Tanzania - Petroleum Sector Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-5239-TA MEMORANDUM AND RECOMMENDATION !OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 33.7 MILLION TO THE UNITED REPUBLIC OF TANZANIA FOR A PETROLEUM SECTOR REHABILITATION PROJECT DECEMBER 13, 1990 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.  C ,ECY EQ2UAET Currency Unit - Tanzanian Shilling (TSh) US$1.00 = TSh 130.0 (at time of appraisal) US$1.00 = TSh 195.0 (October 1990) TSh1.O = US$0.0051 PETRCIPhL ABBRVTIOS MD ACRONM USED EC European Communities EIB European Investment Bank ERP - Economic Recovery Program ESAP Economic and Social Action Program GOT 2 Government of Tanzania IBRD International Bank for Reconstruction and Development IDA International Development Association IRTAC Industrial Rehabilitation and Trade Adjustment Credit LPG Liquified petroleum gas MRC = Multisector Rehabilitation Credit MWEM Ministry of Water, Energy and Minerals PSC Project Supervisory Committee PWG Project Working Group TAZARA - Tanzania Zambia Railway Authority TIB Tanzania Investment Bank TIPER 2 Tanzanian and Italian Refinery Company Ltd TPDC t Tanzania Petroleum Development Corporation TRC 2 Tanzania Railway Corporation VEIGHTS AND EEASURES 1 metric ton (mt) . 1,000 kilograms (kg), 7.19 barrels, 1,143 cubic meter 1 ton of oil equivalent (toe) - 10 million kilocalories (39.7 million Btu) 1 US gallon - 3.785 liters 1 liter - 0.26 US gallon Fiscal Year Government/TIB: July 1 - June 30 TPDCt January 1 - December 31 Oil Companies: January 1 - December 31 This report was prepareu by Zia Mian ('PTIE), task manager until completion of negotiations, T. S. Nayar, Principal Engineer (AFTIE) and Eric Daffern, Principal Financial Analyst (AF6IE) task manager since Mr. Mian's departure. Secretarial support was provided by Mrs. Joan Pandit and Mrs. Adriana Arriagada. Messrs. Franco Batzella and Kenneth Newcombe acted as lead advisors. Messrs. David Cook (AF6IE) and Stephen Denning (AF6DR) were the managing Division Chief and Country Director.  FOR OFFICIAL USE ONLY TANZANI* PETROLEUM SiECTOR REHABILITATION PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of the United Republic of Tanzania Beneficiar5es: Ministry of Water, Energy and Minerals (MWEM), petroleum marketing companies and Tanzania Petroleum Development Corporation (T'nCl Amount: SDR 33.7 million (US$44.0 million equivralent) Terms: Standard IDA terms, with 40 years' maturity On-lending Terms: A portion of the Credit will be used by MWEM for technical assistance, project management and studies (US$5 million). The balance of the proceeds would be on-lent to the project beneficiaries for a maximum term of 15 years (including a five-year grace period) at an interest rate of at least 9.5? per annum. The Tanzania Investment Bank will administer the on-lent funds on behalf of GOT, and receive a 1Z, one-time commission, and a 1I service fee to cover operational costs. Government will bear the credit risk and the beneficiaries will bear the foreign exchange risk. Financing Plan: US$ million equivalent IDA 44.0 DANIDA 2.5 EIB * 8.9 EC * 6.0 Govarrnment of Netherlands 6.5 OPEC Fund 6.1 TPDC/Government/Oil Companies 29.6 Total 103.6 * Availability of funds subject to ratification of Lome IV by member governments. If EIB financing is delayed the Borrower will secure financing from alternative sources. Economic Rate of Return: 26Z for the rehabilitation of the distribution system and 15? for the Tanga bulk petroleum terminal. Staff Appraisal Report: No. 8342-TA MLan: IBRD No. 22181 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.  MEMORAUDUM AND TION OT ME PUESIDENT OF THE INTERNATION&L DEVELOHENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A PETROLEUN SECTOR RHRBILITATION PROJECT 1. The following memorandum and recommendation on a proposed development credit to the United Republic of Tanzania for SDR 33.7 million (US$44 million equivalent) is submitted for approval. Part I of the document discusses the country's economic performance and development prospects, and the Bank Group's assistance strategy. Part II of the document describes the proposed credit. I. Country Policies and Bank Group Assistance Strategy Background 2. In the first six years after Tanzania achieved independence in 1961, its economic policy objectives stressed growth in per capita income and national self sufficiency in skilled manpower, relying mainly on market forces. The economy, which was predominantly dependent on subsistence agriculture and a few estate crops, registered rapid growth. Despite this growth, the country continued to depend on external financing, made little improvement in income distribution and did not diversify its economic structure. Disappointed with these results, in 1967 the Government reassessed its development objectives and strategies, introduced sweeping changes and embarked on a new epoch of economic management. 3. The new priorities, as enunciated in the Arusha Declaration, were directed towards establishing a socialist society, with emphasis to be given to broad-based rural development, self-reliance in development efforts, and the development of an educational system geared to the needs of the people. The Arusha Declaration emphasized that the State, with guidance from the Party, should play the leading role, especially in the reform and creation of appropriate institutions. This led in the late 19609 and early 1970s to the nationalization of large-scale industry, commerce and finance, the formation of Ujamaa (communal) villages, and the replacement of farmers' cooperatives with state-run crop marketing authorities responsible for all aspects of marketing of Tanzania's main export crops. The Government also embarked upon an ambitious program of industrialization based upon import substitution and the creation of heavy industries. 4. Despite the abrupt major institutional changes, Tanzania managed to achieve significant improvements in the social sectors during the 1960s and early 1970s. Tanzania's commitment to social sectors and longer term development issues attracted sizeable amounts of aid from the donor community. Significant results were achieved in the areas of education and health with well-publicized improvements in literacy, access to primary education, infant survival, and health care in general. By the end of the 1970s, the Government had made substantial progress towards achieving its social and equity objectives through the development of social services. The enrollment rate in primary schools increased from 32 percent in 1965 to  -2 almost 60 percent by 1975, life expectancy rose by nearly 5 years and access to safe watei. improved in both rural and urban areas. Significant reductions were registered in net income disparities through the tax structure and a dramatic compression in net salary ranges in the public sector. 5. The Economic Crisis. In the second half of the 1970s, however, the Tanzanian economy entered a period of economic decline from which it is only now beginning to recover. The overall downturn in the economy was caused in part by a series of external factors including successive droughts, the rapid increase in oil prices, the collapse of the East African Community and the war with Uganda. But the crisis drew attention to the policy and institutional weaknesses and the underlying distortions. These included, inter alia, an overvalued exchange rate, inadequate incentives and resources for the agricultural sector, a poorly devised and implemented industrialization strategy, excessive administrative controls over economic activity and the continued growth in the size of the public sector without due regard to the limited financial and administrative capacity. The Adjustment Process 6. Economic Survival Plans and the Structural Adiustment Program (1980-1982). In response to the rapidly deteriorating economic situation, the Gcvernment launched Economic Survival Plans in 1980 and 1981, and a Structural Adjustment Program (SAP) in 1982. However, these policy reform efforts were insufficient to reverse the situation. The adjustment of the exchange rate, for example, was insufficient to remove the overvaluation, and the increase in agricultural producer prices fell short of the prevailing rate of inflation. The 1984/85 budget, however, provided the first indication of a new pragmatism in the Government's economic management. The exchange rate was devalued by a third, parastatal subsidies were cut, an import liberalization program was initiated, and restrictions on the movement of grain were eased. Simultaneously, cooperatives (which had been abolished in 1976) were re-established and were assigued many of the responsibilities and assets of the abolished crop authorities. Positive responses to these measures encouraged the Government to consider a more comprehensive and systematic policy reform program. 7. The Economic Recuvery Program (ERP) 1986-b9. In mid-1986, following a review of the SAP experience in light of the disappointing performance of the economy, and after extensive consultations with the Bank and the IMF, the Government introduced a new Economic Recovery Program (ERP) aimed at remedying the defects of earlier policies. The ERP was endorsed by the first Consultative Group (CG) meeting in nine years. The objectives of the ERP were: (a) to increase the output of food and export crops by providing appropriate price and non-price incentives for production, by improving marketing structures, and by increasing budgetary and foreign exchange resources available to agriculture; (b) to improve the physical infrastructure by directing resources to rehabilitation rather than new investments; (c) to increase industrial production by improving capacity utilization through improved mechanisms for allocation of scarce foreign  -3- exchange; and (d) to restore domestic and external equilibrium by pursuing prudent fiscal, monetary and trade policies. 8. The ERP envisaged that the Tanzanian economy would achieve positive growth rates in per capita income, a sustainable external balance of payments position with both higher export and import levels, an acceptably low rate of inflation, and restored levels of physical and social infrastructure within 5-7 years. To this end, the Government made significant policy changes at both the macro and sectoral levels, including: (i) substantial exchange rate adjustments and introduction and subsequent expansion of a window for non- administrative allocation of foreign exchange (the Open General Licensing system); (ii) significant adjustments in interest rates, resulting in real positive rates for some instruments; (iii) a major reduction in the number of price controlled items; (iv) real increases in producer prices for export crops and reforms in agricultural marketing (e.g., eliminating all remaining restrictions on the transport and marketing of grain; and for some traditional export crops allowing cooperatives to export directly, without resort to the marketing boards); (v) liberalization of most transport tariffs and support for private transport fleets; and (vi) institutional changes aimed at encouraging and facilitating the activities of the private sector. 9. The ERP was supported by significant inflows of external assistance, including an August 1986 IMF Standby Arrangement and a November 1986 IDA Multisector Rehabilitation Credit (MRC, Crs. 1741-TA and A03Y-TA) of US$135 million. A PFP elaborating on the ERP policies was endorsed by the Committee of the Whole and the IMF Board in October 1987, and facilitated Tanzania's access to the IMF's Structural Adjustment Facility. In January 1988, IDA provided an additional of US$30 million for the ERP as supplemental financing for the NRC. A second PFP that facilitated Tanzania's access to IMP resources in the context of the second annual arrangement under the SAF, was endorsed by the Committee of the Whole and IMF Board in November 1988. In December 1988, the Board approved further support for the ERP through the Industrial Rehabilitation and Trade Adjustment Credit (IRTAC, Cr. 1969-TA) for US$135 million. More generally, the ERP attracted considerable support from the international community including a significant increase in concessional capital flows, particularly for import support. 10. The combination of policy and insti_utional reforms and increased external assistance resulted in a substantial improvement in the economy. The rate of growth of real GDP exceeded the population growth rate in 1986 for the first time since 1980, and is estimated to have grown at 4 percent p.a. in 1987 and 1988, and at slightly above four percent for 1989, indicating not only continued real per capita growth, but also a slight acceleration of the pace of economic recovery. Moreover, much of the obvious growth in economic activity taking place throughout the country is outside of the formal sector and is most likely not fully captured in the GDP statistics. An exchange rate depreciation of over 85 percent in less than two years improved resource allocation and reduced excess demand for imports. Inflation has not risen from the pre-ER? level in spite of the significant devaluation and the removal of price controls. The behavior of the parallel market exchange rate provided a clear, quantifiable indicator of the extent of the macroeconomic adjustment, appreciating in real terms by about 30 percent from 1986 through 1988. Increased availability of fuel and transport, the liberalization of food grain trade, and improvements in farm input supplies have resulted in improved availability and more competitive  supplies of the staple foods. Increased transport capacity, partieularly in the private sector, together with the continuation and expansion of the own- funded import scheme, have resulted in a much improved availability of basic consumer goods throughout the country and have acted as a considerable incentive for production of export crops. Manufactured and other non- traditional exports have also begun to increase rapidly. 11. Generally, the ERP stabilization measures were successfully implemented and have resulted in a significant reduction of economic distortions. But these are only ITItial steps which need to and are being followed by further policy and institutioaal changes for tha nascent recovery to be intensified and sustained. In the monetary area, for example, the Government failed to limit overall credit growth, with the result that the ERP targets of reduced inflation will take longer to achieve. Moreover, because of inappropriate credit allocation, saw dynamic segments of the economy have been relatively starved of liquidity. e roots of the credit problem are in the structural flaws of the agricultural marketing and financial system (paras 18 and 21); these are complex institutional problems, which are now at the top of the Government's policy reform agenda aAd priority issues in our assistance strategy as discussed below.  Table Is TZUNUNA - ET MACROECDSZC IDICAI$ 1is" 1987 1988 1989 1990 GOP Growth rate 8.6 4.0 4.8 4.4 4.5 GDY/Capit. growth rate 1.6 -0.9 2.2 0.7 1.8 Consumptlon/capita growth rate 2.1 0.3 0.4 0.6 0.7 Debt servce (in US o) 69 88 8S 87 90 Debt s.rvieo/XGS 16.0 16.7 17.2 16.4 15.2 Debt servloo/GDP 1.4 2.4 2.7 8.1 8.6 oross Investment/GOP 16.6 17.8 16.2 19.4 19.B Domestic saving/GOP 1/ 6.6 0.0 -4.8 -0.8 -8.5 National savingn/GDP 1/ 8.5 0.6 -4.0 -0.6 -4.0 Ratio of pub/pvt Investment ?8.8 44.7 89.7 88.3 88.1 GOvt.revev.us/GDP 15.1 16.2 19.8 28.1 23.1 Govt.expenditures/GDP 28.0 24.8 28.6 32.8 82.8 Deficit(-) or surplus(*)/GDP -7.9 -4.0 -8.7 -9.7 -9.8 Exports 9rowth rate -4.6 16.7 6.2 9.2 10.5 Export*/GDP 1/ 9.1 18.0 15.5 18.2 28.0 Import growth rate 6.1 0.7 0.9 5.6 2.7 Importe/GDP 1/ 20.8 85.4 40.0 48.0 59.2 Current account (in US1 i.) -897 -742 -744 -688 -758 Current account/GDP 1/ -8.1 -21.8 -28.7 -28.9 -80.1 memo Items: ExchangC Rate 82.7 64.8 99.8 148.9 196.1 Rel Exchang Rate Index 2/ 1.088 0.685 0.601 0.468 0.403 Domestic nf lation Rate 82.4 29.9 81.2 27.0 18.6 Notes: 1/ Ratio* are calculated In current terms. The large swings in the ratios are primarily related to the adjustment in the exchange rate - offsetting the significant overvaluation of the Tanzanian shilling in earlier years. 2/ 1980 = 1. Rise In the Index indicates appreciation. All growth rates are expressed In constant terms, ratios to GOP In current terms.  - 6 - Vey Development Issues and Government Policies under ERP II (Economic and Social Action Program) 1990-92 12. In order to consolidate the ERP stabilization measures and sustain economic growth, the macroeconomic adjustment program needs to be continued and completed. Equally important, crucial structural and institutional improvements need to occur at all levels of the economic system. Consequently, the Government prepared a second phase of its ERP called the "Economic and Social Action Program" (ESAP) for the period 1990-92. The ESAP was presented at the last CG meeting, in Paris in December 1989. The policies of the Government introduced under the program were welcomed and significant additional resources were pledged for the first year of the ESAP. The main features of the ESAP include, inter alia: (i) continued adjustment of the exchange rate; (ii) continued trade policy reform; (iii) reform of agricultural marketing; (iv) financial sector restructuring; (v) public sector management reform; (vi) industrial restructuring; (vii) rehabilitation of the physical infrastructure in support of the directly productive sectors; and (viii) rehabilitation of the delivery system for social services. Macroeconomic Management 13. The ESAP explicitly recognizes the need to continue to move from direct to indirect economic management instruments. Indeed, the shift from administrative mechanisms has been at the core of the policy changes. But the indirect instruments need to be further developed and the capacity of the Government to use them needs to be strengthened. The development of these instruments, their application to reduce distortions and increasing the relative incentives for economically efficient activities will continue to be the focus of our macroeconomic dialogue. 14. The Foreign Exchange Management Regime. In the short term, the key adjustment required is the adoption of an appropriate foreign exchange rate regime. Since April 1986, the exchange rate has devalued from Tsh 17 to Tsh 195 per US dollar (October 1990). This represents significant progress towards depreciating the Tanzanian shilling in real terms. For the future, it is important for the Government to adopt an exchange rate management regime whereby the exchange rate is continuously reviewed and adjusted in line with developments in the balance of payments in general, and in the OGL and in exports incentives in particular, and which accounts for, inter alia, terms of trade and inflationary developments. Working with the DMF towards the establishment of a responsive foreign exchange management regime is a key component of our strategy. 15. Money and Credit. During the ERP, the annual limits for money and credit expansion were exceeded. As a result, tha Government was not able to reduce inflation, but managed to contain it at 28 percent per annum, despite the massive exchange rate adjustment. The excessive growth in credit was largely the result of the financial difficulties of the marketing boards, in particular the National Milling Corporation and to a lesser extent, the tobacco and cotton marketing boards owing to their institutional rigidities, transportation, storage and processing problems. The Government's objective is to reduce the rate of monetary growth while ensuring adequate supply of credit to the more productive sectors of the economy. This not only requires an appropriate fiscal policy but also the  -7- elimination of the financial difficulties of the marketing b3ards throu3h the restructuring of the agricultural marketing system (para 19). 16. Government Budget. The Government was successful under the ERP in controlling expenditure, and focussed the public investment program on rehabilitation and completion of ongoing projects rather than on new investments. It also succeeded in containing the overall budgetary deficit within the set limits. However, serious issues remain to be addressed (paras 23). Practically all Government activities are underfunded. Furthermore, although recurrent transfers to parastatals have largely been terminated, heavy claims are now being made on the budget for parastatal restructuring and in respect of earlier parastatal overdrafts guaranteed by the Government. 17. On the revenue side, the first phase of reform of customs tariffs and sales taxes was initiated under IRTAC. Focus now is on additional measures for correcting the remaining structural deficiencies in the tax system (e.g., extensive use of exemptions) and its administration (e.g., poor collection and compliance rates) so as to further improve the revenue performance. 18. Pricing and Distribution Policies. To encourage domestic savings and efficient financial resource use, the Government made the structure of interest rates positive in real terms. The Government expects to be able to reduce interest rates by lowering the rate of inflation through appropriate budgetary and monetary policies. The number of categories of goods subject to price control was reduced to 10, considered basic necessities, comprising less than 15 percent of the consumer price index basket. As goods were decontrolled, the regulations that *confine' goods to specified parastatals for their importation and wholesale distribution were also dismantled. Our strategy is to continue to work with the Government to continue the processes of price decontrol and deconfinement. Maior Sectoral Issues 19. Agriculture. Restoration of growth and increased export earnings will depend primarily on the performance of the agricultural sector, and hence on the package of incentives for agriculture. Under the ERP, the Government has raised the real level of producer prices, linking them more closely to developments in world market prices. Improvements in the efficiency of agricultural marketing would also be critical. Domestic foodgrains trade from the farmgate to the consumer was liberalized in the past three and a half years, and this was a major factor in the increased production. As part of ESAP, the Government has begun to implement a program for fundamental changes to improve the structure of export crop and agricultural input marketing (under the Bank-supported Tanzania Agricultural Adjustment Program. For some crops, it has permitted cooperative unions and other bodies to participate in export marketing and to import inputs either directly or through agents. As further measures, the program focuses on diversification of marketing channels and other improvements in the efficiency of export crop marketing. The key features of the program are: (i) to reduce the role of the marketing boards to managing auctions or open tender systems and providing quality control and market intelligence; and (ii) to introduce multiple channels of marketing  - 8 - by allowing private traders, farmers' associations, primary cooperative societies and cooperative unions to trade freely among themselves and to retain ownership until final sale of their crop. The next phase of the progran will require reforming the cooperatives. Studies are now underway to develop a reform progrwa for these marketing agents. 20. Financial Sector Reform. The increased reliance on indirect instruments of economic management and the reduced role of the Government in directly productive activities must be accompanied by a restructured role for the financial sector in the mobilization and allocation of resources. At present, however, the sector is afflicted by a number of major problems including the poor financial condition of the banking institutions, the inadequate capacity for resource mobilization and serious inefficiencies in credit allocation (primarily to public enterprises and cooperatives, ignoring the private sector). Consequently, the Government has undertaken a comprehensive sector review with Bank and IMF assistance and is preparing an action program for the reform of the sector. The main objectives of the Government's reforms are to diversify financial channels and services, improve resource mobilization, restore the financial viability and increase the efficiency of the banking institutions. The reform is also expected to cover the overall system for managing and regulating financial institutions including the functioning of the Bank of Tanzania (the central bank), the restructuring of the National Bank of Commerce, overhauling the system for providing agricultural credit and parastatal finance, establishment of new specialized financial institutions and introducing new instruments and services. The Bank plans to support the setion program in this key sector with a Financial Restructuring Credit (para. 46). 21. Industry. The Government's objectives in the industrial sector are to improve capacity utilization while at the same time ensuring that resources are directed towards the more productive and efficient firms in the sector. In this regard, external sector policies and fiscal and monetary policies are of critical importance. In addition, specific interventions are being prepa.ed to assist in the progressive restructuring of particular subsectors, commencing with textiles, leather and agro-processing. These are potentially viable sub-sectors that could be expected to recover quickly and provide substantial supply responses. The strategy is to continue the subsectoral approach by carrying out more subsectoral studies and developing and implementing additional subsectoral restructuring programs. Reforms in the management and operation of parastatals are also necessary to ensure that they are responsive to price and other macroeconomic signals. 22. Infrastructure. A major objective of ESAP is the rehabilitation of physical infrastructure. The main emphasis under the Government's recovery program in regard to roads was the rehabilitation of the country's network of highways, secondary roads, feeder roads and access roads, which are of particular importance to the evacuation of agricultural production to processing centers and ports. Closely linked with rehabilitation is improving the capacity of central and local government authorities to maintain the road network, both in regard to stretches that are still in rea,onable condition and those that are recently rehabilitated. The Government with Bank assistance prepared an Integrated Roads Project (IRP), which was approved by the Board on May 31,  - 9 - 1990. A comprehensive road transport policy paper was prepared by the Government and its recommendations have made an important contribution to the further improvement of policies in this area. A two- stage program for the rehiabilitation of the Tanzanian railway system has also been prepared and endorsed by donors who committed sufficient funds for the first stage of the program which has been completed. A second phase was appraised in July 1990. The railway rehabilitation program is an important ingredient in the rehabilitation of the petroleum distribution system, which itself is needed to complement the road and other projects. The challenge for the Government under ESAP is to implement these agreed transport rehabilitation programs. Public Sector Management 23. The public sector has always been cast in the leading role in the Tanzania's development strategy. However, despite impressive achievements in the past, the sector Is no longer able to fulfill that role, and, in fact, has become a drag on the recovery of the economy. If recovery is to be sustained, it is necessary to address critical problems in four broad areas: (i) central government public expenditure priorities; (ii) local government finance and management, (iii) public service pay, staffing levels, and management, and (iv) the parastatal sector. 24. Central Government Expenditures. Central government programs are over-extended and under-funded. Among the main causes are: the rapid expansion of commitments, revenue weakness, crowding out of ministerial programs by debt service and emergency funding for parast-.tals, and the overexpansion of staffing. The Government needs to focus recurrent expenditures on priority programs, and resolve She financial difficulties of parastatals as quickly as possible. Though it has been significantly scaled back and focussed on the completion of existing projects, the Public Investment Program (PIP) requires further rationalization to reflect rehabilitation priorities more effectively. The Government and the Bank jointly carried out a public expenditure review (PER). The recommendations of this study constitute a basis for the restructuring of the public expenditure and the formulation of a medium-term strategy for public expenditures, covering both recurrent and development outlays under ESAP. 25. Public Service. For at least one and a half decades the Tanzanian Government expanded its total employment twice as fast as the underlying revenue base. By 1984, total employment in public service, excluding the armed forces, was about 300,000, a level that has remained constant since then. Over the years, as the budget situation deteriorated and inflation rose, pay levels failed to keep pace and differentials became compressed, severely distorting the incentive structure and reducing public service morale and productivity. The average wage has lost 80 percent of its value since 1976. The ratio of after-tax incomes between top salary and minimum wage was as low as about 4:1 in 1987/88, though this has improved to 9X1 currently. The Government has moved to eliminate ghost workers (about 28,000 were eliminated from Government pay roles in 1989), but further retrenchment is required if pay levels are to be restored. In addition, the Government's capacity to effectively manage the public service and restore discipline needs to be strengthened.  - 10 - 26. Local Government. After being in abeyance for over a decade during the period of decentralization, local governments (district and urban councils) were reintroduced in 1983/1984 and given responsibilities for, inter alia, primary education, health care and water supplies. With a few exceptions, urban and district councils have performed poorly. Their staffs are too large, paid on the same eroded scales as central government, and poorly motivated. They have generally not succeeded in collecting much revenue of their own and remain heavily dependent on transfers from central government. Financial and establishment controls and overall management are weak. 27. Parastatals. With over 400 different agencies, Tanzania's parastatal sector is too large, poorly managed, and for the most part an inefficient user of resources and a burden on the economy. Lifting the burden of the public sector by reducing its size and making it operate more efficiently is one of the most important and difficult tasks facing policy makers in the next five years. Among other actions, utilities need to adjust their tariffs; insolvent financial institutions need to be restored to health (or done away with), and many public enterprises need to be scaled back or abolished. The Bank and the Government jointly reviewed the parastatal sector and a report, 'Parastatals in Tanzania: Towards a Reform Program', was issued in July 1988. The Bank is assisting the Government to develop a reform program based on the results of the study. Our proposed lending program includes an adjustment lending operation intended to support the -implementation of reform programs to improve public sector management. Longer term Development Issues 28. Population and Human Resource Development. In addition to the issues discussed above, Tanzania faces a number of medium to long-term issues, some of which have short-term aspects which Government programs must begin to address. Tanzania faces a critical problem in terms of the rapid rate of population growth (3.2 percent per annum). If fertility does not decline, the rate of population growth will have grave implications for: (i) the country's resource base, particularly land and the environment; (ii) per capita incomes and living standards; and (iii) pressures on public services, particularly education, health and housing facilitie.,. Our assistance strategy will focus on helping Tanzania to slow down the population growth rate by supporting efforts for family planning and/or monitoring an education campaign. 29. Closely related is the issue of human resource development including, inter alia, the strengthening of the analytical and monitoring capabilities to pursue both immediate and longer term development goals. Key issues in this regard are: (i) mobilizing resources for the social sectors (cost-recovery and community participation); and (ii) more efficient use of existing resources (for example, focussing on maintenance and rehabilitation of existing social service facilities, before expansion). Both the Education Rehabilitation (FY90) and the Human Resources Development (FY93S) projects will aim to address these issues. 30. Women play a very important role in Tanzania's economy by growing most of the food and finding most household fuel and water. But their access to development programs is limited, la-gely by tradition. We  - 11 - plan to prepare an assessment paper on women's potential role in Tanzania's development, the policy and institutional framework affecting their welfare and productivity, the strategy and action programs for their involvement in the development process. The study will be an input into the Country economic memorandum planned for FY91, which will serve as a main vehicle for a dialogue with the Government. On the project side, the Agricultural Research and Agricultural Extension (FY89), Population, Health and Nutrition FY91, and Smallscale Enterprise FY92S projects, will all pay special attention to women's needs and issues. 31. Entrepreneurial and Private Sector Development. Two decades of centralized investment planning and extensive Government interventions in economic activities have suppressed free enterprise and resulted in activities, technologies and organizational designs unsuited to the economic needs of Tanzania. There is an active informal sector but the formal private sector, which had little encouragement, remains very small outside of the petroleum sector. With the shift from direct to indirect instruments of economic management, and with the Government concentrating on provision of infrastructure and services, the future tempo and pattern of economic activity will increasingly be determined by the skills, talents and ideas generated by individuals and private enterprises. In addition to the Government's commitment to the private sector through this project, we will use our economic and sector work and IFC lending operations: (i) to determine effective mechanisms of promoting entrepreneurial activity in the Tanzania environment; (ii) to assist in the formation of appropriate policies which will provide for equal access to credit and other services necessary for entrepreneurial development; (iii) to facilitate the transformation from the informal to formal private sector; and (iv) to provide resources for private sector investment. The reform programs to improve the financial and industrial sectors would facilitate the channeling of financial resources to the private sector. 32. Environment. Helping Tanzania to address its environmental problems is a priority in our assistance strategy. The country is endowed with a wealth of natural resources. However, the exploitation of these resources is proceeding largely in an unmanaged and destructive manner. The key issues include deforestation, soil erosion, wildlife conservation, and institutional capacity and legal framework. With the help of the Swedish International Development Authority and the International Union of Conservation of Nature, the Government is carrying out an environmental assessment to develop an environmental strategy and an action plan. The plan will form the basis for assistance by the Bank and other donors who are expressing keen interest in helping Tanzania to deal with its environmental problems. Meanwhile, on the basis of what is already known, the Bank is using ongoing lending operations and the existing work program to begin and in some instances continue to help to address some of the critical short and medium-term issues, particularly in the areas of reforestation and institution building. 33. Poverty Alleviation. The extensive poverty which existed in Tanzania many years preceding its adjustment program is still evident. Bank efforts will focus on poverty reduction as a major goal, and on the social dimensions of the adjustment process. We will aim to assist the Government to ensure that low-income groups have opportunities to participate in the Economic Recovery Program and that vulnerable groups  - 12 - will not be adversely affected. So far, even in the short term, the measures implemented in the context of the ERP and the related increase in the concessional capital inflows have been beneficial to the poor. There have been no visible adverse economic and/or social effects associated with the ERP. Deflationary forces emerged from the supply response. availability of imports and increased competition resulting from the trade liberalization measures. Fiscal and monetary restraint coupled with realistic interest rates have provided a check on inflationary pressures. Moreover, though more progress is required, higher producer prices of the main exports resulting from continued exchange rate adjustment and from improvements in marketing efficiency, have raised farm incomes and rural purchasing power. In urban areas, food grain prices have remained stable because of substantial reductions in marketing costs resulting from grain trade liberalization. Our strategy will focus on those areas likely to need particular attention during the recovery process including the poorest groups, women and children, and those expected to be displaced from public employment in the next phases of the ERP. Growth Prospects 34. In the coming years the Tanzania economy is expected to achieve: Table Ili TANZANIA - GROWTH PROSPRCTS 1990-1995 1995-2000 (annual averages) Real GDP growth 4-4.5Z 4-4.5? Real per capita growth 1.2-1.72 1-1.7Z Export volume growth 9.5-10.5Z 9-10X Import volume growth 2.7-3.2? 3.2-4.5Z Current account deficit/GDP 35-26? 25-20? Reduced distortions, improved allocation of foreign exchange, in addition to infrastructural and institutional improvements, should lead to significant improvements in the efficiency of resource use. In particular, the improved policy environment should lead to: (i) better utilization of imported inputs, particularly in industry because of the reallocation of resources away from low and negative value-added activities toward more efficient export-oriented enterprises; (ii) increased utilization of existing capacity in low import-intensive activities; and (iii) an allocative shift in favor of agriculture, a less import-intensive sector. This would result in sustained positive per capita income growth; substantial export volume growth, in the short run from improved performance of traditional exports and later emanating particularly from increased non-traditional exports and tourism; a reduction in import dependence; and an improved current account position. 35. For many years, Tanzania will continue to face large external imbalances. Thus, the Government's adjustment program will continue to  - 13 - require an active exchange rate policy coupled with large amounts of external financing and debt alleviation to support sustained growth. The composition and terms of external flows needed to support the ERP are as important as the absolute volume: (i) the present mix of about 50/50 between import support and specific investments in rehabilitation projects is appropriate and needs to be maintained, but should be reviewed on a regular basis; (ii, in some instances donors should be prepared to fund up to 100 percent of the capital costs of the projects they support; and (iii) donors should be prepared to finance some recurrent costs for a limited period. 36. Agriculture will remain the main source of incremental growth. However, the country needs to develop other sources of growth and increase its export earnings in order to achieve its longer term development objectives. Potential areas include: ti) development of non-traditional exports, especially mineral exports; and (ii) development of the tourist industry which hitherto has been inhibited by lack of appropriate policy incentives and inadequate infrastructural facilities. Performance Indicators 37. As already discussed, we have identified key components affecting the implementation of the adjustment program. Inadequate performance in these critical areas would trigger an evaluation of the impact on the program and the development prospects of the economy and, if warranted, a reassessment of the level and orientation of our assistance strategy. The key indicators for judging progress on the implementation of Tanzania's adjustment program include: (i) maintaining an exchange rate consistent with appropriate demand in the expanding trade liberalization facility (OGL) and with growth in non-traditional exports; (ii) maintaining fiscal prudence consistent with virtually zero net borrowing from the domestic banking system, and beginning the process of public expenditure and public sector management restructuring; Ciii) implementing the reforms of the agricultural marketing system in accordance with the agreements reached in the context of the IDA-Financed Agricultural Adjustment Credit (Cr. 2116-TAN) (para 18); (iv) restructuring of the financial sector in accordance with the recommendations of the financial sector review and maintaining a positive interest rate structure; and (v) implementing a rehabilitation program for improving the efficiency of the transport sector in accordance with the scope and schedule to be agreed in the context of the proposed Integrated Roads Project (para. 21). Bank Group Operations 38. The Bank's involvement with Tanzania can be divided into three distinct periods: (i) from 1961, until the end of the 1970s, when the Bank strongly supported Tanzania's overall development strategy emphasizing growth with greater income equality and quickly became involved in almost all sectors of the economy (by the late 1970s, our program had expanded to over six projects per year and over US$100 million in commitments, about 40 percent of which was IBRD); (ii) from 1980 to 1986, when the Bank scaled back its assistance program as the economy continued to deteriorate and we were unable to reach an agreement with the Government on the policy and institutional changes necessary to restore  - 14 - growth; and (iii) from 1986, with the launching of the ERP, when we entered a third period in our involvement with Tanzania characterized by improved dialogue and expanded assistance (annual Bank disbursements have increased from US$69 million in FY86 to US$137 million in FY90). Since the beginning of this period, we have been incorporating the lessons learnt from our previous association. Particular emphasis has been given to develop and implement an integrated strategy between the macro, sectoral, and project components, with a policy-focused economic and sector work (ESW) program playing a crucial role (paras 42 and 43). 39. Lending Operations through end of FY90. Tanzania joined the Bank, the Association, and the International Finance Corporation in 1962. Beginning with an IDA credit for education in 1963, 79 IDA credits and 19 Bank loans, two of these on Third Window terms, amounting to US$2,112.33 million have so far been approved for Tanzania. In addition, Tanzania has been a beneficiary of 11 loans totalling US$244.8 million which were extended for the development of the common services and development bank operated regionally by Tanzania, Kenya, and Uganda through their association in the former East African Community. IFC investments in Tanzania have included the Kilombero Sugar Company, soap manufacturing, metal product manufacturing and the Amboni sisal rehabilitation project. 40. Bank Group lending in Tanzania has centered on agriculture transport and communications, industry and energy and education and manpower development. Since FY81, new Bank Group lending has been focusseJ primarily on the rehabilitation and use of existing productive facilities and the expansion of infrastructure and services (such as power generation and education facilities) of long-term use to the economy. Projects have included technical assistance and training for better maintenance and use of existing facilities and more effective resource use. Lending during FY82-90 included a Second Petroleum Exploration Project, a Petroleum Sector Technical Assistance Project, Third and Fourth Techz.cal Assistance Projects (focussed on key manpower gaps in the agricultural sector), Dar es Salaam Sewerage and Sanitation (Rehabilitation) Project, a Coal Engineering Project, a Fourth Power Project (hydroelectric), a Port Rehabilitation Project, a Sixth Highway (Rehabilitation) Project, involving rehabilitation of high priority roads and assistance to the trucking industry, a Power Rehabilitation Project to restore Tanzania's power system, and a Second Telecommunications Project, to rehabilitate and improve the efficiency of the telecommunication system, an Agricultural Export Rehabilitation Project, to improve Tanzania's agricultural export performance, a National Agricultural and Livestock Research Project, to develop the national research services, a National Agricultural and Livestock Rehabilitation Project, to strengthen the agricultural extension service and cashew and coconut, a Treecrops Project to improve production of these crops through breeding and developing of disease-resistant and high-yielding plants, a Health and Nutrition Project to strengthen Government capacity to deliver health and nutrition services, a Ports Modernization project to help expand the physical facilities and strengthen the managerial and operational capabilities of the Tanzania Harbors Authority, an Education Planning and Rehabilitation project to rehabilitate the educational system and strengthen capacity to plan and implement appropriate education policies, and an Integrated Roads Project to restore Tanzania's essential road  - 15 - network, restructure and develop the institutional capacity within the transport sector. 41. In addition to financing specific projects, the Bank Group has provided non-project assistance on five occasions in support of Government efforts to deal with its balance of payments difficulties. The first such credit was made in 1974, the second in 1977, the third, an Export Rehabilitation Program Credit Cor US$40 million (Credit 1133-TA) in April 1981. Although the Credit assisted in financing much needed agricultural inputs, the overall economic environment did not substantially change, and hence the desired recovery of agricultural exports did not take place. A Multisector Rehabilitation Credit (MRC) for US$135 million, comprising an IDA and African Facility Credits of US$50 million and US$46.2 million, respectively, and Special Joint Financing of US$33.8 million was approved in November 1986. It supported the implementation of a comprehensive policy reform under the ERP (para 8). In order to address critical bottlenecks which emerged during the first year of the implementation of the ERP, in January 1988 and Board approved supplemental financing to the MRC comprising of an IDA Credit of US$30.0 million and an African Facility Credit of US$26.0 million. The Saudi Fund contributed US$4.0 million in the form of Special Joint financing. The Industrial Rehabilitation and Trade Adjustment Credit (IRTAC) of US$135 million was approved in December 1988. Subsequently, the Board approved an additional US$12.6 million for the operation from 'IDA reflows' as part of the Fifth Dimension. The IRTAC operation supports the initiation of the restructuring of Tanzania's industrial sector and trade reform measures, some of which (such as OGL) were initiated under the third tranche of the MRC. The most recent fast disbursing operation is the Agricultural Adjustment Credit, the operation which supports crucial measures for reform of the agricultural marketing system. Table III: TANZANIA - DISTRIBUTION OF BANK LENDING FY86-90 (US$ Million ) Amount Sector FY86-90 Z of Total Adjustment Lending Operations 446.1 47.4 Agriculture 81.8 8.7 Education 38.3 4.1 Energy 40.0 4.2 Forestry _ _ Transport 267.0 28.4 Urban - - Health and Nutrition 47.6 5.1 Telecommunication 20.0 2.1 Total 940.8 100.0  - 16 - Bank Assistance Strategy 42. The main challenges facing Tanzanias' economy are: (i) to accelerate growth by consolidating policy reform and restructuring key institutions including, inter alia, agricultural marketing boards and the cooperatives, financial institutions and parastatals; (it) to rehabilitate key infrastructure and services; (iii) to restore social services (health, education, water) to the level of development achieved in the 1970s; and (iv) to address medium to long-term development issues, especially substantial reduction in its high population growth rate, poverty alleviation, human resource development and effective protection of its environment. The Bank's overall assistance strategy has six major and closely related components: (a) improve the efficiency and effectiveness of economic management and resource allocation; (b) reduce and rationalize the role of the public sector; Ic) reduce sectoral and physical constraints; (d) develop entrepreneurship; (e) address social and longer- term development issues; and (f) mobilize adequate external resources. Vehicles for Implementing the Strategy 43. Economic and Sector Work (ESW) Strategy. The planned ESW is a crucial component of the Bank's assistance strategy to Tanzania. It is designed to provide the analytical underpinning for the Bank's policy dialogue on the key ESAP and longer term development issues. It is imperative for the Bank to carry out comprelensive analyses, identify policy options and clearly demonstrate the expeeted benefits and costs of the recommended agenda of policy and institutional reforms needed to sustain the ESAP and eventual economic growth and development. The pace of adjustment in Tanzania is very dependent on the quantity and quality of our ESW. The recent experience with regard to the industrial sector study which facilitated the ongoing IRTAC, and the review of the food grain marketing system which facilitated an important reform of the system, clearly demonstrated the indispensability of and the payoffs which can result from an investment in ESW. In addition to facilitating an effective dialogue with the Government, donors look to the Bank for leadership in this important work. 44. Over the last three years, we have undertaken a number of major sector studies: (i) a review of food grain and agricultural export marketing systems; (ii) a transport sector study which focussed the attention to the Government and the donor community on the issues in the transport sector; (iii) a parastatal sector study to underpin the dialogue on the reform of state enterprises; (iv) a review of the public expenditure to facilitate restructuring of the public expenditure program and improve resource allocation; and (vi) a number of specific subsector studies in the areas of trade, tariffs and taxes which are important inputs into the ESAP. We are completing an economic report, that will analyze some of the medium and longer-term issues facing Tanzania and set the stage for the next phase of the reform program. During FY91 and FY92, we plan to undertake structural studies, and carry out reviews and assessments of debt management, food security, environment and land use, education sector, small-scale enterprises, mining, transport sector, population policy, women in development, and AIDS. These assessmenta and studies also facilitate preparation and implementation of our lending  - 17 _ operations, both adjustment as well as investment projects. In developing and carrying out the ESW program, we will aim to make it as collaborative as possible, and rely on economists from local universities and research institutions. 45. Cooperation with the IMF. Continued close cooperation and coordination between Government, the DMF and the Bank in the further development and implementation of the ESAP is clearly critical. We will continue to work with the Government and the IMF on the preparation of policy framework papers and ensuring that an appropriate macro framework is maintained. 46. Lending Strategy. The planned FY91-95 lending operations are directly linked to the Bank's assistance strategy. The five-year lending program includes one quick-disbursing adjustment lending operaLion each year, in continuing support of the anticipated policy and institutional reforms which Tanzania needs to carry out. The policy based-lending operations will focus on development issues that are especially critical to the further implementation of the ERP, as already discussed (paras 11- 32). In FY89, we focussed on trade reform and industrial restructuring and in FY90, we focused on the reform of the agricultural marketing system. We expect our next operations to focus on financial sector reform, public sector restructuring and on further restructuring of the industrial sector, in that order. 47. Complementing the adjustment lending operations are high priority specific investment operations focussed on rehabilitating of key economic services and physical infrastructure, and tackling long-term development issues. We began this process with agricultural services (IDA credits have recently been approved for research and extension rehabilitation projects); transport (with Board approval of the credits for the Ports and Integrated Roads projects in February and May 1990, respectively) and in health and education (with credits approved in March and May 1990, respectively). Our five-year lending program provides for broadening this approach to cover energy, railways, urban infrastructure, forestry and human resource development, and as needed, to intensify it with follow up specific investment projects. In designing these future projects we will focus on projects which help to build and strengthen the core planning, implementation, management and monitoring capacities of specific institutions. During the transitional period of three to five years, about 60 percent of IDA lending would be for adjustment operations. Thereafter, with a supportive policy framework largely in place, and with the results of the reform program being felt over a wide spectrum of economy, IDA lending would begin to shift emphasis to investment operations as the main lending vehicles, and the proportion of adjustment lending would correspondingly decline. 48. Supervision Strategy. Capacity for project implementation in Tanzania had virtually collapsed w4.th the general deterioration of the economy and is still weak, due to shortage of skilled and experienced manpower and weak institutions. In the short run, our assistance strategy calls for: (i) project design which takes into account the skills gap; (ii) intensified supervision effort (we have substantially increased the amount of resources allocated for supervision); and (iii) provision for selective technical assistance. For the medium to longer term, we expect  - 18 - our planned assistance in the public sector management, education and human resource development to help address this problem. 49. Aid Coordination Strategy. Tanzania's adjustment program needs substantial amounts of external financing well beyond any one donor's resources. Consequently, the Bank's assistance strategy also focuses on assisting Tanzania to mobilize appropriate external financing (in terms of quantity and quality) through cofinancing arrangements, and formal and informal aid coordination efforts. Tanzania meets the eligibility and qualification criteria for the Special Program of Assistance (SPA) for debt distressed countries in Sub-Saharan Africa. We will work closely with the Government and the donors to translate pledges of assistance to Tanzania under the SPA into actual disbursements. The Bank plans to maintain the cycle of annual CG meetings for Tanzania. The Bank has also assisted the Government in organizing effective donor meetings at the sectoral level, including transport, agriculture and energy. Similar meetings will be organized for other key sectors. Finally, the Bank plans to keep in regular and close contact with other donors to facilitate effective coordination of donor programs. Stummary Assessment 50. There is a strong consensus that Tanzania made good progress in the implementation of the initial three-year phase of its ERP. Nevertheless, much more remains to be done to address the many remaining structural issues, and rehabilitate the country's key economic and social services and infrastructure. Recognizing this need, the Government has launched a second phase of the ERP, the ESAP, to build on the steps taken to date. The macroeconomic scenario and Bank assistance strategy outlined above are based on two critical assumptions: (i) that the Government continues to move ahead with the economic reform at a reasonable pace; and (ii) that other donors including the IMF continue to provide the necessary support in terms of both quantity and quality. This, indeed, does appear to be the most likely scenario. 51. However, there are risks to bear in mind. Although Tanzania made substantial progress in the implementation of the first phase of its ERP, the consensus within Tanzania for reform is still tenuous, although strengthening. Given the extent of the remaining distortions and seriousness of the economic situation, some donors are restive about the pace of the adjustment program. But the Government is convinced that the pace is at the edge of social, political, institutional and administrative feasibility. Government commitment to continue with the adjustment effort is firm. The prospects for sustaining the program should be measured against where the country has come from, its accomplishments to date and the resolve to continue. 52. The Bank's assistance strategy as described above assumes the present pace of adjustment to be an acceptable core of reform. The political changes taking place in Tanzania, including inter alia, President Mwinyi's consolidation of power now as Chairman of the ruling Party as well as President and Head of State, and the appointment of like- minded pragmatists in key Government ministries, are providing a window of opportunity to engage the Government in a challenging dialogue for broadening and deepening the adjustment process, and the most likely  - 19 - prospects are for continuing to make progress in this regard. If the efforts for a faster pace of adjustment succeed, additional external financing may be needed, and the prospects are that it will be forthcoming. If on the other hand, the pace should slacken and render the program insufficient or in the unlikely extreme, reverse the adjustment measures, IDA will reassess its assistance strategy, including the orientation and level of the lending program. Bank assistance would be limited to a core program of specific investment projects focussed on rehabilitation of the vital infrastructure and work on development issues of continued relevance (e.g., road maintenance, environmental protection, health and education).  - 20 - II. The Proposed Crpdit 53. The proposed Credit would be on standard IDA terms, with 40 years' maturity, and would assist in rehabilitation of the petroleum sector. The project would be cofinanced by five other donors who are contributing US$30 million equivalent: DANIDA, US$2.5 million; EIB, US$8.9 million; EC, US$6.0 million; Government of Netherlands, US$6.1 million; and the OPEC Fund, US$6.1 million. In addition, the Government of Italy will provide US$12.0 million in parallel financing. 54. Sector Background and Strategy. The Economic Recovery Program (ERP) launched by the Government of Tanzania (GOT) has led to a major expansion of output in agriculture and other sectors. However, progress under the ERP is constrained because transport problems and fuel shortages have prevented the increased production of export crops and the higher industrial output from being fully translated into export earnings. IDA is supporting Government efforts to solve these problems through projects for rehabilitation of ports and roads, through a rail rehabilitation project (recently appraised), and through the proposed petroleum rehabilitation project. The present petroleum distribution system is slow, unreliable, expensive and its deteriorated condition threatens the environment. Most oil products are distributed by road, at several times the equivalent rail cost. Rail transport of petroleum, when used, is combined with general goods trains and hence is slow. Lack of investment funds by the private sector has led to significant deterioration of physical facilities such as depots, jetties and barges, and in mans cases retailers have had to cannibalize pumps and other equipment to keep crucial installations in operation. 55. The Government's objective in the petroleum marketing sub-sector is to improve the availability of petroleum products throughout the country, reduce the cost of supply and improve the efficiency of the private sector supply and distribution system. The strategy to achieve this is to reduce the cost of imported petroleum by improved purchasing arrangements, upgrade dilapidated distribution facilities, make -greater use of the railways for bulk petroleum product transport, enhance the ability of the private sector in management of the distribution system. and ensure a policy framework that would give sufficient incentives for the petroleum products to be efficiently distributed to places where they are needed. As the major policy measure to achieve this, Tanzania has recently adopted a petroleum pricing policy that will avoid subsidies, generate revenues for the national budget, send users clear signals on economic cost, and give incentives to private petroleum marketers to renovate their facilities while maintaining financial viability. 56. Government has made a number of improvements in petroleum procurement practices. Petroleum products are now purchased competitively as a result of their inclusion in the Open General License window and through the OPEC Fund financing of imports. Crude oil for processing at the refinery at Dar es Salaam is procured under a collateralized financing arrangement. GOT has agreed to arrange for consultants to study and recommend improvements in the system of purchasing crude oil, the financing arrangements (currently linked to coffee exports) and the related coffee marketing arrangements. The proposed project will address  - 21 - the transport and distribution issues in the strategy, and will place a heavy emphasis on using private sector companies to achieve this. The project will be cofinanced by Denmark, the Netherlands, the EC, EIB and the OPEC Fund. Italy will finance in parallel the rehabilitation of the oil refinery. 57. Rationale for IDA Involvement. The proposed project is consistent with the Bank Group strategy for Tanzania, which gives priority to rehabilitating and modernizing the existing critical infrastructure. Because the dilapidated condition of the petroleum industry has made the supply of petroleum costly and unreliable, the rehabilitation of the petroleum sub-sector is important to the success of the Government's Economic Recovery Program. IDA's involvement and support would act as a catalyst to attract private petroleum company investments and donor cofinancing. It would also ensure compatibility with low-cost options for the transport of petroleum products to neighboring landlocked countries. 58. Project Objectives. The proposed project would improve the availability of petroleum products throughout Tanzania by improving the efficiency and effectiveness of the petroleum industry in the country. This objective would be achieved by reducing transportation costs, modernizing and rehabilitating the supply and distribution network, strengthening the technical and management capacity of the related institutions and developing and implementing an appropriate petroleum pricing policy. Finally, improvements and strengthening of the storage and handling facilities would reduce current levels of oil pollution, and reduce the threat to the environment from spillage and leakages. The specific objectives of the project aret (i) to reduce the haulage cost of petroleum products; (ii) to improve the performance of the oil industry; (iii) to implement an appropriate petroleum pricing policy; (iv) to Improve national and transit petroleum trade; (v) to reduce oil pollution and the threat to the environment; and (vi) to improve the technical and managerial skills and capability of petroleum industry personnel. 59. Project Description. The proposed project would improve the petroleum companies' ability to provide services throughout Tanzania by making funds, especially foreign currency, available to the established oil companies and to TPDC for high priority investments. These investments would include: (i) rehabilitation of existing storage depots and construction of nei depots for petroleum products; (ii) the modification of existing and construction of new railway loading and unloading facilities that will permit the use of dedicated "block" trains, which will carry only petroleum products; (iii) the installation of an offshore loading facility and the construction of a new petroleum terminal at Tanga, which will enable Tanga to be used as a direct import point, thereby reducing handling and transport charges; (iv) the rehabilitation of existing jetty facilities and repairs to the existing 400-ton barge G.. Lake Victoria; (v) acquisition of much needed equipment and materials, including 87 railway wagons geared to carry petroleum and LPG, nd equipment and spare parts to rehabilitate and modernize the existing retail outlets of the oil companies; and (vi) the provision of LPG filling and marketing facilities. In addition to funds for investment projects, the proposed project would finance technical assistance and training designed to strengthen the project beneficiaries and implementing agencies. The funds for the investment projects would be lent through the  - 22 - Tanzania Investment Bank ('IB). Because of its weak portfolio and high level of arrears, TIB is not creditworthy for Bank/IDA lending; however, its size and experience in similar lending makes it the best suited financial institution in Tanzania to undertake this job. TIB will function as the administrator of the loan, and vill receive a one-time one percent commission and a one percent service fee to cover the costs related to this. Government will accept the credit risk, and the beneficiaries will bear the foreign exchange risk. The project would be carried out over seven years. The total cost of the project is estimated at US$103.6 million, of which US$74.0 million would be in foreign currency. A breakdown of the costs and the financing plan is shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Tanzania are given in Schedules C and D respectively. A map is also attached. The Staff Appraisal Report, No. 8342-TA, dated December 13, 1990 is attached. 60. Agreed Actions. Of the actions agreed to between the Government and IDA, the principal items includes (i) agreement on the principal features of the petroleum product pricing policy and a system for the review and adjustment of prices, as needed; (ii) that GOT will arrange for consultants to study and recommend improvements in the system of purchasing crude oil, the financing arrangements (currently linked to coffee exports), and the related coffee marketing arrangements; (iii) yearly (in September) review of project implementation, oil prices and the price adjustment mechanism, and progress in the rehabilitation of TRC; (iv) the establishment and suitable staffing of a Railway Coordination Committee; and (v) that GOT will either conclude agreements with EIB and EC by Dec. 31, 1991 for the financing of rail tank wagons and new depot facilities, or ensure that adequate funds for these are available from other sources on satisfactory terms and conditions. There are three conditions of effectiveness: (i) that Government will sign a subsidiary agreement with TIB and that TIB will sign subsidiary financing agreements with at least two oil companies; (ii) that contracts between TPDC and TCR and TAZAMA, satisfactory to IDA, will be executed on the use, maintenance, operations and management of railway tank wagons owned by TPDC; and (iii) the appointment of an experienced Project Manager. There are two conditions of disbursement: (i) on disbursement of funds for the Tanga bulk oil terminal, that the agreement between GOT and the OPEC Fund has been executed, and that detailed engineering and construction costs, acceptable to IDA, have been provided for work under this component; and (ii) on the disbursement of funds by TIB to the oil companies, that a satisfactory financing plan for the investments to be financed under the project by each oil company is in place prior to respective di oursements. 61. Project Benefits and Risks. Availability of petroleum products in the interior of Tanzania must be improved substantially for the ERP to be sustained. The proposed project is the least-cost option for making petroleum products reliably available throughout the country. Improvements in household petroleum fuel supply (e.g. LPG) will relieve fuelwood pressure equivalent to 35,000 hectares of natural woodlands which would otherwise be required to supply equivalent energy on a sustained basis over a 20 year re-generation cycle. Principal benefits of the project are the cost savings to be derived from: (a) direct import of products at Tanga instead of transhipment by road; (b) bulk transport of petroleum by rail in properly managed block trains instead of piece-meal  - 23 - movement mainly by road; and (c) sustained Involvement a.d improved efficiency of the private companies in the petroleum sector. An important benefit of the project is to minimize and contain damage to the environment, which is currently threatened by the deterioratec condition of transport, supply and distribution network. The internal economic rate of return (ERR) for the rehabilitation project is estimated at about 26 percent, excluding benefits from transit trade. For the Tanga petroleum terminal, the ERU is estimated at 15 percent. 62. Because project preparation proceeded with the benefit of detailed consultation with and between Government, oil marketing companies and railways officials, the risk of delays through misunder,tanding project objectives and components has been min4mized. The risks of procurement delays are limited because the goods to be acquired are either replacement parts or equipment of standard specification. Risks that delays in the 'parallel-financed item (the refinery modification) will delay implementation of some of the IDA and co-financed components will be minimized by close monitoring by the project management team in MWEM. 63. There could be some delay in the implementation of certain components due to insufficient coordination among the various implementing agencies (such as the petroleum marketing companies and TPDC) and other Government agencies such as the railway parastatals. A project supervisory comittee is being established with representation from Implementing agencies, and a full-time project implementation team headed by an experienced project manager within MWEM would be providcC to overcome this problem and monitor the progress of the project continuously. Technical assistance funds are provided to hire, if necessary from outside Tanzania, the Project Manager and a Petroleum Products Transport Specialist with suitable experience. 64. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of Association and recomiend that the Executive Directors approve the proposed Credit. Barber B. Conable President Attachments Washington, D. C. December 13, 1990  - 24 - Scedaule A TUIA~~~~~~~ PETROLI SECTOxR U LIST PROJECT ESTIMATED COSTS A1D FINANCIG PUN Netbuated Costs: X of Local Foreigm Total Total --- (USS million) ------ Existing Oil Industry Facilities Depot Rehabilitation 10.3 13.3 23.6 22.8 Other facilities 2.6 10.8 13.4 12.9 New Oil Industry Facilities New Depots 6.5 14.5 21.0 20.3 Joint Industry Components 0.2 10.1 10.3 9.9 Other New Facilities 1.5 7.4 8.9 8.6 Technical Assistance 2.0 5.0 7.0 6.8 Total Base Cost 23.1 61.1 84.2 81.3 Contingencies Physical Contingencies 3.8 6.5 10.3 9.9 Price Contingencies 2.7 6.4 9.1 8.8 Total Project Costs v 2L2 l 11 (a) Where local duties and taxes are applicable, they will be borne by the beneficiaries and paid in local currency. WNM would recommend to Government to defer the payment of taxes until the project facilities are fully operative; and (b) all beneficiaries are operating entities and interest during construction will be financed from operating income and will not be capitalized. Financinx Plant S of Local Foreign Total Total <-- (US$ million)- __- IDA - 44.0 44.0 42.5 DANIDA - 2.5 2.5 2.4 RIB * - 8.9 8.9 8.6 EC * - 6.0 6.0 5.8 Government of Netherlands - 6.5 6.5 6.3 OPEC Fund - 6.1 6.1 5.8 TPDC/Government/Oil Companies 29.6 - 29.6 28.6 Total ..2-A 2i& JaLl JQsQ  - 25 - Schedule B Page 1 of 2 PETROLEUM SECTOR RUAUILITATION PROJECT PROCUREMENT MNEOD AND DISBDSDMENNS Procurement Method Project Element ICB LIs Other Total <------(Us1$ million)----------> Storage Tanks Materials 5.3 5.3 (5.3) (5.3) Existing Depot Facilities 6.0 6.0 12.0 (6.0) (6.0)3 (12.0) Existing Other Facilities 2.4 2.4 (2.4)8 (2.4) Spares and Consumables 7.32 2.0 9.3 (7-3) (2.0)' (9.3) New Joint Depots 3.1 2.5 12.9 18.5 (3.1) (0.5) (3.6) Transport Vehicles 3.3 3.3 (3.3) (3.3) LPG Marketing (New) 5.0 5.0 Tanga Petroleum Terminal 4.3 4.3 (3.1) (3.1) Victoria Lake Barge Repairs 1.0 1.0 Victoria Lake Jetties 1.9 1.9 Rail Tank Wagons 6.0 6.0 T.A. & Project Management 5.0w 5.0 (5.0) (5.0) Total 4 L. LA aLL. 1L% (20.8) (7.3) (15.9) (44.0) * Amounts financed by IDA are in parentheses. 1 Procurement for the parallel financed components would be in accordance with the guidelines of the financing institutions. 2 Items are intended for equipment installed at about 350 retail outlets, operated by five different oil companies. Per their established corporate procurement guidelines, they rely on more than one vendor for price competitiveness. Proprietary spare parts and components for existing equipment. 4 Including contingencies. ' Consultancy Guidelines  - 26 - Schedule a Page 2 of 2 DISBURSEMENTS I of expend. (US$ million) to be financed Equipment and Materials Rehabilitation of facilities (a) 18.8 10OZ of foreign expend. Tanga petroleum terminal (b) 4.5 10OZ of foreign expend. Spare parts & consumables 7.3 1002 of foreign expend. Studies and project management 3.8 10O of foreign expend. Office Equipment 0.7 MWEH: 1002 of expen. TIB: 1002 of foreign, 802 of local expend. Training 0.5 1002 of expend. Unallocated 8.4 TOTAL: 44.0 (a) Rehabilitation of all facilities (excluding Tanga Petroleum Terminal and including new depot at Mpanda). (b) Tanga offshore facilities and new terminal. Estimated IDA Disbursementes IDA Fiscal Year <------------------US$ million-------------> FY9M FY92 FY93 FY94 FY95 FY9C6 Y97 Annual 1.3 3.2 9.0 10.5 11.0 7.8 1.2 Cumulative 1.3 4.5 13.5 24.0 35.0 42.8 44.0  - 27 - Schedule C TANZLAM PEITRILKU SECTOX REA TILIThUON PROJNCT Timetable for Key Processing Events: a. Time taken to prepare 20 months b. Project prepared by MWEHIPWG/ConsultantsIIDA c. First IDA mission November 1987 d. Departure of Appraisal Mission May 1989 e. Negotiations May 1990 f. Planned Date of Effectiveness April 1991  - 28 - Schedule D Status Of Bank Sroue Ocerations In TANZANIA Page 1 of 3 PFO8R2S - Susmary Statement Of Loins and IDA Credits (LOA data as of 10130/90 - NIS data as of 11/lOf901 Auaunt in US1 Billion (less cancellationsl Lzan or Fiscil -Undis- Closino credit No. Year SorroNer Purcose ank IdA buried Date ----__- ------ ---- - -- Credits *Z Creditsfsl closed 781.57 C Ol50-TAN Vs90 TANZANIA GRAIN STORAGE & IIL. 43.00: 20.52 12/31/90(fi C10560-TAN 1981 TANZANIA EDUCATION VII 25.00 1.67 12/31/90(R) C 12290-TAN 1982 TANZANIA FORESTRM -II 12.00 4.08 12131190f1i C13700-TAN 1963 TANZANIA NIUF!NDI PULP&PAPER 18.00 2.&0 12/31/901R1 C137;10-TAN 1983 TANZANIA COAL BNS.CREDIT 6.30 .17 0630/90iR C10S0-TAN 1984 TANtiANIA POWER IV 35.00 2.07 12/31/901R) C1536O-TAN 1985 TANZANIA PORTS R8AH. 27.00 2.82 06130190 C16040-TAN 1985 TANZANIA PETROSECTOR.T.A 8.00 4.08 0630t911R) CL6870-TAN 1986 TANZANIA POWER REHABJ.ENERY 40.00 5.77 12/31/90 C16980-TAN 1186 TANZANIA SIXTH inY. (RENAl) 50.00 38.27 06/30192 C18100-TAN 1987 TANZANIA TELEC.I1 23.00 8.10 06/30191 C18?10-TAN 1988 TANZANIA AMLXPORTS RV. I 30.00 29.29 06/30196 C9690-TANlS 1989 TANZANIA IND.&TRADE ADJUS.CR. 135.00 76.20 12/31/90 Cl0700-TAN 1989 TANZANIA NATL.A6.& LIY.R