of Document TheWorldBank VOROMCIAL USE ONLY Repwt No.8836 AUDITREPORT PROJECTPERFORMANCE TANZANIA INUSTRIAL COIPLEXPROJECT MDROCORO (LOANS 1386/1385T-TA) JUNE 29, 1990 Operations EZYalat1cn DepartmeAt This document distion andway be asnd by recipie hasa resticted of oly Intperformance tWeiofficial dutes Its may not otherwbe be diclosed wthout contents WorldBankatwhoati ANDACRONYMS ABBREVIATIONS BTO - Back-to-Office Report EDP - European Development Fmnd SIB - EuropeanInvestment Bank WRV - EconomicRecoveryProgram ICB - International Competitive Biddtng MSC Morogoro Shoe Company NDC - National Development Corporation PCR - Project Completion Report PPAR - Projent Performance Audit Report PR - President'. Report SAP - Staff AppraisalReport TDFL - TanganyikaDevelopment Finance Company,Ltd. TIB - TanzaniaInvestmentBank TLAI - Tanzania Leather Associated Intdustries UNDP - United Nations Development Program UNIDO - United Nations Industrial Development Organization .RRENCY LQUIVALENTS Currency Unit - TanzanianShilling (TSh) - 100 cents 1978s 1US$ - TSh 7.7 1979: 1US$ - TSh 8.2 1980s 1US$ - TSh 8.2 1981: 1US$ - TSh 8.3 1982: 1US$ - TSh 9.3 1983: 1US$ - T1lh 11.1 1984: 1US$ - TSh 15.3 1985: 1US$ - TSh 17.5 1986: 1US$ - TSh 32.7 1987: 1US$ - TSh 64.3 1988: 1US$ - TSh 120.0 1989s 1US$ - TSh 143.4 AppraisalYear - US$1.00 - TSh 8.30 InvestmentPeriod - US$1.00 - TSh 8.30-17.50 CompletionYear - US$1.00 - TSh 17.50 WEIGHTSANDMEASURES ha - hectare - 2.47 acres kg - kilogram- 2.250 pounds (lbs) km , 1,000 meters (m) - 3,280 feet (ft) - 0.61 miles m2 square meter - 10.76 square feet (eq ft) m3lyr - cubic meters per year ton - 1,000kilograms (kg) tpy - tons per year FISCAL YEAR Government: July 1 - June 30 TLAI; January 1 - December 31 FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDUSTRIALCOMPLEX NOROGORO PROJECT (LOANS 1386/1385T-TA) TABLEOF CONTENS Pa4e no. PInFACE *********e*ee*....****e*.***..***.......................... 1. BASIC DATA SHEET ............... iii EVALUATIONSNM2IARY ................. , v I* BACKGROUND *.................................................. 1 The IndustrialSetting ..... 1 I......... Objectives ................................. 4 DESIN AD _I. PRWOECT A SCOE ..................................... 4 Project CoAcept andScope * .................................4 III. IMPLEMENTATION EXPERIENCU *................................... 6 Project Management ........................................ 6 IV. PROJECT OUTCOME ............................................ 8 V. OVERALL ASSESSMENT ...........................................12 VI. LESSONS OF EXPERIENCE...... o o....................... .....*.... 13 ATTACHMENTS 1. Morogoro Shoe Company: Productionand Sale., 1980-87 ........ 17 2. Morogoro Shoe Company: Summaryof FinancialStatements, 1982-87 ................................ 18 3. Morogoro Leather Goods Company Limited: Sumary of Financial Statements, 1983-87 ...... ........................19 4. Morogoro Leather Goods Company Limiteds Summary of Production and Sales, 1983-87 .............................. 20 5. Industrial Estate: Summary of Financial Statements, 1983-87 ................................ 21 This,documenthas a restricted distributionand may be used by recipients only in the performance duties.Its contents may not otherwisebe disclosedwithoutWorldBankauthorization. of their official TABLE OF CONTNRTS (cont'd) Page No. PROJECT COMPLETIONREPORT I. INTRODUCTIQN ......................................................... 25 II. PROJECT3ACRGROUND .................................. 25 A. Project Preparation, Appraisal and Loan Approval .... O.. ... 25 B. Project Description and Objectives ....................... 26 III. PROJECT IMPLEMENTATION AND MANAGEMENT ................. ....... 28 A. Achievement of Objectives ............... ........... 28 B. Project Scope Changes .*...... ...... .... .. ..... 29 C. Project Management ....................................... 29 D. Employment and Training .................................. 30 E. Use and Performanceof Consultantsand Engineering Servlces ..**.***...**c** .**.**.......... ............. 31 F. Procurement ....*.*** ........................ * ** ....... ........... O 32 G. Implementation Schedule .................................. 32 H. Ecology .... ................. ..................... 3 3..**** I. Capital Cost, Financingand Loan Disbursements ........... 33 IV. OPERATING PERFORMANCE ......................................... 35 A. Market Development ...................................... 35 B. Production Build-up .. **.........*....* ................... 36 V. FINANCIAL PERFORMANCE ................. .... .... ........... 37 VI. ECONOMIC PERFORMANCE ....*.... ............ *.. ........ .... .. . 38 VII. BARK'S ROLEAND LESSONS LEARNED ........... ................... 38 ANNEXES 3-1 Actual and Estimated Implementation Schedules .... ............ 41 3-2 Actual and EstimatedCapital Costs and FinancingRequired .... 42 3-3 Actual and Estimated Disbursement Schedules ..... ............. 43 PROJECT EOMANE AIT RPORT IDGORO INDUSTIAL COMPLEX POJECT (LOANS1386/1385T-TA) This is a Project Performance Audit Report (PPAR) on the Morogoro Industrial Complex Project, supported by Loans 1386/1385T-TA in the amount of US$23 million. The loans were approved in March 1977, became effective in July 1977, and closed in December 1984, two years after the original date. The PPAR was prepared by the Operations Evaluation Department (OED), while the Project Completion Report (PCR) by the formerIndustry Department of the Bank. The PPAR is based on the attached PCR, Staff Appraisal and President's Reports, sector and economic reports, OED's study "World Bank/Tanzania Relations, 1961-1987," (chapter on Tanzania's Industrialization Effort 1961-87), the loan documents, the summary of the Board discussions, study of the project files and discussions with Bank staff. The 01D mission discussed the effectiveness of the Bank's assistance with the Tanzania Leather Associated Industries (TIAI), the Morogoro Shoe Company (MSC), the Morogoro Leather Goods Company, Ltd., Goverrment officials, and the banking and business community. Their kind cooperatlon and valuable assistance in the preparation of this report is gratefully acknowledged. The PCR ably and candidly discusses the project experience with regard to the origin, preparation, implementation, management, operations, and financial, economic and institutional performance, and draws the lessons learned. The PPARfocuses and elaborates on the framework of the country's industrial strategy and policies at appraisal, the project design, the quality of the Bank's appraisal work and effectiveness of supervision effort, the outcome of the project, the extent and effectiveness of the Bank's advice and interventions to help resolve critical issues, the project's sustain- ability, and draws additional lessons from the project experience. The draft PPARwas sent to the Government z.nd the agencies concerned for their review. However, no coments were received. * ~- iii - PROJECT PEFUXe9MC AUI RPR INDUSTRIAL CO(YLEXPROJECT MOROCORO (LOANS 138611385T-TA) BASIC DATA SHEET L-IAN MQLI (Amounts in US$ Million) As of Mar. 31, 1990 Lcan No. Oritinal Disbursed Cancelled Repaid Outatandina 138611385T-TA 23.0 23.0 0.0 9.8 13.2 CM"ULATIVEESTIMATEDAND ACTUALDISBURSEMENTS E128 n79 E2 E1 MI FY83 FY84 nY85 uralsl I.stlmete (US$ N) 7.1 15.4 20.1 22.0 22.5 23.0 23.0 23.0 Actual (USS xl 9.0 14.4 7.8 20.4 21.2 21.6 22.4 23.0 A&ctual a8 of hppa8l () 126.8 93.5 8.6 92.7 94, 93.9 97.4 100.0 nROJCT DATE$ Orisns.J Revised/A¢tual Startof Preparation n.a. 01174 Appraisal n.a. 10175 BoardApproval n.a. 03103177 Lcan Signing n.a. 03129/77 Loan Effectiveness n.a. 04,1t6/77 LoanClosing 12131/82 12/03184La Date Completion 12/80 lb 12183I- Completion Time (months) 48 84 Tim. Overrun (months) -- 36 Date of Start-up of Operations: Shoe Factory 06179 12180 LeatherGoods 12/78 03/82 Industrial Estate 06180 12183 TotalProjectCost (US$M) 32.2 - 35.1 Cost Overrun (Z) __ 9.0 Tot4 Financing Required(US$M) 36.2 40.9 Financial Rate of Return (2) 15.2 negative Shoe Factory(2) 17.2 negative Industrial Estate(Z) 9.2 negative Economic Rate of Return (Z) 26.4 negative Shoe Factory(2) 29.8 n6gative Industrial Estate (Z) 15.9 negative - isv- weoks) (staff urn n*Uf1Th m It YM fill fiRfll flu It8a lYE J311111 Prs#praist 5.3 4.1 0.6 - - - - - - - 20.0 Awraal * 86.4 16.6 - - . . - 103.0 Noutitns 25.7 - - - - - - 25.7 . Sprvision -. 7. LI AA M LI i Lg AI LI l ia1 i LZ OA' MIA total 5.3 100.5 45.2 15.6 9.9 S.? 7.5 11.9 4S 5.7 12.8 10.3 0.4 242.3 MISSINDAT No. of No. of staff Date of & bh/YearWeeks Fersons Weeks Report PreparationI 02!74 no&* I n.-. 02128174 PreparationII 06174 1.4 1 1.4 07112/74 PreparationIII 12/74 0.6 1 0.6 12110/74 Appraisal 10/75 5.0 3 15.0 03/03/77Id SupervisionI 05/77 1.4 1 1.4 05/18177 SupervisionII 02/78 2.0 2 4.0 04/12/78 SupervisionIII 07178 1.4 1 1.4 08/23/78 SupervisionIV 04/79 1.0 1 1.0 05/29/79 SupervisionV 10/79 1.2 2 2.4 11i06/79 SupervisionVI 02180 1.2 1 1.2 03/02/81 SupervisionVII 06/8! 1.2 2 2.4 06/24181 SupervisionVIII 11/81 1.0 1 1.0 01/27/82 SupervisionIX 12/81 1.4 3 4.2 03125182 SupervisionX 11/82 2.4 1 2.4 12/22182 SupervisionXI 11183 0.4 1 0.4 11/11/8S Su:ervlslonXII 01/85 1.8 2 3.6 02113/85 SupervisionXIII 09/85 0.8 1 0.8 12/18/85 Completion 01/86 0.8 1 0.8 05106/86 OTHER PROJECTDATA Borrowers Government of Tanzania Executing Agencyt National Development Corporation (NDC)/ Tanzania Leather Associated Industries (TLAI) Ia Payments continued being made after closing date-on commitments made before this date. Date of final disbursements July 23, 1985. lb No definition of completion is given in the Loan Agreement. The SAR (para. 5.10) indicates Implementation would cover a six-year period ending December 1982 but PCR, Annex 19 (Project Implementation Schedule) extends only through December 1980. Supervision reports indicated a completion date of June 1982. LI Partialcompletion. Id BTO Report dated November 19, 1975. Delay In preparationof appraisal reportmainly due to change in projectscope Snd needto ensuresufficient vater supplyfor the industrial complex. - v - AUDT REPORT PROJECT PERPORMANCE INDUSTRIALCOHPLEX MOROGORO PROJECT (LOANS 1386/1385T-TA) EVALUATIONSUMMARY Introduction 1. A centrally directed strategy of industrialdevelopmentand policy frameworkwas adopted in earnest by Tanzania'spolitical leadershipduring the late 1960. to advance the objectives of self-reliance, economic growth and structural transformation. Industry was seen as a powerful engine of growth that could modernize the economy through more capital-intensive, higher-productivityprocesses,promotedwithin a protected environment. The Government firmly believed that a rigorously pursued industrialization strategy with emphasis on resource-based,producer goods industries that cater to basic needs, dubbed as the basic industrystrategy,coupled with an extensive state involvement in the economy, vould accelerate growth and achieve a more equitable socio-economic development. The Bank endorsed this approach to industrialdevelopmentfrom its inception,and even became its staunch supporterthroughoutthe 1970s (PPAR,paras. 1-7). Obiectives ii. In the context of the basic industry strategy, the public sector assumed a leading role in the developmentof the manufacturingsector. The basic objectiveof the project under review was to use domestic hides, skins and cotton, which were exported largely unprocessed, to produce finished productsof high quality for export markets and therebyincreasevalue added, foreign exchange earnings and employment. The main component of the Bank- supported project was the establishment of a shoe factory that could produce 4 million pairs a year, 80 of which would be exported mostly to Europe. The other components comprised a small-scale leather goods plant and the constructionof an industrialestate, all to form part of an inter-linked industrial complex that also included a tannery and a canvas mill (PPAR, paras. 8, 9). Imilementation ExDerience iii. The project management set up was not properly organized and staffed, the prime contractorturned out not to be qualifiedand experienced, and their performancewas not satisfactory. Implementation was delayed by over three years largely due to inadequate organizational arrangements, poorly defined contractualresponsibilities between sponsor and contractors, exogenous factors (e.g*, difficultyin attractingqualified expatriatesand local staff), and the limited experience of the consultingand engineering firms involved. Installed cost overruns were 23Z, primarily due to the - vi - higher cost of imported equipmentfor the shoe factory. The commissioning of the equipmentwas incomplete,haphazard and poorly timed, while a good part of commissioned machine* was found to be damaged, defective or not working. Payment applications were handled Inadequately by both the consulting firm and the project management unit, in part because of poor record keeping. The quality of the constructionmaterials was inferior,and the supervision of the civil works inadequate. The training the workers received abroad was poorly planned, unstructuredand superficial. Finally, the management and marketing contractorfailed to fulfilltheir obligationsand, as a result, no credible production/export program, maintenance capability, accounting and budget procedures,or managementinformationsystemwas ever developed (PPAR, paras. 13-15). The frequencyof the Bank's missions and, especially,their effectiveness declined as the project approached physical completion and start-up. In short, project implementation has been extremelyweak (PPAR, para. 28). Outcome iv. The shoe factory, comissioned in 1980, has never operated at more than 4S of its capacity (in the last several year- it has been virtuallv idle) and, of course, never developedexport capabii. ';t.. The project's con- tribution to the Shoe Company's institutionbuilding lissbeen negligible. Neither managerial capabilitynor professionalknow-how in design, pattern making, tech=iques, productionand quality control,or marketing of footwear has been deveioped. A number of potent factors account for the company's poor performances excessivelylarge size of plant; over-optimistic assess- ment of the possibilities of penetrating foreign markets in the face of entrenchedcompetitors;cursory world market analysisand non-identification of specific export outlets at appraisal;and incufficientoperational and export marketingexperienceof the contracted managementimarketing consultant (PPAR,part. 16). v. The Shoe Company is financially unsound as it has sustained 1J,,5es and its net worth is negative; recalculated financialand economic rates of return are negative, compared to 17S and 301 respectivelyat appraisal;and the future of the shoe factory remainsbleak. The managementof the holding company (TLAI) as well as of the Shoe Companymade no seriouseffort over the years to capture a share of the domesticmarket or come up with a practical solution to utilize the facility. Selling off all or part of the equipment was not possiblefor ideologicalreasons -- at a time when private firms were allowed to import shoemakingequipment. The possibility of operating the shoe factory on a sunk cost basis has been consideredsince 1982 but without success. Aside from the need for correctiveaction in the country'smacro- economicpolicy framework,a pivotal conditionhas always been the necessity of the Shoe Company to enter into a management/marketing contract/partnership with an experiencedforeign firm, a conditionwhich in the firm's situation and Tanzania'seconomic circumstances was not feasible. As it now stands, the Shoe Company has no purpose and no viable organizational, managerialand work force structure. Assuming the development of a more conduciveeconomic environment and tangible improvementsin leather processing and marketing, TLAI and the Governmentcould considerseveral options: continuethe search for a foreign firm with established marketing outlets and willing to risk some equity to form a joined venture; lease the facilities; or outright sell - vii - the plant and equipment(as a whole or in segments),breakingaway from ideo- logical orthodoxy. Currently, the Governmentis in the process of coming into a decisionon this importantissue (PPAR, paras. 22-24). vi. The performanceto date of the other two components, i.e. the indus- trial estate and the leather goods plant, does not allow for optimism con- cerning their future financialviability either. The leather toods factory commencedoperationsin 1983. It operateson a very small scale, and never came close to projected levels of production and sales at appraisal because of weak management, unavailability af good quality leather, lack of imported accessories, poor product design, limited local demand, and lack of export possibil!ties due to quality and price considerations.As in the case of the shoe factory, no export markets had been identifiedat appraisal. It sur- vives only because of the switch to productionof canvas goods, cateringto a captive market. The financialpositionof the company is precariousand its prospectsuncertain,as the entire equipmentwould need to be replacedbefore long (PPAR, paras- 25, 27). The organizational structure of the industrial estate l1aves much to be desired. The estate is poorly managed, no main- tenance is taking place because of lack of funds, the assessmentof rentals and collectionsfor the standardfactoryblocks and housing units are discre- tionary, the occupancy rate of the standard small-enterprise units in the estate is 501, and the estate operates at a loss. Financial and economic rates of return of both componentsare negative, and their sustainability uncertain (PPAR,para. 27). OverallAssessment vii. The concept and desian of the shoe factorv were excessively ambitious-- productionof 4 million comparedto ordinaryplant sizes with an output of 0.5-1.5 million pairs annually, suggestinginsignificantgains in scale economiesby constructinga plant of much larger size especiallyin an inauspicious environment. The possibilities of facile technologytransferin the country's environmentwere grossly overrated,while the targeted export figure of 801 of productionwas overly optimisticfor an upstartingcountry and factory that had no traditionin shoemaking, used low grade leather,and faced stiff competitionfrom entrenchedexporters in a market where superior quality and changing fashion are doW4nant elements. The expediency of designing a smaller project catering in part to the domestic market and building up export capability graduallywas not considered. World market demand was estimatedto be so large and growing that the modest increment in supply from the project would be easily marketable. Moreover, although the critical element for the project's success was identified the absolute necessity to establish a joint venture to ensure the requisite management capability and experience in export marketing, the importance of this pre- requisite was diluted as the chances for engaging foreign partners faded out, and makeshift arrangementswere put in place instead. Ultimately, the key factor for effectivemarket penetration (aside from quality and price) came to be the developmentof a successfulmarketing strategy,and the appraisal foresaw no major problems in establishing externalcommercialrelationships. Finally, the appraisal brushed off major (and known) problems in animal husbandry, marketing and pervasive price controls that impacted on leather quality and supply (PPAR, paras. 10, 11). - viii - viii. The locationof the plant is far from ideal since it is cheaper to transport finished leather and fabric than shoes to points of destination. The design and constructionof the building is not appropriatefor tropical climate, while it entailed higher absolute costs and foreign exchange requirements. The selection of machines, based on the concept of a "universal"system, implies a significantpercentageof idle machines during production. Moreonor, the se32ctionof a wide rauge of machine models led tc procurement from 25 different manufacturers,inter alia, entailing higher investmentand inventorycosts. More careful study of the machinery layout, the operationsto be performed,and selectionof equipmentis likely to have reduced the total investmentin equipment (PPAR,para. 12). ix. The shoe factory was an over-dimensionedproject, built in an environment lacking physicpl, technical and managerial infrastructure. Underlyi_^ assumptions regarding competitive quality, cost structure and world prices were overly optimistic. Given its inordinatescale and the high risk involved, deci3ive factors determiningthe feasibility of the project did not receive the attentio.. they deserved. In particular,in the absence Of a Rartner eLxRerienced in shoe manufacturikn_ and export marketina and a stake in the venture, the prolect should have not been underakn. Inabilitv to involve a willint and capable Dartner from the very beainnina in the vroiect should have signalled to the Bank that further efforts in desianinR and prenarine the -roject in its griainalexort-oriented confianrationmt be discontinued. Yet, despite the fact that the necessityof a joint venture had been recognizedvery early, in the process the importanceof the icsue eluded the Bank, and project preparationproceede6 even though the project could not elicit investor interest. In the end, the simplisticview (and counvenient way out) was taken, that contracting a company experienced in management and export marketing,even without a stake in the venture,vould be sufficientto ensure project success (PPAR,paras. 17, 26). x. The contractsigned between the sponsor and the management/marketing contractor,originallyintendedas a conditionfor Board presentation of the loan but in effect signed a year later, did not contain a detailedmarketing plan as envisaged,recorded only intent and did not stipulate penalties or provide incentivesfor export performance, and obtainedno guarantees. It is strikingthat the Bank was satisfied with the contractin the absence of such a plan which itself had requested be included,and did not insist that the plan, iLncluding adequate guarantees for its implementation, be presented before signature of the contract given its paramount importancefor project success and the determination that the contractor's export marketing organi- zation needed strengthening. As it turned out, the contractedfirm did not have the experience they claimed they had, the Bank having failed to iavesti- gate sufficiently the firm's assertionsregarding their experienceand per- formance record with implementation of shoemaking plants and their interna- tional marketing contacts (PPAR, paras. 18-20). xi. With the project three years under preparation,the Bank apparently was not eager to delay further Board presentation, and placed excessive con- fidence in the contractor's pledge -- hardly a felicitoushandling of such an important matter. Conceivably,a delay in presenting the project to the Board, even at that late stage of project preparation, might have resultedin - ix - an entirely different outcome. In the event, the objectivesof the project were not achieved, financialand economic rates of return are negative, and the project is a failure. Furthermore, under the present management struc- tutre, know-how, market conditions,cost structure,raw materials situation, and caliber of operating staff, the likelihood of the virtually idle shoe factory operating as it was originally planned, and on a financially and economically viable basis, is remote and the project is not sustainable (PPAR, paras. 20, 26). xii. There can be no question that the Bank exercised poor judgment in g_ing ahead, and in such scale, with this project. Furthermore, given that the Tanzaniansprofessed no experienceand were looking up to the Bank for guidanceand advice concerningproject identification, design, and execution, the poor outcome of this particularproject, as well as of others in other sectors,and the ensuing disappointment have cast doubts on the soundnessof the Bank's counsel, and have underminedthe trust of the Tanzanian officials in the expertise and judgment of the Bank's technical staff and management (PPAR, para. 29). Lessons of ExRerience xiii. The project experience, detailed in PPAR, para. 30 and PCR, para. 7.02, is instructive in many respects and suggests a number of recom- mendations. Specifically,unsatisfied essential preconditionsfor project success identified during the stage of design tend to be diluted in the process of project preparation and be replaced by makeshift arrangements which ultimately turn out to be detrimental to the project outcome; there- fore, when essential Rreconditionsfor prolect success cannot be met. the Rro 4 ect should not be undertaken. In the same vein, haste to present to the Board and commit Bank funds before critical contractual obligations have been fully negotiated and agreements have been reached between the parties involved can alter significantly the project outcome and inadvertently lead to supporting unviable operations. In designing export-oriented projects, the severe impediments to transfer of technology and techniques in a country that has no tradition and lacks basic technological infrastructure should not be underestimated; the difficulties a new entrant is bound to face in peve- trating a highly competitive market suggests the expediency of a gradual build-up of export capacity, relying initially on the domestic market; and early identification of export markets and access to channels of distribution are paramount preconditions. xiv. While respecting minimum economic size, careful consideration should be given to avoid designing projects far exceeding optimal scale of plant in a difficult environment, particularly in export-oriented projects. Careful study of the machinery layout and optimal selection of operations to be performed can reduce significantly the level of investment in equipment and inventories. To ensure uninterrupted production, full appreciation of flaws in backward-linked activities which impact on the quality and the flow of supply of raw materials (e.g., processing, pricing, marketing) is crucial; generally,a project is unlikely 4o succeed in an uninviting policy environ- ment (e.g., price controls, unavailability of foreign exchange and institu- tionaa credit, poor infrastructure). Project implementation could suffer from the lack of a determinedeffortto assess realistically the technical and managerialcapability for project of the projectsponsor.Responsibility implementacionshouldbe entrusted to a projectmanageron site;management arrangements should be designed in such a way as to ensure sufficient decision-making authority and effective monitoring of contractors; the per- formance of the project manager and the supporting team shr--1 be reassessed during implementation to detect early on shortcomings and Sest corrective action; and the functional. responsibilities between project sponsor/manager and consultants/contracteroe - uld be clearly defined. The frequency,but more importantly, the e iess of the Bank'ssupervision effottcan be determiningfactorsof t , iroject's outcome. Finally,the experiencein Tanzania, casts doubcson the serviceability as well as els"amere, of the holdingcompanyconceptanr its ability to guide and assistconstructively its subsidiaries. AUDIT REPORT PROJECT PERFORMANCE INDUSTRIALCOMPLEX MOROGORO PROJECT (LOANS 1386/1385T-TA) I. BACKGROUND The IndustrialSettina 1. A centrally directed strategy of industrialdevelopmentand policy frameworkwas adopted in earnest by Tanzania'spolitical leadership during the late 1960s to advance the objectivesof self-reliance, economic growth and structuraltransformation. Industry vas seen as a powerful engine of growth that could modernize the economy through more capital-intensive, higher-productivity processes,promotedwithin a protected environment. The Government firnly believed that a vigorously pursued industrialization strategy with emphasis on resource-based,producer goods industries that cater to basic needs, dubbed as the basic industrystrategy,coupled with an extensive state involvement in the economy, would accelerate growth and achieve a more equitable socio-economic development. The Bank endorsed this approach to industrialdevelopment from its inception,and even became its staunch supporterthroughoutthe 1970s. 2. The implementation of the adopted industrialization strategyfmplied inter alias: creation of effective organizational structures and planning processes to ensure appropriateinter-sectoral (e.g., industry,agriculture, infrastructure) and intra-sectoral (e.g., rationalproject selection)alloca- tion of resources;the substitutionof an administrative apparatus for the market mechanismto effect resourceallocationdecisionsand implementpolicy measures; development of public management capability to ensure efficient project implementationand operation; significant levels of investment in relatively large, capital-intensive and import-intensive industries;a con- stant and dependablestream of foreign exchange to finance imported capital and recurrentimport requirements; a relativelylarge domesticmarket to reap scale economies; and an adequate supply of technically trained manpower, including managers, to operate industrial undertakings -- a tall order. ConsideringTanzania'slevel of development and the demandingrequirements of a basic industry strategy, it is arguable whether the strategy could have been effectively implemented at the projected pace and time frame. 3. Major setbacks set in early on and the achievementof these goals in the immediatefuture is far from assured. After two decades of misperceived and poorly Implemented inward-looking industrialization, and despite the injectionof an inordinateamount of external financialand technicalassis- tance, the industrialstructurethat has evolved to date is not significantly differentfrom that which existed in the early 1960s, real per capita income and wages in the late 19809 are lower than in the mid-1960s,the balance of payments situationremains critical, and heavy dependenceon foreign inputs, financialresources,technologyand expertisepersists-- in defiance of the stated goals. A confluenceof factors,encompassing an excessiveand poorly managed planning system, inadequate policies and ineffective institutional arrangements,extremely low productivityof the work force and the invest- ments undertaken and, to some degree, external shocks, has led to the development of an inefficient industrial structure which is incapable of generating the hoped for sustainable growth and transformation of the economy. 4. Investmentin manufacturingwas strong during 1967-79, growing at over 15S annually in real terms, inducedinter alia by substantialinflows of officialaid at concessionary terms. It tapered off in the early 1980s, and declined dramatically (by one half) by the mid-1980s, mirroring the dire economicdifficulties afflictingthe sector and the economy as a whole. Real value added in manufacturing increased 6.82 per annum in 1967-79, but declined precipitouslythrough the 1980. -- by about 52 per annum. During the same period, the share of manufacturing in GDP rose from 9.51 to 12X, but fell to 7.32 in 1986. Capacity utilizationaveragedaround 502 in the 1970. but dropped to 25Z in the 1980s, due to over-design,heavy dependence on imported inputs, management and technical problems, poor maintenance, and insufficient infrastructure. Despite industrial investments amounting to some US$3 billion in real terms during the past two decades, labor produc- tivity remains below the 1966 level. Real output per employee in manufac- turing has been declining constantlysince the late 1960s, and by 1979 was 70% of the 1966 level; by 1986, ic had fallen further to 561. Real earnings per employee increased by 11S between 1967 and 1973, but declined sharply thereafter;by 1979 they were more than a quarter lower than in 1966, and by the mid-1980s only 301 of the 1966 level. Finally, exports of manufactures have been erratic, averaging 131 of total exports during 1967-79 and 71 during 1980-86. They grew (from a small base) 81 annually in nominal terms during 1967-79 but declined by 72 a year throughout the 1980s. In real terms, manufacturing exports increased marginally in 1967-72 and declined constantly thereafter through the late 1980s. 5. The string of intractable problems afflicting industrial perfor- mance, and whose severity assumed unwieldy proportions during the 1980s, includes oversized or sub-optimal plant scale; completed but inoperative plant capacitydue to lack of infrastructure; shortage of technical and mana- gerial skills and continued reliance on high-priced expatriates; acute shortages of imported inputs due to the lack of foreign exchange; low factor productivity due to overmanning, rigid labor laws, poorly maintained equip- ment, absence of incentives to reward performance, and poor plant utiliza- tion; inadequate economic infrastructure (shortage of power and inadequate transport system in particular) reflecting the poor inter-sectoral allocation of investment and recurrent resources; under-capitalized and heavily indebted, if not virtually bankrupt, parastatals due to poor management and performance, reinforced by rising indebtedness due to successive drastic devaluations. 1 The poor condition of the parastatals and their inability to 1/ Between 1966 and 1989, the shilling has depreciated dramatically: in 1966 TSh 7 - US$1; in 1989 TSh 145 - US$1. service their debt has in turn undermined the viability of the financial intermediaries (TIB and TDFL), which display an extremely weak portfolio and are striving to remain sfloat. 2 6. Inadequate allocation of resources and deficient incentive str.c- tures for the development of the agricultural sector, excessive administra- tive controls over economic activities, and the continued growth in the size of the public sector without due regard to the limited administrative capacity available distorted the pattern of development process and stifled progress. Ineffective organizational structures and planning processes in- capable of ensuring proper coordination and inter- and intra-sectoral alloca- tion of resources; ambitious investment programs, largely supported by the largess of the Sank and sympathetic donors; poor project screening procedures and haphazard project selection; underestimation of the human, institutional and organizational capacity of the country; poor organizational structure and performance of parastatals; and a distorted policy framework resulted in the development of an industrial sector which is over-extended in relation to the size of the market and the country's technological and skill (managerial, technical and labor) capabilities. The policies adopted ended up favoring industries linked to imported capital, skills and materials, rather than the use of domestic resources, thereby creating mounting pressures on the balance of payments at a time when, largely because of the anti-export bias, foreign exchange earnings were dwindling. Industrial investments made in the 19708 lacked selectivity, were grossly unproductive, and did not succeed in changing perceptibly the industrial structure, as no effective mechanism was developed to ensure that they interlocked and made the best use of available resources. The flaws and underlying problems of the strategy became more forcefully evident in the late 1970. and persist since then, suggesting that external dependence in all its dimensions will continue well into the 1990s. 7. In 1986, the Government prepared an Economic Recovery Program (ERP), taking the first initial steps to rectify the distortions created by earlier policies in an attempt to reverse the protracted deterioration of the economy. The areas addressed include exchange rate policy, the trade regime and foreign exchange allocations, performance of parastatals, the agricul- tural marketing system, pricing policies, industrial restructuring, transport sector efficiency and public expenditures. The Goverment's objectives in the industrial sector aim at improving capacity utilization, rehabilitation of major industries, completion of on-going projects, and at ensuring that resources are directed toward the more productive and efficient firms in the 2/ For details on the concept of the basic industrial strategy, policy framework, and the structure and performance of the manufacturing sector see: OED, Report No. 8329, World BanklTanzania Relations. 1961-1987, January 16, 1990, Vol. II, "Tanzania's Industrialization Effort 1961-87,0 pp. 45-142. The present condition of the manufacturing sector has been ably diagnosed and analyzed in a recent World Bank sector study entitled: Tanzania: An Agenda for Industrial Recovery, Report No. 63'S7, June 30, 1987, 3 volumes. See also OED, PPAR No. 7744, Tanzania: TIB (Loans 1172. 1498 and 1750) and TDFL (Loan 1745), May 4, 1989. -4- sector. The ERP envisages a recovery period of five to seven years. 3 Furthermore, in the framework of an active macroeconomic dialogue, the Bank and the Government have been working jointly to develop specific action pro- grams to rationalize the industrial sector, to be supported by sector lending. The proposed industrial restructuring scheme envisages three phases. Phase I will involve a diagnostic study of selected subsectors, including textiles, and the identification of pressing issues both at the enterprise and subsector levels. During Phase II, rehabilitationand re- structuringprograms will be developed,including t'.metables for implemen- tation. Phase III will lead to the implementation of agreed action programs;.4 Obiectives 8. In the context of the basic industry strategy, the public sector assumed a leading role in the developmentof the manufacturingsector. The basic objective of the project under review was to use domestichides, skins and cotton, which were exported largely unprocessed, to produce finished productsof high quality for export markets and thereby increasevalue added, foreign exchange earnings and employment. The main component of the Bank- supported project was the establishment of a shoe factory that could produce 4 million pairs a year, 80S of which would be exportedmostly to Europe. The other components comprised a small-scale leather goods plant and the con- struction of an industrial estate, all to form part of an inter-linked indus- trial complex (SAR, para. 4.01). II. PROJECTDESIGNANDSCOPE Proiect Concent and Scove 9. The project under review was conceived as an integral part of an industrial complex which comprises an industrial estate, that would provide land and basic infrastructure to small-, medium-, and large-scale plants; and a four-factory integrated complex consisting of a tannery, a canvas mill, a shoe factory, and a leather goods plant. The state-owned National Develop- ment Corporation (NDC), the original sponsor of the project, obtained tech- nical and financial assistance from Bulgaria for the establishbmvt of the tannery,while the construction of the canvas factory was financed by EIB and EDP. The Bank's project financed the shoe factory (main component), the leather goods factory (small-scale undertaking), and the industrial estate. 31 The government's program of policy and institutional reforms for 1987-90 are outlined in Tanzania: - Policy Framework Paper. 1987-90, No. SecM87-1077, October 2, 1987, paras. 6-24. 4/ For details see PR No. P-4944, Industrial Rehabilitation and Trade Adiustment Prosram, November 22, 1988, paras. 93, 100-103. Recent economic developments and the impact of the ERP are discussed in Ibid., paras. 12-19. All plants making up the complex, including standard buildings to house 18 artisanal or small manufacturingestablishments, vould be located in the industrial estate to be constructed (detailed features in SAR, paras. 4.02-4.14 and PCR, paras. 1.01-1.03, 2.01-2.08). The Tanzania Leather Associated Industries (TLAI), a state-ownedholding company formed in 1979, succeededNDC and took over the assets of the project. The assets were in turn transferred to two newly formed companies whicb assumed operational responsibility: the Morogoro Shoe Company (MSC), established in 1980, and the MorogoroLeather Goods Company,Ltd., establishedin 1982; the industrial estate is managed by TLAI, as the originally envisaged establishmentof an estate corporation(SAR, para. 8.01(d))did not materialize. There have been no significant changes in project scope. 10. The concept and design of the shoe factory were excessively ambitious -- productionof 4 million compared to ordinary plant sizes with an output of 0.5-1.5 million pairs annually, suggestinginsignificant gains in scale economies by constructing a plant of much larger size especiallyin an inauspicious environment. The possibilities of facile technologytransferin the country's environmentwere grossly overrated,while the targeted export figure of 801 of productionwas overly optimisticfor an upstartingcountry and factory that had no traditionin shoemaking, used low grade leather, and faced stiff competitionfrom entrenchedexporters in a market where superior quality and changing fashion are dominant elements. The expediency of designing a smaller project catering in part to the domestic market and building up export capability gradually was not considered. World market demand was estimatedto be so large and growing that the modest incrementin supply from the project would be easily marketable. Moreover, although the critical element for the project's success was identified the absolute necessity to establish a joint venture to ensure the requisite management capability and experience in export marketing, the importance of this pre- requisite was diluted as the chancesfor engagingforeign partnersfaded out, and makeshift arrangements were put in place instead (see below paras. 17-20). Ultimately,the key factor for effectivemarket penetration (aside from quality and price) came to be the developmentof a successful marketing strategy, and the appraisal foresaw no major problems in establishingexternal commercialrelationships(SAR, paras. 4.17, 4.20; PCR, para. 4.02). 11. The appraisal also brushed off the issue of leather quality on grounds that "althoughnot of the best quality,"exportswere being made, and that improved leather qualitywas expected at existiig and planned tanneries (SAR, paras. 2.11, 4.17). The implicationsof major (and known) problems with the branding, flaying, drying, preparation, transport, storage and marketing of hides and skins which, given the quantities required for the operationof the shoe factory at full capacity,would have created shortages of high quality leatherwere not reflectedupon. Furthermore, two important factors impacting on the adequacy of leather supply did not receive due attention at appraisal: the already mentioned poor animal husbandrywhich - 6 - reduced the estimated off-take, and the pervasive price controls which resulted in extensive unrecorded exports of hides and skins to neighboring countries.5 12. The location of the plant, justified as an effort to decentralize industryand as an inter-linking componentof the industrialcomplex concept, is far from 'tdealsince it is cheaper to transport finished leather and fabric than shoes to points of destination. The design and constructionof the building is not appropriate for tropical climate (steel pillars and aluminumwalls with no ventilationsystem),while it entailedhigher absolute costs and foreign exchange requirements. The selection of machines for conveyorswas made based on the concept of a universal system, wlhereby each conveyor can produce any assortmentof shoes with any technology. However, this implies that during the production of specific types of shoes using different technologieson all conveyors there will be a significantpercen- tage of machines that would remain idle. Had conveyors specializingin a narrower range of shoe types and using a finite number of technologies been selected, probably one-third of the machinery installed would not be necessary. Moreover, since the selectionof machine models were made with a view to enabling the company to produce a wide variety of products and ensuring a flexible production program, machines were procured from 25 different manufacturers, inter alia, entailing higher investmentard inven- tory costs. Furthermore,the machine park was not properly balanced: there were insufficient quanti-ies of some equipment, other machines were in excess, and some were not ..eededat all. More careful study of the machinery layout and the operationsto be performedmost 'Likely would have reduced the total investmentin equipment. III. IMPLEMENTATION EXPERIENCE ProiectManaRement 13. The set up for the management of the project was not appropriate, the prime contractor6 was not qualified and experienced,and their per- formancewas not satisfactory.7 Considering the environment, the implementa- tion schedulew&s optimistic. Implementation was delayed by over three years largely because the project manager was stationed at NDC's headquarters, devoted part of his time, did not have extensive experience, and was not providedwith the requisitestaff support in terms of numbers,competenceand St The Bank even entertained the notion that it would be a surplus of leather that would be sold to other users in Tanzaniaor exported (Letter to Governmentdated January 26, 1976, p. 1). 6/ The prime contractor was responsible for project design, detailed engineering,procurement,constructionsupervision,training, start-up, managementof operationsand marketing (SAM, Annex 7, paras. 1-6). ZI The assessmentsmade relate to the shoe factory, The implementation of the other componentsdid not present major problems. expertise (e.g., engineering,accounting,legal) to enable him to perform a task of the magnitude and complexityat hand. Also, the field management team was not fully qualifiedto exercise effectivesupervisionover the work of the consultants and contractors. Exogenous factors (e.g., scarcity of cement, slow handling of goods at the port, delays in foreign exchanr- - Uo- cations, customs clearances,diepatcbingand transportation of mater._ * and equipment,shortage of water and electricity, 8reat difficultyin attracting qualifiedexpatriatesand local staff willing to live on location),as well as the limited experienceof the consulting and engineering firms that were subcontracted, exacerbated the situation(PCR, parse. 3.02, 3.04, 3.05, 3.10, 3.14, 3.15). Finally, the management and marketing contractor failed to fulfill their obligations during start-up. Thus, the expatriate general managerwas not qualified and wss dismissed; his replacement left shortly thereafter and was not replaced. The planning and finance manager proved also not to be qualified and was dismissed. The production manager quit after a brief stay. No credible production/marketing program, financial budget, or formal reportingand control systemwere ever developed. 14. Most of the equipment was procuredthrough international competitive bidding from an ad hoc consortiumof equipmentmanufacturers. Nonetheless, the process of evaluatingand awarding contractswas not always smooth and caused implementation delays. Unfamiliaritywith the Bank's procedures, involvement of inadequate and inexperiencedstaff, and incomplete under- standing of the role of the consulting firm created difficulties (e.g., handling of the bids). Only one-third of the machines were commissioned, while the rest of the equipmentunderwent only test-runs. Furthermore, com- missioning took place when many pieces of equipment and spare parts had not yet been uncrated, and most of the equipmentwas not tested for a suffici- ently long period of time even at nearly full capacity. A good percentageof machines and equipmentcommissioned was found to be damaged,defectiveor not working. Payment applicationswere handled inadequatelyby both the con- sulting firm and the project manager, in part because of poor record keeping (PCR, paras. 3.12-3.14). The cost overrun for the shoe factory amountedto 23S, largely because of the higher cost of imported equipment (PCR, paras. 3.18, 3.19). 15. The constructionof the plant was poor. Machine platforms for the installationof sophisticatedequipment were not built properly. Shortly after commission,the walls showed structuralcracks and signs of corrosion, and there were drainage and sewerage problems. In general, the quality of constructionmaterials used was inferior, and the supervisionof the civil works inadequate. The training the workers received abroad was poorly planned and superficial. The Bank endorsed the program, but did not follow up closely on the progressand the results achieved. The training focussed more on general concepts and knowledge and hardly on hands-on practice and exposure in shoemaking processes. The workers that were selected had no basic qualifications and were trained on equipment different from that procured for the project. No trainingwas provided for electronically con- trolled equipment. There was also a serious languageproblem which further impeded communication and learning. Finally,the project did not provide for training of middle-levelmanagerial cadr s, the assumptionbeing that such skills will be acquired by understudyingexpatriates during the start-up period (PCR, paras. 3.02, 3.08). -8 - IV. PROJECT OUTCOME 16. The shoe factory, commissionedin 1980, has never operated at more than 4% of its capacity (in the last several years it has been virtually idle) and, of course, never developed export capability (Attachment 1). The project's contribution to MSC's institution building has been negligible. Neither managerial capability nor professional know-how and skills in design, pattern making, techniques, production control, quality control and marketing of footwear has been developed. Accounting and mana8ement information systems also leave much to be desired. A full-fledged maintenancecapabilirv has hardly been developed, and current elemental practices are poor and hap- hazard, raising questions about the ability of the installed and stored equipment to functionproperly. A number of potent factor& account for its poor performance: excessivelylarge size of plant (para. 10); over-optimis- tic assessmentof the possibilities of penetratingforeign markets, the more so since during project preparation only a very general worldwide market analysiswas made, and no specific export outlets had been identified (SAR, paras. 4.16-4.20;PCR, para. 4.02); and insufficient operationaland export marketing experienceof the contracted managementand marketing consultant. 17. The crucial omissionwas that a lointventure ensurintboth exaeri- ence in eXport marketing and a stake in the enterDrise-- a condition sine qua non for the success of an undertakingin such a highly competitiveindus- try -- was not formed early on durinA proiect Dreyaration. It is suggestive, and ironic, that even at a late stage of project preparation,the Bank had communicatedto the Governmentthat "a ioint ventLre onerationwith a well- establishedforeigngartner in t.his field. includingeouitv DarticiDation. is essential to ensure the suceets of the shoe manufacturinaenterprise...T_e inclusionof the shoe factory in the grolect would be de2endenton develop- ments relatin_ to these ioint =enture _roDosals" [by several parties which made preliminary contactswith NDC] (Letter to Governmentdated January 26, 1976, pp. 2, 3, emphasisadded). Inabilityto involve a vlling: and canable oartner from the very beginnint in the proiect should have sianalled to the Bank that further efforts in designing and grenarina the proiect in its original export-oriented confisurationmust be discontinued. Yet, despite the fact that the necessityof a joint venture operation with equity partici- pation by the party responsiblefor marketing had been recognizedvery early by both the NDC and the Bank (Memo of December 4, 1974; PCR, para. 4.02), in the process the importanceof the issue eluded the Bank, and project prepara- tion proceeded even though the project could not elicit investor interest. In the end, the simplisticview (and convenientvay out) was taken, despite the fact that the project sponsor was inexperienced in shoemaking and was relying entirely on the Bank's guidance, that contractinga company experi- enced in management and export marketing, even without a stake in the venture,would be sufficientto ensure project success (PCR, para. 4.03). 18. As it turned out, the contractedfirm did not have the experience they claimed they had, the Bank having failed to investigatesufficientlythe firm's assertions regarding their experience and performance record with implementationof shoemakingplants and their international marketing con- tacts. In fact, initiallythe Bank "assumed"that NDC had investigated the contractor's"experiencein similar projects, particularlyregarding inter- nationalmarkats" (Telex of July 28, 1976). Subsequently, the Bank satisfied itself, but only after a perfunctorycheck on the contractor's backgroundand experience. The consultingfirm's inexperience in plant management and lack of market contacts, coupled with poor quality of leather,acute shortage of experienced operators and middle-level managers, poor product design and quality, low production levels, unrealistic foreign exchange rates, and inability to import inputs for export production, resulted in production costs well above world prices and a product that was not marketable. 19. Conveniently, the contract signed recorded only intent, and did not stipulate penalties or provide incentives for export performance (PCR, paras. 3.11, 4.03). The agreementsigned between NDC and the managementand marketing contractor,originallyintended as a condition for Board presenta- tion of the loan but in effect signed almost a year later (Memo of July 21, 1976, para. 4), did not provide e detailed marketing plan. For instance, prospectivemarkets where the proposed types of shoes would be sold were not identified in concrete terms; the price structure and projected volume of sales for each type of shoe were not specified;the marketingorganization in each target country (importers,sales agents, wholesalers,retailers,etc.) was not detailed; a promotionalbudget was not presented. It is striking that the Bank was satisfiedwith the contract in the absence of a detailed marketingplan which itself had requestedit be included (Memo of October 27, 1976), and did not insist that such a plan, includingadequateguaranteesfor its implementation, be presented before signatureof the contract given its paramount importancefor project success and the determination that the con- tractor's marketing organizationneeded strengthening(Memo of October 7, 1976). 20. Contrary to the Bank's original assertion that "before approving such contract(s) we would assure ourselves that suitable guaranteeowere secured from the prospective technical partner to market the whole or the bulk of the output of the shoe factory at appropriate prices" (Memo of July 16, 1976, para. 6), the language in the final contractwas diluted to a mere endeavor to export 85Z of MSC's productionand under certain conditions. No wonder the managing/marketing firm had no interest in increasingproduc- tion and promoting exports. In fact, blaming adverse local conditions,the contractorassertedthat they could not fulfill their obligations. Thus, the contract failed to achieve the objectives it sought. In short, with the project three years under preparation,the Bank apparentlywas not eager to delay further Board presentationand placed excessiveconfidencein the con- tractor'spledge -- hardly a felicitoushandlingof such an important matter. Conceivably,a delay in presenting the project to the Board, even at that late stage of project preparation, might well have resulted in an entirely differentoutcome. 21. As already alluded, there has been no build-up in shoe productior. (Attachment1) and, in recent years, the plant has been virtually inopera- tive. Under the circumstances, the inability to export is understandable. Interestingly, however, TLAI and MSC made no serious effort to capture a share of the domesticmarket, the more so given the outdated and broken down equipment and poor operatingcondition of the other state-ownedshoe factory (Tanzania Shoe Company -- Bora, in Dar-es-Salaam)and MSC's advantage of operating a modern plant. As a result of this inertia, the financial and economic performance of the project is predictable. Revenues have been - 10 - meagre, and accumulated losses reached TSh 216 million by 1987 (Attach- ment 2); they keep rising as a decisionregarding the fate of the plant has yet to be reached. The value of fixed assets, originallycarried at acquisi- tion costs less depreciation, have been adjustedupward since 1985 to reflect the devaluation of the TSh. But book values do not reflect the fact that some of the equipment is damaged, while an unknown percentage is not in working conditionas components were missing on arrival. The same applies to the stock of spare parts, materials and other consumables which account for a significant percentage of the total value of the equipment and materials (PCR, para. 5.02). More importantly,because of poor maintenance over the years, the book value of the equiprent grossly overstates its market value. Finally, liabilities apparently have not been adjusted to reflect the higher cost of servicing debt denominated in foreign currencies. 22. In general, the financial position of the Shoe Company is unsound as its net worth is negative, 8 recalculatedfinancial and economic rates of return are negative,comparedto 17X and 302 respectively at appraisal,while the future of the shoe factory remains bleak. The management of the holding company (TLAI) as well as of the Shoe Company made no determinedefforts over the years to come up with a practical solution to utilize the equipment. Selling off all or part of the equipment was not feasible for ideological reasons,althoughprivate firms were allowed to import shoemakingequipment. Nonetheless, the reasons usually advanced -- lack of working capital, inability of the tanneries to provide the desired quantities and types of leather required, and no access to foreign exchange to import inputs -- though real, are only incidentaland cannot explain the shoe factory's poor performance. As it now stands, the Shoe Company has no purpose, no viable organizational, managerialand work force strueture,and recapitalization is not the solution. 23. The possibilityof operatingthe shoe factory on a sunk cost basis and at a fraction of its capacity primarily for export markets was looked into by the Government,UNIDO (lead role), and the Bank in 1982. However, the prospectsof such a venture were conditioned,inter alia, on conductinga market study; entering into a technical assistancecontractwith an experi- enced foreign firm in production,marketing and training;improvinghide and skin collections, tanning (necessitatinga US$9 million rehabilitation program for the tanneries),marketing and distributionof leather; taking measures with regard to tariffs, pricing, taxation and streamlining of administrativeprocedures; and spending an estimated US$5 million for the implementation of a five-phaseshoe productionprogram. The final decision was placed squarelyon the Government. A protractedperiod of study reviews, indecision,and inability to develop a realistic program for the shoe and leather industriesupstreamensued, and there was no follow up. 24. By 1985, the Bank affirmed that, for MSC's operations to become viable, it was necessary to: make exports profitableby devaluationof the TSh to realistic levels or introducingequivalentexport incentives;ensure 8/ Accounting procedures are somewhat murky (see Attachment 2, years 1985-1987). - 11 - contractually the availability of leather in the required quantities and qualities; form a new operating company (free from MSC's debt service obligations); and enter into a comprehensivemanagement/marketing contract with a foreign firm experiencedin the manufactureand marketing of shoes in foreign countries. To this end, the Bank contacted several potential inves- tors/management firms but without success. In view of the difficult circum- stances,the Bank recommendedto TLAI and the Government(Lettersof March 27 and April 25, 1985) that they seriously consider closing the footwear factory, if a qualified foreign partner cannot be found. Although open for social reasons, the factory remains virtually inoperative. Assuming the developmentof a more conducive economic environmentand tangible improve- ments in leather processing and marketing, TLAI and the Government could considerseveral options: continuethe search for a foreign firm with estab- lished marketing outlets and willing to risk some equity to form a joined venture; lease the facilities;or outrightsell the plant and equipment (as a whole or in segments),breaking away from ideological orthodoxy. Currently, the Government is in the process of reaching a decision on this important issue. 25. The leather goods factorycommencedoperationsin 1983. It operates on a very small scale, and never came close to projected levels of production and sales at appraisal (SAR, para. 4.12; Attachment 3). It showed for the first time a small profit in 1987, and this because of the switch to the production of canvas goods (Attachment 4) taking advantage of a captive market (the army and the cooperatives) and raw material availability~ How- ever, the financialposition of the company is much worse than presented in its financialstatements because of insufficient depreciationallowancesover the years and no charges for rent. Moreover, the firm's entire equipment would need to be replacedbefore long because of the very high wear and tear following the productionof heavy duty canvas products for which it was not intended. As a result, the company*sprospectsremain uncertain. As in the case of the shoe factory,no exportmarkets had been identifiedat appraisal. 9 It was felt at the time that, with the training, technical advice, and marketing know-how to be received, the factory would be able to produce export quality leather goods, despite ever-changingtastes in fqshion and channels of distribution. Furthermore,given the plant's minusceiie output (0.4Z of the world market) there would be no difficultyin marketingoverseas the entire production (SAR, Annex 8, para. 2). Nevertheless, productionof leathergoods remainedextremelylimitedbecause of weak management,unavail- ability of good quality leather, lack of imported accessories, poor product design, limited local demand, and lack of export possibilities due to quality and price considerations. The SAR (Annex 23, para. 8) had indicatedthat the major risk lay in the ability of the leather goods factory to manufacture products of acceptablequalityand style, and develop the necessarymarketing network to handle the sales in overseasmarkets. This risk was consideredas minimal as the management and marketing services would be provided by the shoe factory prime contractor -- which were not. 91 The marketing contractfor the leather goods factorywas signed two years after Board approvaland did not include a marketingplan. - 12 - V. OVERALL ASSESSMENT 24. The shoe factory was an ambitious and over-dimensioned project, M.uiltin an environment lacking physical, teahnical and managerial infra- structure. Underlyingassumptions regardingcompetitive quality,cost struc- ture and world prices were overly optimistic. Given its inordinatescale and the high risk involved, decisive factors determiningthe feasibilityof the project did not receive the attentionthey deserved. In particular,in the absence of a partrner experiencedin shoe manufacturingand export marketing and a stake in the venture, the nroiect should have not been undertaken. The fact that there were no takers should have alerted the Bank that the project'sviabilitywas problematic. Ultimately, the operationof an export- oriented project was entrusted to a parastataloperating in a country where there was no experience in the type of the product to be exported -- a product destined for a highly competitive and sophisticatedmarket where superior quality, and keeping up with ever-changingfashions, styles and designs are critical elements of success. The project's contributionto MSC's institutionbuildinghas been negligible. The holding company (TLAI), for reasons probably beyond its control, never developed the requisite capacity to guide, direct or muster foreign assistance to assist the shoe company (MSC) constructively. Thus, the objectivesof the project were not achieved, financial and economic ratcs of return are negative, and the project is a failure. Furthermore, under the present manage8ent structure, know-how, market conditions, cost structure, raw materials situation, and caliber of operatingstaff, the likelihoodof the virtually idle (11 capacity utilization)shoe factory operating as it was originallyplanned, and on a financiallyand economicallyviable basis, is remote and the project is not sustainable. There can be no auestionthat the Bank exercisedpoor iudament in aoina ahead. and in such scale.with this vroject. 27. TI.eperformanceto date of the other two components,i.e. the indus- trial estate and the leather goods plant, does not allow for optimism con- cerning their future financial viability either. The proposed plant for leather goods was a small-scaleoperationwhich, it was felt at appraisal, did not warrant carrying out a detailedmarket survey. It never really took off due to poor management, and is currently vegetating, producing small quantitiesof tarpaulinand other canvas productsfor the army. On the other hand, the organizational structure and management of the industrialestate leaves much to be desired,while the occupancy rate of the standard small- enterprise units in the estate is 501. The estate is poorly managed, no maintenance is taking place because of lack of funds, the assessment of rentals and collectionsfor the standardfactoryblocks and housing units are discretionary, and the estate operatesat a loss (Attachment 5). Financial and economic rates of return of both components are negative,and their 8Us- tainability uncertain. 28. The Bank was actively involved in the conception, design and preparation of the project, but minimally in the search for consulting, engineering, and management firms and in assessing their capabilities. In fact, the Bank failed to establish the qualifications and experienceof the prime consulting and engineering firm, with detrimental implications for the - 13 - shoe factory's success. The project sponsor'sconcern (Memo of December 4, 1974), also shared by the Bank's staff, on the need to establish a joint venture with a partner experienced in shoe manufacturingand marketing and who should also have a stake in the undertaking, at the end was not heeded. The Bank expressed full confidencein NDC's ability to assume full responsi- bility for the implementation of the project, it being viewed as the excep- tion to the rule in Tanzania (Memo of March 24, 1987, para. 2(b)), without a realistic asuessment of their actual capacity. Perhaps because of this trust, as well as the misplacedconfidencein the prime contractor,the Bank distanced itself during implementation and early in the operational stage. The frequency of the Bank's missions and, especially, their effectiveness declined as the project approachedphysical completionand start-up -- when the Bank's assistance was needed perhaps most. Eventually, the Bank did offer advice as to how MSC could get out of the impasse. But aside from the need for correctiveaction at the macroeconomicpolicy level, the critical element remained the necessity for MSC to enter into a management/marketing contract/partnership with an experiencedforeign firm, a solutionwhich, in the face of the enormity of the problems engulfing the project and the coun*- try's dire economicconditionsin the early 1980s, Was hardly practicable. 29. The fact remains,however,that although NDC (more specifically the Project ManagementTeam comp.osed of its staff)ludid, inter alia, review the feasibility studies, selected contractors, drew up agreements with them, called for tenders, accepted delivery of equipment, followed up on the progress of implementationand commissioningof the project, they had no experienceand were relying on the Bank for advice. The Bank's support of the project, favorableopinion of the contrectors, and explicit or implicit endorsement of the actions of the prime contractor sufficed to quell any lingeringdoubts and questions regarcingshortcomings in project implementa- tion. Given that the Tanzanians were lookingup to the Bank for guidanceand advice concerning project identification, design, and execution, the poor outcome of this particularproject, as well as of others in other sectors, and the ensuing disappointmenthave cast doubts on the soundness of the Bank's counsel, and have underminedthe trust of the Tanzanian officials in the expertise and judgment of the Bank's technical staff and management. VI. LESSONSOF EXPERIENCE 30. The project experience is instructivein many respects. Further to the lessons aptly drawn in the PCR, para. 7.02, scme additionalobservations and recommendations are offeredbelow. (i) Unfulfilled essential Preconditions for nroiect success iden- tified during the stage of desi&n tend to be diluted in the process of project Drelaration and be replaced by makeshift J0/ Apparently, there were no internal independentreview procedureswithin NDC's management structure concerning the development and commissioning of studies,despite its involvementin many industrialprojects. - 14 - which ultimatelX arrangements, turn out to be detrimentalto the pro-ect outcome. Therefore, when essentialpreconditions for grojectsuccesscannotbe met (e.g.,formation early on during projectdesignand preparation of a jointventureto ensureboth experiencein exportmarketing and a stakeof the partnerin the venturein this case),the nrolectshould not bi-undertaken. (ii) _aste to present to the Board and commit Bank funds before criticalcontractualobligations have been fullynegotiated and agreementshave been,reachedbetweenthe partiesinvolvedcan altersignificantly outcome the expected of the projectand nad- vertentlyleadto supRortinRunviableoperations. of exportmarketsand accessto channels (iii) Earlyidentification of are paramountpreconditions distribution in desiRninQexDort- Rroiects. oriented (iv) The severeimpediments to transfer and technicmes of technology in a country and lacksbasictechnological that has no tradition infrastructureshouldnot be underestimated. (v) The difficultiesa new entrantis boundto facein penetrating a highly competitive export market should be duly oppreciated, particularlywhen he opts for exportproduction on a largescale, superior qualityand ever-changingfashions are dominantfactors, and the marketis held in sway by entrenched competitors. This suggests, inter alia, the exvediency of a gradualbuild-upof exportcapacity. relvinginitially on the domestic market. (vi) While respecting minimum economic size, carefulconsideration shouldbe givento avoiddesigninRproiects optimal far exceedina environment, scale of plant in an inauspicious in particularly projects. export-oriented of flaws in backward-linked (vii) Full aRPreciation activitieswhich impacton the qualityand the flow of supplyof raw materials (e.g.,processing,pricing,marketing) is crucial,in order to ensure production. uninterruptel (viii) Proiect imnlementation could suffer from the lack of a determined effort to assess realistically the technicaland managerial capability of the project sponsor. Generally, responsibilitv for project implementation, including procurement work, should he entrustedto a project manaaer on site, who should also be provided with the requisite supportstaff in terms of numbers, competence and expertise (e.g., engineering, accounting, legal); the performance of the nroiectmanaaerand the sunRortina team should be reassessed during implementation to detect early on shortcomingsand suggest correctiveaction; the functional resvonsibilities between vroiect sDonsor/manager and consul- tants/contractors shouldbe clearlydefined; and projectmanage- ment arrangements shouldbe designed in such a way as to ensure sufficient decision-making authority and effective monitoring of contractors. - 15 - (ix) Careful study of the machinery layout and areater selectivity of olerations to be performed based on a narrower product range and a finite technology mix can reduce sisnificantlv the level of investment in eauivment and inventories, without compromising the flexibility of the production program. (x) The frequency, but more importantly,the effectivenesos of the Bank's upervision effogrtcan be determinins factors of the groject 9utcom. (xi) A nroiect is unlikely to succeed in an uninvitinxnolcy environ- mg_t (e.g., poor infrastructure, price controls, unavailability of foreignexchangeand credit). (xii) The experiencein Tanzania,as well as elsewhere,casts doubts on the serviceabilityof the holdina company concept and its ability to guide and assist constructivelyits subsidiaries. - 17 - Attachment 1 TANZANIA _O BO INDURiAL COWLEXPROJECT 8lffM"R° SHOECAWMs A"> SL_ES. 1180-87 PROM=UCTON 1080 1081 1082 1908 1984 1985 18g 1987 Shoe> ('000 pairs) 20.0 55.8 156.0 156.6 77.8 57.9 104.8 83.8 Shoelc n ('000 pairs) a.r. 442.0 227.4 510.4 879.8 46.0 41.2 2.0 CottonThred ('000 .) a.*. 64.2 727.8 860.9 72.8 - - - Shoe Capaclty Utilixation (1) 0.5 1.4 8.9 4.0 2.0 2.0 8.0 1.0 Voalv of Sales (TSb milllon) - 12.0 86.1 40.9 81.1 25.1 77.0 88.8 Sou0res Moroor. Shoe Company. - 18 - Attachment 2 TANZANIA 9RO STR. C,E MOT yQpl SHQ COUPAINYI SUUIARYOPFIACL 02-8? * 1. STATYY_EMSNT CTSh II Ian) _106 tl I41 L9U 1098 1987 Rvenuos 80.2 41.2 8?.5 24.2 85.5 88.3 Cost 46.2 54.9 60.6 28.6 J9.5 25.2 Not Incom (9.1) (16.6) (22.1) (42.8) (64.8) (7.0) Asset 225.9 204.4 188.1 262.5 t 60.S ? 1,419.7 ? Liabilities 165.6 160.5 168.5 126.7 t 168.0 ? 192.65 Capital 90.4 90.4 90.4 90.4 90.4 00.4 AccumulaeWd ProfIts (Losses) (50.1) (46.5) (70.0) (149.1) (211.9) (216.2) Equity 60.8 48.9 19.6 71.2 t 55.8 t 50.7 t Source: Morogoro Shoe Comany. - 19 - Attachment 3 INDUSTRIAL MOROGORO PROJECT COMPLEX MOROGORO GOODS LZATMER L_MITED: SUMNARY COMPANY OF FINANCIALS.TATENXSE. 1983-87 (TSh million) I9 L2!A I2 198_6 J8 Revenue 2.0 3.5 18.5 38.9 91.9 Costs* 3.5 6.3 19.0 48.1 69.1 Net Income (Loss)* (1.5) (2.8) (0.5) (7.2) 22.8 Assets 5.0 4.6 17.7 38.4 25.6 CurrentLiabilities 3.8 6.5 16.8 28.9 23.6 Long-termDebt 4.0 3.7 6.6 27.0 17.5 Capital 5.7 5.7 5.7 5.7 5.7 AccumulatedProfit(Losses)* (1.5) (4.3) (4.8) (12.0) 10.8 Equity* 4.2 1.4 0.9 (6.3) 16.5 *Doesnot include rent for the premises; depreciation allowances are inadequate.(see PPAM,para.25). LestherGoodsCompany Source: Morogoro Limited. - 20 - Attacbment4 WRO GOROIDUSTRIAL c_ L PROJCT MOROGOROLEATHER GOODS COMPANY LIMITED: SUMMARY OF PRODUCTIONAND SALES. 1983-87 (TSh '000) Item (Leathery 1983 1984 1985 1986 I8 Handbags 105 718 531 10,092 3,252 Suitcases - - - - - Wallets 90 250 - - - Belts 809 950 1,677 5 74 Jackets - e - - Items (Crnvas) - - - - _ Tents - - 5 86 327 TruckTarpaulins - - 109 669 908 Land Rover Tarpaulins - - 347 977 544 Grain Tarpaulins - - - 215 262 OtherCanvas Goods - - 31.653 37.419 25.497 Total Sales 1,850 3,490 18,420 37,690 89,501 Sources Morogoro Leather Goods CompanyLimited. - 21 - Attachment5 TANZANIA M4ORCGORQ INDUSTRIALCOMUPLEX PROJECT INDUSTRIALESTATE: SUMMRY FINANCIALSTATEMENTS .1923-87 (TSh m-. "n) 1Q2i l4 jf1985 1986 197 Revenues 1.1 1.1 2.4 3.2 3.6 Costs 0.9 1.7 5.9 14.5 32.8 Net Income 0.2 (0.6) (3.5) (11.3) (29.2) Assets 42.7 39.2 66.0 121.6 179.8 Liabilities 10.2 12.5 25.4 77.7 135.9 Equity and Retained Earnings (Losses) 32.5 32.5 40.6 43.9 43.9 Sues Tanzania Leather Associated Industries. - 23 - PROJECT COMPLETION REPORT TANZANIA KOROGORO INDUSTRIAL COMPLEX PROJECT (LOANS1386/1385T-TA) June 30, 1986 Industry Department -25 - PROJECT COtPLETiON REPORT INDUSTRIALCOMPLE PROJECT MOROGORO (LOANS 138611385T-TA) I. INTRODUCTION 1.01 In responseto a request from the Government,the Bank, beginning in 1974, assistedthe NationalDevelopmentCorp. (NDC) in the preparation of a multi-useindustrialproject at Morogoro, a town about 180 km west of Dar es Salaam. NDC is a parastatalagency which owns or has shares in a number of industrialenterprisesand was also in charge of promotingthe establishment of new industriesin selectedsubsectors. 1.02 Preliminarystudieswere carried out in 1974 to define the scope and feasibilityof buildingan industrialestate to provide preparedland and common services to small-,medium-, and large-scaleplants and to establish a four-factory complex comprising a tannery, a canvas mill, a shoe factory and a leather goods factory. 1.03 NDCobtainedBulgarian technicaland financialassistancefor the tannery and financingof the other componentswas to be undertaken Jointly by the Bank and the EuropeanEconomicCommunity (EEC). After appraisal,however, a decisionwas made shiftingthe responsibility for the construction of the canvas plant to the EEC through the European In,zastment Bank (EIB) and the European Development Fund (EDF) while the Bank was left in charge of the other Morogoro industrialcomplex components. 1.04 The project has been physicallycompleted (exceptfor a central effluent treatmentplant) with a delay of 36 months and a cost overrun of 9X but, as explainedin the followingsections,it has never been fully operational. Further assessments have been and are being undertakenby the Governmentto determinewhether it will be possible to operate the main Project component- the shoe factory - at lower capacity but with positive cashflow. II. PROJECT BACKGROUND A. Project Preparation, Appraisal and Loan Approval 2.01 Early in the 1970s, the National Development Corp. (NDC) started planning the establishment of four factories to process hides and skins produced in the area around Morogoro, a town of about 40,000 inhabitants, located 180 km west of Dar es Salaam. It was soon apparent that the development of land and services for these factories could be planned and executed more efficiently together rather than separately and that these services could be extended to small industries as well as to other large operations to be planned later. - 26 - 2.02 In 1973, the Governmentrequestedthe Bank to asist NDC in the preparationof a multi-industrial project to be located at Morogoro;the project as then conceivedcomprisedan industrialestate, standard buildingsfor small industriesand an industrialcomplexwhich, in its first stage. would include a tannery,a canvas mill, a shoe factory and leather goods plant. Before appraisalof the project by the Bank, NDC negotiatedwith the governmentof Bulgariafor technicaland financial assistancefor the tannery. Thu EuropeanEconomicCommunity(EEC) also assistedthe Governmentand NDC in the preparationof this multi-purpose project. 2.03 The studies for the industrialestate and the factory complex were submitted to the Tanzanian authorities by mid-1975. The export potential for leather and leather products and the shoe factory study were further reviewed by two firms of experts, who, oefore departure of the Bank appraisal mission, found them satisfactory. At this stage, an area of 204 ha about 4 km north of Morogoro was reserved by the Gc-<ernment for this project and future expansions. The area allocated for the initial phase of the project was a 65 ha site. 2.04 The Bank initiallyappraised,in October 1975, a project includingthe canvas mill componentof the proposedover-allMorogoro industrialcomplex. After meetingsheld in Luxembourg, Washingtonand Dar es Salaam, the scope of the Bank's participation was modified, and it was agreed that the canvas mill would be financedby E18. As already mentioned,the governmentof Bulgariahad already undertakento build the tannery for NDC. There were also delays due to the need to ensure availability of water for the units of the complex. After the changes mentionedabove, the appraisalreport was completedon March 3, 1977, and the recommendedfinancingof US$23 million was approvedby the Board on March 29, 1977. The Bank's financingpackagewas comprised of two equal parts: one was a loan (No. 1386-TA)at the then prevailinginterestrate of 8.5% p.a. to be repaid in 20 years, with first payment due in February 1982 (i.e., a 4-1/2 year grace period);and the other, a "third window" loan (Loan No. 1385T-TA),at 4.SX p.a. interest,with the first payment due in January 1983 (i.e., a 5 3/4 year grace period) and final maturity in January 2001 (i.e., a total repaymentperiod of almost 24 years). The Loan 1/ was signed on April 6, 1977 and became effectiveon July 6, 1977. B. Project Descriptionand Objectives 2.05 The main objectiveof the proposedMorogoro industrialcomplex projectwas to create a "development pole' in the Morogoroarea based on the utilization of the substantialpotentialfor the supply of hides, skins and cotton as raw materialsfor the manufactureof leather,footwearand other productsmade from leather and canvas. This development was to be 1/ The two Bank loans will be collectivelyreferredto in the report as the Loan. - 27 - complementedby an industrialestate attractingsmall- and medium-sized manufacturingenterprises,as well as other large-scalefactorieswhich may be developedlater. 2.06 The part of the Morogoro IndustrialComplex to be financedby the Bank (the Project)is comprisedof: (a) The Infrastructurecoveringdevelopmentof 65 ha of land (out a total reservetarea of 204 ha availablefor future expansion); fencingand surface drainage;Internalroads; water supply system with a capacityof 4,000 m4/day includingdistribution system and fire hydrants;power supply system includinga substationand high and low tension lines, street lightingand control panels; severageand rain drains; and a central effluenttreatment plant.*/ (b) The Shoe Factorywas designedto manufacture2 million pairs annuallyof leather and 2 million pairs of canvas shoes. The buildingsfor the productionequipment,utilities,warehousing and administration were calculatedto require a built area of 11,237m 2 . The demand for electricpower working at full capacitywas estimated at 2,100 kW and the water requiredat about 350 m; daily. At full capacity,this factorywas estimated to require a staff of 1,065. (c) The IndustrialEstate was planned to comprise 4 standardized buildings 12 m wide and 120 m long (with a total built area of 5,760 mZ) that could be partitioned into 24 modules of 240 m2 each. These modules were to be used by artisanalor small businessesmaking small items for the major factoriesin the Complex. It was planned that the administration offices for the industrialestate would initiallyfunctionin one of the standard buildings. (d) Housing: the Project included35 detachedand semi-detached housing units with a total area of 5,250 m2 . These houses were to be assignedduring Project construction to expatriates, visitorsand out-of-town Tanzaniansupervisors and to estate and supervisoryofficialsafter start-up. (e) The Leather ProductsFactory: althoughformallya part of the four-factoryindustrialcomplex, this unit was estimatedto need only 768 m2 of floor space and thereforepart of one of the standardbuildingswas assigned to it. 2.07 The NationalDevelopmentCorp. (NDC), created in 1964,was the Governmentagency responsible for the preparationand initial implementation of this project as was the case with other major public sector investmentsin the industrialsector. At the time of appraisal, 2/ Because of the specialneeds of the tannery and the canvas mill, their designs includedtheir own effluentpre-treatment facilities. - 28 - NDC's portfoliowas comprisedof 22 companies 3/ with aggregaterevenues of US$189 million in 1975. The Morogoro IndustrialComplex (MIC) was planned to add five enterprisesto this group: three of them (the Shoe Factory,the Leather Goods Factory and the IndustrialEstate) constituting the Bank Project as describedabove and the other two (canvasmill and tannery)being financed by EIB and the BulgarianGovernment,respectively. 2.08 The TanzaniaLeather AssociatedIndustries(TLAI)was formed in February 1979 as a holding company for three operatingcompanies: Tanzania TanneriesLtd., (Moshi Tannery),Tanzania Shoe Co. (BORA) and TanzaniaHides and Skins (TUS). The latter was later transferredto the Ministryof Agriculture. The Mwanza and MorogoroTannerieswere established as separatecompaniesin 1977 and 1979, respectively, and the Canvas Mill, in 1983, and the investments made in them incorporatedinto TLAI's holdings. The MorogoroShoe Co. (MSC)was establishedin 1980 to take charge of MIC's Shoe Factory and a separatecompanywas created in 1982 to run the Leather Goods Factory. NDC was (and is), however, unable to fill in the managerial positionsrequiredto man efficientlyall the new companiesbeing spun off and consequently the Bank requestedoutside assistancefor the implementation and managementof the project components(SAR, paras 4.07, 4.10 and 4.13). AND MANAGEMENT III. PROJECT IMPLEMENTATION A. Achievementof Objectives 3.01 The Morogoro IndustrialComplex project as a whole has attained many of its objectivesand especiallythe successfulcompletionof the canvas mill and, althoughwith many shortcomings, the constructionof a tannery that can process hides and skins produced in the surroundings or brought as surplusesfrom other regions in the country. Among the componentsfinancedby the Bank, the attainmentof the Project's ob4ectives4/ has been limited to the partial start up of the leather goods plant7(para3.03) as well as a very modest utilizationof the standard small-enterprise buildings. The main Project component - the shoe factory - although commissioned in 1980, has never operated on an annual basis at more than 4% of its capacity (para 4.05). 3.02 The reasonsfor this failure are many: macroeconomic conditions (distortedprice, cost and foreignexchange relationships) and implementationdelays partiallycaused by exogenouscircumstances (scarcity of cement, slow handlingof goods at the port, slow allocationof foreign exchange)but the impact of Project-related deficienciescannot be overlooked. Among the latter, the most importantfactors in the poor performanceof the Project'sshoe factory are: (i) an excessively 3/ Not includingthe public sector textilemills which in 1974 were grouped under a new holding company,the NationalTextile Corp. (TEXCO). 4/ The Bank-financed ProJect spelled with capital P to distinguishit from other componentsof the Morogorc IndusrialComplexproject (i.e. tannery,canvas mill, leather-board) financedelsewhere. - 29 - ambitiousconceptionof this project component;(ii) the inexperience of the owners and local Projectmanagersin the implementation of a project of the scope of this industrialcomplex's;(iii) the insufficient expertiseof the main consultingand engineering firm contractedfor the execution of the Project, and particularlyin large-scale footwearmanufacturing (para 3.10); (iv) the very thin layer of professionalcompetenceavailable to TLAI or to the Project'soperatingunits; (v) overoptimistic assessment of the possibilities of successfulpenetration of internationalmarkets (pars 4.02); and (vi) insufficientexport marketingexperienceon the part of NDC, the shoe factory staff and the managementand marketingconsultant (para 4.03). B. Project Scope Changes 3.03 There have been only minor project scope changes,such as modifications in the lay-out and variationsin the area of the industrial complex'sbuildingsas well as in the water supply system. Furthermore, some of the equipmentfor the leathergoods plant, receivedby March 1982, has been installedin the shoe factory buildinginstead of using onc of the standardbuildingsas originallyplanned. As discussedlater, it is also likely that the scope of the shoe factory'soperationswill be substantially modified (para 5.04). C. ProjectManagement 3.04 Project implementation was expectedto last three years followed by a ti-ree-yearstart-upperiod to reach practicalfull capacity production. Responsibility for implementation and start-upof the Project was vested in NDC's Researchand Development Dept. and a ProjectManager was appointedin consultation with the Bank. He was to lead a team comprisinga senior project officer,an administrative manager and a project accountant, as well as three project officers (for the shoe and leather goods, the canvas mill and the industrialestate). The Project Managerwas also to be assistedby other NDC corporatestaff providing engineering,legal, accounting, recruitmentand trainingservicesas needed. 3.05 The obligationof the ProjectManager and his team locatedin Dar es Salsam were: (i) the preparation of a project executionplan including strategicpath network; (ii) screening,evaluationand selectionof consultants and contractors and coordination and monitoringof their work; (iii) preparation of periodicprogressreports as requiredby the Bank and NDC; (iv) review and approvalof bills submittedby consultants and contractors. The Project Manager did not have enough experiencein supervising a project of the size and complexityof the Morogoro Industrial Complex and furthermore had to divide his time with other tasks. This work was to be supportedby fiuld managementpersonnel,established at Morogoro, and comprisinga supervising engineerand a works accountant,who were to act as owner's representatives, in constanton-site liaisonwith consultants and construction contractors. This team, which was also supposedto be in charge of checkingand processingwork progress certificates(for payment in Dar es Salaam),was too weak for the task of supervisingthe consultants' and contractors' work. - 30 - 3.06 After completionand start-up,the appraisal report indicated that NDC's OperationDepartmentwould have the responsibility for the operationof the Project'scomponents. This responsibility was, however, to be dischargedthrough three subsidiarycorporations to be establishedby December 1978 to take charge of the industrialestate, shoe factory and leathergoods componentsof the Project. A holding company,TLAI, was formed in February 1979 (para 2.08) and two long-establishedfirms, the Tanzania Shoe Co. (Bora) and the TanzaniaTannerieswere made TLAI's subsidiaries. The MorogoroTannery and the Morogoro Shoe Company (MSC) were also incorporated as TLAI's subsidiaries when establishedin 1979. D. Employment and Training 3.07 Direct employment in the four factories included in the complex was estimated at about 2,440 in the appraisal report; actual figures for the Bank financedcomponentsare about 29% below those estimatedduring appraisal: Tanzania- Morogoro IndustrialComplex EmPloyment AppraisalReport Actual (Jan. 1986) Tannery 334 n.a. Canvas mill 921 n.a. Shoe factory 1,073 780 LeatherGoods 113 65 Totals 2,441 n.a. In additionto direct employment,the Projectwas expectedto provide opportunities for the establishment of up to 24 small manufacturing 5/ The TanzanianSmall businessesemploying less than four workers each. IndustriesDevelopment Organization(SIDO)was expectedto promote this part of the project but only meagre results (two participants)have been obtained. 3.08 The firm contractedfor general engineeringservices (para. 3.09) was also put in char3e of trainingworkers in the manufactureof shoes and leather goods. Two groups of 16 and 12 Tanzanianworkers each followeda 6-month to 1-year trainingstage abroad, while other workers were being trained at the Bora factory in Dar es Salaam. The results of training abroad are not known because the Morogoro shoe factoryhas not operatedat the expectedquantitative and qualitativelevels and most of the trained workers are now employedeluewhere. An acute shortageof middle-level managerialexecutivesis also noticeable. The Project did not provide for specific trainingof this type: it was assumed that Tanzanianstaff working side-by-side with expatriatesduring the three-yearstart-upperiod (para. 3.09) would acquire the needed skills and experience. This skill upgradinghas not happened. At Leastpart of the reason is that any i/ 18 units if one of the standardbuildings were to be used to house the leather goods fac ory. - 31 - potential candidatefor a position as a successfulmanagerialor professional executivemust either have become rapidly discouragedby the inoperativeness of the Project componentsand moved elsewhereor accepted being bureaucraticcogwheelsin the Morogoro enterprises. E. Use and Performanceof Consultantsand EngineeringServices 3.09 During appraisaland Loan negotiations,it was agreed that NDC would employ a qualifiedfirm (or firms) to provide needed technical assistanceduring construction and initial operationof the shoe and leather goods factories and that an experienced (expatriate) industrial estate manager would be recruited in consultation with the Bank. Prior to presentationof the project to the ExecutiveDirectors,two technical assistancecontractswere negotiated. The first one was for the provision of engineeringdesign, construction supervisionand trainingservicesup to the commissioning of the shoe plant and was signed in February1977 after approvalby the Bank. The second one, covering factorymanagementand international marketingservicesfor a period of three years after start-up was signed in June 1978, but with a proviso that it would not become effectiveuntil October 1979. (A six-monthtemporarycontractfor design and preliminary marketing studieswas also signed in April 1979.) Contractsfor engineeringservicesfor the industrialestate and separately for the effluenttreatmentplant were signed with a local subsidiary of a foreign firm. 3.10 The consultingfirm selected for the engineering of the shoe factorycontrolleda companymanufacturing equipment for the tanning and footwearindustries.Wi It had broad experiencein the engineeringand commissioning of tanneries but only limited experiencein the implemen- tation of large shoe factories.2/ During Project executionit was pointed out that the caliber of the consulting firm was inadequateand that they were not very experiencedin operatinga plant of the Morogoro'ssize, particularlyin an environmentof scarcityof foreign exchange. It was also pointed out that the engineeringcompany did not provide a detailed analysisof productionand sales potentialand of the inputs and training requirementsto reach it.f/ 3.11 For marketing,the engineeringcontractorintendedto create in Switzerland a majority-owned subsidiary,but its initialcapital of only Sw F 100,000did not seem to offer the possibilityof backing export contractswith strong financialguarantees. The marketingcontracthad no strong incentivesfor its fulfillment. It was only a record of intentions and it had neither special incentivesfor excellentperformancenor penaltiesfor failure to perform. After the plant was commissioned, Bank supervision miasions reported that the engineeringcompany apparentlydid not have the direct market contracts they had claimed to have or were more No. 1213-TA,Annex 7-2. §J SAR. z/ SAR No. 1213-TA,Annex 7-6. I/ June 24, 1981 and January 27, 1982, SupervisionReports. - 32 - interestedin sellingproducts to its Europeanaffiliatesat very low prices than in obtainingrevenuesfor MSC. In March 1982, the Bank recommendedto the Governmentthat a replacementfor the consultingfirm should be sought but by that time the deterioration of the country's overallmacroeconomic conditionsmade it difficultto find interested candidates. By the end of 1982, all personnelof the consultingfirm had left Tanzaniaand no replacementfirm was appointed. F. Procurement 3.12 The Loan Agreementstipulatedthat the Bank would finance 100% of importedgoods and consultingand trainingservicesand 502 of civil works. Most of the shoe factory equipmentwas bought through international competitivebidding (ICE) from an ad hoc consortiumof Italianequipment makers and the balance from Italianand UK firms. Except for the effluent treatmentplant, civil works were contractedfor with local companiesbut, in 1980, the share of Bank financingfor these contractswas lowered from 50% to 15% because of the observedincreasein foreignexchangecosts. In fact, Bank funds were finally not used at all for civil works except for importedsteel structures(para 3.19). For the Project as a whole, the Loan proceedswere distributed as follows: Italy (58.6%),the UK (19.7%) the US (7.9%), Lichtenstein(4.2%),the FR of Germany (3.6%) and the balance of 6.0% among six other countries. 3.13 Procurement and payment applications were handled poorly by the Project sponsor and the Consultants, in part because of poor record keeping. Lack of complete understanding of the Bank's procurement procedures and of the consultants' role in Bank-financed projects created some difficulties and delays. For instance,the consulting firm issued tenderswithout securingprior Bank approvalof the bid documents,and without NDC's participation and, in another case, the Project Manager tried to change the bid award for civil works in the industrialestate, which had been approvedin October 1978, to a 38% higher bidder on the grounds that the winner was unqualified. The Bank pointed out that the lowest bidder had been prequalified and insistedon the originalbid award. This was finally acceptedbut five months were lost in the process. At the time of Loan closing,many pieces of equipmentand spare parts had not yet been utcratedbut, on the other hand, by September 1985, wben no new payment applicationswere acceptedby the Bank, several contractsfor goods and servicesalready receivedand for part of the cost of the centraleffluent treatmentplant still under construction went unpaid by TLAI. The Governmenthas not been able to release the requiredforeign exchangeand the suppliershave tried to obtain assistancefrom the World Bank in securingpaymentsfor their goods and services. G. Implementation Schedule 3.14 Milestonesin the implementation of the Project - actual and estimatedat the time of appraisal - are shown in Annex 3-1. Delays in the construction of the shoe factory and its start-uphave been of only 18 months but in fact commissioning took place when part of the equipmenthad - 33 - not been tested at full (or nearly full) capacity for a sufficientlylong period of time. The delay in other Project componentshas been longer: 38 months for the start-upof the leathergoods factory and 48 months for the completionof the infrastructure (exceptfor the effluent treatmentplant which is not expectedto be in operationbefore December 1986). 3.15 The main reasons for the delay in Project implementationwere: (i) the relativelack of experienceof the major engineeringcontractorin working in a very underdeveloped region, under conditionsof acute scarcity of foreignexchangeand very limited local supportivemanagerialstaff, and having to contendwith an extremelycumbersomebureaucratic system for obtainingforeignexchange, customs clearances,and dispatchingand transportation of materialsand equipment;(ii) scarcityof cement,water and power during some criticalperiods of construction and (iii) impossibility of finding qualifiedstaff (both Tanzaniansand expatriates)willing to live in Morogoro. H. Ecology 3.16 The main environmental issues in the Morogoro IndustrialComplex were not related to the Project componentsbut to the tannery and the canvas mill. The design and construction of a central effluenttreatment plant was, however,part of the Project. This central plant has been designedon the basis of the tannery liquid waste being first processedin a pre-treatment plant includedin the tannery design. The general design and the detailedengineeringfor the effluent treatmentplant were contracted with a local subsidiary of a foreign firm and the terms of reference as well as the approval of the studies were consulted with the Bank's Environmental Advisor. Although this central treatmentplant is not yet finished, the cost of this part of the Project assigned to protect the site environment is estimated at 5.5X of the total installed cost. 3.17 The disposalof solid waste productswas also consideredduring project implementation.Eventually,the scraps of hides and skins not used in the manufactureof leathergoods will be processedin a leatherboard plant, which is almost ready for start-up. But for the present these materialstogetherwith screeningsand sludge from the pre-treatment plant are being removedfrom the plant area. I. Capital Cost, Financingand Loan Disbursements 3.18 The most recent capital cost estimatesindicatethat the total Project cost (i.e., excludinginterestduring construction) has been US$35.1million equivalentas shown in Annex 3-2, summarizedbelow: - 34 - Tanzania- Morogoro IndustrialComplex Project Capital Cost and FinancingRequired (US$ million) Actual Appraisal Report (Preliminary) For- For- Over- Local eign Total Local eign Total run Shoe Factory 2.9 12.5 15.4 4.2 15.7 19.9 23.2 Leather Goods Equipment 0.3 0.3 0.1 0.8 0,9 200.0 IndustrialEstate 3.5 4.1 7.6 6.4 1.5 7.9 3.9 Total InstalledCost 6.4 16.9 23.3 10.7 18.0 28.7 23.2 Working Capital 5.2 3.6 8.9 3.5 2.9 6.4 (28.1) Project Cost 11.6 20.5 32.2 1-4.2 20.9 35.1 7.0 Interestduring Construction 1.0 3.1 4.0 1.5 3.1 4.6 15.0 FinancingRequired 12.6 23.6 36.2 15.7 24.0 39.7 9.7 s_= _ == _ _= _ The total Project cost is now estimatedto be 9% higher than the Appraisal Report estimatemainly because of the 25.6% overrun in foreign currency installedcost of the shoe factory. The increasein financingrequired (9.6%) is only slightlyhigher than the project cost overrun. 3.19 Actual allocationof Loan proceedsshow a substantial departure from the AppraisalReport estimates. As shown in table below, actual Bank financingof equipmentand materials has been considerably higher than the amount originally allocated in the Loan agreement. Tanzania - Morogoro IndustrialProject Allocationof Loan Proceeds (US$ million) Categories SAR Estimates Actual I Equipment& Materialsa/ 9.70 13.79 II Civil Works 5.30 2.28b/ III ConsultingServices 3.00 3.74 IV Training 0.40 0.05 Interestduring construction 3.10 3.10 Unallocated 1.50 - Totals 23.00 22.96 a/ IncludingUS$2.0 million for working capital (SAR para 5.07). b/ This amount (for importedstructures) was includedin Category I in the Bank's disbursement accounts. 3.20 Actual and estimatedLoan disbursement schedulesare shown in Annex 3-3 and summarized in the following table: - 35 - Tanzania- Morogoro IndustrialComplex Project CumulativeDisbursement Schedules (US$ million) % Actual/ AppraisalEstimate Actual Estimate 1977 - 0.17 1978 7.10 9.03 127.2 1979 15.40 14.37 93.3 1980 20.10 17.85 88.8 1981 22.00 20.42 92.8 1982 22.50 21.19 94.2 1983 23.00 21.60 93.9 1984 22.41 97.4 1985 22.96 99.8 The actual disbursementschedulein the Project has been reasonablyclose to the appraisalestimate. IV. OPERATINGPERFORMANCE A. Market Development 4.01 The domestic market for footwearhas not shown any growth trend since the time of appraisaland in the last three years has in fact declinedas shown in the followingtable. Tanzania - Morogoro IndustrialComplex Project ApparentConsumptionof Footwear (Millionpairs) Production 1978 1980 1982 1983 1984 - MSC - - 0.16 0.16 0.08 - Bora 3.10 2.50 1.50 1.75 1.91 - Small enterprises 1.30 1.30 1.24 0.80 0.60 4.40- T.80 2.90 2.71 2.59 Imports 0.20 0.15 0.10 0.10 0.15 Total 4.60 3.95 3.00 2.81 2.74 Based on populationfiguresand per capita consumptionin other countries, TLAI and MSC officialsbelieve there is a large potentialdemand for footwearbut even if this view is accepted,future growth of actual domesticsales will be slow because of the general economic limitations prevailingin the country. 4.02 In view of the country'sexisting footwearmanufacturing capacity,the Project'sshoe factory componentwas conceivedas an export-oriented plant and, in the appraisal report, it was assumed that 80% - 36 - of its output would be exported. Thus it was expectedthat by the time normal operatingproduction(90% of the full 4 million pairs of shoes capacity)was reached,nearly 2.9 million pairs of shoes would be sold in the international market. The magnitude of the effort requiredto reach this export target was recognizedearly in the appraIsalof the Project. The December9, 1975, decisionmemorandumstated; "It was agreed that a joint venture operationwas essentialif the shoe factory was to be constructed as proposed. The factorywas export orientedin a highly competitiveindustryand firm arrangements for managementand marketing, preferablywith equity participation by the party responsiblefor marketing,were necessary. In the absence of such an arrangement this subproject would have to be redesignedto serve the domesticmarket and build up export capabilities gradually". A more optimisticview of the possibilities of penetratingforeignmarkets developed in the following years and, during preparation of the appraisalreport, only a very general world-widemarket analysis was made but no specificexport outletswere identified. 4.03 During negotiationsno agreementwas sought to form a joint venture and it was thought that the contracting of a company presumably experienced in marketing would be sufficient to ensure success in the export drive; a contract for management and marketing services was consequently negotiated(para. 3.09), since no other firms showed lasting interestin this venture. This contractstipulatedthat the consulting firm would endeavor to export 8jX of MSC's output. When the plant was commissioned, this was not feasible because the cost of production at Morogoro was about 60X higher than prices in the international market (and the quality was lower). The contractalso establishedthat if this goal was not reached, the consulting firm would buy the balance produced at cost plus a margin of 8-121. The contract did not, however, establish any penalties for failure to produce a significant number of shoes or any incentives for reaching clearly stated production targets or for better than expectedresults. Consequently, it was of no interestto the Consultants to increase production and the contract failed to attain the objectives sought. 4.04 The market for leathergoods is very diversifiedand the proposed plant was a small operationwhich did not warrant the carryingout of a detailedmarket survey. At the time of appraisal,the main products consideredwere leatherjackets,walletsand handbags;during project supervision, industrialgloves were added to the plant's proposedproduct mix; and, at present,canvas has also become a raw material for the productionof leatherand canvas handbagsand small suitcases. B. ProductionBuild-up 4.05 The industrialestate, althoughit harbors three large-size plants,has receivedno net income from them, the leathergoods factory startedoperationsonly in 1985, and, as shown in the table below, there has been no productionbuild-upin MSC, the main Projectcomponent. - 37 - Tanzania- Morogoro IndustrialProject MSC: Productionand Sales 1984 1980 1981 1982 1983 Jan-Sea Shoes ('000 pairs) 20.0 55.3 156.0 158.6 70.6 Shoelaces('000 pairs) n.a. 442.0 227.4 510.4 59.7 Cotton Thread ('000 m) n.a. 84.2 727.3 850.9 310.3 Shoe CapacityUtilization(%) 0.5 1.4 3.9 4.0 2.3 Value of Sales (T Sh million) - 12.0 36.1 40.9 31.6 V. FINANCIALPERFORMANCE 5.01 At the time MSCwas formed as a separate company, there were some delays in determiningthe value of its assets and liabilitiesand protractedconversations took place in 1979/80 between NDC, the original equity holder, and TLAI, the new holding company for leather related industries. Financialstatementsfor the 1982-1984period show a deteriorating situationas a consequence of the operatinglosses from the very small scale of operations. Tanzania - Morogoro Industrial Comple mSC - Summary of Financial Statements (T Sh million) 1982 1983 1984 1985 Revenues 36.2 41.2 38.5 Costs 46.2 54.9 60.6 Net Income (9.1) (16.6) (22.1) Assets 225.9 204.4 183.1 Liabilities 165.6 160.5 163.5 Capital 90.4 90.4 90.4 AccumulatedProfits (Losses) (30.1) (46.5) (70.8) Equity 60.3 43.9 19.6 5.02 Althoughthe 1982 and 1983 statementshave been audited,they probablydo not fully reflect the deterioration of MSC's financial situation. The value of fixed assets is carried at acquisition cost less depreciationand, although an increasein current T Sh values could be expected from the devaluationof the T Sh, the book values do not take into account that some of the equipmenthas been damaged,and it is not known whether some items are in working conditionor are operatingproperly. The same applies to the stocks of spares,materials and productswhich were valued at more than T Sh 70 million by the end of 1984. (The 1985 results were not made availableto the January 1986 mission but all indications are that at present the net worth of MSC has been eroded to practicallynothing or has a negativevalue.) 5.03 There are no financialstatementsavailablefor the industrial estate and leather goods fact4ry components of the Project. The small size - 38 - of i;eir operationswould not allow for optimismon the Project'sfinancial per.ormance, even if they were successful. There is thereforeno possibilityof determininga meaningfulfinancialrate of return for the Project. TLAI's net worth remainedpractically stable at T Sh 425 million through the end of 1984 because the value of its main assets (investments in its subsidiaries) are carriedat book value, which has probably deterioratedbadly as a consequence of MSC's situationand outlook. 5.04 The possibilityof operatingthe shoe factory on a sunk cost basis at a fractionof its capacity to produce competitively for the domesticmarket has been looked into by the Government,UNIDO and the Bank. The prospectsof such a venture,however, do not appear viable and the Bank has recommended to TLAI that the footwearfactory at Morogorobe closed. TLAI and the Governmentmay still attempt to look for a serious proposalfrom a foreign firm, with establishedmarketingoutlets and willing to risk some equity in the venture. VI. ECONOMIC PERFORMANCE 6.01 Under existing conditions, it is not possibleto make an economic analysisof the Project. As mentionedabove, the Bank is assistingthe Governmentin studyingpotentialoptions that could permit operationof the shoe factory not only avoidingfurther financialdeterioration of MSC and TLAI but also showingeconomicbenefits for the country on a sunk-cost basis. VII. BANK's ROLE AND LESSONS LEARNED 7.01 The Bank was instrumental in startinga development pole in Morogoro,an underdeveloped area west of Dar es Salaam, by assistingthe Governmentand NDC to establishan industrialcomplex comprising infrastructure, three large-sizeindustrialplants, standardbuildingsfor small industriesand housing units for supervisorystaff. The overall conceptionof an industrialcomplex in the area was sound but unfortunately the most importantBank-financed componentof the Projectwas over-ambitious for the conditionsprevailingin the country. During preparation of the appraisalreport, a crucial conclusionreached in the issues paper and the decisionmemorandumwas not heeded: that the inclusionin the Project of a shoe factory should depend on the development of joint ventureproposalsensuringthe success of a factory designed for export in a highly competitive subsector. The Bank also did not sufficiently investigate the Consultant's claims on their experiencein the implementation of shoe making plants and on their international marketing contacts. 7.02 The main lessons learnedare: (a) caution should be exercised in acceptinglarge projectsfor the implementation of which there is little or no experiencein the country (or in the agency) undertakingthem. A careful analysis of risks should be carried out prior to or during appraisaland - 39 - the quality and experienceof interestedengineeringand consultingfirms should be firmly ascertainedduring the appraisalprocess; (b) when the inexperience of the sponaor of a project is evident,the appointment of an owner'srepresentative may not be enough to ensure its successfulimplementation. In such case, an experiencedjoint venture partner should be found or a strong managementprofit-sharing system should be established, in which some of the risk is shared by the contractor,for instanceby making the managementfees stronglydependenton measurable performance milestones; (c) in cases where consultancy services are crucial for thc success of a project or account for a large proportionof the project's cost, the Project sponsorand the Bank should agree on a well-plannedselectionprocedure,where the proposingcompanies' adequacyto the task can be effectivelyevaluatedand where opinionsfrom differentsources (previoususers, relevantBank staff and the sponsors'experiencedstaff) can be heard and evaluated; (d) for marketingservices(particularly for exports) to be effective,it is necessarythat the Bank be fully satisfiedthat the firms offeringtheir serviceshave the experienceand contactsclaimed,and that they have performedsatisfactorily in the past in the markets and types of productsfor which they are to be contracted; (e) in those cases where exports are indispensable for the success of a project,covenantsshould be sought to ensure that the potentialprofitability of exports is not jeopardizedbecause of acute distortionof the exchange rate or unavailability of foreignexchange to buy the spares and materialsneeded to produce the project'sexport-oriented products; (f) a strong project construction supervisoryteam at the site is for the timely implementation indispenisable of a project; establishingcost controlmeasures and monitoringthe observance of specifications and the maintenanceof appropriate quality standardsshould be part of their responsibilities in supervising the consultants'and contractors' work; and (g) more frequentsupervision missions should be sent by the Bank and in these missionsclearlydefined progressmilestonesshould be establishedto be checked in the near future, during the next supervision mission. Therefore,these missionsshould be more closely spaced than they generallyare for most projects. - 41 - ANNEX 3-1 PROJECT COMPLETIONREPORT INDUSTRIAL COMPLEX TANZANIA - MOROGORO PROJECT (LOANS 1386-TA/1385T-TA) Actual and Estimated ImplementationSchedules (US$ million) Appraisal Report Actual Consultants Selection Shoe Factory - Engineering 03/77al 02/77a/ Shoe Factory - Management and Marketing -b/ 08/78 Industrial Estate 03/77 12/77 Central Effluent Treatment -b/ 06/81c/ Leather Goods 09/77 12/78 End of Detailed Engineering Shoe Factory 09/77 04/79d/ IndustrialEstate 07/77 08/78 Central Effluent Treatment Plant -b/ 06/83 Leather Goods Factory 12/77 12/81 Procurementel Shoe Factory 12/78 12/79 Industrial Estate 9/77 -f/ Leather Goods Factory 9/78 09/81 Construction Shoe Factory 12/78 06/80 IndustrialEstate 12/80 06/83 Central Effluent Treatment Plant -b/ 12/83i&i Leather Goods Factory 12/78 h/ Start-up Shoe Factory 07/79 12/80i/ Leather Goods Factory 01/79 03/821/ a/ End of selection period as shown in SAR Annex 19 and actual date of contract signing. b/ Included in line above. cf For detailed engineering; a contract for design and general engineering for the effluent treatment was signed in June 1977 and the report was finished ln April 1979. d/ Except for detailed wiring and piping drawings. e/ End procurement,including shipment of equipment to Morogoro. f/ Very small items included in other purchases. g/ Contracted for but not yet finished. h/ Included in industrial estate. i/ Partial start-up. Industry Department June 1986 - 42 - ANNEX3-2 PROJECT REPORT CG4PLErION - MROGORO INDUSTRI&COMPLEX TANZANIA PROJECT (LOANS 1385T-TA) 1386-TA/ Actual and Estimated Capital Costs and Financing Required (US$million) AppraisalEstimates Actual Frei Local Total Foreig Local Total ShoeFactory ESuipment 6.91 0.45 7.36 10.52 0.94 11.46 CivilWorks 2.16 1.77 3.93 2.27 2.77 5.04 Engineering,Management and Marketing 2.88 0.54 3.42 2.92 0.34 3.26 Pre-OperatingExpenditure 0.53 0.18 0.71 - 0.15 0.15 Lastalled Cost 12.80 2.94 15.42 15.71 4.20 19.91 Working Capital 3.53 4.65 8.18 2.65 3.20 5.85 SubprojectCost 16.01 7.59 23.60 18.36 7.40 25.76 leatherGoodsPlant Equipment ~~ 0.21 0.01 0.22 0.57 0.07 0.64 CivilWorks - - - - - - Engineeringand Consulting 0.02 0.01 0.03 0.19 0.02 0.21 Pre-OperatingExpenditure - - - - 0.01 0.01 InstalledCost 0.23 0.02 0.25 0.76 0.10 0.86 Working Capital 0.15 0.52 0.67 0.22 0.29 0.51 SubprojectCost 0.38 0.54 0.92 0.98 0.39 1.37 Industrial Estate InEquipment 0.05 0.01 0.06 0.33 0.02 0.35 CivilWorks 3.57 3.33 6.90 0.50 6.23 6.73 Engineering and Consulting 0.52 0.17 0.69 0.68 0.10 0.78 Pre-Operating Expenditure - - - - 0.06 0.06 Installed Cost 4.14 3.51 7.65 1.51 6.41 7.92 Working Capital - - - - - - Subproject Cost 4.14 3.51 7.65 1.51 6.41 7.92 Overall Project Equipment 7.17 0.47 7.64 11.42 1.03 12.45 Civil Works 5.73 5.10 10.83 2.77 9.00 11.77 Engineering and Consulting 3.42 0.72 4.14 3.79 0.46 4.25 Pre-Operating Expenditure 0.53 0.18 0.71 - 0.22 0.22 Installed Cost 16.85 6.47 23.32 17.98 10.71 28.69 Working Capital 3.68 5.17 8.85 2.87 3.49 6.36 Project Cost 00.53 11.64 32.17 20.85 14.20 35.05 IndustryDepartment MNy1986 - 43 - ANNEX3-3 REPORT PROJECTCOMPLETION PROJECT COMPLEX - MO(0000O INDUSTRIAL TANZANIA (LOANS 1386-TAI1385T-TA) Actual and Estimated Schedules Disbursement (US$ million) Z Dlsbursed Actualvs Year Quarter Estimate Actual Appralsal Actuai Estimate 12/77 4 0.17 0.74% 03/78 1 1.30 1.15 5.65% 5.00% 88.60% 06/78 2 2.80 1.15 12.17% 5.00X 41.07% 09/78 3 4.95 4.70 21.52% 20.43% 94.95% 12/78 4 7.10 9.03 30.87% 39.26% 127.18Z 03/79 1 9.25 9.60 40.22% 41.74% 103.78% 06/79 2 11.40 10.17 49.57% 44.22% 89.21% 09/79 3 13.40 11.69 58.26% 50.83% 87.24% 12/79 4 15.40 14.37 66.96% 62.48% 93.31% 03/80 1 16.85 15.70 73.26% 68.26% 93.18% 06/80 2 18.30 15.48 79.57% 71.65% 90.05% 09/80 3 19.20 17.57 83.48% 76.39% 91.51% 12/80 4 20.10 17.85 87.39% 77.61% 88.81% 03/81 1 20.65 18.60 89.78% 80.87% 90.07% 06181 2 21.20 19.66 92.17% 85.48% 92.74% 09/81 3 21.60 20.05 93.91% 87.17% 92.822 12/81 4 22.00 20.42 95.65% 88.78% 92.82% 03/82 1 22/12 20.88 96.17% 90.78% 94.39% 06/82 2 22.25 20.88 96.74% 90.78% 93.84% 09/82 3 22.38 21.00 97.30% 91.30% 93.83% 12/82 4 22.50 21.19 97.83% 92.13% 94.18% 03/83 1 22.63 21.19 98.392 92.13% 93.64% 06/83 2 22.75 21.60 98.91% 93.91% 94.95% 09/83 3 22.889 21.60 99.48% 93.91% 94.41% 12/83 4 23.00 21.60 100.00% 93.91% 93.91% 03/84 1 23.00 21.60 100.00% 93.91% 93.91% 06/84 2 23.00 21.68 100.00% 94.26% 94.26% 09/84 3 23.00 21.96 100.00% 95.48% 95.48% 12/84 4 23.00 22.41 100.002 97.43% 97.43% 03/85 1 23.00 22.65 100.00% 98.48% 98.48% 06/85 2 23.00 22.67 100.00% 98.57% 98.57% 09/85 3 23.00 22.90 100.00% 99.57%5 99.57% 12/85 4 23.00 22.96 100.00% 99.83% 99.83% Industry Department May 1986
Группа Всемирного банка · Project Performance Assessment Report
Tanzania - Morogoro Industrial Complex Project
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