271 28ac 8048 8ol 8570 3879 4167 4619 uxehenge Rate 64.8 106 130 146.5 154.3 164.2 174.2 185.6 197.6 GOP Tab hilton 22511 2040 06 490 442642 510698 687763 675926 776941 693065 6DPefitor 30 87.6 45 51.7 57.1 62.6 69.2 76.1 63.7 ? Deflator Unde 100 128.3 150.0 172.8 190.3 200.7 280.7 258.7 279.0 Shae of GOP 10.2 19.6 22.0 22.6 28.2 28.8 28.3 28.4 23.4 Amount (Currnt 'Tab ) 36469 56371 61069 100922 118627 110949 117491 181604 208977 Amount (Constant 1907) 86804 46578 64040 56562 62278 6817 662S6 n167 74902 Chan (l) 2.7 16.0 8.4 6.3 4.9 4.5 5.0 4.6 EpenOiture Share 6? 24.8 26.5 81.9 31.8 81.1 30.7 30.8 29.9 29.4 Amount (Current Tab *) 4708 64019 117550 140760 1588M 160448 204606 232305 262561 ANmot (COnsta 10) 54703 6?037 7838? 61679 68479 86062 08789 91579 94103 Chano (X) 22.6 16.9 4.2 2.2 3.1 3.2 3.1 2.8 Owerell Defiit Share of C? 8.1 8.7 9.9 9.0 7.9 7.4 7.0 6.5 6.0 Soure s Table 2.1 Note: The tabLe is in caLendar years. Expenditure is net of debt redemption - 38 - such as public service pay and the better funding of priority programs such as social services and infrastructure maintenance, but insufficient for an acceptable rate of progress. Given that the demand for many Government programs is population driven, the prospects of Tanzania resolving deepseated public expenditure problems by revenue growth alone are extremely remote. This points firmly to the conclusion that escape from the trap of low program effectiveness lies in a fundamental restructuring of public service pay and staffing, and a radical reassessment of program priorities, policies and modes of delivery. The rest of the PER report explores the need and scope for such restructuring. - 39 - CHAPTER III: PUBLIC EXPENDITURE STRATEGY AND ISSUES A. INTRODUCTION AND MAIN THEMES 3.1 This Chapter discusses some issues of public expenditure management that arise from the review in Chapter II of Tanzania's public expenditure performance and prospects. Several themes, which constitute the principal message of the PER, recur in the discussion of these issues. 3.2 The need for a public expenditure strategy. In reviewing the evolution of the present pattern of public expenditure, there is a strong impression of a series of ad hoc adjustments to specific crises, with an implicit assumption on each occasion that the crisis would prove temporary. Public expenditures have been quite effectively controlled but they have not been effectively planned. It is quite clear that there is now, and has been for some time, a radical misalignment between what the Government is attempting through public expenditures and the resources that it can actually command. As a result, even the available resources are used very inefficiently. There is a need, increasingly recognized within the Government, to develop a public expenditure strategy that is rooted in a realistic assessment of resources available. 3.3 Planning and the planning horizon. If public funds are to be used efficiently, it is crucial that the agencies responsible for drawing up and executing Government programmes have clear and reliable guidelines concerning the resources available to th .m. At present budgetary foresight rarely extends more than a year ahead, and it is inevitable that vote- holders think predominantly in terms of ad hoc adjustments to unpredictable budget cuts. Thus, some sort of medium term framework needs to be developed as the cornerstone of the public expenditure strategy. 3.4 Reduction of Government Functions. The mismatch between the Government's present commitments and its resources cannot be resolved by any reallocation of those resources among the full range of its present activities. This has been the implicit approach up to now, but its effect is only to ensure that all activities are seriously underfunded. In order for the core of essential Government functions to be effectively performed, some non-essential functions will have to be discarded. There is room for debate as to which functions should take priority, but there can be no doubt that the Government is currently attempting considerably more than it can accomplish. Thus, the public expenditure strategy must be built on a clear set of priorities. By the same token, there must be acceptance that for every activity that is given priority, other activities must be downgraded or phased out. Without the corollary, priorities are meaningless. - 40 - 3.5 Alternatives to Public Expenditure. The scarcity of public funds must prompt a search for ways of achieving the Government's goals that are not heavily dependent on public expenditures. A number of policy shifts in this direction have already occurred, with the recognition of the importance of the fiscal and policy framework, rather than direct public investment, as the key to progress in the industrial and agricultural sectors. In a number of areas there is scope for communities to provide services for themselves rather than depend wholly on government provision. Also, where it remains preferable for Government to provide a service directly there may still be scope for the beneficiaries to contribute towards its cost. 3.6 Revenue strengthening and cost recovery. There is a need to strengthen revenue performance. This does not mean that there is a major unexploited tax base that can transform the situation. Any revenue measures must take account of the effects on the wider economy, and measures that would stifle the ERP must be eschewed. However, leakage rates have been high and there is potential for improving the collection of existing revenues. More generally, in a number of sectors the scope for expanding or maintaining services will largely depend on the degree to which cost recovery can be introduced. Revenue strengthening is the subject of Section F of this chapter, and the general principles of cost recovery are discussed in Section G. 3.7 Focus on Recurrent Expenditure. The traditional concern of planners has been with the public investment programme, as reflected in the Development Budget. This makes some sense when the funds to maintain recurrent activities can be taken for granted, but in Tanzania's present case the Recurrent Budget is seriously overstretched and it is essential that the initial focus of public expenditure planning should be on the Recurrent Budget. This has implications for investment program priorities. Instead of driving the Recurrent Budget, the investment program should take its priorities from the restructuring of recurrent activities. The Report develops this theme in general terms in Section C of this chapter, but it is also relevant to each of the individual sectors considered in Chapter IV and to the budgetary management issues discussed in the final section of this chapter. B. MEDIUM-TERM FINANCIAL FRAMEWORK 3.8 The challenge for MFEAP in the coming years is how to manage effectively the multiple processes of public expenditure restructuring. The Treasury has been remarkably successful, in the circumstances, in controlling expenditures. This has been done by cutting line ministries' allocations and withholding pay increases in order to keep within deficit targets, and accommodate a growing number of contingency items, no easy task in circumstances of fluctuating revenues. In the next few years, MFEAP has to not only continue doing this, but also preside over fundamental fiscal restructuring. It therefore needs additional tools for - 41 - the task. Strategic decisions await a range of key issues, such as how much to set aside for parastatal restructuring, grants to councils, public service pay increases, where resources may be found to increase recurrent allocations to key ministries, how large the Development Budget should be, and what balance to strike between project aid and commodity aid. Once these issues have been resolved, they need to be implemented by government agencies, which Lust in turn be engaged in a process of adjusting their programs to the resources available. 3.9 The PER's view is that this process will not be successful if MFEAP he.s to carry the entire burden of the restructuring process alone. To ensure a successfu.l outcome, the incentive structure of the budgetting process has to change. Two essential features to alter the incentive structure are: (a) Extending the financial planning horizon from a single year to a three to five year perspective. (b) Ensuring that financial plans are viewed as hard, not soft frameworks. The latter is in contrast to the customary Five Year Plan approach, whose emphasis is on the fulfillment of previously established program objectives, frequently necessitating a blurring of the requirementsiresources equation by recourse to an elastic funding gap, to be filled exogenously or in unspecified ways. 3.10 The complex agenda of fiscal restructuring facing Tanzania would become more manageable if some sort of Medium Term Financial Framework (MTFf) could be constructed.1 Its objective would be to provide the scaffolding within which the prucess of public expenditure restructuring can take place. Such scaffolding is essential since some means is required by which the trade-offs inherent in the process can be made explicit. At one level this means assessing the impact of claims on budget resources over which the Government has little control (egs debt servicing, contingent claims), to determine the amount of discretionary funding available for departmental programs and civil service pay reform. At another level it means making more transparent the competing nature of departmental expenditure allocations. The essence of a MTFF is to determine, firstly, the principal directions in which public expenditures need to be restructured, secondly, the resources envelope available, and 1/ Some elements of a longer term budget framework already exist. For many years budgets have shown in the Estimates 'tentative projections" for the year following the budget. These can be regarded as signalling the direction in which the Government intends changing the composition of the budget (e.g. the largest increase in the tentative projections for 1989/90 - 92 percent - is for the Ministry of Communications and Works), but fall short of the type of financial planning framework proposed by the PER. - 42 - thirdly, the creation of a framework and incentive system. The exact specification and calculation of the MTFF lies beyond the scope of the PER, and will require a substantial effort by MFEAP staff, both from Treasury and DEVPLAN. However, in broad terms it is possible to outline how it might be constructed, and the types of calculation that would have to be made. The next few paragraphs discuss what is required, and further details are given in Chapter 5, together with a scenario illustrating how the budget might look five years hence, after restructuring. 3.11 The first task is to assess the likely patterns of domestic revenues growth. The macroeconomic projections described in Chapter 2 suggest that Tanzania should be able to achieve an average GDP growth rate of 4 - 5 percent, as it is currently experiencing, over the medium term. This should permit revenue growth of about 5 percent per annum in real terms. Assuming the policy reform momentum is sustained, aid flows can be assumed to continue at present levels in real terms. A critical issue for government aid policy is the division between project aid and commodity aid. This is shown in Chart 1, which illustrates the building blocks of the MTFF, as 4.8 percent and 8.3 percent of GDP respectively (though in practice probably closer to 50/50 when the undercounting of project aid flows is taken into account - see Section H of this Chapter). In the near term, given the large volume of projects under implementation, it is quite difficult to shift resources between projects and import support, other than at the margin. Over the longer term the opportunity to do so increases. 3.12 Projecting expenditures is most easily done if a distinction is drawn between discretionary and non discretionary expenditures. As statutory expenditure, CFS is non-discretionary. However, with the existing stock of Government debt reasonably well defined, and with new loans on concessionary terms, it should be relatively straightforward to project the evolution of CFS. Assumptions will have to be made on the future path of the real exchange rate. In the near term the exchange rate effect is likely to outweigh the softening of the terms of aid and the fact that in budgetary terms repayments exceed new loans. Thus CFS may rise further as a share of total budget expenditures before fallirg over the long run. It is important that the future magnitude of this critical component of recurrent expenditures be projected as accurately as possible. 3.13 Hinisterial Supply offers greater scope for discretionary variation over the medium term, and thus the restructuring of ministerial programs. Grants (see Chart 1) comprise transfers to local councils, transfers to non-commercial parastatals, and external subventions (mainly subscriptions to international organizations), and are all contained within ministerial votes. Contractual and contingent liabilities are largely concentrated in MPEAP, and currently represent difficult-to-budget contingency sums, for the most part to do with the resolution of marketing board and state enterprise deficits. Personal Emoluments and Other Charges have so far been the residual, but since this has been at such high cost in terms of public service productivity, this state of affairs needs to be reversed as soon as possible. - 43 - 3.14 The PER's recommendation is that a set of aggregate recurrent expenditure ceilings be prepared for the line ministries, not simply for the coming year, but for a period 3 - 5 years ahead, consistent with MFEAP's assessment of the net resource position. The latter would comprise the amount of domestic revenue and counterpart funds available for discretionary allocation after debt service and other contingency amounts are taken into account. Initially this would be calculated on a constant shares basis (Chart 2 shows the present division of Ministerial Supply), but over the medium term shares would need to be altered to reflect ERP priorities. These would be for the Government to determine, but it seems clear from the work of the PER thatt (a) MALD and MCW's recurrent allocatior.s would need to be increased relative to other ministries. (b) Allocations to MLG might also have to increase, following further study of council finances (see Section J). (c) Reduction in the share of some ministries - particularly those providing what the PER terms "Other Government Services". Ministries would be asked to review their programs within the medium term framework, making it clear that the latter was firm and not open-ended, and that any increase in the share of a particular ministry could be accommodated only if a corresponding reduction in the share of another ministry was identified and agreed. To withstand the resulting pressure from all sides, the framework would have to be carefully prepared and endorsed at the highest level of Government. At the same time it would be made clear to ministries that they would be formally released from existing quantitative program objectives, and be required to concentrate on improving the effectiveness of existing priority programs. Ministerial headquarters would, in turn, be responsible for extending the process to the departmental level. To encourage cost recovery line ministries would be told that budgetary allocations would be adjusted to reflect the success in offsetting costs. 3.15 In some manner staffing and pay issues would need to be incorporated in the process. This is likely to be complex given the degree of mismatch between staffing levels and the resources available to pay salaries. However, it is difficult to specify in detail how this should be done until the Government's plan for public service reform are more fully developed. The first requirement is a review of the present balance (or imbalance) between staffing leveli and the resources available to meet payrolls, so that a judgment may Le reached on how much further staff reduction is needed, and to establish guidelines for future establishment levels. This would be based on analytical work by MFEAP and NMLD, drawing upon data generated by the Census and the Nsekela Salaries Commission. The PER's analysis of the evidence available to it suggests that total public service staffing may be 40-50 percent in excess of what can be afforded, if a well-motivated and professional service is to be re-established. - 44 - 3.16 The policy would then have to be operationalised. One approach would be to set parallel manpower ceilings for ministries, within which staffing levels would have to be adjusted. These would be set by reference to Census data, the pattern of establishment growth in the past decade, and normative judgments on the staffing levels needed to carry out particular functions. Another approach would be to integrate staffing into the financial framework, signalling to line ministries that resources freed by staff savings could be retained within the ministry and applied as supporting expenditure for retained staff. In either case it would be necessary for the central allocation ministries to specify in advance their assumptions on the path of real wage restoration. Overall, the objective would be to force ministries and departments to review both programs and staffing levels and address the trade-offs between them. 3.17 The Development Budget should be integrated into the framework. As existing projects complete, the scope for varying the size and composition of the Development Budget widens. Section C discusses in greater detail the relationship between recurrent and development expenditure, and develops two key points. Firstly, the need to balance the volume of capital expenditure with the capacity of the Recurrent Budget to sustain the recurrent arising therefrom; and, secondly, the need to match Development Budget allocations to the priorities of a restructured Recurrent Budget. In operational terms, this implies the following: (a) Determining the optimum size of the Development Budget over the medium term; (b) Developing guidelines as to how the Development Budget should be apportioned between sector ministries. The first step, determining the size of the capital development program, involves MPEAP examining the balance between capital and commodity aid over the medium term. There are massive rehabilitation requirements, particularly infrastructure, that could absorb a large amount of project aid. On the other hand, too rapid a shift in the project/commodity aid balance would curtail counterpart revenues, and imperil the financing of the Recurrent Budget. The PER's assessment is that as long as debt servicing absorbs such a large proportion of recurrent budget resources, the present balance of roughly 50/50 should not be altered greatly. Rapid expansion of the Development Budget, if matched by a corresponding switch of donor funds would quickly siphon donor support from the Recurrent Budget, directly affecting the d:Lscretionary parts of the budget, the Supply votes, resulting, most 'Likely, in a further squeeze on PE's and Other Charges. Furthermore, overall expenditures would fall because of the longer interval between commitments and disbursements for development as compared with recurrent programs. 3.18 The foregoing suggests that the Development Budget should not be expanded greatly beyond its present size. With regard to its apportionment (Chart 2 shows the present division of the Development Budget between - 45 - ministries), this will need to be determined in the light of the Goverw%ent's assessment of the core functions it must carry out to support the ERP. Some of these priorities will be met largely by shifts in recurren. allocations (eg. primary education), some by a mixture of recurrent and capital (eg. water, health), and others primarily by an increase in capital allocations (eg. roads). To make room for the latter, the scale of some capital programs will have to be reduced (e.g. agriculture). In all cases, capital and recurrent allocations will have to be matched, to ensure the wasteful cycle, already experienced by Tanzania, of investment, decay and rehabilitation is not repeated. 3.19 The reshaping of the Development Budget thus could be carried out either by using formal allocation ceilings for ministries, or by informal mechanisms applied at the project screening stage, based on a clear view by MFEAP of how the Development Budget shot'ld be reshaped, and corresponding control over the aid coordination process. It should be noted, however, that there are likely to be exceptions to the general rule that priority for a sector in the Recurrent Budget conveys corresponding priority in the Development Budget. While this holds true for sectors like roads, it does not follow for agriculture, where public investment levels are too high, diffuse, and inappropriately oriented (see Chapter 4 for a fuller discussion of agriculture and other sector programs). C. BALANCE BETWEEN RECURRENT AND DEVELOPMENT EXPENDITURES Centrality of the Recurrent Budget 3.20 Development planning has tended to focus on the development budget because of the perceived link between capital investment and growth. This is always a dangerous oversimplification (i) because of the need to link development expenditures to the Government's ability to sustain the operating and maintenance costs entailed by its investments; (ii) because many of the Government's recurrent activities are also important for growth (not least its human capital investments through education and health services); and (iii), because by no means all project expenditures constitute capital formation. This is increasing so in countries where the recurrent budget is under pressure and the focus of the development budget is rehabilitation. Rehabilitation projects often contain significant recurrent elements (in the hope they may be taken over by the recurrent budget before the project ends), blurring the line between the two budgets. But because they are donor funded, convention requires they be inserted in the capital budget, turning it into an 'aid budget". It would be particularly inappropriate to place the main restructuring emphasis on the Development Budget in Tanzania today, when it is obvious that most of the Government's recurrent activities are seriously underfunded. At the same time there are built-in pressures (both demographic and deriving from existing policy commitments) for the expansion of these activities. In these circumstances it is clear that the primary focus of public expenditure planning must be on the Recurrent Budget. The Development - 46 - Budget must be tailored to complement the Recurrent Budget, not vice versa. The Recurrent Budget is thus the principal focus of the PER. Assessing Potential Commitments 3.21 The habitual focus in budget preparation is on incremental expenditures. The focus of planners on the developmevt budget is one aspect of this, and any attention to the recurrent impact of the development budget has also tended to be on the marginal recurrent expenditure implications of projects, not the total expenditure requirements of sectors or subsectors. This approach would be practical, though not ideal, if existing activities were adequately funded and had acceptable economic and social returns. Since they are not adequately funded, it is essential that new expenditure claims are evaluated explicitly in the context of the entire set of claims, new and existing, for the sector or subsector concerned. 3.22 The starting point for a ministry seeking to develop a public expenditure strategy, therefore, should be a quantified assessment of existing commitments (both met and unmet). These fall into a number of categories: (a) Recurrent funds required to make good the underfunding of existing recurrent services. (b) Recurrent funds required to meet built-in commitments to the expansion of services, as in the case of Universal Primary Education, for example. (c) Capital funds required to make good the past neglect of maintenance (eg of the road system) through rehabilitation projects. (d) Capitai funds required to complete the set of projects already under way. (e' Recurrent funds required to operate and maintain these projects once completed. 3.23 Unfortunately, it is not at this stage possible to quantify satisfactorily the expenditure requirements implied merely by the Government's existing commitments. The Budget Hanagement Development Programme (BMDP) of MFEAP is attempting such an exercise, but it is clear from the initial efforts that the necessary data are not readily available - 47 - and that progress is likely to be gradual and piecemeal.2 Nevertheless, the BMDP's initiative is important and needs to be followed through. It is important too that DEYPLAN should concern itself less exclusively with the development budget and become more closely involved with the rest of MFEAP in the analysis and programming of recurrent expenditures. In individual sectors there should be specific studies to determine the gap between commitments and actual expenditure levels, and strategies should be framed for each sector that are consistent with plausible levels of financing. 3.24 Those carrying out the review should forearm themselves against the danger that departments will argue that the problems of their sector could be mitigated with only a moderate increase in funding relative to total public expenditure. The trouble is that this cannot be true for all sectors simultaneously, emphasizing the need for MFEAP to provide sectoral planners with clear and mutually consistent resource parameters. This is a danger not confined to sector protagonists. The PER mission itself found it much easier to identify areas where budgets should be expanded than contracted, which says something about the difficulties of public expenditure restructuring and why budgets inexorably grow. 3.25 The emphasis on the planning of recurrent expenditures is particularly important for those sectors, such as health and education, where the Government's activities are especially dependent on recurrent resources. Given the scarcity of recurrent finance, set against the demographic increase in demands for services, it is necessary to reappraise both the overall service targets of these sectors and the proposed modes of delivery. It will be not be possible to expand these services unless their unit costs to Government can be lowered. 3.26 Although it is not possible at this stage to quantify all the existing commitments noted in paragraph 3.22, some clear qualitative conclusions may be drawn. Concerning, first, the underfunding of existing recurrent services, there is no doubt that such underfunding is the rule; it affects virtually every activity of government and applies on a substantial (non-marginal) scale. Evidence of this underfunding includes: (a) Casual observation. No one can fail to be aware that in every sector public servants are starved of the resources they need to do their jobs effectively. This is manifested by teachers without teaching materials, hospitals without drugs, agricultural extension workers without demonstration kits, games rangers without transport, road maintenance teams without equipment and so on. That this is a problem 21 See A Study of Standard Costs and User Charges by Dr. N.E. Osoro, September 1987, prepared for the PER. This study investigated the adequacy of funds allocated to key social sectors. It discovered plenty of evidence ox under provision but found that in many areas standard costs were either out-of-date, not calculated or otherwise deficient. - 48 - of long standing is demonstrated by the visible deterioration of physical assets such as roads and buildings. (b) Gap between recurrent budget requests and actual provision. This indicator may not be very precise because, after years of stringency and resource cuts, budget requests are likely to be a compromise between hope and expectation rather than a full costing of a department's needs. Nevertheless, it is clear that actual provision falls far short of even conservative estimates of requirements for the proper running of existing services.3 (c) Decline in real terms of the aggregate Supply vote. Converting current price expenditure figures to constant prices is hazardous because of problems in defining an appropriate deflator. Nevertheless, as shown in Chapter 2, there can be no doubt that there has been a fall in the real value of ndn-personnel recurrent expenditures during a period when there has been a continued expansion of the services the government attempts to provide. Supply votes have in particular been seueezed by the growth of debt servicing Consolidated Fund Services (CFS) and by the need to meet large expenditure commitments on behalf of parastatals. (d) Specific studies. There are a few specific studies that give insights into the scale of the problem. Osoro (Op.cit. page 14) found that actual budgetary provision was only 57 percent of requirements for primary education. (e) Decline in real salaries. It is sensible to consider remuneration as a separate component of the recurrent funding problem. It is a general issue across all sectors and requires government-wide action to address it. Also, it could be argued that the decline in real pay levels (which is documented in Section E below) has a beneficial side - a reduction in the cost to Government of a given input. But, without yet addressing the question of what an 3/ One pertinent examples the Regional Agricultural Development Officer (RADO) in Morogoro informed the mission he had a recurrent budget of roughly Tsh 6 million for 1987/88. The minimum needed to operate his services effectively he estimated would be about Tsh 18 million, but being a realist he had requested *only" Tsh 13 million. So what the RADO had was less than half of his request and a third of what he believed he really needed. Even after discounting the tendency of spending units to exaggerate their funding needs, this suggests a significant shortfall. The PER's impression is that this example is not at all untypical. - 49 - appropriate level of real remuneration might be, it may be observed, first, that it is quite clear that pay has fallen to such a degree that the productivity of government's employees has been adversely affected and, secondly, that the decline in real pay levels is itself an indication of the extreme pressure on recurrent resources that has been experienced. 3.27 Some indication of the degree of recurrent underfunding can be gleaned from analyzing the composition of recurrent budget expenditures over time in real terms, using the GDP deflator. This shows the squeeze on discretionary expenditures imposed by internal transfers (to parastatals and, after 1983/84, to local government councils). Table 3.1 - Index of Share of Real Net Supply in Total Recurrent Expenditure (TRE) 76177 78/79 80/81 82/83 83/84 84/85 85/86 Total Recurrent Expenditure 100 116 121 128 114 128 142 Net Supply 100 98 91 91 86 108 113 Source: Statistical Appendix Tables B1, B8, B10. Note Net Supply - TRE minus debt servicing, grants and contractual and contingent liabilities. Note that while the table shows that the amount of recurrent resources left over for personal emoluments and supporting expenditures declined in real terms from 1976177 to 1983/84, it says nothing about how during the same period commitments were increasing. Had there been no increase in commitments, line ministries would have experienced tight budgets. But the previous decade was a period of rapid expansion of expenditure commitments, particularly in the social sectors, with the recurrent costs impacting in the period 1976/77 to 1980181. Nor does the table show the squeeze within Net Supply caused by the rising share of Defense expenditures. With population growing at 35-40 percent in a decade, per capita supply expenditures have contracted. 3.28 Concerning funds required t. meet increasing built-in commitments: It may be noted in passing that recurrent expenditures would need to increase in real terms by around 3 percent a year just to maintain a constant per capita level of expenditure, but more disaggregated analysis is needed for practical guidance, since individual elements of the government expenditure programme are differently affected by demographic pressures. The sector in which there is the strongest combination of demographic pressure and policy commitment is education. There are three elements of upward pressure on educational spending: a rapidly growing - 50 - school age population, the long standing commitment to UPE, and the very sharply tapered educational pyramid above primary level.4 3.29 Concerning capital funds required to make good the past neglect of maintenance: Several points may be made. Firstly, although maintenance breakdown is most evident in sectors such as transport, there are rehabilitation requirements in all sectors. Thus the total cost of restoring facilities to the condition they would be in had normal maintenance occurred is extremely large. Unfortunately, a global estimate of what this would cost the Tanzanian Government does not exist, although there are estimates for some sectors (See Chapter 4 Section F for an estimate of the rehabilitation costs of transport infrastructure). Secondly, rates of return from rehabilitation projects, because resources used to bring back into use large capital assets are heavily leveraged, may be very high (say 40-50 percent) if the resources are directed to relieve bottlenecks, suggesting that rehabilitation should have preference over new projects. From this it follows, thirdly, that rehabilitation projects themselves should be carefully targeted, towards the areas where social and economic returns are especially high, the reverse of an across-the-board approach. A global estimate of Tanzania's rehabilitation needs may never be known; what is important is that there should be planning and budgeting machinery in place to identify the critical high return areas, and to channel resources to them. 3.30 Concerning capital funds required to complete the set of projects already under way: The number of "projects" under way is very large. DEVPLAN's 1987 Investment Programme Review listed 868. Of these 322 were foreign or jointly funded and 536 funded solely from domestic resources. The average expenditure on foreign or jointly funded projects for 1987/88 was around Tsh 30 million per project, and for domestically funded projects was less then Tsh 10 million. There is little evidence that the number of projects has declined in recent years despite the fall in real terms of the size of the Development Budget. Moreover, such forward projections as there are (the Investment Programme Review has never spanned more than three years) do not indicate that more than a negligible proportion of projects will be completed within the planning horizon. At 41 For example, the World Bank/UNESCO Education Sector Review The Financing of Education in Tanzania (May 1988) bases its analysis of the financial costs of meeting the projected demand for education on a rise in primary school intake from 80.6 percent of 7-year old children in 1986 to 100 percent in the year 2000, and an increase in the transition rate to secondary education from 5.5 percent to 15 percent in the corresponding period. This would result in a 108 percent increase in primary school enrollments, and a 209 percent increase in public secondary school enrollments, and a 266 percent increase in total secondary school enrollments. - 51 - the same time, ongoing projects are very poorly documented5, so that there is no obvious basis from which to assess their future financial requirements. 3.31 Many projects within the Development Budget are little more than expenditure items, often compensating for shortfalls in recurrent budget financing and continuing indefinitely.6 Particularly in the case of domestically funded projects, there is often no documentation to justify the activity and provide a basis for appraisal by MFEAP. A rough estimate would be that between a third and a half of the domestically funded component of the Development Budget should be transferred to the Recurrent Budget. There needs to be a comprehensive review of the whole Development Programme in order to establish more clearly what it comprises, reduce the number of projects to a level that is manageable in planning terms as well as in terms of their cost, and build up a better picture of their eventual cost, recurrent as well as capital. The scarcity of funds combined with the number of uncompleted projects certainly means that there is very little scope for commencing new ones. Many of the existing projects should be terminated. 3.32 Concerning recurrent funds required to operate and maintain projects once completed: The link between capital and recurrent expenditures is vital if the cycle of decay and rehabilitation is not to be repeated. As with capital costs, the recurrent implications of full-scale rehabilitation are not known and probably never will be. What can be said is that an across-the-board rehabilitation of all Government programs, just as it would be unaffordable in capital terms, is unlikely to be sustainable in recurrent terms. This follows from the hypothesis, central to the PER's analysis, that present public expenditure difficulties are, in part, due to the overly rapid accretion of program responsibilities by the Government in the 1970's. This overcommitment of the budget is supported by the analysis of the relationship between development and recurrent expenditure set out in Annex IV. Using representative r" coefficients for each sector, the analysis suggests that the magnitude and composition of public investment program implemented by Tanzania in the mid to late 1970's would have required recurrent real revenue growth of around 9 percent per annum, which in turn would have required GDP growth not much short of this rate. This 5| An exercise was attempted during the PER to build up a profile of a few of the largest projects in the main sectors; information sought included a basic project description together with summary figures on past expenditures and those required to complete the project. What the exercise revealed was that such information is not readily available. The Budget Management Development Programme has en- countered similar difficulties on a broader scale in attempting the Commitments Study already referred to. 6/ Staff in MALD's Project Planning and Monitoring Bureau estimated that 80Z of MALD projects fell within this category and could not be considered as investment activities. - 52 - is another reason why establishing clear priorities for rehabilitation is operationally more relevant than knowing the overall cost of rehabilitation, and why the planning of such prograL;s must be within the context of recurrent affordability. Conclusion 3.33 The foregoing suggests that as a working hypothesis, the development budget should be held constant in real terms, with the bulk of additional resources going to the recurrent budget.7 However, this conclusion should be subject to detailed review in the course of reviewing and rolling forward the PIP. Consistent with this prescription, the PER considers recurrent and development expenditures issues jointly for each sector in the rest of the Report. D. BALANCE BETWEEN SECTORS AND ACTIVITIES 3.34 The PER looks at competing sectoral claims for public expenditure in Chapter 4 below. The aim of in the present section is to identify some of the principles that should govern decisions on relative sector priorities and on priorities between competing programmes within sectors. The problem is more subtle than it may first appear. 3.35 At one level it is obvious that public expenditures should reflect the priorities of the Economic Recovery Programme. But the ERP's priorities do not translate directly into public expenditure allocations: (a) The fact that a sector is crucial does not necessarily mean a corresponding requirement for public expenditures. In a number of sectors (eg industry, agriculture) the most important need is to adjust the framework of policies and fiscal regulation so as to improve incentives. Without an effective policy framework additional public expenditure may be futile; within an effective policy framework additional public expenditure may not be necessary or ap- propriate. (Of course, there are also cases where policy adjustment and well-directed public expenditures are both required. The point here is that there is no substitute for careful sector by sector review of the merits of public expenditure proposals.) 7/ This would be consistent with the little-regarded law of budgeting which states that a constant-level of capital spending necessitates an ever-increasing level of recurrent expenditures. Formulated another way, if recurrent expenditures growth is to be constrained by domestic revenue growth consideration, the share of the development budget must be limited. - 53 - (b) Even when public expenditure is required to address constraints affecting a sector, the crucial bottlenecks may require expenditure on another sector. A clear example is agricultures communications infrastructure is a serious constraint on agricultural production; this means that expenditure on the rehabilitation of the transport sector is a vital component of agriculture strategy and could have a higher priority than direct public investment in the sector. Again the lesson is that pre-conceived ratios between sectors are unlikely to be very helpful; cross- sectoral effects have to be explicitly considered. (c) The distinction that is often drawn between 'productive" and "service' sectors can be very misleading. The natural inference, in the light of the ERP which stresses the restoration of Tanzania's productive capacity, is that wproductive' government expenditures should be favoured over (implicitly *unproductive") services. It has already been observed (point (a) above) that direct government participation in the productive sector may not be appropriate. Paradoxically, the Government is a major producer in the two main service sectors of education and health, while in the productive sector of agriculture the Government is mainly a provider of services with actual production overwhelmingly concentrated in the private sector. Furthermore, whenever the public sector engages in directly productive activities, the evidence is that it is not particularly effective, and returns are low or negative. 3.36 Choices within sectors may be as important as choices between them. There are real trade-offs between the different levels of the educational and health systems, and between competing claims for funds within every other sector. The share of total expenditures that a sector merits will depend partly on the intra-sectoral choices that are made. In considering these intra-sectoral choices it is important not to take existing patterns of expenditure as given. Many activities need to be redesigned to operate effectively at a lower level of resources. The question has to be 'what can we do with the resources we have?" not 'what resources must we have to do things the way we are used to?" 3.37 Both the design of sector programmes and the choices between them need to be based on an accurate costing of the resources involved: there are several aspects to this, including: (a) The need to take recurrent as well as capital cost implications into account in the choice between projects/programmes. (b) The need to value foreign exchange costs correctly. The overvalued shilling has tended to understate the true - 54 - opportunity cost of the foreign exchange component of public expenditure. Adjustment of the exchange rate is making the real cost of foreign exchange more apparent, but it will affect components of the expenditure programme to different degrees. E. PUBLIC SERVICE MANPOWER, PAY AND PRODUCTIVITY Overview 3.38 Public service pay is a significant component of public expenditure (about one fifth of total recurrent expenditure) and issues of pay, productivity and numbers of people employed are relevant to all sectors. Indeed, it can justly be argued that these are the central issues of public expenditure in Tanzania, and that the process of adjustment and recovery will not be complete unless they are addressed. There is growing awareness in Tanzania of the need for solutions in this area, and a process of addressing public service issues has begun and some important first steps have been taken. In this section the PER (i) reviews trends in public sector pay, (ii) discusses the implications of these trends for public sector productivity, (iii) examines trends in the size and composition of public sector employment, and (iv) draws some conclusions about pay and employment policies consistent with public expenditure constraints. Pay levels 3.39 Tables 3.2 and 3.3 summarize what has happened to Tanzanian wage and salary levels in real terms during the 1970s and 1980s. Table 3.2: Index of Real Wages Minimum Middle Top Average Year Wage Wage Salary Wage 1969 100 100 100 100 1975 103 68 44 108 1980 63 37 21 65 1986 30 n/a 6 19 Source: See Table C10 in Statistical Appendix - 55 - Table 3.3: Ratio of Average, Middle and Top Salaries to Minimum Wage Year Minimum Middle Top Average 1969 1.0 6.7 28.8 1.6 1975 1.0 4.4 12.3 1.7 1980 1.0 3.9 9.6 1.7 1986 1.0 n/a 6.3 1.1 Source: See Table Cll in Statistical Appendix After holding its own in real terms during the first half of the 1970s, the minimum wage steadily declined from 1976 onwards, so that by 1986 it was worth less than a third of its 1970 value. Pay trends above the minimum wage level have been even more disadvantageous; as salaries have declined differentials in pre-tax pay have also narrowed sharply (Table Cll). A top salary that was nearly 30 times the minimum wage in 1969 is now only about 6 times the minimum wage; over the same period the top salary has fallen to 6 percent of its former value. The average wage lost 80 percent (see Chart 4) of its value in the decade after 1976, and the differential between the minimum and the average wage has almost disappeared.8 In the early years minimum and average wages were maintained in real terms, with only middle and top salaries falling. This reduction in differentials was probably deliberate, as the Government sought to make public service pay scales inherited from the colonial era conform with national equity considerations. After 1975, the process appears to have been driven by economic circumstances rather than as part of a deliberate plan, with public sector wages increased only in the light of available funds, with the largest increase given to those closest to the poverty line. Some adjustment of personal income tax thresholds and rates was effected in the 1988189 Budget in compensation, but again the wage increase was skewed in favor of the lowest groups, with salaries between Tsh 1370 and Tsh 1500 per month (about US$15) receiving a 20 percent increase, about two thirds the intervening inflation, and salaries above Tsh 6000 per month receiving only 10 percent. Thus real 8/ Differentials after tax are even smaller. The ratio of after tax incomes between top salary and minimum wage falls to about 4:1 on 1987/88 pay and tax rates. (This does not take into account fringe benefits, which may considerably widen the true differential in some cases.) - 56 - Chart 4 PUBLIC SERVICE EXPANSION AND DECUNE OF REAL PAY GDP/GOVERNMENT EMPLOYEES 19704 300O 280- 8260- 240- -22D- G oemn Emnplavess _ 180- t _ }120-GO 40- ~ ~ ~ ~ ~ -J UJ~~~~~~~~~~~~~~~~- no #o201 - ZU 9 a! a! 114 I' 9 I INDEX OF AVERAr;E PUSUC SECTOR WAGES 150 - 140- 130-< 8 90-\ 500 30 \ 10 - O- . a a .a a a a a a . . . - 57 - monetary waIes for all groups fell again, and differentials were further compressed. 3.40 Fortunately for all wage recipients, there have been increases in allowances and fringe benefits. In the 1988/89 Budget rent assistance was announced for officers living in their own quarters and in private rented accommodations. Furthermore, in recognition of the high cost of transport, a special transport allowance of Tsh 330 per month was introduced for Government employees working in the Dar-es-Salaam Region. A less desirable aspect of non-wage benefits is that they tend to be unevenly distributed. Some benefits in kind (such as access to Government housing at a rent that is a fixed share of salary and far below prevailing private sector rentals) are worth considerably more than benefits in cash, with considerable variation in access to them. On the whole the value of benefits received by public officers in the higher salary ranges is greater, thereby compensating for the compressed monetary wage differentials. Middle level officers, as a whole, appear to be compensated much less by this device, receiving few perks yet earning a salary only marginally better than groups with fewer skills and less responsibilities. 3.41 Even though pay in real terms is so low, Personal Emoluments claim a substantial proportion of the Supply votes. Table 2.7 shows that PEs have usually taken between 30 percent-40 percent of the Ministerial Supply vote (after deducting grants and contractual liabilities) though in recent years the ratio has been declining (25 percent of Net Supply in 1988/89). The percentage of direct expenditure accounted for by Personal Emoluments falls within a fairly narrow band as far as the larger ministries are concerned (see Table B26 for 1988/89, when the Ministry of Agriculture and Livestock had a PE ratio of 48 percent but all other ministries with payrolls exceeding Tsh 100 million were near the overall average of 15 percent). The proportion of expenditure accounted for by Personal Emoluments at the Regional level has at times been much higher, as 91 Tanzania is not unique in this respect. Many SSA countries in the first decade after independence conducted salaries' commissions to revise minimum wages upward, and decolonialize their public service salary and benefits structures, to remove features geared to an expatriate administrative cadre, and to reduce what were seen as excessive differentials. As often as not this was carried out in the context of a National Incomes Policy. The subsequent erosion of this structure, by two oil shocks, poor economic performance, and too fast a rate of public employment expansion was widely experienced. Between 1975 and 1983 top salaries fell by 31 percent per annum in real terms in Ghana, 14 percent in Nigeria and the Sudan, 9 percent in Sierra Leone, and 35 percent in Uganda. In all these countries middle and lower level salaries fell as well, but by a proportionately lower amount, resulting in a marked compression of salary differentials. See Lindauer, Meesook and Suebsangs Govt. Wage Policy in Africa: Some Findings and Policy Issues, World Bank Research Observer, January 1988. - 58 - Table B24 shows. PE ratios need to be interpreted cautiously, since they vary according to the nature of an agency's work and can move in either direction in times of fiscal stress. What can be inferred from the Tanzania ratios, taken in the context of the real wage and salary development discussed above, is that both PEs and other charges have been cut as revenues have deteriorated. In addition, in recent years the strain has been increasingly taken by wages and salaries.10 Productivitv 3.42 There is no doubt that current productivity is very low, and that the productivity of the public service has declined over the same period as its pay has fallen. But the link between pay and productivity is not necessarily simple. It was clear to the PER mission that staff are commonly short of even the most basic materials and facilities that they need to be effective. This lack of support would be sufficient by itself to undermine productivity, and it is therefore difficult to assess the extent to which low pay is a cause of low productivity and not just a parallel manifestation of Tanzania's financial straits. However, there are a number of indicators that pay levels pr se do contribute to the problem. 3.43 First, it is a matter of casual observation (to the outsider) and of daily experience (to Tanzanian public servants) that official earnings are well below what is needed to support a family at any reasonable standard. The PER mission was very impressed with the diligence of many public officers in spite of their lowly pay, but it is clear that few public servants can afford to devote themselves entirely to their official employment. Absenteeism and moonlighting are commonplace. Low pay also increases the temptation to seek illicit gains from official positions. The mission's impression was that, in the circumstances, standards of discipline and probity have remained remarkably high, but there is no doubt that some public servants do succumb to temptations that are magnified by their paltry salaries. The situation is likely to get worse the longer such low salaries persist, and further decline in public sector morality, should it be allowed to occur, could be very difficult to reverse. 3.44 Second, an undermining of public service productivity may be discerned in the movement of skilled Tanzanians out of the government proper. The private sector, though small, is able to offer much more attractive terms to the middle and higher level manpower it employs. 10/ It is hard to define a Onormal' PE ratio, though one would expect in many government agencies to find a rough balance between PEs and other costs. In Tanzania PE ratios have fallen as resources have tightened, but the ratio could rise if the Government decided to adjust to weakening revenues by reducing supporting expenditures. Both, ultimately, affect productivity. - 59 - Parastatals, although in theory constrained by the terms of the National Income3 Policy, are often able to offer a significantly more attractive package of pay and fringe benefits than the government itself. The result is a steady loss by the public service of some of its best technical people. Latterly, there has been increased evidence of an international dimension to this brain drain. The University, for example, has lost significant numbers of its best Tanzanian staff to institutions elsewhere in Africa. 3.45 Thirdly, low pay increases the incentive for officers to seek compensation within the official system, by taking all available opportunities for internal and external travel, to attend seminars, conferences, particularly if they are donor sponsored or otherwise related to a donor funded project. This had led to the widespread practice of direct funded attendance allowances, and other forms of income supplementation which, while understandable from the viewpoint of the individual officer, distorts work patterns and is a further source of inequity. Indeed, the view was expressed to the mission that for many officers, their primary concern is the next opportunity for domestic or foreign travel, when allowances may be drawn. This situation is less an indictment of the individuals themselves so much as a commentary on a distorted incentive structure. The net effect is a conversion of resources originally voted for operations and maintenance to salary supplementation. 3.46 Before discussing what should be the pay and productivity component of the public expenditure strategy, it is necessary to examine the equally vexed question of the level of employment in the public service. The story of declining pay is also a story of rapid public service employment expansion. Public Service Employment Levels 3.47 Data on public service employment levels are very unsatisfactory. Part B of the Statistical Appendix presents the various data assembled by the PER mission. Table Cl displays the inconsistencies between data from different official sources, and these problems with the data are discussed in the Statistical Appendix's introductory Note on Public Service Manpower Data. However, although the different series disagree about the absolute level and composition of government employment, they all show a steady rise in the government payroll, averaging over 5 percent per annum, although there have been interruptions that correspond to periods when the Government was trying to cut back on staff. - 60 - Table 3.4 Public Sector Share of Total Formal Sector Employment, Selected Years 1970 1975 1980 1982 1984 Total Employment ('000) 376 471 603 633 633 Of Which: Government 135 148 224 281 302 Parastatals 85 158 203 185 186 Private Sector 156 165 176 167 145 Shares ( percent) Government 35.9 31.5 37.1 44.0 47.7 Parastatals 22.5 33.6 33.7 29.3 29.3 Total Public Sector 58.4 65.1 70.8 73.3 77.0 Private Sector 41.6 34.9 29.2 26.7 23.0 Source: Tables C8 & C9 in Statistical Appendix 3.48 There can be little doubt about the relative importance of public sector employment in the economy as a whole. Table 3.4 summarizes the data presented in tabled C8 and C9 in the statistical appendix. It shows the shares of the government and parastatal sectors in total formal sector employment. By 1984, according to the official employment statistics, the Government itself accounted for nearly half of all formal sector employees; government and parastatals combined provided more than three jobs out of four. Public sector employment (government plus parastatals) has predominated since the expansion of public ownership that followed the Arusha Declaration, but, if these data are to be believed, there has been a further shift in employment structure during the 19809. Parastatal employment fell somewhat ir. those years, but there was a substantial fall in private sector employment that was more than offset by the increase in government employment. The data may not be relied on very precisely but it is clear that the public sector, and government in particular, dominates the Tanzanian formal sector labor market.11 This point needs to be borne in mind, since public service employment strategy will have repercussions for the entire labor market. 3.49 It should be noted that major changes have occurred in the balance of government employment between central, regional and local tiers, although these are difficult to document precisely. With the reintroduction of the Local Authorities, the regional tier has dwindled sharply in relative importance, and it seems that the majority of ill If this were not so, there might have been many more civil servants opting for priiate sector employment. - 61 - government employees (about two-thirds -see statistical Annex Table Cl) now are at the local level. Policy Implications 3.50 Tanzania has reached a situation that is hard to tolerate but also hard to escape from. The elements of an adjustment programme for public sector pay and employment policies can be defined, but there will be political obstacles to its implementation and even a determined reform will take years to restore public sector pay to realistic levels. Arguably, recreating an effective civil service is the most difficult part of the overall recovery process. The PER believes the necessary reform programme has five elements: (a) increasing real pay levels; (b) achieving a more effective structure of incentives and differentials; (c) controlling and reducing public sector employment; (d) affordable and fair arrangements for those retrenched from the public sector; (e) adapting economy-wide incomes and employment policies. 3.51 Increasing real pay levels. Present levels of pay are clearly inconsistent with efficiency in public sector performance. The point of controversy is not whether pay needs to be increased but how the Government can afford to do so. This question is closely related to the control of the numbers on the public payroll 12 (which is considered shortly). Setting a precise long-term target-level for real pay is less important, but the Government should form a view on the order of magnitude involved, so as to analyze the trade-offs and time-path required for getting there.13 The latter (which the PER recommends) is likely to be a combination of an 12/ Under its present agreement with the IMF, the government has undertaken to ensure that the public service pay bill rises by less than the rate of inflation. This would have to be modified if the recommendations of the PER adopted, since the total wage bill, despite retrenchment, would rise as a share of Government expenditures. 131 Returning to the real pay levels of the early 1970's (a fivefold increase in present levels) might not be necessary, a lesser target might suffice. But it should be settled after a review of public officers' living costs and ascertaining the minimum pay level required to meet those costs, on a full time employment basis. The scenarios calculated in Chapter 5 are based on a trebling of monetary pay by 1993194. - 62 - initial significant upward adjustment (e.g. at least a doubling) of monetary pay combined with a reduction in fringe benefits and staffing levels. Thereafter, further adjustment would be progressive, as a reward for productivity gains and insofar as financial conditions permit, critical to the latter is how quickly the restructuring of the parastatal sector can be completed and, thus, MFEAP's shard of the Recurrent Budget reduced. 3.52 Incentives and differentials. Every pay award since Independence has narrowed differentials. The gap between top and bottom scales at independence was indeed excessive (greater than 40:1), but the process of eroding differentials has continued without, it appears, any positive policy as to what would constitute an equitable pay structure. While the adjustments at the beginning of the decade were guided by an in depth review of the inherited structure, the further erosion of differentials since the mid-1970s seems to be the byproduct of an instinct for awarding proportionately smaller cost-of-living adjustments to the higher grades whenever salaries are reviewed. It may well make it easier to secure wide political acceptance of less-than-full compensation for inflation to demonstrate that the better-off are being asked to take a bigger share of the burden, but if this attitude is always adopted it is only a matter of time before differentials effectively disappear. As part of the reform strategy, the government should formulate an explicit policy on incentives (including both monetary pay and non-wage benefits) and differentials and work towards achieving a stable and efficient pay structure in the course of successive salary reviews.14 3.53 A starting point would be to review the experience of the past twenty years and form a judgement on the stage at which differentials seemed appropriate, in the context of the country's level of development, labor market conditions and social and political considerations. Next it would be necessary to look at how different levels are rewarded within the total range. Decompression means unravelling the disproportionate awards of the past decade. This implies larger increases for higher grades in future awards, but it may also mean special adjustments to certain grades in the middle where pay and responsibilities have become egregiously mismatched. 3.54 Non-wage benefits also need critical examination, particularly as they have become for some groups more important than monetary pay. The aim should be to reduce the number and relative importance of non-wage benefits, many of which are relics from the colonial era. Generally, it is more efficient and equitable to reward people in monetary terms rather than 14/ The restoration of reasonable differentials will be politically difficult. To restore the differential between top salary and minimum wage to what it was as recently as 1980 would require a more than 50X increase in top salaries if the minimum wage were unchanged. Annex III discusses in more detail the tradeoffs between decompression, general salary increases and retrenchment, and the cost of alternative strategies - 63 - in kind. The administration of benefits in kind is costly and the benefits iutroduce a rigidity into personnel management that runs contrary to what is required in an efficient and flexible public service.15 A clear case in point is housing. Access to public housing at subsidized rents is greatly prized because it is limited. Thus transfers are resisted. The choice is either to attempt to build homes for all Government employees (which would be unaffordable as well as extremely burdensome to manage), or to move to a point where rents on the existing Government housing stock are truly economic (i.e. officers are indifferent between public and private housing), and salaries realistic. The latter (which the PER recommends) would have to be achieved in step with pay increases, since the occupants of Government housing would not be able to afford economic rentals on their present salaries. 3.55 Administrative control of public service employment. At least twice (in 1976 and 1985) the government has attempted to trim numbers c- people on the public payrolls. On each occasion there was a substantial initial cut in the payroll but this proved to be only temporary and public service employment quickly resumed its upward trend. Since 1986187 there has been a freeze on recruitment (except for health and education staff) but the PER mission could find little evidence that this is proving effective. The inability of government to generate clear statistics about its own payroll is symptomatic of the problem of ineffective control of public service hiring. It must therefore be a first priority to strengthen the Government's establIshment control mechanisms. Until this is done the Government will be una1i.e to carry through whatever policy on the size of the public service it may decide upon. The civil service census is an important first step in trying to bring public service employment under control, and is strongly endorsed.16 The PER mission found little evidence of establishment decisions being made in the context of the budgetary resources available to a ministry. It is vital that the cent-al allocation ministries act as one, otherwise the line ministries will use the lack of coordination as a means to lever up their allocation. If establishment decisions are made independently of the budgetary situation, MFEAP will be presented with a dilemma - to provide funds for a newly established post, 15/ The Nsekela Salaries Commission, it is understood, took a different tack, recommending that benefits be increased to compensate for defi *ancies in monetary pay, and in particular that the Government should increase the supply of public housing. In the view of the PER, this takes pay policy in the wrong direction, makes it more rigid and cumbersome, and increases inequity. It would also create pressure on parastatals to follow suit. 16/ The Census is supported by the UNDP project Redeployment of Human Resources in Tanzania: Possibilities and Programmes, signed on 31 December 1987. The project provided assistance in the execution of the Census, and is currently helping the Government analyze the data sad prepare an action program for the redeployment of restructured civil servants. - 64 - or withhold them and add to the number of approved but not filled positions. The next step is to rebuild the ability of the Government to control and manage establishments. In part this is a matter of improving the capacity and procedures of the Ministry of Manpower and Labour Development (MMLD) in the areas of personal management, career development training policy, and integrating its establishment functions (such as control of the establishment register) with the budget and planning activities of NEEAP. In part it means changing incentives so that departmental managers have an interest in controlling staff numbers, and benefit from responsible action in this area. Section J on Planning and Management of Public Expenditures discusses this topic further. 3.56 Control of local authority employment is crucial. The local authorities have a large labor force but are administratively weak. Many have become reservoirs of large numbers of underpaid and unproductive staff, to the detriment of their ability to deliver the important services that are their responsibility. (See Section I below.) The PER did not have the time to explore in depth the staffing policies and management systems of councils. But it is clear that effective control is lacking, and with central government meeting the bulk of the local government wage bill. the incentive to keep staff numbers down appears absent. There also seems to be a serious morale problem among former central government employees transferred to local government. 3.57 Retrenchment. There is clearly a trade-off between pay levels and numbers employed. (This is particularly so given the current government commitment to prevent the total wage bill from expanding in real terms.) If the seemingly inexorable growth of the public service is allowed to continue at its trend rate there will be further real reductions in pay. A policy to control public service numbers would have three elements: (a) an effective freeze on new hiring; (b) exorcism of 'ghosts' discovered through the census; (c) selective retrenchment of existing employees. 3.58 Following the initial analysis of Census returns, a large number of "ghost workers" were identified: 7,600 from Central Government and 20,400 from Local Government. However, subsequent investigation has shed doubt on the accuracy of these figures (the mission encountered different views as to whether the actual number of ghost workers was larger or smaller), and at the time of finalising this Report, fresh analysis was underway. A retrenchment exercise, which would take the process beyond the initial stage of eliminating fake entries on the payroll, and address actual overstaffing, needs to be carefully planned. It should not follow the pattern of financial cuts which have generally been spread indiscriminately across all sectors, thus undermining government efficiency across the board. Surplus staff need to be carefully identified. They will fall into two categories: - 65 - (a) Cases vhere there is clear overstaffing in certain posts and grades.17 (b) Cases where it is not so much the staff who are superfluous but the jobs that they are doing. The retrenchment exercise must be seen as part of a process of narrowing down government's activities to a set of basic functions that it can perform effectively.18 3.59 Eliminating "ghosts' is a relatively straightforward exercise provided payroll systems are brought up-to-date with the results, suitably corrected, of the Census. The social costs are minimal and no compensation is required. Reducing overstaffing is more difficult, but essentially straightforward in technical terms. Most managers know where the worst overstaffing occurs. What is needed is a means of deciding which staff to retain and which to retrench (at the lower levels of government, which is where the greatest overstaffing tends to occur, a last in-first out principle is frequently applied), and a system of compensation that cushions social hardship. Retrenchment though the elimination of supervisory jobs is much more difficult, since it involves taking stock of the functions of a ministry, how they are being carried out, and the relevance of the staffing in relation to this. The PER conclusion is that an effective retrenchment program in Tanzania will involve all three. The public sector in Tanzania has become over extended not simply because of overstaffing, but because it has taken on responsibilities larger than the economy can sustain. This points to a fundamental rethinking of the functions of Government, and whether its objectives might be met by indirect, less costly means. 3.60 The trade-offs between retrenchment and pay reform are significant. While there are some immediate gains to be realized from improved revenue collection, there is no escaping the conclusion that a significant amount of staff reduction must occur if a properly functioning 17/ It was reported to the PER that a recent exercise by the Ministry of Labor and Manpower Development identified between two and three thousand excess workers among the central government's clerks, typists, messengers and watchmen. It appeared that on average half the existing staff in these categories could be retrenched without loss of efficiency. 18/ Some prima facie examples: the reduction in the scope of Price Control under the ERP ought to mean a substantial reduction in the staffing of the Price Commission; both the DEVPLAN and the Finance wings of MFEAP have in part maintained separate aid coordination sections (this is expected to be rationalized under the new Planning Commission); on a larger scale, the justification for maintaining foreign missions in no fewer than 30 embassies is hard to discern, and there is scope for reducing Regional payrolls in the light of decentralization to local councils (see Section J below). - 66 - public service with good morale and high productivity is to be achieved in an acceptable time frame. Annex III examines different pay adjustment strategies for Central and Regional Administrations. The results may be summarized as followst a) Revenue Growth Alone If the long-term growth of real revenues and expenditures is 5 percent (corresponding to a 4.5 percent tread growth of GDP), the civil service is frozen at its present level, and no further budget restructuring occurs: (i) with incremental resources allocated to wages and other charges in the present proportion (i.e. keeping a constant PE ratio) it would take over 35 years to restore public service pay to the level of the mid 1970's; (ii) if allocation of additional revenues is biased towards wages until the average PE ratio has risen to 50 percent, it would take 23 years to restore pay. This indicates that, without further action on the structure of the budget and staffing levels, revenue growth alone is unlikely to result in a satisfactory pay adjustment time frame, since even if wage are given preference over other charges (this may not be the optimum balance), it will take twice as long to restore wages as it took for them to be eroded. b) Retrenchment If retrenchment can be carried out quickly (and external funds are secured for compensation) and is followed by an effective freeze, the savings in the wages bill can immediately be applied to higher wages. Furthermore, the reduction in numbers increases the value of supporting expenditures per employee, in turn permitting the Government to shift to a higher PE ratio, thereby releasing further resources for pay increases. The critical factor is the scale of retrenchment. (i) A 10 percent retrenchment with no shift in the PE ratio releases only enough funds for a 11 percent rise in real wages; (ii) A 20 percent retrenchment accompanied by a shift to a 40 percent PE ratio enables wages to be increased by 88 percent; - 67 - (iii) A 30 percent retrenchment accompanied by a shift to a 50 percent PE ratio permits a 168 percent wage increase. c) Decompression The Government would presumably not want to increase wages without taking steps at the same time to decompress differentials. Decompression from a 6:1 to a 12:l ratio (i.e. - restoring the wages spread of the early 1970's) is less costly than restoring the level of real wages. The PER estimates it would take from 2 1/2 to 4 1/2 years under the revenue growth assumptions used above. If the savings from retrenchment are first used to decompress the salaries structure and the residual applied to a general increase, the results are as follows: (i) A 10 percent retrenchment yields budgetary savings sufficient for a partial decompression, but no general wage increase; (ii) A 20 percent retrenchment would enable salaries to be decompressed completely and a general increase of about 50 percent effected; (iii) A 30 percent retrenchment would enable the general increase to be about 114 percent. 3.61 These calculations are, of course, the product of highly simplified assumptions. But they illustrate the need for a significant degree of retrenchment if the Tanzania public service is to escape from the low pay/low productivity trap. They also point to the importance of maintaining establishment control after the initial retrenchment has been effected. Were the Government able to sustain indefinitely a total freeze on public service numbers, it would still take many years (over two decades) to restore the real wage levels of the early 1970's. However, those remaining in the public service could be assured of a steadily rising real wage over time, which should contribute significantly to morale. Moreover, it may not be either necessary or desirable to adopt the real wage levels of the early 1970's as a target since the external and domestic economic conditions that made such pay levels affordable no longer apply. A survey of public service living standards and of current pay practices in the parastatal and private sectors should be carried out to help frame an appropriate pay adjustment strategy. Furthermore, a total employment freeze is unlikely to be sustained for an extended period. There are certain services of the Government that are population driven and while the Government should transfer as far as practical and equitable the costs of such services to beneficiaries, the pressure on establishments is likely to resume. It is critical that the resulting establishment creep should be held well below the trend in real revenues. It should also be held below population growth - to do otherwise implies either a re-extension of - 68 - Government activities in the economy, or another cycle of declining public service productivity. 3.62 To conclude this discussion on pay restructuring, it may be noted that the numerical model implicit in these calculations may overstate the difficulty of the situation. Budget systems show flexibility under pressure, and compensation mechanisms develop. To some extent low monetary pay has been compensated (albeit unevenly) by other parts of the Recurrent Budget, such as non-wage benefits, travel and attendance allowances. The Development Budget also plays a part: first call on project vehicles in the transportation of office staff to and from work, a necessary activity because of the vulnerability of public transport and the inadequacy of Government pay. Some projects, it was reported to the PER, directly supplement the pay of public officers working on them. Decompression of salary scales and a general rise in the level of monetary pay should gradually lessen the pressure on the "other charges" component of the budget, releasing funds for PE's or more productive forms of supporting expenditure. But the extent of this effect cannot be measured precisely by a PER, although its general magnitude will be known to policymakers. 3.63 Severance Terms. If the retrenchment program is not to cause undue hardship and prove acceptable to those involved, it may be necessary to devise a package of compensation measures. This will have to be determined by the Government, taking as the starting point severance terms provided for in the Public Service Act and in officers' letters of appointment, where applicable. Since the scope for devising and mounting special training schemes to re-equip workers for life outside the public sector is limited (Government is shedding staff because it cannot handle its existing commitments), the main features of compensation schemes will have to be financial, in the form of lump sum payments, paid, perhaps in stages, related to length of service, and in respect of those taking early retirement enhanced pension arrangements (which in turn would require the rebuilding of the presently ineffective pension administration). Whatever form a program of compensation would take, it would have to be carefully planned and efficiently administered. In view of the potential sums involved, it is hard to see how this could be financed without extensive donor support, paid into a retrenchment fund. 3.64 Wider Implications for incomes and employment policy. The National Incomes Policy is largely irrelevant to Tanzania's present economic circumstances. It has its origins in a period when the perceived danger was that urban formal sector employees would use their bargaining power to achieve an unacceptable differential between urban and rural incomes. There now needs to be an explicit policy concerning public sector pay structure and incentives, and recognition that the public sector no longer plays a leadership role in wages. The emphasis of policy should shift towards the use of competition rather than controls in the setting of prices and the promotion of productive employment in both the formal and informal sectors. This emphasis would be valid in any case, but becomes particularly Important when employment opportunities in government and in the public sector generally are being reduced. It is beyond the scope of - 69 - the PER to outline the specifics of a new incomes and employment policy, but it is clear that circumstances have changed greatly since the Incomes, Wages and Price Policy was first promulgated in Government Paper No. 4 of 1967. Some of these changes and the need to relate pay to productivity are recognized in its successor, Government Paper No. 1 of 1981, (The National Policy on Productivity, Incomes and Prices), but its analysis and proposed solutions in many respects run contrary to the more decentralized style of economic management that lies at the heart of the ERP, and contrary to many of the PER recommendations.19 F. REVENUE TRENDS AND PROSPECTS Introduction 3.65 The main focus of the PER is on the expenditure side of the budget. Making detailed recoamendations on revenue enhancement is a separate exercise, outside the scope of this Report. However, it is necessary to take stock of what has been happening to domestic revenues in recent years, in the light of the present large gap between commitments and resources, and in order to make some judgments on what is likely to happen to revenues over the medium term, and to assess in general terms the scope for Government action. In this connection, a number of initiatives aimed at strengthening revenue performance should be mentioned. (a) Current Government work on import tariffs, and sales taxes, aimed at improving the situation of effective protection by curtailing the range, lowering the levels of tariffs, and reducing the present large number of exemptions. (b) A UNDP technical assistance program aimed at strengthening the Customs and Income Tax Departments. (c) An IMF mission on Tanzania's Tax System in April 1988. (d) A World Bank study of the financial performance of transport sector in May 1988. 191 For example: (i) its objective to further narrow income differentials; (ii) creation of a price stabilization fund to cushion farmers' incomes; (iii) rent control and the reduction of house rents for middle ar-. high level salaries in lieu of salary increases; (iv) Government controlled company investment and housing funds; (v) increased resources to National Price Commission, control of construction prices and private sector profit margins; and, (vi) ai unworkable system of Government monitored productivity bonuses applied to both public and private corporations. - 70 - On the assumption that progress is made in strengthening the performance of the two Departments, the necessary changes are made to the tax system and the economy continues to respond to Government policies, the domestic revenue situation is likely to improve. The question is what contribution of revenues should be assumed for the purposes of planning expenditures, and what must be done to secure chis. Past Revenue Trends 3.66 In the past decade, there have been significant changes in both the level and the composition of revenues and revenues generally have not fulfilled expectation. The performance of revenues accounts for part (but by no means all) of the present crisis of public finances in Tanzania. The following trends, illustrated in tables B5-B9, may be noted. 3.67 The composition of revenues has changed over the past decade and a half. (a) Export duties were abolished in 1980/81 and no longer contribute to revenues. (b) Import duties, after peaking at 13.9 percent of total domestic revenue in 1978/79 declined sharply to 5.9 percent in 1982/83. They are now picking up with the recovery of imports and the adjustment of the exchange rate. (c) There has been a persistent tendency for the share of consumption and excise duties to rise. These duties now account for well over half domestic revenues. Their importance reflects, in part, the shift from imported manufactured goods to local production utilizing zero-rated imported inputs, but also progressively heavier taxes on domestically produced beer, petroleum, cigarettes and textiles, which combined yield 66 percent of total consumption and excise taxes. (d) The share of income tax receipts has fallen, reflecting in part the sharp decline in real incomes of public sector employees (the bulk of PAYE taxpayers), which has occurred notwithstanding very high marginal tax rates.20 Other 20/ The tax on income about Tsh 20,000 per month is 75 percent, giving an average tax rate of 45 percent on the threshold level. The marginal tax on a senior public officer is 40 percent. - 71 - factors have been lack of growth in the base for company taxation, and the effects of inflation.21 (e) The share of Other Taxes and Income Sources (e.g., property taxes, stamp duty, licenses, parastatal dividends, etc.) has fallen. 3.68 In terms of the overall level of revenues, the picture is more complicated to decipher. In nominal terms all categories of revenue have risen sharply, twelve times since 1975/76 and over five times since 1980181. In 1976 prices revenues have risen over the period as a whole by 30 percent, but fell sharply in 1984/85 and 1985/86, recovering only in 1986/87 and 1987/88. Total revenues in 1985/86 were 7 percent below the 1976/77 level and 17 percent below the 1873/84 level. This was due principally to large falls in import duty ccllections and consumption and excise taxes, reflecting, in turn, very low imports and, associated with that, declining output in the main excise yielding industries. (a) In relation to total output a broadly similar picture emerges. Revenues averaged 19.0 percent of GDP over the period 1975/76 to 1984/85, and then declined sharply to 15.4 percent in 1985/86 before recovering to an estimated 19.6 percent in 1987/88. (b) In relation to the budget balance, the overall deficit averaged 12.8 percent of GDP between 1975/76 and 1981/82, fell to an average of 8.5 percent for the next four years, before returning to earlier levels in 1986/87 and 1987/88. In broad terms these figures show moderate tax buoyancy until the middle 1980s, sharp reversal in 1985186, followed by recovery. However, the picture is affected by several developments that are not fully reflected in statistics. Firstly, considerable caution must be used interpreting estimates of Gross Domestic Product. While it is possible that the official figures do not fully capture the declining performance of most sectors of the economy in the early 1980s, the recovery which began in 1984/85 could, by contrast, be underestimated, due mainly to the fact that much of the increased activity has taken place on the fringes of the formal economy. Secondly, in a similar way official estimates of inflation (which are used in this Report), may not have fully captured price developments in the parallel market thereby leading to an overstatement of revenues in constant prices. Thirdly, the overvaluation of the currency until 1986 and its progressive correction since then has affected both sides of the budget, but in particular expenditures, which have a high foreign content. This has resulted in movements in the budget deficit relative to GDP that tell little about the fiscal stance. The widening of the deficit/GDP ratio 21/ Unlike personal income tax, which is payable on a current year basis, company income tax is payable itl arrears, after the year in which income was earned has passed. _ 72 - in 1986187 and 1987/88 reflects the revaluation in shilling terms of the external components in revenues and expenditure, and disguises a tightening, not a loosening of the fiscal stance. 3.69 Against this background, several conclusions can be drawn. The first is that whatever tax buoyancy exists in the Tanzanian system has come largely from progressive increases in rates, to the point where the incentives for evasion are high and collection difficulties are compounded. Secondly, much of the present increase in output is taking place in the informal sector or in parts of the economy (such as small scale agriculture) that are inherently difficult to tax. The reasons why growth is occurring in this way have their origins in the structure of the economy, the apparatus of administrative allocation and control that was developed in the 1970s, disillusionment with established marketing systems, and the determination of economic agents to avoid official channels. This process gained impetus with the introduction of own fund imports in 1984/85. However beneficial the process of liberalization has been for the economy as a whole, the inelasticity of many parts of the tax system has resulted in a weaker revenue response than otherwise might have been expected. Thirdly, virtually all sources of revenue face major collection problems. Much of it has to do with the fact that the most dynamic parts of the economy, the agriculture and services sectors are the most difficult to tax. The industrial sector, which provides the bulk of consumption and excise taxes and contains many corporate income tax payers, contracted during much of the 1980s, and now requires extensive restructuring before its recovery can be self-sustaining. Collection problems are also related to the level of tax rates, the low pay and difficult operating conditions of those responsible for assessing and collecting taxes, and a budget system under such strain that the link between revenue collection performance and expenditure allocations has largely been severed. This shows up in the share of revenues collected by ministries other than the Ministry of Finance. The latter has always been the main revenue source, but in 1975/76 line ministries collected 5.6 percent of domestic revenues but only 1.7 percent in 1986/87. The budgeted figure for 1988/89 is 1.5 percent. This suggests scope for much more effective cost recovery. Revenue Strengthening Agenda 3.70 The steps that need to be taken to make government revenues more dynamic may be summarized as follows. Some are already being acted upon, others are detailed in the report referred to above. Import .tie 3.71 The first requirement is to rationalize the structure of tariffs. This is necessary from both revenue and resource allocation reasons. Until recently, an overvalued exchange rate, the use of quantitative restrictions and centralized foreign exchange allocation relegated tariffs to a minor role in determining the allocation of resources and in generating revenues. The Government has been reviewing - 73 - the tariff structure and in the 1988/89 Budget took steps to lower the maximum tariff, simplify the structure and reduce the number of exemptions. These changes, together with further tariff rationalization in the 1989/90 budget, should result in a more administratively feasible system of import taxes, and, with the continued adjustment of the real exchange rate, growth of revenues. Until the 1988/89 Budget the full range of tariffs was from zero to 150 percent, with the bulk of items falling between zero to 60 percent. Exemptions have been widespread and have exceeded collections,22partly the result of agreements with donor agencies and partly discretionary. The deterrent effect of high rates until recently has been offset by the overvalued exchange rate, particularly for own funds imports. But as the exchange rate became progressively more realistic, high rates encouraged evasion and reduced collections. '3 Action to reduce the number of exempt categories and exemptions granted is strongly recommended and is one of the measures that would contribute most to government revenues. This should be accompanied by a much closer audit of customs staff decisions, since the present leakage is as much due to non- exempt goods under duress being classified as exempt goods as it is to goods imported by bona fide exempted importers. The low value of the Revenue Collection Efficiency Ratio (XER) is evidence of the extent to which the system is being abused. Sales Taxes 3.72 Sales taxes, which were merged with excise duties in 1976, are levied on both imports and domestically manufactured goods. As with tariffs, sales tax rates vary greatly, from 0 to 300 percent, with a large number of intermediate steps. This multiplicity of rates encourages misclassification and undesirable pressure on an overstrained 22! In 1986 the weighted average of scheduled tariff rates was 33 percent for consumer goods, 23 percent for capital goods, and 16 percent for intermediate goods. Due to widespread exemptions the actual (collected) duty rate was only 11 percent for consumer goods and 6 percent for capital and intermediate goods. See IRTAC President's Report, 1988, page 14. 23/ The present structure of import tariffs and sales taxes encourages evasions and applications for discretionary exemptions. In the transport sector, for example, the average collection rate for goods entering in the 20-25 percent tariff category is over 30 percent, but this declines to only 13 percent for goods attracting a 100 percent tariff. See Tanzania: Financial Performance of the Transport Sector, World B.nk 1988. For the economy as a whole the Revenue Collection Efficiency Ratio (RCER) in 1986 averaged 32 percent. The weighted average of scheduled duties, which ranged from zero to over 500 percent, was 21.8 percent but the actual duties collected implied an effective rate of only 6.9 percent. See Aide Memoire of the IRTAC Appraisal Mission, March 1988. - 74 - administration. A similar simplification of the structure is recommended, reducing existing rates to a limited range, or even a single moderate rate (e.g. 20 percent) applicable equally to imported and domestic goods. High sales tax rates (or a special excise tax) should be retained for only those goods, such as beer, spirits, tobacco, petroleum products and textiles, which have special revenue properties. 3.73 In the case of beer, the largest revenue earner contributing 20 percent of sales tax revenue in 1987188, it is important for the Government to continue to fine tune the tax to match demand with production capacity. Gasoline and diesel are products characterized by inelastic demand, high foreign exchange cost and easy and efficient collection. With the present price of gasoline at around $1.00 per gallon, converted at the parallel exchange rate, the scope for increasing revenues without exceeding the effective price in neighboring countries is large, and would enable the Government to capture some of the rents accruing to intermediaries in times of shortage. The burden of higher fuel taxes is likely to be disseminated widely to both prGducer and consumers, and is unlikely to be less inequitable than other taxes or foregone social expenditures. Mobilizing additional revenue through equalizing petroleum product prices with neighboring countries is discussed in Tanzania: Financial Performance of the Transport Sector (pages 15-16). According to this report, equalization of prices on the basis of the official exchange rate would raise fuel prices by 10-55 percent depending on the product, and by 85-157 percent at the parallel market exchange rate. Assuming there were no exemption and inelastic demand, this would mobilize over Tsh 5 billion and over Tsh 9 billion, respectively, in extra tax revenue. This illustrate the scope for additional revenue from fuel taxes. A more gradual approach increasing real prices by 5-10 percent a year, exempting diesel sales to Government and mitigating kerosene increases would after four years still raise an additional Tsh 3-4 billion. If ploughed back into the transport sector, this would go a long way towards adequate financing of road maintenance. Transport operations, as it were, have enjoyed subsidized fuel prices at the cost of deteriorating roads. There can be little doubt which side of the equation has added most to transport costs. If the Government moves to increase petroleum taxes (a further round of increases was announced at the end of 1988), attention should be paid to distributor margins which have a bearing on the oil companies' willingness to share the cost of rehabilitating the oil products distribution system. Income Taxes 3.74 Income tax rates for both individual and corporate tax payers are high and almost certainly are a factor in poor compliance and weak collections. The highest rate on incomes (75 percent on income above Tsh 20,000 per month) is widely evaded in the private sector. The highest rate for public officers (45 percent at the time of the PER mission), while reduced somewhat in the 1986/87 budget, is out of proportion to the real purchasing power of public sector salaries, and has created strong pressure - 75 - for payment in kind, a costly and inflexible form of remuneration.24 The bulk of tax is collected from public sector employees on a PAYS basis, and the Income Tax Department encounters serious difficulty assessing and collecting tax from the private sector. Revenues could be expected to strengthen over the longer term if tax rates were reduced and greater use was made of presumptive assessments.25 3.75 The standard company tax rate has been 50 percent since 1975/76. This relatively high rate is offset by the fact that, unlike unincorporated income tax, the tax is payable a year in arrears. Taxes are payable within three months of the end of the financial year on a partial self-assessment basis, which allows for a 20 percent error in estimation. Final payment must take place within nine months after the end of the accounting period, and it takes the income tax department a further six months to complete the assessment. A move to a current year basis, which would have to be done progressively to avoid undue tax burden, woulu strengthen revenues and permit a lowering of rates to improve collections. A review of current rules on depreciation and inflation, and the effect of exchange rate changes would appear indicated. 3.76 One area where collection problems are unlikely to be quickly resolved is parastatal tax arrears. Cash flow and credit problems cause parastatals to delay tax payments. These problems are likely to persist for a while, as the protection enjoyed by state owned enterprises is reduced. Over the longer term, stronger financial performance should result in more prompt settlement of tax liability. Other Taxes and Revenues 3.77 Other categories of taxation have declined in importance over time, and the potential for large revenue increases is limited. The 241 Benefits in kind are taxed more lightly than monetary income. If a person enjoys the use of a company car, a portion of its mileage is assumed to be used for pleasure and taxed but in a way that leaves the beneficiary better off than if he received extra income to run his own car. Government housing is not taxed, and the 10-15 percent of salary automatically deducted as rent is assumed to equate the benefit, despite the fact that the free market value of the housing may exceed total monetary salary. A similar situation arises in respect of parastatal housing benefits. 25/ Initially, revenues might fall, because of the predominance of public sector tax payers on fixed salary scales. But this should be offset by (a) savings arising from lower gross government pay adjustments, and (b) the progressive liberalization of parastatal pay policies. - 76 - Government should continue to review these sources, with the following guidelines in mind. (a) Elimination of taxes and fees which are difficult to collect, contribute little to revenues, and impose an unnecessary bureaucratic burden on producers and consumers. The process of economic liberalization should result in the redundancy oi many fees and licenses. Estate duties are largely uncollectible and could be considered for reduction or abolition. (b) Regular upward adjustment, in line with inflation, of those taxes and fees considered to have either economic or financial relevance. (c) Stronger incentive to Government-departments to collect fees and charges. In some cases, this can be encouraged by greater use revolving funds, in other cases by linking more clearly budgetary allocations to revenue collection performance.26 Prospective Revenue Growth and Implications for Expenditure Planning 3.78 Many of the modifications to the tax system indicated above are already being implemented or are under consideration by the Government. In addition a major program of administrative strengthening is underway in the Customs and Sales Tax Department and the Income Tax Department. This should result not only in better levels of equipment and training, but also in revised procedures, simplifying routines with greater emphasis on presumptive assessments and concentrating scarce resources on current collection cases and on taxpayer categories likely to yield the largest revenues. Over the medium term, reform should result in a more elastic tax system, improved collection efficiency, and higher compliance. If this occurs in the context of continued output growth, and macroeconomic reform, government revenues over the medium term should grow significantly faster than the economy as a whole. 3.79 There is thus room for optimism on revenues. But because higher revenue elasticity depends on a series of reforms affecting all major tax categories, and matching improvements in the staffing and administration of 26/ Revolving funds, typically used when departments are involved in trading activities (e.g. prison farms) carry both risks and advantages. Offsetting diminished central expenditure control are potential gains in cost recovery when communities can relate their contribution to improved services. Any extension of revolving funds, however, should be done a case-by-case basis, taking into account the financial record of the relevant activity, and the general desirability of decentralizing financial management as far as is practical. - 77 - the revenue departments, it would be unwise to commit these revenues ahead of their receipt. Two other reasons for caution are the requirement to continue to reduce the budget deficit as proportion of GDP, and the desirability of providing some cushion for the unexpected, on the grounds that more damage is likely to be done exceeding the intended budget deficit outcome that undershooting it. In the context of a projected GDP growth rate of between four percent and five percent over the long term, Government revenues could be expected to grow at about five percent. In the short term, revenues could grow significantly faster with further adjustment in the real exchange rate and improved collection efficiency, but it would be imprudent to make expenditure plans on such a basis. The latter should therefore be based on the expected longer term path of revenues. A further consideration is the desirability, over time, of achieving balance between recurrent expenditures and domestic revenues, thereby eliminating the recurrent budget deficit which has persisted, with the exception of 1983184, since 1977178. This is desirable from several viewpoints, for example, improving the economy's savings performance. Another is the objective of shifting. over the medium term, some of the commodity aid currently being used aS InIP support to rehabilitation. Changing the balance, which is not advocated in the shortrun, involves complex judgments on the viability of the BOP, the Government's project implementation capacity and the returns from a faster rate of infrastructure rehabilitation, and government revenue considerations. G. COST RECOVERY Introduction 3.80 Cost recovery27should be an important element in a sustainable public expenditure strategy for Tanzania. There are three principal reasons why this is so. In the first place, cost recovery enhances domestic revenues. In the present constrained budgetary situation, there may be no alternative if services are to be properly provided and, in due course, expanded. Secondly, cost recovery is consistent with decentralization and greater community involvement in the running of services, and thus self-reliance. The third reason is that charging for services promotes more efficient use of resources. This is perhaps of lesser relevance in the context of social services, where the issue is not uneconomic use by consumers so much as the poor quality of services themselves. However, the level of prices is important for economic services, such as power and agricultural inputs, where undercharging may result in waste and uneconomic demands. 27/ Cost recovery is used here as an umbrella term that can cover: (i) the imposition of direct user charges for services (as through school fees or road tolls); (ii) the indirect recovery of costs from users (eg the raising of fuel taxes to cover the costs of road maintenance; (iii) contributions in kind by the beneficiaries towards the provision of services. - 78 - 3.81 The commonest argument against cost recovery is on grounds of equity, namely, that it is inequitable to base access to a service on ability to pay for it. The Tanzania Government has a strong concern for equality which has been reflected in long-standing commitments to the free provision of such basic services as health, education and water supplies. But the equity argument loses its potency when free services become unavailable or sink to unacceptably low standards because of the Government's inability to fund them adequately. Moreover, there is scope for taking equity considerations into account in the way cost recovery is implemented. In recent years there has been some movement in Tanzania away from free provision towards the practice of user charges. There has been considerable de facto recognition of the case for cost recovery. In areas where the health service is represented by mission facilities, fees are standard. Parental contributions for primary education now amount to fees in all but name and explicit fees have been introduced for public secondary education. There is an increasing emphasis on the importance of self help by communities. There is much evidence of public acceptance of user charges when these are visibly linked to the provision of a service at a level of quality that is appreciated. The case of mission health facilities has already been cited. Evidence of willingness and ability to pay is also provided when the absence or inadequacy of government services causes people to turn to the private sector. Water is often purchased from private sellers at very h_gh prices; considerable sums are paid to informal health practitioners and pharmacists and so forth. 3.82 This has been complemented by moves towards cost recovery at the policy level. These range from general statements by political leaders that communities should take responsibility for operating many services themselves, to sector strategy papers that seek to define new parameters for the provision of services. A recent example is water supplies, the subject of a Government workshop in January 1988, which endorsed cost recovery and community involvement in rural water supply schemes. General Issues in Cost Recovery. 3.83 The sectors with the greatest potential for cost recovery are: education, energy, health, roads and water supplies. The prospects for cost recovery in these sectors are individually discussed in Chapter 4. This section considers some of the general issues involved in cost recovery. (a) The institutional framework in which cost recovery is to take place is important. This is likely to vary between sectors according to how a service is delivered. In some cases existing arrangements require no change for cost recovery. For example, in power full cost recovery by TANESCO is a matter of introducing economic tariffs; the issue constraining the Government is social impact and timing rather than any need for institutional change. In other cases, for example rural water supplies, facilities would probably have to be transferred to communities if - 79 - they were to play a greater role in their operation and maintenance. (b) There is a need to plan the move to cost recovery carefully, since timing is crucial. Where the institutional framework is in place and there is capacity and willingness to pay, cost recovery can be implemented quite quickly. In other areas, it may not be possible to put services on a cost recovery basis immediately. For example, full cost recovery at the tertiary education level (the most expensive in unit cost terms) is unlikely to work equitably unless a student loan system is introduced. But banks are unlikely to launch such a scheme until graduate pay levels in the public service are more realistic. (c) It is important that those who are asked to contribute towards the cost of services that were once free should understu.Ad the context in which payments are now sought, and Vwdn made how they will improve service delivery. In the case of services where communities are likely to be directly involved in operation and maintenance, it will be necessary to engage in dialogue on how they should be operated. (d) Where services have badly deteriorated, it may be necessary to provide substantial capital inputs before charges can be credibly introduced or raised. Dar-es-Salaam water supplies appears to be a classic chicken-and-egg example. The National Urban Water Authority (NUWA) cannot operate on present water charges, yet public dissatisfaction is so large that raising charges might only worsen the Authority's collection problems. Thus cost recovery must be introduced as part of an overall package of rehabilitation, improved management and operations and re- orientation of specific services. There is a clear role for donor support in this respect. (e) Generally, it will be necessary to demonstrate that payments for a service that was once free (or high charges in place of token ones) result in more reliable and effective service. This is difficult to assure in situations where budgetary mechanisms are under great pressure, and payments into general revenues seemingly disappearing without trace. One option is to make greater use of revolving funds, so that user payments as far as possible can be retained at or close to the point of service delivery. Another option is to establish a more automatic link between budget provision and revenue collection performance. This is a complex matter that raises difficult to resolve questions of resource fungibility, expenditure control and accountability, - 80 - collection incentives and the fiscal rectitude of government agents. It nevertheless needs to be considered if cost recovery mechanisms are to be more widely employed. The institutional framework for the delivery of services and the performance of different agencies will be relevant in determining the best approach to use. (f) A distinction should be drawn between cost recovery at the point of delivery and the earmarking of funds collected as part of general revenues. For the most part, the latter should be avoided. While there is merit, for example, in ensuring road transport users pay sufficient zales and excise taxes to fund a proper level of road maintenance, it would be wrong to set such revenues aside solely for use in the sector. Receipts that are part of general tax revenues have to pay for Government services outside the sector in which they are collected. By balkanizing the budget, earmarking of general revenues imposes unwanted rigidity in the budget allocation process. There are enough external constraints on budget formulation without creating additional internal ones. (g) In some sectors the best course may be to allow cost recovery to develop to its ultimate form: taking certain activities outside of the public sector altogether. The growing acceptance by the Government that much of the expansion of secondary elucation will have to be through private schools is an example of this. 3.84 The forgc4ng suggests that while cost recovery is an important part of the public expenditure strategy, its introduction needs to be properly planned. While in certain sectors measures can be put in place lmmediately, in others cost recovery will have to be introduced gradually, in the context of institutional reform and the rehabilitation of existing facilities. Furthermore, its impact is likely to be more significant to the sustainability of individual services than in terms of overall budget revenues. - 81 - H. UTILIZAT4ON OF AID Introduction. 3.85 Official aid flows have always been an im ortant resource for Tanzania, greatly exceeding private capital flows.20 In the past decade aid has become even more critical, overtaking export earnings as the principal source of external resources, as the performance of t!le economy has faltered. In the course of the 1970s, Tanzania became one of the largest aid recipients in Sub-Saharan Africa, establishing a special relationship with many donors who were attracted to the country's emphasis on self reliance, growth with equity and the targeting of government programs on basic needs. Aid flows reached a high point in 1981 ($703 million of ODA net from all sources), but declined sharply during the period 1983-85 in the face of growing implementation difficulties and donor dissatisfaction with Tanzania's macroeconomic policies. Since the lavach of the ERP in 1986, donor flows have risen quite strongly, and are in the process of overtaking the earlier peak in nominal terms, but are still below it in real terms. Characteristics of Aid Flows. 3.86 The significance of aid flows to Tanzania, both from the donor's and the recipient's perspective, are best illustrated by the following comparisons. They show the country's heavy dependence on external assistance, but also some less widely recognized characteristics. a) In terms of regional performance, in 1980-81 Tanzania was the largest t,zipient in Sub-Saharan Africa of aid from all sources. At that time Tanzania received 1.9 percent of global ODA from all sources, and 9.0 percent of all DAC aid to SSA. By 1985-86, however, the shares had fallen to 1.4 percent and 5.7 percent respectively, and Tanzania had been overtaken in SSA by Sudan and Ethiopia. More recent comparative data are not yet available, but can be expected to show some improvement in Tanzania's share, though still remaining below earlier levels. b) With respect to individual donor programs, in 1980-81 Tanzania was the premier SSA recipient of ao less than nine DAC bilateral donors, most prominently the Nordic countries and the Netherlands. The figure had dropped to seven by 1985, but has risen again since then. 281 Over the period 1982-85, Official Development Assistance (ODA) net amounted to 91.42 of Total Receipts, according to OECD data. See Geographic Distribution of FinanUial Flows to Developing Countries, pp 222-3, OECD, 1987, from which the country comparisons are drawn. - 82 - c) The terms of aid to Tanzania have been very favourable. According to OECD data for 1985, the grant element in total ODA was 97.7 percent, one of the highest in SSA, comparing favourably with Kenya (92.3 percent), Zambia (91.1 percent), Ivory Coast (85.0 percent) and Ghana (84.8 percent). d) Relative to population, Tanzania's aid receipts are comparatively modest, amounting to $22 per capita in 1985, somewhat less than the median level ($36) and well below countries like Botswana ($90) and Mauritania ($121). beneficiaries of a small country effect and other special factors. However, amongst countries of comparable size, only Sudan registered higher per capita aid receipts. Since 1985, aid flows to Tanzania have risen to about $34 per capita, but so also have aid flows to other countries, particularly when valued in US dollars. e) Relative to other forms of foreign exchange receipts, aid flows have risen quite sharply. Until 1981 aid receipts were generally less important than export earnings. But exports plummeted sharply in the early 1980s, and although aid receipts fell as well, the ratio of receipts to official export earnings rose from 93 percent in 1981 to 170 percent in 1985, the nadir of Tanzania's export collapse. Although exports have recovered somewhat since then, aid flows have risen as well, and on a gross basis aid receipts are still close to double export earnings. This heavy dependence on aid, as discussed later, greatly complicates the task of foreign exchange management and is central in determining the optimum aid strategy for Tanzania. Aid flows as a source of foreign exchange become even more critical when account is taken of export retention schemes and bilateral trading arrangements, which reduce the flow of foreign exchange to the central bank. f) Aid receipts in relation to total output show considerable variability. Aid constituted an estimated 13.2 percent of GDP in 1980. The ratio fell to 7.5 percent in 1985, but recovered to about 9.5 percent in 1986 and 16.4 percent in 1987. However, these ratios are considerably affected by the exchange rate used to compare domestic output with international currency denominated aid flows and by imperfections in the measurement of output. Because of t'e large overvaluation of the Tanzanian shilling the importance of aid flows in earlier years is underestimated and difficulties in capturing the expanding parallel market activities suggest that GDP may be understated in later years. If CG estimates of gross flows (including technical assistance) are compared with output valued at the average 1988 exchange rate, the ratio rises to over one quarter. - 83 - g) Problems of measurement and valuation also affect the estimation of aid's contribution to the financing of the Government budget. In terms of the Development Budget, the share of aid flows in financing expenditures has been relatively steady, averaging a little over 50 percent (see Table B25). But as a result of the high proportion of aid flows directly disbursed by donors and problems in recording these amounts in the budget, the true proportion is much larger. In recent years, the Development Budget has been supported also by counterpart revenues from commodity aid (see Chart 3). h) With regard to the Recurrent BudLet, the recent shift away from project aid to commodity aid and balance of payments support to the econory at large has generated substantial counterpart income to the Government, for the most part taken into the budget as recurrent revenues. In 1986/87 the share of counterpart income in the budget estimates rose to 16.1 percent, largely the .esult of exchange rate changes, and comprises 22.3 percent of revenues in the 1988/89 Estimates. This increase in the share is partly due to the further adjustment of the exchange rate, and partly due to an increase in the volume of !mport support.29 3.87 Currently, total aid flows from all sotrces on a gross basis are estimated at approximately $950 - $1000 million, comprising about $150 - 200 million of technical assistance30, and the remainder split roughly 29/ In this calculation the counterpart funds generattl from commodity aid and balance of payments support that accrue to the Government are treated as recurrent revenue, as they are treated in the Government Budget (Code 2200 Refunds, Contributions and Receipts for Services on Behalf of Other Institutions: 2270 Other Programme Assistance. A fiscally more correct way would be to treat counterpart funds as a form of deficit financing. In which case the ratio of courLerpart funds to domestic -evenue is 19.0 percent in the 1987/88 Estimates and 28.7 percent in 1988/89 Estimates. Furthermore, in the 1988/89 estimates an additional category of counterpart funds, Development Revenue is utilized for the Development Budget. 30/ The Consultative Group estimates for capital aid in 1988 were $508 million of grant disbursements and $270 million of concessionary loans. The figure for technical assistance is based on bilateral denors' estimates of the proportion of their aid programs channelled as technical assistance. l; is a lower figure than that estimated in a recent UNDP report Strengthening Technical Cooperation in Tanzania, prepared for the 1988 Consultative Group meeting. The latter's estimate of 35-40 percent of total aid flows was based on DAC data, but was felt by donors present at the CG to overstate the position. - 84 - equally between project aid and commodity aidibalance of payments support. Project aid is spread across many sectors. Commodity aid is concentrated chiefly in the industry and transport sectors, with additional amounts allocated to agriculture and food aid. Recent Trends. 3.88 Associated with these changes in total flows, a number of trends may be noted. a) The terms of aid have become steadily more favourable during the past decade. Bilateral donors have completed the retrospective conversion of earlier loans to grants, and most bilateral programs are on a grant basis, with the remainder providing concessional loans. The very high grant equivalent of aid disbursement, combined with the virtual cessation of commercial lending, means that the negative effects on debt servicing of current flows are minimal. b) As noted, there has been a strong trend towards commodity aid by bilateral donors, and increasing interest in co- financing adjustment lending by the World Bank. This reflects the view, firstly, that project experience has been unsatisfactory, secondly, that import support is critically needed, and thirdly, that changes in macroeconomic policy have to be implemented before conventional project finance cen be resumed. c) At the same time, bilateral donors are modifying their projects, in recognition that traditional approaches to the design of projects may no longer be appropriate, and are shifting more and more explicitly to 'project' forms or recurrent budget support (e.g.: DANIDA's Essential Drugs Program, SIDA's support for school textbook production, and NORAD's maintenance support to the IDM at Mzumbe). d) Bilateral donors are also changing the design of capital projects in another way, not only towards rehabilitation, but using simpler technologies to ease maintenance and involve communities with the operation and upkeep of local services. Associated with this has been a bypassing of government financial and administrative structures, as these become less effective. Examples of these trends are to be found in programs to rehabilitate basic social services. At the same time the proportion of aid funds directly administered by donors has been rising. e) Changes have occurred in the relative importance of the main aid partners. Commitments by CMEA donors have fallen, and in the face of unresolved arrears, disbursements by - 85 - OPEC donors have largely been suspended. Tanzania is now critically dependent on DAC bilateral donors and the World Bank. Issues Arising and Recommendations for Aid Strategy. 3.89 The most striking conclusion from this review of aid to Tanzania is the sheer importance of aid flows to finance the ERP, and thus how critical it is that they be utilized effectively. From this standpoint, a number of issues for policy makers arise. a) Aid Coordination. It is vital that Tanzania strengthens the machinery of government in order to take the lead in aid coordination. Notwithstanding the merger of the Ministries of Finance and Planning three years ago, two separate aid coordination sections still exist in the combined Ministry, and aid coordination remains, essentially, a donor driven process. The agencies for the most part determine their strategies and areas of concentration and work out programs with the line ministries in the absence of effective orchestration of the process by MFEAP. It is understandable how this has arisen. and to the extent that a more active role by donor agencies has enabled increased levels of aid commitments to be disbursed, it can be viewed as a positive development. But if potential aid flows are to be put to the best use and maximized over the longer run, improvements need to be made. The first requirement in building a more effective aid coordination machinery is the strengthening of the planning and budgeting functions in MFEAP, and the integration of recurrent and capital budget priorities. Work currently being undertaken by the BMDP to strengthen the recurrent budget process, if linked to a regularly updated PIP/IPR and the introduction of recurrent budget departmental guidelines differentiated according to a medium term plan for restructuring allocations and staffing levels, would provide the necessary foundation for Tanzania taking the lead in aid coordination. The second requirement is the close monitoring of existing and prospective donor programs. Donors can help in this process by providing timely information on program levels and disbursements, so that aid flows can more accurately be reflected in the budget. Even where resources are managed and disbursed directly by the donor, they need to be shown as both revenue and expenditure in the budget, in the - 86 - interests of fiscal planning and more comprehensive accounting. 31 b) Elimination of Underfunding. The underfunding of the Government's own activities makes efficient use of aid very difficult. There is a strong incentive on the part of both donor agencies and line ministries to design projects around special management units. This creates an artificial demand for expatriates and results in *islands' of properly funded activity that are difficult to integrate into the normal administrative apparatus of ministries, and usually cannot be sustained without indefinite donor support. This dilemma is likely to persist for as long as it takes to get budgets and salaries back to some sort of properly funded equilibrium, and is an added reason why the salariesistaffing issue must be addressed, in the interest of more effective use of aid resources. Until public service productivity is raised, aid will continue to be wasted, and donors will go on seeking ways of administering their programs outside the normal channels. c) Commodity Aid and Balance of Payments Support. It is particularly important for the Government to closely monitor the balance between BOP support and more traditional project support. The relationship is both critical and complex. BOP support is now crucial not only because of its contribution to imports, but also because the counterpart funds generated thereby have become a major contributor to the funding of the recurrent and development budgets. Thus any significant variation in the level of import support has immediate budgetary consequences. This means that special care must be taken in planning the composition of future aid flows, to avoid abrupt changes, and ensure a fiscally satisfactory balance between import support and rehabilitation aid. Credit policy is also involved, since the capacity of parastatal and private 31/ Failure to capture direct donor expenditure on projects in the Government accounts increases the probability of recurrent strain in subsequent years. A department receiving high levels of donor support not recorded in the Government accounts is less likely to make proper provision for operation, maintenance and replacement. Accurate bookkeeping in itself is not a source of additional resources, but it is the foundation of fiscal planning. Thus donors who do not supply budget and accounting staff with accurate and timely disbursement information are more likely to find themselves saddled with continuing commitments once the original phase of the project has passed. See the Report of the Controller and Auditor- General: 1986, page 4, and earlier volumes. - 87- sector firms to provide local cover depends on their ability to raise credit. To be confident that the resources are available to enterprises that are capable of putting them to good use requires the rapid elimination of structural distortions in credit markets. Thus an early solution to the overdraft problems of the marketing boards and proceeding with the planned review of the financial sector are critical to the effective use of donor import support. d) Allocation Mechanism for Commodity Aid and BOP Support. So that aid flows contribute to the restructuring of the industrial sector (and not merely a partial rehabilitation of the existing structure), it is important that, as far as possible, import support is channelled through the OGL facility recdntly introduced by the Bank of Tanzania. Because exi, king donor procedures in the main are generally not well adapted to market oriented foreign exchange allocation mechanisms, this means that the simplification of donor procurement procedures, and ultimately their complete untying, must be a prime objective of the Government's aid coordination strategy. In cases where import support cannot be channelled through the OGL facility, or otherwise is to be targeted to a particular enterprise or sector, it is important that this be done in the context of economic (not just financial and technical) analysis to determine the viability of the enterprise receiving support and to devise a strategy for the restructuring of the relevant sector or subsector. e) Capital Assistance. Capital projects need to be biased towards rehabilitation. This is broadly the approach being followed in the PIP, and to which donors are responding. In the coming years, as ongoing projects are completed, there will be increased opportunities to redeploy capital aid. In this context, difficult decisions will have to be made on where to focus aid resources, and it is important that this be done within an overall framework of priorities. The first issue is the trade-off between rehabilitation and expansion, which is particularly pressing in the social sectors. As the discussion in Chapter 4 shows, the gains from applying public resovtrces to rehabilitation as compared with expansion are like'y to be significantly larger in the short to medium term. 'The second is the recurrent cost implications of capital projects. A contributory factor in the fiscal strains that developed in the 1970s was the breakdown of the discipline of scrutinizing the recurrent costs of capital spending proposals, and relating them to an overall framework of recurrent budget priorities and expenditures growth - 88 - ceilings such as had been in existence in the previous decade. The recurrent costs of completed projects, whether they be new or rehabilitation schemes, need to be given prominence in determining how to allocate aid resources. f) Recurrent Components of Projects. In the light of the inadequacy of present recurrent expenditure allocations in many areas and the high potential returns from augmenting them, some donors are including significant amounts in their projects to make good key recurrent deficiencies. There is a case for continuing, and perhaps extending, such arrangements, particularly where foreign procured inputs are being provided. These can make a critical difference to the effectiveness with which domestic resources are being used. But it needs to be remembered that such interventions are short-term solutions, and should not be used to postpone the required fiscal restructuring. In other words, the overriding priority must be the reordering of recurrent budget outlays to reduce allocations and staffing for less essential activities and properly support priority programs. It should be borne in mind that this restructuring is more likely to occur if such funding is channelled through import support programs. In addition to supplying foreign exchange, this form of aid generates revenue for the Exchequer that is completely fungible between uses, and thus ultimately more supportive of the type of restructuring of priorities that is necessary if the Government is to decisively escape from the underfunding of key programs.3Z g) Diversification of Aid Sources. It is desirable that Tanzania diversifies its sources of external finance. At present, Tanzania is heavily dependent on DAC bilateral donors and the World Bank, who for the most part have already expanded their programs in support of the ERP, and will find it difficult to increase the real level of commitments much further. At the same time, there is a sizeable group of OPEC donors and other multilateral 321 One of the consequences of high aid dependency is the "balkanization of the budget, namely the tying of aid to discrete programs in the recurrent and capital budgets and the reduction in the amount of discretionary funding available to budget managers. This phenomenon is frequently associated with a donor led aid coordination process. While donors may view their interventions as promoting key priorities, in many cases they may be substituting for local funds, and in aggregate their interventions, particularly if they include recurrent programs, may erode the very priority setting process they seek to support, and make the type of budgetary restructuring Tanzania now faces a more complex process. - 89 - agencies which are currently no longer disbursing, but could be expected to do so quite rapidly if accommodation could be reached on outstanding arrears. Given the concessionary nature of such flows and the likelihood that they would quickly exceed current arrears, this would seem to be the fastest way for Tanzania to expand the existing aid envelope provided the necessary foreign exchange can be mobilized. An essential part of any strategy for the resumption of disbursements should be proposals worked out in advance for how new commitments by these agencies should be channelled. Proposals to cofinance existing rehabilitation or balance of payments support prograrses would appear to be the surest route both to early disbursement and effective use of resources. h) Commercial Borrowing. The scope for expanding medium commercial credits is very limited, and such sources (and Government guarantees to facilitate them) in general terms should not form part of the Government's (sternal resource mobilization strategy, for three reasons. Firstly, the country's credit standing is low and this is likely to be reflected in high spreads or front-end fees that will adversely affect the debt service ratio. Secondly, banks may seek to securitize their loans with a lien on export earnings, at the expense o. the cash flow of the Bank of Tanzania and reducing its degrees of freedom in managing the country's foreign exchange reserves. Thirdly, because of the existence of undrawn aid commitments that offer a low cost alternative to commercial borrowing. The situation is dirferent with short term credits. Provided they are extended on normal terms, and are free of special securitization devices, shcrt term credits (less than one year) can form an important part of the central bank's reserve management strategy. However, they are essentially sources of tra4e finance, and thus are not an alternative to aid flows. I. PARASTATALS Background 3.90 With somewhere in excess of 400 parastatals, Tanzania has the largest parastatal sector in SubSaharan Africa. A small number of them date back to the period around Independence. Many state-owned enterprises were created following the Arusha Declaration, when key sectors of the economy were brought into public ownership, and banks, insurance companies trading houses, agricultural estates and major manufacturing firms were nationalized. A further number came into existence during the 1970s when pub'ic enterprises were used as the vehicle to spearhead investment, especially in the industrial sector, and to generally extend the public - 90 - sector's role in the economy. In addition, many non-commercial parastatals were formed throughout the period, such as education and training institutions, research institutes, and other quasi-governmental bodies, serving a public purpose but separately constituted and dependent on the Government budget for recurrent and capital funding. Aggregate employment by parastatals approaches that of Central and Local Government, and the two categories combined account for over three quarters of formal wage employment in Tanzania. 3.91 In recent years, the performance of parastatals has come into question. Productivity has declined, overstaffing is rife, accountability and financial discipline have weakened. Few public enterprises pay regular dividends to Government, indebtedness to the banking system is rising at an alarming rate, with large contingent claims on the Government, particularly in respect of marketing boards. Arrears are high, both to banks and other parastatals, and there is widespread public dissatisfaction with the level of service provided and the quality of goods produced. At the same time there are substantial Government arrears to parastatals, and they are used to circumvent departmental budget constraints. 3.92 While economic inefficiency has not been soelly a parastatal phenomenon, the extent and causes of weak parastatal performance have been a major concern of the Government and have been analyzed in a number of reports and inquiries. These includet (a) The Hamad Commission in 1983 which recommended the dissolution of the crop authorities and their replacement by cooperatives and marketing boards, the closure of some loss making parastatals, cost cutting and reduction in staffing levels. (b) The Presidential Implementation Team (PIT), created to carry out and further develop the Hamad Commission's recommendations, and which submitted its own report to the Cabinet in 1987. This recommended profitability as the principal yardstick of parastatal performance, greater autonomy to managers and a parastatal-by-parastatal review to determine which to retain and which to dismantle. tc) The Nsekela Commission, established to review public sector pay policy. It advised in its report in 1987 that greater latitude should be given to parastatal managers in hiring and firing staff and determining salary and wage levels. (d) A World Bank study completed in early 1988 which recommended the clarification of goals for parastatals, their classification into commercial and non-commercial, a review process to determine the essential ones to rehabilitate and retain, a reduction in preferential treatment, greater competitive pressure and a corresponding increase in manager's autonomy and accouxtability. - 91 - 3.93 A number of the recommendations of these reviews, which form a consistent pattern, have been adopted for implementation, and other are under active consideration. Direct subsidies to commercial parastatals have been terminated. In public statements by the President and senior Ministers parastatals staff and management have been put on notice that their performance will be judged increasingly by commercial criteria. Of particular importance for the parastatal sector are the policies of the Economic Recovery Program with its objective of progressively reducing macro-economic distortions, eliminating preferential and discriminatory treatment, and generally fostering a more competitive ek.onomic climate based on a realistic structure of relative prices, fewer direct controls and greater reliance on market forces. Impact of the Parastatal Sector on the Budget. 3.94 The primary concern of the PER is the impact of the parastatal sector on the Government's budget. Parastatals have had a substantial impact on the Government's budget in several ways. Firstly, parastatals are responsible for a large proportion of the PIP, and fund the bulk of their capital requirements through the Development Budget, with externally acquired resources on-lent, granted as equity, or simply transferred to the parastatals in question. During the implementation of the BIS in the late 1970s, investments in manufacturing parastatals comprised the bulk of the PIP, and today parastatals still account for a large proportion of projects and programmed expenditures in the three year program. Originally, these expenditures were entirely on new schemes. Now the emphasis is changing to rehabilitation, and this trend could strengthen as the process of parastatal restructuring continues. 3.95 Secondly, parastatals contribute to government revenues, through dividends and taxes. Their dividend performance has been disappointing compared with earlier expectations. Despite the fact that about three quarters of parastatals are commercial, an average of only one dozen have paid dividends to the Government in the past five years, and only three (BOT, NBC and Tanzania Cigarette Co.) have done so on a consistent and worthwhile basis, with the Central Bank alone accounting for three quarters of all payments. More parastatals pay corporate income tax. But relative to the resources absorbed in their creation, the amounts received, with the exception of a few highly profitable performers, are not commensurate. This has been one of the factors behind the lack of dynamism in Government revenues over the years. A small number of parastatals -- those concerned with petroleum products, beer and soft drinks, cigarettes and textiles, pr3vide significant amounts of eycise and sales tax revenue. But this has more to do with the taxable properties of their products than their efficiency. 3.96 The third area of the budget on which parastatals have an impact is Recurrent Expenditures. This occurs in two ways. In the first place there are the transfers and subsidies needed to fund the operating budgets - 92 - of non-commercial parastatals and other semi-government bodies. A total of 120 such bodies are listed in the 1987/88 Recurrent Expenditure Estimates as receiving grants and subventions over the poriod 1986186 to 1987/88. This is not an exclusive list -- further graats and subventions are made in local authority budgets to local parastatal entities. Table 3.5 summarizes this listing (the full list is reproduced in Table B20 in the Statistical Appendix). Table 3.5: Selected Grants and Subventions (Tsh million) 85186 86/87 87188 88189 Institution Actual Actual App Estimate Estimate Total Grants & Subventions 1886 3019 3088 4137 olv CCM 417 591 863 840 University of DSM 339 438 536 730 Sokoine University 127 169 267 355 Muhumbili Medical Ctr 186 352 536 783 Memo Items Total Supply 20,169 29,644 39,665 57,468 Subventions as X Supply 9.4 10.2 7.8 8.9 3.97 As the table shows, a small number of non-government entities, headed by the Party, the University of Dar-es-Salaam and Muhumbili Medical Centre, account for just over half the total volume of subventions to non- commercial parastatals. The remainder comprises sizeable transfers to bodies like the agricultural research institutes down to transfers of a few thousand shillings.33 In aggregate these transfers amount to 102 of the total Supply Vote, equivalent to the funding of a large ministry. 3.98 Parastatals have also impacted on the Recurrent Budget via the expenditure vote of the Public Investment Division of MFEAP, where, under Sub Vote 4800 Contractual and Contingent Liabilities various forms of assistance to parastatals have been extended. In recont years these have included the following: 33/ In terms of the Government budget, the distinction of being the smallest parastatal in Tanzania goes to the Tanzania Beekeepers, Association. - 93 - (a) Since 78/79, a variable and sometimes large item (Tsh 1202 million in 88189) called Financial Assistance to Parastatals. (b) Since 80/81 an annual transfer to NBC of Tsh 250 million in respect of a Government assumption of NMC debts. (c) An annual subsidy to Tanzania Fertilizer Company, which terminated in 82183. (d) A rising amount (Tsh 1100 million in 88/89) entitled Crop Authority Overdrafts. (e) Allocations for Parastatal Rehabilitation (Tsh 762 million in 88/89. In 1987188 and 1988189 these parastatal related transactions amount to 28 percent and 31 percent of the Ministry's total Recurrent Expenditure Vote, and 5 percent and 6 percent of Total Supply, respectively. Issues of Parastatal Financing. 3.99 3ecause Tanzania's parastatals are such a large and diversified group, it is difficult to generalize about the impact on public expen- ditures. Five distinct categories can be identified: (i) Financial parastatals, such as BOT, NBC, CRDB, TIB and those dealing with housing finance and insurance; (ii) utilities such as those responsible for power, water supply, telecommuninations, air transport and railways; (iii) public enterprises operating as commercial entities in fields such as industry and services; (iv) the seven agricultural marketing boards; and (v) training institutes, research bodies and other non-commercial bodies that operate for the most part as extensions of government but with separate legal status. In varying degrees all have been exposed to the financial squeeze of recent years. They have a large payroll of underpaid employees, and, like government agencies proper, represent a considerable suppressed demand for public expenditures. But there are additional aspects to their potential claims on the Government budget. These are best explained if the position of each category is reviewed separately. Financial Parastatals. 3.100 The financial parastatals are the most profitable of the commer- cial parastatals. Over the years they have tended to contribute more to Government rev-enues t1an they have added to Government expenditures. It should no,t be assumed this situation will continue. Serious problems are emerging with the loan portfolios of financial institutions, and in due course these could have a significant impact on both the profitability of banks and on the Government's budget. There are several dimensions to the problem. - 94 - (a) Loans made under Government Guarantee. NBC, TIB and CRDB all have an unacceptably large proportion of non-performing loans and loans in arrears. Many of these are loans extended to cooperatives, ujamaa villages and parastatals under direct or implicit government guarantee. Banks holding these loans believe the Government must compensate them for losses. (b) Shift towards positive real interest rates. Prior to the launching of the kRP, the interest rate structure was strongly negative in real terms. The reduced cost of borrowing disguised credit problems. Now nominal lending rates are close to being positive in real terms. Many borrowers have found it difficult to service loans. In the absence of a large interest rate subsidy. they have either gone into arrears or incurred further indebtedness. (c) Lending to the Industrial Sector. A significant proportion of the industrial enterprises banks have extended loans to are economically unviable. As the exchange rate is adjusted and the regime of price control, confinement and administrative allocation of foreign exchange is progressively dismantled, hitherto suppressed credit problems are likely to become more apparent. (d) Marketing Boards. The most serious threat to the financial sector is the overdrafts of the agricultural marketing boards. At the beginning of 1988 the accumulated overdraft of the NMC amounted to Tsh 10 billion with unsold stocks of only Tsh 2 billion. In 1987/88, the Cotton Marketing Board increased its overdraft to Tsh 4 billion, and the Tobacco Processing and Marketing Boardly Tsh 1.4 billion. While some of this represents the financing of stocks that in due course will be sold, to a significant extent the causes of the overdrafts are structural. (e) Competitive Environment. Hitherto banks in Tanzania have operated in a closed and protected environment, each one operating in its chosen sphere, with little overlap. With the CRDB moving into commercial banking, there is likely to be more competition for customers and deposits, which will be beneficial for borrowers and for the efficiency of the banking system as a whole. But insofar as part of the dividends and taxes paid by NBC to the Government comprises - 95 - monopoly rents, Government revenues from this source may fall for a period. 34 3.101 The net effect of these pressures on the credit system is that financial parastatals are facing a period of increasing portfolio problems, in which significant write-offs and capital restructuring will be needed. The Government is likely to be increasingly involved in this process. both in terms of honoring guarantees and providing equity injections and debt write-offs. The magnitude of this cannot be determined at this stage, but they are bound to affect both the Recurrent and the Development Budgets. A commission to review the financial sector has been estublished, and a number of important studies are being carried out under the umbrella of the Commission. These should provide a clearer picture of the dimensions of financial sector restructuring and the likely impact on the Government's budget. Utilities. 3.102 Aside from the fact that the Government itself is a major consumer of the services of utilities, the group impacts on Government finances through both the Recurrent and the Development Budgets. In the coming years substantial capital resources will be required for rehabilitation and, to the extent that it is justified, investment in new facilities. TANESCO and TRC are among the utilities requiring substantial funding of this type. The main source, as in the past, will be external aid agencies, with only minimal local funding. From the viewpoint of efficiency in public expenditures, several observations may be made. The first is the importance of preparing medium-term rehabilitation plans for the major utilities. This has been an ongoing process with TANESCO and TPTC and is now beginning with TRC. It needs to be extended to other utilities and enlarged to cover management and operational efficiency improvements as well as the rehabilitation and renewal of fixed assets. The second is the regular adjustment of tariffs, to ensure that these are made in a timely way and that, subject to efficient performance, management and board are given greater freedom to set tariffs on the basis of commercial criteria. 3.103 The impact on the Recurrent Budget derives in part from past capital programs. Much of the capital of utilities has been built up through the Government incurring debt and on lending it to the parastatal concerned. In a number of cases, due to cash flow problems, the utility has been unable to meet its commitments under the terms of the onlending agreement. Consequently, the Government has had to service external debt without a matching inflow from the utility, and this nas unbalanced the Government's own accounts. In addition, the Recurrent Budget has had to 341 Government revenues from NBC in recent years have been artifically high, because NBC has failed to make realistic provision for portfolio losses, and because of the large spread between deposit and lending rates. - 96 - bear the cost of financial restructuring, notably NUWA and TRC in the 1988189 Estimates. 3.104 Tariffs are, therefore, important from several angles. In the first place, they need to be sufficient to cover the operational expenues of the utility, meet overheads and pay capital charges. Secondly, they need to be set at full ecovomic cost covering levels if an artificially high demand for the utility's services is to be avoided. This in turn would inflate capital requirements, and make it more difficult to secure the desired level of external funding. Thirdly, as a means of achieving adequate cash flow and economic pricing, tariffs should be high enough to provide the utility a satisfactory return on its investment. 3.105 With the process of exchange rate adjustment and credit and foreign exchange allocation still to be completed, high domestic inflation a backlog of overdue tariff increases, the required adjustments in the short to medium term are likely to be large. To the extent that social and political considerations make it difficult to increase tariffs in a single step to the required level, it may be necessary to take a staged approach. In such circumstances, it is sounder to finance the transition costs through the Government budget, than through the banking system or through further buildup of inter-parastatal arrears. This would make the rehabilitation costs, the trade-offs in expenditure reductions elsewhere and the financing requirements more explicit. Whatever route is chosen, phased adjustment should be done in the context of a plan that embraces the actions required to improve services, the target tariff level and the intermediate steps to reach it, and the financing of the transition costs. Unfortunately, comprehensive tariff adjustment plans have been slow in appearing. One of the more difficult cases is TANESCO, where the implicit budget subsidy is especially large (equivalent to the recurrent funding of a major ministry) and politically sensitive. Other parastatals undergoing tariff adjustment are NUWA and TRC. Public Enterprises. 3.106 Commercial parastatals comprise the largest category of parasta- tals, with the bulk of public enterprises to be found in manufacturing, trading and agriculture. Under the ERP, the Government's policy is for commercial parastat.als to become more competitive by changing macroeconomic policy and dismantling the protection hitherto afforded these enterprises through price control, confinement, preferential credit and foreign exchange allocations. In addition, interventions are planned in specific sub-sectors, to prepare plans for the restructuring and rehabilitation of economically viable enterprises. 3.107 There are several implications of this process for public expenditures, apart from those already discussed affecting the financial sector. In the first place restructuring is likely to generate a significant requirement for external resources, which will need to be reflected in future allocations in the PIP. However, it may not be either - 97 - practical or desirable to reflect these as individual enterprise projects as has been the practice in the past. The reason for this is that the essence of restructuring is a shift away from a planned approach to public enterprise resource allocation to a predominantly market determined one. This would be facilitated by making external aid resources available in progressively increasing amounts through the OGL window of the Bank of Tanzania, and by ensuring adequate medium term finance is available through suitably strengthened development banks and other financial intermediaries. The Government has already begun to move in this direction by instructing public enterprises to regard banks rather than the Development Budget as their primary finaacing source. It needs to be followed up by action to strengthen the financial intermediaries, increase the competition among them, and to channel more aid resources through them as they become more effective conduits. 3.108 Specific public enterprise restructuring projects will, however, continue to feature in the PIP, which includes parastatal investments financed by development banks as well as by the Government's budget. In such cases it is essential that feasibility studies are done to ensure that the target enterprise has a high potential for viability in a less distorted and more competitive environment. Special treatment may also be considered for parastatals yielding high revenues to the Gcvernment, such as those producing beer and cigarettes. Both are relatively efficient operations, and their critical role in generating tax revenues merits giving their rehabilitation special priority. Specific proposals on how the restructuring process might be carried out are contained in the recently completed study on parastatals by the Bank.35 35/ For a limited number of key parastatals that the Government is determined to support (e.g.: utilities, insurance and banking), "the Government -ould work out with them an agreement that in the initial year would include plans for equipment rehabilitation and financial restructuring plans and ci an annual basis cost minimization targets and pricing formulas as well as investment plans." For other commercial parastatals, "thought should be given to setting aside a specific pool of budgetary resources for such assistance and asking firms in this ategory to compete for these resources by submitting proposals on a competitive basis to a panel of experts'. Parastatals in Tanzania: Towards a Reform Program, April 1988, pp. 44, 45. - 98 - Marketing Boards. 3.109 The agricultural marketing boards, both the NKC and those dealing with the six major export crops, require fundamental restructuring. This implies modifications to the national food security policy and a change in the scale and price structure of domestic food grain purchasing by NMC, and action to make the export crop marketing boards operate in a more competitive environment. New arrangements for MNC have already been agreed and are now being implemented. Task forces have been established and high priority has been assigned to the re-definition of export marketing board functions and the implementation of the required changes. As discussed above, it is important that these changes are effected without delay, not only from the point of view of the strains they are imposing on the credit system, (and thus, ultimately, the Government budget) but also because the present performance of the export crop parastatal, while somewhat improved, remains problematic from the perspective of the recovery of exports and the balance of payments. In the short run the impact on the Government's budget will Le negative, as evidenced by the provision mentioned above in the 1988/89 budget for the overdrafts of the crop authorities and the operation of the SGR. The fiscal consequences of the marketing boards are likely to be a factor for several years to come, Non-Commercial Parastatals. 3.110 The semi-government bodies, such as training institutions, research stations, specialized institutes, and non-governmental bodies such as the designated hospitals which rely on government transfers for part or all of their income, are likely to continue drawing resources from both the recurrent and development budgets. The PER mission lacked the time to investigate this group in depth, but the Government budget estimates suggests that they have been subject to the same financial pressures as other bodies in the public sector, with reducing budget transfers in real terms. In broad terms the Government has met the problem by spreading the available resources thinly across the range, signalling that the agencies concerned must live within their reduced allocations. 3.111 As the resource situation gradually improves, these semi- government and non-government entities are likely to assert their claims for a higher share. Some of these claims are legitimate, others are likely to result in further waste, if acceded to. It is important that the process of reviewing and rationalizing public expenditures described elsewhere in this Report should include this field of expenditures. The issue is partly whether such bodies should be parastatals (other countries have chosen to operate their main referral hospital as a division of the health ministry), and partly how such activities stand in terms of public expenditure priorities, and whether the scale of their operations and their staffing levels are appropriate. In some cases there will be scope for savings by dispensing with certain bodies or re-incorporating their functions within the public service. In other cases (such as mission run hospitals which are highly effective producers of health care), restoring - 99 - the real level of transfers could be a very productive use of resources.36 A close look should be taken at two groups in particular. The first are numerous bureaux, boards and institutes whose functions were formerly carried out by Government departments, and then spun off into separately constituted parastatals. Some of these functions are needed, others (e.g. price control) have a much reduced role in a less regulated economy, and should be scaled down, amalgamated or terminated. The second group is the numerous training institutes, whose role and funding need to be re- evaluated in the light of the Government's diminished ability to finance them adequately and to absorb the output of such institutes in the public payroll. I. LOCAL GOVERNMENT37 Background 3.112 Local Authorities have been re-established after having been in abeyance for a decade;38 there is a corresponding diminution in the responsibilities of the Regional tier of government. Urban and District Councils are now responsible for about nearly one fifth of discretionary public expenditure in Tanzania, they employ two thirds of all public servants, and their responsibilities include some of the most important basic services. At the same time the finances of the Councils are very precarious; the government has expanded their responsibilities more than their subventions and the Councils have not developed a strong revenue base of their own. The present stage is one of transition and it is not clear exactly what pattern of local and regional gcvernment will be the result. The PER team was therefore concerned to take the local government dimension into account in its review. 361 This recommendation was also made by the Bank's report Parastatals in Tanzania, -hich recommended that: "the status of each non-commercial parastatal should be scrutinized with care. Some are no different from ministerial departments and should be reconstituted as such. Others are likely to operate more efficiently if they are administered somewhat separately and have more autonomy to hire and fire and raise revenues through the sale of goods and services ... Still others should be abolished or reconstituted as private voluntary agencies supported solely by private contributions. The goal of such a review should be to reduce the number of such agencies that have to be administered and financed and to improve the cost- effectiveness of those that remain' (page 43, para 3.23). 371 Annex I is a background paper on decentralization from which the points made in this section have been drawn. 38/ An exception was a small number of urban municipalities (eg. Dar-es- Salaam) which remained in existence throughout this period. - 100 - Institutional Arrangements 3.113 Administratively Tanzania is divided into 20 Regions and over 100 Districts. Prior to 1972 Tanzania had a two tier system of government, comprising central government and local government, the latter comprising locally elected district and urban councils. The 1972 Government Decentralization (which is a partial missnoma since it abolished the second tier of government), which took place during a period of expansion in the role of Government, granted an enhanced status and much greater autonomy to the central government representatives in the Regions. The latter became administratively responsible for a range of services which had been previously handled by central government ministries and by the former district and urban councils. The Regions were also responsible for preparing and negotiating their budgets with the Prime Minister's Office (PMO), which held ministerial responsibility for regional matters, and with Treasury. The budgets for each Region were subsequently tabulated separately in the Estimates. However, the Regions were not expected to raise revenue on their own behalf: the revenue they collected was credited to General Revenue and they were financed by central government allocations. Regional establishments were set by the same process applied to central Ministries. 3.114 In contrast to the 1972 decentralization, the reinstatement of local government under the 1983 Local Government Act was undertaken at a time when it had become clear that the Government had become severely overextended in the services that it was trying to provide. Thus the public sector was facing the double squeeze of severe resource constraints and increasing demand, generated by population growth, for basic services such as education, health care and water supply. In this situation, reestablishment of local authorities was a way of distancing the Government from the funding of these services, as well as providing opportunities for raising revenues locally and achieving a greater degree of community participation in the provision of services as a way of reducing their budgetary cost. 3.115 The 1983 reforms transferred responsibility from the Regions to Councils for the four key areas of primary education, primary health care, district roads and water supplies. In these areas Government provides subventions to the Councils to meet basic operating costs. The reforms also transferred responsibility for other smaller departments (such as tiade, cooperatives, forestry, fisheries and wildlife but excluding agriculture and livestock services) to the Councils, but the costs of these departments have to be met from the Councils' own revenues. Government subventions also cover half of the salary costs of certain key officials of the District Councils including the District Executive Director, the - 101 - District Planning Officer, the District Accountant and the Coancil Treasurer.39 3.116 Despite the loss of large areas of responsibility to the Councils, and two thirds of its budget, the regional level of government has remained intact. There has been no change in the stat'as of the Regional Commissioner and Regional Director of Development (RDD), and the budgetary system for the Regions remains unaltered. Consequently, although a large number of line staff were transferred to council service, many remained and the Regions now have planning and administrative staffs which are too large for their reduced role. This is wasteful, particularly when there is such a need for staff to strengthen the relatively weak planning and management capacities of the Councils. 3.117 One of the consequences of the 1983 local government reforms is that the responsibilities of the government departments at the regional level now vary greatly. For example the Regional Education Officer has only a small ctaff operating as an inspectorate with primary education falling under the Councils and secondary and tertiary education under the national authorities. In health, while primary health care facilities are now under the Councils, hospitals other than the four national referral hospitals fall under the regional budget rather than the Ministry of Health. Consequently health now has the largest budget of any Regional department. Roads are split three ways: trunk roads are the responsibility of the Ministry of Communications and Works, regional roads fall under the Region, and District roads under the Councils. making it possible to have three maintenance organizations represented within one district. 3.118 The larger departments at the Regional level generally have technical responsibilities and requirements that are considered beyond the capacities of Councils to handle (for example the running of hospital services or heavy plant and equipment). This however raises the question of whether the departments concerned might be more effective if they were more fully integrated into their respective ministries. 39/ An exception to the decentralization process was the transfer in 1982 of agricultural and livestock development services which had been under the Regions to the direct ce-ntral control of the Ministry of Agriculture and Livestock Development (MALD). This was in response to the argument that separation of extension services from the technical ministry had made them subject to local political inter- ference and severely reduced their effectiveness. A number of other ministries, such as Lands, Natural Resources and Tourism, and Communications and Works have expressed similar desire to have more effective control over their regional and district departments, but the MALD example appears to be regarded as an excaption rather than a precedent. - 102 - Financing of Local Government 3.119 Council expenditures are funded both by their own revenues and by grants from the central government. The main sources of 'own revenue' are the Development Levy (a poll tax payable by all adults), property rates (in the case of the Urban Councils), produce cesses and various licenses and fees. The Development Levy ie the biggest revenue source for District Councils; for Urban Councils the property rate is the biggest part of the revenue base. However, own revenues are still dwarfed by the central government subvention: development levy revenue was expected to be only one quarter of the central government recurrent subvention in 1987/88.4 As responsibilities have been transferred from Regions to the Councils, so the pattern of funding has changedt allocations to the Regions have declined and subventions to the Councils have increased. However, there has been a decline in the real value of this funding at the same time; the aggregate value of the central government's recurrent funding of regional and local government in 1985186 was not more than three fifths of previous levels. In effect therefore, Councils have acquired responsibilities but not the resources to fulfil them. 3.120 Prospects for increasing Councils' own revenues are good in the case of Urban Councils but much less promising as far as the District Councils are concerned. Property rates could, with revaluation and Improved collection, provide substantially increased local revenues in urban areas4' and the town councils could also achieve a much higher degree of cost recovery in their provision of urban services.42 Opportunities for the Districts are much more limited: there is room for improvement in the collection of all revenues, but there is only limited scope for increasing the level of the Development Levy (the main source of own funds). The poverty of rural taxpayers limits the Levy's potential, which is further restricted by skepticism about the value of Council services. Produce cesses are in principle a useful source of revenue, but ability to collect cesses effectively often depends on cooperative societies which are themselves administratively and financially weak. Specific charges and self-help contributions towards the basic services these councils provide are the other main avenue for increasing their resources, and may have the advantage of a more visible connection between payment and benefit than is provided by the Development Levy. 401 See Annex I, Table 4. 411 This depends on Government itself paying its share of property rates. Failure to do so in the past was one of the main factors that originally undermined urban local authorities. 42/ This would have to go hand in hand with the improvement of services through their rehabilitation and more eff-ctive management. - 103 - The Local Government Financing GaM 3.121 The Regions face the same problem as the rest of the public service in receiving inadequate funding for the services that they are providing. Evidence gathered during the PER suggests that the non Personal Emoluments component of the Recurrent Budget is only about a third of the level necessary to support effectively the current levels of staffing. The ratio of non-PE to PE buuget allocations is considerably lower for the Regions than for the central ministries, possibly indicating that regional staff are relatively less well supported than their ministry colleagues.43 3.122 However, it is in the Council budgets that the financing gap appears to be most severe. This is primarily because the Councils are responsible for providing basic social services for which there is usually a common standard of provision and for which growth in demand is closely linked to population growth. With declining real levels of budget provision there is a widening gap between the resources needed and those available. The situation is made worse by the inability of Councils to collect their budgeted levels of local revenues. 3.123 This financing gap is perhaps best illustrated in primary education, which is t'he major budget item for the Councils. Tanzania has a well structured system of primary education based on extremely modest unit costs and requiring some cost contribution from parents. Nevertheless to operate the system properly would require increasing Councils' resources for primary educavion by at least 75 percent.44 3.124 The financing gap is evident on the development as well as the recurrent budget. The services for which Councils are responsible have built up such a backlog of maintenance that there is a substantial rehabilitation requirement. Development funds are inadequate even to complete projects that have already been started, but this does not prevent Councils from succumbing to the pressures to start new projects. Not the least of these pressures is the increase in demand for health and education services as the population grows and the impact of higher primary enrollments is felt in demands for more secondary education provision. 43! For the 1986/87 Recurrent Budget, with subheads 5600 and 5700 for lIternal and External Grants and Subventions excluded, the ratio of non-PE to PE allocations for the Ministry Recurrent Budgets was 3.9;1 and for the Regional Recurrent Budgets 2.3:1. Since salary scales are equivalent, this suggests a lower level of supporting expendi- tures at the regional level. 44/ The education financing gap is illustrated in Annex I, Table 6. - 104 - Administrative Weakness 3.125 The Councils are administratively weak. Their shortage of qualified staff is compounded by the loss of experience and institutional continuity during the period of their abolition. It is hardly surprising therefore, when one considers the financial pressures Councils face, that financial control within the Councils appears to be very weak. Council Tre.surers often have very limited qualifications and experience relative to their responsibilities. The huge demands on the Councils' limited resources result in funds being switched between designated purposes in the attempt to meet the pressures of the moment, aud Councils are typically in arrears to suppliers such as the water and power utiliLies and the Central Medica_ Stores. 3.126 There is a danger that unless the Councils' revenues and their financial procedures and accounting are strengthened, the local government system will again be brought into disrepute and that this will be used to justify a further round of institutional reform, the costs of which would be considerable. 3.127 Manpower data for the government sector in Tanzania are very unsatisfactory. However, the staff complements that the Councils have inherited from the Regions are very substantial. It is estimated that, out of approximately 292 000 government employees in 1986187, 163 000 were local government employees. The Local Government Service Commission is responsible for only about 2 000 of the most senior local government staff, the remainder being locally hired. There are no data on the rate of expansion of the local government payroll, but there has been a seemingly inexorable tendency for public service numbers to grow even while real pay levels have fallen steeply (see Chapter 3, Section E). There must be concern that growth of the local government payroll may continue at the expense of Councils' ability to deploy effectively the staff they already have. At the same time, strengthening of Councils' administrative performance will be heavily dependent on the training and motivation of their existing senior staff. Future Directions 3.128 "'he restoration of local government is to be warmly welcomed. Given the chronic resource scarcity that Tanzania faces, it is important both to increase the resources available and to maximize the effectiveness with which they are used. The re-establishment of local government can help on both counts: local management of the provision of important basic services can make them more responsive to people's needs and increase the willingness of communities and individuals to contribute towards the provision of the services they want. 3.129 However, local government is not a panacea. The resource gap in the health and education sectors is not closed by the transfer of responsibilities to the Councils, and it will take time to build up their administrative capacity If the gap between the Councils' resources and - 105 - their responsibilities is allowed to grow, the vhole local government system, as well as the services for which it is responsible, could be jeopardized. If local government in Tanzania is to survive and to prosper, steps must be taken both to enhance the resources (human as well as financial) of local government while at the same time restricting its responsibilities to a manageable core, and curtailing staffing. Their tasks will require further work and determined implementation. In the meantime, the following pointers are offered by the PER mission. 3.130 In terms of the allocation of resources: (a) The government must recognize that the demands of primary education and health care will require a growing central government subvention to the Councils, whose own revenues cannot be expanded adequately. (In the case of Urban Councils, the government subvention may be partially substituted by payment of rates.) (b) There should be a further reallocation of resources (particularly in terms of planning and administrative manpower) away from the Regions in favor of the Councils. A critical area is the councils' ability to prepare and administer sound budgets, plan programs and control staffing levels. (c) Given that Councils will depend for a substantial proportion of their revenues on local taxes and cost recovery, there may be significant disparities between different regions of the country in the ability to finance basic services. The central government should consider an equalization formula to compensate for unacceptable disparities.45 (d) Local Government suffers in the same way as the central government from the erosion of pay levels and incentives. Strengthening council services in the long run will require increasing real pay levels, particularly for more senior staff. As with central government there is bound to be a trade-off between numbers employed and the ability to offer better pay. (See the discussion in Section V above.) 3.131 In terms of augmenting local government resources: (a) The emphasis must be on improving collection under existing revenue measures. 451 This issue is discussed in Financing Local Government in Tanzania, by David Gould and Philip Mawhood, Commonwealth Secretariat, October 1985. - 106 - (b) Self-help contributions and cost recovery through appropriate user charges will be important in financing basic services. (c) There is strong potential for making urban services self- financing, and the constraints which prevent this happening should be investigated. (d) There must be emphasis on the training and supervision of management and technical staff of the Councils, and they should be augmented by the further reallocation of sta:"f from the Regional level. (At the same time, there must be effective controls on local government manpower numbers and local government must undergo the same manpower review process as central government - see Section E above.) 3.132 In terms of limiting local government responsibilities: (a) Councils should be relieved of their more peripheral respon- sibilities and the staff that go with them, so as to concentrate on the core of basic services for which there is a strong demand. (Candidates for reduced responsibility are cooperatives, forestry, fisheries and wildlife.) The implication is that these activities would be returned to Central Government, at least for a period until councils are stronger. However, it is recognised that some activities - e.g. wildlife - would benefit from greater local participation and identification, and this should be taken into account in deciding where responsibility should be vested. (b) The Government must review its targ8ts for the provision of basic services. Some existing targets (eg for the provision of rural water supplies) are unrealistic, and the attempt to meet them is likely to lower overall achievement rather than raise it. (See the discussion of sectoral targets in Chapter 4). In any case it makes sense to give priority to the maintenance and rehabilitation of existing facilities and services ahead of their expansion. J. PLANNING AND MANAGEMENT OF PUBLIC EXPENDITURE Introduction. 3.133 Institutional and procedural aspects of the planning and management of public expenditures have not been a primary focus of the PER. However, achieving a better pattern of public expenditure does depend on improving the ways in which expenditure is planned and managed. This section examines the implications of the major themes of the PER for Tanzania's planning and budgeting system. In some areas the mission feels - 107 - competent to make quite specific recommendations. In others the PER can only highlight issues of concern that merit more detailed attention. 3.134 This report emphasizes the importance of forward planning of expenditures and of placing recurrent budget issues at the centre of the planning process. In both these respects, Tanzania's present planning system is rather weak. The weakness that is discerned does not arise out of a lack of comitment to planning. Tanzania has always placed much emphasis on planning and there is a strong element of continuity in the planning process that has been followed over the years. Currently a new Five Year Plan is in preparation (after u hiatus following the end of its predecessor, which has been bridged by the introduction of the Economic Recovery Programme), and Annual Plans are produced regularly as part of the budgetary cycle. There is, however, a pronounced gap between the aspirations of the planning system thiat has become established, and its achievements. Investment Programme Planning 3.135 One of the consequences of the economic difficulties and fiscal constraints faced by Tanzania during the 1980s was a shortening of the planning horizon as government programmes and activities were curtailed by the immediate financial constraints. Planning of the PIP had always been seen in the context of the preparation of the Development Budget and the related exercise if the Annual Plan. The economic uncertainties of the early 19808 meant that the 1981-86 Five Year Plan provided little medium or long term perspective to the PIP. 3.136 As a result the concept of the PIP as a medium-term program appears to be relatively weak among planners in Tanzania, particularly those outside of MFEAP. Dogged by years of budget cuts and lacking the fiscal framework for a strategic reassessment of their activities, most sector ministries have retreated from forward planning and programming and have surprisingly little idea either of their likely future investment requirements or of the resotrces that they can expect to receive from Treasury. This situation contrasts with the formal annual planning and budgeting system which is well entrenched and, despite the recent economic difficulties (and in marked contrast to some other African countries), continues both to function and to be respected. 3.137 Not only has the planning horizon been shortened, there has also been a deterioration in the historical information available in preparing the PIP. This has two, related, aspects: X _ the lack of detailed Development Budget expenditure records, and - the increased proportion of aid finance that is disbursed directly by aid agencies, and is often not reflected in the budget. (See discussion of the issue in Chapter 2, Section B, and Chapter 3, Section E). - 108 - 3.138 Preparation of the PIP is coordinated by DEVPLAN. The activity focusses on two documents: (a) The Development Budget: The Development Budget Estimates are finalized for presentation to Parliament in June and their approval constitutes the formal sanction for the PIP for the coming year. The Estimates are broken down to the project level and show both foreign and local funding components and the sources of foreign funding. The Estimates also include columns for revised expenditure estimates for the current year and actual expenditure in the preceding financial year. However, in the latter case, figures have not been included in the Estimates since 1980181, reflecting the backlog in Government accounts. Tentative expenditure projections for a further year ahead are also given although these are regarded as being very unreliable with little attempt made to match them with the expected availability of funds. (b) The Annual Plan: The Annual Plan is supposed to be prepared concurrently with the preparation of the Development Estimates by the Treasury, but in recent years has not been ready by the time the latter are debated by Parliament. It provides a brief description of the activities to be undertaken in each sector, but in recent years has become primarily a retabulation of the Estimates. It uses the same project classification as the Investment Programme Review and the Development Budget, but shows expenditure figures only for the current financial year. Funding is broken down between domestic and foreign sources. A third category of "other finance,' which does not pass through the Government budget, is also included. The sources of 'other finance, include counter art funds from the sale of certain types of commodity aid,40 borrowing from the development banks and, in the case of some parastatals, internally generated finance. The difficulty in obtaining consistency in the coverage of funding from these sources considerably reduces the value of their inclusion in the Annual Plan. 3.139 Investment Programme Review. More recently DEVPLAN has initiated an Investment Programme Review (IPR). This comprises a set of tables prepared by the National Economic Policy Division and covers the 1986/87- 1988/89 ERP. The IPR was first produced in 1986 and subsequently revised in April 1987. It lists all projects in the PIP and gives estimates of expenditure against foreign and local funding. The IPR is undertaken prior 46/ For example, funds from the sale of World Food Program (WFP) and European Community (EC) food aid are available to support projects in the Ministry of Agriculture and Livestock Development. - 109 - to the finalization of the Development Budget and its estimates for the coming financial year are subsequently adjusted in the Development Budget. The IPR is primarily an internal MFEAP document and staff in the sector ministries appear largely unaware of it. 3.140 All of these exercises rely on information from the budgetary process. While this ensures consistency it also involves considerable repetition between documents and duplication of effort in their production. (Each exercise is managed by a different section of MFEAP.) None of the documents provides a thorough conceptual basis for the PIP. The main deficiencies are: (a) The absence of a time perspective. The IPR represents the most recent attempt at multi-year programming of the PIP. However, the failure to roll over the exercise in 1987 by adding a further year and its limited distribution outside of the National Economic Policy Division of MFEAP has considerably reduced its usefulness. (b) The absence of information on the lifetime expenditure of projects within the PIP. The financial profile of any project (and the basis for choosing between projects and programming their expenditures) is incomplete without information about its previous expenditures and the balance required to complete it.47 In principle the information is easy to specify; in practice, in Tanzania it is very hard to compile, which relates to our next point. (c) The absence of any succinct project profiles describing the investments being made under the PIP. Such projects could form the basis for the initial screening of projects, show how they relate to the overall policy framework for the sector concerned, and provide a proper basis for the monitoring of the Programme. A project profile or thumbnail sketch' need be no more than a paragraph or two summarizing what the project consists of. At minimum it should contain the Total Estimated Cost (TEC) of the project, the annual phasing of capital expenditures and an estimate of incremental recurrent costs. There is little point in showing the rate of return which will be available for only a few projects and is unlikely to be comparable across sectors. It should be possible for policy makers to take in the essentials of the project at a glance and thus quickly relate it to the overall thrust of the Government's efforts in the sector. 471 Whatever the horizon of the PIP, some projects will extend beyond. There should always be a final 'balance-to-complete3 column to cope with this, and show the 'overhang' of expenditure to be carried forward into the next planning period. - 110 - 3.141 Comprehensiveness of the PIP. It is important that the PIP should be comprehensive. The PER has already referred [in the Aid Utilization section above) to the problem of ensuring that aid-funded projects are brought to account both in budgetary terms and in terms of their incorporation in the national planning process. A related problem affecting the coverage of the PIP is the extent to which commodity aid (and certain types of BOP support) should be included in the Development Budget and the PIP. The basic principle should be that if the assistance is covered by matching local funds it should not be included in the PIP, but that if it is not, (and is provided by Goverument as a grant or long-term loan), it should form part of the PIP. Some examples illustrate the range of possibilities: (a) A project or organization in the public sector receiving assistance from external sources directly, for example vehicles provided to a government department as additions to their existing fleet. Such projects should be included in the PIP, (equivalent to 'D' category in the budget). (b) Assistance covered by matching funds from recipient organizations,for example steel purchased by a parastatal or private business. This would not form part of the PIP. 'c) Assistance received as a grant or soft loan by an intermediary (for example fertilizer "on-lent by a development bank as seasonal credit or used to create a revolving fund). This would be included in the PIP, but identified as assistance to the intermediary institution. (d, Assistance covered by matching provision in the Recurrent Budget. For example drug kits provided under the Essential Drugs Programme are meant to be purchased by District Councils from their recurrent budgets. As such they should not be included in the PIP. 3.142 The Tanzanian budgetary system recognizes this type of distinction, but in practice the growing importance of commodity aid has allowed some inconsistencies to develop. For example: (a) TRC has been receiving considerable bilateral assistance under aid agency commodity aid provisions which appears not to have been reflected in the Development Budget. (b) The voted provision under the Development Budget for the National Transport Company (NTC) increased more than fourfold between 1986/87 and 1987/88 and appears to reflect NTC's role in handling certain types of commodity aid for the road transport sector. Inasmuch as the Treasury requires matching funds to be made available by the - ill - recipient organizations, this should not be included in the Development Budget. Generally, the objective should be to reflect as accurately as possible the receipts and expenditures of public monies on development projects, whether in cash or in kind. This is essential not only for expenditure control reasons but also because the planning of the development budget and its integration with the Recurrent budget is impossiole if large chunks of the former go unrecorded. 3.143 One of the biggest practical problems for DEVPLAN in trying to manage the PIP is the sheer number of projects it contains. At the time of the 1987 IPR, the PIP consisted of 868 projects 332 of which were foreign or jointly funded and 536 funded solely from domestic sources. The average expenditure on foreign or jointly funded projects for 1987188 was around Tsh 30 million per project and for domestically funded projects less than Tsh 10 million. There is little evidence that the number of projects has declined in recent years despite the fall in real terms in the size of the Development Budget, and a major effort by the Government to scale back the PIP and eliminate new projects. 3.144 Consolidation of the PIP The number of projects in the PIP is excessive and this has adverse consequences for the management of the PIP. Thus: (a) Staff within the Sectoral Planning Division of MPEAP have so many projects within their portfolios that they have little opportunity to become familiar vith individual projects. For example during the PER sector economists had great difficulty in providing basic information about the five largest projects in their respective sectors. (b) Many projects within the PIP are little more than expenditure items compensating for shortfalls in recurrent budget financing and continuing indefinitely. 48 Particularly in the case of domestically funded projects, there is often no supporting documentation to justify the activity and to provide a basis for appraisal by MNFAP. A cursory review suggests that between a third and a half of the domestically funded component of the Development Budget should be transferred to the Recurrent Budget. (c) Capital projects often become disaggregated into a series of individual subprojects, items which remain substantially underfunded and which never reach completion. For example 48/ Whatever the horizon of the PIP, some projects will extend beyond. There should always be a final 'balance-to-complete' column to cope with this, and show the "overhang" of expenditure to be carried forward into the next planning period. - 112 - the 1987 IPR shows 25 projects for customs posts each receiving an average of Tsh 1.7 million for 1987188. All of these projects are shown as continuing throughout the PIP period indicating that none is expected to be completed. A more systematic approach would be to combine each of these items into a single project for construction of Customs Posts and for the work to be phased with funding concentrated on a limited number of facilities at one time. 3.145 Recommendations for Strengthening Investment Programming In part, the difficulties of planning the investment program arise from the country's eronomic problems and the degree of uncertainty Tanzania has experienced. As the ERP proceeds, these problems are likely to lessen, and better management of the PIP can itself play an important part in consolidating economic recovery. Measures that need to be taken to make management of the PIP more effective include: (a) The establishment of a forward perspective for the PIP. It is recommended that this be achieved by extending the IPR to cover a three year rolling PIP. The format of the IPR should be expanded to show previous expenditure on each project as well as the balance of funding required after the timeframe of the PIP to complete the project. (b) The need for DEVPLAN, in association with other MPFAP units, to determine forward budget ceilings so that the PIP can be based on a realistic assessment of the resources that will be available to the Development Budget. This would discourage sector ministries from embarking upon projects with inadequate finance in the hope of securing additional funds in subsequent years. (c) Within DEVPLAN programming of the PIP should be consolidated under the Division of Progranming, Budgeting and Control. This would involve the transfer of responsibility for the IPR from the National Economic Policy Division and its integration into the overall budget cycle. (d) The role and usefulness of the Annual Plan exercise should be reviewed. At present the Annual Plan is little more than a retabulation of the Development Budget, yet it involves a considerable workload for the staff of the Sectoral Planning Division. Time released from this task could be used for more effective planning and management of the sector project portfolios and the establishment of clear sector policies and strategies. The original justification of the Annual Plan, the integration of the PIP with the Annual Foreign Exchange and Credit Plans, no longer exists with the adjustment of the exchange rate and interest rates towards market clearing levels, and the move from direct to indirect controls. - 113 - (e) Achieving a more comprehensive coverage of the PIP in the IPR and Development Budget. There is a need to undertake a review of all donor programmes to ensure that aid flows are being correctly reflected in the PIP. There are two aspects to thist firstly to ensure that projects implemented under direct donor disbursement procedures are being consistently reflected in the budget; and secondly, to ensure that where commodity aid is not being covered by matching funds, the purpose of its expenditure is included in the PIP. (f) Obtaining timely and accurate records of aid flows disbursed directly by aid agencies so that such expenditures can be brought to account. While responsibility for obtaining such information lies with Treasury there is a need for it to be made available to and used by DEVPLAN for monitoring the PIP. (g) Reducing the number of projects in the PIP. This would involve: si) transferring to the Recurrent Budget domestically funded projects which have become a guise for recurrent funding to departments; (ii) amalgamating small projects which are essentially expenditure items for a larger aggregate project activity; (iii) closing projects for which there is no hope of securing adequate funding for their completion. (iv) controlling the addition of new projects to the PIP. (h) With fewer projects in the PIP, staff in the Sectoral Planning Division should be able to become more familiar with the projects within their sector portfolios. Working in cooperation with their colleagues in the planning units in sector ministries, they should become more involved in the project planning, appraisal, programming of funds, monitoring and evaluation of their projects. As an immediate step there is a need to establish separate files within DEVPLAN for each project in the PIP core planning documents, project agreements and progress reports should be maintained. (i) Greater decentralization in the planning and management of the PIP. One of the consequences of the large number of projects in the PIP is that DEVPLAN has become too involved in the detail of the PIP at the expense of considering the broader issues of resource planning and allocation. DEVPLAN - 114 - should concentrate on strategic intersectoral issues of resource allocation with greater responsibility given to the sectoral ministries in determining allocations within their overall sectoral limits. Greater decentralization also implies some simplification of the planning and budgeting system to reduce the amount of detailed information supplied to DEVPLAN.49 (j) Finally, it would be necessary to ensure that the Five Year Plan, whenever it is produced, is consistent with the IPR and the medium-term fiscal framework into which the IPR should fit. In the past Tanzania's five year plans have tended to sidestep problems of recurrent resource adequacy and reflect instead aspirations and long term objectives for each sector. This makes them less useful as a vehicle for illuminating choices and trade-offs, and setting priorities. In consequence, five year plans very quickly lose their relevance to economic managers, and may even be misleading. Planning Recurrent Expenditures 3.146 Whereas the PIP horizon has tended to shorten in recent years, the recurrent budget horizon has never been long enough. Traditionally, the recurrent budget has been the province of Finance, rather than DEVPLAN, and the merged MFEAP has made little practical difference to that dichotomy. (There are still separate Commissioners for the Recurrent and Development Budgets.) 3.147 There is already recognition in Government of the key problems with the recurrent budgetary process (which is touched on in Sections III and IV of this Chapter). Some important attempts to reform and improve the budgeting process are focussed on the Budget Management Development Programme (BMDP) in MFEAP, which is receiving technical assistance from Sweden. The BMDP is premised on a recognition that improvement must be iterative, based on the understanding and acceptance of changes as they are introduced. Two important initiatives of the BMDP are particularly relevant to the planning of recurrent expenditure: 1) the wconmitments study" and 2) an effort to improve the annual budgeting process by reformulating the timetable - especially so as to issue expenditure ceilings earlier. 49/ Not only is the information sought in connection w!th the Annual Plan and the Development Budget .oo detailed (and thus less likely to be supplied on time and easily digested) but much of it is no longer relevant to the type of planning required by the ERP. Information on physical inputs and outputs has relevance only to a system of central planning based on material balances that is extremely costly in manpower, difficult to operate effectively and inappropriate to the indirect style of economic management of the ERP. - 115 - 3.148 The BMDP's work is important and deserves support, particularly by the senior managers within GOT who stand to benefit most if its efforts are successful. The PER offers two recommendations relating to the BMDP's budget strengthening work: (a) Issuing ceilings earlier while retaining the present, essentially one-year, recurrent budget planning horizon may be an improvement,50 but the process needs to go a stage further by providing ministries with indicative ceilings two-to-three years ahead. Preparing those ceilings requires effective cooperation between the economic and financial wings of MFEAP, and, of course, must be part of the same exercise by which development budget guidelines are also drawn up. The problem of uncertainty can be made manageable by 'rolling over" the planning period each year. (b) The Recurrent and Development Budget Departments should be functionally integrated in a single Budget Department, one which the Development and Recurrent Budget requirements of each ministry are considered jointly. Strengthening Financial Management and Monitoring. 3.149 Effective management of either the Recurrent or the Development budget depends on control of expenditures (so that funds are used for the purposes intended) and an accounting system that provides rapid feedback on actual expenditures. The report has already outlined the Auditor-General's concern to maintain satisfactory standards of financial management and noted that, on the whole, the financial management structure is sound. However, it will continue to be subject to the pressures that are reflected in the Auditor-General's reports, and the Government cannot afford to be complacent. Measures to reinforce standards of financial management range from the specific (e.g. support to the Auditor-General's Department, replacement of accounting machinery51, training of financial accounting cadres, and so forth) to more general and long-term measures: for example, 50/ A difficulty is that the earlier the budgeting exercise takes place the less is known about current-year out-turns as an input into estimates for the next year. This reinforces the PER's point about a multi-year perspective. 51/ The opportunity exists to considerably strengthen the Government accounts by installing modern computer systems. The PER understands that this is currently being studied with SIDA assistance. Desk top computers equipped with suitable softward and linked in a network at moderate cost can both improve the accuracy and timeliness of the accounting system and provide line managers with up-tp-date reports of their financial position. - 116 - a strategy for the restoration of adequate remuneration for a trimmed-down public service could have an important effect on the temptations to impropriety.52 Internal audit should be strengthened, and over the longer term budget staff should develop a capacity to carry out 'value for money' audits of selected government programs. Another area demanding attention is the Government Tender Board system. The basic concept of central and regional tender boards is a sound one, but according to reports recived by the PER, the system appears not to be functioning properly and the causes should be investigated and remedied. Manpower Management 3.150 It is important to view public expenditure planning in more than financial terms. There is a need to bring manpower considerations directly into the picture. Thus: (a) Financial ceilings need to be complemented by (or at least cross-checked with) guidelines on manpower numbers. Departments should project the numbers of people they plan to employ as well as the amount of money they plan to spend. This is particularly important for services which employ large numbers of people whom government is also responsible for training. Demand driven services, particularly in the social sectors, have shown a tendency in Tanzania to expand their manpower regardless of the financial situation. This is frequently reinforced by a training and bonded employment dynamic that has proved itself to be highly resistant to establishment freezes. There needs to be more effective cooperation between DEVPLAN, MLMD and the Treasury, both during the budget preparation process, and during the rest of the year when there is greater opportunity to consider longer run manpower levels and strategies that should underpin the guidelines. (b) Government needs to be able to control its payroll as well as its budget (see Section E above). This requires the strengthening of establishment control systems, since there is no point in promulgating ceilings that cannot be enforced. This should be addressed in the context of the UNDP program of support to the Civil Service Censuas. (c) There is a particular need to re-examine the manpower planning structure, which appears to be functioning rather weakly -- evidenced, for example, by a proliferation of institutions and a lingering tendency to regard it as a governmental duty to offer employment to all the graduates 52/ It could also relieve the Government's present acute difficulties in retaining qualified accountants in the face of keen competition from the private sector. - 117 - of government-sponsored training. Government :annot afford to expand its employment of trained manpower at past rates. Since Government is the dominant employer, this implies a substantial reduction on prospective training requirements in a number of areas, and a more even sharing of the output of training institutions with the private sector. This needs to be reflected in the Government's manpower planning.53 531 The implications are not all straightforward. Demand for some categories of manpower will continue to be strong; in others there may be an imminent danger, if not a present fact, of oversupply. The PER's point is that manpower projections need to be carefully reviewed in the light of the appropriate limitations on government employment. At present they are based on a unconstrained 'needs" approach, and have become increasingly divorced from financial realities. - 118 - CuAPTE IVn SECTOR PROGRAMS A. INTRODUCTION Scope of the Chapter 4.01 This chapter analyses the Government's main sectoral programs in the context of the priorities fcr economic recovery, and against the background of the recurrent and development budget issues discussed in the preceding chapter. The secturs covered are as follows: - Agriculture (Section B) - Natural Resources, including Forestry & Fishing (Section C) - Industry (Section D) - Energy & Minerals (Section E) - Transport and Communications (Section F) - Education (Section G) - Health (Section H) - Water and Urban Development (Section I) - Other Government Services (Section J) - Regional and Local Government (Section K) 4.02 The Central Government ministries responsible for these sectors took the following shares of the 1987/88 and 1988/89 Recurrent (excluding debt service) and Development Estimates for central government:1 Table 4.1: Budget Estimates Shares Sector Recurrent Development z 2 2 1 1987/88 1988/89 1987188 1988/89 Agriculture 3.7 3.3 14.3 16.8 Natural Resources 1.3 1.2 5.3 3.5 Industry and Trade 0.5 0.4 6.4 5.7 Energy and Minerals 0.2 0.2 11.9 16.4 Commmnication and Works 4.5 4.6 14.2 10.0 Education 8.1 8.3 4.3 3.2 Health 4.9 4.8 1.2 4.0 Water 0.7 0.7 7.0 5.5 Other Government Services 51.0 54.7 19.4 18.9 (Regional & Local Govt.) 25.0 21.8 16.0 16.0 -------------------------------------------------------------------__-------- 100.0 100.0 100.0 100.0 1/ Source: Statistical Appendix, Table B17. As noted at several points in the chapter, this is only a rough guide to the relative importance of the sectors, as regional and local government, and non-budgetan, expenditures need also to be taken into account. - 119 _ 4.03 Several points about the table need to be noted. Firstly, the analysis of recurrent budget shares is done net of debt servicing, or to be precise, net of Consolidated Fund Services (CFS), that portion of the Recurrent Budget that is statutory, a first charge on the Consolidated Fund and not subject to line-by-line parliamentary approval. The reason is to abstract debt servicing (98 percent of CFS), and to show sector allocations in terms of discretionary expenditures, or what is called, in Tanzanian budget nomenclature, Total Supply (TS). 4.04 Secondly, as already indicated, sector allocations are expressed in terms of the resources available to the principal ministries responsible for the sector. Where there are centralized ministrie,;, such as MALD, operatirg as the sole government agent in the sector, the administrative allocation is a reasonable proxy for total Government spending in the sector. Where services to a sector are provided by several agencies (eg. Health on which there is expenditure by all tiers of Government), the budget share is understated. A brekkdown of Government expenditure by purpose, as analysed by the Bureau of statistics, is given in Table Bll, although, as the footnote to the table indicates, this must be interpreted cautiously. The reason for adopting this approach is operational relevance. Budgets are made and unmade in terms of administrative not economic classifications. 4.05 Thirdly. tremendous variation may be observed between the recurrent and development budget shares of ministries. Some ministries (such as Energy and Minerals) have a very small recurrent allocation, but have a large share of the Development Budget, and vice-versa (eg. Education). This tends to determine where the main public expenditure issues of the sector lie. In the education and health sectors the central problems have to do with the Recurrent Budget. which in turn should set priorities from the Development Budget (what is described elsewhere in the Report as the development consequences of Recurrent Budget). In the case of Industry and Trade, the reverse is true. 4.06 Fourthly, in i departure from the normal practice of Bank PER's, a section is included on Other Government Services. This is deemed necessary not because the Report has many specific recommendations to offer on the activities that fall under this heading, which for the most part lie outside of the Bank's lending experience, but because of the scale of expenditures involved, particularly recurrent, and the implications to other sectors of an expansion or contraction of the group's relative share. B. AGRICULTURE Institutions 4.07 The main government institution responsible for the agriculture sector is the Ministry of Agriculture and Livestock Development (MALD). There is also a number of marketing boards and other parastatal bodies, engaged in agricultural activities or providing services to the sector. Forestry and fishing come under the Ministry of Lands, Natural Resources and Tourism, but - 120 - are grouped together with agriculture in some of the data concerning public expenditures. This sector begins by reviewing expenditures on the sector as a whole, and then discusses the expenditure programs of the principal agency, HALD. Public Expenditures 4.08 On a sectorwide basis, public expenditure on agriculture, forestry and fishing has experienced some variation over the past two decades. According to data analyzed by the Bureau of Statistics, the sector's share of discretionary public expenditure, taking recurrent and development together, averaged 12.2 percent in the 1970s, but has declined to 8.9 percent for the present decade. Highest relative expenditures occurred in the middle of the last decade when sector spending reached 16 percent of Total Supply. The lowest point was 1984/85 when the share fell to 7.4 percent. With regard to the composition of expenditures in the sector, the proportion of capital expenditures, much of which comprises the investment program of parastatals, has always been high -- in five out of the last seven years it exceeded recurrent, and has averaged 16.7 percent of total development expenditure compared with a corresponding 4.1 percent for recurrent expenditure. The latter, furthermore, has been declining from 4.6 percent in 1980/81 to 3.1 percent in 1986/87. Thus the sector as a whole presents a picture of high capital expenditures accompanied by low and declining recurrent outlays. 4.09 The Ministry of Agriculture and Livestock Development's pattern of expenditure reflects the same bias towards capital programs as the sector. However, paradoxically, MALD's share of recurrent expenditures has been rising, from 1.7 percent of Total Supply in 1980/81 to 3.9 percent in 1987/88. This is due primarily to the recentralization of the l4inistry in the intervening period (in 1980/81 the bulk of agricultural services was financed through the Regional Supply Votes). Table 4.2 summarizes the allocation of HALD's recurrent budget in 1987/88 and 1988/89. Resources are allocated to six departments and four research, extension and training institutions. HALD's Dzv-elopment Budget, amounting to Tsh 2.48 billion in 1987/88 and Tsh 4.77 billion in 1988/89, is between two and three times as large as its Recurrent Budget. Additional funding of Tsh 462 million was available in 1987/88 through the regional and local government budgets. Table 4.3 shows the allocation of MALD's 1987/88 and 1988/89 Development Budgets by major categories. - 121 - Table 4.2: MAUD Recurrent Budget CTsh mlUlion) Departments 87188E 88/89E Administration 152.6 194.3 Agriculture 377.9 474.8 Livestock 329.4 406.3 Research & Training 181.1 243.5 Irrigation 37.5 61.0 Planning & Marketing 9.0 13.3 Subtotal 1087.6 1393.2 ---------------------------------------------------------------__---- Parastatal Subventions Tanzania Agric. Research Org. 128.0 173.0 Tropical Pesticides Research Institute 31.0 79.0 Uyole Agricultural Centre 60.0 77.0 Tanzania Livestock Research Org. 89.0 152.4 Subtotal 308.6 481.4 -----------------------------------------------------------------__-- Total MALD 1396.2 1874.7 Source: Development Budget Estimates. Table 4.3:)ALD l Develount Budget (Tsh million) 87188E 88/89E Administration & Planning 324.7 468.7 Manpower Development 105.1 111.3 Agricultural Services: - Ministry 502.3 899.1 - Parastatals 937.6 2419.1 Irrigation 383.3 584.9 Livestock Research & Training 19.5 38.0 Animal Health Services 32.8 39.2 Livestock Devt Services: - Ministry 52.4 67.7 - Parastatals 120.6 145.1 -----------------------------------------------------------------__--- Total 2478.3 4773.1 Sourcet Development Budget Estimates - 122 - Assessment 4.10 Recurrent Budtet. The principal work of MALD is research and extension. Crop and livestock extension account for half of the Ministry's budget; research and training take a further third. In overall terms, MALD's recurrent budget appears to be reasonably balanced between activities, with over a third of the budget going to research and training, and the bulk allocated to crops and livestock extension, reflecting the relative importance of these activities. 4.11 This apparent balance, however, masks some serious problems. The first is the general underfunding of research and extension activities relative to the scale of establishments and their function. The subventions to research parastatals are insufficient for them to carry out their planned programs, and large infusions of vehicles and equipment are needed to compensate for years of inadequate funding of repair and replacement. As a result, the ability of the research institutions to play their part in the development of relevant crop and livestock messages to extend to farmers has been compromised. The exten.ion activities of MALD have similarly been affected, in this case by inadequate supporting expenditures. The most critical deficiency is transport, without which, regional and district agricultural officers cannot supervise field staff.' Shortage of funds also affects the equipment available to extension workers, whose productivity is further compromised by lack of such things as soil testing kits, sprayers, measuring instruments and stationery. The net effect of these deficiencies (compounded by low pay) is to make MALD staff unavoidably deskbound and unproductive. There are also management and institutional weaknesses that reduce the effectiveness of the resources that are available to Ministry staff. In the coming years these deficiencies will be tackled by two important projects aimed at rehabilitating agricultural research and agricultural extension, respectively. Initially, most of the additional recurrent costs will be capitalized, in the meantime recurrent allocations will need to be built up to ensure the long-run financial sustainability of these programs. 4.12 It is unlikely the required level of funding will be achieved by the normal growth of revenues associated with the recovery process. Elsewhere in this Report it is suggested that while there are some short-run gains to revenues from the further adjustment of the real exchange rate and improved collection efficiency, over the medium term, assuming ministerial shares of the Recurrent Budget remain the same, departments could expect, on average, a 5 percent gain in the level of real resources each year. Analysis of the recurrent costs of the Research and Extension rehabilitation programs suggests 2/ To support the activities of an estimated 4842 field staff and their supervisors there are, reportedly: 12 FWD vehicles, 10 motorcycles and 5 bicycles. At the ward and village level, extension staff walk on foot to assist farmers, but can reach only about 1lO of the farmers they are supposed to cover. - 123 - that the growth in MALD's recurrent budget (excluding personnel emoluments which are centrally determined) will need to be at least 7-8 percent per annum over the medium term if it is to sustain the operating costs of the restored research and extension services once the period of capital rehabilitation is completed. This implies that MALD's share of Total Supply will need to rise from its 1988189 level of 3.5 percent to at least 5 percent by the middle 1990s, and continue growing as the project is extended nationwide. If this is not considered a feasible proposition, then either the scale of the rehabilitated services must be substantially reduced, or commitments must be sought from donors to meet the major share of the incremental recurrent costs of research and extension for an indefinite period. Particularly critical is vehicle and equipment replacement.3 4.13 International comparisons provide a guide to appropriate expenditure effort but need to be interpreted cautiously. Table 4.4 shows typical ratios of public capital. and recurrent expenditure on research and extension to the value of total agricultural product for groups of countries at different stages of development.4 Table 4.4 - Public Expenditure on Agricultural Research and Extension GrouD Percent of Value of Agricultural Product, 1980 Research Extension Low Income .50 .44 Middle Income .81 .92 Semi Industrialized .73 .59 Industrialized 1.50 .62 East Africa .81 1.16 Tanzania 1987/88 .45 .57 (PER estimate) 3/ Analysis of the National Agricultural and Livestock Extension Rehabilitation Project suggests that the extension budget would have to grow by an annual rate of 7.5 percent over the eight-year life of the project if the rehabilitated service is to be financially sustainable. Similar calculations for the Research project give an annual rate of 6.0 percent over five years. Note that these calculations assume that the whole of the non-PE increment of the research and extension budgets will be available for the incremental costs of these two projects. In practice, there will be other claimants. 4/ Robert E. Evenson, The Economics of Extension in Investing in Rural Extension: Strategies and Goals, ed. Gwyn Jones, 1986. 124 - IFAD has recently recommended minimum ratios of 1.0 percent for research and 0.5 to 0.8 percent for extension, which are in line with current World Bank thinking.5 Implementation of the National Agricultural and Livestock Research Project and the National Agricultural and Livestock Extension Rehabilitation Project would raise Tanzanian expenditures to approximately these levels (in the case of extension, probably higher). Note, however, that the present Tanzania ratios imply a level of spending efficiency surpassing what presently occurs, due to low salaries and lack of essential equipment. Further, attainment of such ratios, in itself, does not imply effective research and extension unless it is accompanied at the same time by effective management. 4.14 The second major problem, the cost of grain marketing subsidies, has hitherto been largely invisible in public expenditure terms, but has deep implications for the Government's budget. The crux of the problem is the Government's policy of food security, until now implemented outside the budget by the National Killing Corporation (NMC). Although Tanzania has one way or another subsidized grain consumption and production over a long period, in recent years the costs of doing so have sharply risen. This is due to three factorss (a) the change from cash to credit financing of the subsidies, which results in interest payments cumulating; (b) adequate rainfall which has resulted in increased production; and (c) the success of domestic trade liberalization policies in keeping down grain prices to consumers in combination with unrealistic official producer prices. In addition, NMC has had the responsibility for managing the country's Strategic Grain Reserve (SGR), whose purpose is to provide a cushion in times of domestic production shortfall pending the importation of grain and the mobilization of food aid. 4.15 The cost of this policy in 1987/88 took the form of rapidly escalating NMC overdrafts, borne by the banking system. By the end of the fiscal year, the Corporation's unsecured overdraft amounted to about four times MALD's recurrent budget. These overdrafts are now becoming budgetary as the Government is called upon to fulfill its guarantee obligations. This has made the cost of Tanzania's unaffordable food subsidy policy more transparent. 4.16 Fortunately this situation is in the process of being corrected. New arrangements for NMC and the operation of the SGR were agreed in the middle of 1988, and are now being implemented, by: (a) reducing the scale of NMC's grain purchasing operations, 5/ Seminar oa The Generation and Transfer of Technology for Poor Farmers, Korea, June 1988. - 125 - changing it from a buyer of first resort to buyer of last resort, and setting more realistic into-store prices; (b) modifying the present policy of panterritorial pricing, which in its present form encourages maize production surplus to local needs in areas with high transport costs, borne by NMC; and, (c) making explicit provision in the budget for some of the costs to NMC of operating a Strategic Grain Reserve (or for the operation of the SGR as a separate organization, as is currently being considered). The 1988/89 Recurrent Budget makes provision for these costs, under the vote of the Ministry of Finance, with Tsh 440 million for the management and supervision of the Strategic Grain Reserve, and Tsh 1,100 million for crop authority overdrafts, the largest of which relates to the NMC. Similar provisions will have to be made in future budgets, until the Government's liability for the accumulated overdrafts is extinguished.6 From a fiscal viewpoint it is vital that the overdrafts of not just NMC but the export crop marketing boards do not again get out of hand. This in turn is dependent on how the new policies for NMC are implemented, and the measures the Government adopts to make export crop marketing more responsive, competitive and less costly. One cannot emphasize too strongly the need to move quickly and decisively implementing agricultural marketing reform. In the years ahead, the Treasury's ability to increase MALD's allocation for research and extension (and for that matter other priority programs such as primary health care and education) depends crucially on reducing unnecessary parastatal transfers. 4.17 Development Budget. Significant features of the Ministry's Development Budget are as foll.-.-s: (a) The high proportion of the resources (54Z in the 1988/89 Development Budget) allocated to parastatals. (b) The significant level of funding for irrigation development (12Z of the 1988/89 Development Budget) even though irrigated agriculture accounts for a much smaller fraction of total agricultural production, and rainfed agriculture can be very significantly expanded. (c) The relatively modest allocations (212 of the 1988/89 6/ The 88189 budgetary allocation of Tsh 440 million, which has been released to NMC, covers the purchase of an additional 27,000 tons of maize, in order to bring SGR stocks from 113,000 tons to the target level of 140,000 tones. It does not cover, it is understood, the transportation of the grain to consumer areas, nor the annual management costs of the SGR. - 126 - Development Budget) to agricultural and livestock development services, primarily research, extension and veterinary services. In recent years these services have become run down and in many areas ineffective. (d) The significant allocations to administration and planning. This category includes a number of technical assistance projects and the increase is largely due to the effects of the progressive devaluation of the shilling. It is also an example of what might be termed the *projectization of recurrent costs', to obtain donor finance for what are in the main recurrent activities. Some of these distortions may be traced to donor initiatives. Over the years there have been irrigation and state farms projects promoted by bilateral donors and accepted by the Government without prior reference to the professional staff of MALD. Generally, they point to Government-wide weaknesses in the screening of projects, and the need for more effective aid coordination by both recipient and donors. The Government needs to develop a clearer picture of how aid resources on offer can be best deployed, and donors need to understand better investment priorities under the ERP. 4.18 MALD has more projects than any other ministry.7 DeV'7an's most recent Investment Programme Review listed a total of 166 projects, of which 60 have foreign funded components. There is considerable scope for simplifying MALD's project portfolio by closing, merging or transferring projects to the recurrent expenditure items. A rationalization along these lines would make it easier to manage the residual agricultural investment programme effectively, and to focus resources on those projects considered crucial to the development of agriculture in Tanzania. Although it would take several years to reshape MALD's capital programs, the PER recommends that such a review should be carried out as soon as possible, so that the reshaping may be reflected in the 1989190 Development Budget, and have a bearing on current discussions with aid agencies. It is suggested that the review be guided by the following principles. 7/ They may also be seriously underreported. The foreign funded component of MALD's Development Budget in 1987188 is estimated at $30.8 million at the exchange rate used at the time of preparing the budget, and the corresponding figure for 1988189 is $40.1 million. Planning staff in MALD estimate the level of underreporting to be about one-third of total aid commitments. By comparison, UNDP (Development Cooperation Report - 1986) estimated aid flows to the agricultural sector in 1986 at $55 million, though this figure also includes some commodity aid and technical assistance. 8/ This figure differs slightly from the 179 projects included in the 1987188 Estimates, and the 148 projects in the 1988189 Estimates. Only 57 of these are donor funded, but collectively they comprise 92Z of expenditures. - 127 - (a) Recognition that the objectives of agricultural recovery are achieved not solely through the medium of public capital expenditure directly on the sector, but through a shift in the balance between capital and recurrent expenditure, through carefully targeted expenditures in other sectors which are presently inhibiting agricultural production, and by policy reform. Especially critical are: (i) The rehabilitation of transport infrastructure, particularly the road and rail networks; (ii) The rehabilitation and in some cases expansion of agricultural processing facilities, particularly cotton ginneries, coffee factories and oilseed extraction. Here, the financing mechanism may not be direct investment through the Development Budget, but on-lending to independently operating processing facilities through financial sector intermediaries; (iii) The rehabilitation and where necessary restructuring of general agricultural marketing services undertaken by the agricultural marketing boards. Here there is scope for mobilizing resources outside the budget by encouraging private sector involvement in agricultural marketing wherever possible. (b) The central focus of MALD's Development Budget should be the rehabilitation of the agricultural and livestock research and extension services. However this is a process which will have considerable recurrent budget implications and cannot be isolated from the more general problems of underfunding of government services and the lack of staff incentives. It is clear that resources will not be sufficient for a general rehabilitation of services and that the present strategy of carefully phasing investment and targeting it on crops and areas where the potential is greatest, is the correct approach. The risks of undermining productivity gains by a countrywide approach are high. The financial sustainability of programmes, in terms of whether MALD can carry their recurrent costs, should be a key test in the screening of projects for a core investment programme. (c) PIP investment in the agricultural production parastatals should be sharply reduced as a consequence of the policy of making commercial parastatals depend on the banking sector for their investment requirements and of efforts to transfer such enterprises to the private sector. Public expenditures should be increasingly focussed on programs to support smallholder agriculture, with less and less emphasis on the - 128 - state farming sector. Some public resources may be needed over the medium term to rehabilitate viable farm input enterprises. (d) Similarly, further investment in irrigation, particularly large large-scale irrigation schemes, should not be a priority under the PIP. Irrigation is still relatively insignificant in Tanzanian agriculture and the experience of other countries in the region suggests that the economic returns are likely to be low if only because the high management demands of irrigation schemes development are unlikely to be attainable under present conditions in Tanzania. A distinction, however, should be drawn between high cost capital intensive schemes and low cost schemes developed and managed by individual small-scale farmers, located in the drier, erosion prone areas. (e) Development projects that are primarily vehicles for dcnor support of continuing activities should be terminated as soon as practical, and the activities, according to their justification, incorporated in the Recurrent Budget. Conclusion * 4*4.19 The importance of agriculture in Tanzania suggests that the Ministry's share of recurrent supply should be increased. Should this occur (the restructuring scenario in Chapter 5 provides for this), it will still be necessary to plan very carefully for the recurrent implications of capital projects seeking to rehabilitate and expand MALD's essential research and extension services, and to ensure that tho increased resources are well managed. Furthermore, when making resource allocation decisions, it should be borne in mind that while the foundations for more effective agricultural services must be laid now, in the short to medium term the principal means for stimulating output is policy reform, namely, macroeconomic policies to reduce price distortions and sharpening incentives, and sector policies aimed at improving input distribution systems and marketing. MALD's share of the Development Budget (16.8 percent in 1988/89) on the other hand, should be sharply reduced. C. NATURAL RESOURCES 4.20 In Tanzania the natural resources sector includes forestry, fisheries and wildlife and these, together with tourism, fall under the Ministry of Lands, Natural Resources and Tourism (MLNRT). These subsectors have not been the subject of a separate review under the PER, but nevertheless figure in the Development Estimates, with an overall allocation in the 1987/88 - 129 - budget of Tsh 480 million, and Tsh 738 million in 1988189 9 (2.8 percent and 2.6 percent respectively of the Development Budget). MLNRT's Recurrent Budget is currently much less than its development estimates and about 1 percent of the recurrent supply. The public expenditure issues of the natural resources sector are in the first instance those of the Development Budget, but, as will be seen there are longer run issues of conservation and the environment that need to be considered, for which the resources of the Recurrent Budget, as they are presently deployed, may not be sufficient. Set out below, in Tables 4.4 & 4.5 are the Ministry's respective recurrent and development budgets for 1987188 and 1988189. Table 4.4: Recurrent Budget: MLNRT, (Tsh m.) 871/88E 88/89E Administration and Finance 164.8 232.0 Land Development Services 11.1 13.1 Surveys and Mapping 30.6 55.1 Town Planning 26.2 37.6 National Sites and Services Project 2.6 3.3 Wildlife 71.0 104.5 Forestry & Beekeeping 87.3 123.8 Fisheries 61.0 92.1 Tourism 14.3 24.4 ----------------------------------------------------------------- TOTAL 468.8 685.9 Source: Recurrent Estimates. 4.21 The major share of the PIP in recent years has been directed to the development of softwood forests and of the sawmill and wood processing industry, for domestic consumption and for export. In 1988/89 these had a budget of Tsh 543 million. It is expected that the level of investment will decline in the future with a number of major projects now coming to completion and with the policy to encourage greater private sector involvement in the industry. A similar trend can be expected in the fisheries subsector where major investments in the Tanzania Fisheries Corporation (TAFICO) and the Mbegani Fisheries Institute have now been completed. 9/ This excludes the Lands and Tourism Division and other non-natural resources components of the Ministry's budget which amounted to Tsh 90 million and Tsh 229 million respectively. - 130 - Table 4.5: Develorment Estimates - Natural Resources (Tab m.) 87188, 8s/89E Lands 61.3 229.2 Wildlife 44.8 67.3 Tourism 29.0 15.0 Fishing 86.8 127.0 Forestry 348.8 543.3 (Residual 343.6) ------------------------------------------------------------__--- TOTAL 914.3 981.8 Sources Development Estimates 1988/89 Note: The residual in 87188 is the difference between the total of the projects listed in the Estimates and the Ministry total. It would appear either the total is wrong, or some projects have been omitted. 4.22 Against the background of falling investment requirements for the major forestry and fisheries enterprises there is need to give greater attention to Government's role in managing traditional activities in the sector. In the case of forestry, wood fuel accounts for over 90Z of the forest resource consumption and the indigenous forest resource is currently being exploited at over twice its regeneration rate. In parts of the country, where there are severe problems of degradation, community forestry activities have a potentially important role to play in soil conservation and catchment protection. A number of community forestry projects have already been startedlO and an increasing emphasis will need to be given to these in the future. However, such projects have to be matched to the availability of recurrent resources to fund the activities once started and consequently the immediate investment requirements are not likely to be great. As far as possible they should be designed so that their recurrent costs are minimal and they can be maintained by communities or individuals.11 4.23 Protection of wildlife and fisheries will similarly require greater 10/ For example, SIDA is supporting catchment forestry, soil conservation and village afforestation projects. 11/ For an excellent outline of the issues facing the forestry sector see the Ministry's Tropical Forestry Action Plan: Issues Paper, May 1988. It makes the case for a re-orientation of activities, noting that "the present forest-related administrations appear to be overloaded with many tasks that could more effectively be carried by the private sector.' (Page 20). - 131 - emphasis in future budgets. Restoring the capacity of the Wildlife and Fisheries Departments to maintain and protect the natural resource endowment is a complex task and likely to take time. It involves not only re-equipping staff to carry out protection functions but also to conduct extension with local communities so that the latter associate the conservation and environmentally sound development of these resources with their own self interest. In the face of poverty and population pressures the task is complex and difficult. However, the potential for strong donor support in this area is good, both in terms of financial resources and technical assistance to work out relevant extension approaches. Game poaching and *dynamite fishing, are growing problems and will demand additional investment and recurrent funding in order to protect and maintain the basic ecological resource for the future. 4.24 The natural resources sector also illustrates some of the issues of cost recovery facing government. A number of softwood forest plantatioas are now beginning to be exploited. However the current rates of forest royalties are insufficient to meet costs of replanting and management and consequently funds for these activities continue to be voted annually through the Development Budget. The SIDA funded forestry management project in Kilimanjaro Region is experimenting with the levying of transport and silvicultural fees charged to loggers in addition to the normal royalty fees. Funds raised from these charges are then retained within a revolving fund for subsequent use by the project. Similar arrangements should be considered for forestry activities elsewhere. Scope also exists for innovative approaches in wildlife conservation, where a portion of park fees could be set aside for projects in the surrounding communities. Mechanisms for administering the funds would need to be carefully considered. 4.25 District level forestry, fisheries and wildlife staff are employed and paid by their respective District Councils although MLNRT is arguing that they should be brought under central control like MALD staff. It is argued that the political will of District Councils is deficient to provide adequate funding levels for services which, although important, do not have a strong community demand. Also cited is the potential conflict of interest between conservation requirements and District Council needs for revenue from, for example, tree felling royalties. It may be necessary to transfer these responsibilities back to central Government until councils are financially stronger, and in a better position to view natural resources in a long term perspective. On the other hand, if this is done the need to help communities see the benefits of natural resource management should not be lost sight of. 4.26 In summary, while there is unlikely to be a need for a greater level of overall funding under the PIP to the natural resource sectors, there should be a reallocation from supporting modern sector conmercial enterprises to promoting the conservation of resources in the traditional sector. This will require a shift in approach towards extension activities, but will need to be matched to the management capacity of the Ministry and the availability of recurrent funding. - 132 - D. INDUSTRY Background 4.27 Tanzania's industrial sector has been the subject of recent review by the World Bank. 12 The sector faces severe structural problems which includes (a) chronic capacity underutilization due to input shortages and insufficient working capital; (b) poor economic viability with many industries providing little or no value added; and (c) problems of securing adequate management against a background of severely eroded salary levels. 4.28 The Government Ministry responsible for the sector is the Ministry of Industries and Trade (MIT). Its responsibilities are essentially supervisory, consequently its recurrent budget is very small (less than half a percent of Total Supply) and is dwarfed by development expenditures on the sector. The public expenditure issues of the sector thus mainly concern the public investment prograre but the financial impact of the sector is not confined to MIT's budges Direct investments in industrial enterprises and the meeting of the Goverument's contractural and contingent liabilities arising from the sector appear in the Ministry of Finance budget, for example. Public Investment Program 4.29 In the past a major share of Tanzania's PIP has been allocated to the industrial sector. As recently as 1980181 the budget of the Ministry of Industries and Trade was 21.12 of the Development Budget. However this situation has changed dramatically with the allocation to the industrial sector declining from Tsh 1,482 million in 1980181 to Tsh 1,086 million ir. 1987188, 6.3Z of the Development Budget. 13Whereas the industrial sector investment under the PIP was over twice that of agriculture in 1980181 it: is now less than half. The reasons for this decline include: (a) The completion of major projects initiated in the previous decade under the Basic Industries Strategy, and the generally unfavorable investment opportunities in the sector in the 1980s. 121 For example, the recent World Bank report: Tanzania: An Agenda for Industrial Recovery, Report No. 6357-TA, June 30, 1987. ,I/ In the 1988/89 Estimates, MIT's share of the Development Budget fell further to 5.7 percent. _ 133 - (b) The change in emphasis under the Government's Structural Adjustment and Economic Recovery Programmes away from new investment to the rehabilitation of existing industries. (c) The policy under the ERP of shifting investment resources from industry to other sectors such as infrastructure and agriculture where economic returns appear to be greater. (d) The shift in responsibility for financing industrial investment from the PIP to the banking sector (associated with a greater emphasis being given to the financial viability of parastatals. Restructuring of the Industrial Sector 4.30 The Public Investment Programme will rightly give priority to non- industrial sectors during the next Five Year Plan period, but there remains considerable uncertainty about the scale of industrial sector investment that will be necessary. The Ministry of Industries and Trade currently has no forward investment programme for the sector and is waiting for a number of subject or studies to be undertaken, (e.g. under the forthcoming Industrial Rehabilitation and Trade Adjustment Credit - IRTAC) to determine which industries merit rehabilitation. Although much of Tanzania's industrial plant is very run down, in many cases rehabilitation is not justified because the industries concerned are not economically viable. At the same time Government action on macroeconomic policy and the dismantling of price and distribution controls is creating a more competitive economic climate, conducive to restructuring. 4.31 An important task facing the Government is to develop a consistent procedure for evaluating and handling industrial investment. There is a danger of public sector investment being confined to the less viable projects which could not sustain commercial funding from the banking sector. 14 A government ministry is unlikely to provide an efficient institutional framework for making enterprise-level investment decisions or for overseeing the management and implementation of industrial projects. The latter point has been acknowledged with the proposed arrangements, yet to be finalized, for the monitoring of parastatal project implementation to be undertaken by financial institutions, but there is also a need for greater decentralization of investment decision-making to those institutions and to the investment holding companies. 4.32 The implications for MIT are that it should concentrate on 14/ In this respect it should be noted that for 1987/88 Tsh 403 million, over a third of the budget allocation for the Ministry of Industries and Trade, was allocated to projects which were considered of low priority by the recent World Bank Sector review. These projects were Pesticides/Insecticides Formulation, Captive Foundry, Mbeya Textile Mill, Ibagala Sheet Glass, Arusha Bricks and Tiles, and Tissue Paper. - 134 - developing the overall policy framework and spelling out criteria for industrial investment (such as through the new Investment Code) rather than involving itself directly in investment. Instead of comprising investments in a number of specific industries whose impact and importance is unclear, the PIP should become more supportive of the Ministry's wider role in facilitating industrial development. Within the context of a smaller industrial sector programme, investment activities could comprise in the longer run: - Onlending of aid funds to the Development Banks, which in turn would be the main source of local and foreign capital for enterprises pursuing rehabilitation and expansion. - Rehabilitation and development of basic industrial infrastructure (although in many cases this would be through the budgets of other ministries such as Water or Communications and Works). - Facilitating the development of small-scale industries and nonformal enterprises, although such sugport, by definition, will not require large amounts of funding. 1 4.33 In the short run, however, the Government will find it difficult to disengage quickly from the industrial sector. Many of the firms in the sector are public enterprises. Those that are viable or potentially viable will require capital for rehabilitation and, in due course, expansion. Those that are fundamentally uneconomic will have to close or be absorbed into other operations, both privately and publicly owned. Either way, there are likely to be calls for Government funding, to strengthen balance sheets of viable enterprises, to facilitate take-over by a more robust operation, assist in redundancy payments, or make good guarantees of their indebtedness. The industrial sector's PIP will have to reflect the financial implications of restructuring in the coming years. If public funds are to be used efficiently, it is vital that the Government continues with its policies of macroeconomic adjustment and trade and price liberalization, and at the same time, moves forward with its plans to review and strengthen the financial sector, whose effective operation is vital to successful industrial restructuring. In this connection the announcement in July 1988 of the establishment of a Commission to review the workings of the financial sector is greatly welcomed. It is also vital that the terms of any transfers to parastatals, whether equity, grant or loan, be specified clearly, which has not always been the case in the past. 4.34 The implication in budget terms of the foregoing is, therefore, a sharp curtailment of MIT's share of the Development Budget, while maintaining 15/ The strategy recommended in the Bank's report Parastatals in Tanzania: Towards a Reform Program, September 1988 (page iv) is to 'subdivide commercial parastatals into those that must be maintained in public hands and made to work effectively, those that no longer have any rationale and are to be divested, and the remainder that should be allowed to fend for themselves, prospering or failing without special help or intervention." - 135 - sufficient provision in MFEAP's share for parastatal restructuring in the short&cun and the funding of development finance institutions over the longer term. E. ENERGY AND MINING Background 4.35 The main public expenditure issues in the energy and minerals sector have to do with the public investment program and with the institutional/tariff regime associated with the sector. Table 4.6 shows the 1988189 Development Budget for the Ministry of Energy and Mines. Total allocations increased from Tsh 595 million in 1980181 to Tsh 2,049 million in 1988189 with the Ministry's share of the Development Budget increasing from 8.5Z to 11.91. Over 501 of allocations during the 1980s have been accounted for by the power subsector through Tanesco. In the 1988189 Development Budget Tsh 4659 million is allocated to the Ministry, equivalent to a 16.4 percent share. The corresponding figure for the Recurrent Budget in the last two years is 0.2 percent of Total Supply. The public expenditure issues of the sector are primarily related to the investment program. 4.36 Tanesco, the Tanzanian power utility, and the largest component of -he Ministry's development budget has a well defined forward investment programme. In the short term this concentrates on the rehabilitation of existing infrastructure and the extension of the national distribution network so that a number of diesel fuelled power stations can be replaced by cheaper and more reliable hydropower from the national grid. The next major addition to power generation capacity is not scheduled for construction until the early 19909, although with power demand growing at 14 percent per annum, consideration is being given to bring the investment forward. Table 4.6: Development Budget, Ministry of Energy and Minerals (Tsh million) 1988/89E Energys - Ministry 27.0 - TANESCO 3645.3 - TPDC - Minings _ Ministry 40.0 - STAMICO 946.3 ----------------------------------------------------------- TOTAL 4658.6 Source: Development Estimates. - 136 - Energy 4.37 The main problems in the sector relate to Tanesco's difficult financial position and its inability to service loans from Government. This is primarily the result of inadequate and delayed tariff adjustments although poor revenue collection is also a contributory factor. In a situation where Tanesco's loan service payments and some of its generating costs are increasing as a result of the progressive devaluation of the Tanzanian currency. There is need for Tanesco to be able to set its tariff rates to cover its cashflow and achieve an economic return on its capital without Government exercising undue pressure or delay. About 80 percent of Tanesco's capital expenditures are in foreign exchange, financed mostly by aid funds on-lent by Government, with the Corporation taking the exchange risk. Amongst Tanesco's collection problems are: non-payment both by individuals and by certain parastatal entities such as NUWA, illegal tapping, bribery of revenue collectors (which has increased as tariffs have risen), and a long running dispute on power charges with Zanzibar. 4.38 Although tariffs were increased by 67 percent in March 1986 and by 25 percent in January 1987, and by a further 5 percent in September 1987 and again in July 1988, Tanesco's financial situation has continued to deteriorate. This has two important implications for Government finances: j Tanesco is unable to meet its debt servicing obligations to the Government (estimated to be approximately Tsh 2.5 billion in 1988, equivalent to over 10 percent of the Government's own debt service payments, or more than the entire recurrent funding of a major ministry, such as Health or Communications and Works.) - Insofar as power tariffs understate economic costs, Tanzania, through encouraging the growth of demand, will incur the capital costs of new generating capacity earlier than desirable. At the end of 1987 it is estimated that the average incremental economic costs of supplying electricity amounted to about Tsh 13.7 per KWh compared with an average tariff yield of about Tsh 4.1 KWh. As a result, there is a large and currently increasing subsidy element in pricing. This is tantamount to treating power as a social service, passing only a portion of the cost on to the consumer. There is also a case for introducing electricity tariffs that reflect regional rather than average national costs of supply, because of the substantial differences in supply costs between the hydro-based grid and the isolated diesel stations. 4.39 Ascertaining the size of the subsidy is difficult, since TANESCO's present high costs of generation may in part be due to overcostly investment in the past. This reinforces the need to review tariff levels frequently to avoid artificially stimulating demand, and to review the investment program regularly. To enable Tanesco to cover debt servicing and earn a 10 percent financial return on capital, it has been estimated that tariffs would have to be increased by 5-10 percent monthly over the next couple of years, or be subject to an immediate increase of 90 percent. - 137 - 4.40 Inevitably, the cost of power has become politically sensitive, and the Government is concerned that the path of adjustment should be a gradual one. Currently, new proposals for the progressive adjustment of tariffs and the restructuring of Tanesco's balance sheet are being devcloped by the Government. In carrying out the tariff adjustment program, the following points should be born in mindt (a) The financial restructuring will have an impact on the budget, and must be fully allowed for in fiscal planning; (b) The longer the adjustment period, the greater the impact on the budget. Within a fixed resource envelope, this means less resources for other areas of Government expenditure, including ones which also impact on target groups in the population. If the adjustment rate is too slow relative to inflation (as it has been in the past two years), Tanescois financial position will worsen; (c) As long as power is subsidized, demand will grow rapidly and may cause the Government to invest prematurely in additional generating capacity. For these reasons it is important that an economic pricing structure be achieved as soon as possible. 4.41 Tanesco's investment programme does not appear to be adequately reflected in the Government Budget. World Bank estimates of the forward investment programme for Tanesco give total estimae ed expenditures of Tsh 5,518.9 million in 1987188, Tsh 4,959 million in 1988189 and Tsh 3,359.5 million in 1989190. This compares with the 1987/88 development budget figure of Tsh 1,199.1 million. While these figures are not directly comparable, 16 it is clear that there is considerable underaccounting of investment levels in the Estimates has taken place of the 1988189 figure of Tsh 3645 million goes some way towards correction. 4.42 Sizeable investments ($42 million) have also been identified for the .petroleum sector, in relation to the rehabiliation and improvement of bulk handling and distribution facilities. A petroleum pricing study is a key initial step. An important objective is the establishment of an incentive structure that encourages the five oil companies operating in Tanzania to contribute to the mAximum extent possible to rehabilitation costs. Minerals 4.43 The investment requirements for the minerals sector appear much less 16/ The World Bank estimates are likely to include some commodity aid components. - 138 - certain. Tanzania is currently rehabilitating the Ilima Coal Mine and developing a further mine at Kiwira. Unless future power generation capacity is to use coal 17 there is insufficient domestic demand for these two mines and Tanzania has no comparative advantage as an exporter of coal. Other mining ventures for gold and semi-precious atones have been established by the Tanzania State Mining Corporation (STAMICO). They have never achieved viability under parastatal control and Government policy is now to encourage private sector investment and management. of these mines. This approach is to be welcomed, since it holds promise of improved operating efficiency and reduced demand for budgetary funds. As a general policy the Government should avoid direct investment in the sector, encourage its development by local and foreign entrepreneurs, and concentrate its energies on negotiating the most favorable royalty and profit sharing terms. Any Government resources channelled to the sector, whether of domestic or external origin, can only be at the expense of Government programmes in other sectors that lack the option of private sector implementation. 4.44 Another major investment that is uncertain is the construction of an Ammonia Fertilizer Plant at Kilwa Masoka (the Kilamco project). The plant would utilize natural gas from the nearby Songo Songo field. For Tanzania this would be a huge project with total investment costs estimated at $480 million of which the Government contribution wou.'d comprise the construction of a gas pipeline and provision of about $50 million in equity, with the remainder coming from foreign investors and lenders. The viability of this project depends on an increase in the world market price of fertilizer. 4.45 The decision on whether to go ahead with the project is a complex one, and depends on many factors, including: (a) recognition by the Paris Club of the enclave nature of the project and the need to exempt its debt from any future rescheduling; (b) securing the funds for the pipeline and the Government's equity participation, through the Tanzania Petroleum Development Corporation (TPDC); (c) continued close monitoring of the costs and benefits of the project (which depend, inte.: alia, on the patterns of future power development, the main determinant of the opportunity cost of gas), to be sure that the benefits of the project are commensurate with those expected from rehabilitation expenditures that alleviAte infrastructure bottlenecks or reverse the deterioration of existing public sector investments. 17/ The favored options at the moment are either additional hydroelectric generation or a gas-fired power station utilizing gas from Songo Songo. - 139 - The costs and benefits of Kilamco have been the subject of a separate report by the Bank. 18 which has stressed the importance, in view of the size of the project, of making any final decision to proceed in the context of competing demands for domestic and external resources from rehabilitation programs. Conclusion 4.46 In su9mary the main elements of Government's investment strategy for the energy and minerals sectors should bet (a) To see that investment levels in the power subsector are adequate to ensure that future power demand is met. (b) To remove the constraints on Tanesco's financial viability by instituting economic tariffs and according Tanesco greater autonomy in making future tariff adjustments. (c) To reduce levels of parastatal investment in the mining subsector and instead encourage foreign and private sector investment. This would permit the Ministry's large share of the Development Budget (16.4 percent in 1988/89) to be somewhat reduced, although allocations will continue to be considerable because of the capital intensive nature of power generation investment. F. TRANSPORT. COMMUNICALTIONS AND WORKS Background 4.47 Tanzania's transport system has never been well developed in comparison with neighboring countries. In recent years it has deteriorated to the point where it is now severely hampering Tanzania's economic recovery. In many agricultural producing areas road transport is restricted to the dry season, and the poor condition of road surfaces throughout the country has greatly increased distribution and marketing costs. The railways, which are strategically located to carry the bulk of long distance traffic, are able to carry only 30 percent of goods movements in the country, and port capacity is similarly run down. 4.48 The decline in transport sector performance and the deterioration of infrastructure over the past decade and a half can be attributed to two fundamental factors: (a) inadequate resource allocation to the sector and, 18/ Kilamco Ammonia/Urea Fertilizer Proiects World Bank Assessment, Hay 1987 - 140 - (b) weak institutional structures. In addition, transport regulations and foreign exchange allocation have tended to favour public sector operators over private operators. The situation in each of the subsectors is briefly summarized below. 4.49 Railways. The freight haul capacity of TRC declined from a peak of 1.7 million tonnes in the early 1970s to 0.88 million tonnes in 1986. The traffic on offer to TRC is at least twice what is now being carried. A TRC Emergency Progamme was agreed in 1987 and is now under implementation. Its first phase provides for rehabilitation of locomotives and wagons, relaying of the Central line, improvement of the telecommunications system and strengthening maintenance capacity. Funds for the first phase of the Emergency Programme (US$26 million) have been secured and additional works requiring about US$20 million have been identified for further financing. The main problem now facing TRC is improvement of its management and operations so that it can become financially viable and make adequate provision for maintenance and depreciation of its assets. 4.50 Ports. Comprehensive overhaul of the Dar-es-Salaam port is now under way. The work, scheduled for completion in 1991/92, includes modernization of the container handling berth, rehabilitation and replacement of cargo handling equipment, and rehabilitation of the general cargo berths. The additional funding requirement over the next 3-5 years has been estimated at US$32.5 million for the expansion of container facilities at Dar-es-Salaam ($25 million) and for the urgent repair of the port of Tanga ($7.5 million). Operational efficiency has been gradually improving, and sustaining the necessary operational and management improvements will need to be the main concern over the next few years. 4.51 Civil Aviations Despite a high average passenger load factor of 76 percent, Air Tanzania Corporation (ATC) has had persistent financial deficits, and has faced perennial problems in financing its recurrent requirements, particularly spare parts. Inadequate airport facilities have also affected fleet utilization. Similarly the operations of the Directorate of Civil Aviation (DCA) have come under growing strain due, in part, to the failure to collect airport charges. Although a proper strategy for the civil aviation sector has not been worked out, no major investment requirements are expected in the near future. Improving the financial performance of ATC 19and increasing cost recovery in the DCA are the immediate priorities and are essential to minimizing future demands on the PIP. 4.52 Roads. The primary cause behind the deterioration of the road network is lack of maintenance stemming from declining recurrent budget allocations, compounded by insufficiently trained personnel, shortage of 19/ A study has been commissioned to formulate a strategy to improve the financial performance of ATC, improve cost recovery in the civil aviation sector, and develop a least cost' strategy to meet the apparent unsatisfied demand for air travel. - 141 - foreign exchange, and a weak institutional structure. Some 60-70 percent of the road network needs costly and time consuming rehabilitation, and this now constitutes the main resource requirement in the transport sector. In addition there is need to strengthen the institutional structure for road maintenance particularly for regional and rural roads. 20 Outstanding financing requirements for the roads subsector are estimated at $210 million over the next five years. 4.53 Telecommunications. The Tanzania Posts and Telecommunications Corporation (TPTC) is a well run parastatal that has been able to maintain its financial viability through regular adjustments in its tariff structure. TPTC is currently implementing a rehabilitation programme with World Bank funding. 4.54 Road and Sea Transport: The National Transport Corporation (NTC) is a parastatal holding company that covers shipping, bus and trucking services. In the past the companies under its control have incurred financial losses. Government policy is now for companies within NTC to obtain their investment funds from the banking sector, and for those which are not viable to be wound up. 4.55 Against this background, the rehabilitation of Tanzania's transport and communications infrastructure, together with the restoration of a durable maintenance capacity, constitutes one of the biggest challenges of the ERP, and has substantial implications for public expenditures. The process of restoration is likely to take at least ten years, and will require a high level of commitment by both the Government and external agencies. The requirements can be divided into two broad categories: - Rehabilitation of the fixed assets, plant and equipment of the transport parastatals responsible for harbours, railways and air transport, coupled with improvements in management capacity and tariff policy to improve operating performance and prevent another cycle of deterioration and collapse. Finance for the immediate capital requirements has been largely secured and the priority should now be given to measures to improve financial and operating performance. - The provision of substantial amounts of external capital aid and technical assistance to rehabilitate the road system, accompanied by reallocation within the Government's budget in favour of maintenance activities, measures to ensure the sector is adequately recovering costs, anJ institutional strengthening. 4.56 The budgetary provision and future funding requirements for the transport and communications sector are considered below. Particular attention is given to the requirements of the roads subsector, where the 20/ A study is now being undertaken to determine a suitable structure for regional and rural road maintenance. - 142 - outstanding capital financing requirements are greatest and where there are major implications for the Recurrent Budget. Budgetary Provision. 4.57 Within the Government budget, maintenance and development of transport and communications infrastructure fall under the Ministry of Communications and Works (MCW), with the Prime Minister's Office (PMO) and Ministry of Local Government, Cooperatives and Marketing (MLGCM) responsible for regional and district roads and buildings. Tables 4.7 and 4.8 summarize the respective recurrent and capital budgets of MCW. 4.58 Table 4.7 illustrates the broad range of responsibilities of MCW. The largest component of the Ministry's budget is Construction and Maintenance, which comprises routine maintenance and essential reconstruction of trunk roads and upkeep of central government buildings. Although the Government has announced its intention of increasing maintenance allocations, the share of maintenance in the overall recurrent budget has been falling in recent years, and comprised only 1.6 percent of Total Supply in 1987188, of which about two thirds was directly for roads. Table 4.7 Recurrent Budget: Communications and Works 1987/88 and 1988/89 (Tst m) 87/88 88/89 Estimates Estimates Manpower Development & Administration 64.0 86.3 Central Transport Licensing Authority 6.1 6.8 Planning & Research Unit 7.3 9.8 Communications & Transport Division 185.7 292.1 Directorate of Civil Aviation 327.8 446.1 Directorate of Meteorology 126.5 155.5 Finance and Accounts 18.6 25.5 Construction & Maintenance Division 569.7 1059.2 (of which Roads - 350.1) Electrical & Mechanical Div. 307.7 397.3 Supplies & Services Div. 101.3 163.5 -----------------------------------------------------------------__------- TOTAL 1714.6 2642.1 Source: Recurrent Estimates. 4.59 Despite an increase in the 1988/89 Budget, (the Construction and Maintenance Division's share of Total Supply rose to 2.0 percent) these levels are far below what would be required for regular maintenance. An annual - 143 - maintenance outlay of $2,500 per km 21has been calculated as necessary to maintain the trunk road network once it is in good repair. This is five times the 1987188 recurrent budget provision, 22and its inadequacy is attested to by current maintenance practice. Virtvilly no routine maintenance is carried out, and all available funds are used for emergency recGnstruction, to repair damaged bridges and restore critical sections of highway that have been washed away. Behind these figures of budgetary underprovision, there are major institutional problems that will also have to be addressed. 23 4.60 At the regional and district levels, recurrent budget provision is also totally inadequate, resulting in the lack of both the equipment and materials to carry out maintenance effectively. 1987188 allocations to the Regioni through PMO were Tsh 329.0 million for regional roads, and Tsh 46.3 million for maintenance of Government buildings. The Central Government subvention for rural road maintenance to the district and urban councils was Tsh 180.4 million. 4.61 The second largest component of MCW's recurrent budget is the Directorate of Civil Aviation. Part of this expenditure is recovered in aircraft navigation and landing fees and other charges, the share of which has been increasing in recent years (28 percent in 1986187, 30 percent in 1987188 and 40 percent in 1988/89 - the last two on an estimates basis). It is important that this trend should be continued. Proposals for improving the collection of passenger tax and other revenue measures are discussed in Tanzania: Financial Performance of the Transport Sector. 4.62 A related public expenditure issue is the financial condition of Air Tanzania Corporation (ATC). Half of ATC's fleet of eight aircraft is 211 This is calculated on the basis of annual maintenance costs of $700 per km and periodic maintenance (bitumen spray and chips) of $12,000 per km every seven years for the bulk of trunk roads and $22,000 for the heavily trafficked TANZAM road. 22/ Assuming a trunk road network of 10,000 km and the exchange rate of $1.00 - Tsh 70 used in the preparation of the 1987188 Recurrent Budget Estimates. 23/ Precise comparisons over time of the resources available to the Ministry of Work's for road maintenance are made difficult by changes in the responsibilities of the Roads Division. In earlier years it was responsible for aerodrome maintenance as well as roads, in later years the Roads and Buildings Divisions are combined). Nevertheless, it is estimated that the share of Central Government discretionary resources allocated to the Ministry of Works for road maintenance declined from 4.0 percent of Total Supply in 1978/79 to an average of 2.5 percent in the early 1980s, to just over 1.0 percent in 1987/88 and about 1.6 percent in 1988/89. Given that the decline in maintenance set in more than a decade ago, the 1988/89 allocation remains far below what is needed. - 144 - grounded pending payment of already completed repairs or financing to get repairs or financing to get repairs started. 70 percent of routes flown in 1987 failed to cover even direct operating costs, despite a system-wide load factor of 69 percent. Accumulated losses as at December 31, 1987 were $20.6 million and its capital base was a negative $5.3 million, (see ATC: Strategic Evaluation and Corporate Restructuring, Draft World Bank Report, January 1989. Currently ATC's losses, as with other unprofitable parastatals, are being absorbed by the Banking system. Restoring ATC to financial health requires a doubling of fares on domestic routes, organizational streamlining and staff reductions, abandonment of uneconomic routes, greater commercial autonomy and an exceptional equity injection of $5 million from the Government. Should the latter wish to have ATC continue flying uneconomic routes for social or political reasons, a recurrent subsidy would need to be provided. Thus, the restructuring of ATC (which cannot be postponed any longer), would have significant budgetary implications. If past practice is followed, the equity injection would be financed through MFEAP's recurrent budget. Any recurrent subsidy, it is recommended, should be carried by the Directorate of Civil Aviation's vote, where it can be compared with other expenditure priorities in the aviation subsector. Alternatively, fares would need to be increased by a further amount, depending on tbe number of uneconomic routes retained. 4.63 The 1987188 Development Budget for MCW totalled Tsh 2,450 million with an additional Tsh 475.6 million (mainly for roads) under the regional and local government budgets. The breakdown of MCW's Development Budget in 1987/88 and 1988/89 is given in Table 4.7. In recent years the Development Budget has been increasingly used for meeting rehabilitation needs and, in the case of the locally funded component, for emergency maintenance. 4.64 As a proportion of the total PIP, the resources allocated in MCW declined during the early 19809 from 18.4 percent in 1980/81 to 10.0 percent in 1988/89. Allocations for roads and bridges declined in absolute terms over the period from 1980/81 to 1985/86 (and as a proportion of the total Development Budget from 7 percent to 4 percent) before being substantially increased in 1986187 and 1987/88. The proportion of the Development Budget allocated to the roads subsector, even taking account of regional and local government allocations is much lower than in other countries in the region where allocations of 15 percent or higher are not uncommon. - 145 - Table 4.8s Develo2ment Budget. Commmnications & Vorks. 1987188 Departments 87188 88/89 Administration 53.1 65.0 Communications/Transport Nat Transport Co. 271.3 162.4 Air Tanzania 32.1 50.0 Posts & Telecoms 73.5 277.8 TRC 157.0 361.1 Tanzania Harbours 572.1 284.2 Civil Aviation Dept. 42.0 84.0 Meteorology 37.0 102.5 Aerodromes 46.7 144.9 Roads and Bridges 1042.5 1132.3 Workshops 66.0 121.1 Construction 56.7 63.0 -------------------------------------------------------------------_ TOTAL 2450.0 2848.3 Source: Development Budget Estimates. Note: The column total for 88189 differs from the printed Estimates figure of 2834.2. Future Expenditure Requirements 4.65 It is primarily in the roads and road transport subsector where the outstanding rehabilitation issues remain to be addressed. The Government presented its financing requirements for the transport sector at a donor's conference held in December 1987. 24 This estimated outstanding financing requirements for the Transport Sector Recovery Programme at $547.2 million over the period 1987188 to 1991/92 as shown in Table 4.9. 4.66 Table 4.9 excludes existing commitments and includes recurrent cost items. Much of the allocation to the trucking subsector would consist of commodity aid/balance of payments support for which local coverage would be required and would therefore not contribute to public expenditure. In a number of cases, further work is needed to define expenditure requirements in later years. 25 24/ See Government of Tanzania Programme for Transport Sector Recovery' December 1987. 25/ Because of its magnitude, the total size of the transport rehabiliation program needs to be monitored carefully, lest the capital components upset the overal balance between project aid and balance of payments support. - 146 - Table 4.9: Outstanding Finance Required for TransDort Recovery Programme US$ million 1987/88 1988/89 1989/90 1990/91 1991192 TOTAL ---------------------------------------------------------------__--------- Trunk Roads 3.8 27.8 30.0 39.2 62.4 163.2 Rural Roads 6.3 9.0 9.0 11.3 11.2 46.8 Trucking - 55.0 79.0 79.0 79.0 292.0 TRC - 10.5 9.0 - - 19.5 TAZARA - 12.5 8.2 - - 20.7 THA - 5.0 - - - 5.0 _______________..___________________________________________________________- TOTAL 10.1 119.8 135.2 129.5 152.6 547.2 Source: Transport Sector Recovery Programme. 4.67 An idea of the likely budgetary implications of the transport sector recovery programme can be obtained for the roads subsector where investment requirements have been enumerated (Table 4.10). These increase from $39.5 million in 1987/88 to $80.6 million in 1990/91. Over the same period it is proposed that recurreant budget funding for road maintenance should increase from $10.1 million in 1987188 to $18.2 million in 1990191 of which $7.4 million would be sought from foreign sources and might fall under the PIP. Table 4.10s Roads Investment ant Maintenance Programme 1987/88-1991/92 $ million 1987/88 1988/89 1989190 1990191 1991/92 TOTAL ---------------------------------------------------------------__--------- Investment Trunk Roads 15.5 52.6 42.5 51.5 50.4 212.5 Rural Roads 24.0 28.2 28.2 30.2 30.2 140.8 ------------------------------------------------------------------__------ TOTAL 39.5 80.8 70.7 81.7 80.6 353.3 ------------------------------------------------------------------__------ Maintenance Trunk Roads 3.8 9.8 11.2 11.9 12.0 Rural Roads 6.3 6.0 6.0 6.3 6.2 ---------------------------------------------------------------------__--- TOTAL 10.1 15.8 17.2 18.2 18.2 Source: Transport Sector Recovery Programme. - 147 - 4.68 As with other sectors, rehabilitation in the transport and comunications sector needs to be planned in a way that considers the level of services and infrastructure that Government can hope to maintain given the expected availability of recurrent budget resources. Factors that should be taken into account include: (a) The need to capitalize road maintenance costs where this is feasible. There are two aspects to thist (i) design to minimize maintenance requirements, and (ii) a financing strategy to incorporate maintenance components in externally funded projects and programmes, pending the strengthening of domestic revenues and the progressive restructuring of recurrent budget in favour of maintenance and other high priority functions. (b) The need to maximize the externally funded components of roads projects in order to release domestic funds to cover recurrent maintenance requirements. (c) The present lack of stafr and management incentives in the public service. This raises doubts about the capacity to operate and maintain effectively plant and equipment and suggests that a greater use should be made of private contractors and a cautious approach to the reequipping of road maintenance units and government workshops. gd) The strengthening of Local Government, so that district and urban councils can more effectively maintain the transport infrastructure for which they are responsible. 4.69 To reduce future financing requirements and avoid another cycle of deterioration of transport infrastructure, greater attention should be given to improving cost recovery in the transport and communications sectors. The main requirements are: (a) Ensuring adequate financial provision for road maintenance. This could be linked to specific revenue measures such user charges (e.g. road tolls} or taxes that fall primarily on road users (e.g. fuel tax). 21 (b) Improving the financial performance of transport parastatals 261 From a collection standpoint, excise duties on fuel are an inherently more efficient way of raising revenue from transport operators than road tolls. In Tanzania collection of road tolls are only about 502 of the level expected from traffic counts, suggesting a high degree of evasion. They are probably more efficient from an economic perspective as well. For this reason further expansion of the toll system is not recommended. - 148 - through better management and a requirement for regular tariff reviews. Tariffs that reflect the true cost of services also encourage economic efficiency in the use of those services. (c) Improving the efficiency of revenue collection both in parastatal organizations and in the collection of user charges by Government (such as airport charges collected by the DCA). 27 4.70 Even with the efficiency improvements outlined above, it is clear that a significantly larger budgetary share, both capital and recurrent, needs to be allocated to the sector. To a certain extent savings may be possible elsewhere in the Ministry of Communications and Works vote, through improved productivity and, perhaps, the scaling back of lower priority functions. However, the bulk of resources will have to come from a Government-wide reordering of priorities, and an increase in the Ministry's share of both the Recurrent and Development Budgets. Currently, MCW's share of Recurrent Budget resources (4.6 percent of Total Supply) is less than the Ministry of Foreign Affairs (4.8 percent), a situation that calls for urgent correction. Overall, the PER envisages a substantial increase in MCW's share of the Recurrent Budget and, for the next 5-10 years, a substantial increase in its share of the Development Budget. However, financial control in MCW is reported to be exceedingly weak and the Ministry's capacity to manage a much larger program at the same time needs strengthening. On the recurrent capital side, a review of tender board procedures, contracting practices and MCW's capacity to. supervise consultants and contractors is required. It is therefore crucial that these weaknesses of financial management and implementation are addressed as quickly as possible, and before substantial additional resources are made available to the Miristry. G. EDUCATION Financing of Education 4.71 The sources of public finance for education in Tanzania are the budgets of the Ministries of Education and Local Government, and, to a lesser extent, the Prime Minister's Office. Secondary and higher education falls under the Ministry of Education's budget, primary education is the responsibility of district and urban councils, with teachers' salaries funded by subvention from MLG, the remaining costs being met out of council revenues. The Regional Education Officer and his staff, as part of the Regional Administration, are funded through the PMO as also is adult education. External donors finance the bulk of Development Budget expenditure (which may 271 See Tanzania: Financial Performance of the Transport Sector, World Bank, August 1988, page 21, which estimates that receipts from the passenger departure service charge could be nearly doubled if the charge was collected through the airlines. - 149 - contain recurrent as well as capital elements). 4.72 In principle, primary education, which is compulsory, is free, but a contribution of Tsh 100 per child is collected towards the cost of teaching materials. Some charges have recently been introduced for secondary education. At university levels the tuition is free but a charge is levied for board and lodging. The Government has been reluctant to introduce fees for fear that this would deter students from poorer families. A student loan system for university level education, to replace the allowances presently paid to students, is under consideration, but the low entry salaries into the public sector, which employs the bulk of university graduates, make it an impractical proposition for the time being. 4.73 Table 4.11, which draws on a recent SIDA study and is corroborated by the PER's own analysis of education sector spending (see Table B21), analyzes the source and uses of Budget funds on education. The budgetary shares of the different education tiers have been relatively stable over time, though with a tendency for secondary and higher education to preserve real levels of expenditure better than primary education. Ovet time, the share of education in total recurrent budget sector expenditure, when allowance is made for the different channels of funding, appears also to show no particular trend. Contrary to a recent UNICEF finding, the PER found no evidence that the education sector has fared any worse than other social and economic sectors in its share of public expenditure. While real per capita expenditure on education is now about two-thirds the level of the mid-seventies, the sector's share of total recurrent and capital expenditure, excluding debt service, in the 1988189 Budget is 14.0 percent, compared with 14.4 percent average for the period 1971172 to 1980/81. This suggests that the underprovision experienced by the education sector must be attributed to other factors. The conclusion of the PER is that the funding difficulties of secondary and higher education are due mainly to the general deterioration in revenues, the pressure on sector allocations exerted by debt servicing, and rising enrollments. In the case of primary education, the bulk (around 85Z) of expenditures are on teachers' salaries which are funded by central government on scales that are standard for the teaching service. 4.74 Local authorities are responsible for teaching materials, and the maintenance of furniture and buildings. It is in this area that funding deficiencies are the greatest. The problems encountered by councils in collecting the enrollment fee from parents and in supplying textbooks, notebooks and materials for classrooms lie at the heart of the funding problems of primary education. Parents are reluctqit to make payments for what they see as no more than a promise that books will be available. Two factors impede fulfillment. The first is a severely deficient school materials distribution system that causes textbooks financed by bilateral donors and printed locally to pile up in central warehouses. The second is the overall weakness of Council finances that makes the delivery of textbooks to schools unreliable and may result in money collected for schoolbooks being diverted for other purposes. - 150 - Table 4.11: Financing of Education. 1987188 Budtet (Tsh million) Sources Uses ----------------------------------------------------------------__--------- Recurrent Budget Ministry of Education 3,087 Primary Adult Ministry of Local Govt. 3,799 Secondary 953 Prime Minister's Office 81 Teacher Training 499 Higher 1,090 Other 353 -------------------------------------------------------------------__------ Total Recurrent 6,967 6,967 Share of Total Supply 17.62 ----------------------------------------------------------------__--------- Development Budget Ministry of Education 748 Primary & Adult 350 Ministry of Local Govt. 126 Secondary 226 Prime Minister's Office 115 Teacher Training Higher 216 Other 101 -------------------------------------------------------------------__----- Total Development 989 Share of Total Devt Budget 5.72 Sources: Education in Tanzania - Government Expenditure 1983-1987 by G. Anderson & G. Rosengart, SIDA; 1987/88 Estimates Notes: Primary and adult education are shown together because facilities and teachers are shared and the accounting system does not permit full identification of adult education components. SIDA estimated the share of total sector recurrent spending on adult education at 6-92. Issues 4.75 The principal issues now facing education in Tanzania are the quality of education, the,financial capacity of the various levels of government responsible for providing it, pressure to increase the low transition rate from primary to secondary education, and the general rise in the school age population due to rapid population growth. As well as shortages of textbooks and other teaching materials, teachers are poorly paid and have low morale, classrooms lack desks, and many of the schools built of temporary materials during the drive for UPE are now structurally unsound. Those responsible for the education system in Tanzania are expressing increasing concern about the quality of primary education, reflected in the attainment level of those entering secondary schools, and declining scores in - 151 - secondary school entrance examinations. Primary school enrollments fell from 3.5 million students in 1981182 to below 3.2 million in 1985/86. In some areas enrollment levels are falling as parents appear to be questioning the value of their children attending primary school. Poor Standard IV exam results and tests of language and numerical skills attest to declining pupil performance. 4.76 At the secondary level, there is great pressure, generated by Universal Primary Education (UPE), to expand the number of schools. At present very few (2.4 percent in 1985) of primary leavers attain places in public secondary schools. One outcome of this pressure is the rapid growth of privately run secondary schools, charging high fees relative to the quality of education offtred (the overall transition rate in 1985 is estimated to be about 5.2 percent, approximately one third of the transition rate for Africa as a whole). 4.77 There is also a low transition rate between the lower and upper secondary school c cles. In 1985/86 only 18 percent of pupils progressed from Form IV to Form V. As a result, Form VI output is low, with the majority going on to university. The Government intends to expand the number of public secondary schools, through day attendance rather than boarding, but lacks the funds to implement such a program. A target transition rate of 15 percent by the year 2000 was set by the Presidential Commission on Education in 1982. There is also an insufficiency of teaching materials at the secondary level. English is the language of instruction, but many teachers have an inadequate grasp of the language, and students are even less prepared to be taught in the language, having had only Swahili to that point in primary school. Secondary school buildings have also not been properly maintained and there has been insufficient funding to replace equipment. Since 1978, when many secondary schools were converted into "diversified" schools with a heavy practical bias to the curriculum, equipment costs have risen. 4.78 The major issues of post secondary education are the quality of students feeding into colleges from the secondary level, high unit costs and the limited relevance of the curriculum. It has been estimated that the cost per student in primary school in 1985/86 was Tsh 957. As multiples of the primary education cost per student, the average costs of higher levels of education were, respectivelyt secondary, 18.2; teacher training, 28.8; technical 54.8; and university, 203.2. These are much larger differentials than normally found, and reflect, in part, the distortions of underprovision, which is more pronounced at the primary level, and in part the high cost of post-primary education arising from boarding costs and curriculum factors. Nevertheless, they illustrate the costs involved in any expansion of higher education, and the importance of reducing post primary unit costs whenever possible. This is particularly true for university level education, whose high unit costs derive from too diversified course offerings, boarding accommodation for all students, and a teacher/student ratio of 1:3, more than twice the SSA average. This suggests that existing facilities could be used more intensively and that savings could be realized by accommodating more students off campus. - 152 - Financial Implications of Expanding Enrollments 4.79 A recent UNESCO/World Bank Study, The Financing of Education in Tanzania (draft May 1988), analyses the costs of meeting the Government's enrollment tszgets by the year 2000, using 1985/86 budgetary allocations as the base. Primary school enrollments increase in line with population growth, with rising intake and retention rates. Secondary schooling is expanded to meet the Government's 15 percent transition rate target, with the lower to upper cycle transition rate increased to 27 percent. Enrollments in technical colleges are tripled and university enrollment is doubled. To provide for increased allocations for primary teaching materials, secondary unit costs are reduced by reorienting the curriculum away from higher cost practical subjects, increasing the student/teacher ratios from 14.6 to 25, and by reducing the proportion of boarders by 50 percent. Teacher salaries are held constant in real terms. Projections along these lines are shown in Table 4.12. 4.80 Table 4.12 suggests that, provided the required unit cost savings can be made, the expansion in enrollments can be achieved if budget allocations to the education sector grow by 5.4 percent per annum in real terms. Under a general economic recovery scenario, this could be achieved without significant sacrifices in other sectors. If post primary unit costs remain the same, the required budgetary growth rises to 6.3 percent. Table 4.12: Enrollments and Public Recurrent Ezpenditures 1986 and 2000 1986 2000 -------------------------------------------------------------------__---- Total Total Unit Recurrent Unit Recurrent Enrollments Costs Costs Enrollments Costs Costs ('000) (Tsh) (Tsh m) ('000) (Tsh) (Tsh m) ---------------------------------------------------------------------__-- Administration - - 267 - - 450 Primary 3115.8 957 3020 6564.0 1100 7200 Secondary 91.6 334.7 of which: Public 48.3 , 17400 753 133.9 105CO 1400 Private 48.3 200.8 Teachar Training 12.5 27600 345 19.5 27600 540 Technical 1.6 52400 81 4.6 52400 240 Higher 3.4 194500 669 6.9 125000 860 Adult - - 205 - - 400 TOTAL----------3224.8------------5341--------6929.7----------------110-__- TOTAL 3224.8 5341 6929.7 11110 - 153 - 4.81 However, these calculations assume no adjustment of real salaries. If these are increased in line with a general recovery of revenues of 5 percent per annum, (which would accord with the Government's desire to restore public service salaries generally), the sector's high ratio of Personal Emoluments would require education sector budget allocations to rise by around 9 percent per annum. On the assumption that overall revenues grow at 5 percent per annum this implies an increase in education's share of the recurrent budget from 17.6 percent of Total Supply in 1987/88 to around 30 percent by the year 2000. This could be accomuodated only by substantial cuts in other sectors' shares. Thus public expenditure policy in the education sector involves a trade-off between salary increases, enrollment expansion, and other sector allocations. While the share of education in total recurrent expenditure net of debt servicing could be increased slightly (the budget restructuring scenario developed in Chapter 5 considers increasing it from 18.5 percent to 22.0 percent), an increase to 30 percent, in the judgement of the PER is neither feasible nor desirable. This suggests that the expansion of enrollments in the public education system indicated by the UNESCO projections is unlikely to be attainable. With regard to the sector's share of Development Budget expenditure, 5.7 percent, some expansion seems possible, provided it is focussed on rehabilitation. conclusions 4.82 The overriding issue in the education sector in the coming years is how to prevent further erosion of Tanzania's extensive education system. Although the resources available through the recurrent budgets of the Ministries of Education and Local Government and the Prime Minister's Office are not sufficient to educate the number of children that the Government desires, it seems unlikely that the share of education in the total budget can be increased by the amount implied in the preceeding paragraph, given competing dema;4s from other sectors. While economic recovery over the longer term should generate the revenues required to make Tanzania's education goals more attainable, a strategy is required for the short to medium term. The foregoing analysis suggests it should be along the following lines: (a) First, the trade-off between quantity and quality must be faced. This suggests that the shortage of resources at all levels of education has reached a point where, until there is a marked improvement in their availability, it makes little sense, either economically or socially, to continue expanding the public education system. Over the longer term, consideration can be given afresh to expansion, but this should be contemplated only after significant and measurable improvements have occured to the existing public education system. Gains from increasing enrollments are now far outweighed by the efficiency losses of declining standards caused by deficient teaching materials and deteriorating teaching environments. Capital resources at all levels should be directed towards the rehabilitation of the _ 154 - existing educational infrastructure, and the increase in recurrent resources that may be expected from economic recovery should be used to improve the funding of existing, not new activities. Tanzania achieved a dramatic expansion in its education system in the 1970s. This needs to be consolidated, otherwise it vill be lost. The implication of this is that unless the Government is prepared to sanction a major increase in the share of the budgetary resources allocates to education (which implies substantial reductions to the shares of other sectors), the Government's enrollment targets for the public education system must be re-examined in the light of budget constraints. (b) In the next few years the main focus of the Government's actions to restore the education system should be the primary level. There are three reasons for this priority. Firstly, because a primary education will be all that most children receive. Secondly, because declining primary education standards affect all levels. Thirdly, because relatively small amounts of additional resources could yield a significant payoff in terms of improving the effectiveness of primary education. The single most serious deficiency at the primary level would appear to be teaching materials. The ratio of salaries to total expenditures on primary education is extremely high (85 percent compared with a government-wide PE ratio of 26 percent and a normalw range of 40-60 percent). This suggests an imbalance in provision and the possibility of worthwhile gains in teacher productivity by correcting it. Supporting expenditures could be doubled for an overall increase in primary education expenditure of 15pfercent Achieving this is administratively more difficult than raising teachers' salaries, since supporting expenditures are the responsibility of councils, and increasing provision would have to come as part of a general strengthening of local government finances. However, as an interim measure, further donor recurrent support along the lines of the EDP program in the health sector, would be worth considering. The Government should urgently review the existing school materials distribution system and make it more effective. (c) If the pressure on the Government's budget is to be reduced, Tanzania must diversify its sources of educational finance, by: (i) encouraging the development of more privately-owned or church-owned and financed schools; (ii) raising the level of family financial contribution by charging tuition at the secondary and tertiary levels, given the strong level of demand that currently exists. Presently, parents pay some tuition for primary school, but none fc'r secondary and university schooling, the opposite of what - 155 - might be expected. Special provision could be made for bright children from poorer families. The scope for privately-owned schools is greatest at the secondary level, but the Government should also consider permitting church-run primary schools, as was the case in the 1960s. This implies, at the margin, the Government shifting from the direct construction and operation of new schools to indirect facilitation and monitoring of community education initiatives. (d) Opportunities for a higher financial contribution from parents to primary education are limited in the short term. Parents already pay an enrollment contribution, schooling is compulsory and dissatisfaction with the quality of education offered and distrust of council financial management make collection of the existing charge problematic in many areas. The first step is to improve educational quality. At the same time efforts at community self-help should be encouraged, and capital expenditure at the primary level concentrated on providing rehabilitation materials to support local effort, rather than new construction. 28 Ce) Steps should be taken to lower the high costs of post primary education, by reducing the proportion of boarders, and by re- examining staff/student ratios and the curriculum. Compared with other SSA countries, Tanzania's ratios are quite generous and could be lowered if matching changes were made to the curriculum. (f) While selected expansion at the secondary level may be justified if the principal means of doing so is private, current plans to expand higher level education should be shelved until the existing system is more securely financed. This is not to deny the requirement for more higher level skilled manpower in Tanzania, but rather an acknowledgement of the high unit costs of this tier of education, and that any additional public resources that may become available, as with other tiers, will, for the time being, have a much higher pay-off in social and economic terms if they are allocated to rehabilitation and the better funding existing enrollments. A further factor is that if the public service is to be restructured and no longer grow at the high annual rates of the past, public sector demand for higher level manpower will be reduced. Energies should 28/ In one district the PER team found the council utiLizing its entire primary education building vote on the construction, by private contractor, of a single new primary school instead of using the fuads to support community self-help efforts in rehabilitating existing structures. - 156 - therefore be applied towards curriculum revision, with a view towards lowering unit costs and tailoring the output of higher level institutions for a broader client base, with the private sector absorbing a larger share of the output. (g) Plans to expand university places (current plans are to double university enrollments by the year 2000) should be shelved, and efforts directed towards solving current problems besetting higher level education in Tanzania: quality, relevance and unit costs. (h) As local government becomes stronger, more authority should be delegated to council education staff, particularly the DEO and school principals, in the running of schools, transfer of teachers, etc. This should facilitate staff savings at the regional and central levels, and make the administration of primary education more responsive. Delegation should be accompanied by management training. H. HEALTH 4.83 Tanzania was one of the pioneers in SSA in establishing a national health care system, with a pyramid structure aimed at providing primary health care to the bulk of the population at an affordable cost and achieving a proper balance between curative and primary/preventive care. By 1978 100 percent of urban dwellers and 72 percent of rural dwellers were within a 5 kilometer access to health services. Today Tanzania has about 3,000 rural health facilities that serve as the base for a health care structure that moves upward from dispensaries to rural health centres, to district hospitals, regional hospitals and, finally, to three national medical centres. The majority of facilities are government run, though a significant proportion are under the control of missions and other agencies. 29 4.84 This system is functioning, but is under strain. Among the most serious problems aret (a) the declining real pay of medical staff which affects morale and productivity; (b) shortages of drugs and other medical supplies; 29/ In 1985 there were 152 hospitals in Tanzania, with a total of 22,880 beds. They comprised 4 consultant hospitals/medical centres, 17 Regional hospitals, 48 district hospitals, 18 district designated (i.e. mission owned) and 51 voluntary agency hospitals, 8 private hospitals and 3 specialist hospitals. There were also 260 health centres with 5,122 beds and 2,832 dispensaries with 11,320 beds, with missions responsible for running more than 400 of the dispensaries. - 157 - (c) management and operational deficiencies in the Central Medical Store (CMS) and the domestic pharmaceutical industry; (d) lack of foreign exchange to repair and replace equipment; and, (e) neglected maintenance of buildings. 30 4.85 As a result, the health service, while fundamentally sound in structure, has experienced difficulty in maintaining the momentum of earlier progress in improving the health status of the population. Furthermore, the Tanzanian health service now faces the additional burden of the AIDS pandemic. 4.86 The principal source of financing for the health sector is the Government budget. The Ministry of Health and Social Welfare is directly responsible for the regional hospitals and the four medical centers at the apex of the system, and provides a subvention to mission hospitals to cover staff salaries. It also pays for nurses' training and has the principal responsibility for preventive health care. Government district hospitals are financed through the Regional Supply vote, under the control of the Prime Minister's Office. Health centres and dispensaries, apart from those operated by missions and other private agencies, are the responsibility of district and urban councils, which receive subventions to cover about 80 percent of their costs from the Ministry of Local Government with the remainder to be found from Council revenues. Treatment is free at Government health facilities, but missions charge for health care according to a schedule of rates approved by the Ministry of Health. Financing is also available from bilateral donors and other agencies, mainly for development projects, but also for certain recurrent inputs, such as drug supplies to health centers and dispensaries, which are funded through the joint DANIDA/UNICEF Essential Drugs Programme (EDP). Central Government funding of health care in Tanzania, as provided for in the 1987/88 budget estimates, is set out in Table 4.13. 4.87 Although the Ministry of Health's share of Total Supply, at 5.0 percent, is now lower than a decade ago (7.1 percent in 77178) and real per capita expenditures are about earlier levels, three quarters the share of recurrent spending on health, contrary to recent analysis, 3 has probably not declined significantly when MLG and Regional allocations are taken into account (see Table B21), and may even have risen slightly when donor recurrent 30/ Costs of repairing hospitals and regional health centres have not been estimated, but a joint Ministry of Health (MOH)/DANIDA mission concluded that 37 percent of government rural dispensaries were in good condition, 45 percent in fair, and 18 percent in bad condition, with repair costs estimated at Tsh 195 million in 1985 prices. 31/ See UNICEF, Annual Report, Tanzania, 1987. - 158 - funding is considered. In the 1988/89 Budget the sector's share of Tctal Supply is 11.1 percent and its share of development expenditure approximately 2-3 percent, giving an overall share of 8.1 percent, as compared in the 7.1 percent average for the period 1971/72 to 1980/81, excluding debt service. On a per capita basis, health expenditures have fallen in real terms, to about three-quarters the level of the mid-seventies. It would appear, therefore, that the financial problems of the health sector, are more the result of general budgeting pressure arising from revenue weakness, foreign exchange shortages and a crowding out of all forms of sector expenditures by debt servicing. As with the education sector, budgetary constraints have undermined a system of social service delivery that had been expanded rapidly in earlier years, and had already achieved extensive coverage throughout the country. A further factor has been the pressure of an expanding population. While the number of hospitals, health centres and dispensaries has only marginally changed since 1980, the patient base has increased by over five million. The conclusion to be drawn, therefore, is that a general improvement of the budgeting problems of the health sector will have to come gradually, as the economy recovers and revenues strengthen. 4.88 In the meantime, there are some specific actions and policy measures that the Government should consider. They are as followst (a) Until the overall budget situation is markedly better, there should be no further expansion of the public health care system in Tanzania. The system was rapidly expanded during the 1970s and the recurrent budgetary implications of this expansion have never been properly met. It is hard to avoid the conclusion that the health status of the population at large stands to lose more from the further dilution of budgetary allocations than it vould gain from the creation of additional facilities. Nor are budgetary resources the only constraint. The attempt to further expand the public health system would impose additional administrative strain, particularly on local government. The only exceptions that might be considered are a limited number of additional pr "-ry health care facilities in urban centers which have experienced the greatest growth of population, if it can be shown that by building these facilities pressure is taken off the higher level institutions in the urban centers, and significant savings or improvements in health care are likely to occur. The other category of exception that could be considered are special preventive campaigns to deal with health emergencies and with fertility, and which stand a high chance of securing special donor funding. AIDS and iodine deficiency disorders are likely examples, and resources will be needed for the implementation of the national population policy. The Government might also make an exception for programs increasing the population's own responsibility for health and nutrition (which following establishment would be almost entirely financed by commmnities themselves. To be effective these programs will need to be integrated into the existing health structure, and the information, ed-ication and communication capacity of the MOB - 159 - Table 4.13: Fiw&ncing of Health Care, 1987188 Budget Estimates (Tsh million) Sources Uses Share ------------------------------------------------------------------__----- Recurrent Budget Ministry of Health 1838 Medical Centres 702 16.3Z Min. of Local Govt 1358 Regional Hispitals 1112 25.7Z PMO/Regional Supply District Hospitals 551 12.8Z Vote 1123 Other Curative 378 8.82 ------------------------------------ Total Curative 2743 63.32 Rural/Training/ Other 1576 36.52 ------------------------------------------------------------------__----- Total 4,319 Total 4319 100.O0 Development Budget Ministry of Health 213 Min. of Local Govt. 92 PMO/Reg. Supply Vote 101 --------------------------------------------------------------------__--- Total 406 Sources: Estimates Note: Included in the MOH recurrent budget is Tsh 194m for social welfare. For the purposes of this analysis, social welfare (principally care of destitutes, disabled and blind) is classified as health expenditure. Prior to 1986/87, social welfare was the responsibility of the Prime Minister's Office. In 1987/88 MOB's share of Total Supply was 5.0 percent. MOH's estimates for 1988/89 is Tsh 2774 million, equivalent to 5.2 percent of Total Supply. strengthened. As with the education sector, the need to plan within a tight budget framework means reviewing national targets for the sector such as health facility coverage and staffing levels, which, while desirable, are no longer attainable within the present timetabl'. (b) Special care should be taken to ensure that the part of the health care system run by voluntary agencies is adequately - 160 - financed. These institutions are effective providers of health -are with the limited resources available. While they have access to external funding, and should be encouraged to maximize income from these sour-es, they are dependent on Government for the funding of their staff costs and for the approval of their fees. As the exchange rate is adjusted, medical supplies will rise sharply in cost, and this will put pressure on their operating costs and charges structure. New charges will need to be approved quickly, and the subventions by Government adjusted in the light of financial realities. 32 (c) 'While the proportion of MOH's total recurrent budget spent directly on curative medicine (69 percent), is in line with neighboring countries; 33 the amount allocated to preventive services (Tsh 84.5 million in 1987188 or 4.6 percent of MOH's total vote) appears to be too small. The PER team did not have the time to establish the extent to which this might be augmented by donor funding not captured by the budget or by loc4'l authority allocations, but would recommend that a review be nade of the adequacy of its funding. It is recognized that the issue is more complex than a simple correction of the relative allocation to preventive services in the- health budget. Preventive services are transport intensive. Increasing budgetary allocations is unlikely to be effective without addressing the problem of vehicles and their maintenance and operating costs, suggesting that the prioritizing of preventive activities must be a central part of such a review. (d) Within the total health sector budget, the shares allocated to the three medical centres (16.3 percent) and the 17 regional hospitals (25.7 percent) appear high compared to the share allocated to district hospitals (12.8 percent). Relative allocations should be reviewed for two reasons. Firstly, it is likely that curative care is more cost effective at the district hospital level than higher up the referral structure. Secondly, there is a need to strengthen the district hospitals' capacity 32/ in recent years subventions through item 5627 Designated District Hospitals have held steady at around 16 percent of total MOH expenditures on curative services. 33/ In Kenya the proportion of the health budget spent on curative medicine was 67? in 1984185. - 161 - to supervise the health centres and dispensaries under them. Tanzania's primary health care structure depends heavily on effective supervision if the resources are to be used properly. 34 (e) Recurrent support by donors in the health sector appears to be highly effective, and should be continued until the operating costs of Tanzania's health service can once again be covered by domestically generated revenues. In this context, the decision to extend the EDP substantially beyond its original expiration date of 1989 is welcome. Government and donors could usefully explore other areas where the funding of recurrent costs has a high return, (e.g. extending the EDP to cover hospital and urban health centre drug supplies). It is desirable, though, that recurrent cost funding takes place in the context of a framework for restoring financial self-reliance over the medium term, if it is not to become a permanent crutch. (f) Effective health care is heavily dependent on complementary inputs, such as improved water and sanitation, better nutritional status and population and family planning programs. The first is a matter of public health education and making available rosources for rehabilitation of existing water supplies and sanitation systems, and is discussed elsewhere in this chapter. The second depends partly on targeted programs and partly on continuing agricultural policy reform. Population and family planning are important both from the viewpoint of the health and nutrition status of women and children, and also because rapid population growth undermines an already strained health care system. The Government will need to keep these interrelationships in view, if the goal of a restored health care system is to be achieved. (g) An adequate drug supply and distribution system is essential. Commodity aid by donors should be supplemented by determined action to improve the operations of the CMS and the efficiency of the drug manufacturing parastatals. As the OGL system is expanded, the Government should consider deconfining the importation and distribution of drugs, both to increase channels of supply, and to provide competition to domestic manufacturers 341 This is borne out by the conclusion of a recent review of the Essential Drugs Program, which expressed concern about the misprescription of drugs at health centers and dispensaries due, amongst other factors, to inadequate supervision. - 162 - and distributors to force them to become more efficient. 35 However, this should be done in a manner consistent with the national list of essential drugs - which itself should be reviewed on a regular basis. Drug losses through pilferage and unauthorized sale are also a problem. Here, the situation is unlikely to change quickly for the better since in part the practice has become a compensation mechanism for low pay. Increases in real pay, over time, should gradually reduce the problem and make controls more enforceable. (h) Consideration should be given to the introduction of user charges in public health facilities. Although this would be a significant change in existing Government policy, the policy has been under consideration by the Ministry of Health which is considering how user charges might best be implemented. If introduced they would provide additional resources to improve the quality of health care. Precedents exist in the charges levied by mission facilities and through informal payments reportedly made to staff in government establishment to secure treatment. The evidence is that people are willing to pay for effective treatment. The timing and modalities of charges at Government facilities need, however, to be considered carefully, to ensure that charges are associated with improved service and greater availability of drugs. There is scope for linking the introduction of charges with donor intervention in support of the required improvements, and with mechanisms to retain all or part of the revenue generated at the local level. 36 (i) The health sector's share of the Development Budget is small, at 2.3 percent in 87188. There is a case for additional donor capital support for the health sector, provided it is targeted towards rehabilitation of existing facilities at the district hospital level and lower, and provided such interventions are part of an integrated plan to strengthen the domestic financing of the health sector, that includes higher domestic allocations for maintenance and equipment replacement. Rehabilitation of higher level facilities is also required but this must be highly 351 The Bank's industry sector study, Tanzania: An Agenda for Industrial Recovery, found one private sector producer 50 percent more cost efficient than the two major parastatal producers. (Vol. I, page 60). 36/ At present revenues collected by MOH are extremely small, comprising 0.7 percent of total ministerial recruitment expenditures in 1986/87, an estimated 0.4 percent in 1987/88 and 0.8 percent in 1988/89. - 163 - selective and should not be the main focus of the rehabilitation strategy. If the experience of other sectors is a guide, economic returns to rehabilitation in the form of repairs to buildings and equipment refurbishment and replacement should be high. (j) To support the process of salary restoration, the ministries involved in the sector should carry out a review of staffing levels. Given that nurses are one of the largest groups of health workers, opportunities for staff cuts are probably limited, and emphasis should be on an effective freeze (the present exemptions made for medical personnel, while wholly understandable, cannot be afforded). 37 To avoid upward pressure on establishments, training programs should be reviewed, and intakes adjusted in line with natural attrition and the upgrading of existing staff. The primary orientation of health sector training should be in-service in the form of refresher and upgrading courses. (k) The effectiveness of the health sector depends critically on the strengthening of local government. Although major components such as salaries are funded by Central Government and drugs supplied through the EDP, the ability of councils to provide their share of the financing of health centers and dispensaries is critical (especially for their operating costs). Local Governments are likely to have an increasingly important role in managing health services, making them more responsive to local population needs and engendering community participation. (1) The capacity of the Ministry of Health to collect and analyze health and nutrition data requires strengthening. This is needed to help the Government monitor the position of vulnerable groups in the adjustment process, and to provide feedback to policy makers on the success or failure of programs and to help make Tanzania's health care system more cost effective. In recent years health planning has been a discrete sub-vote in MOH's recurrent budget, with its allocations adjusted in line with increases in the Ministry's vote. Strengthening health planning may be as much a matter of more systematic gathering of information and analysis as more resources. Particular functions which require strengthening are budgeting (especially in view of the changes in macroeconomic parameters), linkages between the development and recurrent budgets and accounting 37/ The draft health sector study, Tanzania: Population, Health and Nutrition Sector Review, (Chapter V), concludes that there is unnecessarily high staffing at lower level facilities, particularly RHC's. It recommends that MOH conducts a comprehensive review of staffing levels, patterns and distribution, and cautions against implementing higher staffing standards, as presently proposed. - 164 - systems. The Ministry will also need to develop its capacity to differentiate between programmes on the basis of their economic and social returns, so that as the resource constraint eases funds may be directed towards programmes with the highest payoff for the population at large. (m) Finally, community participation can be an important form of resource mobilization for the sector. In many cases, villages have constructed dispensaries. Villagers need to be mobilized to take greater responsibility for their own health care, through selecting and paying salaries for village health workers (VHWs) and contributing to the rehabilitation of facilities. Villages, with the existing political structure, have a unique opportunity to resolve non-acute cases of malnutrition identified by child growth monitoring, through the provision of supplemental food, food on a loan basis and paid employment for members of families in need. Such an approach needs to be developed in urban areas as well. Key to increased community participation is the decentralization of primary health care, in turn dependent on building up the capacity of district health management staff and strengthening local government generally. I. HOUSING, WATER SUPPLY AND SANITATION Introduction 4.89 Public expenditures on housing, water supply and sanitation have both rural and urban aspects. But because of the density of urban dwelling and the rapid rate of urban population growth, the greatest problems are to be found in the urban areas. In budgetary terms these problems are both recurrent and capital: - recurrent in the sense that agencies responsible for services, if they are to perform them adequately, face operating expenses far in excess of current revenues; - capital in that there is both a massive backlog of neglected maintenance and provision of services which require rehabilitation and catch-up expenditures, and new programs to keep pace with the growth of the urban population. 4.90 There are also policy and institutional aspects that need to be addressed if durable solutions are to be found. These have to do with the relationship between central and local government in these sectors, the strengthening of urban and rural councils, and new approaches to the financing of services. They concern the responsibilities of Government, in its various forms, on the one hand, and individuals and communities on the other, in the maintenance and operation of these services. - 165 - 4.91 A multiplicity of agencies are responsible for housing, water supply and sanitation. At the central government level, the principal actors are: the Ministry of Lands, Natural Resources and Tourism which sets policy for and implements national urban development programs; the Ministry of Water, the successor to the Ministry of Lands, Housing and Urban Development, which was split from ARDHI in April 1987, which is responsible for sector policy and national urban and rural water supply programs; the Ministry of Local Government (MLG) which is responsible for supervising councils and approving their budgets; and the Ministry of Health and Social Welfare (MOH) which is responsible for rural sanitation policies and health education. At the local government level the principal agencies are the urban councils and the district councils, which have responsibility for urban and rural services. Finally, there are a number of parastatal agencies with responsibilities in the sector, such as the National Urban Water Authority (NUWA) in Dar-es-Salaam, the National Housing Corporation (NHC) and the Tanzania Housing Bank (THB). Urban Issues 4.92 Population dynamics provide a formidable challenge for urban services. 38 Although Tanzania is one of the least urbanized countries in Africa, its overall population growth rate of 3.5 percent is one of the highest, contributing to a very rapid growth of the urban population. Currently around 14 percent of the population lives in towns, but this proportion is changing rapidly. Between 1967 and 1978 the urban population grew at an estimated 9.2 percent p.a., and there are few signs that this rate is slowing down. If it is maintained, Tanzania by the year 2000 will have a total population of around 35 million, one third of whom will be living in urban areas. Dar-es-Salaam. which contained approximately 757,000 people in 1978, is now estimated to have 1.6 million, and on present projections will be a city of around 3.6 million by the turn of the century. Similar expansions, in some cases faster, are being experienced by other towns. Within Dar-es-Salaam some squatter areas are experiencing rates of population growth of 20-25 percent. 4.93 All of this has been accompanied by a decline in the capacity of urban authorities, both councils and parastatal agencies, to maintain and extend services. Garbage is uncollected, water supplies are subject to frequent interruptions, and are contaminated by faulty sewerage systems. Many urban roads in wet weather are suitable only for FWD vehicles due to lack of maintenance. Accompanying this has been a failure to control urban expansion and keep pace with services. Lacking equipment, urban authorities have been unable to survey new areas and with insufficient capital budgets, little new serviced land has been made available. As a result, squatter areas have proliferated, many of them in low lying areas subject to flooding in the rainy 381 For a further discussion of the present condition of urban services and the impact of population growth, see S. Kulaba Urban 'rowth and the Management of Urban Reform, Finance, Services and Housing in Tanzania" March 1987. - 166 - season. High population density, interference with natural drainage systems, and overcrowded and improperly sited pit latrines combine to create major environmental hazards. 4.94 Although urban councils were restored in 1978, experienced staff had been dispersed and management was weak. The urban sector's share of total development expenditures remained small, insufficient for councils to re-equip themselves with the tools and equipment to maintain services, and to make any headway coping with the expanding urban population. As a result urban councils were caught in a trap from which they have found it difficult to escape. Their inability to survey land, demarcate building plots and provide basic services meant that an increasing proportion of the urban population for which services were to be provided were falling outside their revenue net. Inability to maintain existing systems engendered strong opposition to the charge increases that were needed to put services on a proper basis. The collection efficiency of the development levy, which, in the absence of effective property taxes, had become the principal source of locally generated revenue, fell. Efforts to exert development control over squatter areas were, on occasions, undermined by party officials, and the standing of councilors and their staffs was further eroded by reports of mismanagement and petty corruption. 4.95 It is important that a strategy be formulated to help urban councils break out of their financial weakness/low efficiency trap. Such a strategy should cover not only Dar-es-Salaam, but also secondary towns that are important as regional centres, suppliers of services to the main agricultural areas, and centres of employment in their own right. The principal elements of an urban rehabilitation strategy are as follows: (a) The first priority is to strengthen municipal finances. Revenues, at the present time, are far too dependent on the development levy, which is difficult to collect and regressive. Councils need more elastic revenue sources and greater diversity. Property tax offers the greatest scope for revenue enhancement and was the mainstay of urban authorities revenues in the 1960s. Councils need to move faster updating valuation roles and improving record systems. On the expenditure side, accountability, which has declined along with the demoralization of local government personnel and increased budgetary pressure, needs to be improved. (b) Since 1986 Central Government policy has been to encourage councils to stand on their own feet and raise the bulk of resources from their own revenues. Local Government transfers have consequently declined in real terms. While this is the correct policy for urban councils' operating budgets. the latter have been reluctant to raise more revenue because of the unpopularity they feel this would engender. The way out of this dilemma is to make it clear that central government support for councils is conditional on progress putting in place new revenue sources, and that the means of support would not be recurrent transfers but well targeted programs addressing the equipment and - 167 - rehabilitation needs of councils. Central Government lacks the resources to support such programmes itself, and for it to be successful, substantial amounts of donor support would be needed. Government should also consider reintroducing rate payments on its own properties. (c) The main areas for increased donor support would be urban water supplies, roads and surface water drainage, sewerage and garbage collection systems, and housing support, in the form of sites and service schemes and squatter upgrading. Support should not be limited to provision of equipment, which will be wasted if not accompanied by improvements in organization and management of services. Technical assistance and selected equipment inputs may also be needed to support the central management functions of councils. (d) Interventions need to be flexible, supporting councils that are prepared to take constructive initiatives and undergo the reforms necessary to make their operations more efficient. As far as possible, resources should be channeled directly to local councils, at the same time making it clear to local taxpayers that ccuncils' efforts at strengthening revenues will be reflected in improved services. (e) Councils on their part will need to review staffing levels, to correct the present mismatch between staff levels and the capacity to fund operating expenses. Overstaffing varies between urban centres and it is impossible to make a universal prescription, Rather, a process should be initiated to bring staffing levels into line with what councils can reasonably expect to equip and support over the medium term, as revenues improve. Staff reductions will also make it easier for councils to raise salaries in line with Central Government as it, too, carries out a staffing review. (f) The backlog of maintenance and urban service. ,rovision is so substantial and the urbanization pressure so strong that councils cannot hope to restore all services to the bulk of the urban population within a reasonable time frame. Rather, decisions will need to be taken on the most essential services, and to seek innovative solutions that maximize community self help. A model that places all responsibility on Councils will fail. (g) Rousing provides an illustration of this approach. Centrr and local government resources are sufficient only for token housing construction, and houses built by the public sector are let at rents so low that they are bound to deteriorate through lack of maintenance. A far more productive use of scarce resources would be to remove constraints to private housing, such as surveyed land and the provision of minimum services. In squatter areas, after the appropriate surveys, title may be offered as an inducement for - 168 - community effort at cleaning drainage systems. Consideration should be given to the disposal of publicly owned housing to tenants, initially on a pilot basis, if there is no immediate prospect of raising rents to a level sufficient for proper repair and maintenance. (h) The parastatals ln the sector, NUWA, NBC and THB, have in recent years been disappointing performers. NUWA, a nationally constituted water authority, has performed poorly as provider of water to Dar-es-Salaam, its sole present responsibility. The PER mission did not have the time to investigate the difficulties of these parastatals in depth, but quickly formed the view that proposals to expand NUWA activities to other urban centres were ill-conceived and should be postponed indefinitely. NEC provides over a large stock of urban housing, but uneconomic rents, collection difficulties, unsuitable designs, and management problems have led to the abandonment of maintenance, and its housing stock is deteriorating. New policies will need to be developed in the housing sector, but as indicated above, the emphasis should be on the facilitation of private house construction for occupation and rental, rather than public sector provision. In this context public resou;ces should flow not to NHC, but to agencies that survey land and establish conditions for and provide support to individual housebuilding initiatives. NHC will need to assess the condition of its housing stock, establish a strategy for bringing rentals to a level that makes repair and maintenance economic, and, perhaps, disposing to existing occupants a proportion of its housing. Recapitalized, THB could play a role facilitating private house construction and the purchase of NHC housing by occupants. 39 Rural Issues 4.96 Because of the lower density of population, rural housing, water supply and sanitation problems are more manageable than those in urban areas. The public sector's role in rural housing, apart from institutional housing, is minimal and likely to remain so. Improved rural sanitation is a matter of public education, not direct provision, encouraging people to construct improved pit latrines and locate them where they will not contaminate water supplies or be affected by seasonal flooding. This is primarily the responsibility of the Ministry of Nealth. In contrast, the public sector has had a larger role in the provision of water supplies, setting well-defined targets for potable water, and investing substantial sums in the past two decades in rural water schemes. In turn these programs have made a major contribution to the health of the population. 39/ THB along with other banks, will be surveyed by the recently established Commission to Review the Financial Sector, which can be expected to make recommendations on its future role, capital restructuring and operating procedures. - 169 - 4.97 Many of these schemes are no longer functioning, due to lack of spare parts, inadequate maintenance, diesel oil shortages, and inappropriate technology. Currently, emphasis is being placed on rehabilitating these schemes, using the simpler technology of hand pumps and surface water systems, and including communities in the operation and maintenance of their systems. This approach is strongly supported, since it minimizes the recurrent costs of rural water supplies to government and places maintenance responsibility with those who have the greatest interest in keeping the system operating. However, it is recognized that in some areas the depth of boreholes and the absence of suitable surface water make low cost options more difficult. This does not invalidate the principle of cost recovery, but it does point to the need for flexibility in applying it, and complementary action in areas like agricultural marketing, where institutions and policy constraints have served to depress rural incomes. 40 4.98 On a national scale, the pressure for new systems for areas not yet served is great. The recommendation, however, is that suc' schemes be given lower priority until existing schemes have been rehabilitated and the overall resource situation has improved. This implies a review of national water supply targets in the context of what is affordable in present circumstances. 41 J. OTHER GOVERNMENT SERVICES 4.99 A large part of the total budget is accounted for by what might be described as Other Government Services. These services cover a wide range of activities normally viewed as the classic functions of government, falling naturally into the arene of public administration. Most prominent are defense and law and order functions, as carried out by the Ministry of Defense (MOD) and the Ministry of Home Affairs (MHA). But there is a multiplicity of other 401 For a discussion of the issues surrounding rural water supply cost recovery and the special problems of an area where there is no alternative to a more expensive pumped water system, see Whittington, Hujwahuazi, McMahon & Coe, Willingness to Pay for Water in Newala District, Tanzanias Strategies for Cost Recovery, October 1988, a report prepared for USAID. 411 This process is now underway. The original goal, set in 1971, was p'cass to potable water for the entire rural population by 1991. In 1975 the target year was advanced to 1981, at a time when there was heavy donor assistance to the sector. In 1986 in a Ministry of Water seminar on national water policy in Arusha, there was general recognition that these goals were unrealistic, (the present coverage is about 45 percent) and that communities needed to be more closely involved in the design, management and financing of rural water supply schemes. (Op. Cit page 4) - 170 - players ranging from medium size agencies such as the Ministry of Foreign Affairs (MFA) and the National Service, down to the smaller roles of the Office of the Speaker, Exchequer and Audit, and the Civil Service Commission. The largest in the group in financial terms is the Ministry of Finance, Economic Affairs and Planning (MWEAP) (Tsh 11.5 billion in the 88/89 Recurrent Budget or 21 percent of Total Supply), though most of the money comprises transfers and is not spent directly by the Ministry. Collectively the group accounted for Tsh 21.8 billion of expenditures in the 1987/88 Recurrent Budget (55 percent of Total Supply) and Tsh 31.4 billion (59 percent of Total Supply) in the 1988/89 Estimates. In 1987/88 the group's share of capital expenditures was Tsh 3.8 billion (22 percent of the Development Budget). Several of the ministries concerned (MOD and MFA) have a high share of foreign currency expenditures in their budgets, and as the exchange rate has been adjusted, their votes have been under particular strain. As well as being recurrent expenditure intensive, these services absorb a large proportion of government manpower. Approximately one third of the total staff of Central Government is employed by MHA alone (See Table C2), a concentration of manpower exceeded only by the armed forces, which are not counted as part of the Central Government establishment, though they are a charge on the budget through the recurrent vote of MOD. 4.100 over the years the share of Total Supply of this group has been consistently high. After excluding subventions to local councils from the PMO vote in earlier years, the share amounted to 58 percent of Total Supply in 1978/79, 63 percent in 1983/84, and 55 percent and 58 percent in 1987/88 and 1988/89 respectively. Table 4.14 sets out recurrent allocation to the relevant ministries and departments in the past two years. 4.101 The PER did not review these sectors in detail, partly because they are sectors in which the Bank has no lending experience, and partly because of the sensitivity of several of them. Many of the functions carried out under the Other Government Services rubric, such as maintaining law and order, are crucial underpinnings for social and economic development. However, because collectively they absorb the bulk of recurrent budget resources and a not insignificant portion of the Development Budget, they cannot be ignored in any strategy to restructure public expenditures. The following points are worth making. (a) The Need for Scrutin. Given the continuing constraints of public finance, Other Government Services should be no less critically reviewed than other sectors. Expenditures on these categories, although also constrained, appears proportionately large compared with allocations to social services and infrastructure. If the latter are to be strengthened, some of the resources must come from a reallocation in the Recurrent Budget away from Other Goveroment Services. This is not a statement about the relative merits of different budget priorities, but rather the fiscal reality that if one set of activities is to be given priority, others must have their shares reduced. (b) Staffing Levels. As a major source of public service employment, - 171 - Other Government Services should be scrutinized for overstaffing. While rationales may exist for present establishments, it is clear that, as with other branches, the Government is unable to provide either adequate salaries or supporting expenditures to reward staff and make them productive. Furthermore, some of the fastest manpower growth has occurred in these areas. Between 1980181 and 1987188 personnel in post in MHA grew by 49 percent, in Defense (public officers, not uniform personnel) by 51 percent, and MFA by 38 percent. These increases took place at a time when the economy was stagnating and the real resources available to the Government were not increasing. (c) Foreign Exchange Costs. In the case of the Ministry of Foreign Affairs, in particular, there must be concern about foreign exchange costs. Even though MFA's relative share of Total Supply has doubled in recent years as a result of exchange rate changes, it is unlikely that the current relative share of Foreign Affairs takes full account of the opportunity cost of the foreign exchange required to maintain overseas representation at its current level. A review of the number of foreign missions (30) and their staffing in relation to foreign policy priorities and the effective contribution of permanent foreign missions to critical activities such as aid negotiations (which are handled either in Dar-es-Salaam or by MFEAP led negotiating teams), appears long overdue. The number of overseas missions has grown steadily in recent years (22 in 1977/78, 28 in 1983/84), and for many years an overvalued exchange rate has disguised the true costs of foreign representation. Currently, the Government is spending more on Tanzania's 30 foreign missions than on operating the entire Ministry of Agriculture and Livestock. Management and MPA's recurrent budget exceeds that of MCW and MOB. 42 Thus, the inference of the budget estimates is that foreign representation is accorded higher priority than agricultural research and extension, road maintenance and hospitals. This would seem a clear case of budget allocations not reflecting ERP priorities. 42/ There may also be scope for savings by releasing resources tied up in property purchased for embassy staff. - 172 - Table 4.14t Recurrent Estimates 1987/88 and 1988/89 for Government Services (Tsh million) Vote Ministry/Department 87/88 88/89 -----------------------------------------------------------------__------- 30 President's Office and Cabinet Secretariat 540 761 31 Second Vice-President's Office 17 27 32 Labor and Manpower Development 285 361 33 Commission for Enforcement of Leadership Code 11 12 34 Foreign Affairs 1432 2765 35 Permanent Commission of Enquiry 8 12 36 Civil Service Commission 6 9 37 Office of the Prime Minister and First Vice President 887 1314 38 Defense 6175 6827 39 The National Service 1111 1323 40 Judiciary 277 459 41 Justice 44 65 42 Office of the Speaker 76 125 45 Exchequer and Audit 41 50 50 Finance, Economic Affairs and Planning 6516 11500 51 Home Affairs 3873 5134 53 Community Development, Culture, Youth and Sports 183 236 54 Radio Tanzania 122 166 55 President's Office - Capital Development 56 66 56 Price Commission 10 13 57 Defense and National Service 148 192 58 Standing Committee on Parastatal Organizations (SCOPO) 9 13 59 Law Reform Commission 5 11 ------------------------------------------------------------------------__ TOTAL 21,832 31,441 Share of Total Supply 55.0Z 58.62 Source: Public Expenditure Estimates (d) Defense. Except the past two years when it has been overtaken by MPEAP and MLG, Defence has had the largest vote of any ministry. Defence expenditures 43 peaked in 1985186 at 23.4 percent of Total Supply, declined to 20.3 percent in 1986/87, an estimated 16.9 percent in 1987/88 and an estimated 12.7 percent in 1988189. This is 431 The reference here is to expenditures on the armed forces, under Vote 38 Defence. There is also Vote 57 Defence and National Service, the ministry in charge of vote 38 and Vote 39 National Service, and is staffed by members of the civil service. Compared with Vote 38, the Ministry's share of the budget is very small (0.4 percent of Total Ministerial Supply). - 173 - a striking reduction and represents determined action on the Government's part to contain the impact of defense expenditure on the budget which had remained on a plateau for several years after the termination of the Amin War. The details of how this reduction has been carried out are confidential, but from the published Estimates, it is evident that part of the reduction has come on armed forces pay, which in the past years has tended to be significantly higher than the public service, and the remainder from constraining SuPP1Y and Ordnance Services. Because of the large potential for Defense to crowd out other expenditures, it is critical that these reductions (which suggest a high prior level of waste) are sustained. 44 45 (e) Home Affairs. The Ministry of Home Affairs (MHA), while relatively unimportant in development budget terms, is the second largest spending ministry (if subventions are excluded) in the recurrent budget. It has responsibilities for police, prisons, immlgration, refugees and fire and rescue. The 1988189 police recurrent budget, at Tsh 2646 million, is larger than that allocated to MCW, and the prisons budget is almost as large at Tsh 2005 million. It is beyond the scope of this PER to comment on the appropriateness of these expenditures, other than to note that they comprise a significant componeat of total recurrent expenditures and that they must be planned and managed with the same amount of care as other sectors. The large increase in MHA staffing, both establishment and in post, suggest a powerful and entrenched growth dynamic, expanding employment at an annual rate far greater (5.9 percent) than population growth. Clearly, then, NHA must be a prime target for an effective employment freeze, staffing review and cutbacks, accompanied by realistic guidelines for police and prison services coverage in the future. 44/ According to the Report of the Auditor-General, Defense has suffered from serious problems of expenditure control. In 1985/86 Defense's excess expenditures over approved estimates was Tsh 451.0 million, 19 percent over budget compared with a government wide excess of 5.5 percent (42 percent of which was contributed by Defense). Defense also had the largest overdraft (Tsh 2,949 million out of a Government total of Tsh 4060 million), the greatest volume of unvouched and improperly vouched expenditures, and outstanding imprests and advances. 45/ It is to be hoped that the saving implied by the 1988/89 Estimates is a real one, and not the result of taking components of defense expenditure off-budget. Generally, the Government's current practise of publishing the Defence estimates in fully, rather than as a one-line item, is to be welcomed. The benefits of transparency where wuch an important component of expenditures is concerned outwiegh, in the PER's judgement, considerations of confidentiality. - 174 - (f) Finance. The Ministry of Finance, Economic Affairs and Planning requires mentioning as the largest Ministry in recurrent budget terms, even though its staffing is only that of a medium size Ministry, and the bulk of its recurrent funds, an average of 80 percent in the past three years, are either subventions or contingency amounts to be utilized by other public sector agencies. The recurrent vote of MFEAP has thus become a budget within the budget - an accommodation point for departmental underbudgeting. unforeseen contingencies, lending guarantees that the Government is called upon to honour, parastatal rescue operations, salary replenishments and compensation for exchange rate changes. It is also the Ministry's principal mechanism for ensuring adherence to fiscal targets. In an environment where mechanisms of expenditure planning and control have broken down at the departmental level, the Finance Ministry believes it has no alternative but to hold itself the largest share of voted funds. Concerning the fourth fifths of MFEAP's recurrent budget transferred from the Ministry: (i) The largest item is Item 4804 Contingencies in the Subvote of the Budget Division, and amounts to Tsh 5572 million in 1988/89, or 48 percent of the entire MFEAP vote. Most of the contingency provision will be applied to salaries and allowances, ministerial budgets having been prepared before the decision was taken on the salary and benefits increase that could be afforded. In future years as staffing levels are reduced, and domestic revenues can be more confidently predicted, it should be possible to move from a situation where the salary increase is treated as a residual to one in which the intended adjustment is built into the budget framework from the start. Confidentiality and the printing timetable for the Estimates submitted to the National Assembly may still require the use of a contingency item. The important point is to reach as soon as possible a position where the restoration and restructuring of public service salaries is brought forward and given the priority it deserves in the budget planning process. The failure in the past fifteen years to do this in large measure is responsible for the overexpansion of Government employment and the decline in morale and productivity. (ii) The second part of MFEAP's budget that requires comment is Item 4800 Contractual and Contingent Liabilities of the Public Investment Division. Set out below is the breakdown of this item in the past five years. - 175 - Table 4.5 MFEAP Budget Investment Division: Contractual and Contingent Liabilities (Tsh million) Item 84185AE 85186A 86187A 87188AE 88/89E --------------------------------------------------------------__---------- 4R12 Crop Authority Overdraft 500 460 464 925 1100 4822 Govt. Guarantee NBC/NMC 250 250 250 250 50 4823 Financial Assistance to Parastatals 150 175 665 1202 4824 Parastatal Rehabilitation 762 4825 Management & Supervision of SGR 440 Other 5 4 31 5 10 ------------------------------------------------------------------------_ TOTAL 755 864 920 1845 3564 Share of Total Supply 4.42 4.22 3.22 5.0 6.6Z Source: Estimates, various years. As the table shows, Contractual and Contingent Liabilities have become a significant and in the past two years sharply rising part of the Recurrent Budget. In the short-to-medium term this category is likely to remain large. It constitutes, as it were, the fiscal manifestation of the economic costs of past policies that previously were carried by the banking system or otherwise disguised. Insofar as transferring these costs to the budget results, as it does, in greater financial transparency and fewer distortions in monetary policy, the process is to be welcomed. Over time, such costs should be brought down. But their reduction, given the magnitude of parastatal restructuring required, is unlikely to be rapid. Over the longer term they can be substantially lowered if policies more conducive to parastatal self-sufficiency are followed, such as the avoidance of Government guarantees, a more competitive environment, and the removal of constraints on utility tariff adjustments. Recent decisions placing NKC operations on a more commercial footing will help to reduce the overdrafts of the crop authorities, as will the reform of export crop marketing boards. The operating costs of the - 176 - Strategic Grain Reserve (SGR) are a legitimate charge on the budget and should remain, in either the budgets of MFEAP or MALD, (though, as noted in Chapter 4, the provision in the 1988/89 budget is for the expansion of the SGR, not its operation). 46 4.102 Finally, donors, who in the past have tended to neglect the classical functions of government, should be prepared to support priority rehabilitation programs in the sector, as is now happening with UNDP and some bilateral donors such as SIDA and ODA in the fields of revenue collection, statistics and budget management, accountancy and public administration training. 46/ Strictly speaking the Tsh 440 million to fund the enlargement of the SGR is a capital transfer, and should appear as a locally funded project in the Development Budget. By the same token, some of the items in the Contractual and Continaent Liabilities subvote, such as Parastatal Rehabilitation, might be ruore correctly located in the Development Budget. In the interests of expenditure control and transparency, there should be greater disaggregation. Single line items of this magnitude should be avoided whenever possible. - 177 - CHAPTER 5 - nMPLEMENTING THE PUBLIC EXPENDITURE STRATEGY Introduction 5.1 Before discussing the steps the Government might take to implement the public expenditure strategy, a number of general points need to be made. The first is that devising and implementing a public expenditure strategy is a medium-term activity, stretching over several years. While certain actions can be completed immediately, others require longer to implement and the results take time to show. However, this should not be construed as an argument for delay. The productivity of public expenditures is at present very low. Although the failings of the public sector have much to do with the deterioration of the Tanzanian economy, the potential contribution of an efficient public sector to Tanzania's recovery is high. Indeed, the perspective of the PER is that improving public sector efficlency is critical to the success of the recovery program. Without euach gains, the ERP will fail. 5.2 The second point is that the public expenditure strategy has many elements. Some of them the Government has begun moving on -- indeed has made significant progress. Others remain to be acted upon. The issue here is that the elements in the strategy fit together. Progress in one area complements another. Equally, the reverse is true: failure to address a problem in one area may vitiate progress in another. For example, there is no point in undergoing the social and political pain of retrenchment if it is not accompanied by steps to improve establishment management and link it more closely with budgeting. 5.3 The third point is that the process of establishing a public expenditure strategy is as important as the end product itself. An in depth review of departmental programs with clear resource guidelines replacing mandated but unattainable targets is valuable as a planning discipline in addition to any beneficial changes that result from it. 5.4 The fourth point follows from the preceding three -- namely, that it is important that the actors involved are fully informed about the process and its purpose. This applies not just to policy-makers - whose role is critical - but also to all those affected by the process, so that they understand how the changes they experience fit into a larger picture and have meaning. It is also important that donors understand the public expenditure strategy, so that their contributions are consistent with it, and that if called upon, they can provide direct support to the process itself. 5.5 This chapter, therefore, sets out what the PER mission considers the main eleuients in the public expenditure strategy, how they fit together, and what processes must be set in t-ain to achieve it. It concludes with a budget scenario for 1993/94. - 178 - Main Elements in Public Expenditure Strategy 5.6 There are seven main elements in the public expenditure strategy, listed belows (a) Financial Framework (i) Medium-term projection of the foreign and domestic resources likely to be available for the Recurrent Budget and the Development Budget; (ii) Estimation of likely demands on resources by debt servicing, salaries, Ministerial supply, and subventions to local government and parastatals; (iii) Setting of multi-year Ministerial Recurrent Budget ceilings; (b) Review of Sector Programs Review by ministries and agencies of their programs in the light of priorities and the resource ceilings of the financial framework. (c) Review of Staffing A parallel review by ministries and agencies of their staffing levels in the light of (b) and overall guidelines set by MFEAP and MMLD on staff reduction. (d) Sector Strategy Papers The preparation by ministries of sector strategy papers summarizing their priority programs in the light of the program and staffing reviews described above. (e) Institutional Strengthening Action to strengthen the Government's capacity to manage the public expenditure strategy and the ERP generally, in the areas of: (i) Aid Coordination, Planning and Budgeting; (ii) Establishment control; (f) Supporting Action Supporting action in the fields of: (i) Domestic revenue mobilization; - 179 - (ii) Local Government strengthening; (iii) Parastatal reform. (iv) Debt management (v) Overall management of ERP. (g) Building Support for the Strategy Steps to ensure the process is understood by policy makers and participants, and fully supported by: (i) Cabinet and Party; (ii) Public service. Financial Framework 5.7 The element that has been most conspicuously lacking in the policy formulation process in Tanzania is a realistic financial framework within which Government programs can be planned. This requirement holds both for the expansion of programs, the normal focus of a Five Year Plan, and the restructuring of programs, the concern of a PER. It is necessary to project forward the budget for the next five years to provide a framework for civil service reform, the recasting of ministerial programs, planning of the Development Budget, and for aid management. This implies preparing the following projections: (a) Domestic Revenues Projection of domestic revenue flows, on the assumption that Tanzania is able to achieve an average annual GDP growth of about 4-5 percent under the ERP. On the basis that improvements are made to the tax system and collection efficiency rises, the assumption used by the PER is that domestic revenues should grow by about 5 percent per annum in real terms. The Government should make its own estimates of revenue growth, bearing in mind that the higher the figure, the more the public expenditure strategy will be vulnerable to upset, and the greater the likelihood the overcommitment of resources will continue. (b) Aid Flows Projection of future aid flows. The presumption that donors will at minimum maintain aid flows in real terms, or slightly increase them, assuming appropriate recovery policies are followed, is a reasonable hypothesis in the light the three CGs held since the ERP was launched. As a - 180 - working assumption, the present 50/50 split of commodity/project aid should be retained. (c) Government Debt-Servicing Projection of future Government debt servicing, taking into account existing external loan commitments, likely future loan commitments, and domestic debt. These magnitudes are broadly known or can be estimated, but assumptions will need to be made on domestic inflation, the further adjustment of the exchange rate, and the terms of future debt rescheduling. Consolidated Fund Services (CFS) already absorb 28 percent of the Recurrent Budget. It is necessary to know whether this share will grow and by how much. (d) Recurrent Subventions A further 27 percent is absorbed by subventions, principally to local government and to parastatals, either in the form of reimbursements to banks which have lent under Government guarantee, or as part of financial restructuring. As Chapter 3, Section I indicates, although over the long run the aim is to reduce parastatal transfers, in the short to medium-term they may increase. (e) Ministerial and Regional Supply In the first iteration, allocations should be projected on a constant shares basis, thereafter shares should be adjusted in the light of ERP priorities, as presently perceived, for example: (i) increased allocation to maintenance implies a larger share for MCW, as does the rehabilitation of agricultural research and extension to MALD. (ii) reduction in shares of Other Government Services. (f) Development Budget Projection of Development Budget expenditure in the light of aid flows, domestic resources, requirements to complete existing projects, termination of others, and provision for new projects in priority rehabilitation areas (e.g. roads). (g) Overall Deficit Containment of the overall deficit, consistent with the Government's fiscal and monetary policy, as set out in the Policy Framework Paper, and the longer term, need to - 181 - improve the savings ratio and the private sector's access to resources. 5.8 A key function of the medium-term financial framework is to indicate to ministries and departments the resource envelope they must operate within. The conclusion from the projection exercise is likely to be a moderate increase in domestic revenues, a relative decline in debt- servicing and, hopefully, reduced need for contingency allocations. This will give the Government a little more flexibility and a chance to improve reol pay and to reverse the deterioration in key programs. B"^' for most spending ministries this means the continuation of a highly %.cnstrained budgetary environment for several years. Thus most ministries will have to keep their program expansion plans on the shelf and concentrate on rehabilitation. 5.9 The purpose of the framework is thus to work through some of the mechanical changes impacting on the budget (e.g. exchange rate) to plan ahead for areas of predicted heavier expenditure, to establish the margins within which allocations to line ministries can be increased, and, finally, to give legitimacy to the second stage of the public expenditure strategy. This is necessary because what is involved is essentially a top down process based on availabilities, in contrast to the largely needs approach that has driven the Tanzanian budget during most of the past two decades, and been the main reason for the overcommitment of public expenditures. Review of Departmental Programs 5.10 The second stage in implementing the public expenditure strategy is for ministries to review their departmental programs. In many respects, this process is already underway. A number of ministries have begun reviewing their programs and how they should be delivered, concluding that there is a need for greater cost recovery and community involvement 1/ They should be encouraged to complete the process and prepare a policy paper on the priorities to be attached to programs and how activities in their respective sectors should be carried out, within a framework of limited resources. The BMDP encouraged all ministries to review the cost and priority of existing program as part of its study of expenditure commitments. However, the response by ministries was uneven and incomplete. 5.11 It is important that the rules governing the review be firmly established at the outset. It could be argued that the process described is the same as that carried out during the preparation of the Five Year Plan -- a macro framework accompanied by sector programs. But the problem with past planning exercises has been that: 1/ The BMDP encouraged all ministries to review the cost and priority of existing programs as part of its study of expenditure commitments. But the response by ministries was disappointing. - 182 - * (i) The macro framework tended to be too optimistic, and was not effectively translated into a financial framework; (ii) Sector programs have been profoundly expansionary, driven by ministries responding to Party objectives and quantitative targets. Furthermore, departments have seen both the plan and the budget as a bidding process for additional resources. 5.12 The PER's proposal is different: a process not of planning for expansion but planning for more effective utilization of existing resources. It is therefore quite different in its orientation. The starting point of the exercise is the financial framework, expressed in terms of a medium-term estimate of the likely resources available for Ministerial Supply, net of CPS, salary increases and subventions to parastatals and local Government. Apart from some variation in ministry shares, this is likely to mean little effective increase on present levels. For the exercise to work, ministries have to be formally released from targets laid down in documents such as a 20 Year Perspective Plan and other policy papers that specify quantitative program objectives. However desirable, such quantitative targets have for the most part been shown to be unattainable, and several have been quietly dropped or reformulated. It is necessary also to make clear to ministries that while the social objectives that have guided Tanzania for the past two decades remain unchanged, ministries are free - and, indeed, encouraged to re-examine the means by which they are to be obtained. 5.13 The review should encompass the following aspects of departmental programs: (a) Standard Costs Ministries should estimate what is required to operate services at a satisfactory funding level. The PER found that few ministries had up-to-date estimates of the resources needed to carry-out a function properly, but many believed that actual levels were about one-third required levels. Ministries should require their departments to estimate standard costs, relate them to actual provision, and then make a judgement on the effectiveness of service delivery at the level implied by the financial framework. The purpose of this is to oblige departments to consider the trade off between resources, effectiveness of delivery and scale of coverage. In some cases, it may be found that while actual funding is far below the required level, staff have managed to maintain relatively high service levels. In other cases, it will be found that the reduced funding has caused effective service delivery to fall to zero. (b) Setting of Priorities - 183 Once ministries have assessed standard costs and made assessments of the effectiveness of services, they should be required to set priorities between programs, in the light of the available resources. Generally speaking, it will be better to concentrate resources on a limited priority program than to maintain the thin spread of resources across the field. As well as indicating the programs to receive more resources, those that will be scaled back or closed down should also be identified. (c) Cost Recovery Ministries should be encouraged to develop their ideas on cost recovery (as some are now doing). To give departments the incentive to pursue cost recovery, some ground rules must be set. It is important that cost recovery should not mean that the resources raised thereby are dissipated in general revenue, leaving the ministry's budget allocation unchanged. Either: (i) the revenues collected will be retained in a revolving fund close to the point of collection, or; (ii) the amounts collected will be considered additional to the ministry's budget allocation in future years. 'Whichever method is chosen will depend on the situation in which costs are being recovered, the nature of the activity, and the department's record of expenditure control and accountability. (d) Directly Funded Parastatals Parastatals directly funded by ministries (e.g. training establishments, research institutes and other agencies carrying out semi-governmental functions) should also be included in the review process. Some have performed creditably well under difficult circumstances. Others are overstaffed and unproductive at their existing levels of funding and would not necessarily improve with more. All are claimants for additional Governmental resources, which are unlikely to be forthcoming. Ministries should therefore review the parastatals under their purview, in the following sequence: (i) Determine first the importance of these parastatals to the ministry's central objectives, and the share of the ministry's aggregate budget that can be allocated to them: (ii) Review next the relative importance of individual parastatals and what their functions should be, to - 184 - determine how much of the ministry's finite resources should be allocated to them; (iii) Ask the parastatal's management to prepare a budget, operations and staffing plan consistent with the resources available and the priorities chosen; (iv) Close parastatals where the activity is of marginal importance and performance poor. (e) Development Program The review of ministerial programs should be extended to the Development Budget. Although the PIP was reviewed at the start of the ERP, further appraisal is necessary, both to take stock of the projects that were permitted to continue, and to ensure that new projects are consistent with the priority recurrent programs of ministries. In the case of the existing stock of projects, it is clear that there exist both slow spending projects with little prospects of completion, and projects of questionable economic value (see, for example, Chapter 4, Section B) which discusses MALD's capital program). These need to be terminated, and the resources, if possible, transferred to higher priority uses. Secondly, criteria more specific than those laid down for the ERP need to be established for the inclusion of new projects. Generally speaking, this means the preparation of projects that address the rehabilitation requirements of the key recurrent programs, as defined in the program review. The Development Budget, as it were, would take its cue from the reshaping of the Recurrent Budget. 5.14 As part of the medium-term financial framework ministerial ceilings should be set for the Development Budget as well as the Recurrent Budget. This will not be easy - the rehabilitation requirements of different programs vary greatly, and until recurrent priorities have been better defined, it will be difficult to set capital ceilings with any degree of precision. However, MFEAP will need to maintain a clear picture of priority areas for rehabilitation and establish limits for ministry capital programs. In addition, it will have to establish, as part of its fiscal strategy, o0erall limits for the Development Budget, in the context of likely flows of external assistance and the need to keep appropriate balance between import support and project aid. Review of Staffing Levels 5.15 In parallel with their review of departmental programs, ministries will need to carry out a review of staffing levels. Although the Government has, since the census, eliminated a significant number of ghost workers from Central and Local Government payrolls, there is still - 185 _ substantial overstaffing. This is measured in terms of the number of people needed to carry out a task and in terms of the Government's ability, now and in the future, to support staff with materials and equipment, and to pay realistic salaries. Ministries, as part of the review process should consider the extent to which stsffing levels can be reduced. This should be done by either (i) elimination of functions, or, (ii) reduction in the numbers of staff needed to carry out functions. To encourage ministries to downsize staff, it could be made clear that part of the funds saved by staff reductions would not go back into the central pool, but be retained by the ministry and be available for increasing that ministry's supply vote. As part of the review process, each agency should prepare a staffing plan, comprisings (i) initial staff reductions, and, (ii) medium- term staffing levels. Only in exceptional cases will this imply increases. Because of the disruptive effect of staff reductions, the process of preparing and executing staff reduct!on plans should be carried out within a well-defined timeframe. This rule; out elaborate job evaluation exercises. 5.16 Ministries should no longer feel obligated to absorb all the output from training establishments. Indeed, part of the overall review process should be a scrutiny of training establishments. The PER did not have the time to review training establishments in depth. But in the course of discussions with agencies it concluded that the skilled manpower problem in Tanzania is not so much a question of insufficient training places, but the uneven performance of training establishments and a deficient work environment, in the form of inadequate pay, insufficient supporting expenditures and the abandonment of normal operating procedures. Ministries reviewing training establishments should not assume that training places, as a matter of course, will be expanded, or even existing levels maintained. Rather, the question should be asked what is the optimum level in relation to the revised staffing of a ministry and its likely evolution, and the ministry's ability to fund the training establishment at a satisfactory level of effectiveness. 5.17 Finally, it will be necessary to change the orientation of many training establishments. A public service that is downsizing and for the foreseeable future plans to devote the bulk of any extra resources to correcting salary and supply deficiencies, needs to shift its main training effort from pre-service to in-service courses. Downsizing is not an end in itself, but a necessary precondition for upgrading the performance and skills of those who remain in the public service. Institutional Strengthening 5.18 The process of program and staffing review needs to be supported by ;.'nstitutional strengthening in three areas: (i) Aid coordination, planning and budgeting, (ii) Establishment management, and (iii) Overall economic policy management. :1 _ 186 - (a) Aid Coordination, Planning and Budgeting In Chapter 3, Section I, a number of recommendations are made for strengthening the planning and management of public expenditures. These emphasize the importance of forward planning of expenditures and placing recurrent budget issues at the centre of the planning process. Specifically, the key recommendations are: (i) Introducing a multi-year perspective to the setting of recurrent budget ceilings. The first step in this would be the establishment of the medium-term financial framework outlined above. Thereafter, it would be rolled over on an annual basis; (ii) Extending the Investment Program Review (IPR) to cover a three year rolling PIP, expanding the format of the IPR to show previous expenditure on the project and the balance of funding required after the timeframe of the IPR to complete the project; (iii) Decentralizing the planning and management of the budget to give spending agencies greater flexibility in (and thus responsibility for) the composition of their programs, within the context of firm and unambiguous expenditure ceilings; (iv) Integrating the Recurrent and Development Budget Departments into a single Budget Department, to facilitate the joint review of recurrent and capital spending proposals; (v) The establishment of more effective links between the aid coordination units of MFEAP and its planning and budgeting units, so that aid coordination can be driven by local rather than donor derived programs. The Budget Management Development Program (BMDP) is seeking to strengthen recurrent budgeting along the lines indicated above. This work is important and needs to be integrated with similar action on the Development Budget. Improved aid coordination is important in several respectst (i) to ensure that balance between project aid and import support is closely monitored, and shaped according to the requirements of the OGL facility, the financing of the Recurrent Budget by counterpart funds, and the financing of rehabilitation programs; (ii) to ensure that project aid is distributed according to the Government's perception of sector rehabilitation priorities - a key role for DEVPLAN; and (iii), to ensure that once donor funds are committed in principle, the commitment is programmed and drawn down with -187 - principle, the commitment is programmed and drawn down with maximum dispatch. (b) Establishment Management Past attempts to reduce overstaffing in the public service failed, in part, because insufficient was done to strengthen the capacity of the Ministry of Manpower and Labor Development (MMLD) to control and manage establishments. This task is critical, not just because of the need to control numbers, but because a strong ministry is required to preside over the downsizing of the public service, and the restoration of pay, morale, productivity and discipline. The PER itself did not have the time to study these aspects in sufficient depth to make specific recommendations. Rather, it is hoped that a program of measures will be developed in the context of UNDP assistance to civil service reform. The principal elements in a program to strengthen establishment management are: (i) Improved public service statistics and the validation of payroll data, the basis for which has been laid by the census; (ii) Better integration of establishment management with the budget process; (iii) Creation of a capacity within MMLD to plan and supervise, in conjunction with MFEAP and PMO, the process of pay and differentials adjustment; (iv) Reestablishment of career structures, schemes of service, annual performance reports, training plans and disciplinary procedures. On paper these still exist, but have largely fallen into disuse. They need to be resurrected and updated. (v) Measures to strengthen personnel management in line ministries, as part of a larger process of improving departmental management, through greater delegation, responsibility and accountability. To reinforce the link between staffing levels and the budget, MFEAP and MMLD should consider publishing each ministry's approved establishment alongside its budget allocation in the Estimates, together with a summary table showing ministry totals for the current and two previous years. - 188 - SupRorting Action in Related Fields 1 5.19 To complement the steps being taken directly by ministries on their program priorities and staffing levels, and on expenditure management generally, there needs to be supporting action in the following areas. (a) Domestic Resource Mobilization A number of recommendations are made in the PER on strengthening Government revenues. Many of these have been made elsewhere, in Bank and Fund reports, and the Government itself has launched a drive to improve collections. It is essential that these programs be prosecuted vigorously. The most important are: (i) Completing the simplification of the tariff and sales tax structure and the reduction of exemption; (ii) Increasing petroleum product taxes; (iii) Moving progressively to a current year basis for company income tax; (iv) Elimination of taxes and fees that are difficult to collect and yield little revenue, and regular upward adjustment, in line with inflation, of those considered to have economic and financial relevance. While these measures should make the tax system more elastic, a cautious approach to future revenues shoulc ve adopted by budget planners, incorporating collection efficiency gains only when there is solid evidence that they are being realized. (b) Local Government Although the PER makes some recommendations on strengthening councils' revenues, they are indicative only, and it is clear that a local government financing gap will exist for many years to come - perhaps indefinitely for rural councils. The implication for the public expenditure strategy are: (i) The need for an in-depth review of local government finances, programs and manpower. (ii) Subjection of local government to a review of priorities, programs and staffing levels similar to that carried out by central government. This should relieve councils of their peripheral responsibilities; - 189 - (iii) As numbers are reduced, action to improve the real pay, decompress differentials and restore the morale of local government staff; (iv) Continuation of significant central government transfers to councils combived with incentives to maximize their own revenue efforts, while at the same time compensating for the weak revenue raising capability of councils in the poorest regions. Because of the hiatus in local government between 1975 and 1983, a significant amount of training of council staff will be needed if operating procedures are to be strengthened. At the same time, just as with central government, the trade off between numbers employed and the ability to offer better pay will have to be faced. An important initial step has already been taken with the elimination of ghost workers from councLl payrolls, but it is clear that the process will have '-o be taken further, if staffing numbers are to be brought more into line with local and central governments ability to adequately pay and support staff. Tk roles of the Ministry of Local Government and Cooperative Development and Marketing, and the Local Government Service Commission will clearly be crucial in this respect. tc) Parastatals Although current transfers to parastatals (otl%er than those directly funded by the Government) have ended, the public expenditure strategy will have to take account of the restructuring of parastatals for wome years to come, in the form of: (i) assumption of government lending guarantees; (ii) transfers to restructure the balance sheets of overborrowed but necessary to retain parastatals; and (iii) funding to DFCs for medium-term on-lending to viable enterprises and direct on-lending for the rehabilitation of utilities. The magnitude of these claims on the government budget will become clearer as the restructuring of the industrial sector proceeds, and the Government strives to put the utility parastatals on a sounder financial footing, strengthens the balance sheets of the financial sector, and scales down and modifies the role of the marketing boards. Two aspects of this process are important for the public expenditure strategy. Ci) The need to make a preliminary overall assessment of the likely call on government budget resources from the major utility, industrial, marketing board and financial sector parastatals undergoing resiructuring. This assessment, which can be progressively refined as - 190 - more information becomes available, is essential both for the financial framework, so that the necessary provision can be planned for, and for aid coordination purposes so that the required external support can be programmed for those entities viewed as economically viable and deserving of rehabilitation; (ii) The continuation of macroeconomic and other policies aimed at reducing parastatal protection and making their operating environment more competitive. (d) Debt Management Since debt servicing has become such a major component of the recurrent budget, and will increase further in shilling terms as the currency adjustment continues, it is important that there be accurate forward projections of the Government's debt servicing schedule, and a strategy that ensures that key foreign exchange payments are made on time, lest critical aid programs are disrupted. As statutorv expenditure, debt servicing is a prior claim on the Consolidated Ft"d, and thus accurate programming of the residual among the spending ministries . critically dependent on reliable debt servicing projections being available to the Government's financial planners. In recent yer:s the Government and tne Bank of Tanzania have invested resources in improving the monitoring country's extezual debt with the help of the Bank and othet agencies. These efforts are important, and need to be continued in support of the financie' framework. (e) Management of the ERP The final major area of importance to the public expenditure strategy is the overall management of the ERP and its adjustment policies. The improvement in domestic revenues and in turn the Government's prospects for progressively restructuring public finances depends critically on keeping the sanzanian economy on its present growth path. This in turn depends on the implementation of a wide ranging agenda of policy and institutional reform, both at the macroeconomic and at the sector level. Exchange rate policy, financial sector reform and credit policy, agricultural marketing reform, industrial restructuring and transport sector rehabilitation all have a bearing on the revenues and expenditures of Government, and thus how effectively a public expenditure strategy can be devised and implemented. - 191 - Building Support for the Strateg- 5.20 If the restructuring of public expenditures is to be carried out successfully and be durable, there needs ta, be full political support from ministers and understanding of the purpose and processes of program and staff reviews by the public service at large. While MFSAP and MMLD as resource allocation ministries are the linchpins of the process, they cannot be expected to bear the full weight of the negative reaction6 that are likely to be ge1erated. There needs to be full political backing and all ministries and departments need to be involved in its implementation. The approach suggested by the PER is as followss (a) After completing the financial framework, MFEAP and HMMD would submit to Cabinet a paper summarizing: (i) the current effectiveness of programs and public service productivity, (ii) medium-term public resources position, and (iii) the implications for Government programs and staffing if their effectiveness is to be improved. The purpose of the paper would be twofold: Firstly, to demonstrate that incrementalism will not yield the desired results, and that more drastic restructuring is required; secondly, to outline the next steps and obtain a mandate to proceed; (b) Once Cabinet backing had been obtained (and possibly debate by the National Executive of the Party as well), MEEAP, MMLD and PMO would prepare more detailed projections of budget resources, and submit their recommendations on ministerial shares of total supply, together with proposals for the restoration of sala;-4es, based on MFEAP's revenue projections and interpretation of ERP prior. ^es. Ministers would be free _, argue for an increase in their allocation, but this wa.ld be accepted only if Cabinet collectively agreed to reduce another ministry's share; (c) Once ministerial shares had been agreed, MFEAP would translate them into prospective allocations, and ministries and departments would be directed to review their programs in the light of expenditure ceilings, prepare standard costs, assess the implications, and make recommendations on program priorities. At the same time HMLD would issue guidelines on how the review of staffing should be carried out. After completing the review, ministries would prepare a paper on the policy and program implications; (d) After checking by MFEAP, the program and policy papers would be presented to Cabinet for approval. 5.21 An Eejsential feature of the process is decentralization, forcing ministries to review what it is they are trying to achieve within a hard budget framework. Previous attempts by MFEAP to get ministries to - 192 - rationalise their budgets have mostly failed. Ministries have been unwilling to face the consequences of their resource position, and refused to trim their programs, obliging MFEAP each year to cut requests arbitrarily. Two steps are necessary to change the process from soft to hard budgeting: (i) the endorsement by Cabinet of a realistic financial framework, and (ii), the suspension of quantitative program targets. 5.22 One final element is necessary if the process if to be acceptable: the establishment of transparent and equitable separation processes, and fair compensation for the retrenched. Further work on compensation terms is necessary. But it is clear that the principal element in the compensation package will need to be a financial grant, since the Government's capacity to provide training for work outside the public sector or to provide alternative employment is very limited. Compensation may need to be on generous terms to minimize social hardship and the risk of a political backlash. Since the Government's ability to fund compensation is very limited, the donor community should be requested to help. Scenarios for a Restructured Budget 5.23 To illustrate what a medium term financial framework could imply, the PER calculated some budget restructuring scenarios for the year 1993194, five years hence. Key assumptions underlying these projections are: (a) Continued GDP growth of between 4 and 5 percent per annum. (b) Substantial restructuring of the parastatal sector between now and 1993194. (c) Improved domestic revenues through tax reform, cost recovery and increased collection efficiency. (d) Restoration of urban council finances through the development of property and other taxes, to the point where urban councils no longer require recurrent budget transfers. Ie) A public service productivity package, comprising: a 30 percent average reduction in central and local government staffing levels, a trebling of monetary pay, adjustment of income tax bands, reduction in fringe benefits and an increase in supporting expenditures per person in post of 50 percent. 5.24 The GDP growth rate is consistent with the macroeconomic projections outlined in Chapter 2, and should be attainable provided external conditions do not become seriously adverse and the Government moves ahead vigorously with its reform program, particularly in the areas of agricultural marketing and trade liberalization. The latter are also critical to resolving the fiscal burden of the parastatal sector. The assumption is made that for the next two or three years there may be heavy - 193 - calls on the budget to make good parastatal borrowing guarantees and to restructure the balance sheets, through equity injections and debt write- offs, of those parastatals the Government wishes to retain and strengthen for strategic reasons. By 1993/94 this process should be largely completed. However, provision must still be made in MFEAP's bodget for phased bank guarantee payments and the funding of financial intermediaries which, in future, should be the primary source of medium-term finance for viable public enterprises. 5.25 Improved domestic revenues through tax reform, cost recovery and increased collec:ion efficiency has already begun, the 1988/89 budget anticipating a marked improvement on earlier levels. It will be important to monitor collections, pursue vigorously present programs to strengthen the Customs and Income Tax Departments, und to carry out tax and tariff reform measures that simplify the rate structure and make revenues easier to collect. Cost recovery will also play a role in raising domestic revenues, but the scope for doing so is difficult to predict, and the feasibility will have to be determined sector by sector. 5.26 Full restcration of urban council finances is a controversial assumption, not for lack of Government intent or an urban revenue base, but because of the weak management and administrative capacity of many councils. The proposed Local Government study should clarify steps needed to restore municipal finances and assess how quickly this can be done. 5.27 The public service productivity package is at one and the same time the most important and the most controversial of the budget restructuring assumptions. It builds on the analysis carried out by the PER on the cost of restoring wages and salaries to an acceptable level and decompressing differentials. The most controversial element is the average reduction in central and local government staffing of 30 percent. For the sake of simplicity, the scenario assumes the cuts will be across the board. In practice, they are likely to be differentiated: the degree of overstaffing is not uniform, and the proposed curtailment of functions will mean that some ministries will need to shed more staff than others. A 30 percent retrenchment has been chosen for two reasons, chiefly. Firstly, because it approximates the extent to which establishment growth has outrun the revenue base. Secondly, because cuts of this magnitude are indicated by the arithmetic of pay increases and the rebalancing of Other Charges (it is cheaper to equip a scaled dcwn public service). 5.28 The results of this scenario exercise, which should be regarded as one selection from a range of possible outcomes, are shown in Charts 5, 6 and 7. (a) Chart 5 shows the structure of the budget in 1993/94 under the assumption that the overall budget deficit is reduced from 8.9 percent of GDP to 6.8 percent. his continues the trend of deficit reduction of recent years and is consistent with the mediur-term fiscal perspective of the Government's Policy Framework Paper. Compared with 1988/89 - 194 - Chait 5 TANIZANIA RESTRUClURED BUDGET SCENARIO - 1993/94 Expend#Ure Reenue/Rnonclng (1993/94) (1993/94) 40 [ I ~~~~~~~~~~~~~LOOaM013%) DevenoWn Exende Grants (3,1%) (&4$) 30 _ Oomm O __________ ~(112%) tO1l(1) Debt omw Rff44s Astance Corokited ( ) (48) hr,d (82%) =OW Interestro (29%) (317%) AOther L (09%) Grants(599%) & ExC (98$) Cartfingent Dnf Ltbd5II (1.9S) (234S) (189%) Personal 10 ErolurrIents (4.5%) Irco Tax O0mw (6.6$) & Fees (48%) Pelo oSuplry(I %) _____ _____ Conpamd wih the 1988/89 Budget. Scenario b0utww sngmen Oamstc Rsveni hew Mhst suppv o atloaos pacto 0 Psnal Erourm torD Se icrl ancd 0 rele naller D _wt SudWet. huorr budg tol (DonetR ewu ToTal EtpenituelsDebt Redempn) s6.8 percentdat GOP. W. rd BaIt-44171:4 - 195 - (See Chart 1) domestic revenues increase from 20.8 percent of measured GDP to 23.4 percent, through improved import duty and income tax collections and greater cost recovery (via a doubling of Other Taxes and Fees). On the expenditure side, Ministerial Supply increases from 15.9 percent of GDP to 18.9 percent due to an increase in Personal Emoluments and Grants (mainly to district councils). The substantive completion of parastatal restructuring, however, permits Contractual and Contingent Liabilities to be reduced. External debt servicing is expected to remain constant in foreign currency terms. Luwer average interest costs allow internal debt servicing to be reduced. However, the last coaponent of Consolidated Fund Services (shown in the Chart as 'Other" and which comprises State House and other non-debt related statutory expenditure) rises to accomuodate higher pension payments associated with pay increases and retrenchment. Development expenditures, the residual in this scenario, fall as a share of GDP in order to meet the overall budget deficit target. To match this, a substantial amount of the counterpart revenues from balance of payments aid is sterilised by the Bank of Tanzania. (b) Chart 6 shows how the composition of the Recurrent Budget might change. Local Government would become the ministry with the largest program, due to increased allocations to district councils. The Ministry of Finance's share would be lower, due to the diminished need for parastatal financing, and the share of the Ministry of Foreign Affairs would be sharply reduced, necessitating a drastic curtailment of overseas representation. Funds released would be used to augment the shares of the Ministry of Communication and Works and the Ministry of Agriculture. The share of Defense would be frozen at its current level, and Home Affairs share, of necessity, would rise because of the large number of staff on its payroll (though this could be reviewed in a subsequent iteration). Through changes in regional and local government allocations, consolidated sector spending on education and health would rise from 18.5 percent to 22.0 percent and from 11.1 percent to 14.0 percent, respectively. However, these latter increases are needed primarily for higher salaries and supporting expenditures to adequately fund existing schools, hospitals and clinics, and do not in themselves permit an expansion of the public education and health systems. The latter would require a substantial reduction in unit costs, greater cost recovery and/or a reduction in other sectors' shares. (c) Chart 7 compares recommended Development Budget shares in 1993194 with 1988189. The main changes are the curtailment of MALD expenditures through the termination of investments in state farms and large scale irrigation, and the concentration of resources on rehabilitation of research and extension and other smallholder services. Direct public investment in mining and industry is terminated. - 196 _ Chat 6 TANZWIA BUOGET RESTRUCTURING: MINISTRY SHARES OF RECURREN WDGET TOTAL SUPPLY Sifts Rutwxuctzn Af lterR.uucW"n (1906/69) (1966/69) 100 RaX . R (66%) aOtls (56%) (ol/wH" 26%.WohsO9%) (oIwl401h132%) 90 , 11W (70%) 0Ote (75%) PmeM,inW& :23%S Pime M ritu (21%) hot S9e (23%) Not S&v* (25%) 80 . A c.ttr (33%) FamA^ (3.0%) Corwnturiicoatin Hon-a (54%) &Woli (46%) FosgnAftw (48%) A0cuituf (66%) Heat (48%) Eeucation (70%) Edu"fcatin (83%) ' 0 mar _ Aftn (89%) ~~~~5O ~~~~~~~Co"wunncatoxs a .o8, (83%) 0oeve4 (119OS) 40 . MMAffov5 ( 6%) 30 G (152) Defense fl9%) o/ Eclucoat (102%) Hel (37%) 20 LoCta GCWnftmnt (224%) o/wEaucotor (150%) to firance (200%) moto (54%) SeCta re d ToW SAY (S) 8/89 93194 (i) EOuca 185 220 (2) iell 111 140 (3)Waok. &5 83 Wat B*- 441 71.6 - 197 - Resources thereby released are used to expand the ehabilitation programs of the Ministry of Works and Communications, the Ministry of Local Government (mainly for urban programs), and the Ministries of Education and Health. 5.29 The budget scenario described above is a first attempt to translate the analysis and recommendations of the PER into a medium term financial framework for the budget. The next step is for the Government to review the assumptions and judgements underlying the scenario and to carry out its own framework calculations, along the lines described in the first part of this section. The Government's framework may not conform exactly with the PER, but, if the desired objectives are to be attained, it would need to reflect the direction and magnitude of change indicated by the PER. In this connection, four additional points are made. (a) The Goverment will need to consider closely all aspects of the staff reduction and pay adjustment strategy. A fiscally satisfactory scenario (in appearance, not dissimilar from the foregoing) could be worked out with somewhat less rigorous retrencbment assumptions and smaller pay increases. Alternatively, the public service could be redefined more narrowly, by excluding goups such as teachers, sharing the costs of their salaries with communities, or local government workers below the grades for which the LGSC is responsible. However, since these groups perform public functions, sidestepping issues of pay and staffing levels in this way would do little to resolve the fundamental problems of motivation and productivity. Overall, the more cautiously the Government acts to curtail functions and reduce staffing levels, the greater the risk that the public service will remain overstaffed, underpaid and engaged in too many activities, perpetually locked in its low productivity trap. (b) Special attention should be paid to the scale of Government expenditures in the economy. Generally speaking, the Government should aim to reduce the present overall budget deficit (currantly estimated at 8.9 percent of GDP) over the longer run. This is required in order to ensure sufficient resources for the private sector and to strike a better balance between the public and the private sector, moving away from the heavy reliance on public sector intervention in the economy. (c) A budget strategy that temporarily deviated from the trend of declining fiscal deficits could be formulated. This would be possible if, as projected, balance of payments support exceeds the financing requirements implied by the scenario depicted in Chart 5. Such a strategy could take the form of maintaining the present deficit/GDP ratio for a period to permit an enlarged Development Budget, with the additional spending concentrated on infrastructure rehabilitation. In such a case, the share of the Ministry of Communications and Works would be higher than the 21 percent projected in Chart 7. Accompanying this strategy, - 198 - Chart 7 TANZANIA BUDGET RESTRUCTURING: MINISTRY SHARES OF DEVELOPMEI.T WDGIT EXPENDITURE Before Restructudng Aer Resttictudng (4986/69) (1988/89) 100 regons (e7%) Reotom (65%) 90lo _ Otter (65%) O0er (6t5%) _ _ _OCMp Dev (10%) a DO.Car ev (t 8% ind&Trooe (1 0%) Eet3D& Not S (25%) tEducation (31t%) LonlLX Not Resources 80 Defense & Notional & Tourism (35%) Service (34%) Loras. Not Resources hriace (SO%) &Tounsm (35%) 70 MediH h (40%) Woaer (55%) Watert (55%) kEucation (60%) [noiJSrv & 60 - Trade :51%) -' 60 ___ _ _ _ _ _ _ _ _ _ Healt (70%) , c~~~~Fnance (7 2SI) inane .) . __Agnculture (80%) LLOCOi Gov (83%) Energv & Minerals (120%) 40_ Comttun ceon & works (100%) 30 - LOCol GOvt (14 5%) o/wUrton (100%) Energy & Mire= (164%) 20- Comrmunication 10 & Wadcs (21 0%) AQtCultute (165%) 0t Wold Sank - 44171 7 - 199 - howevev, would be tiohter credit ceilings compared with a scenario of reducing fiscal deficits. Cd) Alternatively, it might be considered that, within the framework of a declining overall deficit, the share of the Development Budget might be increased and that of the Recurrent Budget reduced. This would be a prudent scenario if the Government had reservations about domestic revenue growth. However, for this to work, even more vigorous action on recurrent expenditure restructuring would be needed. 5.30 Alternative scenarios need to be judged in the larger context of the Government's strategy for economic recovery and how the level and composition of public expenditures contribute to economic, social and political objectives. Regarding the scale of Government expenditures, it may be noted that reducing the deficit to 6.8 percent of GDP by 1993194 would not necessarily lower the share of Government expenditure in GDP. In the 1988189 Budget, total expenditure, net of debt redemption is estimated at 29.7 percent of GDP. In the scenario depicted in Chart 5, it would rise slightly to 30.2 percent. With an unchanged overall deficit, it would increase to 32.3 percent of GDP. 5.31 Furthermore, considering the alternative of an unchanged budget deficit and a larger Development Budget as a viable option heightens the emphasis on two existing PER recommendations and adds a third one. They are: (a) A program of measures to strengthen the Government's capacity (at present insufficient) to manage a much larger infrastructure program. (b) The fundamental restructuring of Recurrent Budget priorities, expenditure levels and staffing. (c) An explicit policy to reduce the telative size of the Development Budget once the cycle of rehabilitation is complete. 5.32 Strengthening the Government's capacity to manage a much larger infrastructure program implies improvements in MCW contract management, an overhaul of the tender board system, and a higher level of efficiency by the multiplicity of agencies which impact on the day-to-day business of consultants and contractors. Better aid coordination is also needed, partly to monitor the crucial balance between Import support and project aid, and partly to ensure that the large amount of aid tied up in commitments to infrastructure rehabiliation projects is utilized at an acceptable rate. Otherwise, total aid disbursements to Tanzania could fall. 5.33 TL2 need, a fortiori, to carry out e fundamental restructuring of the Recu.:rent Budget arises because the justification for larger overall - 200 - public expenditures over the short-term is as a stepping stone towards more efficient discharge of core public sector responsibilities. More practically, donors might not be willing to finance an enlarged investment program if they felt fundamental problems of public sector efficiencies were not being tackled. Reduction of the st-re of the Development Budget after the cycle of rehabilitation has been completed would be prudent to avoid repeating the capitallrecurrent imbalances of the previous decade. By then, the PIP would be compored primarily of new projects, with incremental recurrent costs. i Development BudgetlTotal Supply ratio of 42 percent would probably not be sustainable in recurrent terms, particularly if it contained a significant number of social sector programs, as might be expected after a period of consolidation. 5.34 For all scenarios, it would be necessary to estimate the impact of higher overall Government expenditures on monetary conditions and the Government's targets for the balance of payments. The more that counterpart revenues from import support are applied to Government expenditures as opposed to being sterilized at the Bank of Tanzania, the tighter credit conditions will have to be for the private sector, possibly defeating the underlying purpose of accelerated infrastructure rehabilitation. These trade-offs need to be considered and a balance struck.
Группа Всемирного банка · Public Expenditure Review
Tanzania - Public expenditure review (Vol. 2 of 3) : Technical report
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