Document of m r p I IThe World Banik FILE v

FOR OFFICIAL USE ONLY

Report No. 1868-TA

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

April 26, 1978

This document has a restricted distributiun' and may be used' by recipient's only iF the perfo ib ee oftheir official duties. Its contents may not otherwise be discIosed WiAbutf Worhdi taifll autioiViatfin.

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CURRENCY EQUIVALENTS

Currency Unit = Tanzania Shilling (Tsh)Tsh 1.0 US$0.12US$1.0 Tsh 8.30

WEIGHTS AND MEASURES

Metric System

1 hectare (ha) = 10,000 m = 2.46 acres1 kilometer (km) 2 0.62 miles1 square kilometer (km ) = 0.39 sq. miles = 100 ha1 kilogram (kg) = 2.20 pounds1,000 kg = 1 metric ton = 0.98 long ton

ABBREVIATIONS

MOA = Ministry of AgricultureCNSL = Cashewnut Shell LiquidCATA = Cashewnut Authority of TanzaniaMDB = Marketing Development Bureau

of the Ministry of AgricultureCCM = Chama Cha Mapinduzi

(Political Party)NBC = National Bank of Commerce

FISCAL YEAR

Government: July 1 - June 30

CATA October 1 - September 30

FOR OFFICIAL USE ONLY

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. THE AGRICULTURAL, RURAL AND INDUSTRIAL SECTORS .......... I

A. The Agricultural and Rural Sector I.................. B. The Industrial Sector ....... ........................ . . . . 8

II. CASHEWNUT PRODUCTION, PROCESSING AND RESEARCH .... ....... 10

A. Cultivation, Harvesting and Products of Cashew Tree. 10

B. Raw Cashewnut Production in Tanzania . ....... ........ 11General ......... ... 6. .**......... .......................... 11Cashewnut Producing Areas .......................... 12Production of Existing Trees ....................... 12Plantation Program ................................. 12Raw Nuts Grading and Extension Services ............ 13Purchasing Arrangements and Transport .... .......... 14

C. Cashewnut Processing .. .... ..... ... ........... .. 14Manual Cashewnut Processing .... o...o ......... 14Principles of Cashewnut Processing ..... 15Processing Coefficients .... o --. -... 16Mechanical Processing in Tanzania ...... .. ...... 16

Do Cashew Research . . ....... . ... . ..... . ..... ,.. . 17

III. CASHEWNUT MARKETS AND PRICES . ........ ... .. ............ o.. 18General ....... ,.- . ooo. 18Trade in Cashewnut Kernels ....... o.. ..................... 19Consumption ..60................................... .... ....... 20Prices ........... o.o......... .. o.. 20Trade in Raw Cashewnuts * * ..................... ....... .. 21Cashewnut Shell Liquid (CNSL) ........................... 22Producer Prices ........... . .. .. . .. . .. .. . .. . a * ........ ... . 22

IV. THE CASHEWNUT AUTHORITY OF TANZANIA ..o ....... 22Organization and Management ... ......... ... 23Financing ........ 23Reports, Accounts and Audit ... o ......... 23Financial Prospects ....... .................. ........ 23Existing Factories ...................... ... .......... 24Other CATA's Activities .. .................. .. **...... 24

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Table of Contents (Continued) Page No.

V. THE FIRST CASHEWNUT DEVELOPMENT PROJECT .... ............. 25

A. Summary Project Description ........... .. ........... 25A. Cashewnut Production ........................... 25B. Staff Employment, Staff Training and Project

Preparation .................................. 25C. Rural Water Supply and Community Education

Centers ...................................... 25

Project Cost ................................... 26Project Construction ........................... 26Research ........... ............................ 27Financial Management ........................... 28

Monitoring .......... ........................... 28Conclusion ......... ............................ 28

VI. THE PROJECT ....................... ...................... 29

A. General Description ................................ 29

B. Detailed Features .................................. 29Factory Sites ...................................... 29CNSL Storage Facilities ............................ 31

CNSL Tankers and Vehicles .......................... 31Staff Housing ...................................... 31Professional. Services .............................. 31Envirorment and Occupational Health .... ............ 32

C. Organization and Management ........................ 33Project Construction ............................... 33Factory Operation .................................. 33Monitoring .......................................... 33

D. Accounts and Audits ................................ 34

VII. PROJECT COSTS, FI]NANCING AND PROCUREMENT .... ............ 35Capital Costs ............ 35

Operating Costs ......................................... 36Financing ............ 36

Disbursements ............ 36Procurement ............ 37

VIII. FINANCIAL EVALUATION .................................... 37

Basic Assumptions.37Financial Projections.38Farmers' Benefits.38Government Cash Flow ............................... 39Foreign Exchange Benefits .......................... 39

Table of Contents (Continued) Page No.

IX. ECONOMIC EVALUATION ..................................... 39

A. Summary Economic Benefits and Justification ........ 39B. Basic Assumptions .................................. 40C. Sensivity Analysis ................................. 40D. Uncertainties and Risks ............................ 41E. External Effects of the Project .... ................ 42

X. AGREEMENTS AND RECOMMENDATIONS .......................... 42

Annex 1: Tables

1. CATA Purchases of Raw Nuts, 1969/70 to 1976/772. Rainfall and Cashewnut Growth Periods3. Cashewtree Plantation Program: Allocation of Planted Areas4. Cashewtree Plantation Program: Anticipated Yields5. Cashewtree Plantation Program: Production6. Summary of Tanzania's Cashewnut Processing Capacity7. Supply of Raw Nuts and Processing Capacity8. Exports of Cashewnut Kernels from Processing Countries9. India's Margin on Raw Nut Processing10. Kernels 320 Wholes Prices CIF New York11. Raw Cashewnuts Production12. Price Relationship between Tanzanian Mix and 320 Wholes13. Projection of Kernel Prices14. Economic Cost of Raw Nuts to Factories15. Financial Cost of Raw Nuts to Factories16. Financial Cost of Exporting Raw Nuts17. Producer Prices for Cashewnuts18. CATA Income Statements19. CATA Balance Sheets20. Comparative Estimate of First Project's Costs21. Tankers Requirements for Transportation of CNSL22. Project Costs Summary23. Detailed Project Costs24. Cost of Professional Services25. Disbursement Schedule26. Projected Income Statements for a Typical Project Factory27. Consolidated Cash Flow Statements for the Project's Factories28. Cash Flow Statements for CATA29. Government Project Related Cash Flow30. Foreign Exchange Earnings and Expenditures31. Economic Rate of Return Calculation32. Economic and Financial Rates of Return Sensitivity Analysis

Table of Contents (Continued)

Annex 2: Selected Documents and Data Available in the Project File

Charts: The Cashewnut Authority of TanzaniaImplementation Schedule

MAP

This report is based on the Eindings of an appraisal mission which visitedTanzania in June/July 1977, consisting of Messrs. F. M. Patorni, A. Wilson(Bank) and J. Ohler (consultant). Mr. R. Lacroix (consultant) reviewed inSeptember/October 1977 the technical and economic aspects of the main cur-rently available cashewnut processing methods. Mr. M. Coyaud (Bank) visitedthe Ministry of Water, Energy and Minerals in December 1977. Mr. P. Patel(Bank) reviewed in January 1978 Government's proposals for the siting of onefactory in the Coast Region. Mr. F.M. Patorni (Bank) visited Tanzania inFebruary 1978 to update the appraisal report.

I. THE AGRICULTURAL, RURAL AND INDUSTRIAL SECTORS

A. AGRICULTURAL AND RURAL SECTOR

Background

1.01 Tanzania has a total population of about 15.3 million (mid-1976),which is increasing at an annual rate of about 2.7 percent. Average percapita GNP for 1976 is estimated at US$180, and average per capita income inthe rural areas is put at about US$70. The real growth rate of GDP of theeconomy averaged about 4.8 percent per annum over the period 1964-1975.Roughly 40 percent of GDP is derived from agriculture and related activitiessuch as forestry with about half of this contribution coming from subsistenceproduction. About 94 percent of the Tanzania population lives in the ruralareas, and 90 perccent of the economically active population is engaged inagriculture.

1.02 Most agricultural production is from smallholdings using familylabor. Large-scale agriculture is confined to a small number of privateestates and state farms producing sisal, coffee, tea sugar, wheat, rice andlivestock. Estate production has diminished in importance, and the state farmprogram remains small. Tanzania's national livestock herd, with a cattlepopulation estimated at 10 million head, is grazed extensively over the 40percent of the country which is free from tsetse fly infestation. It islargely managed along traditional lines.

1.03 About 70 percent of Tanzania's foreign exchange earnings from mer-chandise exports are accounted for by exports of unprocessed agriculturalcommodities, and a further 7 percent comes from exports of processed farmproducts. The major agricultural export commodities are cotton, coffee,sisal, cashewnuts, tea and tobacco.

1.04 The recent performance of the agricultural sector as been sluggish.Over the period 1967-1976, the average annual rate of growth of agriculturalproduction was 2.8 percent, only slightly greater than the rate of populationgrowth. From the late 1960's onward, food crop production failed to keeppace with population growth and, as a result, Tanzania became increasinglydependent on imports of maize, rice and wheat. The effects of this slowgrowth were exacerbated in 1973 and 1974 by the effects of a severe droughtwhich resulted in poor harvests and the need for large imports of foodgrains.In 1975 and 1976, agricultural production recovered from the effects of thedrought increasing in real terms by about 6.5 percent in 1975 and by a further4.5 percent in 1976.

Agricultural and Rural Development Strategy

1.05 The Goverrment has undertaken a comprehensive program to supportthe development of productive activities in the agricultural sector, in con-junction with efforts to achieve balanced regional growth and more equitable

income distribution. Within these objectives, Government is paying particularattention to achieving self-sufficiency in food production and to supportingthese crops which represent sources of foreign exchange earnings. Greateremphasis is being placed on the production rather than the social aspects ofrural development projects. In addition, Government has made substantialheadway during the past decade in laying the foundations for a long-termprogram of rural development. Beginning in 1970, the Government launched awide-ranging program to resettle the country's rural populations into villages.In 1972, it decentralized government administration to the regional anddistrict levels in order to tailor development programs more closely to theneeds of the new villages (paras. 1.07-1.09). In 1975, it instituted theVillage and Ujamaa Villages Act, which laid down the legislative base andprocedures for the newly created villages (paras 1.10-1.12). With the estab-lishment of new villages, the Government set ambitious targets to provideessential social services. Under a Universal Primary Education Programlaunched in 1974, close to 100 percent of all children of primary school agewere enrolled in primary sclaool by the end of 1977. A program of villagewater supply was initiated in the same year with the objective of providingthe entire rural population with an accessible supply of potable water by 199:so far, 36 percent of villages have water supply systems. A program hasrecently been launched to provide the full rural population with access torudimentary health rare as soon as possible.

1.06 However, the rural populace has yet to experience the benefits ofthe Government's overall strategy. Real rural per capita incomes actuallydeclined by 4 percent between 1969-1975 and represent only 43 percent ofaverage urban incomes. The Government's social programs still affect onlya small proportion of the total rural population. Although major institu-tional reforms have been made, the institutional structure in the rural sectoris still in flux, and may require yet further change. In some respects (forexample, changes in the input delivery system), excessive institutional changemay have been partly responsible for the relatively poor performance of theagricultural sector.

Rural Organization

1.07 In order to improve the quality of its programs and projects, tospeed their execution and to encourage the mobilization of local resources,the Government, in 1972, adopted a decentralized administrative structure.Regional and District authorities were granted primary responsibility forthe planning and implemental:ion of development activities within theirjurisdictions, and were given a high degree of administrative autonomy.Tanzania is now divided in 21 Regions, containing a total of 80 Districts.The political head of each Rtegion is the Regional Commissioner, who hasthe rank of Cabinet Minister, and who is chairman of the Regional Develop-ment Committee, and a member of the country's National Assembly and of theNational Executive Committee of Tanzania's only political party. Chama

Cha Mapinduzi 1/ (CCM). The political head at the District level is theArea Commissioner, who is the CCM District Secretary and Chairman of theDistrict Development Council. All Regional and Area Commissioners aredirectly appointed by the President of Tanzania.

1.08 The Regional civil service is headed by the Regional DevelopmentDirector (RDD), assisted by a Regional Planning Officer, and by the headsof the twelve Regional functional departments of the central ministries. 2/The head of each of these departments reports directly to the RDD, who, inturn, is responsible to central Government through the Prime Minister'sOffice (PMO). At the District level, the administration is headed by theDistrict Development Director (DDD), assisted by a District Planning Officerand the heads of the District functional departments, which are the same asthose represented at the Regional level. The field-level staff of the centralministries are answerable to the DDD through the heads of their functionaldepartments, but receive technical guidance from the functional staff at theRegional level and, through them, fron the central ministries. All civilservants within a Region are ultimately responsible to the RDD and, onceappointed to a Region, can only be transferred with the consent of the RDD.

1.09 This decentralization of government authority has served to improvecommunications between the Government and the village and between the Partycadre and the civil service. Villages, in principle, have more opportunityto participate in the planning and implementation of the development programswhich affect their future. The Party is more aware of individual villageneeds. The civil service operating at the district and regional levels hasa more integrated approach to rural development than was possible throughthe central technical ministries. However, qualified manpower is insufficientto fill the many positions demanded by a decentralized government structure.Decentralization has not led to the anticipated levels of local participationin the planning process, which remains dominated by the central ministries.The division of responsibility between the central ministries, regional anddistrict authorities and parastatals remains poorly defined, and bureaucratictensions persist.

Villagization

1.10 Since independence, the grouping of dispersed farm families intovillages has been a key element of Government strategy for the rural areas,in order to facilitate the provision of infrastructure and services to therural population, and to encourage self-reliance and a community approach torural development. During 1974, the emphasis shifted from creating additional

1/ Roughly translatable from the Swahili as "the Party of the Revolution".

2/ Education, Health, Lands, Industry, Commerce, Natural Resources, Live-stock Development, Crop Development, Water, Public Works, Ujamaa andCooperatives, and Culture.

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ujamaa 1/ villages (the ultimate goal of which was fully collectivized agri-cultural production) to forming "planned" of "development" villages, whichplace less stress on communal production, and more on "block farming" (inwhich each farmer cultivates his own plot within an overall block of landallocated to the village) and on individual holdings within the villageframework. At the same time, the pace of villagization was considerablyaccelerated, not without some degree of disruption of production in someareas. At the present time, there are about 7,700 registered villages,containing over three-quarters of Tanzania s rural population.

1.11 The village is intended to act as the country's primary social,economic and political unit. Basic social services, including health facili-ties, classrooms and water supply systems, are to be located in each village.Economic services, including provision of credit, supply of inputs, organiza-tion of extension services and marketing of produce, are to be coordinatedat village level. Economic infrastructure, such as storage godowns, process-ing equipment and small-scale industries, are to be village owned investments.The villages' legal status has now been spelled out in the Villages and UjamaaVillages (Registration, Designation and Administration) Act of 1975. Eachvillage of 250 families or more is registered and elects, through a VillageAssembly, a Village Council. The Village Council has the power to allocateland and control its use, owns heavy agricultural machinery and other capitalgoods (except for livestock a,nd small farm tools which remain individualproperty), can borrow and is required to establish a capital fund, a reservefund and a disposable fund.

1.12 It is too early to judge how effectively the villages will be ableto meet their ambitious goals. Early performance has been mixed, with vil-lages in some regions demonstrating an impressive ability to mobilize localsupport for the construction of social infrastructure (such as schools) orproductive infrastructure (such as village grain and input stores), whilstother villages have shown little ability to effectively mobilize local re-sources. Villagization has brought with it problems which are increasinglybeing felt in Tanzania. In some areas of high population density, villagiza-tion has led to overgrazing and depletion of soil fertility. In other areas,there are substantial diseconomies in that villagers must now travel furtherto cultivate fields, collect fuelwood and draw potable water. The Governmenthas already acted (through 'Operation Correction' in 1976) to rectify the mostserious cases of misallocation, but more attention to village siting and sizeis needed to overcome many of the existing problems of village settlements.

Agricultural Marketing and Prices

Parastatals

1.13 In 1976, the District and Regional Cooperative Unions, which formerlyplayed an important role in agricultural marketing, were dissolved and theirfunctions transferred to other national, regional and district organizations,

1/ "Ujamaa" is a Swahili word meaning "familyhood".

the most prominent of which are the various parastatal crop authorities. Atpresent, there are separate parastatal institutions for coffee, cotton, sisal,tea, tobacco, cashew-nuts, pyrethrum, sugar, livestock and dairy products andfoodgrains. Many of these parastatals have been established quite recently,or have taken over the functions of predecessor organizations. The generaltendency has been for Government to enlarge the role and scope of theseorganizations, placing a severe strain on their manpower resources.

1.14 The marketing system is usually characterized by lack of competi-tion, high marketing costs, poor service and slow payments to farmers. Manyparastatals have been proven to be inefficient, with excessive overhead costs.Overall operational efficiency has not improved over the past decade, andmay even have declined in some cases. These inefficiencies have resultedin increased trading margins, which in turn lead to higher consumer pricesand/or lower producer prices. These problems have been exacerbated by thechanges outlined above. While some parastatals have performed creditably,there is evidence of crops not being purchased and transported in a timelyfashion, of delayed payments and of further increases in marketing costs.The Tanzanian Government is aware of these problems, and is taking stepsto remedy the situation, which include the review by Standing Committee onParastatal Organization (SCOPO) of the structure and managerial performanceof parastatals, and recent dismissals of staff in parastatals that were overmanned.

Pricing Policy

1.15 The control of producer and wholesale prices of major crops inTanzania is an important policy tool of Government. Almost all principalexport crops are controlled, as are major food products (with the exceptionof such items as fruits, vegetables, eggs and fish). Responsibility formaking price recommendations rests with the Ministry of Agriculture, withfinal decisions on pricing taken by the Economic Committee of Cabinet.Prior to 1974, Government downplayed the use of price incentives to en-courage increased production. Thus, for several years prior to 1974, mostproducer prices were held fixed despite increases in input costs. Sincethen, however, the Government has recognized the need to maintain farmerincentives by providing remunerative returns. During 1974, very substan-tial producer price increases were introduced and since then, producerprices have been reviewed annually, with further price increases announcedto maintain farmers' production incentives.

1.16 Producer prices for a wide range of commodities, including maize,wheat, rice, tobacco, cotton and cashew nuts, are set on a uniform national(or 'pan-territorial') basis. The objective of this policy is to promotethe development of the more remote regions by nullifying the effects oftransport costs. This policy could have major disadvantages in the long-run, since it is likely to lead to sub-optimal allocation of productionfactors; this misallocation will be greater the more successful uniformpricing is in stimulating production in areas in which, otherwise, pro-duction would not be economic.

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1.17 In recent years, Government has encouraged the use of inputs suchas fertilizer and improved seed, through the subsidization of these inputs.Particularly in the case of fertilizer, distribution and use has often beenindiscriminate, with little regard being paid to whether the use of fertil-izer on particular crops or particular soil types was agronomically andeconomically desirable. Much greater attention is now being given by Gov-ernment to ensuring that inputs, in particular fertilizer, are being dis-tributed for use only where such use is profitable, in terms of increasedyields. In the case of fert:ilizer, which is priced on a pan-territorialbasis, the level of subsidy has been progressively reduced from 100 percentof total cost in the 1973/74, and 1974/75 seasons, to 75 percent of cost in1975/76 and 50 percent of cost in 1976/77 and 1977/78. However, at presentworld fertilizer prices, the subsidized price of fertilizer, reflecting thefact that the Tanzania Fertilizer Company (which produces the bulk of fer-tilizer used in Tanzania) is a high-cost producer, and that the presentlevel of subsidy represents a subsidy to the factory, rather than to theagricultural sector.

Agricultural Services

Research

1.18 Agricultural research in Tanzania is undertaken by a variety ofgovernmental agencies. The Ministry of Agriculture (MOA) is responsible foroverall guidance of the national research effort, and operates a network ofcrop and livestock research stations. Tanzania's research system has severalweaknesses. MOA has not been able to exercise effective control and, as aresult, priorities have not always been firmly established, the regionalemphasis has been unclear, and research resources have not been allocated inaccordance with development priorities. There is a need for greater focuson improving knowledge about Tanzania's various agro-economic zones, and onimproving the farming systems in these zones through a greater emphasis onfield testing. The links beltween research and extension are weak, partly as aresult of the Regions being responsible for extension, while MOA is in chargeof research and training.

1.19 Agricultural research in Tanzania is increasingly becoming linkedwith the various international agricultural research institutes under theConsultative Group for International Agricultural Research (CGIAR), and isreceiving additional support comes from bilateral agencies. IDA is intendingto assist, as part of a proposed Agricultural Services Project, in strengthen-ing the ability of the Tanzarnian research system to carry out field testing,and in forgoing effective links with the agricultural extension services.The Tanzanian research system also receives support under the Tabora RuralDevelopment Project (Cr 703-TA), and additional support would be providedunder the proposed Mwanza/Shinyanga Rural Development Project.

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Extension

1.20 The agricultural extension service in Tanzania is staffed by about

100 graduates, 3,000 field officers, who have received some formal training,

and by about 3,500 field assistants, many of whom have received no formal

training. Of field level extension staff, about 54 percent are employed by

MOA but under the day-to-day control of the region, with the remaining 46

percent employed by various crop parastatals.

1.21 As the research base is weak, extension agents have few proven

technical packages to extend to the farmers. The training of field staff is

grossly inadequate, and refresher courses are infrequent. Field staff are

inadequately supervised, and receive limited logistic support. A review of

the extension system has been underway in Tanzania for about two years, with

MOA and the PMO holding differing views on how it should be reorganized. In

order to assist in the development of an effective extension service, IDA has

proposed to carry out jointly with the Government an initial survey of the

needs of research and extension services in Tanzania, with the intention of

following through to the preparation of a research and extension training

component of a National Agricultural Services Project.

Credit

1.22 Long, medium and short-term agricultural credit is provided by the

Tanzanian Rural Development Bank (TRDB) which administers special funds on

behalf of the Government, and which has been supported by the Bank Group as

the major credit channel for those IDA funds disbursed for direct use by

farmers. During the year ending 30th June 1977 (1976/77) TRDB made loans

totalling Tsh. 77 million, of which Tsh. 33 million (43 percent) went to

registered villages (mainly for seasonal inputs), and Tsh. 16 million (20

percent) went to parastatals, with the remainder split between cooperative

societies, producer associations and District Development Corporations.

Almost Tsh. 53 million (68 percent) of TRDB's lending in 1976/77 was for

short-term finance of seasonal crop inputs. The remainder was medium and

long-term credit, including Tsh. 15 million (19 percent) for livestock devel-

opment and Tsh. 5 million (7 percent) for rural transport, with smaller

amounts for small-scale industries, crop storage facilities, farm machinery

and fisheries development. TRDB at present charges interest rates of 8.5

percent on short-term financing, and 7.5-8.5 percent on medium- and long-term

credit. A project to further strengthen TRDB is currently being prepared with

IDA assistance.

Rural Transport Services

1.23 An adequate road transport system is needed to ensure the efficient

movement of crops to market centres and railheads, and to support timely

delivery of agricultural inputs to the farmers. Despite Government's efforts

to upgrade the road network, which have been concentrateu on recent years

on bitumenizing existing roads rather than building new ones, only about 10

percent of the 33,400 km of roads provide reliable, all weather service. The

remainder are, in general, little more than earth tracks impassable in the

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.ainy season. The condition of the road network is generally poor, reflectingthe lack of adequate maintenance due to shortages of equipment and qualifiedstaff, institutional inefficiLencies and insufficient budgetary allocations.Rural roads are in especially poor condition. Current government action toaddress these problems includes the provision of staff training and equipmentunder the IDA-assisted Highway Maintenance Project (Credit 507-TA) and theTabora Regional Development Project (Credit 703-TA) and the recently createdBetterment and Maintenance Units, which are upgrading selected secondary roadsin several regions.

B.. INDUSTRIAL SECTOR

1.24 At independence Tanzania had an extremely limited industrial sectordominated by private firms. Three major features have characterized thesector since that time: rapid expansion, an impressive diversification inproducts produced, and a major shift in ownership from private to publichands. The contribution of manufacturing to GDP more than doubled by 1976as the number of jobs in the industrial sector tripled. Furthermore, thelimited range of products produced in 1961 has been significantly expanded asnew plants producing a wide range of consumer goods and some intermediate andcapital goods were completed. Finally, following the Arusha Declaration in1967, the Government systematically transferred the control and ownership ofthe large private and foreign-owned industrial enterprises to publicly-ownedparastatals. By 1974, the public sector accounted for about 50 percent ofmanufacturing value-added and employment. Presently, four ministries control17 holding companies which have a total of 97 subsidiaries in various pro-ductive sectors. It must, however, be noted that the private sector stillremains an important participant in industry (430 of 500 factories with over10 employees are in private hands).

Performance and Problems

1.25 Aggregate manufacturing production grew rapidly between the mid-sixties and the onset of the economic crisis in 1974. The average annualreal growth of the manufacturing sector was 7.8 percent between 1964-75compared to an average growth rate of 4.8 percent for total GDP. However,while this record of increasing output would seem to indicate satisfactoryindustrial performance, a detailed analysis of Tanzania's record in themanufacturing sector indicates that productivity has been low and outputhas been far less than warranted by the level of investment.

1.26 The problems underlying the suboptimal performance in the sectorare many. At the macro level, the Government has not yet developed theadministrative capability to monitor and coordinate effectively the opera-tions of the control systems which were instituted along with the increasedpublic ownership of manufacturing enterprises. Important components of thiscontrol system include centra,lized decision-making on investments, detailedallocations of foreign exchange through import licensing, an extensive regimeof price controls and rules of procedure operated by the National Pricing

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Commission, and wage-setting by the permanent Labor Tribunal and the Govern-

ment. While the government feels these controls are needed to achieve itsdevelopment goals, their effect has largely been to insulate public enter-prises from the discipline of market forces. At the micro level two addi-tional sets of problems operate. First, performance indicators consistentwith the macro control systems and clear guidelines for evaluating perform-ance are still lacking. Managers and workers, therefore, have few motivatingincentives in Tanzania. Second, there is a scarcity of trained managerial

personnel and skilled labor, and most enterprises have to live with periodic

shortages of other key inputs.

1.27 These issues have been raised in various Bank reports on theTanzanian industrial sector. The Government is well aware of them and con-

siderable discussions have taken place among Tanzanian economic and enter-prise managers on possible solutions. The Bank Group has participated inthese discussions within the context of both general economic work and spe-

cific projects in the industrial sector. These issues were a particular focus

of the recent review of the Basic Economic Report in November 1977. Whiledecisions on any major macro policy changes dealing with the incentive systemfor workers and managers, parastatal organizations and the price and importcontrol systems will take time because of their importance and breadth, atthe firm level a number of improvements have been made. These include staff

retrenchment in overmanned parastatals, an eight percent limit on allowableincreases in overhead costs of manufacturing firms which approach the NationalPrice Commission for price increases and the hiring of a foreign consultant

group to advise on operational/managerial improvements for the subsidiariesand associate firms of the major industrial holding company, the NationalDevelopment Corporation (NDC). Specifically, as a result of the NDC sponsored

efficiency studies, its operating companies have been able to improve their

operations and correct problems in management, maintenance, inventory con-

trol, excess receivables, unbalanced process lines, and worker skills. Thisapproach could be repeated with success in additional parastatals.

Basic Industrial Strategy and the Third Five-Year Plan

1.28 Future development of the sector will be based on the Basic Indus-

trial Strategy (BIS) adopted in 1974 by the Government. The two main goalsof this strategy are structural transformation and self-reliance and its main

emphasis is on the use of domestic resources for domestic needs. This in-volves giving top priority in investment allocations to industries supplying(i) basic needs of food, shelter, health, education and transport, and (ii)producer goods which contribute to production of a wide range of industrialproducts. However, as it has emerged BIS will also permit expansion of

export-oriented production, especially that based on domestic raw materials

(for example cashew processing, sisal spinning, textile manufacture, and meatand leather processing). A potential problem with the BIS is that attempts to

restructure the economy too quickly during this period of resource stringency

may ultimately frustrate both growth and structural change. A too rapid ex-

pansion of particular sectors may lead to excessive reliance on external

finance, know-how and markets, and the massive investment coordination re-

quired by the strategy may overburden the country's already weak planning

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capacity. Moreover, effective implementation of the strategy will require

specific changes in the macro policy framework towards a protection and tariff

structure which does not discriminate against backward linkage import substi-

tution, discourage domestic production of capital goods, or confer high and

widely varying effective rates of protection to the production of consumer

goods.

1.29 Preliminary indications are that the Third Five-Year Plan under

preparation (FY77-81) envisages an investment program of about Tsh 23 billion,

of which about 21 percent will go to manufacturing. Projects with Bank group

support earmarked for development/implementation under the Plan are the indus-

trial estate at Morogoro, the cashewnut processing factories and the textile

mill expansion at Mwanza. In addition, NDC is presently implementing five

other major projects: a tannery, a bicycle plant, a farm implements factory,

a detergents factory, and a pharmaceutical plant. A pulp and paper mill

project and another textile plant are in advanced stages of preparation

for Bank Group financing.

II. CASHEW PRODUCTION, PROCESSING AND RESEARCH

A. Cultivation, HarvestinR and Products of the Cashew Tree

2.01 The cashew tree, Anacardium occidentale L., is a native of Brazil,

but was introduced by the Portuguese in the 1600's into Asia and Africa

to prevent soil erosion. The tree, which is an evergreen, naturally grows

up to 12 meters high and has a spread of 25 meters. It has an extensive

root system, which helps it to tolerate a wide range of moisture levels

and soil types, but prefers well-drained sandy loam or red soils, and an

annual rainfall between about 35 and 120 inches (990-3050 mm). Cashew trees

are most frequently found in coastal areas.

2.02 Most cashew trees start bearing fruit in the third or fourth year

and are likely to increase their yield up to about twenty years until room

and water and nutrient supply become limiting factors. They have a bearing

life of over 30 years depending on growing conditions. The average yields

of raw nuts of a mature tree under smallholder conditions is in the range of

7 to 11 kilos per annum but under favorable conditions yields may reach 15

to 20 kg. Where the trees are planted about 12 meters apart (70 trees per

ha), which is considered to be the most productive spacing for mature trees

in Tanzania, the average yield per hectare could be about 1,000 kg (i.e. 15

kg/tree) with large variations above or below this figure. However, cashew

trees in Tanzania are more closely planted and are often intermixed with

other trees either in small orchards or in the wild. This makes reference

to a national acreage under cashews meaningless.

2.03 The cashew tree flowers for 2 or 3 months and the fruit matures

about 2 months after the bloom. The raw cashewnut (the true fruit) forms

first at the end of the fruit stalk (peduncle). Subsequently, the fruit

stalk swells to form an 'apple' with the raw nut attached externally. Once

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picked, this apple will keep for only 24 hours, but the raw nuts keep for12 months or more, if they are dried to reduce the moisture content to 9percent or below, packed in gunny bags and stored in proper conditions.

2.04 The raw cashewnut is 1.5 - 4.0 cm long and kidney shaped. Its shellis about 3 mm thick, having a soft, leathery outer skin and a thin hard innerskin. Between the skins is a honeycomb structure, which contains a phenolicmaterial, called cashewnut shell liquid (CNSL). Inside the shell is thekernel, wrapped in a thin brown skin, the testa, which contains tannin. Theconstituent parts of a raw nut make up about the following proportions byweight: the kernel is 25 to 30%, the shell liquid about 20 to 25%, thetesta about 2% and the shell the balance. These figures vary considerablyfrom year to year and region to region, and also between trees. Differentmethods of extracting the kernels from the raw nuts are described in sectionC below.

2.05 The marketed products of the cashew tree are kernels and CNSL.Kernels are consumed directly, mainly as roasted and salted nuts, or in con-fectionery and bakery products. CNSL is the only naturally occurring phenolicmaterial entering into world trade. Over 90% of all imports are used in fric-tion materials. However, CNSL is of minor importance to the cashew processingindustry, as sales value represents only about 3% of total sales value. Thecashew apple can be used to manufacture jams, soft drinks and alcoholicdrinks. However, in the main producing areas of East Africa and India littleof the crop of apples is consumed. The testa is not exploited commercially.

B. Raw Cashewnut Production in Tanzania

General

2.06 Tanzania is the world's second cashewnut producer after Mozambiqueand produces an average 120,000 tons of raw nuts annually which representsabout 30% of the total world's production of about 420,000 tons (Tables Iand 11). Cashewnut product is the fifth export crop of Tanzania aftercoffee, cotton, tobacco and sisal, and accounted for about Tsh 210 million(US$25 million) in 1975/76 i.e. about 7% of the value of total agriculturalexports of Tsh 3,000 million (US$360 million).

2.07 Raw cashewnuts are produced almost entirely by smallholders. Theraw nuts collection starts at the end of the rainy season in June and ends inNovember (Table 2). It is estimated that about 400,000 farm families livein the cashew producing areas. Besides cashew trees, traditional food crops(cassava, sorghum, millet, maize) are grown and almost completely consumedby the growers. Cashew is the only significant source of cash and generatesabout 90% of the annual family cash income of about Tsh 400 (US$50).

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Cashewnut Producing Areas

2.08 Cashew trees producing areas are shown on the Map. Soils vary fromsandy to red-sandy loams and red loams. The best cashew trees grow on thewell drained upland red soils. The average annual rainfall varies between600 and 1,500 mm depending on the region, the heaviest rainfall being alongthe coast. There are two weLl defined seasons, the dry season from mid-Mayto mid-November and the rainy season from mid-November to mid-May. Totalrainfall and rainfall distribution in cashew growing areas vary considerably,resulting in varying yields from year to year.

2.09 There is no direct relationship between production and acreage,as trees are scattered over the producing areas, usually closely plantedand intermixed with other trees, crops or bush. The spread of trees hasbeen caused by planting as well as by seed thrown away by men and animalsafter consuming the apple. No information is available on the contributionto the spread of the trees made by purposeful plantings.

Production of Existing Trees

2.10 About 70% of the raw cashewnuts are produced in the Southern regions,in the Districts of Mtwara, 1.indi, Newala, Nachingwea, Masasi, Songea, Tunduruand Kilwa (see Map). The remaining 30% are produced in the North, mostly inthe Coast Region. Although annual production has varied from year to yearby about 10% under and up to 20% above an average of 120,000 tons in the69/70 - 76/77 period, the percentage contribution of the regions to the totalproduction is about constant. CATA purchases of raw nuts during the period69/70 - 76/77 are shown in Table 1. It is estimated that almost all produc-tion is purchased by CATA, very small quantities being locally consumed.

2.11 The future production of existing cashew trees is estimated toremain approximately at the current average of 120,000 tons annually. Pur-chases by CATA in 75/76 and 76/77 were about 10% lower than this average,mainly because adverse weather conditions affected both seasons. Table 2shows the average monthly rainfall in the Southern cashew production areasand the growth cycle of the cashewnut.

2.12 The Government's villagization program might also have had an ad-verse effect on CATA's purchases in 74/75 and 75/76, since farmers were notallowed to walk further than 5 miles away from their new villages in theseyears, and could not collect the nuts at their old farms. This restrictionwas abolished in July 1976.

Plantation Program

2.13 During the 1976/77 season, Government and CATA have initiatedthe implementation of a 150,000 ha plantation program. About 8,200 ha wereplanted during the 76/77 season and, acccording to Government's plans, theprogram would be completed within two years by 1978/79. In the present reporta more conservative view was taken and it is assumed that the program wouldbe carried out during the 5-year period 1977/78 - 1981/82. The allocation of

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planted areas by Districts, as currently planned by Government, is in Table 3.About 700 villages would be involved in the program. Anticipated yields arein Table 4. The development of the program's production is in Table 5. It isexpected that at full development in 1992 the new plantations would produceabout 100,000 tons of raw nuts annually, increasing the country's productionby over 80% from 120,000 tons to 220,000 tons annually. As will be notedlater (para 6.03), the processing facilities being financed under the Projectare required even without this planting program.

Raw Nuts Grading and Extension Services

2.14 At village level, two graders check the quality of the raw nutsduring the purchasing season. About 1,400 graders are currently employed bythe 700 cashewnut producing villages, and trained by CATA through seminarsheld about twice a year. These graders are paid by the villages which re-ceive from CATA a fee of Tsh 0.10/kg of raw nuts purchased. At divisionlevel (about 5 divisions per district), CATA employs two extension assistantsper division, who control the graders' activities and assist in their training.CATA also employs in each district an extension and procurement manager whoworks in close collaboration with the extension staff of the Ministry ofAgriculture, and, for each region, a regional manager.

2.15 The grading system described above departs from the organizationalarrangements by which, until 1976/77, CATA was employing its own graders.Some of the 550 former CATA graders would be employed by the villages, theremainder would be employed in CATA's factories. As the consequences of thereplacement of CATA graders by village graders can only be assessed throughexperience, no precise forecast of the future performance of graders can bemade at present. Grading could deteriorate substantially, as this actuallyhappened in 1972/73 when the now-defunct cooperative unions were made respon-sible for grading: the overall percentage of undergrade raw nuts was about40%, compared to an average of 20% during the 69/70 - 75/76 period. It canreasonably be expected that CATA would wish to reappoint its own graders ifraw cashewnut quality deteriorated because of the above change in the gradingsystem. Assurances were obtained from the Government at credit negotiationsthat the cashewnut grading system followed during the 1977/1978 season wouldbe reviewed no later than June 30, 1980, and if such review indicates that thenew system is not satisfactory, CATA would be authorized to follow the 1976/1977 system or such other system satisfactory to the Association and CATA.

2.16 Extension services are provided by the Ministry of Agriculture andare organized on a regional, district and village basis. There is one re-gional agricultural officer per region, one district officer per district andone extension officer per village, in charge of extension for both agricultureand livestock. However, following Government's decision to appoint a villagemanager for each village in Tanzania, a tight staffing situation of the ex-tension services is likely to develop, because the majority of the villagemanagers have been recruited from the agriculture and livestock extensionservice cadre. Raw cashewnut production, however, should not be very sensi-tive to the quality of the extension services.

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Purchasing Arrangements and Transport

2.17 During the purchasing season from October to February raw nuts arepurchased daily in each village by a team comprising a cashier, a villagerepresentative and a grader. Procurement activities are conducted by twelveCATA's District Procurement Centers (branches) under the supervision of CATA'sheadquarters. Farmers are lpaid immediately on the basis of weight and grade(prices are discussed in Chapter III). A levy of Tsh 60 per ton, about 6% ofthe farmers' price, is also paid by CATA directly into each village's develop-ment fund. The raw nuts are stored in 80 kg bags in the village store, untilthey are collected by trucks and transported to CATA's main stores in Dar esSalaam and Mtwara (for direct export), or to factories (for processing).

2.18 Raw nuts are transported by trucks belonging to Regional TransportCompanies, District Development Corporations and private owners, followingannual tenders invited by CATA for the transportation of the year's harvest.Before 1976, Regional Cooperative Unions were also transporting a largeportion of the harvest. Since the dissolution of the Regional cooperativeUnions in 1976, CATA has been experiencing transport problems which resultedin delays in transporting raw nuts from villages to the main storage inMtwara.

2.19 It is expected that transportation problems will be progressivelyalleviated through the reorganization of the trucking industry and theestablishment of public transport companies, supported by IDA (TruckingIndustry Rehabilitation and Improvement Project, Cr. 743-TA). To alleviateits transportation difficulties until the public transport companies operateefficiently in about 1980, CATA lodged an application in early 1977 withthe State Motor Corporation for the purchase of a fleet of 70 lorries. Theactual allocation to CATA was 8 lorries for calendar year 1977, and CATAis expected to receive further allocations for the following years untilall 70 lorries are obtained. CATA considers these arrangements satisfactory;however the additional transport requirements of the processing project, beingadditional to those above, are being provided under the Project (para 6.11).

C. Cashewnut Processing

Manual Cashewnut Processing

2.20 Traditionally, extraction of the kernel from the shell of the cashew-nut has been a manual operation. The raw nut is roasted to make the shellbrittle and to loosen the kernel from the inside of the shell. Most of theshell liquid is released and burnt when the raw nuts are roasted. The shellis cracked with a hammer. Once the kernel is removed from the shell, it isdried, the testa is peeled off and the kernel is graded and packed in 25 lbtins, from which the air is replaced with carbon dioxide.

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2.21 Manual processing is carried out mainly in India, which processesby hand about 300,000 tons of raw nuts annually. The financial and economicviability of manual processing depends upon labor costs and efficiency. InTanzania, nine manual processing units were established in rural areas since1970 with a target processing capacity of 1,000 tons per unit. All theseunits have been operating at loss, and only two are still operating but areexpected to be closed shortly. These unsatisfactory results are due to lowlabour productivity, low quality of production and high wages. Except forthis small (and declining) proportion of raw nuts processed manually, Tanzaniahas traditionally exported most of its raw nuts to India. However, as de-tailed below, Tanzania has embarked on a program for mechanical processingwithin Tanzania.

Principles of Mechanical Cashewnut Processing

2.22 For a long time, the shape of the raw cashewnut and the brittlenessof the kernel defeated attempts at mechanized decortication. Some semi-mechanized processes were introduced in the 1960's and have been used intothe 1970's but they still showed little labor saving over hand-shelling andoutturned a high proportion of broken kernels. Few fully mechanized systemsare commercially available at present, the most widely known being:

(i) the Oltremare system (Italy), introduced in the mid-60's;

(ii) the CASHCO system (Japan), introduced in 1970;

(iii) the Sturtevant system (UK), first commercially manufacturedin 1970.

2.23 The mechanical processing of cashewnuts consists of the followingmain steps:

a) Sizing, required for accurate control of humidificationand heat treatment.

b) Humidification, to provide moisture which in the heattreatment will become steam and rupture the cellularmaterial and release the CNSL from the shell.

c) Heat treatment, usually in a hot bath of CNSL.

d) Shelling. The methods of shelling differ with theequipment utilized (see following paragraph). Kernelsare separated from the shell through series of pneumaticand/or vibrating devices.

e) Drying of kernels.

f) Peeling (removal of the testa) which is carried outmanually or with mechanical aids.

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g) Sorting and grading. There are about 20 grades ofkernels, depending on whether the kernel is broken ornot, how it is broken, its size and color. This isdone by hand and/or mechanical and electronic devices.

h) Packing of kernels, in 25 lb tins in an atmosphere ofcarbon dioxyde to prevent future deterioraiation of thecontents.

2.24 Three main processies are commercially available. The main differencebetween the three commercially available processes noted in para 2.22 is atthe shelling stage of the process. The Oltremare process uses opposed bladesbetween which the nuts are conveyed and cut open by a linear movement of theblades. The CASHCO process uases rotary blades. Under these two processes,the raw nut is levered open, after cutting by the blades. In the Sturtevantprocess, the roasted nuts are projected against fixed metal plates, therebybreaking the shell and releasing the kernel. The processes also differ bytheir labor requirements, preconditioning techniques and other engineeringaspects.

Processing Coefficients

2.25 Processing coefficLents vary according to the type of equipmentutilized, the skill of the operators and the quality of the raw nuts. Thetwo coefficients most representative of a factory's performance are:

(i) the percentage of Icernels to raw nuts; thispercentage usually varies between 20% and 25%;

(ii) the ratio of whole/tbroken kernels; this ratio canvary widely, but is generally between 70/30 and 40/60.In India, under manual processing this coefficient hasconsistently been about 80/20 in the years 1972 to 1975.

Other processing coefficients include the percentage of CNSL recovery, whichis usually about 7% of the raw nut in weight, and ratios describing the pro-portions of various kernel grades in the finished product. These variouscoefficients are of particular importance when deciding on the optimum processfor procurement under the project, since lower cost systems appear to haveinferior coefficients. It is therefore important that these coefficients aretaken into account, as well ais capital and operating costs (see paras 7.08 and9.21), in the choice of the processing equipment.

Mechanical Processing in Tanzania

2.26 There are two cashewnut processing factories currently in operationin Tanzania:

(i) TANITA, in Dar es Salaam, with a processing capacityof 12,500 tons of raw nuts annually. This factory wasestablished in 1965i and utilizes Italian (Oltremare)equipment.

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(ii) The Mtwara Cashew Company, in Mtwara, with a processingcapacity of 8,000 tons of raw nuts annually. This factory

was established in 1970 and utilizes Japanese (CASHCO)equipment.

2.27 Six new factories are currently under construction in Tanzania, fivebeing financed by the Bank under the first Cashewnut Development Project (Loan1014-TA) and one by the Bank of Sicily; all these factories will employ the

Italian (Oltremare) process. Four further factories are currently planned,one may be proposed to the Bank of Sicily for financing, the other three beingthe object of the present report.

2.28 A summary of these factories is in Table 6 and their location isshown on the Map. Detailed schedules of the development of Tanzania's pro-duction and processing capacity are in Table 7. Total production capacitywould reach 113,000 tons of raw nuts per annum in 1984, i.e. still marginallyunder the average production from existing trees, without provision for

processing production from the plantation program.

D. Cashew Research

2.29 No significant research on cashew which could benefit Tanzaniais carried out anywhere in the world. In Tanzania, research was originallycarried out at the Nachingwea Research Station. The main experiments carriedout before 1968 and their results are described in detail in the appraisalreport of the first Cashewnut Development Project (Report No. 397a-TA). In1968 all cashew research was transferred to the Mtwara Research and TrainingInstitute, a multi-purpose research station run by the Ministry of Agriculture.Since then, no intensive cashew research has taken place in Tanzania. Atpresent, the Mtwara station is only involved in cashew seed production and insome research on cereals. The old Nachingwea station and the Chambezi stationin the Bagamoyo District are also involved only in seed production.

2.30 Funds were included in the first Project financed by the Bank in1974 (Loan 1014-TA) for the financing of staff and research equipment. How-ever, the research staff provided for under the Project was not recruited,except an expert who arrived in Tanzania in late 1977 to stay for one yearand, the outline of a research program was only drawn by CATA in early 1977,about one year behind schedule. The Government's postponement of the researchprogram was due to their expectation of a grant from the Italian Governmentto finance the research program. Government recognizes the need for cashewresearch which should be carried out mainly in the fields of variety selec-tion, breeding and pest and disease control to improve the overall quality ofcashew nuts in the long-term, but it prefers to finance such research withgrant or quasi-grant funds, rather than funds on Bank terms, such as financed

the first Cashewnut Development Project.

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2.31 The outline of the research program drawn up by CATA was appraisedby the Italian Government in 1977, which is expected to finance a researchprogram during the two years; 1978/79 and 1979/80. The proposed projectincludes the continuation of this program for four years.

III. CASHEWNUT MARKETS AND PRICES

General

3.01 Until the late 1950s, India was the largest producer of raw nutsand had developed a flourishing processing industry in the state of Kerala.After the development of the cashewnut industry in Africa, India lost itspredominance in production but still remains the leading processor. Becauseof its efficiency and low cost, the Indian processing industry, which remaineda hand industry, is still competitive and viable despite the governmentalprice subsidies granted to African processors and the extra freight chargesborne by Indian processors. An advantage of the Indian processors is theturnout of a higher percentage of whole kernels, about 80 percent, as comparedto the mechanical systems used in East Africa which only turn out about 40 to70 percent whole kernels.

3.02 Apart from India, marketed production of raw cashewnuts is concen-trated mainly in East Africa and Brazil. Total annual world marketed pro-duction ranges between 400 and 500,000 m.t. (Table 11). Mozambique is thelargest producer, with Tanzania, India, Brazil and Kenya following in thatorder.

3.03 Both in India and Brazil there has been significant expansion ofplantations in recent years. In Brazil, in particular, where most of theproduction has in the past been from wild trees, very large organizedplantations were set up under government supported policies in the late1960s and early 1970s. Their output is expected to come on stream in thenext few years and to be quite large 1/. In East Africa, on the contrary,the increase in commercial production of cashew-nuts resulted mainly frommore intensive harvesting of existing trees stimulated by the higher pricesreceived by the farmers, although Tanzania is now embarking on a villageplantation program (para 2.13).

3.04 Hand processing never developed on a large scale in East Africabecause wage rates were higher than in India. As a result, most EastAfrican raw cashewnuts were exported for processing to India until theearly 1970s. With the development of mechanical processing the incentiveto process the raw cashewnuts in the producing countries has grown, mainlybecause of potential increase in value added and export earnings.

1/ According to the US Agriculture Attache Report (BB-6024, July 14, 1976),production of unshelled nuts in the new organized cashew plantation willreach about 53,000 metric tons in 1980 and about 182,000 metric tons in1988.

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3.05 Development of the processing industry has been rapid particularlyin Mozambique. Mechanical processing was introduced there in 1963. By 1973,

about 70 percent of the total raw cashewnuts production (170,000 m.t.) wasmechanically processed, the rest being exported raw. In Tanzania, the pro-cessing capacity reached about 20,000 m.t. a year in the early 1970s, butadditional processing capacity is being built with World Bank and otherfinancing (as detailed in para 2.27). In Brazil, processing capacity hasgrown sufficiently to absorb all the domestic crop, but the processes usedare still for the most part crude and semi-mechanical.

Trade in Cashew Kernels

3.06 Most of the processed cashewnuts are traded in the internationalmarket. Total trade ranged in recent years between 65,000 and 100,000 m.t.(Table 10). The decline in recent years is due to Mozambique shortfall in rawnuts marketed production, due to the disruption of its marketing system, whichis expected to recover fully within a few years. Usually, processors sellto dealers in the importing countries, either directly or via a selling agentin the importing country. Dealers in turn sell to manufacturers, who processthe cashewnut kernels and prepare them for retail sale. Most shipments to theUSA (the largest importer) from India and Africa pass through the hands offour main agents in New York.

3.07 India is the main exporter of kernels, although her share of themarket declined from 95 percent in 1962 to about 55 percent in 1972. Themain reason for the Indian decline is the rise of East African and Brazilianexports. By 1972 Mozambique exported 26 percent of the world cashewnutscompared to 4 percent in 1962 and Brazil exported 6 percent compared to 1.1percent in 1962 11.

3.08 The regional distribution of world imports of cashewnut kernelshas remained fairly constant over the years. North America's share of totalimports ranges between 55-60 percent; Eastern Europe, including the USSR,imports about 25 percent; Western Europe imports about 10 percent; theremainder of imports is divided among a large number of countries. Follow-ing the rapid growth in their per capita income, imports of Japan, Hong Kongand Singapore have become significant. These three countries now accountfor about 4 percent of world imports.

3.09 Imports of cashewnut kernels have been growing at a relativelyfast rate in most of the importing countries from the 1960s to the 1970s.The combined imports of the US and Canada have increased at a rate ofabout 4.0 percent per annum between 1960-62 and 1973-75. The Soviet Unionincreased its imports at a rate of about 13.7 percent per annum during thesame period. Within Western Europe, the U.K., Germany and Holland are

1/ Since 1973, production of cashewnuts in Mozambique registered a setbackcaused by a combination of adverse weather conditions and changes in theorganization structure of the industry. Statistics also became scarce.

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the main importers, though the import growth rate of Germany and Hollandhas been substantially faster than in the U.K. In Asia, Japan showed a

fast growth rate in imports, and in the Pacific, Australia and New Zealandhave continued to increase their imports at a rate of about 7.0 percent per

annum.

3.10 Consumption: About 60% of cashewnut kernels are consumed as roasted

and salted nuts, and the remainder in confectionary and in bakery products.Salted cashewnuts compete with other types of nuts, although other savorysnacks can impinge on the market for salted cahsewnuts. Since the price ofcashewnuts is substantially higher than the price of peanuts or other snacks,its strong demand growth is largely due to a marked preference of consumersfor salted cashewnuts. Sales of cashewnuts normally reach their principalpeak at Christmas with a lower peak at Easter. Increased consumption in theUS, Western Europe and Japan has occurred despite rising cashewnut prices andhas coincided with a rising income. Income elasticity of demand for cashewnutsin most of the developed countries is estimated in the range of 0.5 and 1.5,though in the U.K. and few other countries, the income elasticity is lower.

3.11 Cashewnuts are used in confectionary and baking simply as a sub-stitute for almonds or for other higher priced nut meals. The bland tasteof cashewnuts is lost in chocolate and bakery products where they are usedmainly to extend the nut texture without masking the primary flavor. Cashew-nuts are not widely used in the baking industry. They are not as suitablefor cake decoration as almonds. As chopped nuts, they face competition withless expensive nuts such as peanuts and unblanched hazelnuts. Overall, thedemand for cashewnuts in confectionary and baking fluctuates more than thedemand for salted cashewnuts.

Prices

3.12 Prices of cashewnut kernels 1/ in current terms have more thandoubled in the past 13 years from about US$0.45/lb in 1963 (c.i.f. New York)to US$1.82/lb in 1976 and to an exceptionally high price of US$2.40/lb in 1977due to shortage. Cashewnut retail prices are normally two or three timeshigher than those of peanuts. Therefore, variations of cashewnut prices overa narrow range do not induce substitution with other salted nuts. However,substitution on the basis of price between cashewnuts and other tree nutsis more likely in mixes where direct consumer preference is not so strong.

3.13 It is expected that until 1980 a worldwide shortage of cashewnutswill push market prices up. The walnuts and almonds industries in the USwhich have a strong impact on the world market, have been adversely affectedby the droughts and have struck the main producing areas. As a result, pricesof all types of nuts are on the rise and cashewnuts are affected mainly asa substitute.

1/ Grade 300-320 whole kernels in 25 pound tin c.i.f. New York.

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3.14 There is, however, no known research on the cross price elasticitiesbetween cashewnuts and other types of nuts due to a limited time series. Itwill be highly speculative therefore, to determine whether prices of cashewswill decline when an expected recovery of the nut industry comes about asexpected in the following three or four years. Authoritative sources in themarketing of cashews believe that consumer behavior has been adjusted alreadyand therefore prices will stay at a higher level than in the past despite thelikelihood that prices of other types of nuts will decline.

3.15 As there is little reliable information on future world cashewproduction, statistical analysis of past prices would not result in a fullysatisfactory forecast or prices. In the analyses included in the presentreport, it has been assumed that the price of kernels 320 wholes CIF New Yorkwill be at US$1.60/lb. This corresponds to a 12% increase over 1976 prices,in real terms which is considered realistic by CATA and cashew traders, asconsumer behavior has been adjusted to the recent high prices of US$2.40/lb in1977 (para 3.14). As shown at Table 13 the projected price for the Tanzanianmix in 1985 and thereafter, in 1978 terms, is Tsh 21,180 per ton.

Trade in Raw Cashewnuts

3.16 Trade in raw cashewnuts has been virtually confined to imports byIndia of East African raw nuts and occasionally from West Africa and SouthEast Asia. Despite the increase in processing capacity in Africa since themid-1960s, India has been able to maintain the level of its imports of rawnuts at about 150,000 tons annually, because the growth of East Africanproduction of raw nuts out-stripped that of the domestic processing industry.Only in the case of Mozambique have raw nut exports to India actually fallen,but India has been able to compensate for it through higher imports fromTanzania and Kenya.

3.17 Prices. In Tanzania, CATA is the sole agency for the export of rawnuts. Raw nuts are mostly sold to the Cashew Corporation of India. Volumeof sales and prices are negotiated annually at tripartite meetings of India,Tanzania and Mozambique representatives. As India is practically the soleoutlet for raw cashewnuts, raw nut prices are not determined by a price paritybetween raw nuts and kernel prices, but rather by the bargaining power of theparties concerned. Although no price parity formula between kernels and rawnut prices has yet been agreed upon during negotiations between Tanzania andIndia, it may be presumed that the margin between kernel prices obtained byIndia and raw nut prices paid by India will be kept down to the lower levelsof recent years as Tanzanian supply of raw nuts declines and India is obligedto offer competitive prices for the raw nuts. For the purpose of the finan-cial and economic analyses in this report, the future margin is assumed tobe about 100% (the margin varied between 90% and 125% during the 1973-1976period) (Table 9). With a projection of FOB prices for kernels for Indiaof the equivalent of Tsh 24,460 at present exchange rates in 1978 terms,this implies a raw nut FOB Tanzania price of Tsh 2,800 per ton (in 1978prices). The latter price coincides with the indication recently receivedfrom Tanzania that a parity probably acceptable by both Tanzania and India

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would be Tsh 17.50 per ton of raw nuts FOB per one US cent per lb of kernels320 wholes CIF New York. With kernels 320 wholes at US$1.60 per lb CIF NewYork, this results in a raw nut FOB price of Tsh 2,800 per ton. This assump-tion of a relatively low margin to India for raw nut trade, although opti-mistic as regards to Tanzania's balance of payments, is conservative inregards to assessing the economic viability of this Project.

Cashewnut Shell Liquid (CNS,J

3.18 CNSL is exported mainly to Japan and the USA for use in the auto-mobile and paint industries. Sales value of CNSL represents about 3% of totalsales value. CNSL future price is estimated at Tsh 2,500/ton (US$300) FOBTanzania in 1978 prices. Tb,is price is the same, in real terms, as in thepast.

Producer Prices

3.19 A review of producer prices is carried out annually by CATA andthe Marketing Development Bureau (MDB) 1/ of the Ministry of Agriculture.Upon recommendations by the Ministry of Agriculture, the Economic Committeeof Cabinet decides prices (para 1.15) for standard and undergrade nuts whichprices are published before the harvest season. At present producer pricesare computed on the basis of export prices of raw nuts (Table 16). Benefitsare passed on directly to farmers, except small amounts (about 7% of netproducer price) which go to a village fund (fund to finance village's in-vestments benefiting to the community) and a fund to improve feeder roads.The margin of about 20% of the export price is expected to cover CATA's debtservice resulting from past commitments (construction of first phase proj-ect and other) and to provide funds in certain years for investment in thecashewnut industry (Table 30). Past producer prices are shown in Table 17.

3.20 The producer price setting mechanism used at present is satisfac-tory, as most cashewnuts are exported raw. However, at Project completion,Tanzania's cashew processing capacity will have reached such level that theredistribution of factories' benefits to farmers could have an impact onfarmers' cash income, which is at present about Tsh 400 (US$50) annually,almost totally generated by raw cashewnut sales. The price setting mechanismshould then be adjusted accordingly. A further discussion of this matter isat paras 8.16 and 8.17.

IV. THE CASHEWNUT AUTHORITY OF TANZANIA

4.01 The Cashewnut Authority of Tanzania (CATA) was established by theCashewnut Industry Act of 1973 (The Act). The Act which came into effective-ness in October 1973, gives CATA monopoly powers over all activities connected

1/ The MDB is an advisory body within the Ministry of Agriculture, respon-sible inter alia for the annual agricultural price review. MDB isassisted by an FAO/UNDP Project (S TAN 27).

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with the cashew industry. These powers are to be exercised subject to the

overriding authority of the Minister of Agriculture. Until 1973, these

functions were the responsibility of the National Agricultural Produce Board

(NAPB) a parastatal organization whose existence was terminated in 1973 when

its trading activities in cashewnuts, oilseeds and food crops were transferred

to CATA, the General Agricultural Products Export Corporation and the National

Milling Corporation respectively.

Organization and Management

4.02 CATA's organization is summarized in the chart. The Directors of

the Board are appointed by the Minister of Agriculture. At present, there

are 16 directors, including representatives of the Ministry of Agriculture,

the Ministry of Finance and Planning, and of the Regions and Districts within

which CATA is operating.

4.03 The functions of the senior management staff in CATA shown in the

chart are self-explanatory. The General Manager is appointed by the President;

he is the chief executive officer of CATA with overall responsibility for the

management and operations of CATA and for implementing the Project.

Financing

4.04 Until now, CATA has been financed through Government grants, loans

from Government and the Tanzania investment Bank for capital investments,

and through the National Bank of Commerce for working capital.

Reports, Accounts and Audit

4.05 The Act required the Board of Directors of CATA to file an annual

report on its operations with the Minister of Agriculture within six months

following the end of its financial year. CATA is also required by the Act

to keep proper books and accounts and to prepare annual balance sheets and

income and expenditure accounts which should be audited by the Tanzania Audit

Corporation and sent with the audit report to the Minister within six months

of the annual audit. The Minister is required to lay the accounts and audit

report before the National Assembly as soon as practicable after the receipt

thereof.

4.06 CATA's financial reporting, however, is weak and accounts have not

been prepared on time since CATA was established in 1973 (para 5.08). It is

expected that this situation will be remedied with the reinforcement of CATA's

financial management to be undertaken under the proposed Project (para 6.15).

4.07 CATA's income statements and balance sheets for the years 73/74 and

74/75 are shown in Tables 18 and 19. Audited 1975/1976 accounts should be

available by mid calendar 1978.

Financial Prospects

4.08 CATA's consolidated cash flow (Table 28) is expected to remain

positive. This question is further discussed at para. 8.03.

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Existing Factories

4.09 CATA is a majority shareholder in TANITA and in the Mtwara CashewCompany, the only two mechanized processing factories operating at present.TANITA's operating results have been variable, and the quality of its man-agement and factory operations could probably be improved significantly.The Management Information System being designed under the first CashewnutDevelopment Project should lead to better management (paras 8.08 and 8.09).Factory operation should benefit from professional services included in thefirst Cashewnut Development Project, which uses the same method of processing.In particular, the kernel whole to broken ratio, which is at present 60/40,could increase sensibly, since this ratio is 70/30 for a similar factorypresently operating in Kenya which benefits from technical services.

4.10 The Mtwara Cashew Company (MCC) has incurred losses every year sinceit started operating in 1970. Its original equipment was a failure and wasreplaced in 1974 by a new design from its co-owner, Cashew Company Ltd., Tokyo.Other technical problems, as well as frequent power failures from the Mtwaratown supply, contributed to the poor results of the factory. It is expectedthat the above problems will disappear, because the technical problems havebeen solved by the equipment manufacturer, and are progressively incorporatedinto the factory, and because CATA intends to purchase an independent powergenerator. The whole/broken ratio is at present about 45/55. This ratio islower than at TANITA, because the Japanese process employed at MCC causes morekernel breakage than the Italian process, although it has a higher kerneloutturn.

4.11 The Mbagala factory is a hand processing factory which will beclosed shortly because it is not profitable. Its capacity is about 2,500 tonsof raw nuts annually, and the whole/broken ratio is about 43/57. In 1976, theoverall weighted average whole/broken ratio for the Tanzanian mix was 48/52.

Other CATA's Activities

4.12 CATA carries out a few ancillary activities, such as the transporta-tion of fertilizers in the Mtwara region, and the operation of service stationsin Mtwara. These activities have a marginal impact on CATA's finances. Asthe only major commercial institution in the area, CATA has also had underconsideration the construction of an hotel in its headquarters' town ofMtwara, which does not offer suitable accomodations. However, it is notexpected that CATA would finance or manage enterprises not directly connectedwith the cashewnut industry, without prior consultation with the Association.

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V. THE FIRST CASHEWNUT DEVELOPMENT PROJECT

A. SUMMARY PROJECT DESCRIPTION

5.01 In May 1974, the Bank extended a Loan for US$21 million (Loan

1014-TA) to the Government of Tanzania to help finance a project for CashewnutDevelopment. When the Loan was signed, the project was expected to consist of

the following parts:

A. Cashewnut Production

(1) The construction, installation and equipping of (i) five new cashew-

nut processing factories to have an aggregate annual capacity to process about

40,000 tons of raw cashewnuts, and (ii) storage facilities at the port of

Mtwara to store 700 tons of cashewnut shell liquid, and the provision of the

services for four years of a Senior Manufacturer's Representative and for

three years each of five Assistants to assist in carrying out the above part

of the Project.

(2) The construction and equipping of CATA headquarters at Mtwara,

including the construction of staff houses and the provision of vehicles.

(3) The establishment and maintenance of a road maintenance unit

attached to each of the five factories for the purpose of maintaining farmaccess roads.

(4) The carrying out of a cashewnut research program at the MtwaraResearch and Training Center, and the establishment and operation of a

cashewnut extension and grading service.

B. Staff Employment, Staff Training and Project Preparation

(1) The employment by CATA of (i) a Marketing Manager and a FinancialManager, each for a period of four years, and (ii) professional staff to carryout the research program mentioned above.

(2) The provision of fellowships for Tanzanian research personnel,overseas management training courses for factory managers, and study toursand seminars.

(3) The preparation by CATA of future cashewnut development projectsin Tanzania.

C. Rural Water Supply and Community Education Centers

The carrying out by the Borrower of:

(1) The construction and equipping of rural water supplyfacilities at seven locations in Tanzania to supplywater to cashewnut farmers.

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(2) The construction of seven community education centersin the areas from where cashewnuts are being suppliedto the five i-actories included in the Project.

B. PROJECT HISTORY

Project Cost

5.02 When bids were received and awarded for the supply and erectionof processing machinery and the civil works relating to the project's fivefactories, headquarters, stores, etc., costs of these items turned out tobe about 30 percent above the appraisal estimate, with buildings costs overtwice the original estimate. The Tanzania Investment Bank (TIB), a develop-ment finance company supported by the Bank (Loan 1172-TA), agreed in December1975 to a loan of US$1.1 million to help finance the buildings. This loan ismet from the proceeds of the Bank Loan 1172-TA. TIB lent a further US$600,000in 1977 to meet the total financing gap for buildings of US$1,750,000.

5.03 Nevertheless, the following Project components had to be excluded,with the Bank's approval: (i) the establishment of Community EducationCenters in seven selected viLllages, (ii) the improvement of rural watersupplies in seven selected villages, and (iii) the maintenance and upkeepof access roads to facilitate transportation of cashewnuts from the villages.The exclusion of these components is not expected to have any significanteffect on the Project's financial and economic performance. Community Educa-tion Centers and water supplies were not directly related to cashewnut activi-ties. The maintenance of roads is carried out by the Ministry of Works underthe supervision of the District Development Director. Standards are similarto those elsewhere in Tanzania. The works are financed through a levy oncashewnut purchases. Table 20 shows the revised estimate of project costsand their financing.

Project Construction

5.04 Project's construction has been proceeding satisfactorily, with theexception of the arrangements for the water supply of the factories. Thewater supply difficulties were first identified in June 1976, when CATA esti-mated the costs of water developments at about US$570,000, compared to theappraisal estimate of about US$150,000. The Bank recommended that CATA liaisewith the Mtwara District Administration to find out if savings could beachieved by coordinating activities with the Ministry of Water. In October1976, the Bank was informed that the existing sources of water were insuffi-cient and that the lowest of- the proposals made by contractors would costabout US$1.26 million. However, the Bank found that the technical specifica-tions and conditions of contract were inadequate and that Bank's procurementprocedures had not been followed. New bids were invited under ICB proceduresat the end of 1976, and the lowest of the two bids received was at US$1.8million. Upon the Bank's recommendation that CATA try to reduce this cost bydiscussing with the Ministry of Water the possibility of their participating

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in the works, the award of the contract was withheld until July 1977. As thediscussions with the Ministry of Water yielded no results, the contract wasawarded in July 1977 for an amount of US$1.6 million (the lowest bidder havingrevised his offer downwards).

5.05 In February 1978, the project's completion schedule showed anaverage delay of about five months in the completion of the factories:

Training andCommissioning Commence Full Operation Commence

Factories Appraisal Est. Feb. 78 Est. Appraisal Est. Feb. 78 Est.

Lindi Factory May 77 April 78 Sept. 77 Aug. 78(10,000 tons)

Mtama Factory July 77 May 78 Oct. 77 Sept. 78(5,000 tons)

Nachingwea Fact. June 78 June 78 Sept. 78 Sept. 78(5,000 tons)

Masasi Factory April 78 Sept. 78 Aug. 78 Jan. 79(10,000 tons)

Newala Factory Feb. 79 Jan. 79 June 79 May 79(10,000 tons)

OtherMtwara Workshops not applicable May 76 July 77CNSL Depot not applicable June 77 July 78CATA Headquarters not applicable Feb. 77 April 78

Extension and Grading

5.06 According to CATA, cashewnut extension and grading services havebeen operating satisfactorily. The percentages of undergrade raw nuts tothe total purchases (Table 1) tend to show that the proportion of undergradenuts was kept down to reasonable limits since 1973/74. No claims for reim-bursement (25% of local expenditures were to be financed under the loan) havebeen received by the Bank for this component, as Government prefers financingthese expenditures from their own funds rather than from borrowings from theBank.

Research

5.07 The Project Agreement required that, no later than December 31,1975, or such other date as the Bank and CATA may agree CATA submit to theBank for review a draft of the research program. The research staff pro-vided for under the Project was not recruited, except an expert who arrivedin Tanzania in late 1977 to stay for one year. The Government's postponement

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of the research program was due to their expectation, which materialized,

of a grant from the Italian Government to finance the research program (see

paras. 2.29 to 2.31).

Financial Management

5.08 The post of Finance Director provided for under the project has

never been filled satisfactorily. CATA's financial reporting is weak,

accounts are not prepared on time, the auditor's reports which have been

received by the Bank (FY73/74 and 74/75) highlighted poor accounting practices,

and comprehensive financial projections are not available. The auditor's

report qualifications mainly refer to poor accounting practices, resulting

into unreliable records. A study for the design of a management information

system was made by the firm Coopers and Lybrand and financed under the first

project (Amendment No. 2 of the Loan Agreement, August 1977). The consultant's

report was completed in December 1977. It is intended that funds be included

in the second project for the implementation of this management information

system, and for the services of a qualified finance director. The recruitment

of the finance director would be a condition of credit effectiveness (para.

6.15).

Monitoring

5.09 The appointment of qualified officials or organization to monitor

all the project's activities, and to prepare annual reports thereof, was a

requirement of the Loan Agreement. However, as none of the factories being

constructed in the first phase are yet in operation, no formal appointment has

taken place as CATA has been quite capable of monitoring its present activi-

ties. With the introduction of the management information system noted in

para. 5.08, CATA should be able to monitor its expanded activities without

further external assistance.

Conclusion

5.10 The physical execution of the project, which is expected to be com-

pleted in March 1979 is, overall, satisfactory. The unsatisfactory aspects

of financial reporting and research are not affecting the immediate project's

performance, and are expected to be rectified shortly.

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VI. THE PROJECT

A. General Description

6.01 The Project was conceived by Government as a follow-up to the firstCashewnut Development Project Financed by the Bank (see Ch. V). The Project

would after about three years (1978/79 - 1980/81) increase cashewnut process-

ing capacity by 30,000 tons annually through the establishment of new factories.

The Project would include:

(a) the establishment of three cashewnut processing factorieseach with the capacity of processing 10,000 tons of rawcashewnuts annually;

(b) the extension of port storage facilities of Cashewnut ShellLiquid (CNSL), a by-product of cashewnut processing, by 750

tons;

(c) the procurement of factory vehicles and tankers to trans-

port CNSL;

(d) the construction of staff houses for two factories;

(e) professional services for engineering, supervision ofconstruction, operation of the factories and trainingof personnel, financial management, the implementationof a management information system, the strengthening ofCATA's cashewnut research program and the carrying outof a study to determine occupational health hazards incashewnut factories.

6.02 The Project would be implemented and managed by the CashewnutAuthority of Tanzania (CATA), a public institution established in 1973 to

conduct all activities connected with the cashew industry (see Ch. IV),which is the entity managing the first Cashewnut Development Project.

B. Detailed Features

Factory Sites

6.03 The Project would provide one factory of 10,000 tons capacity of raw

nuts in Kibaha in the Coast Region and two factories of 10,000 tons capacity

of raw nuts each, in Newala and Mtwara respectively, in the Mtwara Region.The capacity of 10,000 tons of raw nuts corresponds to a standard factory size.

Information on the Map and at Table 7 show that total processing capacity isexpected to remain below the raw cashewnut production, even if the new plant-ing program (para 2.13) is excluded. However, it would be imprudent to embark

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on further expansion of cashewnut processing facilities other than those planned

at present (Table 6) until the actual results of the planting program have shown

that there would be a safe margin between total processing capacity and expected

production. The Government shares these concerns and would keep the Association

continuously informed of any plans for expansion through the regular quarterly

progress reports submitted to the Association.

6.04 Kibaha Site: The factory would be established in the vicinity of

Kibaha, in the Coast Region (about 20 miles west of Dar es Salaam on the Dar

es Salaam-Morogoro Road). Kibaha is a new town which is being planned as the

capital of the Coast Region. The land use plan was prepared by a firm of

consultants and has been approved by Government. A preliminary review of this

plan by the Bank's Urban Projects Department indicated that it was deficient

in certain aspects and recommended informally Government that they review it

particularly to take account of the likelihood of major industries being

attracted -- the present plan only provides for small scale industry.

6.05 However, the site chosen for the cashewnut factory is some 3 km

west of the new town, on reasonably level site, which is not in conflict

with the present or any expected revised plan. Supply of power and water

would not cause problems as the main electricity transmission lines and the

water supply mains to Dar es Salaam run close to the area. An adequate labor

force would be available from neighboring villages, and communications with

Dar es Salaam are good, so that the factory labor supply is not dependent

on the rate of actual development of the new town itself.

6.06 Newala Site: The Newala factory would process cashewnuts produced

mainly in the Newala District of the Mtwara Region. The factory would be

constructed on a reasonably level site at approximately 200 m from where one

of the first project's factories is being constructed. The site is on a main

road about 3 km from Newala. Labor for the proposed factory and for the

factory under construction would come from Newala and neighboring villages.

6.07 The water supply system being constructed under the first Project

for the factory in Newala would be sufficient to supply water to the second

factory proposed under the present report. Water would be pumped from a

source about 20 km from the factory through an existing 17 km long pipeline

at present unutilized and a 3 km long new pipe. The additional costs for the

new factory mainly consist of an increase in the pumping capacity. However,

adequate physical contingencies were added to this cost, to provide for un-

foreseen requirements and to take into account the possible need of replacing

whole or part of the existing 17 km pipeline by new pipes. Power for the

factory would be generated internally.

6.08 Mtwara Site: The Mtwara factory would process cashewnuts produced

mainly in the Mtwara District (Mtwara Region). The factory would be built in

the area owned by CATA and where their present headquarters and main cashewnut

stores are situated. The site is level and well situated. Because of the

availability of existing raw nut storage, which will be underutilized when the

first project's factories come into production, it would not be necessary to

build raw nut storage for the new factory. Workers would come from Mtwara.

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The water supply to Mtwara township is erratic, not due to lack of water, but

due to inadequate electricity supply. The Project would include about three

days water storage at the factory and a diesel generator for the factory.

CNSL Storage Facilities

6.09 The Project would provide for the expansion of Cashewnut Shell

Liquid (CNSL) storage facilities being built in Mtwara under the first

project. This would include a storage tank, pumps and piping. The storage

tank would have capacity of 750 tons allowing for an annual throughput of

about 3,000 tons. With the storage capacity also of 750 tons now under con-

struction, total annual throughput in Mtwara would be about 6,000 tons of

CNSL. This would cover the requirements of the cashew processing industry

in Southern Tanzania. Adequate storage facilities are available in Dar es

Salaam for the CNSL production of the Coast Region.

CNSL_Tankers and Vehicles

6.10 In order to transport the CNSL from the factories to the port

storage facilities the Project would include the procurement of 6 tankers.

One tanker would be utilized for the Coast and Dar es Salaam regions, and

5 tankers in the South. The calculation of tankers' requirements is at

Table 21. These tankers would transport almost all Tanzania's CNSL pro-

duction of about 8,000 tons annually, the exception being the Mtwara factory

(proposed under the Project) which would be directly connected by pipe to

the main storage. At present, CNSL is transported in drums, which is a

dangerous and inefficient method. Because no accurate estimate of the effi-

ciency of tankers operations in Tanzania is available, a physical contingency

of 30%, which could allow for two further tankers, was included in the cost

estimate.

6.11 Each of the three proposed factories would also be provided with

two 7-ton lorries to transport the finished product, kernels, and materials

such as empty tins and gunny bags, and three 4-wheeldrive vehicles.

Staff Housing

6.12 The Kibaha and Newala factories would each be provided with seven

houses for managerial staff (Manager, Administration and Personel Manager,

Chief Accountant, Processing Manager, Factory Engineer, Procurement Manager

and Technical Assistant), and with ten low cost houses for other semi-skilled

staff.

Professional Services

6.13 The Project would provide for consultancy for engineering of civil

works and supervision of Project construction, as in the first project.

Negotiations between CATA and its consultant employed for the first project

are well advanced, and Government gave assurances at credit negotiations that

the consultants would be employed no later than June 30, 1978.

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6.14 Technical and management services would be provided to CATA bythe equipment manufacturer or by a team of consultants for the operation ofthe factories and the training of factory personnel. These services wouldbe provided for a period of about four years after initiation of processing.Assurances were obtained from the Government at credit negotiations that(i) by June 30, 1979 CATA would submit to the Association for its review andapproval the detailed description of the training program for the staff to beemployed in the Project's factories, and that (ii) CATA would employ no laterthan the beginning of the assembly of equipment and for a period of at leastfour years thereafter qualified and experienced technical and managementexperts on terms and conditions satisfactory to the Association.

6.15 The Project would provide for the services of a finance directorand of a chief engineer both for a period of three years. The appointment ofthe finance director would be a condition of credit effectiveness, and CATAhas already taken positive steps to recruit such person. Assurances wereobtained from the Government at credit negotiations that (i) until June 30,1983, the position of Finance Director for CATA would be filled by a personwith qualifications, experience and terms and conditions of employment satis-factory to the Association, and (ii) no later than June 30, 1979, and until atleast June 30, 1983, CATA rould employ a qualified and experienced ChiefEngineer on terms and conditions satisfactory to the Association.

6.16 The Project wouldL also provide for consultancy services for theimplementation of the Management Information System designed under the firstproject by a firm of consultants. The consultant would also provide asistancein training CATA's finance and accounting staff. As the consultants would notbe in charge of carrying out CATA's day-to-day financial management work, butwould provide guidance and supervision, their work would be intermittent. Atotal of 2 man-years, spread over a 3-year period would be provided under theProject. Government indicated at credit negotiations that the contracts forthese services are expected to be finalized soon and gave assurances that theconsultants would be employed no later than June 30, 1978.

Environment and Occupational Health

6.17 The Project would be implemented with due regard to the environmentand to occupational health. Inside the factory the main potential problemscould be caused by dust, CNSL fumes, and fire hazards. Outside, the factorywould release gaseous and liquid effluents and smokes, originating mainly fromthe burning of cashewnut shells, cooling water, used water after the washingof cashewnuts which would contain earth-dust and traces of CNSL, and organicsewage.

6.18 Contact of the skin with CNSL is a health hazard. It penetrates theskin which results in shedding of the upper layer, much as in severe sunburns.It is possible that CNSL compounds, absorbed through the skin, find their wayto other parts of the body, As health consequences of exposure to CNSL andCNSL fumes are not clearly perceived at present, the Project would includea study to determine occupational health hazards in the cashewnut industryand to formulate criteria for monitoring such hazards. Assurances were

- 33 -

obtained from the Government at credit negotiations that such study would becarried out by December 31, 1979 and that its recommendations would be imple-mented, as appropriate, in consultation with the Association.

6.19 The Project's environmental and health aspects have been reviewed bythe Bank's Office of Environmental and Health Affairs, which consider that theproject is environmentally sound and that the measures taken in the field ofhealth are sufficient.

C. Organization and Management

6.20 CATA would have overall responsibility for carrying out the Project.A detailed description of CATA is at Chapter IV.

Project Construction

6.21 Project construction would be carried out by private contractorsunder the supervision of a consulting engineer to CATA and of CATA's engineer-ing department (para. 6.13). This arrangement was made for the constructionof the first project and is satisfactory.

Factory Operations

6.22 All project factories would be fully owned and operated by CATA asself-accounting branches. Each factory would employ about 900 persons, ofwhom about 700 would be women. The manager of each factory would be respon-sible to CATA's Director of Factory Operations and Development (see CATA'sorganization chart). Assurances were obtained from Government at creditnegotiations that, until June 30, 1983, CATA would inform the Associationon any appointments to the positions of Project factory managers sufficientlyin advance of such appointments so as to allow the Association time to commentthereon. The factories would be operated by Tanzanian staff who would beadvised on technical matters by a team of consultants from the equipmentmanufacturers firm or from an independent firm of consultants for a period ofabout four years (para. 6.14). Factory operations would be supervised andcoordinated from CATA's headquarters in Mtwara by the General Manager andhis staff. In particular, CATA's headquarters would directly carry out thefollowing: (i) purchasing, transporting and distributing raw nuts to fac-tories, (ii) collecting CNSL, (iii) providing short-term financing of workingcapital, (iv) marketing of cashew kernels, and (v) monitoring of factories'performance and output quality.

Monitoring

6.23 As noted in para. 5.09, CATA would be responsible for Projectmonitoring and also for the preparation of a Project Completion Report.

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D. Accounts and Audit

6.24 CATA's financial reporting is weak, accounts are not prepared on

time, and the auditor's reports which have been received by the Bank (FY73/74

and 74/75) highlighted poor accounting practices (para. 5.08). It is expected

that this situation would be remedied with the reinforcement of CATA's finan-

cial management to be undertaken under the Project (paras 6.15 and 6.16).

Accounts for factories would be kept separately for each factory. Assurances

were obtained during credit negotiations that CATA would maintain a separate

account for the Project.

6.25 CATA's accounts are presently audited by the Tanzania Audit Cor-

poration which audits all parastatal institutions in Tanzania and which is

acceptable to the Association. Assurances were obtained during negotiations

that CATA's accounts would continue to be audited by independent auditors

acceptable to the Association and that CATA would send the audited accounts to

the Association no later than six months after the end of CATA's fiscalyear.

VII. PROJECT COSTS, FINANCING AND PROCUREMENT

Capital Costs

7.01 Total Project costs are estimated at Tsh 301.8 (US$36.3 million),

the foreign exchange component of which is about Tsh 240.4 million (US$28.8

million) or about 80%. This estimate includes working capital requirements of

about Tsh 18.3 million (US$2.2 million). As goods imported under the Project

would be imported free of taxes and duties, the above cost estimates include

only negligible amounts of taxes corresponding to sales taxes on locally

procured goods.

7.02 All estimates are based on actual bids for civil works and equip-

ment (para. 7.08), which account for about 80% of the Project cost (excludingworking capital) and on prices expected in July 1978. Nevertheless, physical

contingencies of 5% have been added to civil works and equipment covered by

these bids. In addition, 20% physical contingencies have been provided for

water supply and 30% for numbers of vehicles and tankers. Bids received forcivil works and equipment include price adjustment clauses allowing for a

maximum escalation of 5% and 2% of the bid price respectively. An average

inflation rate of about 7.5% per annum was used for the items not covered

in the above bids. The net effects are physical and price contingencieseach amounting to about 7% of base cost.

7.03 Details of the Project costs are presented in Tables 22 to 24, and

are summarized below:

Local Foreign Total Local Foreign Total Foreign BaseExchange Cost

-------Tsh Million ----- -----US$ Million ------ () (%)

Civil Works 37.4 63.7 101.1 4.5 7.7 12.2 63 40

Equipment and Vehicles 4.4 84.4 88.8 0.5 10.2 10.7 95 35

Water 2.2 8.6 10.8 0.3 1.0 1.3 80 5

Professional Services 3.5 46.1 49.6 0.5 5.5 6.0 93 20

TOTAL BASE COST 47.5 202.8 250.3 5.8 24.4 30.2 81 100

Physical Contingencies 3.2 13.0 16.2 0.4 1.5 1.9 81 7

Price Contingencies 3.4 13.6 17.0 0.4 1.6 2.0 81 7

TOTAL COST 54.1 229.4 283.5 6.6 27.5 34.1 81 114

Working Capital 7.3 11.0 18.3 0.9 1.3 2.2 60

GRAND TOTAL 61.4 240.4 301.8 7.5 28.8 36.3 80

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Operating Costs

7.04 Current operations would require bank overdrafts up to a maximum,at the end of each semester of about Tsh 6 million (US$0.7 million) in 1980(the first year of factories operations) prices for each of the three pro-posed factories. This includes half of the expected annual expenses forproduction and administration. Funds required for the purchasing of rawcashewnuts, however, are not included because no additional expenses wouldbe incurred by CATA as raw nuts are at present purchased for export. CATAis currently authorized by the Ministry of Agriculture to overdraft itsaccount at the National Bank of Commerce (NBC) by a maximum of Tsh 200 mil-lion. In practice, CATA's current overdrafts, which finance purchasing ofraw nuts from farmers, do not go over about Tsh 160 million. It is notexpected that CATA will havie difficulties in extending its overdraft facili-ties to about Tsh 240 million (in 1981/82), in order to cover its additionalrequirement of about Tsh 80 million for the starting of 10 new factories,including the three Project factories.

Financing

7.05 The Project would be financed as shown below:

Tsh Million US$ Million _

IDA 229.4 27.5 76Government 54.1 6.6 18Subtotal 283.5 34.1 94

NBC (Working Capital) 18.3 2.2 6

Total 301.8 36.3 100

7.06 The Government would relend to CATA fifty percent of the Credit andfifty percent of the other Eunds required for the Project. This loan would berepaid over 15 years inclusive of five years of grace, with a rate of interestof 10% per annum. The other fifty percent of the funds required for theProject would be made available to CATA as equity. A condition to the effec-tiveness of the Credit is that a Subsidiary Loan Agreement has been enteredinto between the Government and CATA under terms and conditions satisfactoryto the Association.

Disbursements

7.07 The proceeds of the Credit would be disbursed to cover 100% of theforeign expenditures for alL the project's components as follows:

(a) civil works and watersupply facilities: 65% of total expenditures;

(b) equipment and vehiLcles: 100% of foreign expenditures;

(c) technical assistance: 100% of foreign expenditures.

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All disbursements would be against contracts and would be fully documented.The credit would be disbursed over a period of six years. The disbursementschedule is shown at Table 25.

Procurement

7.08 Because of uncertainty on the project cost for equipment and civilworks, and because the type of equipment which would be purchased would deter-mine the processing coefficients (para 2.25) and the economic and financial

performance of the Project, it was decided after the return of the appraisalmission that bids for equipment and civil works should be invited through

international competitive bidding, in accordance with Bank Group guidelines,and should be received and evaluated before credit negotiations. Bids forcivil works have been received by CATA, all from foreign contractors. So as

not to delay the Project, contracts for civil works amounting to a total of

about US$14 million were awarded in April 1978 because construction time is

longer than delivery time for the equipment. Retroactive financing require-ments would amount to about US$2.5 million. Bids for equipment amounting toabout US$11 million have been evaluated, and it is expected that award wouldbe made to the CASHCO (Japanese) manufacturer shortly after signing of the

credit.

7.09 Contracts for the purchase of other goods would be bulked as far as

possible and orders for goods of US$100,000 or more would be procured throughinternational competitive bidding in accordance with Bank Group Guidelines.Orders for less than US$100,000, amounting to a total of less than US$100,000

would be procured with existing Government procedures, which are satisfactory.Engineering, construction supervision, and other professional services wouldbe retained by CATA following Bank Group guidelines.

VIII. FINANCIAL EVALUATION

A. Forecasts of Factory Operations

Basic Assumptions

8.01 The assumptions regarding project capital costs and financing are atparas. 7.01 through 7.05. Recurrent costs and processing coefficients arebased on actual operating conditions of the CASHCO factory in Mtwara. In viewof the technical improvements introduced by the CASHCO company, these assump-tions might be conservative. It was assumed that factories would operate at

95% capacity, as this has been the case historically in Tanzania.

8.02 The selling price of cashewnut kernels, the finished product, wasbased on a projected price of 320 wholes 1/ of US$/lb 1.60 CIF New York, in

1/ Standard grade used to quote cashewnut kernels prices. There are 320whole (i.e. unbroken) kernels in a pound of cashew kernels of such grade.

- 38 -

1978 prices, adjusted to prices FOB Tanzania (para 3.15). The FOB price ofraw cashewnuts was taken at Tsh 2,800 per ton (para 3.17). Producer priceswere kept at their 1978 level (para 3.19).

Financial Projections

8.03 Projected Income Statements and Cash Flow Statements for the Projectfactories are at Tables 26 and 27. Although the factories' net income wouldbe negative during the first two years of operations, their cash flow wouldeach year be positive. The Project's impact on CATA's cash flow (Table 28),including Project components not directly related to the factories' operations(part of management services and agricultural research), would also be positiveeach year.

8.04 The financial rate of return of the factories would be 12% beforetaxes, and 4% after taxes in constant 1978 terms. Sensitivity analyses are inTable 32.

Farmers Benefits

8.05 Assurances were obtained from Government at negotiations for thefirst Cashewnut Development Project (Loan 1014-TA) that, within two yearsafter the date of the Loan Agreement (i.e. by June, 1976), the Borrowerwould establish and thereafter maintain a pricing structure for cashewnutsbased on the grading of such nuts and closely relating world prices to farmgate prices less appropriate processing and marketing costs (Section 4.02of Loan Agreement). Government's pricing structure described in para 3.19follows closely the spirit of the Loan Agreement. However, processing costsare not at present included in the pricing structure, because the factoriesbeing built under the first Project are not yet in operation. To ensure thatfarmers would share in the benefits of the Project, assurances were obtainedfrom Government at the negotiations of the proposed credit that Governmentwould continue to maintain a pricing structure based on, inter alia, the gradingof such nuts and closely relating farm gate prices (less appropriate processingand marketing costs) to appropriate world prices.

8.06 At full development of all CATA's currently planned factoriesin 1984/1985, and at the present level of producer prices, CATA's netannual cash flow before taxes would be about Tsh 140 million (in 1978prices) of which 95% would be provided by the factories' operations.About 20% of this Tsh 140 million correspond to depreciation and willmost likely be reinvested in the cashewnut industry. The balance ofabout Tsh 110 million corresponds to an overall surplus of about Tsh 920per ton of raw nuts purchased from the producer. Of this Tsh 920, aboutTsh 520 represents the surpluses which CATA would have been expected toearn even without any factories, the remaining Tsh 400 being due to thefactories (including the three to be built under the Project). If allthis surplus were distributed to smallholders in the form of increasedproducer prices, these prices would rise by 80% from an average ofTsh 1,120/ton to Tsh 2,040/ton (in 1978 prices), raising the average

- 39 -

family income from about Tsh 400 to Tsh 720 annually. However, such increases

could only be paid when most of the crop is processed through the factories,

rather than exported as raw nuts. The above price increase represents the

maximum increase which could be granted to farmers, since, at this price

level, CATA's would show no profits, and no funds would be available to Govern-

ment in the form of taxes. It is therefore expected that the actual increase

in farmer's revenues will be somewhat lower than stated above. Purely as an

illustration, if half of the possible eventual increase in prices to farmers

took place, and making reasonable assumptions about the relative impacts of

the Project factories and the other CATA factories, the Project would have the

effect of raising the incomes of all 400,000 cashewnut farmers by Tsh 50 per

ton (half of a 25% increase of Tsh 400 per annum), i.e. Tsh 20 per farmer

annually.

8.07 Another way of looking at the input of CATA's factories operations

on smallholders is the better protection against fluctuations in world prices

of cashewnuts. At present, those prices could drop by some 18% without it

being essential to lower the prices to the farmers, while still leaving CATA

in a financially solvent position. With all the factories in full operation,

this margin would be increased to about 30%. As it is considered highly

unlikely that world prices will drop by this amount, there should be little

or no risk to farmers failing to harvest their nuts.

Government Cash Flow

8.08 The Government cash flow is in Table 29. The Government cash flow

would be negative during the three years of Project's construction and the

cumulated deficit would reach a maximum of about Tsh 74 million (US$9 million)

in current terms. Thereafter, the cash flow would be positive; the cumulative

cash flow would become positive during the third year of factories' operations,

in Project Year 6.

Foreign Exchange Benefits

8.09 The Project's impact on Government's foreign exchange earnings is

in Table 30. There would be a foreign exchange deficit during the first

two years, reaching a maximum of Tsh 4.7 million (US$0.6 million), of which

over 60% correspond to operating costs and foregone revenues from raw nuts

exports during the first six months of factories' operation, the remaining 40%

corresponding to the IDA service charge. At full development in Project Year

7, the net annual foreign exchange earnings would be about US$7 million in

1978 terms.

IX. ECONOMIC EVALUATION

A. Summary Economic Benefits and Justification

9.01 The Project would support Government's high priority given to cashew-

nut processing under the Third Five Year Plan. The Project would increase

- 40 -

cashewnut processing capacity in Tanzania by 30,000 tons of rawnuts, whichwould otherwise be exportetd unprocessed, thus increasing Tanzania's netforeign exchange earnings by about US$7 million equivalent annually (in 1978prices) when factories would have reached their maximum capacity in 1984/85.The project would provide employment to about 3,000 workers, of which two-thirds would be women. CaLpital investment 1/ per job created would be aboutUS$9,000 (in mid 1978 prices) and falls within the range characteristic ofmodern medium scale industries 2/. As noted in paras. 8.06 and 8.07, theProject is expected to contribute to increases of farmer's income, affectingall 400,000 cashewnut producers.

9.02 The basic economtic rate of return (ERR) would be about 16%.Foreign exchange and labor were shadow priced.3/ If foreign exchange andlabor were not shadow priced, the ERR would decrease by about 4 percentagepoints, of which 3 percentage points are accounted for by the shadow pricingof foreign exchange.

B. Basic Assumptions

9.03 The economic life of the project is assumed to be 25 years. Therate of return analysis includes all expenditures for capital investmentsreplacements and operation and maintenance costs directly related to theoperation of the factories.

9.04 Assumptions on capital and recurrent costs are at paras 7.01, 7.02and 8.01. Costs do not include price contingencies, taxes and duties. Physicalcontingencies, however, are included in the calculation of the rates ofreturn.

9.05 Assumptions regarding kernel and raw nuts prices are at paras. 3.15and 3.17 respectively. Costs and benefits streams used for the calculation ofthe rates of return are shown in Table 31. The summary of the sensitivityanalysis is in Table 32.

C. Sensitivity Analysis

Changes of Prices

9.06 A decrease of kernel prices of 10% during the entire project life,with an accompanying decrease of the export price of raw nuts, would reduce

1/ Net of price contingencies, working capital and interest duringconstruction.

2/ The cost per job created of the Tanzania-Morogoro Industrial Complex(Loans 1385 and 1386 'CA) calculated on the same basis, is about US$12,500.

3/ Shadow foreign exchange rate Tsh 12.0/US$1.0, compared to currentrate of Tsh 8.3/US$1.0. Wages shadow rated at 75% of their actualprice.

- 41 -

the ERR by 2.5 percentage points from 16% to 13.5%. If kernel prices were 25%

lower than expected during the entire project life, the ERR would be 10%.

9.07 About 70% of the project's recurrent costs correspond to the cost

of raw nuts, the price of which is relatively uncertain (para 9.11). For

each 10% increase (decrease) of the export price of raw nuts, the ERR would

decrease (increase) by about 2.5 percentage points.

Capacity Level of Factories' Operations

9.08 It was assumed in this report that the factories would operate

at 95% of capacity, as this has been the case historically in Tanzania.

For each 10% decrease in the factories' throughput during the entire

project life (this corresponds to about 1,000 tons of raw nuts per factory),

the ERR would decrease by about two percentage points.

Delay in Factories' Start Up

9.09 A delay of one year in the realization of benefits, with an accom-

panying delay of variable production costs, and no delay in capital and fixed

costs, would reduce the ERR by half of a percentage point from 16% to 15.5%.

Capital Costs

9.10 The capital cost estimates are based on actual bids (para 7.08),

and it is not expected that project cost will materially differ from these

estimates. An increase of 10% of capital costs, however, would decrease

the ERR from 16% to 15%.

D. Uncertainties and Risks

Uncertainties

9.11 Most raw cashew nuts produced in Tanzania, if not locally pro-

cessed, are exported to India. The export price of raw cashew is negotiated

each year, and, in the absence of a world market, prices cannot be forecasted

with reasonable certainty. As noted in para 3.17, raw cashew prices are not

determined by a price parity between raw nuts and kernel prices, but rather

by the bargaining powers of the virtually sole purchaser of raw nuts (India)

and of the few remaining producers who do not process their own cashew (mainly

Tanzania). These relative bargaining powers are, of course, directly affected

by Tanzania's decision to process an increasingly large share of its own

cashew crop. This factor makes the economic analysis of the project particu-

larly difficult. However, the principal price assumption (para 3.17) used

for the economic analysis for raw nuts - FOB price of Tsh 2,800 per ton -

implies a relatively low margin for India. It is probable that Tanzania would

receive only about Tsh 2,500 per ton for its raw nuts if it had not decided to

process domestically all its production. If raw nuts were valued at Tsh 2,500

per ton the ERR would be about 18%, and the FRR 14%.

- 42 -

Risks

9.12 Technical risks regarding plant design and operations and risks ofsubstantial delays of construction can be considered low since (i) substantialexperience is being gained during the construction of the first project, (ii)the projection of factory performance is based on actual coefficients observedat the CASHCO factory in Tanzania (Mtwara), and (iii) the project provides fortraining of factory personnel.

9.13 The commercial risks are considered relatively high given the rangeof uncertainty of prices of cashew kernels. It should be considered unlikelythat cashew kernel prices would fall from the expected US$1.60/lb to belowUS$1.30/lb, or rise above US$1.90/lb. This would result in the ERR withinthe 11% - 20% range.

9.14 Managerial risks are minimized through the provision of technicaland management services outlined earlier. Also, the fact that the threefactories would be operated independently mitigates the risk of unsatisfactoryfactory management.

E. External Effects of the Project

9.15 At present Tanzania exports most of its raw nuts to India. Tan-zania's average production is 120,000 tons annually, of which about 20,000tons are processed domestically. The balance of 100,000 tons is exportedto India (80,000 tons) and other countries. India's imports of raw nuts fromTanzania represent about half of its total rawnut imports.

9.16 The development of mechanical processing in Africa will ultimatelyresult in the disappearance of raw cashew trade between Africa and India.The Government of India has, for several years, been aware of these devel-opments, and its current plans provide for raising raw nuts production inIndia by 150,000 tons annually after about 10 years (the Government of Indiahas undertaken the preparation of a paper outlining a possible cashewnut de-velopment project which may be suitable for IDA financing). To the extentthat India is able to step-up domestic production, the proposed Tanzanianproject, which would contribute to a reduction in raw nuts exports of about30,000 tons, would not have a significant impact on the cashewnut processingindustry in India.

X. AGREEMENTS AND RECOMMENDATIONS

10.01 The following are conditions of credit effectiveness:

(a) that the position of Finance Director for CATAhas been filled by a person whose qualifications,experience and terms and conditions of employmentare satisfactory to the Association (para 6.15);

- 43 -

(b) that a subsidiary Loan Agreement has been enteredinto between the Government and CATA under terms andconditions satisfactory to the Association (para 7.06).

10.02 Assurances were obtained from the Government and CATA at creditnegotiations that:

(a) the cashewnut grading system followed during the 1977/78season would be reviewed no later than two years from thedate of the credit agreement and from time to time there-after, and if such review indicates that the new system isnot satisfactory, CATA would be authorized to follow the1976/1977 system or such other system satisfactory to theAssociation and CATA (para 2.15);

(b) consultants for engineering of civil works and supervisionof Project construction would be employed no later thanJune 30, 1978 (para 6.13);

(c) by June 30, 1979, CATA would submit to the Association forits review and approval the detailed description of thetraining program for the staff to be employed in theProject's factories (para 6.14);

(d) until June 30, 1983, the position of Finance Director forCATA would be filled by a person with qualifications,experience and terms and conditions of employmentsatisfactory to the Association (para 6.15);

(e) no later than June 30, 1979, and until at least June 30,1983, CATA would employ a qualified and experiencedChief Engineer on terms and conditions satisfactory tothe Association (para 6.15);

(f) consultants to implement a Management InformationSystem and to train CATA's finance and accountingstaff would be employed not later than June 30, 1978(para 6.16);

(g) Government would carry out, or cause to be carriedout, by December 31, 1979, a study to determinehealth hazards in its cashewnut industry and toformulate criteria for monitoring such hazards, andthereafter, in consultation with the Association, wouldimplement, as appropriate, the recommendations of suchstudy (para 6.18);

(h) CATA would inform the Association on any appointmentsto the positions of Project Factory Managers suffi-ciently in advance of such appointments so as to allowthe Association time to comment thereon (para 6.22);

- 44 -

(i) CATA would maintain a separate account for theProject (para 6.24). CATA's accounts wouldcontinue to be audited by independent auditorsacceptable to the Association, and the auditedaccounts would be sent to the Association nolater than six months after the end of CATA'sfiscal year (para 6.25);

(j) Government would continue to maintain a pricingstructure of raw c:ashewnuts based on, inter alia,the grading of such nuts and closely relatingfarm gate prices (less appropriate processingand marketing costs) to appropriate world prices(para 8.05).

10.04 Based on the above assurances and conditions the proposed Projectis suitable for an IDA Crediit of US$27.5 million, on standard terms.

TANZANIA

SECOND CASHEWNUT DEVELOPKENT PROJECT Table 1

CATA Purchase of Raw Nuts, 1969/70 to 1976/77

(Ton '000)

69/70 70/71 71/72 72/73 73/74 74/75 75/76 76/77

I. Northern Regions

Coast Region 29 31 34 30 39 30 29 29

Other Regions l/ 1 3 4 4 6 5 4 5

Total 30 34 38 34 45 35 33 34

II. Southern Regions

Zone I I/ 42 42 43 47 54 41 38 39

Zone II 3/ 28 27 33 33 31 31 25 28

Zone III 4/ 11 10 12 12 15 -11 10 9

Total 81 79 Al 92 100 83 73 76

TOTAL 111 113 126 126 145 118 106 110

~~~~~~-= :

Undergrade Raw Nuts (x) 4 18 20 39 10 12 19 12

1/ Tanga, Morogoro, Mbeya, Moshi, Iringa.2/ Corresponds to CATA zones A, F, G, H, I which include the districts of

Mtwara, Lindi (pare), and Nevala.3 Corresponds to CATA zones C, D, J, K, L, which include the districts

of Tunduru, Nachingwea, Masasi and Songea._/ Corresponds to CATA zones B and E which include the districts of

Kilwa and Lindi (part).

December 20, 1977

Table 2

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

RainfaLl and Cashewnut Growth Periods /

MonthJ F M A M J J A S 0 N D

Average Rainfall (mm) 2 200 170 180 135 30 6 4 4 8 12 40 140

Rainfall (1975) 2/ - 89 98 - 217 - - - 28 - 107 120

Rainfall (1976) 3/ 227 264 219 77 77 32 - - - 24 - -

Growth Periods:

Flowering

Fruit Set/Ripening l _I

Harvest

1/ For Southern regions, which produce about 70% of Tanzania's cashewnuts.

2/ For the period 1931-1960. Source: Mtwara Regional Integrated Development

Plan 1975-1980, Finnconsult.3/ Nachingwea research station.

Table 3

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Cashewtree Plantation Program: Allocation of Planted Areas

Region District Area (ha)

Coast and Other BagamoyoNorthern Regions Mizizima

KisaraweRufijiKibaha 62,600

Mtwara MtwaraNewalaMasasi 17,500

Lindi LindiKilwaNachingweaLiwale 46,000

Ruvuma TunduruSongeoMbinga 12,500

Morogoro MahengeIfakaraMorogoroKilosa 6,250

Nbeya/Iringa KyelaMboziLudewa 3,125

Total 147,975 ha(150,000)

Source: CATA

Table 4

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Cashewtree Plantation Program: Anticipated Yields

Age of Tree 1/ Yield (kg/tree) Yield (kg/ha) 2/

1

2

3

4 0.5 35

5 2.5 175

6 4.0 280

7 5.5 385

8 6.5 455

9 7.5 525

10 8.5 595

11 9.5 665

1/ Seeds are planted from January to March. Age of tree is counted fromthe date the seed is planted.

2/ Trees are spaced 12 meters apart. There are 70 trees per ha.

August 4, 1977

TANZANIA

SECOND CASEWNIUT DEVZLOENT FROJECT

Cashewtree Plantation Program: Production

(Ton '000)

Year of Area 91/92Plantation 1/ Planted (ha) 78/79 79/80 80/81 81/82 82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91 & thereafter

76/77 8,000 2/ - 0.3 1.4 2.2 3.1 3.6 4.2 4.8 5.3 5.3 5.3 5.3 5.3 5.3

77/78 22,000 - - 0.8 3.8 6.2 8.5 10.0 11.6 13.1 14.6 14.6 14.6 14.6 14.6

78/79 30,000 - - - 1.0 5.3 8.4 11.2 13.7 15.8 17.9 20.0 20.0 20.0 20.0

79/80 30,000 - - - - 1.0 5.3 8.4 11.2 13.7 15.8 17.9 20.0 20.0 20.0

80/81 30,000 - - - - - 1.0 5.3 8.4 11.2 13.7 15.8 17.9 20.0 20.0

81/82 30,000 - - - - - - 1.0 5.3 8.4 11.2 13.7 15.8 17.9 20.0

Total production(for 150,000 ha) - 0.3 2.2 7.0 15.6 26.8 40.1 55.0 67.5 78.5 87.3 93.6 97.8 99.9

Allocation by Region 3/

Coast and other NorthernRegions _ 0.1 0.9 2.9 6.6 11.3 16.8 23.1 28.4 33.0 36.7 39.3 41.1 42.0

Southern Regions _ 0.2 1.3 4.1 9.0 15.5 23.3 31.9 39.1 45.5 50.6 54.3 56.7 57.9

1/ Trees are planted Erom January to March.2/ Actual. n

3/ Production is allocated proportionately to areas shown at Table 3.i.e. Coast and other Northern Regions 42I of total and SouthernRegiona 58% of total.

September 2. 1977

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Summary of Tanzania's Cashewnut Processing Capacity

ExpectedFactory Production at First Year EquipmentName Full Capacity(ton) of Operation Used Observation

TA>.ZT^. 12,,00 uperatilng italianITANITA II 12,500 78/79 Italian Financed by Bank of Sicily,under constructionKibaha 10,000 81/82 Undetermined Financing requested from IDA ,under the ProjectMtwara CashcO Co. 8,000 Operating JapaneseMftwara 10,000 81/82 Undetermined Financing requested from IDA ,under the ProjectLindi 10,000 78/79 Italian Financed by Bank, Loan 1014-TA ,under constructionMtarn. 5,000 77/78 Italian Financed by Bank, Loan 1014-TA ,under constructionNe-wala I 10,000 78/79 Italian Financed by Bank, Loan 1014-TA ,under constructionNewala II 10,000 81/82 Undetermined Financing requested from IDA ,under the ProjectMasasi 10,000 78/79 Italian Financed by Bank, Loan 1014-TA ,under constructionNachingwea 5,000 77/78 Italian Financed by Bank, Loan 1014-TA ,under constructionTunduru 10,000 81/82 Italian Planned, Financed by Bank of Sicily

Total Capacity 113,000

August 18, 1977 X

I-

TANZAN7LA

SECOND CASH5RCUT DhTL0JIPI PLOIECT

Satla a, R.. Outs *nd Procet.S.in C- eltt

(70 '000)

A Mrg. 91/98rod,ot1o,, 76/77 77/78 78/79 79/80 80/81 81/82 82/83 83/84 64,'5 -d70/71-76177 7hereLcer_

1. NartItern Recians

Coas.t R8.g., , 31 29 31 31 31 31 31 31 31 3i 31Other R.oni.- 1 4 5 4 4 4 4 4 4 4 _

0..- '10211D82 - - 1.0 3.0 6.5 11.5 17 42

local Produ,tion 35 34 35 35 35 86 38 41.5 46.5 52 77

PtoC.l nL C-D5CitV

T0-C,. I F..tOry 12 12.5 12.5 12.5 12 .5 12 .5 12 .5 12 .5 12.570011.0 11 Pent..,, _/ _ 8.0 10.0 12.5 12 5 12 5 12.5 12.5 12 5 12 5

I/ISha _/ - - - 7.5 8.5 9.5 10.0 10.4

P-1 c-s-ine CanaitY [2.5 20.5 22.6 25.0 25.0 32.5 33.5 34.5 35.0 35 .

.4a-lc-be r-r E.-oL 21 5 14.5 12.5 10.0 11.0 5.5 5 .0 a 2.0 17.0 0

11. So,.1hern Rent,,,.

ft.d-ct [08

Produetio

Zoo. 1 6L/ 45 39 45 45 45 45 45 45 45 45 45Zon. II L 30 28 30 30 30 30 30 30 30 30Z.n III

1

10 9 10 10 10 10 10 10 10 10

S.C Plec0lnr'sn -- - - 1.5 4 9 15.5 23.5 38

7.t.1 Production 85 76 5 85 85 86.5 90 94 *00.5 108.5 143

Procorsulo Ceneoll,,

Lt,dl F-to y/ - 5.0 9.0 10.0 10.0 10.0 10.0 10.0 10.O 10.0Mowac- C..h.. Co. 8 0 .0 8.0 8 0 8.0 s.0 8.0 s.0 8.0 8.0

--v0.0 F ctory 2/ - - - - - 7.5 8.5 9.5 10.0 10.0MC. Fe.toy 2 - '.5 4.0 5.0 5.0 50 1.0 5.8 5.0 5

No.-.. I Factory 2/ - - 6.0 9.0 10.0 10.0 10.0 10.0 10.0 10.0Ne_.l. 11 FPeto0y 5/ - - - - 7.5 8.5 9.5 10.0 10.0M...1 Ft 0C-y 2/ - - 7.5 8.5 9.5 100 10 .0 10.0 10.0 10.0N.ohign-. FPetory 2/ - 1.5 4.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

T7nduru F.t.oy _ - - - 7.5 8.5 9.5 10.0 10.0 10.0 10.0

Tot.l Pr-o e60n Ce peet, 8 0 16.0 3 2 5 75.0 77U.0 7.3 78.0

Aewileble lor 0.ewrt 68 69 46.5 32 30 17.5 19 23.5 30.5 65

Et.iting T.... 120 110 120 120 120 120 120 120 120 120 120

N- Plestings _ - _ 16 _

T.t.1 120 110 120 120 120 122 127 136 147 160 220

FPe .... si C.peeLty not pplie-ble 20.5 36.5 61 78 a1 1OS 106.5 111.5 113 113

R- Nutc. A*vdlbl. f.. Ueport -"- 89.5 63.5 59 42 41 23 27 35.5 47.5 107

11 TS.e, 8 breg.r.. ).y.. hi, 1erteg.

V Fo Teb l. S S rsuded tn neatest 500 t-e../ ti.ting f-t-r.Ud 0.r fon ierCe.tnoe lieenod by the enk .( SieiLY. Cwtr,Ctle f TotSduru feetery i espetted to t.rt in .. 1end-r 1977.P. Prp.. d .ed the pree.nt prnj et.

W Distrit. of MW-r. pert .f Liedi, d N eI.V Ditti t: n2f Tsnduru. N-ehinEge. esei *d Sor...

/l Oietnte .t Kil . *nd p frt nt Lidi.

9/ 0.d0. oCeetetine e.D.t the first C-ebh t Dov ln_nt PeFrot- ,finscen d by the .

10/ TSld .. um Cill b. cepted bfore greens, r et.s thee lnetl

pCo OtiCe dOt. ill be p ledIely he.n e.- not av_1lhble

De.e.ber 20, 1977

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Export of Cashewnut Kernels from Processing Countries(t0)Q m,t,)

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

Brazil 0.6 1.1 1.1 0.7 1.8 1.5 3.3 5.1 6.5 4.6 7 3e 6.0 7.6 11.4 10.0

Kenya - - 0.1 0.2 0.1 0.2 0.2 0.2 0.1 0.2 0.1 0.2 0.1 0.2 1.6

Tanzania - - 0.1 0.1 0.6 1.4 1.4 2.4 2.9 4.0 2.9 3.7 4,1 4.0 6.1

Mozambique 1.9 2.7 3.5 4.0 5.7 8.1 11.3 12.8 14.7 20.4 27.2 4.0 8, 0. 8.P/ 8.0 -

India A 48.6 51.0 55.7 51 3 50.1 51.0 63.7 60.6 50.3 60.4 66.3 52,3 65,0 53.6 46.0

Total 51.1 54.8 60.5 56.2 58.3 62.2 79.8 81.1 74.5 89.5 103.3 66.2 84.8 77.2 71.7

al Actual Figures un"tro-n. A 'rndtictioni of 8,000 metric tons of kernels has been assumed[1 Twelve months from April of the year shown to March of the following year.Totals may not equal the sum of their constituent items, due to rounding of figures.

Source: National Trade Statistics; Gill and Duffus Landover Ltd., Edible Nuts Statistics December 1976.

Ha.tJ.

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

India's Margin on Raw Nut Processing -

Actual Prices in Current Terms Projected for 1985 and thereafte1972 1973 1974 1975 1976 1976 Terms 1978 Terms

Kernels Exported (ton '000) 66.3 52.3 65.0 53.6 46.0

Value of Kernels FOB India(Rs million) 688.2 744.3 1,181.4 961.3 920.0

Average Kernel Price FOB India(Rs/ton) 10,380 14,231 18,175 17,935 20,000

Average Kernel Price FOB India(Tsh/ton) 9,265 12,545 16,020 14,930 18,650 20,900 24,460

Average Raw Nut Price FOB Tanzania(Tsh/ton) 1,330 1,280 1,720 1,820 1,980 2,400 2,800

Margin per Ton of Raw Nuts(%)-/ 60 125 114 89 117 101 101

1/ Source: India Monthly Statistics of Foreign Trade. Twelve months from April of the year shown to March of the following year2/ For comparison purpose with prices obtained in Tanzania. Exchange rates used are as follows:

72 73 74 75 76

Tsh/US $ 7.14 7.14 7.14 7.41 8.30Rs/US $ 8.0 8.1 8.1 8.9 8.9

3/ Assuming a kernel to raw nut outturn of 23%. The margin would cover transportation and processing costs and profits.Margin (X) 100 x (Kernel Price x 23% - Raw Nut Price)/Raw Nut Price.

H

PZ

S

Table 10

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Kernels 320 Wholes Prices CIF New York(US $flb)

1972 1973 1974 1975 1976

January 0.73 0.74 1.28 1.10 1,05

February 0.72 0.81 1.22 1.12 1.12

March 0.74 0.82 1.18 1,13 1.16

April 0.75 0.86 1.20 1.28 1.18

May 0.75 0.94 1.28 1.22 1.18

June 0.78 1.15 1.30 1,13 1.20

July 0.77 1.20 1.22 1.10 1.25

August 0.75 1.20 1.15 1.15 1.28

September 0.73 1.13 1.10 1.12 1.29

October 0.74 1.10 1.10 1.06 1.28

November 0.73 1.06 1.10 1.03 1.30

December 0.72 1.12 1.06 1.05 1,40

Average 1/ 0.74 1.01 1.18 1.12 1.22

1/ Not weighted by corresponding tonnage.

Source: US Department of Commerce

January 6, 1978

TANZANIA Table 11

SECOND CASHEWNUT DEVELOPMENT PROJECT

Raw Cashewnut Production(t 000 m.t.)

Year Brazil Mozambique Tanzania Kenya India Total

1963 22 133 43 5 66 269

1964 16 142 57 5 14 294

1965 22 119 65 8 67 281

1966 22 106 75 6 59 268

1967 26 97 78 9 72 282

1968 29 189 87 9 68 382

1969 29 132 94 10 68 333

1970 26 138 92 24 58 338

1971 16 156 116 11 90 388

1972 40 201 127 16 77 461

1973 25 167 128 11 65 e 396

1974 35 180 145 22 75 e 457

1975 37 9go 120 25 105 e477

e = estimate

Source: Tropical Product Institute, The Market for Cashew-Nut Kernelsand Cashew-Nut Shell Liquid, Gill and Duffus Edible Nut MarketReports, various issues.

TANZANIA Table 12

SECOND CASHEWNUT DEVELOPMENT PROJECT

Price Relationship between Processing Mix and 320 Wholes

Expected Price RelationshipKernel Grade Outturn (%) (320 grade . lOC)

220 1 105320 30 100450 1 95

T. Wholes 12 95D. Wholes 6 75

50 48

Butts 2 70Splits 15 75Large Pieces 20 65Small Pieces )Baby Bits )Dessert P. .13 50Baby P.

50 32

Total Kernels 100 80

March 23, 1978

Table 13

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Projection of Kernel Prices

Actual Projected for 1985and Thereafter

1976 1976 Terms 1978 Terms

Average Price 320 Wholes CIF New York (US$/lb) 1.22 1.37 1.60

Less: Quality Adjustment 1/ 0.06 9.07 0.08

Less: Freight and Insurance 0.10 0.10 0.12

Average Price 320 Wholes FOB Tanzania (US$/lb) 1.06 1.20 1.40

Average Price 320 Wholes FOB Tanzania (Tsh/ton) 2/ 19,355 22,060 25,830

Price Project Mix FOB Tanzania (Tsh/ton) 3/ 14,862 17,648 20,664

1/ On average cashew kernels processed in Africa command prices about 5% lower than

prices for India processed kernels. The latter weight heavily in the statistics

yielding average New York prices, since India processes over 60% of world cashewnuts.

2/ Ton 1.0 = lb 2,200; exchange rates: US$ 1.0 = Tsh 8.30 in 1976 and thereafter.

3/ In 1976, the average price of the Tanzanian mix was only 77% of the 320 wholes

price, because the weighted average of the whole/broken ratio was only 48/52.

TANITA output was 60/40, the output at the Mtwara Cashew Co. was 44/56 and the

output at the Mbagala hand processing factory was 43/57. The whole/broken ratio

of the new factories is expected to be 50/50, and the resulting average

mix price would be 80% of the 320 wholes price (see Table 12).

March 23, 1978

Table 14

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Economic Costs of Raw Nuts to Factories 1/

(Tsh/ton)

Foreign Exchan8 e Foreign ExchangeShadow Rated 2 Not Shadow Rated

Raw nuts, F.O.B. Mtwara/Dar es Salaam 4,025 2,800

Less: F.O.B. Charges - 100 100

Less: Transport to Factory (Average) 100 100

Economic Cost to Factory 3,825 2,600

1/ In mid-1978 prices.2/ Foreign exchange costs valued at US$ 1.0 = Tsh 12.0 (official exchange rate

US$ 1.0 = Tsh 8.30).3/ No price parity formula between kernel and raw nut prices has yet been arrived

at during negotiations between Tanzania and India, but there are indicationsthat an acceptable parity would be Tsh 17.50 per ton of raw nuts per oneUS cent per lb of kernel, 320 whole, CIF New York.

4/ Mostly handling. Export taxes are not taken into account because they representa transfer within the economy.

March 23, 1978

Table 15

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Financial Cost of Raw Nuts to Factories 11(Tsh/Ton)

Standard UnderGrade Grade

Producer Price 1,150 1,000Transport to Factory 2/ 200 200Bags and Twine 130 130Procurement Administration 190 130Village Levy 60 60

Sub-total 1,730 1,520

Crop Insurance3/ 3 2Cash Insurance 4/ 2 2Bank Interest _! 58 53Head OffIce Administration 120 120Feeder Roads Fund 20 20

Sub-total 203 197

Total Cost to Factory 1,933 1,717

Average Cost to Factory N Tsh/ton 1,900.

1/ Expected 1978/79 costs.2/ Average Tsh 200 per ton for transportation within a district.3/ About 0.15% of value of crop.4/ About 0.1% of cash handled.5/ 6.5% for about 6 months.6/ Based on historical data, showing that an average 20% of nuts are undergrade.

Source: CATA

July 25, 1977

Table 16

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Financial Costs of Exporting Raw Nuts

(Tsh/Ton)

Standard UnderGrade Grade

Producer Price 1,150 1,000Transport 200 200Bags and Twine 130 130Procurement Administration 190 130Village Levy 60 60

Sub-Total 1,730 1,520

Insurances and Interest 62 57Head Office Administration 121 121Handling and Miscellaneous 76 76Branch Costs 190 130Feeder Roads Fund 20 20

Sub-Total 469 404

F.O.B. Charges 105 105Export Tax 1/ 130 120

Sub-Total 135 125

Total Cost 2,334 2,049

Average Cost Tsh/ton 2,280

F.O.B. Export Price Tsh/ton 2,800Less: Average Cost 2,280CATA Margin 520

1/ Half of this tax goes into the Cashewnut Industry Fund, for investmentsin the cashewnut industry.

2/ Based on 20% of nuts undergrade.

TANZANI)

SECOND CASHEWNUT DEVELOPMENT PROJECT

Producer Prices for Cashewnuts(Tsh per ton)

1972/1973 1973/1974 1974/1975 1975/1976 1976/1977 1977/1978

Standard Grade 950 950 1,050 1,050 1,100 1,150 1/

Under Grade 750 750 950 950 950 1,000 1/

Std.Gr/Under Gr. Ratio 60/40 90/10 90/10 80/20 80/20 l/ 80/20

Average Producer Price 870 930 1,040 1,030 1,070 1,120

1/ Expected2/ Average for Tanzania

August 25, 1977

I-

TANZA IU Table I18

SECOM S CASHEWN ltT DEVELOFM ENT FROJECT

CATA ^ Income Scatemenets -

(Tsh Million)

1973/1974 1974/1975

(a) Sales Ravenue 2/

Export Sales 171.7 189.6Local Sales 17.2 25.7

Toral Sales 188.9 215.3

(b) Cost of Sales

urchases 175.6 159.0Opening Stock less Closing Stock (35.3) 0.9

Labour 0.9 0.3Agents' Rnunrratiofn 1.2 0.9Development Levy - Faeder Roads 7.1 5.9

Other - 0.9

Total Cost of Sales 149.5 167.9

c) Cross Sales (a-b) 39.4 b7. 6

(d) Operating Expenses

1. .1.dniistrativc Expenses.

Salaries and Benefits: HO 1.4 1.83ranches 2.7 3,

Other Administrative Expenses 2.1 3.2

Sub-total 6.2 8.7

2. Sellinz and Distributiofn

F.O. t Cha ges 3.6 5.0Export Tax 10.2 17.7Miscellaneous 0.4 0.9

Sub-total 14.2 23.6

3. AiscellaneouS

Gunny Bags 1.0 0.5Other 0.5 0.1

Sub-total 1.5 0.6

Total Operating Expensa 21.9 32,9

(e) Finsncial Expenses

1. Bank Interest

Sub-total 3.4 4.1

2. Other

Insurancees 0.4 0.7Shrinkage of Stocks 1.7 1.6Depreciation 1.0 1 '3Provisions 1 D

MiscUllaeoue Charges 0.1 0.3

Sub-total 4.1 3.9

Total Financial Expenses 7.5 S.0

(f) let Profit (Loss) 3efore S ndries and Bad Debts 9.9 6.4(g) Bad Debts _ g

(h) Sundry Income 1.2 1_1(i) Net Inoe (Loss) 3efor Taxes 11.1 1.5

(j) Taxes 5.0 0.8(k) N et Inco (Loss) A fter Taxcs 6.1 0.8

1/ For the years ending Septmber 30th./ Export sales mainlY to India - Local sales to domescic processing factories.

,Tar.ua-v 10, 1978

Table 19TANZANIA Page 1

SECOND CASHEWNUT DEVELOPMENT PROJECT

CATA Balance Sheets as of September 30th: Assets A(Tsh Million)

1973/1974 1974/1975

ASSETS

1. Current Assets

Stocks 2/ 34.7 48.5Debtors and Prepayments 19.8 44.3Guarantee Deposit with NBC / - 3.6Cash - 0.1

Total Current-Assets 54.5 96.4

2. Fixed Assets

Fixed Assets ( 11.0Capital Work in Progress/ (11.8 10.9less: Accumulated Depreciation 5/ 1.1 2.4

Net Fixed Assets 10.7 19.5

3. Investments_/ 13.2

Other Assets

Loans Advanced 1.0 51.4Goodwill 2.9 -

Total Other Assets 3.9 51.4

1/ Columns may not exactly add up due to rounding.2/ Raw nuts, kernels, packing materials, work-in-progress.3/ Amount paid to the National Bank of Commerce to secure-guarantee from them for a loan

from Banco di Scicilia, to finance the construction of Tanita II factory.4/ Mtwara Staff Houses and Rest House, Kilva Store House, Staff Houses and offices,

Factories at Lindi, Masasi and Mtamza.5/ Straight-line basis: buildings over 25 years, plant and machinery 5 years, vehicles 3 years,

furniture and small equipment 6 years, small tools 2 years. Capital work-in-Progress isnot depreciated.

6/ TANITA factory and other minor investments.7/ Loans advanced to contractors and sub-contractors in the Fir-st Cashewnut Development Project

in 1975.

December 20, 1977

-Table 19TANZANIA Page 2

SECOND CASHEWNUT DEVELOPMENT PROJECT

CATA Balance Sheets as of September 30th: Liabilities and Equity -

1973/1974 1974/1975

LLABILITIES

1 Current Liabilities

Creditors and Accruals 4.9 25.3N.A.P.B. 2/ 26.8 26.8Bank Overdraft 26.8 53.6Taxation Provision 5.0 0.8Current Maturities, Long-Term Debt - -

Total Current Liabilities 63.5 106.5

2. Long-Term Debt

World Bank, First Project - 51.5

Total Long-term Debt - 51.5less: Current Maturities - -

Net Long-term Debt - 51.5

3. Reserves

Development Reserve 3/ - 5.5

Total Reserves - 5.5

4. Equity

Shares 3.0 15.2 4/Accumulated Profits 6.1 5.0

Total Equity 9.1 20.2

5. Difference in Books (3.5) (3.2)

TOTAL LIABILITIES AND EQUITY 69.1 180.5

I/ Columns may not exactly add up due to rounding.2/ This liability was taken over the NatLonal Agricultural Produce Board to be shared between CATA,

the National Milling Corporation and the General Agricultural Products Corporation in proportionto net assets acquired as a result of the break-up of NAPB. The liability was still in NAPBaccount in 73/74 and 74/75.

3/ Amounts retained to be utilized for the develop-ent of feeder roads to cashewnut producing areas.b/ TANITA and Mtvara Cashew Co. factories.

September 2, 1977

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Comparative Estimates of First Proiect's Costs(US$ Million)

APPRAISAL ESTIMATE (May 1974) LATEST ESTIMATE (Nov.1975)Financed by: Financed by:

Total Cost Bank CATA/Govt. Total Cost Bank CATA/Govt. T.I.B. 27

Factory Development:Machinery 6.8 5.5 1.3 10.1 10.1 - -

Factories Buildings 2.3 1.8 0.5 )Other Buildings 1.5 1.3 0'2 ) 15.1 9.1 4.1 1.9Equipment and vehicles 0.8 0.7 0.1 )Working Capital 2.7 2.2 0.5 2.7 _ 2.7

Sub-Total 14.1 11.5 2.6 27.9 19.2 6.8 1.9

Community Education Centers 0.9 0.8 0.1 - - - -

Technical Services 3/ 0.5 0.5 - 1.4 1.4 -

Salaries 4 2.9 0.4 2.5 2.9 0.4 2.5

Rural Water Supplies 1.0 - 1.0 - - -

Unallocated 10.9 7.8 3.1

TOTAL 30.3 21.0 9.3 32.2 21.0 9.3 1.9

1/ It is expected that the next supervision mission will make a new estimate. The 1975 estimatewas made after contracts for equipment and civil works were received, and the Loan Agreement amended toreflect the new allocation of Bank funds into disbursement categories.

2/ Tanzania Investment Bank, a Development Finance Company. TIB loan to CATA ib met from the proceedsof Loan 1172-TA.

3/ Marketing Manager and Financial Manager of CATA for four years, 3 research staff, fellowshipsand trainingcourses, preparation of Phase II Project.

4/ Extension and grading officers, national staff for research and CATA headquarters-Bank contributioncorrespond to 25X of the salaries of extension and grading staff.

November 4, 1977

ar~0~ID.a0Io

Table 21

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Tankers Requirements for Transportation of CNSL

Average No. Raw Nuts CNSLof Round Trips Production Output No. of No. of Tankers

Factory per day Capacity(tons) (tons)L/ Tankers-Days Required 3/

TANITA 2 12,500 875 90 )TANITA II 2 12,500 875 90 )Kibaha 2 10,000 700 70 )

Mtwara 9Wshco 2 8,000 560 56 )Mtwara - - 10,000 700 - )Lindi 2/3 10,000 700 210 )Mtamna 2/3 5,000 350 105 )Newala I 2/3 10,000 700 210 )Newala II 2/3 10,000 700 210 ) 5Masasi 2/3 10,000 700 210 )Nachingwea 2/3 5,000 350 105 )Tunduru 1/3 10,000 700 420 )

1/ 7% of production capacity.2/ 5-ton tankers.3/ Based on 300 working days per year.4/ Would be linked to main storage lby a pipe.

November 28, 1977

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Project Costs Summary /(Tsh Million)

Foreign0 1 2 3 4 5 6 Total Exchange

Civil Works 31.1 47.3 22.7 - - - - 101.1 63

Equipment - 48.1 30.2 7.2 - - 85.5 95

Water Development 7.8 3.0 - - - 10.8 80

Vehicles and Tankers 0.8 1.7 0.8 - - - 3.3 95

Professional Services - 9.1 12.2 9.5 7.2 7.2 4.4 49.6 93

TOTAL BASE COST 31.1 113.1 69.8 17.5 7.2 7.2 4.4 250.3 81

Physical Contingencies - 7.3 6.1 1.5 0.5 0.5 0.3 16.2 81

Price Contingencies - 4.8 4.0 2.4 1.8 2.4 1.6 17.0 81

TOTAL COST 31.1 125.2 79.9 21.4 9.5 10.1 6.3 283.5 81

1/ Derived from Table 23.

H

Table 23

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Detailed Prolect Costs 1!(Tah Million)

Foreign0 1 2 3 4 5 6 Total Exchange t

A. KIAAHA COMPLEX

Civil Works 2/ 9.5 13.9 5.3 - - - - 28.7 70

Processing Equipment 3/ - 19.2 8.1 1.3 _- - 28.6 95

Water Development - 2.6 1.0 - - - 3.6 80

Vehicles 4/ - - 0.3 - - - - 0.3 95

Sub-total 9.5 35.7 14.7 1.3 - - - 61.2 82

B. MTWARA COMPLEX

Civil Works 11.2 17.7 5.8 - - - - 34.7 70

Processing Equipment - - 16.0 10.6 1.3 - - - 27.9 97

Water Development - 2.6 1.0 - - - - 3.6 80

Vehicles Al - - 0.3 - - - - 0.3 95

Sub-total 11.2 36.3 17.7 1.3 _ - - 66.5 82

C. NEWALA COMPLEX

Civil Works 2 10.4 15.7 11.6 - - - - 37.7 51

Processing Equipment - - 12.9 11.5 4.6 - - - 29.0 94

Water Development - 2.6 1.0 - - - - 3.6 80

Vehicles IV - - 0.3 - - - - 0.3 95

Sub-total 10.4 31.2 24.4 4.6 - _ _ 70.6 70

D. TANKERS 5/ - 0.8 0.8 0.8 - - - 2.4 95

E. PROFESSIONAL SERVICES 6/ _ 9.1 12.2 9.5 7.2 7.2 4.4 49.6 93

Total Base Cost 31.1 113.1 69.8 17.5 7.2 7.2 4.4 250.3 81

Physical Contingencie7 7/ - 7.3 6.1 1.5 0.5 0.5 0.3 16.2 81Price Contingencies 8 - 4.8 4.0 2.4 1.8 2.4 1.6 17.0 81

Total Cost 31.1 125.2 79.9 21.4 9.5 10.1 6.3 283.5 81

1/ Costs extracted from bid document, excluding taxes and duties. Contracts are fixed price contracts.Year 0 corresponds to fiscal year starting July 1, 1977.

2/ Tsh 1.6 million have been added to the civil work component of the factories in Yibaha and Newala tocover the cost of one senior staff house and 10 semi-skilled houses which were not included in thebids for civil works. Although contracts for civil works include water development, the latter costsare shown here as a separate item. Contract price includes provision for cost escalation ofTsh 1.8 million for each factory which is deducted to obtain base cost and added back into pricecontingencies.

3/ Contract price includes provision for price escalation of Tsh 0.6 million for each factory which isdeducted to obtain base cost and added back into price contingencies.

4/ Two seven-ton lorries at Tsh 150,000 to transport tins and finished product. Three utility vehiclesare included in the contracts for processing equipment.

5/ To transport CNSL. Tankers requirments are in Table 21. Tankers are required from year 1 becausethey would be seed for the existing factories. Two tankers at Tah 400,000 would be purchased eachyear, except if bulking of orders results in price reduction.

6/ From Table 24.7/ Civil works and equipment: 5%; vehicles and tankers 30%; professional services: 101 (except research and supervision

of construction); water development: 20X plui Tsh 400,000 to cover possible need of constructing additionalpipeline to the Newala factory. Year 0 corresponds to initial payment to contractors and is not subjectto contingencies.

8/ Civil works contracts (including water development) include provision for cost escalation of Tsh 1.8 millionfor each factory. Equipment contracts include a provision of Tsh 0.6 million for each factory. In additionto the above amounts, price contingencies were applied to vehicles and taskers and to the physical contingencyof equipment contracts at 7% for 1978, 6.5% for 1979 and 6% thereafter. On professional services and onthe physical contingency component of civil works, the rates of 8% for 1978, 7.5% for 1979, and 7% afterwardswere used.

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Cost of Professional Services 1/(Tsh Million)

Foreign1 2 3 4 5 6 Total Exchange

A. SUPERVISION OF CONSTRUCTION 2/ 6.2 6.2 0.4 - - - 12.8 87

B. OTHER PROFESSIONAL SERVICES

Factory Operation: Coordinator 3/ - 1.3 1.3 1.3 1.3 1.3 6.5 95Kibaha - 1.3 1.3 1.3 1.3 - 5.2 95Mtwara - 1.0 1.3 1.3 1.3 0.3 5.2 95Newala - 0.5 1.3 1.3 1.3 0.8 5.2 95

Sub-Total - 4.1 5.2 5.2 5.2 2.4 22.1 95

Finance Director 4t 0.7 0.7 0.7 - - - 2.1 95

Engineering Adviser 4/ 0.7 0.7 0.7 - - - 2.1 95

Management Information System 5/ 0.5 0.5 0.5 - - - 1.5 95

Agricultural Research - - 2.0 2.0 2.0 2.0 8.0 95

Health Study 1.0 - - - - - 1.0 95

Sub-Total 2.9 6.0 9.1 7.2 7.2 4.4 36.8 95

TOTAL 9.1 12.2 9.5 7.2 7.2 4.4 49.6 93

1/ In mid-1978 prices. Year 1 corresponds to fiscal year starting July 1, 1978.2/ Would be a fixed price contract for the amount shown.3/ One for each factory, and one coordinator, all starting work at the beginning

of machinery installation and staying during four years. Average cost at$80,000 per man-year.

4/ Three years, starting year 1 at $80,000 per year.5/ Two man-year at $80,000 spred over a thre-year period. F

6/To complement the present research program from year 3 to 6. About 16 man-year rat $60,000.

Table 25

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Disbursement Schedule -/

(US$ Million)

IDA Fiscal Year Quarterly Cumulative Disbursementsand Quarter Disbursements at End of Quarter

1978/79September 30, 1978 - -December 31, 1978 2.4 2.4March 31, 1979 2.2 4.6June 30, 1979 - 4.6

1979/80September 30, 1979 2.6 7.2December 31, 1979 2.6 9.8March 31, 1980 2.6 12.4June 30, 1980 2.6 15.0

1980/81September 30, 1980 1.9 16.9December 31, 1980 1.9 18.8March 31, 1981 1.9 20.7June 30, 1981 1.9 22.6

1981/82September 30, 1981 0.5 23.1December 31, 1981 0.5 23.6March 31, 1982 0.5 24.1June 30, 1982 0.5 24.6

1982/83September 30, 1982 0.4 25.0December 31, 1982 0.4 25.4March 31, 1983 0.3 25.7June 30, 1983 0.3 26.0

1983/84September 30, 1983 0.3 26.3December 31, 1983 0.3 26.6March 31, 1984 0.3 26.9June 30, 1984 0.3 27.2

1984/85September 30, 1984 0.3. 27.5

1/ A 9 months lag between physical investments and disbursements by theAssociation is assumed. Disbursements in 1978/79 correspond toadvance payments to contractors and equipment suppliers.

March 23, 1978

Table 26

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Projected Income Statements for a Typical Project Factory -

(Tsh Million)

16 and1 2 3 4 5 6 - 15 Thereafter

(a) Sales Revenue

Raw Nuts Processed (ton 2/ - - 7,500 8,500 9,500 9,500 9,500

Kernels Pro e(ton) - 1,800 2,040 2,280 2,280 2,280

CNSL (ton) y - - 525 595 665 665 665

Kernel Sale 5/ - - 18.6 39.7 44.7 47.1 47.1

CNSL Sales - - 0.6 1.3 1.5 1.6 1.6

Total Sales _ - 19.2 41.0 46.2 48.7 48.7

(b) Operating Expenses

Raw Nuts - - - 14.2 16.1 18.1 18.1 18.1

Salaries and Wages 8/ - - 6.2 6.2 6.2 6.2 6.2

Other Operating Costs 9/ - - 3.1 3.3 3.6 3.6 3.6

Interest an bank overdraft 1-1 - - 0.3 0.3 0.3 0.3 0.3

Total Operating Expenses - - 23.8 25.9 28.2 28.2 28.2

(c) Operating Income (Loss) - - (4.6) 15.1 18.0 20.5 20.5

(d) Depreciation 11/ - - 4.8 4.8 4.8 4.8 4.8

Net Income Before - - (9.4) 10.3 13.2 15.7 15.7

Interest and Taxes

Interest on Long-Term Loans / - - - - 6.6-0.7 -

Net Income Before Taxes - - (9.4) 10.3 13.2 9.1-15.0 15.7

I/ It mid-1978 constant prices. Year 1 corresponds to the first year of construction.

2/ Factories would operate at 95% of capacity at full development.3/ Assuming an average kernel outturn of 24% in weight.4/ Assuming a CNSL outturn of 7% of raw nuts in weight.5/ Average kernel price Tsh 20,664. See Table 13. Revenues are accounted for 6 months

after the purchase of raw nuts.6/ Average price US$ 300 per ton FOB (Tsh 2,400 per ton).7/ Raw nuts into factory cost Tsh 1,900 per ton (Table 15).

8/ Based on actual operations of Cashco factory in Tanzania.9/ Power, fuel, replacements and maintenance, packing materials and miscellaneous.

Packing materials represent about 65% of these costs.10/ At 11% interest rate with 6 months turnover. Maximum overdraft is Tsh 5 million.

Interest on bank overdraft to purchase raw nuts is accounted for in the price of raw nuts.

11/ Straight line. Depreciation periods: civil works and water development 25 years,

equipment 15 years, vehicles 5 years, professional services 10 years. Investment costs are

averaged for the three factories and were extracted from Table 23.

12/ Half of the funds for factory construction and factory staff training are passed on to CATA

as equity. The other half is onlent at 10% interest rate, 15 years repayment period including

5 years of grace during which interest is capitalized.

TANZANIA

SECOND CASPEWNUT DEVELOPMENT PROJECT

Consolidated Cash Flow Statements for the Project's Factories(Tsh Million)

1 2 3 4 5 6 7 8 9 10 20

I. Kibaha Factory

Operating Income (Loss) - ( 2.6) 6.1 20.3 25.5 29.3 31.4 33.3 33.3 33.3 33.3Depreciation - ( 2.4) ( 4.8) ( 4.8) (4.8) (4.8) (4.8) (4.8) (4.8) (4.8) (4.8)Interest on Long-Term Loans - - - - (3.3) (6.3) (5.6) (5.0) (4.3) (3.7) -

Net Income Before Taxes - ( 4.8) 1.3 15.5 17.4 18.2 21.0 23.5 24.2 24.8 28.5

Loan Repayments - - - - (3.3) (6.5) (6.5) (6.5) (6.5) (6.5) -

Mtw.,-ara Pactory

Operating Income (Loss) - ( 1.2) 0.3 19.9 24.6 29.3 31.4 33.3 33.3 33.3 33.3Depreciation - ( 1.2) ( 4.8) ( 4.8) (4.8) (4.8) (4.8) (4.8) (4.8) (4.8) (4.8)Interest on Long-Term Loans - - - - (1.7) (6.4) (5.8) (5.1) (4.5) (3.8) -

Net Income Before Taxes - ( 2.4) ( 4.5) 15.1 18.1 18.1 20.8 23.4 24.0 24.7 28.5

Loan Repayments -- - - (1.6) (6.5) (6.5) (6.5) (6.5) (6.5) -

III. Kibaha Factory

Operating Income (Loss) - - ( 4.0) 12.5 22.8 28.3 31.4 33.3 33.3 33.3 33.3Depreciation - - ( 3.6) (4.8) (4.8) (4.8) (4.8) (4.8) (4.8) (4.8) (4.8)Interest on Long-Term Loans - - - - - (5.0) (6.1) (5.5) (4.8) (4.2) -

Net Income Before Taxes - - ( 7.6) 7.7 18.0 18.5 20.5 23.0 23.7 24.3 28.5

Loan Repayments - - - - - (4.9) (6.5) (6.5) (6.5) (6.5) -

IV. Conuolidated

Net Income Before Taxes - ( 7.2) (10.8) 38.3 53.5 54.8 62.3 69.9 71.9 73.8 85.5Taxes - 3.6 5.4 (19.1) (26.7) (27.4) (31.2) (34.9) (35.9) (36.9) (42.7)Net Income After Taxes - ( 7.2) (10.8) 19.2 26.8 27.4 31.1 35.0 36.0 36.9 42.8Depreciation - 3.6 13.2 14.4 14.4 14.4 14.4 14.4 14.4 14.4 14.4Loan Repayments - - - - (4.9) (17.9) (19.5) (19.5) (19.5) (19.5) -

Initial Working Capital - 4.5 12.3 1.5 - - - - -

Net Factories Cash Flow - 4.5 20.8 35.1 36.3 23.9 26.0 29.9 30.9 31.8 57.2

1/ In current prices. Projections are based on July 1978 prices, and an inflation rate of7.57. in 78/79, 77. from 79/80 to 85/86, and thereafter. Year 1 corresponds to financialyear beginning July 1, 1978. This Table is derived from Table 26 and the implementationschedule.

April 18, 1978

Table 28

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Cash Flow Statements for CATA V(Tsh Willion)

0 1 2 3 4 5 6 7 8 9 10 20

A. WITHOUT PROJECT

(a) Raw Nut Exports:Exports (ton OO0).V 85 62 53 44 43 41 41 40 40 40 40 40Margin 3J 44.2 32.2 29.6 26.4 27.5 28.2 30.0 31.4 33.2 33.2 33.2 33.2

(b) Factories' Income 4/:Income before Interest

and Taxes 5 21.3 (18.4) (7.2) 63.0 64.1 112.1 129.4 140.9 151.2 151.2 151.2 151.2Less: Interest -i (8.6) (9.4) (10.1) (0.1) (10.1) (8.9) (7) (6.3) (5.0) (3.8) (2.5) -

Sub-Total 12.7 (27.8) (17.3) 52.9 54.0 103.2 122.0 134.6 146.2 147.4 148.7 151.2

(c) Net Income before Taxes 56.9 4.4 12.3 79.3 81.5 131.4 152.0 166.0 179.4 180.6 181.9 184.4Taxes 28.4 2.2 6.1 39.6 40.7 65.7 76.0 83.0 89.7 90.3 90.9 92.2Net Income after Taxes 28.5 2.2 6.2 39.7 40.8 65.7 76.0 83.0 89.7 90.3 91.0 92.2

(d) Depreciation 3.0 9.1 22.4 25.6 29.9 32.3 32.3 32.3 32.3 32.3 32.3 32.3

(e) Principal Repayments (3.6) (8.2) (9.3) (10.0) (16.3) (16.4) (16.4) (16.4) (15.8) (14.7) (14.0) -

Net Cash Flow 27.9 3.1 19.3 55.3 54.4 81.6 91.9 98.9 106.2 107.9 109.3 124.5

B. PROJECT CASH FLOW

(a) Factories' Cash Flow V - - 4.5 20.8 35.1 36.3 23.9 26.0 29.9 30.9 31.8 57.2

(b) Revenue Foregone on RawNuts Exports 7/ - - (1.5) (6.1) (7.9) (9.2) (10.2) (11.2) (11.8) (11.8) (11.8) (11.8)

(c) Other Loans 8/- - - - - - (7.9) (7.7) (7.5) (7.1) (6.9) -

ProJect Cash Flow - _ - 3.0 14.7 27.2 27.1 5.8 7.1 10.6 12.0 13.1 45.4

C. CATA CASH FLOW WITH PROJECT 27.9 3.1 22.3 70.0 81.6 108.7 97.7 106.0 116.8 119.9 122.4 169.9

1/ In current prices. Projections are based on July 1978 prices, and an inflationrate of 7.5% 78/79, 7% from 79/80 to 85/86, and zero thereafter. Tear 1corresponds to financial year baginning July 1, 1978.

2/ Not taking into account the planting programme, and assuming all CATA's factoriesoperate at 95% of capacity.

3/ Tsh 520 per ton (see Table 16) in July 1978 prices.4/ Excluding the factories proposed under the Project.5/ Information provided by CATA. Interest on long-term loans from the Treasury

(20 years, 8-1/2%), the Tanzania Investment Bank (15 years, 10%), the Bankof Sicily (15 years, 7%), and the Export-Import Bank of Japan (13 years, 6-1/2%).

6/ From Table 27.7/ Tsh 520 per ton in July 1978 prices, less 50% to take into account the decrease

in taxes due to lower income.8/ Interest and principal repayments for 50% of the funds passed on to CATA to

financed technical assistance not benefiting the Project factories directly.Half of interest payments are offset by tax effect.

April 18, 1978

Table 29

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Government Project Related Cash Flow-l

(Tsh Million)

1 2 3 4 5 6 7 8 9 10 20

SOURCES OF FUNDS

Factories' Operation:Increase (Decrease) in Tax Revenues 2/ - (3.6) (5.4) 19.1 26.7 27.4 31.2 34.9 35.9 36.9 42.7Tax on Margin on Raw Nuts Exports 3IF - (1.5) (6.1) (7.9) (9.2) (10.2) (11.2) (11.8) (11.8) (11.8) (11.8)Export Tax on Raw Nuts Foregone 4/ -__ (0.4) (1.5) (2.0) (2.2) ( 2.5) ( 2.7) ( 2.9) ( 2.9) ( 2.9) ( 2.9)

Sub-Total - (5.5) (13.0) 9.2 15.3 14.7 17.3 20.2 21.2 22.2 28.0

Revenues from Loans to CATA:Loans for Factories 2/

Interest Payments - - - - 5.0 17.7 17.5 15.6 13.6 11.7 -Principal Repayments - - - - 4.9 17.9 19.5 19.5 19.5 19.5 -

Other Loans 5Interest Payments - - - - - 2.6 2.4 2.2 1.8 1.6 -Principal Repayments - - - - - 5.3 5.3 5.3 5.3 5.3 -

Sub-Total - - - - 9.9 43.5 44.7 42.6 40.2 38.1 -

External Financing:IDA Credit 124.0 62.4 19.0 8.8 9.4 5.8 - - - - -

TOTAL SOURCES OF FUNDS 124.3 56.9 6.0 18.0 34.6 64.0 62.0 62.8 61.4 60.3 28.0

APPLICATION OF FUNDS

Project Implementation 6/ 156.3 79.9 21.4 9.5 10.1 6.3 - - - - -

External Debt Service:IDA Service Charge 0.5 1.2 1.5 1.6 1.6 1.7 1.7 1.7 1.7 1.7 1.5Repayments to IDA - - - - - - - - - 2.3 6.9

TOTAL APPLICATION OF FUNDS 156.9 81.1 22.9 11.1 11.7 8.0 1.7 1.7 1.7 4.0 8.4

Net Cash Flow before CATA's Surplus (32.9) (24.2) (16.9) 6.9 22.9 56.0 60.3 61.1 59.7 56.3 19.6

Consolidated CATA/Govt. Cash Flow -7/ (32.9) (21.2) ( 2.2) 34.1 50.0 61.8 67.4 71.7 71.7 69.4 65.0

I/ In current prices. Projections are based on July 1978 prices, and an inflationrate of 7.5% in 78/79, 7% from 79/80 to 85/86, ard zero thereafter. Year 1corresponds to financial year beginning July 1, 1978.

2/ From Table 27.3/ 50% of Tsh 520 per ton in July 1978 prices.4/ About Tsh 63 per ton of raw nuts in July 1978 prices (Table 16).5/ See Table 28, line B (c) and footnote 8.6/ From Table 22.7/ CATA's project surplus is in Table 28.

April 18, 1978

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Foreign Exchange Earnings and Expenditures -

(Tsh Million)

1 2 3 4 5 6 7 8 9 10 20

Sale of Factories' Production - 15.5 79.6 149.3 183.7 205.1 220.6 233.8 233.8 233.8 233.8

Less:Operating Costs and Replacements - 1.5 6.1 7.7 8.6 9.1 9.8 10.4 10.4 10.4 10.4

Raw Nuts Sales Foregone 1/ 16.9 68.8 89.5 104.5 112.5 120.5 127.7 127.7 127.7 127.7

Net F.E. Earnings (Losses)Before Debt Service - ( 2.9) 4.7 52.1 70.6 83.5 90.3 95.7 95.7 95.7 95.7

Less: IDA Credit Debt Service 0.6 1.2 1.5 1.6 1.6 1.7 1.7 1.7 1.7 4.0 8.4

Net F.E. Earnings (Losses) (0.6) ( 4.1) 3.2 50.5 69.0 81.8 88.6 94.0 94.0 91.7 87.3

1/ In current prices. Projections are based on July 1978 prices, and an inflation rateof 7.57 78/79, 7% from 79/80 to 85/86, and zero thereafter. Year 1 corresponds tofinancial year beginning July 1,1978.

2/ Based on export price of Tsh 2,800 per ton.

April 10, 1978

TANZANI4

Table 31SECOND CASEiEWNUT DEVELOPIENT PROJECT

Economic Rate of Return Calculation(Tsh Million)

Cost and Benefics Stream - No Shadow Pricing Derivation bf Shadow Prices 4/

1 2 3 4 5 6 7 -25 Foreign Echsnge x Fa-tor

Capital Costs 1/ 143.8 73.8 15.0 5.9 5.9 2.8 _ 80 1.36

Operating Costs: 2/Raw Nuts 3/

Kibaha - 9.7 20.8 23.4 24.7 24.7 24.7Mtwara - 4.9 20.2 22.7 24.7 24.7 24.7Newala - - 14.6 21.5 24.1 24.7 24.7

Total Raw Nuts - 14.6 55.6 67.6 73.5 74.1 74.1 _ 1.47 5/

Salaries and Wages 2Kibaha - 3.1 6.2 6.2 6.2 6.2 6.2Mtwara - 1.5 6.2 6.2 6.2 6.2 6.2Newala - - 4.7 6.2 6.2 6.2 6.2

Total Salaries and Wages - 4.6 17.1 18.6 18.6 18.6 18.6 - 0.75

Other Operating Costs 2VKibah- - 1.5 3.2 3.4 3.6 3.6 3.6Mtwara - 0.8 3.2 3.5 3.6 3.6 3.6Newala - - 2.4 3.5 3.6 3.6 3.6

Total Other - 2.3 8.8 10.4 10.8 10.8 10.8 60 1.28

Sales 2Kibaha - 9.6 30.1 43.6 47.5 48.7 48.7Mtwara - 4.8 24.6 42.3 46.8 48.7 48.7Newala - - L4.4 35.6 44.9 48.1 48.7

Total Sales - 14.4 49.1 121.5 139.2 145.5 146.1 100 1.45

1/ Fro= Table 23, including physical contingencies. Investment in CNSL tankers and partof the professional services (finance director, engineering adviser, managementinformation system) will benefit all factories operated by CATA. Only 272 of thesecosts has been lloted to the project (ratio of the project processing capacity tothe total proceasing capacity).

2/ Based on Table 26 phased according to the implementation scheduLe.3/ Based on export price of Tsh 2,800 per ton FOB (Table 14), i.e. Tsh 2,600 per ton into factory.4/ Costs and benefits streams with the use of shadow prices are derived from costs and benefits

streams without shadow pricing by shadow pricing the foreign exchange component of the streams,using the exchange rate US$ 1.0 . Tsh 12.0 (official erchange rate is US$ 1. - Tsh 8.30. Theeconomic cost of rsw nuts is calculated in Table 14. Labor is shadow priced at 753 of itsactual value.

5/ See Tsble 14.

April 3, 1978

Table 32

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Economic and Financial 1/ Rates of Return Sensitivity Analysis

Hypothesis ERR (%) FRR (%)

1. Base estimate (factories operating at95% of maximum capacity) 16 12

2. Factories operating at 80% of maximumcapacity 13 9

3. Factories operating at 70% of maximumcapacity 11 6.5

4. Change in sales due to a change ofkernel prices, with an accompanyingchange in raw nuts prices:

- decrease of 10% 13.5 9.5- decrease of 20% 11.5 7.0- increase of 10% 18 14- increase of 20% 20 16

5. Change in raw nut export price, withoutan accompanying change in kernel prices:

- decrease of 10% 18 14- decrease of 20% 20.5 16.5- increase of 10% 13 9- increase of 20% 10.5 6.5

6. Delay of one year in commencing thefactories' operation 15.5 10.5

7. Increase of 10% of Capital Costs 15 11

1/ Before Taxes in constant 1978 terms.

ANNEX 2

TANZANIA

SECOND CASHEWNUT DEVELOPMENT PROJECT

Selected Documents and Data Available in the Project File

A. Selected Reports and Studies on the Sector or Sub-Sector

Al. CASHEW PROCESSING, Evaluation of mechanical processingmethods, equipment suppliers and operational plants.

A2. Price Policy Recommendations for the 1977/78 AgriculturalPrice Review, five volumes, Marketing Development Bureau,Dar es Salaam, July 1976.

B. Selected Reports and Studies Relating to the Project

Bl. Proposal for a Second Phase Cashewnut Development Project,Ministry of Agriculture, Tanzania, October 1976.

B2. Coast Region Hieadquarters, Kibaha New Urban Area,Norman and Dawbarn, Architects Consulting Engineers,Town Planners.

TANZANIASECOND CASHEWNUT DEVELOPMENT PROJECT

THE CASHEWNUT AUTHORITY OF TANZANIA

80ARO OFDIRECTORS

GENERAL MANAGER

INTERNALAUDITORl

DIRECTOR OF DIRECTOR OF DIRECTOR OF

CROP DIRECTOR OF MANPOWER FACTORtY

DEVELOPMENT MARKETING DIRECTOR OF DEVELOPMENT OPERATIONS

AND AND PLANNING FINANCE AND AND

PROCUREMENT ADMINISTRATION DEVELOPMENT

ZONAL CASHEW ~CROP ZNLPANN

Z ENll CAHPROCUREMENT ZNLPANNIN PUBLIC MANPOWER ADMINIS- FACTR

MANAGR DEVELOPMENT ADMANAGER MANDE EXOT OEAINHE

(NORTHERN) AND RESEARCH RANSSOUTHERN) NAGER ACCOUNTANT ACCOUNTANT RELATION DEVELOPMENT TRATIVE

ZONE MANAGER TRANSPO"T RESEARCH MANAGER MANAGER MANAGER MANAGER 4NGINEER

MAANAGER ZONE RESAEARC

WoOd BanE - 17944

TANZANIASECOND CASHEWNUT DEVELOPMENT PROJECT

IMPLEMENTATION SCHEDULE

1978 1979 1980 1981

1"| I2 3 4 1 2 3 4 1 2 3 4 1 2

CONTRACT WORKS

CIVILWORKS AWARD COMMENCE

KIBAHA AI~IId CONSTRUCTIONKIBAHA - -_ UTOMOBI LIZATiON

I I ~~~~~~CONSTRUCTIONMTWARA I W A _ -_MOBILIZATION

CONSTRUCTIONNEWALA mrFP eA ~

MOBILIZATION

EQUIPMENT

MANUFACTURING AND DELIVERY INSTALLATION TESTINGK I BA H A 1 2 IIa

.MANUFACTURING AND DELIVERY INSTALLATION TESTINGMTWARA I I II

MANUFACTURING AND DELIVERY INSTALLATION TESTINGNEWALA I 7 ] w i

World Bank -18330

IBRD 13096

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AFzLCA SECO-ND CASNENTDVLfMN RJC

TAN OA~MTW-ARA ro erty

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131,1500 AO -,6`~~qddp97074ybyCATA

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Sre ""~KEINYA

K140. Urambo Tabora Singid on oa gw~~~~~~~~~~~~~~~~Kdogv8 Tno '

Kilosa Morogoro ~ Pang

0' sa250 6,0

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r7,000 8

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lvuna~~~ h.nyo Mohengeeb

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-lCuYY a amo upembe* rneo 3i500v

I~~LOI.4ETERS . A (100001 Prt.Lwal

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~~~ " Mbombo Bay -~~~~~~~~~~~~~~~N

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