Tanzania - Smallholder Tea Consolidation Project

Documnt of The World Bank FOtR OFFCIAL USE ONLY Repai Nb 8510 PROJECT COMPLETION REPORT TANZANIA SMALL HOLDER TEA CONSOLIDATION PROJECT (CREDIT 1037-TA) APRIL 13, 1990 Agriculture Operations Division Southern Africa Department Africa Regional Office hi document bss a restited dttdrbuto and may be used by redpents ody In te perfomnce of thdir officl duie Its conents may not othewnde be dilosed witout WoWrd Dank auhradon.  Currenfe! Equivalent Currency Unit - Tanzania Shilling (TSh.) Year TSh/US$Sl 1980 8.3 1981 8.9 1982 9.4 1983 11.1 1984 15.3 1985 17.5 1986 32.7 1987 64.3 1988 112.0 1989 130.1 _/ Estimated annual averages Abbreviations and Acronyms FAO/CP Food and Agricultural Organization/Cooperative Programme FAo!UNDP Food and Agricultural Organization/United Nations Development Program GL Green Leaf GOT Government of Tanzania Ha Hectare IDA International Development Association KG Kilogram KTDA Kenya Tea Development Authority MOA Ministry of Agriculture MCW Ministry of Communications and Works MOP Ministry of Pinance NORAD Norwegian Agency for International Development PCR Project Completion Report SAR Staff Appraisal Report STCP Smallholder Tea Consolidation Project TA Technical Assistance TTA Tanzania Tea Authority Fiscal Year July 1 - June 30  THE WORtLD BANK O FIILUEOL Washington. DC. 20433 U.S.A. April 13, 1990 HEHORAUDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECTt Project Completion Report on Tanzania Siallholder Tea Consolidation Project (Credit 1037-TA) Attached, for information, is a copy of a report entitled "Project Completion Report on Tanzania - Smallholder Tea Consolidation Project (Credit 1037-TA)" prepared by the Africa Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment Tb document has a esicd disibuton ad may be wad by recipients oly the perfcaue of th oficial duties Its contents may am otherw be dicod without Wod Dank authoia .  FOR OFFICL USE ONLY TANZANIA SMALLHOLDER TEA CONSOLIDATION PROJECT PROJECT COMPLETION REPORT Table of Contents Page Preface i Evaluation Summary i Part I: Project Review from Bank's Perspective A. Project Identity 1 B. Background 1 C. Project Objectives and Description 2 D. Project Design and Organization 3 E. Project Implementation 4 F. Project Results 6 G. Project Sustainability 9 H. Bank Performance 10 I. Borrower Performance 10 J. Project Relationship 11 K. Consulting Services 11 L. Project Documentation and Data 11 M. Conclusions and Lessons Learned 12 Part IT: Project Review from Borrower's Perspective A. Comments and Observations on Part 1 of PCR 13 B. Additional Paras on the Project 18 Annexure 1: Fuelvood Planting and Tea Infilling 20 Part IIls Statistical Data A. Related IDA Credits 21 B. Project Timetable 21 C. Credit Disbursements 22 D. Project Costs and Financing 23 E. Project Results 24 F. Status of Major Covenants 26 G. Use of IDA Resources 28 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table 1: Tanzania Tea Statistics 29 Table 2t Schedule of Physical Implementation of Field 30 Progrmme Table 3: Factory Production and Capacity Utilization 31 Table 4: Technical Assistance - Short-Ternm Training 32 Table 5: Tanzania Tet Authority Profit and Loss Statement for the Past 8 years ended 30.6,1988 33 Table 6: Tanzania Tea Authority - Balance Sheets as at 30th June 34 aveD o IBRD 14083R Smallholder Tea Consolidation Projects Location IBRD 14084R Smallholder Tea Consolidation Project: Rungwe Area IBRD 14085R Smallholder Tea Consolidation Project: Bukoba Area IBRD 14086R1 Smallholder Tea Consolidation Projects Lupombe Area IBRD 14087R Sma'ilholder Tea Consolidation Project: Lushoto Area  TANZANI SKALLEOLDER TEA CONSOLIDATICM PROJECT (CREDIT 1037 - TA) PROJEcT COMPLETION REPORT Preface This is the Project Completion Report (PCR) of the Smallholder Tea Consolidation ?roject (STCP) for which Credit 1193-TA in the amount of US$ 14.0 million was approved on June 3, 1980. The Credit was closed on June 30, 1989. three years behind schedule. The last disbursement was made on December 29, 1989. A balance of about US$ 0.96 million remained undisbursed and has been cancelled. The PCR was prepared by the staff of the FAO/CP (Parts I and III). It is based on the findings of a mission which visited Tanzania in April 1989, a review of the Staff Appraisal Report and other project documents and files, and discussions with Bank staff involved in the project. Part II was prepared by the borrower, as required, and is included herein. Parts I and III reflect factual corrections indicated by the borrower in Part II. The Preface and Evaluation Summary were prepared by Bank staCf, Agricultural Operation's Division, Southern Africa Department.  - {i - TANZANIA SMALLHOLDER TEA CONSOLIDATION PROJECT (CR. 1037-TA) PROJECT COMPLETION REPORT Evaluation Summary Obiectives 1. The Project's objectives were to improve tea quality and reduce production costs, and improve the financial viability of the Tanzania Tea Authority (TTA) (para 6). These objectives were timely and appropriate, given the serious deterioration of tea quality and the high losses incurred by TTA (para 3). The project sought to impro-.e tea quality and reduce production costs through expansion of the factory capacity; improvement of transport facilities, including roads, for green leaf; establishment of fuelvood plantations to substitute wood for oil in factory operations; planting and in-filling gaps in existing tea farmss and providing credit for inputs to increase tea yields (para 5). It sought to enhance TTA's financial viability through providing technical assistance, and improving its organization and operational efficiency (para 5); ensuring a more appropriate pricing policy, and transferring the cost of extension services to the Ministry of Agriculture (para 6). The project design and organization were basically sound and appropriate relative to the objectives. However, failure to provide for formal training of key staff was a significant omission (para 15). Implementation Egoerience 2. The project Implementation progress was considerably slower than appraisal expectation. At the end of the original closing date, only about 312 of the Credit funds had been disbursed (para 13). The low rate of disbursement was partly due to the fact that construction of a new factory was cancelled because of inadequate tea production. Overall, the slow Implementation progress was the result of two factors. First, unfavorable macro-economic policies, especially exchange rate policy, continued to adversely affect TTA's financial position (paras 7 and 17). Second, project implementation was severely impaired by long delays in reaching agreement between TTA and the Government regarding financial restructuring of TTA (paras 14 and 16). The implementation of the road component fell far below expectation mainly because the envisaged funds from NORAD did not materialized (para 15, iv). Proiect Results 3. With the extension of the closing date, the project was able to achieve significant results. The tea planting and in-filling component was completed basically as envisaged (para 15, ii). The establishment of  - iii - fuwIvood plantations exceeded original targets in terms of output (pare 15, LiJ), However, only about 492 of the tea road component was implemented (pasr 15, iv). lactory capacity was expanded substantially (Appendix 1, Table 4): production efficiency was sigpificantly increased, leading to lpfroved green-leaf/made-tea ratio (pars 19). The quality of tea improved uoarIedly, enabling Tsazania ters to fetch high export prices (paras 21-22). T2A has made great progress towards becoming financially viable, with net profits (para 24). Current indications suggest a considerably higher rate of returns than envisaged at appraisal (para 27). Pto1ect Sust inability 4. The prj.ect has helped to achieve major improvements in the tea Ln&astry. To sustain these Improvements, it will be necessary to ensure increased green-leaf production by smallholders through ensuring attractive proaducer prices and adequate availability of production inputs and extsension services (para 53). Although TTAs financial situation has Laproved notably, it remains fragile and further efficiency improvements ara needed to place it in a sustainable position (para 26). Additional actions are needed to resolve the labor shortage problem in TTA's estates Cpara 33), and to continue to reduce its costs and improve financial mnuagement (para 34). Furthermore, TTA will need to retain the key technical assistance personnel for a longer period than originally arulsaged and to ensure that the counterpart local staff are well trained to replace the technical assistance staff (para 35). Above all, the Gowortment will need to ensure continuation of a favorable macroeconomic fraetwork. Pilx4izs and Leseons Learned 5. The most import lesson to be learned from this project is the aeed to ensure appropriate macroeconomic framework and domestic pricing poLicy. The past poor performance of the Tanzania tea industry, including the weak financial position of TTA, has been primary due to currency cerwosluation sad failure to relate domestic tea prices to export prices. These issues are now being addressed under the ongoing adjustment program.  PROJECT COMPLETION REPORT TANZANIA SMALLHOLDER TEA CONSOLIDATION PROJECT PART I: PROJECT LstiIEW FROM THE BANK'S PERSPECTIVE A. Prolect Identity Project Name : Smallholder Tea Consolidation Project Credit No. : CR. 1037-TA RVP Unit : Africa Region Country : Tanzania Sector Agriculture B. Backaround 1. The Smallholder Tea Consolidation Project (STCP) was a follow-up to the Smallholder Tea Development Project (CR 287-TA for US$10.8 million), which was completed in 1979, and which had aimed at (i) expanding smallholder tea area by 8,300 ha from 3,270 ha to 11,570 ha and involving 14,000 smallholders; (ii) increasing processing facilities by constructing two new factories and expanding three existing ones; and (iii) constructing 300 km. of tea roads. 2. A full review was carried out in 1979. At that time, the project achievements had fallen short of appraisal targets; around 702 of the targeted area had been planted and production was expected to fail short by 40 to 50?. It was felt that the shortfall was mainly due to the setting of over-ambitious targets at the time of appraisal, weak project management and Government of Tanzania (GOT) efforts to introduce collective farming. Out of the two new factories to be constructed, only one was completed. While tea production had doubled between 1975 and 1979, the quality of tea had deteriorated because expansion of processing capacity had not kept pace with production. Other components, such as road construction, were fully implemented and the number of participating farmers exceeded the appraisal estimate. 3. Th6 Tanzania Tea Authority (TTA) was established as a parastatal corporate body in 1968, responsible for all aspects of smallholder tea development as well as for the functions previously exercised by the Tea Board of Tanzania. These functions include promotion, supervision and implementation of programs for the development of the tea industry; and responsibility for all tea extension services. In addition, TTA owned and operated tour tea factories and estates at Rungwe (Katumba), Njombe (Lupembe), Bkkoba and Lushoto (Mponde). TTA was established with insufficient financial resources to effectively carry out its mandate. By 1979 TTA had accumulated large losses and it was felt that due to institutional and managerial weaknesses, TTA was not in a position to effectively support the expanding tea sector. In view of the above, the  2 Project Performance Audit Report 1/concluded that it was essential that the successive years would be devoted to consolidation and strengthening of TTA's organization, rather than to further expansion. In particular, the quality of the tea had to be improved and the cost of production reduced. This would require a general all-around strengthening of TTA and gresn leaf collection facilities. In addition, it was concluded that some additional processing capacity was needed to accommodate incremental smallholder green leaf expected to be produced as a result of the First Phase Project. C. Pro1ect Obiectives and Descriitiot 4. The Smallholder Tea Consolidation Project (STCP) was aimed at consolidating ongoing TTA operations and -roviding additional processing capacity to cater for the expected incre'Rse in green leaf production from existing smallholder tea plantings. The project also sought to rectify the imbalance between leaf production and leaf processing capacity and generally improvt the quality of processed tea. Finally, the project aimed at improving TTA's financial viability, organizational structure and technical management. In this, the STCP design was fully supportive of GOT's agricultural sector development strategy, which paid particular attention to attaining self-sufficiency in food crops and to supporting export crops. The strategy also put greater emphasis on production rather than on the social aspects of rural developmunt projects. 5. The project provided financing for: (a) construction of one new factory at Ukalawa, completion of the Mwakaleli factory to a four dryer factory, and extending and reequipping the four existing factories at Katumba, Lupembe, Bukoba and Mponde; (b) provision of transport facilities, including green leaf collectton vehicles, spare parts to put repairable vehicles in working order, vehicles for both the factories and TTA headquarters, and vehicles operating costs; (c) establishment of fuelwood plantations to substitute wood for oil in operating the factories; (d) a tea planting program of an additional 200 ha at Njombe and a total of 630 ha infilling in three of the four tea areas: (e) provision of credit to project growers for farm inputs; (f) purchase e, two warehouses in Dar-es-Salaam; (g) construction and maintenance of 176 km of tea roads; and (h technical assistance and in-rernental local staff to strengthen TTA's factory engineering ar&4 technical managewent, and improve its operations. 1/ Report No.2787, dated December 18, 1989.  3 D. Irolect Desism and Ormanizatton 6. 'the project was originally prepared by GOT, with support from the FAOIUNDP Marketing Development Bureau, and was finalized with the assistance of IDA. The project was appraised in July 1978. Subsequent analysis showed, however, that the deteriorating financial position of TTA would continue, even in the *with-project situation if a number of issues, the most iVWortant ones relating to Government pricing policies and TTA cost structure, were not re,solved. Agreement on these issues was difficult to reach, especially as sowe were not specific to the tea sub-sector but affected all agricultural production and parastatals. It was only during post-appraisal, in October 1979, that it was agreed that TTA could only be established as a viable long term entity ifs (i) the current green leaf price were held constant in nominal terms over the project period; (ii) the local market price of made tea were set equal to its export parity price; and (iii) the agricultural extension services, with all associated costs, were transferred to the Ministry of Agriculture. These issues were included as Credit Agreement Covenants and agreed upon with GOT during negotiations in April 198C. 7. The project, being a follow-up to the Smallholder Tea Doevelopment Project, had a clear conceptual foundation. It was generally well prepared witn appropriate scope and scale to address most of the project objectives. The design was based on a thorough technical review of TTA's factory needs and analysis of TTA's financial requirements. Yet, although the macroeconomic and institutional issues affecting the project were fully realized during appraisal, they were insufficiently addressed in the final design, even if account is taken of the severe limitations of an individual project design in addressing macro-economic issues. 8. The roles and responsibilities of the institutions involved in the project were clearly defined and understood, but stringent government regulations and control regarding parastatals inhibited TTA from becoming a viable enterprite especially during the initial years of the project. 9. Green Leaf Production. The factory construction and rehabilitation program was designed on the basis of projected future smallholder and TTA estate production. With the benefit of hindsight, it is clear that green leaf production estimates were over-optimistic, especially when seen against the general economic conditions prevailing in the country at that time. Farmgate prices were low, and the project recommended to reduce them further in real terms (see para 10). Farmers faced difficulties in obtaining farm inputs and extension support was poor. TTA faced serious difficulties in attracting estate labor due to poor wages and inadequate facilities. Although the production levels of the extensive Phase I plantings had been found disappointing, farmers were expected to achieve yields of 3-5000 kg green leaf per ha. Yet, the project did not include any production promotion components, with the exception of 200 ha of new tea plantings and 630 ha of infilliag. Total Incremental annual production of these plantings was estimated at a mere 195 tons of made tea, compared to the planned incremental factory processing capacity of 2,600 tons p.a. As a result, the factory construction and rehabilitation  4 programme had to be modified during implementation and rehabilitated factories were underutilised (Annex 1, Table 3). 10. It was agreed during negotiations that GOT would not increase the price for green leaf in nominal terms for the duration of the project. This would have meant that the smallholder price in real terms would have decreased xrom TSh. 1.10/kg. to TSh. 0.65/kg. by the end of the five-year project period. The reasoning behind this concept was that tea growing was already highly profitable compared to competing crops. and that a reductioa in green leaf cost would greatly assist in reduciug TTA's operating costs. In reality, GOT increased green leaf prices virtually every year, as shown below. Yet, real producer prices remained at or below 1980/81 levels until 1986187. Although this contravened the pruject covenants, the covenant was not appropriate in an environment with continuing depreciation and high domestic inflation. al lhold r8/8 191/82 192/8 19 J 1S3/6 W/06 1965Se 960197 1557/58 188/89 v Or n Lfl Youl: hks._ In "Ig lnal term 1.60 1.60 2.0O 2.80 4.10 4.90 T." 9.90 14.m0 CP1 V Wm 126 12 296 210 874 495 S1 T70 la real terp 1.60 1.19 1.28 1.84 1.47 1.81 1.54 1.02 1.92 e-'imlted second payment of Tlb 0.89. a Consumr Price Isdex 198/91-UN. 11. Partly due to the slow project start-up, and contrary to expectations at the time of appraisal, TTA's operations continued to be unprofitable. Due to its continuing losses, TTA's equity had virtually been wiped out and had a negative working capital in 1982. TTA Was therefore no longer in a position to effectively carry out its mandate. TTA negotiated with GOT for a substantial equity contribution, but it took until 1986/87 before adequate contributions had been made. A more realistic financial analysis would probably have pointed to the need for such equity contribution during appraisal. 12 ~ The fact that no maintenance was included for Phase I roads or for roads to be constructed under the project, led to serious deterioration of some of them, which in turn made some more distant producers difficult to reach, increased vehicle operating costs and threatened green leaf collection. Z. Protect ImDlementatioa 13. Project implementation Was slow. The credit closing date (originally December 31, 1985) was extended three time to December 31, 1988. By the original closing date only 31Z of the credit h&4 been disbursed (Table 3 of Part III). A number of reasons can be cited, of which the decision not to proceed with the uew f