Tanzania - Livestock Development Project

RESTRICTED FILE COPY Report No. P-69 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PR ESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A LIVESTOCK DEVELOPMENT PROJECT October 9, 1968  INIERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECONI-IENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOFIENTT CREDIT TO THE UNJITED REPUBLIC OF TANZANIA FOR A LIVESTOCK DEVELOPMENT PROJECT 1. I submit the following report and recommrendation on a proposed credit in an amount in various currencies equivalent to US $1.3 million to the United Republic of Tanzania. PART I - HISTORICAL 2. In -May 1967, the Government of Tanzania requested financial assistance for the development of a beef ranching program. The applica- tion wyas based on a report prepared for the Government's National Develop- ment Corporation (NDC) by the staff of the Bank's Agricultural Development Service (ADS). The proposed project was appraised in November/December 1967. 3. Formal negotiations took place in Washington in July/August 1968. The borrower was represented by Mr. I.M4. Kaduma, Director of External Aid, Treasury, and Hr. S.T. Militi, laiwyer, Attorney General's Office. The National Development Corporation was represented by Mlr. J.S. Skinner, Assistant General IIanager and by Mr. F.A. Mbuya, Deputy Chief Accountant. The National Agricultural Co. Ltd. was represented by Mr. L.M. Wheeler, Senior Accountant and by Mr. M. Pease, Chief Development Officer (Ranching). 4. This would be the first livestock development project proposed for IDA financing in Tanzania and would be the fifth IDA credit to Tanzania, increasing the total IDA financing in that country to US $27.9 million. A Bank loan of $5.2 million was made to Tanzania Electric Supply Corpany, I uited (TimTESCO) for power dcv6lopmnent. The following is. a summary state- ment of the Bank loan and IDA credits to Tanzania as of September 30, 1968: Amount (US $ million) No. Year Borrower Purpose Bank IDA Undisbursed 45-TA 1963 Tanzania Education 4.6 - 48-TA 196ht Tanzania Roads 14.0 .9 80-TA 1966 Tanzania Agricultural Credit 5.0 2.2 518-TA 1967 TANESCO Power 5.2 5.2 115-TA 1968 Tanzania Supplementary Roads _ 3.0 3.0 Total (less cancellations) 5.2 26.6 of which has been repaid to Bank and others - Total now outstanding Amount sold: .1 of which has been repaid0 - .1 Total now held by Bank and IDA -v1 26._6 Total undisbursed 173  5. In addition to the above loans and credits, the Bank has made three loans for common se-vices in East Af-rica, two for railways and harbors and one for telecommunications. All three loans are guaranteed jointly and severally by Kenya, Tanzania and Uganda, with the United Kingdom also being a guarantor for the first loan for railways and harbors. The following is a summary statement of these loans as of September 30, 1968: (Amount US $ million) No. Year Borrower Purpose Bank Undisbursed llO-EA 1955 East African Common Railways and harbors 24.0 Services Authority (EACSA)* 428-EA 1965 East African Common Railways and harbors 38.0 11.3 Services Authority (EACSA)* 483-Ea. 1967 East Africon Common Telecommunications 13,,0 8.4 Services Authority (E4hCSA) 8F' Total (less cancellations) 75.0 of which has been repaid to Bank and others 13.3 Total now outstanding 61.7 Amount sold: 23.8 of which has been repaid 13.2 10.6 Total now held by Bank 51.1 Total undisbursed 19.7 6. IFC has made two investments in Kilombero Sugar Company in 1960 and 1964 amounting to $4.0 million in loans and $0.7 million in shares. As of September 30, 1968 $0.3 million of the loan was undisbursed. 7. A second education project and the Tanzania-Zambia Highway project have been appraised and are under active consideration. 8. Two new projects, one for harbors and the other for railway, are under consideration for the East African Community. 'F The East African Community has succeeded EACSA as Borrower. ** The East African Posts and Telecommunications Corporation has succeeded ,ACSA as Borrower.  - 3 - PART TI - DESCRIPTION OF THE PROPOSED CREDIT 9. Borrower: United Republic of Ta2nzania Amount: Various currencies equivalent to $1.3 million. Purpose: To help finance the development by the National Agricultural Co. Ltd. of five ranches, the provision of technical services and the training of ranch managers. Amortization: In 50 years including ten-year period,of grace, through semi-annual installments of 1/2 of 1% from September 1, 1978 through Nirch 15, 1983 and of 1-1/2% from Sept- ember 1, 1988 through Harch 1, 2018. Service Charge: 3/4 of 1%. Relending Terms: The Government will relend $1.3 million equivalent to the National Development Corporation (]JDC) at 4'J for a term of 50 years including a ten-year period of grace. NDC will relend the funds to the National. Agricultural Company Ltd. (,TACO) at 7Z f-or a term of 12 years including a five-year period of grace. Beneficiary: Mational Agricultural Co. Ltd. Estimated Economic Rate of Return: PART III - THE PROJECT 10. An appraisal report entitled "Beef Ranching Development Project - Tanzania" (TO-656a dated October 8, 1968) is attached. The Project is part of Tanzania's long-term beef cattle development program and provides for financing the developmient of five large scale ranches. Three ranches are established and twfo more are to be established. Kitengule Ranch, together with its extension covers a total of approximately 100,000 acres, and West Kilimanjaro and 1fkata Ranches are both 80,000 acres each. The two new ranches would be of approximately 80,000 acres each. Before the two new ranch sites are accepted by IDA a field review of each site will be made by IDA personnel. Under the lending program, finance would be made avail- able for such invesGments as on-ranch roads, firebreaks, fencing, water supplies, stock handling and animal health control facilities, ranch build- ings, breeding stock and an initial procurement of feeder steers for  - 4 - fattening. Funds would also be allocated for technical services and a training program for ranch management. Each ranch would be based on a ranch development plan prepared by NA3CO and disbulsements would be made by IDA upon certification by NDC and NACO of eligible expenditures made under the project. 11. The Project is estimated to cost $2.0 million of which $1.8 million would be for ranch development and the balance of $0.2 million would be for technical services and training. Approximately $0.7 million would represent foreign exchange expenditures, but it is recommended that the credit cover a further $0.6 million of local currency exnenditures in view of the country's needs for external finance to cover its development program. On this basis the proposed credit would cover about 65 percent of the total project cost. 12. International competitive bidding would be followed for the purchase of fencing wire and waterpipe. On other items, full advantage will be taken of existing local competitive conditions. Livestock would not be subject to internaticnal competitive bidding because the type of cattle required is found mainly in Kenya. 13. The economic rate of return for the project is estimated at 18%. The principal direct benefits resulting from the project wotid be an increased production of beef and heifers. At full development, 1,800 additional breeding heifers valued at $125,000 would be sold annually from project ranches. The increased annual output of beef is estimated at 1,600 tons, cold dressed weight, valued at approximately $560,000. Foreign exchange savirgs from the reduction of import of breeding heifers and bulls from Kenya, together with export earnings from the sale of canned beef producticn, would amount to about $140,000 per year, net of annual foreign exchange outlays directly attributable to the project. Additional benefit would be the demonstration of better manage- ment practices, improved production and disease control techniques, as well as practical training of ranch managers and field assistants. PART IV - L-GAL INSTRUNBUTS AND AUTHORITY 14. The draft Development Credit Agreement between the United Republic of Tanzania and the Association, the draft Project Agreement between the Association, the National Developmnent Corporation and the National Agricul- tural Company, Ltd. and the Report of the Committee provided for under Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 15. The draft Development Credit Agreement and the draft Project Agreement - a tripartite agreement - follow substantially the usual pattern of other agreements used for livestock projects. The following provisions in these agreements are of special interest: (a) the Borrower will relend the proceeds of the Credit to the National Development Corporation under a subsidiary loan agreement satisfactory to the Associaticn (Section 4.02(a), Development Credit Agreement);  (b) the National Development Corporation will, in turn, relend the proceeds of the subsidiary loan to the National Agricultural Com-.any, Ltd. under a second subsidiary loan agreement, also satisfactory to the Association (Section 4.02(c), Development Credit Agreement); (c) in addition to relending the proceeds of the subsidiary loan to the National Agricultural Company, Ltd., the National Development Corporation will make available to the National Agricultural Company, Ltd., by way of subscrip- tion to its capital stock, funds equivalent to 35 percent of the total cost of ranch development under the Project (Section 4.02(d), Development Credit Agreement); (d) the National Development Corporation will use the proceeds of the repayments of its loan to the National Agricultural Company, Ltd., which are not currently required to service the Government loan to the National Development Corporation or to defray administrative exnenses, for the purpose of financing further agricultural development through its subsidiary companies (Section 4.03, Development Credit Agreement); (e) the National Agricultural Cornpany, Ltd. undertakes to consult with the Association about the technical feasibility and economic and financial viability of any proposed investment projects in dairying (Section 3.03, Project Agreement). PART V - THE ECONOMY 16. A report entitled "Prospects for Economic Development in Tan- zania" (AF-58b) was distributed to the Executive Directors on September 13, 1967 (R 67-148). An updating memorandum, "Recent Developments in the East African Community, Kenya, Tanzania and Uganda" (AF-74) was distributed to the Executive Directors on April 4, 1968 (R 68-52). 17. Since the above memorandum was written, statistics for the year 1967 relating to the key economic indicators have become available. In 1967, Tanzania's real gross domestic product increased by only 2 percent, in marked contrast to the increase of 8.8 percent achieved during the previous year. This decrease in the growth rate was the result of adverse weather conditions in the 1966/67 crop season. The output of two major crops - coffee and cotton - declined by 20 percent and 11 percent respec- tively. Although the output of tea, pyrethrum and, notably, tobacco was higher, this was inadequate to offset the decreases in coffee and cotton. The manufacturing, construction, public utilities and transport sectors remained buoyant, however, and enabled the economy to achieve a modest growth, despite the decrease in overall agricultural production. 18. Despite the setback to the growth of GDP, gross fixed capital formaticn in 1967 reached the record figure of Sh. 1,070 million, represent- ing a 25 percent increase over the 1966 figure. Capital formation as a  - 6 - proportion of GDP in the monetary economy rose to 23 percent in 1967, as compared with 19.5 percent in the previous year. The increase in the public sector substantially excee;1ed that in the private sector, mainly in the categories of construction, machinery and equipment. 19. After the steep rise in merchandise exports which occurred in 1966, there was a decline in 1967. The decrease in the value of exports was the result of reduced volume in the case of cotton, coffee and sisal, the last two commodities also suffering a price decline. W11hile imports both of intermediate and capital goods increased, there was a big reduc- tion in imports of consumer goods, and hence the value of import-s in 1967 was lower than in 1966. Overall, the trade balance remained favorable, but the surplus was considerably less than in the preceding year. 20. Receipts in the services account showed a significant increase. In large measure, this is a reflection of the rapidly developing transit trade with Zambia, and higher earnings from tourism. In regard to payments for services, there was a marked decrease in international investment in- corme payments consequent upon the extension, early in 1967, of public owner- ship to a number of enterprises in the fields of banking, insurance and manufacturing, which had previously been contributing to the outflows; compensation payments to owners of these enterprises will, of course, appear in the capital account. Complete details relating to the capital account are not yet available. It may be noted, however, that the holdings of external assets by the banking system showJed a slight increase at the end of 1967, relative to the position at the sarae time in 1966. This was in spite of the devaluation of the pound sterling during the year which caused a loss to Tanzania of Sh. 36 million and, possibly, some capital flight which may have followed the extension of exchange control to tran- sactions with Kenya and Uganda. At the end of May 1968, Tanzania's con- vertible foreign assets amounted to Sh. 510 million ($73 million), equiva- lent to about four months' imports. 21. The management of Tanzania's public finances continues to be satisfactory. The revised estimate of recurrent revenue in 1967/68 is Sh. 948 million, which represents a 10 percent increase over the high figure attained in 1966/67. Since 1963/6L4, recurrent revenue has been increasing at an average annual rate of 13 percent, well in excess of the Plan target. Although recurrent expenditures have also risen during this time, the budgets have generally been in balance, even after taking into account the contributions which have consistently been made to the develop- ment budgets. 22. Development expenditure in 1967/68 is estimated to have reached about Sh. 300 million, and may be compared with the cumulative total of Sh. 662 million for the three-year period 196h/67. It is now expected that during the five-years of Tanzania's 1964/65-l968/69 Development Plan, actual investment may amount to about 86 percent of planned investment. Allowing for increases in costs during the period, the achievement in physical terms would probably amount to between 60 and 70 percent of the Plan targets.  - 7 - 23. It was assumed in the Development Plan that 78 percent of the finance would be obtained from external sources. In contrast, however, a large proportion of the inves-tment has been financed from internal sources. The very high share of internal sources - 61 percent of the total as against the estimated 22 percent - is attributable to the empha- sis on self-reliance and also to problems in utilising foreign aid, owing to shortcomings in project preparation and iaplementation. There is evidence, however, that Tanzania's capacity for imnplementing projects has undergone an irmprovement. 24. Tanzania's total external public debt (including a one-third share of the East African Cornmunity debt) amounted to $289.0 million on December 31, 1967. The servicing of this debt absorbed about .5 percent of foreign exchange earnings from exports of goods and services in 1967. This is a relatively modest debt service ratio, and would appear to indicate that Tanzania could afford to borrow a larger proportion of its capital requirements on conventional terms than in the past. However, on grounds of the country's poverty, the slow growrth of projected export earnings, an improved capacity for aid utilization and hence the need for substantial amounts of capital in the years to come, it wrould be desirable not to harden unduly the terms of lending to Tanzania. PART VI - COMPLIATNCE 1ITH ARTICLES OF AGREETIENT 25. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VII - RECOTE-UNDATIOt 26. I recommend that the Executive Directors adopt the following Resolution: RESOLUTIONI NO. IDA Approval of Development Credit to the United Republic of Tanzania in an amount equivalent to U.S. $1,300,000. RESOLVED: THAT the Association shall grant a development credit to the United Republic of Tanzania in an amount in various currencies equivalent to one million three hundred thousand United States dollars ($1,300,000) to mature on and prior to March 1, 2015, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1%) per annum, and to be upon such other terms  - 8 - and conditions as shall be substantially in accordance with the terms and conditions set forth in the Development Credit Agreerment (Beef Ranching Development Project) between the United Republic of Tanzania and the Association and the Project Agreement (Beef Ranching Development Project) between the Association, the National Development Corporation and the National Agricultural Company, Ltd., which have been presented to this meeting. Robert S. McNamara President Attachrnent October 9, 1968