Tanzania - Flue-cured Tobacco Project

RESTRICTED FIIE COPY Report No. P-86 This report wos 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A FLUE-CURED TOBACCO PROJECT September 24, 1970  INTERNATIONAL DETEELOGPi E T ASSCCIATION REPORT AND RECOiThENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORST ON A PROPOSED DEVEL:9,P iiT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A FLUE-CURED TOBACCO PROJECT I submit the followlring report and recommendation on a proposed credit in an anount in various currencies equivalent to $9.0 million to the United Republic of Tanzania for a flue-cured tobacco project. PAR'T I - HISTORICAL 2. Although flue-cured tobacco has been grown successfully in Tanzania since the early 1950's it has only been in the past few years that, wfith support from the Government, the crop has gained importance as a useful contributor to foreign exchange earnings. During this period the Government has been endeavoring to devise a strategy for the systematic developmnent of flue-cured tobacco production in Tanzania and its sale on world mairkets. The proposed project is the result of this endeavor. It 7as prepared by the Government w;ith assistance from the Bank's Permanent Mission in East Africa (PIEA) and was appraised for possible IDA financing at the Covernment's request in October/November 1969. 3. Forrial negotiations for the proposed credit took place in lH7ash- ington in April 1970. The Tanzania delegation consisted of Miessrs. E. A. Iulokozi, Principal Secretary, Iviinistry of Agriculture, Food and Coopera- tives; I. M. Kaduma, at that time Deputy Principal Secretary, Hinistry of Finance; R. A. Lyatuu, Chief .`gricultural Officer, Iiiinistry of Agri- culture, Food and Cooperatives; S. T. MaJiti, Senior State Attorney, Attorney General's Chambers; 0. S. Niaundi, Assistant Secretary, Miinistry of Finance; V1. INakame, Manager, Nation-l Development Credit .gency (NDCA); P. J. H. Linsey, Chief Accountant, NECA: and G. P. H.Lugissa, Executive Officer, Tang anyika Tobacco Board. 4. The proposed credit would be the eighth credit provided by the Association to Tanzania., which has also received twro Bank loans. The position of these loans and credits as of A'.ugust 31, 1970, wjas as follows:  -2- Amount (US $ million) No. Year Borrower Purpose Bank IDA Undisbursed 45 TA 1963 Tanzania Education 4.6 0 48 TA 1964 Tanzania Roads 1h.0 0 80 TA 1966 Tanzania Agricultural Credit 5.- 1.3 518 TA 1967 Tanzania ET ectric Supply Co. Power 5.2 1.9 115 TA 1968 Tanzania Supplementary Roads 3.0 1.1 132 TA 1968 Tanzania Ranch Development 1.3 1.2 586 TA 1969 Tanzania Roads 7.0 7.0 142 TAh/ 1969 Tanzania Roads 15.5 9.1 149 TA 1969 Tanzania Education 5.0 5.0 Total (less cancellations) 12.2 48.4 of' which has been sold .1 - Total now held by Bank and IDA 12.1 4.7 Total undisbursed 899 17.7 26.6 1/ This credit, ori-inally $38.0 million, wias increased to $'5.5 million in November, 1969. .The Agricultural Credit Project (Credit No. 80 TA) encountered initial delays, principally due to staffin- shortages and organizational problems affecting the National Eevelopment Credit AEency, the channel for the Credit. Action to resolve these difficulties has been taken and performance has since improved. Steps have also recently been taken to strengthen NDCA's financial structure. The 4ssociation has agreed to postpone the closing date for the Credit frora December 31, 1969 to June 30, 1971. Since NDCA would also be the channel for credit under the presently proposed project, its position is discussed in more detail below (paras. 18-21). 6. Implementation of the Second Education Project (Credit No. 149 TA) was held up by a C-overnment request for amendments to the Project, to which the Association agreed in May 1970 (IDA/R70-8 dated March 19, 1970). The Ranch Development Project (Credit No. 132 TA) also started slow,,ly, mainly because of a reorganization of parastatal organizations in Tanzania, which necessitated amending the Development Credit Agreement, and delays in obtaining satisfactory land titles for the Project Ranches. TIore rapid progress should be achieved in the future. Delays occurred in recruiting experts to be financed under Credit No. 115 TA for the staffing and training program of the Roads and Aerodrome Division of the Niinistry of Commaunica- tions, Labour and WJorks. Satisfactory arrangements for the recruitment of the required experts have now been made.  - 3 - 7. Further projects in Tanzania under active consideration for Bank/IDA financing during fiscal year 1971 include an agricultural education project and a major hydro-electric power project. 8. In addition to the lending set out in paragraph 4 above, the Bank has made six loans for common services in East Africa. All of these loans are guaranteed jointly and severally bv Kenya, Tanzania and Uganda; the United Kingdom is also a guarantor of the first loan for the East African Railways. The following is a summary of Bank loans for common services as of August 31, 1970: Amount (US $ million) No. Year Borrower Purpose Bank Undisbursed 110 En 1955 East African Railways Corporation 1/ Railways 24.0 - 428 EA 1966 East African Railways Corporation 2/ Railways 32.4 1.8 1966 East African Harbours Corporation 2/ Hlarbors 5.6 .9 483 EA 1967 East African Posts and Telecommunications Corporation 2/ Telecommuni- cations 13.0 4.4 638 EA 1969 East African Harbours Corporation Harbors 35.0 33.5 674 EA 1970 East African Railways Corporation Railways 42.4 42.4 675 EL 1970 East African Posts and Telecommunica- Telecommuni- tions Corporation cations 10.4 10.4 Total 162.8 of which has been repaid to the Bank and others 16.5 Total now outstanding 1h6.3 Amount sold: 23.8 of which has been repaid: 16.4 7.4 Total now held by Bank 138.9 Total undisbursed 93.h 93.4 1/ Loan made originally to East Africa High Commission 2/ Loan made originally to East African Common Services Authority  - 4 - 9. IFC has no investments in Tanzania at the present time. PART II - DESCPRTION OF THE PROPOSD CREDIT 10. BORROIER: United Republic of Tanzania AMOUNT: US $9.0 million equivalent in various currencies PURPOSE: To help finance a flue-cured tobacco development project involving the settlement of about 15,00G farmers, the establishment of cooperatives, the provision of credit and supporting staff at an estimated total cost of $14.7 million over the six years 1970/71 - 1975/76 UMIORTIZATION: In 50 years including a 10-year period of grace through semi-annual install- mients of 1/2 of 1% from October 1, 1980 through April 1, 1990 and of 1-1/2, from October 1, 1990 through April 1, 2020 SERVICE CHARGE: 3/4 of 1% per annum ECONOVIC RATE OF RETURN: 305 PART III - THE PROJECT 11. An appraisal report entitled "Tanzania - Flue-Cured Tobacco Project" (No. PA-42A) is attached. The project consists of a comprehensive, integrated program supported by substantial technical assistance, especially at farm level, to increase smallholder flue-cured tobacco production in Tanzania and provide satisfactory marketing arrangements for the enlarged national crop. Institution - building is an essential part of the project, the main components of which are: (a) the establishlment of some 15,000 new growers in 150 new village communities, arranged in complexes of about ten villages each, cultivating at full development 30,000 acres of tobacco; (b) the construction of villar:e and on-farrmi infrastructure comprising access roads, village water supplies, baling centers, curing barns and grading sheds;  - 5 - (c) the establishment of some 15 cooperative societies, of about 1,000 farmers each, to act as channels for the distribution of farm credit and other inputs and to supervise baling; (d) the provision of credit for on-farm seasonal inputs and infrastructure and for working capital for the cooperatives; (e) the provision of staff for project planning and management, for extension services for farmers and cooperatives, for training and research and for NDCA and the Tanganyika Tobacco Board, together with necessary facilities; (f) the introduction of a system of tobacco auctions and construction of an auction floor and additional tobacco storage and processing facilities, following a study of these proposed new marketing arrangeaents. 12. The estimated cost of the project is $14.7 million, of which some 60% would be financed by the proposed IDA Credit of $9.0 million, about one-third by the Tanzania Government and the balance by the Tanganyika Tobacco Board. The IDA Credit would cover the foreign exchange component of the project estimated at $7.4 million and about $1.6 million of local currency expenditure. Despite substantial efforts to mobilize local resources Tanzania is not able to generate sufficient savings to fine'nce all the local currency requirements of its development plans, and in the special circumstances as indicated in Fart V below, some external financing of local expenditure is required. Disbursements of the Credit would be spread over the six years 1970/71 - 1975/76, by the end of which the settlement of new growers under the project would be completed. During the following three years the project would give rise to an addi- tional investment expenditure of $1.6 million for completion of on-farm infrastructure, incremental seasonal credit and technical assistance. Tanzania would finance this further expenditure itself. 13. The project would expand tobacco production in Tanzania by about 20 million lbs. to 45 million lbs. by 1978 and increase the value of exports by $11.5 million, assuming a long-term tobacco price of TSh 4.20 per lb. dry weight f.o.b. Dar es Salaam. This price takes into account the possible end of the embargo on Rhodesia tobacco and the present trends in cigarette consumption. The economic rate of return on the project would vary from about 12% to 37% over a range of export prices from TSh 3.50 to 4.50 per lb. with a most likely rate of 30% at the assumed long term price of TSh 4.20 per lb. Average export prices during the 1969/70 crop year are expected to be about TSh 4.46 per lb. 1h. The Ministry of Agriculture, Food and Cooperatives would have overall responsibility for the proposed project, and a Tobacco Project Group headed by a Tobacco Project Officer wou]d be established under the Ministry to execute the field aspects. Planning and survey of village  - 6 - settlements would be carried out by a section of the Project Group headed by a Senior Planning Officer. The appointmiient of persons to the positions of Tobacco Project Officer and Senior Planning Officer with qualifications and experience acceptable to IDA would be required prior to effectiveness of the Credit. 15. The 150 newr villages to be established under the project would be grouped for administrative purposes into about 15 complexes, for each of which a cooperative would be established to handle the distribution of farm credit and inputs and to supervise baling of cured tobacco. Assurances were obtained during negotiations that the Government would make available all trained staff needed to assist with the establishment of the villages and cooperatives and to help the farmers. 16. The Tangany-ka Tobacco Board (TTB) and the Tanzania Tobacco Processing Company (TTPC), twzo existing entities, would handle marketing and processing. The Tanzania Government proposes to introduce auction arrangements in place of the present system of selling the crop through a foreign sales agent. h study would be carried out under the project to deterrine the size and timing of the construction of the auction floor and of the additional storage and processing facilities required. The study would also investigate the organizational, managerial and training arrangements necessary for the effective operation of the proposed facilities. Assurances have been obtained that the present arrangements for marketing the crop would be continued until new arrangements have been agreed betwJeen the Govermnent and IDA, in the light of -the study's findings, for a smooth transition to an auction system. To prepare the w:ay for the change-over, the Tanganyika Tobacco Board would be required to appoint a Chief Marketing Officer, with qualifications and experience satisfactory to IDAI, before the Credit would be made effective. 17. The cost of constructing the proposed auction floor and additional storage and processing facilities is tentatively estimated at $2.5 million, of which 60%, that is $1.5 million, would be provided from the proposed Credit. However, no disbursement of these funds would be permitted until after the results of the proposed marketing study had become available and agreement reached with the Government on the design, cost estimates and organization aspects. 18. It is proposed that funds provided under the Credit for incre- mental seasonal loans, medium-term loans for on-farm development and long-term loans for the auction floor, storage and processing facilities and the marketing study would be channeled through NDGA, wshich is the executing agency for the ongoing Agricultural Credit Project (Credit No. 80 TA). NDCA already has considerable experience in providing credit for tobacco and its performance in this area has been satisfactory. Its financial position has recently been strengthened by the Government taking over responsibility for bad debts inherited from previous credit organiza- tions and resulting from unsuccessful Government loan schemes. Its staff  - 7 - is also to be strengthened by -the appoint]nent of a financial analyst, with qualifications and experience satisfactory to IDA, prior to effective- ness of the proposed Credit. 19. A limitation in the past on NDC1!Is ability to lend effectively has been that its borrowers - the cooperatives and cooperative unions - have themselves often been weakly managed and have not applied the neces- sary financial discipline on their members. In addition, the technical supervision of the recipient farmers by the Ministry of Agriculture's extension services has sometimes been inadequate. The situation requires that NDCA's future lending programs be backed up by adequate management and technical advisory services at the cooperative and farn levels. These services have accordingly been built into the proposed project. 20. The amount of the proposed Credit wyhich would be channeled through NDCA for use by farmers, cooperatives, TTB and TTPC is estimated at $6.3 million. The remaining $2.7 million would be used directly for expenditures on the project by the iPinistry of Algriculture, Food and Cooperatives. The part of the proceeds of tlhe ID.! Credit to be administered by ITDCA would be passed on to NDCA by the Government under a Subsidiary Loan Algreement satisfactory to IDa, the completion of arrangements for which would be a condition of effectiveness of the proposed IDA Credit. This Subsidiary Loan Agreement woulcl provide that, because onf the need to make seasonal credit available to the tobacco fermers year in and yea-r out at the annual rate of about TSh 13 million ($1.8 million), the first TSh 13 million of the IDA Credit uTould be passed on to NbDCA as permanent capital in the form of a &rrant; the remaining funds would be made available as a loan at 4 percent interest over 14 years, including 6 years' grace. NDCA would charge interest on all its loans of ft- per annum. 21. The Tanzania Government has advised the Association that it proposes to establish a new Rural Levelopment Bank in Tanzania which would incorporate NDCA. The proposed structure of this new bank is under consideration by the Government and the timin