Tanzania - Revised Highway Project

RESTRICTED FILE COPY Report No. P-58 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 The report may not be published nor may it be quoted as representing their views.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 PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SUPPLEMENTARY DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A HIGHWAY PROJECT February 19, 1968  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PRCPOSED SUPPLEMENTARY DEVELOPIvIENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed supplementary development credit in an amount in various currencies equi- valent to US$ 3.0 million to the United Republic of Tanzania.. PART I - HISTORICAL 2. The Association granted a development credit of US$ b.0 - million equivalent to the United Republic of Tanzania (Credit No. 48-TA) in February 1964 to cover the foreign exchange cost of a highway project which was then estimated, on the basis of preliminary engineering, to cost a total of $18.8 million equivalent. The Closing Date of this credit was December 31, 1967. As of that date about $ 7.4 million remained undisbursed. 3. This project has experienced serious delays and substantial cost over-runs. The main reason for the delays was the shortage of per- sonnel in the Roads and Aerodromes Division of the NEnistry of Communi- cations, Labour and Works, due to the departure of a number of experienced expatriates shortly after the credit was signed. In the last year the situation has substantially improved because of increased use of consult- ants. The cost increase was due mainly to an underestimate of the amount of works in the preliminary engineering and to general increases in the cost of labor, equipment and. materials. 4. In March 1966, the Government requested that a supplementary credit be made to cover part of the additional cost of this project. It was also recognized that the Closing Date for the existing credit would need to be postponed. Subsequently, the project was reappraised and a proposed revised project agreed with the Government. 5. The Government was invited at the end of September 1967 to negotiate the proposed supplementary credit during October. The inten- tion was that both the proposed supplementary credit and the proposal to postpone the Closing Date of the existing credit would be presented. simul- taneously in December to the Executive Directors for approval. However, the Government wias unable to negotiate the proposed. supplementary credit in October, and. the negotiations were held in Wlashington from December 11 to December 14, 1967. The Borrower's delegation was headed by Mr. A. E. Mbuya, Principal Secretary of the MJinistry of Communications, Labour and, Works, and included a representative of the Treasury and the Director of the Roads and Aerodromes Division of the Ministry of Communications, Labour and Works.  -2- 6. This would be the fourth IDA credit for Tanzania. In November of last year the first Bank loan, to the Tanganyika Electric Supply Company, Limited (TANESCO), was made. This proposed credit would bring total Bank/IDA financing in Tanzania to $31.8 million. The following is a summary statement of the IDA credits and the Bank loan to Tanzania as of Jaruary 31, 1968: Loan or Credit Amount (U.S. $ Million) Niumber Year Borrower Purpose Bank IDA Undisbursed 45-TA 1963 Tanzania Education 4.6 _ 48-TA 1964 Tanzania Highways 14.0 7.1 80-TA 1966 Tanzania Agricultural Credit 5.0 2.5 518-TA 1967 TANESCO Electric Power 5.2 5.2 Total now outstanding 5.2 23.6 Amount sold: 0.1 Total now held by Bank and IDA 5.1 23.6 Total undisbursed 5.2 9.9 15.1 7. A livestock project has recently been appraised and applications for lending for a second education project and for the construction of part of the highway between Dar es Salaam and the Zambian border are under study. 8. In addition to the above loan and credits, the Bank has made three loans for common services in East Africa, of which two are for railways and harbors and. the third for telecommunications. Each one is guaranteed jointly and severally by Kenya, Tanzania and Uganda, with the first loan also being guaranteed by the United Kingdom. The status of these three loans as of January 31, 1968 was as follows:  -3- Amon (U$ Million) Loan No. Year Borrower Purpose Bank Undisbursed llO-EA 1955 East African Community * Railways and Harbors 24.0 - 428-EA 1965 East African Community * Railways and Harbors 38.0 16.8 483-EA 1967 East African Posts and Telecomrainica- tions Corp.* Telecommunications 13.0 10.1 Total 75.0 of wihich has been repaid to Bank and others 12.5 Total now outstanding 62.5 Amount sold: 23.8 of which has been repaid 12.4 11.4 Total now held by Bank 51.1 Total undisbursed 26.9 9. Although disbursements on the 1965 loan for railways and harbors (No. 428-EA) have been rather slow so far, most of the loan amount is commiitted and the loan is expected to be fully disbursed by eid-1969 as originally planned. A third railways and harbors project is being pre- pared for presentation to the Bank. 10. IFC made two investments in 1960 and 1964 in the Kilombero Sugar Company, amounting to $ 4.0 million in loans and $ 0.7 million in shares. As of January 31, 1968 $ 0.4 million of the loans was undisbursed. PAIRT II - DESCRIPTION OF THE PROPOSED CREDIT 11. Borrower: United Republic of Tanzania Amount: Various currencies equivalent to $ 3.0 million Purpose: To help finance, together with Credit 48-TA, (a) the detailed engineering and construction of approximately 533 miles of main roads, (b) the detailed engineering of approximately 352 miles of additional main and feeder roads, and (c) a staffing and training program in the Ministry of Coimmunications, Labour and Works. * Successors to the East African Common Services Authority.  - h - Amortization: In semi-annual installments beginning February 1, 1978 and ending August 1, 2017. Service Charge: 3/4 of 1% per annum. PART III - THE PROJECT 12. - An appraisal report entitled "Appraisal of a Revised Highway Project - Tanzania" (To 600a dated January 18, 1968) is attached. 13. - The original project, for which the existing highway credit (No. 48-TA) was made, consisted of the detailed engineering and construc- tion of eight major roads, totalling 734 miles. The proposed revised project, which both the existing credit and this proposed supplementary credit would help to finance, consists of: (1) the detailed engineering and construction of six of the original eight roads, totalling 533 miles; (2) the detailed engineering of a 1L2 mile section of the main road to the Zambia border from Dar es Salaam; (3) the detailed engineering of feeder roads totalling about 210 miles in the Geita Peninsula area; and (4) a staffing and training program in the Road,s and Aerodromes Division of the Ministry of Communications, Labour and VIorks. 14. The economic justification of the eight roads included in the original project was reviewed during the reapprai-sal of the project. The construction of the section of the Dar es Salaam-Zambia border road was not included in this project, but it is under active consideration as a separate Bank/IDA project. The engineering and construction of another of the original roads was dropped as traffic had not grown as originally expected; no work had started on this road. The justification for the other six roads remains satisfactory, the overall economic return being about 11 percent. 15. The detailed engineering of the Geita Peninsula. roads has been- included in the proposed revised project to assist the Government in pre- paring a feeder road construction project. The Bank's 1966 economic mission to Tanzania stressed the importance of developing the country's feeder road network and specifically identified the Geita Peninsula area as one where further feeder road development was called for. 16. The Roads and Aerodromes Division of the Ministry of Communica- tions, Labour and TAbrks has overall responsibility for the execution of the project, though much of the detailed engineering and supervision of construction is being carried out by consultants. The inclusion of the staffing -and training program in the proposed revised project will further strengthen the Division as well as help to ensure the maintenance of high standards as non-nationals are replaced by Tanzanians. 17. The proposed revised project's estimated total cost, including an 8% allowance for contingencies, is $22.8 million equivalent, an increase of $ h.0 million over the originally estimated total cost. As the con- struction costs, amounting to about 85% of the total, are now based on-  - 5 - completed detai'led engineering, they are considered reliable. The pro- posed supplementary credit of $ 3.0 million is equivalent to 75% of the additional costs. Though the foreign exchange compor.ent of the additional cost is estimated to be about 65%, it is proposed to maintain the samie percentage contribution (75%) as was provided in the original credit. 18. About 85% in value of the construction works in the proposed revised project is already underway and, on an overall basis, was about 50% complete in November 1967. However, the construction of one road, totalling 100 miles, has not yet begun, as the Goverrnment has been delay- ing going out to tender until supplementary financing is assured. Sim- ilarly, the start of the staffing and training program is dependent on the availability of supplementary financing. 19. The Closing Date of the proposed supplementary credit would be December 31, 1971. The disbursement procedure agreed with the Tanzanians allows for no withdrawals from the proposed supplementary credit with respect to construction or engineering services until the existing credit is fully disbursed; this would not apply, however, in the case of dis- bursements on the training program which would begin soon after the new credit is declared effective. 20. While arrangements for carrying out and supervising the work financed out of the US$ '4 million credit of February 1964 (No. 48-TA) have been improved substantially, it has been impossible to meet the original constructicn schedule. I am accordingly proposing to postpone the Closing Date of this credit to June 30, 1969. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 21. The draft Development Credit Agreement between the United Republic of Tanzania and the Association and the Recommendation of the Commituee provided for in Article V, Secuion l(d) of the Articles of Agreement are being distributed to the Executive Directors separately. 22. Apart from the provisions concerning the modification of the development credit agreement for Credit No. h8-TA, the draft Development Credit Agreement conforms generally to other agreements entered into by the Association for highway projects. PART V - THE ECONOMY 23. A report entitled "Prospects for Economic Development in Tanzania (No. AF-58b) was distributed to the Execsutive Directors on September 13, 1967 (R 67-148). The principal findings of this report and subsequent developments were reviewed in the President's Report and Recommendation to the Executive Directors in connection with a loan to Tanzania for a power project (518-TA). Recent events which might signi- ficantly affect Tanzania's future development are summarized below.  -6- 2b. On December 1, 1967 the new East African Community was formally inaugurated. The Treaty for East African Cooperation w'hich is the basis of the Community provides for a reorganization of some of the existing Common Services, and for the establishment of new institutions. The East African Development Bank could potentially be the most important of those institutions, since it is expected not only to play a major role in financ- ing and stimrilating investment in manufacturing but also in redressing past imbalance in this field arong the three countries, by allocating a higher proportion of investment capital to Tanzania and Uganda, relative to Kenya. The East African Development Bank will finance, wherever possible, projects designed to make the economies of the three East African countries increasingly complemantary in the industrial field. This objective would be further strengthened by the establishment, within the Community, of the Economic Consultative and Planning Council which will assist national planning in the three countries by consultative means. 25. The East African Community has evoked widespread interest in different parts of the world, both because of the statesmanship reflected in its establishment by three sovereign nations, and the highly pragmatic approach revealed. in its administrative and institutional arrangements. An example of the prompt response by some of the neighboring countries is the decision of Zambia and Ethiopia to apply for maribership of the Com- munity, and the distinct possibiLity that Somalia will follow suit. 26. On the domestic scene, there is growing evidence that some of the unccrtainty which characterised the situation in the period immediately following the nationalization measures in early 1967 is being overcome. Negotiations on compensation payments have proceeded satisfactorily in most cases, and settlements have already been reached on the majority of claims. The Government has issued a clear and detailed statement indicat- ing areas and specific types of enterprise which are open to private investors, either exclusively or, if they prefer, in association with the governmenat-owned National Development Corporation. 27. Tanzania's recent economic performance has been satisfactory. In recent years, the gross domestic product has grown at an average annual rate of about 6 percent, rising to 8.8 percent in 1966. Although agricul- ture continues to be the dominant sector in the economy, the steadily rising contribution of the other sectors - notably manufacturing - has brought about some diversification in output. Concerning Tanzania's economic performance in 1967, only preliminary comments can be made, since complete economic data are not yet available. As a result of inade- quate rainfall in the latter part of 1966 and also the late arrival of the 'ong rains -in 1967, output of some of the leading commodities is likely to be lower, and hence the rather spectacular growth of GDP which took place in 1966 is not likely to be repeated in 1967. Encouraging progress is, however, being made in the output of other crops and, with a steady improvement in infrastructure, marketed output is expected to be higher. 7he contribution of the manufacturing sector increased by about 16 percent in 1966 and is likely to be fairly high also in 1967. Taking these fac- tors into accouwt, it is expected that GDP in 1967 may increase by about five to six percent.  28. In recent years, Tanzania has been successful in increasing the rate of investment (from around 11 percent of GDP in 1961-63 to about 16 percent in 1966), and in financing a growing proportion of this investment from domestic savings. Public sector savings have continued to grow, as a result of increases in government revenue and a strict avoidance of unproductive expenditure. These savings are projected to grow further in the 1967-71 period. However, given the rise in government investment which now seems feasible and desirable in the next few years, it seems likely that, even after taking account of the estimated increases, domestic savings would be sufficient to finance only about one-half of the total investment program. Moreover, only 70 percent of the total program is likely to be eligible for external financing. Thus, if the total program is to be financed,external assistance would need to cover, on an average, about 70-75 percent of the total cost of projects eligible for external financing. 29. Tanzania's total external debt (including a notional one-third share of debt on account of the Common Services) stood at $257.8 million on June 30, 1967. The ratio of debt service payments to estimated foreign exchange earnings in 1966 was 4.5 percent.. Projections of debt service payments and foreign exchange receipts indicate that, while Tanzania could incur a. modest amount of conventional debt in addition to borrowing for the Common Services, the major part of future borrowings by Tanzania should be on concessional terms. PART VI - COMPLIANCE WITEI THE ARTICLES OF AGREENENT 30. I am satisfied that the proposed development credit would comply wTith the Articles of Agreement of the Association. PART VII - RECONMENATION 31. I recommend that the Executive Directors adopt the following resolution:  - 8 - RESOLUTION NO. Approval of Development Credit to the United Republic of Tanzania in an amount equivalent to U.S. $3,000,000. RESOLVED: THAT the Association shall grant a development credit to the United Republic of Tanzania in an amount in various currencies equivalent to three million United States dollars (U.S. $3,000,000) to mature on and prior to August 1, 2017, to bear a service charge at the rate of three-fourths of one percent (3A. of 1%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and con- ditions set forth -in the form of Development Credit Agreement (Highway Project - Supplementary) between the United Republic of Tanzania and the Association, which has been presented to this meeting. George D. Woods President Attachments Washington, D.C. February 19, 1968