Document of

The World Bank

Report No. P-3546-TAREPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED DEVELOPMENT CREDIT

OF SDR 16.7 MILLION

(AN AMOUNT EQUIVALENT TO U$$18 MILLION)

TO THE

UNITED REPUBLIC OF TANZANIA

FOR THE

MUFINDI PULP AND PAPER MILL - TECHNICAL ASSISTANCE

AND

ENERGY CONVERSION PROJECT

May 2, 1983

This report may not be published nor may it be quoted as representing the views of the World Bank.The World Bank does not accept responsibility for the accuracy or completeness of the report.-

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CURRENCY EQUIVALENTS

Currency Unit = Tanzania Shilling (TSh)TSh 1.00 = US$0.107US$1.00 = TSh 9.43US$1.00 = SDR 0.927

(As the Tanzania Shilling is officially valued in relation to a basket ofthe currencies of Tanzania's trading partners, the USDollar/TanzaniaShilling exchange rate is subject to change. Conversions in this reportwere made at US$1.00 to TSh 9.43 which was the level set in the mostrecent exchange rate adjustment in March 1982. The USDollar/SDR exchangerate used in this report is that of March 31, 1983.)

WEIGHTS AND MEASURES

1 metric ton (t) = 1,000 kilograms (or 2,204 pounds)i meter (m) = 39.37 inches1 cubic meter (3) = 35.31 cubic feet1 kilometer (km) = 0.621 mile1 hectare (ha) = 2.47 acres

ABBREVIATIONS AND ACRONYMS

CDC - Commonwealth Development CorporationKfW - Kreditanstalt fur WiederaufbauNDC - National Development CorporationNIB - Nordic Investment BankOMC - Operating Management Contract (Contractor)SIDA - Siwedish International Development AuthoritySPB - Seshasayee Paper and Boards Limited, IndiaSPM - Southern Paper Mills Company LimitedStothert - Stothert International Corporation, CanadaTAC - Tanzania Audit Corporation

TANESCO - Tanzania Electric Supply CompanyTANZAM - Tanzania-Zambia HighwayTAZARA - Tanzania-Zambia Railway AuthorityTWICO - Tanzania Wood Industry Corporation

]FISCAL YEAR

Government - July 1 to June 30

NDC and subsidiar:Les: January to December 31

FOR OFFICIAL USE ONLY

TANZANIA

MUFINDI PULP AND PAPER MILL - TECHNICAL ASSISTANCE

AND

ENERGY CONVERSION PROJECT

Credit and Project Summary

Borrower: United Republic of Tanzania

Beneficiaries: National Development Corporation (NDC)and Southern Paper Mills Company Limited (SPM).The Government would make the proceeds of thecredit available through NDC to SPM as shareholder

equity.

Amount: SDR 16.7 million (US$18 million equivalent).

Terms: Standard.

Project Description: The project would assist SPM to manage and operatethe Mufindi Pulp and Paper Mill, which is currentlyunder construction, and to market its output. Theproject would (i) provide SPM with expatriatemanagement services for six years, including aboutone year prior to the start-up of the first papermachine in July 1984, (ii) convert the existingpower boiler from dependence on oil/coal to onethat can also use fuelwood from the nearby Sao Hillforestry plantations, and provide SPM with relatedwood harvesting and transport equipment and (iii)supply imported fuel and pulp to the mill for thefirst six months of operation, and other materialsand supplies (chemicals, spares, consumables, etc.)for about the first three years of operations.

Benefits: The project would allow Tanzania to operate itslargest industrial facility based on localresources and to achieve significant foreignexchange benefits through import substitution andexport earnings. On a sunk cost basis, the projectwould have an economic rate of return of 20%.The project would also facilitate steady progresstowards output levels, export sales and trainingtargets necessary for ensuring financialself-sufficiency for the Mufindi pulp and papermill and eventual replacement of expatriate staffwith Tanzanian personnel.

Risks: The project would face significant risks, includingthe mill's possible inability to reach assumedlevels of capacity utilization for exogenousreasons, such as the lack of imported supplies and

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

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transportation bottlenecks. Domestic demand forpulp and paper products may rise more slowly thanexpected as a result of slow overall growth in theeconomy, and the mill may not be able to penetratenew export markets sufficiently to sell all of itsoutput and generate adequate foreign ex-hange tomeet its long term import requirements. Some ofthese risks would be addressed directly throughfinancing of the mill's initial import nteeds andensuring it ready access to foreign exclhangeresources through a specia L external acc-ount. Theoperating management firm would receive significantbonuses for good sales perf ormance and hasconsiderable knowledge of a key export mnarket(India). There is also a risk that Tanzaniapersonnel may not be able to replace allinternationally recruited staff over a six-yearperiod. The operating management firm would havespecific training incentives in its contract, whichshould reduce this risk. Extensive trai-ning ofTanzanian personnel has also been undertaken underthe existing project.

Estimated Local Foreign TotatlProject Costs: 1 -US$ million---------

Operating Management Servicas 3.5 18.9 22.4Energy Conversion

Boiler 0.3 2.5 2.8Fuelwood Harvesting 0.3 4.0 4.3

Import Requirements - 10.0 10.0

Sub-total 4.1 35.4 39.5

Contingencies:Physical 0.4 1.2 1.6Price 0.5 3.4 3.9

Total 5.0 40.0 45.0

Financing Plan: Local Foreign Total--------- US$ -million---

IDA - 18.0 18.0SIDA - 13.5 13.5Federal Republic of Germany (KfWt) - 8.5 8.5Government 5.0 - 5.0

Estimated Disbursements:

IDA Fiscal Year 1984 1985 1986 1987 1988 1989 1990-US--------------us$ million------------------

Annual 3.4 3.8 5.1 2.6 1.6 1.1 0.4Cumulative 3.4 7.2 12.3 14.9 16.5 17.6 18.0

'The project would be exempted from identifiable taxes and duties.

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Rate of Return: 5% (on basis of full project cost); 20% (onbasis of treating all previous expenditures assunk costs).

Staff Appraisal Report: No separate Staff Appraisal Report has beenprepared.

Map: IBRD Map No. 13486.

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS

ON A PROPOSED CREDITTO THE UNITED REPUBLIC OF TANZANIA

FOR THE MUFINDI PULP AND PAPER MILL - TECHNICAL ASSISTANCEAND

ENERGY CONVERSION PROJECT

1. I submit the following report and recommendation on a proposedcredit to the United Republic of Tanzania of SDR 16.7 million (US$18.0million) equivalent on standard terms to help finance the Mufindi Pulp andPaper-Technical Assistance and Energy Conversion Project. The proceedsof the credit would be passed on to the National Development Corporationand Southern Paper Mills Company as equity.

PART I - THE ECONOMY

2. The last economic memorandum on Tanzania (Report No. 3086-TA) wasdistributed to the Executive Directors on January 23, 1981. A revisedmemorandum, based on the work of two economic missions which visitedTanzania in July and September 1982, will be issued in late 1983.

Background

3. At Independence in 1961, Tanzania (then Tanganyika) was one ofthe poorest countries in the world. Almost solely dependent on subsistenceagriculture and a few estate crops, the country had a very modest indus-trial base (less than 5% of GDP), and a very small number of educated andtrained personnel. For the first six years after Independence, the Govern-ment's development objectives resembled those of many other less developedcountries, stressing growth in per capita income and national self-suffi-ciency in skilled manpower, based on market forces and capital intensiveagricultural projects. This approach had a number of drawbacks, such ashigh investment costs in the agricultural sector, and led in the Govern-ment's view to unacceptable economic and social conditions, such as widen-ing income differentials and unequal opportunities for advancement in therural areas. In response to this situation, the national developmentstrategy was reassessed in 1967. The new priorities, enunciated in theArusha Declaration and related policy statements, were directed towardsestablishing a socialist society, with greater emphasis on broad-basedrural development, self-reliance in development efforts, and the intro-duction of mass education. To accomplish these ends, the State, withguidance from the Party, was expected to play the leading role, especiallyin the reform and creation of appropriate institutions. This led in thelate 1960s to the nationalization of large-scale industry, commerce andfinance, the creation of numerous parastatal bodies, the formation ofujamaa (cooperative) villages, the decentralization of Government (1972),and the mass campaign of villagization (1974-76).

4. Despite some disruption arising from these major institutionalchanges during the period, Tanzania managed to show improvements both insocial welfare and in macroeconomic performance. Primary School enroll-ments increased by more than 50%, life expectancy rose by almost 5 years,and access to safe water increased in both the rural and urban areas. GDPgrew by 4.4% per annum from 1966 to 1973, investment averaged 24% of GDPfrom 1970 to 1973, and domestic resource mobilization :improved with recur-rent revenues rising from 15% of GDP in 1967/68 to 19% in lthe mid 1970s.However, the productive sectors grew slowly and the rate oiF return on newinvestments (which was centered on the industry and transport sectors) waspoor. Perhaps the principal disappointment was in agriculture, the domi-nant sector in the economy, which grew by only 2.3% per anium from 1966 to1973. This growth was also uneven among regions and precluded any narrow-ing of rural-urban income differentials. Tanzania made rapid progresstowards localizing key posts in the economy, but large gaps in manpowerrequirements remained. DependerLce on foreign aid to finance both domesticinvestment and the widening balance of payments gap also increased. By1973, the issues which were to be so important for Tanzania throughout the1970s and early 1980s were becoming clear: How quickly could a countrywith limited trained personnel develop a strong and efficient centrallyadministered economy? The Government's emphasis on equity was often at theexpense of efficiency and incentives; how long could the country affordthese costs? What could be done to improve theX growth rate of themonetized, productive sectors?

5. The oil price increases and world recession of 1973-74 coincidedwith two years of below average rainfall in Tanzania. Agricultural produc-tion also was affected by disruptive changes in the rural areas at thistime (decentralization and villagization), and there was a serious short-fall in foodgrain production. The Government was forced into the worldmarket, making large purchases of foodgrains for cash. Export cropproduction also fell during this period and the barter terms of tradedropped by about one-third during these two years. As a result, thecurrent account deficit rose from US$118 million in 1973 to around US$340million in both 1974 and 1975. Domestically, the recurrent budget fellinto deficit and Government bank borrowing rose from TSh.416 million in1973/74 to TSh.1061 million in 1]975/76.

6. The Government prepared a program to deal with at least theshort-term effects of the crisis and was able to receive some assistancefrom the IMF and a program l-oan from the Bank. Under this program, importlevels were tightly restricted, wages were frozen, government developmentexpenditures were redirected towards the productive sectors, and theTanzanian shilling was devalued by 10% against the SDR. Producer pricesfor food crops were substant:ial:Ly increased and at the same time, theNational Milling Corporation (NMC) was instructed to purchase a number ofdrought-resistant crops such as cassava, sorghum, and pigeon peas in addi-tion to the usual foodgrains like maize. While these steps were taken toincrease food production, they also discouraged the production of exportcrops, weakened the financial position of NMC and required the bankingsystem to extend large amounts of credit to NMC. Aside from the devalua-tion, little scope was given to market forces and Tanzania made no basicchanges in its system of administered prices and government controls. Thebasic weaknesses of the economy persisted: declining export volumes,

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limited trained manpower, disappointing growth in the monetized andproductive sectors, and poor maintenance of existing capital stock andinfrastructure, especially in agriculture and transport.

7. Nonetheless, the Government program, boosted greatly by thecoffee boom of 1977, additional foreign assistance and reasonable weatherfor agriculture, was able to keep the economy in balance until 1978.During 1978, the overly stringent import controls were relaxed at the sametime as the terms of trade began to deteriorate again. The balance ofpayments went into deficit and foreign reserves were drawn down. Then, inOctober 1978, the country was invaded by forces from Uganda. The resultingwar, the oil price increases of 1979 and flooding and drought in differentparts of Tanzania led to a worsening balance of payments deficit and theGovernment built up major arrears on its import payments for the first timesince Independence. The domestic budget fell heavily into deficit asexpenditures (led by defense) rose by 50% from 1977/78 to 1978/79 andrevenues improved by only 10%. As a result, Government borrowing from thebanking system increased from TSh. 600 million in 1977/78 to more thanTSh. 3,000 million in 1978/79. Such borrowing was the major factor inmoney supply growth, which exceeded 53% in this period.

8. According to the official National Accounts statistics, GDP inconstant prices has risen by 4.7% per annum since 1966, and by a slightlyhigher rate of 5.1% per annum over the past six years. However, thislatter trend assumes an 8.6% per annum increase in subsistence agriculture,which seems somewhat overstated in the light of Bank Group projectexperience and the known marketed surpluses of food. Assuming a morerealistic growth rate of 4.0% per annum for subsistence agriculture,overall GDP growth since 1973 would also be reduced to 4.0% per annum.With population growing by around 3.3% per annum, this implies an increasein per capita GDP of only 0.7% per annum. There also has been a change inthe structure of the economy over the past seven years, away from theproductive monetary sector and towards subsistence and service activities.Excluding public administration, commercial services and trade, themonetary sector has grown by only 2.3% per annum over the past seven years,well below the population growth rate. This change in the structure of theeconomy has been a major factor hampering the Government's efforts tomobilize domestic resources.

9. Although Tanzania has sustained a high investment ratio, this hasnot been matched by a similar success in the mobilization of domesticsavings or in the return on investments. Up to the mid-1970s, foreignsavings had financed 20%-40% of domestic investment. However, the depend-ence on foreign savings- rose sharply to more than 60% of domestic invest-ment during the crisis years of 1974-75 and again from 1978. The majorshortfalls in domestic savings have occurred in the Government sector,where they have actually been negative in some years since 1975. The lowreturn on investments is reflected in the incremental capital-output ratiofor the monetary sector, which was around 4.5 at the start of the decadeand rose to between 6 and 7 by 1980.

10. Agriculture remains the most important sector in Tanzania,accounting for 90% of total employment, 50% of GDP and 80% of exports. Thelong-term trend growth rate of agricultural production has hardly kept pace

with population growth and apparently has fallen in more recent years asthe initial expansion of export crop production (through the mid-1960s) hasbeen reversed. This poor performance cannot be adequately explained by thelimitations of the natural environment. Although the importance of ruraldevelopment has continuously been highlighted in Government statements,including the Arusha Declaration and successive plans, this has not alwaysbeen reflected in the allocation of resources to the agricultural sector orin policy formulation and implementation. The general direction of theGovernment's post-Arusha agriculture strategy has also tended to emphasizethe transformation of the institutional structure of rural development(through the formation of villages and increasing public involvement in thesector) over measures designed to improve agricultural production direct-ly. Many of these institutional changes were introduced too rapidly, with-out careful planning or sufficient recognition that by themselves theycould not compensate for inadequate incentives and shortages of skilledmanpower and managers. More recently there has been a greater awareness ofthe role of incentives, and recent price adjustments attest, to the Govern-ment's willingness to use them to influence the pattern of agriculturalproduction. Available manpower, however, is still stretche!d rather thinlythroughout the sector, mainly because of the predominant role assigned tothe public sector. This has resulted in weakened capacity for policyplanning and implementation, especially in the areas of research andextension, and deficient distribution of fertilizers and other on-farmsupplies and equipment. Another factor underlying the poor performance ofagriculture has been the deterioration of transport services. Road, railand water services have declined. owing to a lack of spare parts, poormaintenance and inadequate planning and management.

The Current Balance of Payments Crisis and Medium Term Prospects

11. The slow growth in. agricultural production, transport bottlenecksand external shocks described above have all contributed to the severedeterioration in the balance of payments over the past three years. Exportvolumes have fallen to a level one-third below the peaks of the mid-1960sand early 1970s. Furthermore, the terms of trade have decLined by 27%since the coffee boom of 1977, due to a sharp increase in import costs,especially for petroleum, at. a time when the overall level of export priceshas been rising very slowly. Oring to these adverse developments, thepurchasing power of Tanzanias's exports in 1980 was one-third lower than in1977 and only one-half of tbhe 19166 level. Part: of this shortfall has beenoffset by additional external resources, including a sharp increase incommodity and program aid to more than US$200 million in 1980, as well asby drawings under the IMF st:andby program concluded in September 1980. ButTanzania has also had to utilize large amounts of excepticonal financing,including suppliers' credits and an increase in import payment arrears.Despite this, the volume of imports has had to be severely curtailed, andin 1982, was still no higher than in the mid-1970s.

12. Given the deterioration in international commodity prices,as well as the limited SCOpE! for further exceptional financing, there islittle immediate prospect for an improvement in the balance of payments.This continuing balance of payments constraint is inevitably having adebilitating effect on the economy, with lower imports reducing production.and maintenance of existing assets, resulting in further falls in exports

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and available foreign exchange. This vicious circle will be difficult tobreak, unless there is a substantial injection of foreign exchange andmajor improvements in producer incentives, parastatal operations, importallocations, the promotion of non-traditional exports, and overallgovernment planning and budgeting. In March/April 1981, the Governmentintroduced a number of significant measures--such as higher producer pricesfor coffee, sisal and tobacco and the establishment of a SpecialAgricultural Account at the Bank of Tanzania to ensure that a substantialproportion of foreign exchange earnings are returned to the agriculturalsector. This Export Rehabilitation Program was supported by a US$50million credit from IDA (Cr. No. 1133-TA).

13. During negotiations of the Export Rehabilitation Credit in March1981, agreement was also reached on a Memorandum of Understanding onFollow-Up Measures. These included more restraint and selectiveness in thepublic investment program, more emphasis in the recurrent budget on theoperations and maintenance needs of the economy, improved foreign exchangebudgeting, a re-examination of the roles (particularly purchasing mandates)of the State-owned crop authorities, the introduction of more payment-by-results schemes in industry and a review of subsidy and cost recoveryarrangements in the public sector. The Government also agreed that anindependent Advisory Group would be established to assist the Government inpreparing a comprehensive program of economic rehabilitation and recovery.

14. The Advisory Group began work in November 1981 and completed itsReport in April 1982. The Government adopted a large number of itsrecommendations and incorporated these in a Structural Adjustment Programwhich was issued in July 1982. This Program includes a series ofimportant initiatives and proposals. The development budget for 1982/83has been substantially cut back for the second year in a row to releaseresources for the operations and maintenance needs of the economy.Difficult decisions have been taken in the light of limitations onavailable foreign exchange and physical resources. The price controlsystem has been reviewed and food marketing arrangements are to bereorganized. The Government has begun to allocate a larger, though stillinadequate, share of foreign exchange resources to agriculture through theSpecial Agricultural Account established under the Export RehabilitationProgram. Agricultural producer prices have been adjusted to maintain thembroadly constant in real terms, and the Government has announced itsintentions to relax restrictions on interregional trade. It has alsoopened up the marketing of some funds (mainly minor grains such as millet)to anyone interested in conducting such trade. Special steps are beingtaken to control Government recurrent spending and to reduce parastatallosses. The functions of key agricultural agencies are being reduced andwill be taken over by other bodies, such as cooperatives. All of thesemeasures will serve to trim overall burdens on the public sector and givefurther encouragement to smallholder production.

15. However, while most of the key issues of economic recovery havebeen raised in the Government's Structural Adjustment Program, importantdecisions remain to be taken on matters such as the exchange rate and realadjustments to agricultural prices. Furthermore, the Government has yet tocomplete the preparation of specific action programs in key sectors (e.g.transport) which would have a measurable impact on production. In

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the most important economic sector - agriculture - a PresidentialCommission has recently prepared a detailed set of recommendations, and aGovernment policy paper on agriculture has been issued. Measures proposedinclude the elimination of most consumer food price subsidies, reduction inthe field marketing responsibilities of the export crop parastatals,relaxation of import procedures for agricultural inputs and equipment andthe strengthening of researc]n and extension services. However, follow-upwork is still needed to permit implementation of some of these measures andto define appropriate policiess in other key areas, especially thedecentralization of input distribution and the diversification of cropmarketing channels. Further work is also necessary in estimating theresource requirements of a medium term adjustment program and indicatingprecisely how domestic and foreign exchange budgets will be administered tosupport the program.

16. A Bank economic mission reviewed the Government's program inSeptember/October 1982. The recommendations of the Government'sAgricultural Commission, and an agricultural sector report prepared by Banlkstaff were also discussed with senior Government officials in Dar es Salaamin March 1983. Bank staff will assist the Government during the next fewmonths in further strengthening its proposed agricultural rehabilitationprogram.

17. Discussions with the IMF on a possible Standby Arrangement arecontinuing. Tanzania has ha,l no access to Fund facilities since December1980, when the Government failed to meet performance targets under aprevious Standby. Following three rounds of discussions in May, June andAugust 1982, the Government invited a Fund mission to visit Dar es Salaamfor three weeks in October 1982. No agreement was reached during thismission, particularly on the appropriate magnitude of an exchange rateadjustment, and discussions were resumed briefly in Washing/ton in March1983. An IMF mission visited Tanzania again for Article IV consultationsin April 1983.

18. Even with a much improved export performance, Tanzania willcontinue to face a very difficult balance of payments situation, especiallyover the next three to five years. To sustain an increase in per capitaGDP will require increasing amounts of aid in real terms and a carefulreview of import requirements, especially those for low-priority projectswith long gestation periods and high foreign exchange costs. Otherwise theprospects would be for generally stagnant economic activity over the 1980sas a whole, with a substantial decline in per capita incomes. To avoidthis, there will need to be continued emphasis on export performance and aconcerted effort to improve the level of capacity utilization and effi-ciency in the economy. Furthermore, this must be done without jeopardizingvital food production.

19. Although it may be possible to finance a small portion of thecurrent account gap through commercial borrowings, the scope for this isclearly limited; in addition to the difficulties of raising commercialcredit during a period of balance of payments problems, Tarnzania simplycannot afford the heavy burd,en of debt service payments. Therefore, thebulk of the financing requirements will have to be met by additionalforeign assistance. Possible sources for this include further drawings

from the IMF (which could add US$100 million per annum), deferred paymentarrangements and other concessional financing from oil-supplying countries,

additional new commitments from traditional bilateral and multilateralsources, and a continued movement towards non-project assistance.

External Debt

20. Owing to the very concessional terms on which past aid has beengiven to Tanzania and the Government's previous reluctance to use highercost commercial loans and suppliers' credits, the country's overall debtservice ratio has historically been less than 10%. However, the debtservice burden is expected to increase as past loans fall due for repaymentand new borrowings, including some on commercial terms, are required tomeet the widening balance of payments gap. Such borrowings, together withvery poor export prospects, could raise the debt service ratio to 15%-20%during the 1980s. In 1981, it is estimated that the Bank held 14% ofTanzania's external debt outstanding and disbursed (for the Bank Group, itwas 33%) and the Bank Group received 21% of Tanzania's debt service.Including Tanzania's share of obligations under East Africa Communityloans, the Bank's exposure was 17% (and the Bank Group share, 36%). Thislevel of Bank exposure reflects in part the impact of recent debtwrite-offs, totalling US$277 million in 1978 and 1979. We are projectingthe Bank Group's share in debt service to fall over the coming decade owingto the reduced IBRD component in the lending program and the continued needfor Tanzania to borrow funds on less concessional terms from other sources.

PART II - BANK GROUP OPERATIONS IN TANZANIA

21. Tanzania joined the Bank, IDA and IFC in 1962. Beginning with anIDA credit for education in 1963, 54 IDA credits and 19 Bank loans, two ofthese on Third Window terms, amounting to US$1046.8 million have so farbeen approved for Tanzania. In addition, Tanzania has been a beneficiaryof 10 loans totalling US$244.8 million which were extended for thedevelopment of the common services and development bank operated regionallyby Tanzania, Kenya and Uganda through their association in the East AfricanCommunity. IFC investments in Tanzania, totalling US$4.7 million, weremade to the Kilombero Sugar Company in 1960 and 1964. This Companyencountered financial difficulties and in 1969, IFC and other investorssold their interest in the Company to the Government. A new IFC investmentof US$1.7 million in soap manufacturing in Mbeya was approved by theExecutive Directors on June 8, 1978 and an investment of US$1.5 million inmetal product manufacturing was approved in May, 1979. Annex II containssummary statements of Bank loans, IDA credits and IFC investments toTanzania and the East African Community organizations and notes on theexecution of ongoing projects.

22. Bank Group lending in Tanzania has been centered on: (i)agriculture; (ii) transport and communications; (iii) industry; and (iv)education and manpower development. Since FY81, new Bank Group lending hasbeen focussed primarily on rehabilitation and use of existing productivefacilities and the introduction of infrastructure and services (such aspower generation and education facilities) of long term use to theeconomy. Projects have been designed to minimize new demands on the

Government's recurrent, development and foreign exchange budgets; have been

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centered on already experienced or financially healthy institutions; havebeen logistically insulated, as far as possible, from general supplydifficulties in the economy; and have included considerable technicalassistance and training for better maintenance and use of existing capitalfacilities and more effective resource allocati on in the economy. Recentlending along these lines has included a seconcd petroleum explorationproject, a third technical assistance credit (focussed on key manpower gapsin the agricultural sector), and a rehabilitati-on project i-or the Dar esSalaam sewerage system.

23. A small number of other projects may be proposed in theagriculture, energy and transport sectors during the next three years. Afourth power project, a rehabilitation program for the port of Dar esSalaam and an eighth education project have been appraised. A sixthhighways project, involving mainly the reconstruction of sections of theTanzania-Zambia highway, and a sugar and cotton rehabilitation project arealso under preparation. However, the design of viable pro jects in theproductive sectors of the economy, especially aLgriculture and industry,will remain problematical iDn the absence of a wide ranging economicadjustment program.

24. In addition to financing specific prcjects, the Bank Group hasprovided non-project assistance on three occasions in support ofGovernment efforts to deal with its balance of payments dif-ficulties. Thefirst such Credit was made in 1974, the second in 1977, ancd the mostrecent, an Export Rehabilitation Program Credit (No. 11.33-TA), in April1981.

25. Project implementation in Tanzania has been adversely affectedduring the last four years by the disruptions of the Uganda. War and thecountry's extreme foreign exchange difficulties, which haves resulted inshortages of fuel and building materials, even when budgetary allocationsfor, purchasing them have been adequate. External financing agencies havebeen increasing the share of direct and indirect foreign exchange costscovered by project budgets; however, it is impossible to cuishion projectscompletely, particularly in remote areas, from the ramifications of theeconomic crisis. Despite implem[entation difficulties, disbursements haveremained remarkably steady; Bank Group disbursements grew from US$58million in FY78 to US$81 million in FY81 and reached US$114 million inFY82. A comparison with other portfolios in the Eastern Africa Regionindicates that Tanzanian disbursements have been slightly below average forthe Region, ranging as a proportion of outstanding commiitments at the startof the financial year, from 18.9% in 1976 to 15.7% in 1980 (compared with20.6% and 16.5% in the same years for the Region as a whole).

26. Supervision missions have been concerned with adapting projectimplementation to difficult factors facing the country or individualsectors, which were not anticzipated or have proved worse than expected atappraisal. A major Country Implementation Review was held in Dar es Salaamin October 1982 during which Government officials and Bank staff agreed torecommend the restructuring or discontinuation of several projects whichhave faced persistent implementation problems. At the same time it wasagreed that the Project Implementation Monitoring Unit at the Ministry ofPlanning and Economic Affairs would be strengthened as a focal point forfurther consolidation and imi?rovements in the Bank Group program.

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Intensive supervision, and in the case of the Mufindi Pulp and PaperProject, timely assistance from co-financiers have already had someremedial results. Even in the agricultural sector, where constraints onimplementation have been most severe, there have been importantimprovements in some projects, e.g. Dairy Development. However,considerable work remains to be done in improving project implementationand disbursements. The next Country Implementation Review will be held inOctober 1983.

East African Community (EAC)

27. Developments affecting the East African Community (EAC) wereoutlined to the Executive Directors in a memorandum, dated December 29,1977, (R77-312) and in a statement made on May 6, 1980 (Sec M80-364). Oneof the positive results of the ongoing mediation effort has been thePartner States' decision, taken upon the mediator's recommendation, thatthe East Africa Development Bank (EADB) -- one of the former Community'sinstitutions -- should continue, and a revised charter to this effect hasbeen enacted. The three Governments commented on the mediator's proposalsfor the three Partner States during their meeting in Nairobi in July 1981,and decided to commence negotiations based on the mediator's proposals.The negotiations started in December 1981 in Arusha and continued in April1982 in Jinja, September 1982 in Nairobi and December 1982 in Kampala.The discussions have passed the fact finding stage and are now focussing ondetails of a division formula for assets and debts. While it is generallyaccepted that both location of assets and the principle of equal rights ofall former EAC partners should be taken into account, the weight to begiven to these principles from case to case remains the major issue in thecontinuing negotiations.

PART III - THE INDUSTRIAL SECTOR

28. At Independence in 1961, Tanzania had only a rudimentaryindustrial structure, with cotton ginning being the single largestmanufacturing sub-sector. Total manufacturing employment was only about20,000 out of a total labor force of around 5 million and manufacturing andhandicrafts together contributed less than 5% of GDP.

29. With the new orientation of economic policies after the ArushaDeclaration of 1967, industrial development became a major concern of theGovernment, the primary focus being on import substitution in essentialconsumer goods and meeting the basic needs of the population. The BasicIndustrial Strategy, which was adopted by the Government in 1974, providedthe guidelines for restricting the range of products by placing emphasis onthe use of domestic resources in the production of import substitutes.Major manufacturing plants were brought under the newly establishedGovernment parastatals (companies), and these parastatals became theleading investors in medium and larger scale industrial units. However,even with the increase in parastatal activity, the private sector stillaccounted for more than two thirds of manufacturing value added.

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30. The expansion of public ownership of manufacturing enterpriseshas been accompanied by increasing reliance on direct controls inallocation decisions. Components of the control system include centralizeddecision making on investments, detailed allocations of foreign exchangethrough import licensing, credit allocations according to the annualFinance and Credit Plan, wage setting, and price controls.

31. The growth of industry until the early 1970s was significant.During 1966 to 1973, the manufacturing sector grew by 7.82 per annum andits share in total GDP incr,sased from 8% to 11%. The major contributionsto this growth came from the newly developed large-scale industries.However, even before the impact of the adverse events of the mid-1970s, thegrowth rate was beginning tD slow. Furthermore, despite the emphasis onthe development of industries producing capital and intermediate goods, thedominant activity remained the production of consumer goods: by themid-1970s, basic consumer goods--viz. food processing, beverages, tobacco,cotton, textiles and shoes--still accounted for more than one-half of valueadded and two-thirds of empLoyment in manufacturing.

32. After 1973, the performance of the industrial sector deterioratedin the wake of steep increases in the prices of imported commodities andthe acute balance of paymenls problem. From 1973 to 1979, manufacturingvalue added grew by only 1.7% per annum in real terms, with an actualdecline of 5.2% in 1979; as a result, in 1980 value added was no higherthan in 1973.

33. The principal problems facing the industrial sector at presentare the critical shortage ol- foreign exchange and low capacityutilization. In 1981, due 1:o tihe lack of foreign exchange, manufacturingenterprises received only 14% of their requested imports of raw materialscompared to 50% in 1978, andl this was further reduced in 1982. At the sametime, despite the stagnation in output, investment in new capacityincreased sharply after 1975 and more than tripled over the next fouryears. With rising import prices, the foreign exchange allocated toindustry simply has been too small to allow firms to operate efficiently.As a result, with the exception of firms producing beer and cigaretteswhere capacity utilization iis high, average capacity utilization has nowdropped to 30% compared to 70% in 1978. Other factors such asinterruptions in power and water supplies, inadlequate and costly transport,machinery breakdowns, lack of skilled labor andi experienced management, andirregular supplies of domestic inputs have also constrained industrialoutput. Employment, however, continued to grow by more than 8 percent peryear between 1973 and 1979, despite the dismal trend in output. Thedecline in productivity which this implied was particularly noticeableamong the parastatals.

34. Manufacturing exports accounted for only 6% of total exports in1978. Since 1978, the Government has given prjiority to industrial exportpromotion and has achieved some success. The value of manuafactured goodsexports increased from about: US',30 million in ]978 to US$815 million in 1980and were an estimated US$62.5 mi'llion in 1981. Most of this increase hasbeen through the expansion of trade with neighboring countries underbilateral trade agreements. The difficulty with this pattern of trade isthat most of these countries are experiencing severe balance of payments

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difficulties and payments to Tanzania in hard currencies are problematical.Tanzania has also begun discussions and concluded bilateral tradeagreements with various Eastern European countries.

35. Faced with a deepening economic crisis, the Government is showingflexibility in the implementation of some of its policies. TheGovernment's Structural Adjustment Program of 1982 recognizes theshortcomings of past policies and the need to rationalize and streamlinethe country's industrial structure, including the possibilities ofpostponing, redesigning and cancelling some existing projects and closingdown inefficient firms. At the same time, the Program gives priority toincreasing the capacity utilization of the efficient firms producingessential goods for the domestic market and completing projects based onlocal resources with significant export potential (e.g. Mufindi). The

coverage of price controls has been substantially reduced from over 2,000to around 500 items. Furthermore, enterprises have been encouraged tointroduce payment-by-results schemes and to boost labor productivity.Under the IDA financed Export Rehabilitation Program (Cr. No. 1133-TA)approved in 1981, the Government introduced a number of specific measuresto encourage nontraditional exports, including a cash export bonus scheme.

National Development Corporation and the Southern Paper Mills Company

36. The National Development Corporation (NDC) and its subsidiary,the Southern Paper Mills Company (SPM), are the co-sponsors of the proposedproject. NDC was the sponsor of the Mufindi Pulp and Paper Project(Mufindi Project) financed by the Bank and IDA (Loan No. 1650-TA/CreditNo. 875-TA) in 1979. SPM, which is responsible for the implementation andoperation of the Mufindi project, would be the ultimate beneficiary of theproposed credit.

37. NDC was established in 1964 with its headquarters in Dar esSalaam. It is Tanzania's largest parastatal holding company, in terms oftotal investment, with its plants effectively operating as separate legaland financial entities, and the country's principal instrument forindustrial investment until the Government reorganization of the industrialsector which took place during 1979/80.

38. In 1979/1980 new corporate groups were established to beindependent of NDC. All leather tanning and processing companies formedthe "Tanzania Leather Associated Industries" (TLAI); paper converting,printing and publishing companies were grouped together as the "TanzaniaKaratasi Associated Industries" (TKAI); the Tanzania Cigarette Company andTanzania Breweries became autonomous organizations reporting directly tothe Ministry of Industry; Tanganyika Instant Coffee was transferred fromNDC to the Tanzania Coffee Authority (TCA); chemicals and allied productscompanies formed "The National Chemical Industries" (NCI); and, all motorvehicle activities were transferred from NDC to the State MotorCorporation.

39. NDC's ten-man Board of Directors functions as a policy making andcontrolling body as well as a liaison and coordinating group between NDCand the Government. The influence of the Government on financial andinvestment planning is strong, although there is little direct involve-

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ment in day-to-day operational matters. NDC is: well managed and hasdemonstrated great competence in. the implementation of the MufindiProject. NDC has 227 staff (excluding the employees in subsidiarycompanies) of whom 98 are professionals (including two expatriates) servingin five operating departments: -- (i) Planning aLnd Finance; (ii) Accounting;(iii) Manpower Development; (iv) Administration; and (v) InuustrialDevelopment. The Industrial Development Department, which prepares andimplements projects for NDC as well as monitors existing operations, isorganized into five Divisions, each responsible for a specific group ofsectors of NDC's activities. This Department, together with SPM, isresponsible for the implementation of the Mufindi Project.

40. NDC holds shares in 13 operating companies of which 12 areclassified as subsidiaries (over 50% NDC shareholding). Its totalportfolio is currently Tshs 488.5 million (US$52 million). The 13companies operate in the fields of metal working, mechanical and electricalengineering employing a total of 4,200 people. The consolidated operationsof the NDC Group companies have been profitable every year since 1975. Theoverall capitalization of NDC had a debt/equity ratio cf 7/93 as ofDecember 31, 1981.

41. SPM was formed as a limited liability company under Tanzanianindustrial and commercial laws. Its initial authorized share capital ofTSh 10 million has been increased to TSh 1,500 million to provide foradditional equity subscriptions as execution of the project proceeds.While NDC will own all the company's shares, the management of SPM will beautonomous; NDC would invest the proceeds of the proposed credit toincrease its shareholding in SPM. The total staff of SPM, after the startof operations, is planned to reach about 1,500 people.

Forest Resources and Industries

42. Almost half of Tanzania's land area is classified as forest land,although most of this is dominated by slow growing scattered trees whichyield little commercial timber. There are however, about 900,000 hectaresof commercial forests, of which about one quarter is being exploited.Most of the balance is eithe r in-accessible or poorly stocked. Theindigenous forests supply most of the fuelwood and timber for thepopulation.

43. The most valuable forest resources of the country consist ofabout 60,000 hectares of sofitwood plantations. A,bout half of this isscattered throughout the country and the other half is at Sao Hill, wherepine plantations have been developed with Bank Group financing. The SaoHill plantation presently supplies wood to the Tanzania Wood IndustriesCorporation (TWICO) sawmill at Sao Hill, and wi:Ll be the source of the mainraw material for the Mufindi Pulp and Paper Pro,ect.

44. Forest-based industries are not highly developed in Tanzania.There are about 150 small andL ill-equipped sawmills producing about150,000 cubic meters per year. The TWICO mill, the only sawmill ofreasonably efficient design and size, produces about 12,000 cubic metersper year. It has an annual design capacity of 45,000 cubic meters per yearbut is restricted in its output by a shortage of foreign currency which

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results in poor maintenance, breakdowns of logging trucks, and a resultingshortage of sawlogs.

45. Tanzania's paper industry is very small and most of the country'spaper is imported. Kibo Paper Industries Limited, an NDC subsidiary, beganoperating near Dar es Salaam in June 1978, producing 10 tons per day of lowgrade papers and board from waste paper and imported pulp. In the fall of1982, Kibo Match Company started up another small board plant with acapacity of 36 tons per day at Moshi, producing a reasonable quality ofboard from waste paper and groundwood prepared on-site from pine andimported pulp. The Dar es Salaam plant is being expanded as a sub-projectunder the Bank Group's fourth line of credit to the Tanzania InvestmentBank (Ln. 1750-TA), to produce 30 tons of paper per day. The gradesproduced at Kibo Paper and at Kibo Match all contain waste paper and arethrefore of a lower quality and are aimed -at a different end use than thegrades to be produced at Mufindi (see paragraphs 59-60 below).

Bank Group Experience in Industry and Forestry

46. The Bank Group has approved projects totalling US$215 million inTanzania's industry and forestry sectors. These include four lines ofcredit to the Tanzania Investment Bank (TIB) (US$61 million); one line ofcredit to the Tanganyika Development Finance Limited (TDFL) (US$11million); two textile projects at Mwanza and Morogoro (US$60 million); anindustrial estate project at Morogoro (US$23 million); and an integratedpulp and paper project at Mufindi (US$60 million). The two forestryprojects (Sao Hill Phases I and II), involved Bank Group assistance ofUS$19 million.

47. The Bank Group has been involved with TIB and TDFL since theywere established to provide medium and long-term finance for investments inthe productive sectors. These development finance companies have becomerelatively mature organizations with substantially increased operations.However, in view of the severe foreign exchange crisis since 1979, TIB hasreoriented its operational strategy in the near term towards assisting itsborrowers to rehabilitate or modernize their plants, improve capacityutilization, and promote exports.

48. The two textile investments were made in subsidiaries of theNational Textile Corporation. The first loan of US$15 million(Ln. 1128-TA) financed the expansion of the Mwanza Textile Corporation millby 20 million square meters per annum. The project was completed onschedule, well within budget, and operated extremely well for 18 months,until it experienced serious difficulties due to power failures and thelack of foreign exchange for import of supplies and spare parts. Thesecond project, the Morogoro Textile Project (Ln. 833-TA of US$20 millionand Ln. 1607-TA of US$25 million) involved the construction of anintegrated polyester textile mill with an annual capacity of 21.5 millionmeters of blended fabrics and 650 tons of yarns. Implementation of thisproject has been delayed by about three years, largely due to delays inawarding the main civil works contract and the lack of funds previouslycommitted to the project. Furthermore, in view of Tanzania's foreignexchange difficulties, the project has been modified to produce 100% cottonfabrics instead of polyester blends. The modified project is now expectedto be completed by the end of 1984 with a cost overrun of about 25%.

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49. The Morogoro Industrial Complex Project (Loans 1385-TA and1386-TA of US$11.5 million each) is essentially, complete. However, theoperation of one of its components - a shoe factory - has ifaced seriousdifficulties and operated at only a fraction of capacity, owing to poormanagement and a severe shortage! of foreign exchange for spare parts andsome imported materials. The Gcovernment, with the assiLstance of UNIDOconsultants, is studying various options to restructure and strengthen theleather and shoe industry. Progress of implementation of the Mufindi Pulpand Paper Project (Loan No. 1650-TA and Credit 875-TA of US$30 million) isdealt with in paragraphs 51-66 below.

50. A Bank loan of US$7.0 million (No. 1307-TA) was approved in 1976for the First Sao Hill Forestry Project. This project was completed inlate 1981. About 18,000 ha of plantations have been estab:Lished, exceedingthe original target by about 10%. The Second Sao Hill Project, financedunder Credit No. 1229-TA of US$12 million, of April 1982, will finance thefurther development of about 18,000 ha of existing plantat:ions and theestablishment and development of about 10,000 ha of new plantations.Implementation of this project has just begun. The above projects,particularly those that have started operationE;, have demonstrated theparamount importance of good marnagement and training and adequate foreignexchange funds for recurrent operating needs to ensure efficient and highutilization of plant capacity. These lessons are the principal foundationof the proposed project.

The Mufindi Pulp and Paper Project

51. Introduction. The proposed project would be a follow-up to theMufindi Pulp and Paper Project (Mufindi Project) which was financed in 1979by the Bank Group, the Swedish International Development Authority (SIDA),the Federal Republic of Germiany (KfW), the Commonwealth DevelopmentCorporation (CDC), the Kuwait Fund, the OPEC Special Fund, and the NordicInvestment Bank (NIB), and i.s now reaching the final stages ofimplementation. The financing required for the follow--up project isestimated at US$45 million equivalent, including US$40 mil:Lion in foreignexchange, for three components: operating management assistance andtraining; energy conversion; ancl imported operating supplies for aboutthree years of operations.

52. Operating management assistance and training, which would be themajor part of the proposed project, were foreseen as necessary at the timeof the original Mufindi Project appraisal in view of the country's lack ofskilled personnel to operate such a pulp and paper mill. The energyconversion component, which includes the modification of the power boilerand provision of necessary equipment to harvest, prepare and deliverfuelwood to the mill, is made necessary because of the high cost of bothimported coal and oil and the delays Tanzania has experieneed in developingits indigenous coal resource.s, which at the time of thes MuEindi Projectappraisal, were expected to be the primary fue:L for the mill. Thedeterioration of the Tanzanian economy in the intervening years and thepresent severe lack of foreign exchange has resulted in thie need to providethe Mufindi mill with foreign funds to finance imported operating materialsfor the first few years unti.l the mill can support itself through exportearnings. The implementation of the proposed project is tied directly to

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the completion schedule of the Mufindi mill and its associatedinfrastructure.

53. Description. The Mufindi Project is under construction in IringaDistrict, some 800 km southwest of Dar es Salaam. The mill is designed toutilize the forest resources of the nearby Sao Hill plantations, and willhave a production capacity of 60,000 tons per annum (tpa) of various

categories of pulp, paper and paperboard. It will produce printing and

writing papers, newsprint, kraft sack paper, and linerboard and will supplyall of the country's requirements except for certain grades such astissues, cigarette paper, bank note, and similar low volume specializedgrades. A small amount of semi-bleached kraft pulp will also be producedfor sale to other mills in Tanzania. A significant portion of the mill's

output will be exported.

54. Modern but appropriate technology has been applied in the design

of the mill which will use a standard bleached kraft pulping process withchemical recovery and a conventional stone groundwood mill, to supply pulpto two paper machines. The mill also includes an electro-chemical plantfor the manufacture of the chlorine and caustic soda required in the pulp

bleaching process, as well as primary and secondary effluent treatmentfacilities.

55. Status of Implementation. Physical implementation of the MufindiProject is proceeding well although anticipated completion is about 18months behind the appraisal estimate. This delay is due mainly to delaysin making all of the project financing effective. The civil works are nowcomplete. All of the major process equipment packages have been purchasedand are on site. Erection of the equipment has been started. The twopaper machines are currently scheduled for start-up in July 1984 andJanuary 1985. The present implementation schedule is given in Annex IV.

56. Several key items of infrastructure essential to the MufindiProject, including the power line, railway sidings, escarpment road andtownship for mill personnel are being implemented by the Government andfinanced outside the Project. These infrastructure items have been delayedto varying degrees but are now under control. The power line and railwaysiding are essentially complete . Construction of the escarpment road fordelivery of wood to the mill is underway, after some delays due toprocedural problems in making the foreign loan (EEC) effective and inappointing the consultants and contractor for the work. Since thecompletion of the road is not expected until August 1984 - following thestart-up of the first paper machine (July 1984) - alternative temporaryarrangements will be made to transport the wood to the mill site via therailway. The township is now under construction using supplementaryfinancing of US$25 million from the Kuwait Fund, and will be completed inFebruary 1985. However, with the purchase of the contractors' houses,there will be sufficient housing to accommodate the operating personnel(mostly bachelors) for the start-up of the mill. In summary, implemen-tation of the Mufindi project has proceeded remarkably well despiteTanzania's difficult economic circumstances.

57. Project Cost and Financing Plan. The following table summarizesthe current (February 1983) and appraisal estimates of the project cost.Further details are presented in Annex V.

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Mufindi Project - Summary Cost Estimate(US$ million)

Appraisal CurrentLocal Foreign Total L.ocal Foreign Total

Plant Cost 21.8 130.3 152.1 39.2 171.2 210.4Other a/ 7.7 11.8 19.5 7.8 16.5 24.3

Base Cost Estimate 29.5 142.1 171.6 47.0 187.7 234.7

Contingencies & Escalation 9.5 36.6 46.1 3.0 5.3 8.3

Installed Cost 39.0 178.7 217.7 50.0 193.0 243.0

Working Capital 4.0 2.7 6.7 4.8 5.2 10.0

Interest During Construction 15.1 12.2 _27.3 17.8 5.6 23.4

Total Financing Required 58.1 193.6 251.7 72.6 203.8 276.4

a/ Includes logging capital and pre-operating cost.

The total financing required for the Mufindi Project is currently estimatedat US$276.4 million equivalent, about a 10% increase over the appraisalestimate of US$251.7 million. The revised total foreign exchangerequirement of US$203.8 million represents an increase of about 5% comparedto the appraisal estimate of US$193.6 million. These cost increases aredue primarily to the delay in project implementation. The present costestimates of the project, shown above, are based largely on. fixed pricecontracts already awarded and are therefore considered reasonably firm.

58. As seen from the above table, the project which was fullyfinanced at the time of appraisal now has higher financing requirements,amounting to US$14.5 million equivalent in local currency and US$10.2million in foreign exchange. The Mufindi Project has been assigned highpriority by the Government and has received all the local currency neededthroughout project implementation. In FY83 the Government has providedTSh 233 million (US$24 million) and will allocate TSh 200 million (US$21.3million) in the budget for FY84. The additional foreign exchangerequirements have been met through a supplier's credit (Yugoslavia) inconnection with the mechanical erection contract. The costs of theinfrastructure still under construction, namely the township and escarpmentroad, have been fully financed by the Government, the EEC, and the KuwaitFund.

59. Mufindi Market Prospects. The Mufindi Project was originallyintended to supply primarily the domestic market and, at the time ofappraisal, it was estimated that, on average, less than 6,000 tons per yearwould be available for export during the first eight years of operation.By 1990, it was expected that the domestic market would consume all of themill's output. However, the domestic market has stagnated, due to both a

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shortage of foreign exchange for imports and a general decline in economicactivity in the country. Actual consumption over the past several yearswas as follows:

Paper Consumption in Tanzania

Year (tons)

1977 37,5001978 30,5001979 24,8001980 24,5001981 26,500

Sources: Government Statistics

60. A large part of the country's paper imports in recent years hasbeen made through commodity aid programs from Sweden and Canada. Ananalysis of the grades of paper and paper board consumed in 1981 indicatesthat, of a total of 26,500 tons, approximately 21,900 tons were of thegrades that can be produced by the Mufindi mill; the balance of 4,600 tonsconsisted of board paper and other grades which were either producedlocally (paragraph 45) or imported. Current estimates are that theshortage of foreign exchange will limit paper imports and hence constraindomestic consumption at existing levels until mill start-up, but it isexpected that consumption will increase by 20% to about 32,000 tons in 1985to fill latent demand.This represents only 85% of the level of consumptionreached in 1977. Thereafter, the market is projected to grow at 5.6%annually to satisfy incremental demand and reach about 43,000 tons by1990. This will leave a significant exportable surplus that will amount toabout 36% of the total output of the mill in its first five years, assumingit operates at near to full capacity. Should the market stagnate at the1986 level, the mill would have to export 42% of its total productionduring this five year period.

Mufindi Mill - Production and Exportable Surplus(Thousand tons)

ExportableYear Mufindi Production Domestic Demand a/ Surplus

1984 7.5 26.31985 33.0 27.8 5.21986 44.0 29.4 14.61987 51.4 31.0 20.41988 56.9 32.6 24.31989 60.0 34.5 25.51990 60.0 36.4 b/ 23.6

a/ Only the grades to be produced by Mufindi.b/ The balance of the domestic demand of 6,600 tons would be met from the

production of the other two mills (Kibo Paper Industries and Kibo MatchCompany) as well as imports (about 2,000 tons).

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61. The grades considered most suitable for export are those whichare widely traded throughout the world, namely newsprint and sack kraft(cement bag paper), and to a lesser extent, printing and writing papers.The major potential marketing areas are the Middle East and the Indiansub-continent. Neighboring Eastern African countries will offer additionalmarketing opportunities although these will be limited by the lack offoreign exchange in these countries.

62. Newsprint is the major item of potential sale tc) India, which in1981 imported over 300,000 tons of this grade. The total quantity ofnewsprint to be exported from Mufindi (i.e. about 15,000 tons) would beless than 5% of India's imports. All of the Middle East countries are netimporters of paper. In 1980, their combined imports were about 830,000tons. Mufindi's total exports would be about 2% of this figure, and halfof that would probably be sold to India as newsprint. With the marketingknow-how to be provided under the project's operating management assistanceand the intimate knowledge that one of the parties in this assistance, theSeshasayee Paper and Board Company of Madras (paragraph 70) has of theIndian market, it is expected that Mufindi's exportable surplus will besuccessfully marketed.Furthermore, the operating management contract (OMC)contains strong export incentives as the management firm would receive asignificant bonus based on sales. Because of its modern equipment, highquality wood supply and the technical skill of the management team, Mufindiwill also produce paper of internationally acceptable quality.Nevertheless, it is expected that in the initial years of operation,Mufindi will have to offer )rice discounts to penetrate the market. Underthe operating contract discussed in paragraphs 69-71 below, the expatriatemanagement of the Mufindi mill would be required to prepare annualmarketing plans, the first of which would be ready by March 31, 1984, i.e.,three months before the start of the first paper machine (Section 3.05 ofthe draft Joint Financing Agreement).

63. Prices of pulp and paper products have been rising sharply since1979, due to higher costs of wood and energy, which together account forabout 60% of production cost. In the past year, however, because ofoversupply, prf.ces have dec:lined by about 15%, and in the first quarter of1983 have returned to the levels of mid-1980. These trends are graphicallyillustrated in Annex VI. It is anticipated that in about two years, thesupply demand situation wil:L be in balance and prices will return to theirprevious trend. In the case of newsprint, for example, it is anticipatedthat by 1985, when Mufindi wouldl be starting production, the internationalprice f.o.b. Canada, the world's major newsprint exporter, will reachUS$550/ton in current terms, which was the price prevailing in 1982/83.Equivalent prices for other grades to be produced by Mufindi are US$600/tonfor sackkraft and US$925/ton for printing and writing paper. Thecorresponding c.i.f. prices at Dar es Salaam, landed prices (after additionof the prevailing 15% imporl: duty) and the ex-mill prices used in theprojections for both domestic sales and export are summarized below fromAnnex VI. As shown in Annex VI, the assumed c.i.f. prices for paper at DaLres Salaam are slightly lower than the corresponding c.i.f. prices in IndiaLwhich imports large quantities of paper and pays freight charges very closeto those paid by Tanzania for its paper imports. The ex-mill price iscalculated by deducting from the landed price of paper the transport cost

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of paper from Mufindi to Dar es Salaam (US$30-40/ton equivalent), thelargest consuming center of paper in Tanzania.

Import and Mufindi Mill Net Prices

C.I.F. Landed in Mill Net PriceDar es Salaam Dar es Salaam Domestic Export--------------------1985 US$/ton---------------------

Newsprint 675 775 745 525Sackkraft 725 835 804 575Printing and Writing 1,075 1,240 1,200 -

64. At present the Government sets the prices of paper at the c.i.f.import price, plus 15% import duty. The Government has reconfirmed itsprevious commitment to establish prices at levels which will permit SPM,operating efficiently, to obtain revenues sufficient to cover all of itscosts, to service all of its debts and to earn a reasonable return on itsinvested capital (Section 5.07 of the draft Joint Financing Agreement).This will require that the existing modest import duty be maintained toenable the project to cover its initial start-up cost as well as highinfrastructure cost that any new mill has to carry. As regards exports, itis assumed that the Mufindi mill may have to provide a US$50 discount perton on its exports which would seem sufficient to penetrate the market.Although export prices would be lower than corresponding domestic prices,they would still be higher than the production cost (US$400/ton fornewsprint and $510/ton for sackkraft in 1985 prices) and would allow thecompany to generate the foreign exchange required to operate the mill.

65. Raw Materials and Fuel Supplies. The primary raw material forthe Mufindi mill is the pine resource from the Bank-financed Sao Hillplantations. When the Mufindi mill is at full production in 1990,availability of pine from Sao Hill will be 350,000 cubic meters per year ona sustained yield basis, which will easily meet the pine demand of about250,000 cubic meters per year for Mufindi and 50,000 cubic meters per yearfor the Sao Hill Sawmill. The pulpmill's requirement of short-fibered woodwill be met from eucalyptus also planted under the Sao Hill Project. Theannual allowable cut of eucalyptus is over 50,000 cubic meters per yearcompared with the pulpmill's requirement of about 11,000 cubic meters peryear at full production rate. The total volume and the ratio between pineand eucalyptus required by Mufindi mill will depend on the grade mix ofpapers produced. The majority of chemicals for the Mufindi mill will needto be imported. The two exceptions are limestone which is available fromdomestic quarries, and salt, obtained by solar evaporation of seawater.

66. At the time of appraisal, it was expected that the Songwe-Kiwiracoal deposit would be developed and provide the main source of fuel for thepower boiler of the Mufindi mill. This development has not taken place andit is for this reason, plus the difficult logistics and high cost ofimported coal or oil that the proposed new project would contain a majorcomponent to convert the boiler to burn fuelwood. The source of this wood,and the proposed scheme of harvesting and delivering it are discussed in

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detail in paragraphs 72-74 below. In order to simplify operations atstart-up, it is envisaged that during the initial months of operation, the

boiler will burn fuel oil obtained from a domestic refinery operating onimported crude or coal imported from a neighboring country. The powersupply for the mill will be obtained from the existing interconnected gridsystem, which was recently expanded to serve the Mufindi area.

PART IV - THE PROJECT

Project Background, Objectives and Description

67. The eventual financing of technical assistance for the Mufindimill has been a recurrent topic of project supervision missions and

periodic consultations with the co-financiers. The proposed OMC contractwas prepared by NDC, with the assistance of its legal advisers and Bankstaff, and negotiated during the period August-November 1982. The proposedproject was appraised in February 1983. Negotiations were held inWashington D.C. on April 22, 1983. The Tanzanian delegation was led byMr. Francis Byabato, Assistant Commissioner, Ministry of Finance, andincluded Mr. Arnold Kilewo, Chairman and Managing Director, NDC. A Creditand Project Summary is given at the beginning of this report. ASupplementary Project Data Slheet is attached as Annex III.

68. With the Mufindi Project expected to be completed in mid-1984, amajor effort will be require,d to manage and operate the mill and market its

output. This is the main objective of the proposed project which would:

(i) provide Southern Paper Mills Company (SPM) with expatriate

operating management and training services for six years, including aboutone year prior to the start-uip of the first paper machine in July 1984;

(ii) convert the existing power boiler from dependence on oil andcoal to one that can also use wood fuel readily available from the nearbySao Hill plantations; and

(iii) provide SPM wiLth imported inputs such as fuel and pulp forthe first six months of operation, i.e., until the wood fuel is available,

and other materials and supp:Lies (chemicals, spares, consumables, etc.) forabout the first three years of operations.

Detailed Features

69. Operating Management Contract. As envisaged in the StaffAppraisal Report of the Mufindi Project dated December 14, 1978 (Report

No. 1929-TA, paragraphs 5.27--5.33) the Mufindi mill cannot be operatedwithout the assistance of expatriate management, due to the unavailability

of local skilled personnel w:ith pulp and paper nill operating experience.NDC/SPM have negotiated an operating management contract (OMC) withStothert International Corporation (Stothert), to manage SP]M and operate

the Mufindi mill for a period of approximately six years, including about

one year prior to start-up. Stothert is a Canadian consulting firm locatedin Vancouver that specializes in pulp and paper and other forest-based

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industries. It was founded in 1966 and is associated with C. D. Schultzand Co., also of Vancouver, which is the oldest established forestryconsulting firm in Canada. Stothert have undertaken major operatingmanagement assignments in Canada and in Nigeria. The personnel to beassigned to Mufindi have acquired extensive management and operatingexperience in pulp and paper industries located in developing countries.The General Manager to be assigned by Stothert has more than 20 yearsexperience in operating mills in Colombia, Peru, Thailand, Guatemala, andNigeria. Stothert's forestry associates have worked for more than 35 yearsin assignments throughout the world, including a National Forest Inventoryin Tanzania in 1970.

70. Under the OMC, Stothert, together with its subcontractor,Seshasayee Paper and Board (SPB) of India, would manage the entire company,including personnel relations, financial activities, mill operation,forestry operations, domestic and export marketing, and matters related tothe township. The General Manager would be responsible to the Board ofDirectors of SPM. A Tanzanian General Manager Designate would work inparallel with the Contractor's General Manager. An organization chart forSPM is presented in Annex VII. Stothert personnel would fill the top 15management and supervisory positions in SPM, and through the sub-contractprovide 131 operating and maintenance personnel from SPB. In total, thecontract provides for 4,857 man-months of services, of which 552 man-monthswould be from Stothert directly, and 4,305 man-months from SPB. Thedistribution of man-months by category and year is given in Annex VIII andis considered satisfactory to allow sufficient time to train Tanzanians andgive them the necessary operating experience before assuming key positions.

71. In addition to managing the company, Stothert would train anddevelop Tanzanians systematically to take over all positions in thecompany. This training, which supplements manpower development alreadycarried out during implementation of the Mufindi project (for about 170people), would take place before and after mill start-up, commencing withovetseas courses for about 100 Tanzanians who would eventually occupy keyoperating and supervisory positions in SPM. Under this contract, the OMCwould prepare annual training programs, the first of which would becompleted by December 31, 1983 and actual training progress will bereviewed quarterly by the Board of Directors of SPM. A bonus of US$0.6million would be paid to the OMC based on achieving specific trainingresults. A detailed training program would be submitted to the Associationfor its review by December 31, 1983 (Section 3.06 of the draft JointFinancing Agreement). Furthermore, SPM would submit to the Association byJune 30, 1984, a compensation and incentive system for its personnel toattract and retain qualified Tanzanians (Section 4.02 of the draft JointFinancing Agreement).

72. Energy Conversion Component. The lack of sufficient domesticcoal and the high cost and difficult logistics of importing coal or oil hasled to the decision to convert the power boiler to burn fuelwood as well asthese other two fuels. The proposed project would provide funds toundertake the boiler conversion work and to harvest, prepare, and deliverfuelwood to the mill. While considerable work is planned to developTanzania's domestic coal deposits (including exploration activity undera proposed coal engineering credit from IDA), there is uncertainty aboutthe cost at which this coal will be available. At recent production rates,

- 22 -

the only existing mine at Ilima will be exhausted by the end of 1983 andproduction to replace it will not begin until late 1986 at the earliest.The proposed energy conversion component would allow the Mufindi millconsiderable versatility and permit it to start production, using localfuel resources, at a capital cost which would be recovered in three to fouryears. It is also possible that it will remain more economic for the millto use fuelwood for its boiler, even once domestic coal becomes available,in view of comparative transport costs. The alternative of importing coalfor a limited period, until domestic supplies are better assessed, has beenexamined and found to be less attractive in view of the eventual disruptionto output which would be caused by converting the boiler at a laterdate,once it was installed and operating.

73. The present boiler is designed to produce 50 tons of steam perhour by burning low quality domestic coal plus bark frcom pulplogs. A studyof the boiler design underta'ken by EKONO (Finland) has revealed that withrelatively minor changes to the boiler and its ancillary equipment, it canproduce the same amount of steam, necessary for running the mill at fullcapacity, while burning only green fuelwood (50% moisture). Thiscapability has been confirmed by the boiler manufacturer, Mitsubishi HeavyIndustries (Japan) who have also provided a fixed price! for the boileralterations to reach its guarantee production level. This work can beundertaken during the erection of the boiler which has already commenced.

74. In order to generate the average steam load, EKONO estimatesthat about 38,300 tons per annum, of green fuelwood (50% moisture content)will be required. Tests undertaken by Mufindi's forestry consultants,Swedeforest (Sweden), in the Sac Hill plantations have showm that morethan twice this amount of bio-mass will be left behind as logging residueafter pulpwood harvesting. At present, this residue must be piled andburned in the forest in order to, clear the land for replanting. Thismaterial instead can be gathered., chipped and delivered to the mill to beused as fuelwood. All of the equipment to recover this bio-mass and feedit into portable diesel powered chippers is available as standard equipmentfrom several manufacturers, and would be financed under the project. It iswell proven in many installations around the world. The resulting chippedfuelwood will be discharged to side-dumping box trailers and pulled to themill by truck, an average haul of 55 km.

75. Import Requirements. Given the difficult econom:ic environmentand the experience of other industrial enterprises in Tanzania, it isunlikely that the mill could. operate unless imported raw materials weremade available. Therefore, the project would provide funds for this purposefor the first three years of operation until SPM had built up a steady flowof foreign exchange revenues' from exports. The Government has also agreedin principle that SPM would retain part of its export earnings in a foreignexchange account. This account would be opened by December 31, 1983 andadequate portions of SPM's e!xport revenues would be retained in thisaccount to meet its operating requirements (Section 4.04 of the draft JoirLtFinancing Agreement). It is estimated that ret:ention of 30-40% of suchearnings would be necessary, depending on the :Level of export sales.Furthermore, since SPM will need ready access to foreign funds for paymentsto suppliers of materials and consumables long before it can be expected togenerate export revenues (irn late 1985), it would be necessary to establish

- 23 -

a revolving fund of about US$1.0 million for use by SPM to meet itsrequirements of about three months. Appropriate arrangements to thiseffect between the Government, SIDA and KfW were discussed duringnegotiations.

Project Cost and Financing

76. The total project cost is estimated at about US$45.0 millionequivalent, of which US$40.0 million would be in foreign exchange.Detailed estimates are shown in the Credit and Project Summary and inAnnex IX of this Report. The OMC and overseas training is expected to costUS$24.5 million of which US$20.5 million would be in foreign exchange. Theaverage cost per month for Stothert personnel is US$13,000 and for SPB,US$2,500, including all reimbursable foreign and local expenses. Theseman-month rates are considered reasonable. The training incentive bonus(US$0.6 million) is payable only after achieving specific results.Advisory, legal and technical services (US$0.5 million) would also beprovided to allow SPM to monitor the performance of the OMC. The estimatedsales incentive bonus (US$1.4 million) is calculated from the contractformula which is summarized in Annex VIII. The sales and training bonuseswould represent about one third of the contractor's estimated profit. Theamount shown for escalation (US$3.4 million) includes price contingencieson the man-month rates which are zero for the first two years and 5% perannum fixed thereafter, as provided in the contract with Stothert.Provision has also been made for possible escalation of 7% per annum on theimport requirement and energy conversion components. The project would beexempted from identifiable taxes and duties.

77. The proposed credit of SDR 16.7 million (US$18.0 millionequivalent) would cover 40% of total project costs. Complementaryfinancing on grant terms from SIDA (US$13.5 million equivalent) and theFederal Republic of Germany (KfW) (US$8.5 million equivalent) would cover30% and 19% of total costs respectively. External funds would meet 100% ofthe foreign exchange costs, while the Government would finance the balanceof US$5 million in local costs (16% of total costs). The credit would bemade to Government on standard IDA terms. The proceeds of the credit wouldbe passed on to NDC and SPM as equity, in view of the need to maintain asound financial structure and debt service coverage for SPM (paragraph 82).The following table is a summary of the project cost and financing plan.

Summary Project Cost and Financing Plan(current US$ million)

Project Cost Financing PlanComponent Local Foreign Total Govt IDA SIDA KfW Total

Operating Management 4.0 20.5 24.5 4.0 15.0 5.5 - 24.5Energy Conversion

-Boiler 0.5 3.0 3.5 0.5 3.0 - - 3.5-Fuelwood 0.5 5.0 5.5 0.5 - 5.0 - 5.5

Import Requirements - 11.5 11.5 - - 3.0 8.5 11.5

Total 5.0 40.0 45.0 5.0 18.0 13.5 8.5 45.0

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Procurement and Disbursement

78. The selection of the Operating Management firm was determined inaccordance with Bank Group guide:Lines for the selection of consultants.Throughout the bidding and evaluation process, the cofinanciers wereconsulted and kept fully informed. The agreed draft contrazc has beencarefully reviewed and approved lby the Association and the cofinanciers.

79. Equipment for the alteration of the boiler would be procuredthrough a new contract with t:he boiler manufacturer, Mitsubishi (Japan) whohave already given a firm pr:Lce bid valid until June 1983. Erection wouldbe undertaken as an extra task by the existing erection contractor, INGRA(Yugoslavia), who is already on site. Equipment external to the boiler,which is primarily off-the-shelf conveyor systems and equipment forfuelwood harvesting, preparation, and delivery would be tendered frombidders who have already quoted prices on the main forestry equipment inaccordance with internationa:L competitive bidding procedures. Bidding onthe portable chippers, estimated to cost approx:imately US$1.0 million,would be limited to the few firms that specialize in this equipment.Imported operating materials and supplies would be procured in accordancewith SIDA and KfW procedures.

80. The credit would be disbursed against 100% of foreignexpenditures on consultants' services, training and support equipment(mainly vehicles and teaching aids) and 100% of foreign expenditures onthe boiler conversion component. The Association and SIDA would jointlyfinance the OMC contract, in the ratio of 2.7:1, while SIDA and Germany(KfW) would cofinance other expenditures on a parallel basis. The IDAcredit would be fully disbursed by December 31, 1989 (see Annex X).

Financial Position and Prospects

81. SPM is not expected to start up its operations and generaterevenues until July 1984, because of the 18-month delay in projectimplementation. As a result, SPM will not be in a position to servicethe first loan repayments due in 1983-84. The Government, therefore, hasagreed in principle to extend the grace period of all the subsidiary loansto SPM related to the Mufindi Project by about two years, and to amend theexisting subsidiary loan agreements with NDC/SPM accordingly by December31, 1983.

82. Under existing loan agreements, one-third of the IDA credit andSIDA grant are to be passed on to SPM as loan funds and the remainingtwo-thirds as a Government equity contribution iin order for SPM to maintaina reasonable debt-equity rati o of 50/50. Since this equity contributionhas been reduced as a result of the depreciation of the Swedish Kronervis-a-vis the US$ (from SKr 4.2/US$1.0 at the time of the loan agreement toSkr 7.2/US$1.0 ) and to safeguard SPM's financial position from furtherrealignment of the Tanzanian shi:Lling, the Government has agreed that thepreviously on-lent portions of the IDA credit and SIDA granit will beconverted to equity (Section 3.04 of the draft Joint Financing Agreement).These arrangements will be reviewed by the Government at regular intervals(every 2-3 years) beginning on July 1, 1986 in the light of SPM's actualcash position and earning prospects at the time,, with a view to convertingthe equity contribution to loan terms, if possible, at prevailingparastatal borrowing rates.

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83. The financial prospects of SPM for 1984 to 1990, which aresummarized in Annex XI, have been projected on the basis of the followingprincipal assumptions: SPM's two paper machines will commence productionin July 1984 and January 1985 respectively; Mufindi will gradually build upits production to capacity level by 1989 (see table below); and domesticand import prices will be at levels discussed in paragraphs 63-64 above.The mill is shown to operate eventually at 100% of capacity, which mayappear optimistic in Tanzanian conditions. However, it should be notedthat the 100% level represents 60,000 tons per year which is the guaranteeddesign level rather than the ultimate mill capacity. In fact, the papermachines and all other major process departments could accomodate 75,000tons of production per year; thus, 60,000 tons per yearrepresents 80% ofthe design capacity.

SPM Summary of Projected Financial Data 1984-90 a/(in current US$ million unless otherwise stated)

Year Ending December 31 1984 1985 1986 1987 1988 1989 1990(1/2 yr)

Capacity Utilization % 12.5 55.0 73.0 86.0 95.0 100 100

Income Cash FlowStatements

Sales Revenue 6.8 31.2 41.2 49.6 57.5 60.8 61.7Manufacturing Costs 10.9 21.7 26.5 28.9 31.4 31.7 30.2Depreciation and 4.2 17.0 17.7 18.0 18.3 18.5 18.7Amortization

Interest - 9.5 8.9 8.2 7.5 6.8 6.2Net Income (Loss) After (8.3) (17.0) (11.9) (5.5) 0.4 3.8 6.6Taxes

Cash Generation BeforeInterest Payment (4.1) 9.5 14.7 20.7 26.2 29.1 31.5

Debt Service 1.6 11.1 13.3 15.5 14.8 14.1 11.9

Balance Sheet

Current Assets 3.9 9.2 16.5 21.6 31.8 44.0 59.6Current Liabilities 2.9 7.6 11.4 12.3 13.1 11.7 11.7Long-Term Debt 97.3 92.9 85.6 78.3 71.0 65.3 59.6Equity 179.9 173.9 173.0 170.5 172.9 177.7 184.3

Ratios

Current Ratio 1.3 1.2 1.4 1.8 2.4 3.8 5.1Debt/Equity Ratio 35/65 35/65 33/67 31/69 29/71 26/74 24/76Debt Service Coverage - .9 1.1 1.3 1.8 2.1 2.6

(times)

a/ After taking into account the extension of grace period of thesubsidiary loans and the conversion to equity the portions of IDA andSIDA funds that were to be passed on as loans.

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84. The above table indicates that SPM is expected to incur netlosses every year during the first four years of operation, reaching amaximum of US$17.0 million e(quivialent in 1985 when SPM would just begin itsproduction buildup. Howewer, SPM is expected to earn net income aftertaxes of US$0.4 million equivalent in 1988, increasing to US$6.6 million in1990. SPM's cash generation would be tight during the initial years. Debt:service coverage would be very marginal during 1985-86, but would reach alevel of 1.3 in 1987 and improve to a comfortable level thereafter. Thedebt-equity ratios ranging from 24/76 to 35/65 during 1984-90, and otherfinancial ratios appear stronger than they really are considering thatpractically all of the long-term loans are in foreign exchange for whichSPM assumes the foreign exchange risk.

85. The above projections are based on the domestic and export marketsales levels discussed earlier (paragraph 60). Should the domestic marketcontinue to stagnate and remain at the 1986 level, thereby requiring moreexports, the mill would be exporting about 42% of its output and its salesrevenue would be reduced by about 3%. The effect of such sales on SPM'scash position and debt service would be as follows:

1984 1985 1986 1987 1988 1989 1990

Sales Revenue 6.8 31.2 41.2 48.7 55.6 57.7 57.7Cash Generation (4.1) 9.5 14.7 19.8 24.2 26.0 27.5Debt Service 1.6 11.1 13.3 15.5 14.8 14.1 11.9Debt Service Coverage - 0.9 1.1 1.3 1.6 1.8 2.3

(times)

86. To ensure prudent financial management, the following financialcovenants, which are included in. the existing Joint Financing Agreementdated April 6, 1979 for the Mufindi Project, would be repeated with somemodification under the proposed project: SPM should not incur any debt(beyond that already contracted) which would raLise its debt-equity ratioabove 50:50 and reduce its debt service coverage below 1.5.; it shouldmaintain a current ratio of not less than 1.2 and not make dividendpayments if by doing so the current ratio fell below 1.5 (Sections5.03-5.06 of the draft Joint: Financing Agreement).

87. As a capital intensive project, the Mufindi mill requires a high.rate of capacity utilization before it reaches the project break-evenpoint. For the first year of full operation in 1989, the profit break-evenpoint is expected to be about 82% of capacity. The initial tight financialposition of SPM and the high break-even point indicate that it isimperative for the mill to reach full production as quickly as possible andto preserve a sound financial structure and liquidity position particularlyin the initial years of opeIations.

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Auditing and Reporting

88. As for all parastatal entities, SPM accounts are audited by theTanzania Audit Corporation (TAC), which is a satisfactory arrangement.SPM's audited annual accounts, together with the auditor's report would besubmitted to the Association within four months of the end of the financialyear (Section 5.02(b) of the draft Joint Financing Agreement). In

addition, SPM would submit quarterly financial statements and projectprogress reports including training and marketing plans within 45 calendardays after each quarter. At the end of the project, SPM would submit aProject Completion Report to the Association within three months of theClosing Date of the credit (Sections 3.03(b) and (c) of the draft JointFinancing Agreement).

Project Justification and Benefits

89. As mentioned earlier, the implementation of the Mufindi projecthas proceeded satisfactorily in view of its size and complexity as well ascurrent difficult conditions in Tanzania. However, starting up the milland keeping it operating will require the assistance of expatriateoperating management as well as foreign exchange funds to import chemicals,spare parts and other consumables. The OMC and import financing componentsof the proposed project would address these needs directly.

90. The energy conversion component of the project would be justifiedbecause it would be more economical for the Mufindi mill to burn wood thanimported fuel oil or coal. The internal rate of return on this componentwould be 46% compared with the fuel oil alternative and 18% compared with

imported coal. The ready availability of fuel wood in sufficientquantities from the existing plantations close to the mill site will alsoensure the continuous firing of the power boiler of the mill.

91. The Mufindi Pulp and Paper Project is the most importantindustrial project underway in Tanzania. It accounted for 10% of alldevelopment expenditures during the Third Five Year Plan period (1976-81)and about 50% of all industrial investment during the last five years.While the original rate of return for the project (11%) was low for a largeinvestment, and has been further reduced by lower than expected domesticdemand for paper products and an overall increase in project costs, theinvestment of additional resources is essential for generating some returnon a very sizeable sunk investment. The Government has shown strongcommitment to the project, especially by meeting the full local costrequirements of the project in a timely manner, despite growing pressureson the development budget and the decision to consolidate publicinvestments in less critical areas. Most importantly, with the financingprovided for the proposed project, the Mufindi mill could significantlyimprove the net foreign exchange flow to the country, which is expected toaccumulate to about US$77 million by the end of 1990, when the projectwould attain full capacity operations.

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Mufindi Project - Summary of Foreign Exchange Effect of Proposed Project(US$ Million)

1984 1985 1986 1987 1988 1989 1990

Foreign Exchange RevenuesImport Substitution 5.7 24.1 27.5 31.1 35.0 36.8 38.7Export - 3.0 8.8 13.0 16.4 17.3 16.0

Total 5.7 27.1 36.3 44.1 51.4 54.1 54.7

Foreign Exchange Operating Costs

Direct 3.2 4.3 5.3 6.1 7.1 7.4 7.5Indirect 0.9 3.9 5.3 6.7 8.0 8.4 8.5OMC 3.8 4.6 5.1 3.1 2.1 1.3 -

Total 7.9 12.8 15.7 15.9 17.2 17.1 16.0

Debt Service (Foreign Exchange)Interest and Principal 10.7 14.8 14.4 13.9 13.5 13.5 13.2

Foreign Exchange Surplus

(Deficit) (12.9) (0.5) 6.2 14.3 20.7 23.5 25.5

Cumulative Surplus (12.9) (13.4) (7.2) 7.1 27.8 51.3 76.8(Deficit)

Should the domestic market stagnate at the 1986 level, the cumulativeforeign exchange savings resulting from the Muf:indi operation would bereduced to US$70 million by the end of 1990.

92. The economic rate of return on the Mufindi Project, taking intoaccount the revised project cost including the cost of energy conversionand operating management, and production build-up, is about 5%, compared tothe appraisal estimate of 11%,. 'If all project expenditures as of March1983 are taken as sunk costs, the economic rate of return would be about20%. The following major assumptions have been used in the economicanalysis: (i) border prices have been used for all tradeab:Le goods; (ii)infrastructure costs not recovered through direct charges have been addedto the project capital costs; and (iii) a shadow rate of exchange ofTSh 18.6 to the US dollar has been used for all local inlputs. Details areshown in Annex XII.

93. The reduction in economic rate of return compared with theappraisal estimate results primarily from lower projected revenues and theinitial delays in implementing the project. The lower revenlues are causedby slower than anticipated growth of the domestic market, and theconsequent need to export more of' the mill's production. The higherfreight cost on exports results in a lower mill net revenue on exports.Furthermore, to penetrate export markets a discount of US$50/ton has been

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placed on international prices. Higher costs for the township andescarpment road also contribute to the lower rate of return.

94. Sensitivity tests have been made on the above economic rate ofreturn vis-a-vis sales revenues, manufacturing costs and capacityutilization. The rate of return is most sensitive to sales revenues; a 10%reduction in revenues would lower the return to about 4% on a full costbasis and to about 17% on a sunk cost basis.

Risks

95., Industrial enterprises in Tanzania face several commondifficulties. Among these are: the lack of trained people with industrialmanagement and operating experience; lack .of spare parts, fuel and otherimported materials due to shortage of foreign exchange; and failure of theinfrastructural systems such as railways and electrical power. In additionto these difficulties, Mufindi is faced with a potential export marketingproblem. The proposed project is designed to insulate the mill as far aspossible from these problems.

96. The Operating Management Contractor would be the key to Mufindi'ssuccess. The selected contractor is competent and experienced and thecontract provides him with the authority, means, and financial incentives(bonus) to manage the company effectively and train Tanzanians. However,there is always a risk that trained Tanzanians will seek employmentelsewhere. Although the possibility of losing trained people will bereduced by providing the employee with a suitable compensation andincentive system (paragraph 71), SPM will nevertheless have to train morepeople than actually will be required. The proposed project includesprovision for financing of such additional people.

97. The provision of foreign exchange for imported materials andspare parts for the first three years of Mufindi's operation, would easeone of the major problems facing most Tanzanian industry. After a securedstart-up and three years of operation, the mill could be expected to exportand become self-sufficient in foreign exchange, and would operate its ownforeign exchange account in order to have an assured supply of criticalmaterials and spares. The energy conversion component of the project wouldassure the mill of a reliable supply of cheap fuel which is alsoindigenous, renewable and physically close to the mill. A storage tank forfuel oil would also be installed as a back-up for the main wood fuel.

98. The mill is linked with the interconnected power grid and to theTAZARA railway through a new spur. The power supply to the mill isreliable, as the grid system is based almost entirely on hydroelectricgeneration and does not depend on imported fuel.

99. Penetration of export markets is a challenging problem for anynew mill. Mufindi will have the advantage of an OMC collaborator with anintimate knowledge of the major importing countries, particularly India,and the incentive to export in order to maximize his production bonus whichis calculated on tons sold. In the event that the domestic marketcontinued to stagnate, even more paper would have to be exported. While nomajor difficulties are foreseen in disposing of additional tonnage in

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export markets, the lower mill net prices will have an effect on the cashposition of SPM. If the domestic market remained at the 1986 level, salesrevenue would decline by about US$10 million in total during, the four-yearperiod up to 1990, and it would not be until 1989 that the Company couldpost a positive net profit (US$0.7 million). However, the Company wouldstill maintain acceptable debt service coverage and cash flow.

100. In the event that the project faced a persistent combination ofadverse circumstances, namely a 10% reduction in sales volumes, plus a 10%reduction in sales prices, plus aL 10% increase in production costs, a cashdeficit, after debt service, would continue until 1989 by which time itwould have accumulated to approximately US$22 million, and the accumulationwould not become positive until 1993. However, since the Company will havea competent Operating Management Contractor, the foreign exchange forinitial years of import requirements, a reliable fuel supply, and abuilt-in surplus capacity, the above combination. of circumstances isconsidered unlikely to occur.

PART V - LEGAL INSTRUMENT AND AUTHORITY

101. The draft Development Credit Agreement between the UnitedRepublic of Tanzania and the Association, the draft Joint FinancingAgreement among the United Republic of Tanzania, the Kingdom of Sweden, theAssociation, Southern Paper Mills Company Limited and the NationalDevelopment Corporation and the Recommendation of the Committee providedfor in Article V, Section l(d) of the Articles of Agreement of theAssociation are being distributed to the Executive Directors separately.Special conditions of the credit are listed in Section III of Annex III.

102. It would be conditions of effectiveness of the proposed credit(a) that the Subsidiary Financing Agreement had been executed on behalf ofthe Government, SPM and NDC, (b) that all conditions precedent to theeffectiveness of the Swedish grant agreement had been fulfilled, (c) thatsatisfactory evidence had been obtained that the German contribution to theproject would be available, and (d) that the management consultants tooperate the Mufindi mill had been employed (Section 4.01 of the draftDevelopment Credit Agreement.)

103. I am satisfied that the proposed Credit would comply with theArticles of Agreement of the Association.

PART VII - RECOMMENDATION

104. I recommend that the Executive Directors approve the proposed

Credit.

A.W. ClausenPresident

Attachment

May 2, 1983Washington, D.C.

ANNEX I- 31 - Page 1 of 6

TABLE 3ATANZANIA - SOCIAI. INDICATORS DATA SHIEFT

TANZANIA REFERENCE GROUPS (WEICHTED AVERACESAREA (TIIOUSAND SQ. FM.) - MOST RECENT ESTTMATE

4±

TOtAL 94.).1 HOST RECENT LOW INCOME MIDDLE INCCMEAGRICULTURAL 401.4 1960 lb 1970 /b ESTIMATE /b AFRICA SOUTH OF SAHARA AFRICA SOUTH OF SAHARA

CNP PER CAPITA (US$) 70.0 130.0 280.0,U 250.8 1053.2

ENERGY CONSUMFTTION PER CAPITA(KILOGRANS Of COAL EQUIVALENT) 41.1 63.0 50.5 66.5 610.1

POPULATION AND VITAL STATISriCSPOPULATION, NiL-YEAR (THOUSANDS) 10201.0 13300.0 18650.0URBAN POPULATION (PERCENT OF TOTAL) 4.8 6.9 11.8 17.8 28.3

POPULATION PROJECTIONSPOPULATION IN YEAR 2000 (MILLIONS) 36.2STATIONARY POPULATION (MILLIONS) 110.5YEAR STATIONARY POPULATION IS REACHED 2100

POPULATION DENSITYPER SQ. EM. 10.8 14.1 19.1 27.7 54.7PER SQ. KM. AGRICULTURAL LAND 26.6 33.4 44.9 86.7 129.9

POPULATION AGE STRUCTURE (PERCENT)0-14 YRS. 42.7 44.4 46.0 44.8 46.0

15-64 YRS. 54.3 52.5 50.9 52.3 51.165 YRS. AND ABOVE 3.0 3.1 3.0 2.9 2.8

POPULATION GROWTH RATE (PERCENT)TOTAL 2.2 2.7 3.4 2.7 2.8URBAN 5.0 6.3 8.7 6.2 5.2

CRUDE BIRTH RATE (PER THOUSAND) 46.6 46.8 46.3 47.3 47.2CRUDE DEATH RATE (PER THOUSAND) 22.4 18.6 15.1 19.5 15.7GROSS REPRODUCTION RATE 3.0 3.1 3.2 3.2 3.2FAMILY PLANNING

ACCEPTORS, ANNUAL (THOUSANDS) .. .. 93.6/cUSERS (PERCENT OF MARRIED WOMEN) .. .. .. .. .

FOOD AND SUTRITIONINDEX OF FOOD PRODUCTION

PER CAPITA (1969-71-100) 95.0 104.0 89.0 88.7 90.7

PER CAPITA SUPPLY OPCALORIES (PERCENT OF

REQUIREMENTS) 90.0 91.0 86.5/d 90.2 93.9PROTEINS (GRAMS PER DAY) 46.3 48.8 47.6Td 53.1 54.8

OF WHICH ANLMAL AND PULSE 17.8 21.2 20.5/i 18.4 17.0

CHILD (AGES 1-4) MORTALITY RATE 33.1 25.6 19.4 26.7 23.9

HEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 41.7 46.7 51.6 45.6 51.0INFANrT MORTALITY RATE (PERTHOUSAND) 151.5 125.3 102.9 129.9 118.5

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)

TOTAL .. 13.0 3 9

.0/e 23.9URBAN .. 61.0 88.07i 54.9RURAL .. 9.0 36.07e 18.5

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

TOTAL .. .. 17.0/e 25.8URBAN .. .. 88.07e 63.1RURAL .. .. 14.07e 20.2

POPULATION PER PHYSICIAN 18216.1 22240.8 17553.1/d 32097.3 14185.2POPULATION PER NURSING PERSON

1 1 8 8 6.9/f. 7162.1 2387.5Ta 3264.6 2213.2

POPULATION PER HOSPITAL BEDTOTAL 595.5/ 717.8 499.8/d 1225.0 1036.4URBAN 55.3 58.6 81.37d 249.5 430.8RURAL 1532.9!A .. 1191.1/d 1712.1 3678.6

ADMISSIONS PER HOSPITAL BED .. ..

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL .. 4.4/ .

URBAN 3.1/h 3.27i *RURAL .. 4.571 5.3

AVERAGE NUMBER OF PERSONS PER ROOMTOTALURBAN 1.8/hRURAL .. ..

ACCESS TO ELECTRICITY (PERCENTOF DWELlINGS)

TOTAL .. ..URKAN * .

_ RURAL . _.

ANNFX I- 32 - Page 2 o f 6

Pago 2TABLE 3A

TANZA -TXST-CrAL INDICATORS DATA sHE.ET

TANtANIA REFERENCE GROLPS (WEIGCSTED AVFRACES- MOST RECENT ES.lYATE) IA

MOST RECENT =bW TR INCOMF1960 Lb 1970 Jb ESTIMATE /b AFRICA SOU.TH OF SAHARA AFRICA SOUTH OF SAFHARA

EDUCATION1 =,4TD ENROLLMENT RATIOS

PRIMARYS TOTAL 25.0 39.0 104.0 63.2 83.3MALE 33.0 47.0 113.0 72.7 96.1FEMALE 18.0 31.0 94.0 50.3 80.4

SECOh'DARY: TOTAL 2.0 3.0 4.0 10.2 15.3KALE 2.0 4.0 5.0 13.2 19.4FEMALE 1.0 2.0 2.0 6.6 11.3

VOCATIONAL ENROL. (2 OF SECONDARY) 22.6 .. 1.6 7.9 4.7

PUPIL-TEACHER RATIOPRIMARY 45.3 45.9 41.4 47.4 38.6SECONDARY 19.6 18.4 19.0 26.2 23.4

AOULT LITERACY RATE (PERCENT) 9,5J 28.1/i 66.0/c 34.0 35.6

CONSUL'PT IONPASSENGQE CARS PER ITOUSAND

POPULATION 2.4 2.5 2.6/d 3.0 31.9RLADIO RECEIVERS PER THOUSAND

POPULATION 2.0 11.3 27.7 34.8 71.8TV RECEIVERS PER THOUSAND

POPL'LATION .. 0.3 0.3 1.7 17,9NEWSPAPER ("DAILY CENERALINTEREST") CIRCULATION PERTHOUSAND POPULATION 2.5 ,, 10.1 2.9 19.1CINEMA ANNUAL ATTENDANCE PER CAPITA 0.5 .. 0.2/d 1.1 0.6

LABOR FORCETOTAL1 LAbOR FORCE (THOUSANDS) 4734.7 5841.7 7660.5

FEMALE (PERCENT) 37.2 36.7 36.0 34.1 36.5AGRICULTLRE (PERCENT) 89.0 86.0 83.0 78.4 56.5INDUSTRY (PERCENT) 4.0 5.0 6.0 9.2 17.7

PARTICIPATION RATE (PERCENT)TOTAL - 46.4 43.9 41.1 41.4 37.0YjILE 59.1 56.3 53.1 53.9 46.9FEMALE 34.0 31.8 29.2 29.1 27.2

ECONOMIC DEPENDENCY RATIO 1.0 1.1 1.2 1.2 1.3

INCOME DISTRIBUTION' PERCENT OF PRIVATE INCOMERECEIVED BY

HIGhEST 5 PERCENT OF HOUSEHOLDS .. 24.7HIGHEST 20 PERCENT OF HOUSEHOLDS .. 50.4LOWEST 20 PERCENT OF HOUSEHOLDS .. 5.8LOWEST 40 PERCENT OF HOUSEHOLDS .. 16.0

POVERTY TARGET GROUPSESTIMATED ABSOLUEE POVERTY INCOMELEVEL (USS PER CAPITA)

URBAN .. .. 147.0 134.3 507.0RURAL .. .. 109.0 82.9 200.6

ESTIMATED RELATIVE POVERTY INCOMELEVEL (USS PER CAPITA)URBAN .. .. 125.0 96.4 523.9RURAL .. .. 74.0 60.4 203.6

ESTIMATED POPULATION BELOW ABSOLUTEPOVERTY INCOME LEVEL (PERCENT)

URBAN .. .. 10.0 39.3RURAL .. .. 60.0 69.0

Not availableNdt applicable.

1iOTES

/s The group averagea for each indicator are population-welghted arithmetic means. Coverage of countriesanong the indicators depends on availability of data and is not uniform.

/b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971; and for Most Recent Estimate, between 1978 and 1980.

/c 1976; /d 1977; /e 1975; /f Registered, not *Il practicing in the country; LI 1962; /h 1958;/i 1967T Lj for Mainland lanzania only.

May, 1982

-33-

ANNEX I_____T_____OF __SOCIAL __ Page 3 of 6

Sat.nAltk-at the data -p de- foss esere pe-valy ldgd the st atbootatta md reliable. it h.eni also he -rd thee they my _t he inte-eateIlp tewerabie bstns of the 1tk of stadrdised deftitii. sad -estep ned by dtiffret Moere n olcigthedt.The jes retbelaa enfol to descibe orders of meetd.tdloate tred.. sad tha-rscteiecer.in sajor difference hetescontres

Th. reeec uop r (1) the te couotry group of the ebjct coutry, and (2) a coun try group ith eeitthigh-e iveog toom th- the c-otry groupof the ebjoct onuotry (ocept for "High Income Oil Reporters' groop hars "Middle Imoo North Africa sod Middle Eas" Is thosso bocee- of stronger

aaca-clrralffodree . rho rafar-r gro dar eha -rrgaa ar- oplroreigh-ad srltb-tic -ne for each Jadda-u and shoo only elpmaJority of the co_trios to . ftO ho. dote for tht In~dicaor StLc the co-erge of co osa g the idicators depends on the avilobilicy of date

adIe set n_tfer_, cant.o sc he enencted to rlalting -vege of or indicator to onther. The.- acrgs areony nefu1 to coportog the vein ofone ddeto en a ti- a-g the coutry end ref-efoc groups.

ARSA (tho-on aq.hn.) Pporolt ine "ErOptl d- total. urhe. adrrl-Pplte itlTotl Tota aufa- nre o-poielutg land ena and blend stars; 1979 data, urban, end rua)divi, b thei rePeciv oute of hospital1 bed.Aapii-nto.l - Otee fagro -ulae .aes teepnrrll on permaenely -osllblo do pabua1an pruraI genral sad speland boepual sa

or crope. p.stue.- -rha and kitchen gerda op to lie fellot; 1979 dais. hbhilietaiu o-t-er . gopital ece eenllshsnte preotly staffedhy et Isagi no. physkic-n REtAbIiements providieg. priipally .uato-

GNP PER CAPITA fUS$) - GMP Foo capita -sistes at oroaot macAt prto-a cl1- dIalten_ re non totuded. Renal bspitel., hneve, toinde healthruleted by as ootiot ethod as Seld Saak Atlas (197"O0 baeis); 1960. and sedica1.. cetare tot perantly stffed by a phyatcl-n (bnt bya19 70. nd 1900 data mdira- eis n one,ideife, etc.) ehiob offer ta-patien 'ICc

datton and provide a limIted rag of medical facilitiae. for -tatiagENERGY CONSUMTllION PER CAPITA - dauicnuctto-orl energy 1(o tira1 purposes nbs ho-pitala. i-stldo Slp oitplgeea estss

and lignite, pe trofene nroral gsa and bydro-, oudarad gotema 1c en .rra hospitti, 1-01 ur rore1 bospfsle sod eddoa and saterodytriricy) toilogas f coal aqdaetper .epita; 1960. 1970. end 1979 teeter. Spsoained hospyttolstore itelnded only under ltotl.data. Adeietoa rpIoerra ad - Toal uto of udmlseJoo to or dicbsrgss

from hospitalsdivided by the unae of beds.PPULtATtION aMe VITAL STATISTICS

Tota poelanion. Mld-Teon (tfnc_sda) As of July 1; 1960, 1970, and 1980 fHOUSINGdata. Average Sine o -oehold (pErsn pe I household - totl rhoI nd

trbae Pooulidon (nerco of Uoal - Satl of uphu to fofal populaton; A h-nenhoLd cslts of a roup fWidndol h shar Hofgqsedifferrt daflit ion of urba arso say affect co rability of date od their sal mei. A brdnr or lodgr say or say tot be toclnded to

S asong~~~~_. coun,ire 1960, 1970. and 19Bl deta. the household forstiatiticl purpocee.Ppul'ationPojcisAverag -tbe-o eeu pe ro-tta,ura, and rorl.1 -average one-

totlcpopu1latio by aE und set und thei sort -lily end fertility rates. doilog, epectively. Oellngetlnde oprato trtorsadProjrctlon pA-mtera C. on-etality rates .oPliaeofthree Io.-Is anu- unoccpied pats.itg life e-p-t..ty at birthlcraia tch counry' per ca pita ios-ccs to flecfic tt, (-ecet of dseelltte) - tota, urban, and nune -leve, ad femal life onpectanoy atsbileIng t 71.5 y-an. Tbs pam.- Conv-tioeal deelllng cIt eIer1nioty in ILtvtgquntrn

-trs for fertility rot ainn heve three eeassulgdcIetof tarot, orhat, aedrro d-nelgli-gar -pnoivl.ferility according to Incom 1-1e sod paa f. ely planin petrsnaEach country In thro ..aaegd one f tbeae ote atotut f -otlicy OITCATIWlsnd ferti lity t_sds foo roj-ction purposes. Adjuatn nn-1l-t Rettue

Station.. pony ta - Io a noa tionary popalotian thrre in -0 gpoehaiace P~isay tohoi - total, esleand P o1al - Groa tota, sale and fesaithe birth -t,rn lo qool t the deeth cane. ad tla thtagentracturre arirt f all agon t th. prie-Y loveI - procntogas of tespocttvesianctant Th t achi-nd only after feotlkdi rote decine to ' pr_so schoo-age popoluti-u:ta;oslly lclaWdeachIdldre aged 6-Il

the replacsn lee f unit vet repood-cto atn, he. each geertoyer hut adjusted fardifferen lengiba of prinJo edoco.tion; faruf e- elce Ic f .nactlp.- The -tti-tay ptueinor Ocoat tri.e itth noiveran educo.. eo-a-11-t ay enceed 100 perrent

ralcd o the huais of thn projected caatrtrc f the pouaunstnn-popila onbhi. or aho- tho off icia school ANn.athe yea 2700. sod rod- ram of dclu of fnpralilyrareto~rnplaoo- Iaod col-total sole aed demean - Cospn-daos bone;erodsry

snot level. nducatiotreqnireaat~~~~~~~~~ .e.st f-na ynae of approved poisny ins ltotlnTn-rs-tlatar p L.tuei reached - Tho yea-ae h t.. ourypopalnitt providee genera. noatnrl o taher-rtIng inarctofI or ynilo

nine I-lheechod. aeely o )t 7yerof sn oraadcron re generally

Pea. b. -Mid-pen population pt square kil te- (1~00 hnotate) of Voainl Ir et(ecn o oodt) -Vcaiona i-aitatooctlsa;1910, 170 and 1979 data. include sbocl Inati,o t prarn bc prt noed

Pet at.he. astcalttrllscd- Coop-rd aa above ion enpi-1tun land -1tyora departente of oeondnry iontitnti-oeol;10,1970ad"179 dern. 1pil-teeche natin - orieoc ..ad a-codary -Voa scd eots -r oild in

PouaI'nAge t-rut-o (peoce..t) - Child-e (0-14 yenra) aoic-g 15- posyadocoay 1enel dIvided by to-e_ of teechero It h.a64 yeo.n). an oIrod Y6 .-or and oe s pretgtoaId-year papa- c1rspoi _evl.-fation; 16.17,ad10 data. AdnIl doterey rote (pnerceet - Lacerate adat- lab le to reed and -irann

Population Irnth Sate foorctat- to tal - ono grochnata- of -otn old- aspretn f tato odalt paaltit nd 15 poor. end over.petppuainfor 1950-6. 60-71,anI971-00.

Popalocirn Gr-ti Reto (percet) -crban- hotun groirtn of ubo- papa- COSUMlfPTIONlsto.. far 19510.0 1960-70, and 1970-800 Ponte as(er thousand1 popltn)-Pnagr oncarn co

(pads Birth Mate per cheaand) - odaol livo birtha per cto--ad at old-pent aaoeoig es hu ih pett; oldonotlee, ne noP. a-inti; 1961. 19701..ad 1980 doc.t.nziliteryvehitoos

(rode leath Race (p-r thea..ad) - OAu.. Identho per th-ae-d of oid-par raiotei_r (Pe r thoc..nId papalni-n) -All typpn atocienfor radioPopulation; 1960. 1970, and 19f0 dote. broedcaa.ca to 000001IpbI~c pot thoa.end of populatlt; .. ciadn a--

Groan ardac~tio Rat.-Anetoga nbrof daughtennr cnoili hea In l1 ice..dircinr -acutrian and in poarn oh.. refi-ttrs to f radioher orsl prd-ctv-rP peiod tf aheep-rl-c prns-t ag-.P-cf fo- note 'sa to infct; data for neoc per synneop-rble otocetiiitynnnsannly ie. et., Inu tda ic 960 _91.ad 1981. soot tIan abolished Illc-tsto

Ponily Pleniog -Accetra. dco..al (thruenadi) A-,.Iue rater af accptor. TV ecira(nor, theaa...d.p...tn..-TVro rtep far hroadceat toof both-coocrI devicna une uptcao - taa f1I_ily pania oaga general pnlic per th--nu PopittlIeeclad. aaulicense TV recions

Ps_ll Pla:ttta ee(ec:Pfstid ee)-precgo ane i aort n tyasoo reiatttion of TV sets a in edtect.nnof(Iidbora g (1-44 peera) -hc .e dt-ot d-nleat - N-p:nro tnrltio(a .bo.aad pn ro(-Shore I Ia aErd rIp-oI iorld Iaeotoe age grout.p. c_oioo dal ea __trta tepapo-", defined napniodtc.

pabliontio d- atd pri-rlly to recrding gena.. o1ne. In in catst de-dpOOe ANt NTRaITcON no be daiy if itoppeoneeiln..nt fou tisno a-ktb

loden of food Pcdactla -o CapIta (19-1-100 Iodea ofppcptMouo in.Ata Atteodanc mrl (anit per Yea-saned anthe ratr fprodctio of ll fod cesadtlen Prdnri-annc1adeannPd- endfed and 'tinhtl od aigth en inldlgdnio_ta od irei cio_so

Ia on-caoado peer baan. C_ditie aoe poiteny goods (eg.oeraend enbile -itt..iantand of su-a) ehih ore dible c t'taitotres(g -cffee nodte ap mc, ioded).I dggrete pradacino If nach ct..otny ia base.d veL1400 PORCEost iana averag prdacog picn eight 1991465, 1970,..ad 1980 data. Tota Labor farce (thou...eda) - Zoaoootcally -ci-r pernon.. includira

Per cop nco soppy of caois(eca f raaatre-tf) - Coapa-d fralpie farces nod unesplynd bat -1c lding ooevs ndoa t.enerY oquivnn odnt food aple -ilabln in coutry par .pitt coeing popaetin of all ege Dftaitiot .. onta r0 ris-rFrr day. A-a.eI. -appline cspriae dometic prod-ctin, iporIt lent not ca.ar-bln; 1961, 1970 atd 1961 data.roparte, adchnoni aat ne npyIiet nclade s-ios1 fred, seedn, Pe.-I. (procen.t) - PeaIr labor farce aa pocn-ge of tota Iebr farce.q-aniti-a cae in. food~ y-oc.ssng, _cd ... eet it distrihation. Saq.iro- agricutr (percent -labo forc bit C tro . foretry, ha-ino sod7.st~teeee-citrd by PAdO hoard an yhyedoaglcfoesfrnra cft- fishin on ~ pocntag of tota lao farce; 196d, 1970 aod 1900 data.oity _en Ibeh c..asidarlt ag nonnotnlteapneine, ldy neght,% ago Industry (peocet) - Labor f-rc tn siniog, srcio,soatarilg

and nan di_tibatioo al papalatia- and n11ibig 10 perceoc for noao an en lcrct,otrad got us pec-cgo ftcra Ie frahoaebad loel 1615, 1070 and 1977 data. 161, 19 end 1990t dota.

PerF ctadr oupply of or-rl (apse oI day) - Pro nea -rte- of p-rcapica Pnccpoinbaefnron - orl 1sl, aad fonlr -rPniiolnO_t spply a fodprdy. net ePM of food In defin -do ah. b e,.R- n-tinity nataor cuaated anota, sal., aod fasal labor faren

qaitesnor f or al uoien .torblinbhd by USDA provide far siti- oocnne f ntalt ooadinaepplroco l gs epcieyallosn-p of 60 gra_ of ntalprtt opr1a and _1go faia cd 1960. 1701.ad 1980 dat.Tes t be...d an ILO'n participative ratespuls pranit,o shich 10 gre hul esisl protnt. Thea.atand- inlcigoesn canr ftepopultio.. ond Lng time trend,

ooi-a protein . on avers for the solId, prapo..ed by PAP ic the Third novoona flpedooc.ySatin - Sain of pplti uder 15 and 65 nod ovengo-1d Poad taroy; 1961465, 1970 and 1907 dan.to th total laborface

Po -cnla rnel eppnly ra -nIna and p0I.. - Pr oteic sappiy of food dt-.nia ry _asaaad pulr .ogaapr day; I i91-5. 1970 snd 1977 da.t INCOMEf DISTRIBUTION

Child (agS, 1-h4) ntiSae- ne rh oa)-anvldeaths pr thuadi ocneeofPianlce bt to-I end KlOd) - D'ceived by richesagrrop14 cn, no cldron On thus age gr. p,fa soar Icoig coonI- _ eoa,rchs 0prto,popr2 porcat. so pores 4 pro

ttnie date derived fro lift tobine; 1960, i970 aod 1990 dota. of house holds,

HEAL,TH PapVnTY TARGE0T GOlglPlife Enpctaruy at Binth (peara) A--Avrge -ar of ya-o of lift -eatitg & The folloaieg estosi -ae ey poi eoe f povrty 1eosi,

ectbirth; 1960, 1970 and 1960 dats.. and eboo1d be ioteryretd inth nonstd-rbloca.t.... IInfant fl-rtaity Sate (P,r thonsad) - AnnuI desha f infant under ov yea etiated Ahanlat Po-try Inco._lve (111 ercaitn) - rbat etd rural1

of age per thensad live births; 1961. 1970 and 1980 dar. Abelte povety tnin 1-v1 is rhat inname leve belon hioh a sLai-IdoatoSafe ..ar ..rco ad. nlto)- total ubtn, sod rural - On- aartialYadeqvre dier pine ... osetal noo-food rqdo ei a

her of Ppeni (tota1l,rba., ed I-tel) slo r-e-nbel es to saf affordable.enter sopply (inoldea treated sof etee or antreated hat unoteminatd Satiste Relation Poverty Inc- Level (US$ per- caita) - rhn sod Iorel1

-atr .ncha thet free pretaoted _hphoe1 siprig, sadsntr ells) as r-el relaive poorey to-e leve is oe-third of...rgepr. sptpac=etagno the it -npectn- oast ne. t -o urban arn a public person leans of the conty. (rbee leve Is dariod fe the caraI Iataa rtrsdpast Ilacard no sop than 200 steps from a house sy he level sith adjumen fo f fnls nos of ittg On urbanaeerunei4sced as beig v1iabi rasonble acsof that house . In rural area Satisad uoaalnSae boueboet,oeslvlfnnet raesaeebia -ass -Ind isply that the ha-edo. or -. ers of she bnnseld and pars

1P- Poee of Ppopola-n fre s. Ins) t areatana

do at har to pand a disproportlaant paet of the day in~ fetobtig the ...

lae to eei (neal n.a f an Zrco) srvdby nc dispsa= aPec tsngss of thatc rs-p-ttv pepulatn.- Ueocet dtepoanl nap Onlodthe niaaa a.d diayeaei sigh at vithsI -tee-A. of kinse seeenasd oasi-tser byonter-hern sYsa -e she.e of pit priien sod sim-

isenntin et Phego -Foraltien diidad by .. fla of p-stli.g rhyst- Ro-saic and getil Nata Diobiot_sn I qanifle free a saditl' aneAl an aoe-iny tovet Reesool ea-lysis an Projenasas Sapects

Poseetia pe gsesng senn -PeyiaItien dtoidsd by asue of pr-lisgig Map 19B2sae-ndtlegedgn soa .aista saan, posetgol nes n

- 3 4 - ANNEX IPage 4 of 6

PoPulation 17.5 m illion (mid-1979)G.P Per Capita: US$270 (1979)

TANi'A. NA -- ECONOMIC INDICATORs

Amount(million USS at _ _ AnnuLal Growth Rates 1.)

Indicator current prices) a__ Projecte_d1979 1976 1977 ;978 1979 '980- 1981 1982 1983 1934 1985

NATIONA' ACC UN1T1'S

Gross domest!c product•/ el 4,564.3 6.7 4,7 5.4 3.9 -1.5 3.7 3.6 3.6 3.S 3.6Agriculturee/ 2,210.2 9.8 7,5 7.4 8.0 -6.1 4.2 3.6 3.6 3.6 3.6Industry 549.0 0.9 3.1 -2.2 3.1 - 3.0 4.0 4.0 4.0 4.0Services 1,374.8 3.4 5.5 6.5 3.4 4.0 3.4 3.4 3.4 3.4 I,

C,nsu.mpt ion 4,115.8 1.6 12.3 14.6 -3.4 1.7 4.6 1.9 3.2 3.1 '.2Gross investment 958.6 11.5 2.1 3.8 10.9 -6.2 3.6 3.6 3.6 3.6 3.6Exports of (NFS 647.9 16.8 -22.8 -2.4 -2.8 -9.6 1.7 7.9 5.2 5.2 5.3Imports of GNFS 1,158.0 0.5 4.4 34.9 -19.2 1.5 -2.9 -1.1 2.9 2.6 3.0

Gross national sasings 468.0 64.5 -6.8 -58.0 99.4 -16.9 -23.9 19.0 8.8 9.7 8.H

PRICES

GDP deflator (1978 = 100) 77.2 92.4 100.0 108.5 124.8 140.4 154.4 168.3 181.3 194.5Excin3ge rate (T.Sh. per US$) 8.4 8.3 7.7 8.3 8.2 8.2 8.2 8.2 8.2 8.2

Share of GDP at Market Prices (7) Average Annual Increase (7)_ (ar currencj 1 rices) _ (at stant 1978 prices;

1970 1975 !980 19d5 :990 1970-75 ;975-80 1980-55 1985-90

Gross d,.)restic productel 100.0 103.3 100. 100.0 100.0 4.9 4.1 3.6 3.6Agriculure-/l 36.9 36.9 47.5 47.8 47.9 2.1 5.8 3.7 3.6Induztry 15.5 14.5 11.9 12.3 12.3 3.7 0.7 3.9 4.0Services 37.2 37.R 31.1 30.8 30.6 6.5 4.6 3.4 3.4

Con'lrlPci.n r81.9 91.7 90.3 88.2 86.4 5.9 6.0 3.1 3.1G-oss investsenc 22.5 2'.1 20.0 18.0 18.0 0.2 4.6 2.1 3.6rxDor2, ONFS -24.3 -13.2 -12.' -13.9 -15.2 -5.3 -5.2 5.3 5.4,.ports GNFS 28.4 31.0 22.5 20.2 19.7 -3.8 4.2 1.1 3.0

Gros. national savings 18.3 7.6 9.97 11.6 13.5 -2.4 -3.6 5.7 7.0

As 7. of GD?_-3LIr F'N4ANICF 1970 1975 1979

Curre.w - e.-niee j17.5 20.2 13.5Current expendiiires 16.2 20.2 23.9Surplus (+) or deficit (-) 1.3 - -5.4Ca.iral expenditire 8.3 11.6 12.7Foreign financi-g 2.0 5.4 6.7

1970-75 1975-80 1980-85 1985-90OT9137. INDICATORS

GUN growth rate (.) 4.7 4.2 3.6 3.6GNP per capita growth rate (7.) 1.3 0.8 0.2 0.2

ICOR 5.0 5.5 5.1 5.1Marginal savings rate -0.1 -0.1 0.1 0.2Import elasticity -0.8 1.0 0.3 0.8

a! Ers'imateb/ Apart from trade projectiorm, which include small but offsetting amounts of Zanzibar trade, all data ini thls table are for Mainland

Tanzania only.el Projected years at constant prices.d' At market prices; components are expressed at factor cost and will not add due to exclusion of net indirect taxes and subsidies.e/ Historical trend frori 1973 to 1979 is based on official estimates, which include subsistence productiorn growth rate of 8.67. per

ana,um. We estimate that a more realistic growth rate for subsistence production over this period would be nearer 42 per annun,reducing agricultural growth to 3.47. per annum and GDP grotith to 3.67. per annum.

- 35 - ANNEX IPage 5 of 6

Population 17.5 milliori (mid-1979)C!P Per Capita; US$270 (1979)

TANZANIA - EXTERNAL TRADE-

Amount Annual Crowth Rates (.)

Indicator (million US$ at (at constant 1978 prices)current prices) Actual a - Projected

1979 1976 1977 1978 1979 1980- 1981 1982 1983 1984 1985

EXTERNAL TRADE

Merchandise exports 543.6 7.8 -_9.4 -6.5 6.1 -7.8 2.1 8.5 5.3 5.3 5.3

Major primary products 339.5 9.5 -20.1 -9.7 -0.1 -4.8 3.0 8.8 4.1 4.1 4.1

Others 204.1 3.3 -18.1 2.7 21.5 -14.0 - 8.0 8.0 8.0 8.0

Merchandise imports 1,099.6 -16.4 7.7 36.8 -18.8 1.0 -3.4 -1.5 2.8 2.3 2.9

Foodgrains 19.3 -65.2 23.3 -14.7 -42.4 334.0 -3.0 -47.5 - - -

Petroleum 171.7 11.0 -11.5 12.8 -8.9 2.1 -7.9 5.0 3.1 3.3 3.4

Machinery and equipment 515.0 -15.2 25.1 55.1 -10.0 -7.6 -5.4 2.9 2.9 2.9 2.9

Others 393.6 -13.9 0.7 33.9 -28.9 -7.6 0.7 3.0 3.0 3.0 3.0

?r(ICES

Export price index 77.4 106.9 100.0 106.9 122.1 116.6 123.8 136.2 149.4 163.4

Import price index 81.1 89.5 100.0 118.2 138.2 155.7 173.3 188.5 204.4 220.9

Terms of trade index 95.4 119.4 L00.0 90.4 88.3 74.9 71.4 72.2 73.1 - 74.0

Composition of Merchandise Trade (-/i) Average Annual Increase(7.)(at current prices) (at constant 1978 prices)

1970 1975 1980 1985 '1990 1970-75 1975-80 1980-85 1985-90

Exports 100.0 100.0 100.0 100.0 100.0 -4.5 -5.2 5.6 5.5

Major primary products 59.2 66.3 69.2 67.6 63.5 0.2 -6.9 5.0 4.1

Others 40.8 33.7 30.8 32.4 36.5 -12.9 -1.0 6.8 8.0

Imports 100.0 100.0 100.0 100.0 100.0 1.8 2.6 0.9 3.0

Foodgrains 2.5 15.3 9.2 4.5 3.9 44.8 -5.8 -14.1 -

Petroleum 8.5 11.9 12.7 13.1 13.7 4.8 - 2.0 3.9

Machinery and equipment 35.2 30.8 41.2 38.8 36.9 0.7 11.1 1.7 2.9

Others 53.8 42.0 36.9 43.6 45.5 -1.7 -3.3 2.7 3.1

Share of Trade with Share of Trade with Share of Trade with

Industrial Countries (%) Developing Countries (%) Capital Surplus Oil Exporters (7.)

1970 1975 1978 1970 1975 1978 1970 1975 1978

DIRECTION OF TRADE

Exports 54.0 48.2 68.0 40.0 43.3 73.2 0.6 0.4 0.7

Imports 57.9 59.7 74.2 27.3 25.1 17.9 1.2 3.2 0.8

at EstimateSl Data are for all Tanzania (Mainland and Zanzibar)

- 36--ANNEX IPage 6 of 6

P.cp.lation : 17.5 etillon (mid-1979)GYP P r Capit.: USS 270 million (19795

TA112ANIA BALAhrEOF PAfMtrNT5 XTFFRIAL CA3iTA:.ANr) :i3t

(million USS at current pr0ce,)

Indic-tor 1970 1976 1977 _ 1978 1979 198a- 1981 1982 1983 198'. 'q85 19= 0

BAtAN5E OF PAYtENTS

Export of goods an.l services 350.4 647.2 669.6 631.2 705.6 740.6 741.8 851.1 979.2 1,123.7 1,286.1 2,289.9of which Merchandise f.o.b. 259.3 492.4 547.7 479.2 543.5 572.7 558,2 643.2 744.8 86b1.4 991.8 1.796.3

Imports of goods ant services 377.9 729.6 853.4 1,271.1 1,224.3 1,452.7 1,596.5 1,756.3 1,965.2 2,182.8 2,423.7 3,9C0.7of thich: lefchan-dise c.i.f. 318.4 630.5 750.3 1,146.5 1,099.6 1,299.1 1,412.9 1,549.1 1,732.6 1,932.3 2,149.;1 3,488.1

Se,t raSfens- 5.6 -16.4 11.9 19.2 28.1 20.0 21.6 23.3 25.2 27.2 29.4 43.2

Currenc account balance -21.9 -98.8 -171.9 -620.7 -490.6 -692.1 -833.1 -881.9 -959.7 -1,031.9 -1.108.2 -1,567.6

Official grant receipts 6.2 1 19.0 135.0 214.1 321.4 380.9 410,4 443.2 478.7 517.0 558.1 820.4M & LT laanS (net) 38.1 97.1 162.3 15i.1 255.8 329.3 392.7 408.7 451.0 484.9 569.6l 772. 2Offi cI,1 41.2 107.1 168.0 158.1 162.4 196.1 341.9 377.5 439.8 476.6 577.3 775.9Pri.v,t -3.1 -10.0 -5.7 -7.0 93.4 133.1 50.9 31.2 11.3 8.3 -8.i -3.6

Other capital -29.8 -67.7 10.5 -1S.6 -4.7 2.9 53.0 50.0 50.0 - -36.0Change In reserves (--increa,e) 7.4 -49.6 135.9 270.1 -81.9 -20.0 -20.0 -20.0 -23.0 -20.0 -20.3 -25.0

Internatlonal r.serves 107.5 164.4 300.3 30.2 112.1 132.1 152.1 172.1 192.1 212.1 232.1 357.iReserves as months imports 3.4 712 4,2 0.3 1.1 1.1 1.1 1.2 1.2 1.2 !.2 1.1

EXtR'AI CAPITAL AND DET8

,ross Jisb.rsements 60.5 238.2 326.3 382.5 596.9 763.83fficisl grcots 6.2 119.0 135.0 214.1 321.4 380.0Co-e ssional loans 40.4 93.6 149.5 112.6 103.8 179.7

DACL 20.1 58'0 73.7 64.1 33.2 33.1o'?C - 1.0 6.5 1.2 1.2 35.5IDA 9.4 29.0 39.3 24.4 39.0 49.4Other 10.9 5.6- 30.0 22.9 30.4 61.6

Nov-concessional loans 13.9 25.6 41.8 63.4 171.7 204.1Officia1 export credits - 7.3 - 21.7 32.1 6.81BRD 4.8 17.1 30.4 31.3 36.6 31.8Other essOtilateral - - 3.1 7.6 5.3 14.4Private 9.1 1.2 8.3 2.8 97.7 151.0

EtternAl DebtDebt outstanding and d:sbursed 322.7 1,026.3 1,318.6 1,260.1 1,422.0 1,751.3

Official 193.4 965.7 1,158.5 1,201.4 1,266.6 1,462.7Private 129.3 60,6 60.1 58.7 155.4 288.5

Undisbursed debt 408.4 536.6 560.4 617.5 699.6 679.7

Debt serviceTotal s.rvice pa.yneats -26.3 -41.7 -51.2 -49.6 49.7 -98.2

Interest -10.1 -19.5 -22.3 -24.7 -30.0 -43.7Payments as 7. exports 7.5 6.4 7.6 7.9 7.1 13.3

Average Interest rate on new loans't) 1.6 2.6 3.1 2.6 5.5 4.5Official 1.5 2.3 3.1 2.6 4.0Private 7.0 8.3 9.3 .. 8.5

Average maturity of new loans (years) 38.8 38.0 34.7 35.4 21.1 27.3Official 39.7 39.9 14.7 i 35.4 27.0 .

Private 7.2 5.0 :14.8 .. 9.7

As 7. of Debt Outstandingat End of Most Recent

Year (1979)

Maturlty structure of debt outstandingMaturities due within 5 years 28.4Maturities doe within 10 yearn 62.7

Interest struct.re of debt outstandingInterest due 'ithi. first year 3.0

a/ Estimateb/ E,,Iudes official grant receipt..c/ Includes financing of projected gap oa IDA terms.

- 37 -

ANNEX IIPage 1 of 16

THE STATUS OF BANK GROUP OPERATIONS IN TANZANIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS TO TANZANIAAS OF MARCH 31, 1983

(US$ million)Amount less cancellation

No. Year Borrower Purpose Bank' TW IDAt Undisbursed

Eight loans, one Third Window loan, and twentycredits fully disbursed. 121.24 29.99 184.74

454-TA 1974 Tanzania Cotton2 17.50 1.62507-TA 1974 Tanzania Highway Maintenance 10.20 1.16580-TA 1975 Tanzania Dairy 10.00 4.251128-TA 1975 Tanzania Mwanza Textile2 15.00 0.53601-TA 1976 Tanzania Technical Assistance2 6.00 0.80606-TA 1976 Tanzania National Maize Program2 18.00 4.33607-TA 1976 Tanzania Fifth Education 11.00 4.551307-TA 1976 Tanzania Forestry2 7.00 0.74652-TA 1976 Tanzania Fisheries 9.00 5.36658-TA 1976 Tanzania Tobacco Processing2 8.00 0.46

1354-TA 1977 Tanzania Urban Water Supply 15.00 0.291385T-TA 1977 Tanzania Morogoro Industrial Complex 11.50 1.121386-TA 1977 Tanzania Morogoro Industrial Complex 11.50 0.69703-TA 1977 Tanzania Rural Development (Tabora) 7.20 3.95732-TA 1977 Tanzania Second Sites and Services 12.00 5.24743-TA 1977 Tanzania Trucking 15.00 3.781498-TA 1977 TIB Tanzania Investment Bank 15.00 1.47801-TA 1978 Tanzania Second Cashewnut 27.50 6.72802-TA 1978 Tanzania Tobacco Handling 14.00 9.74803-TA 1978 Tanzania Rural Dev. (Mwanza/Shinyanga) 12.00 5.331607-TA 1978 Tanzania Morogoro Textile 25.00 24.50833-TA 1978 Tanzania Morogoro Textile 20.00 5.04860-TA 1979 Tanzania Tourism Rehabilitation 14.00 9.69861-TA 1979 Tanzania Sixth Education 12.00 10.32875-TA 1979 Tanzania Mufindi Pulp and Paper 30.00 0.07

1650-TA 1979 Tanzania Mufindi Pulp and Paper 30.00 26.64876-TA 1979 Tanzania Fifth Highway 20.50 14.291745-TA 1979 TDFL Tanganyika Dev. Fin. Co., Ltd. 11.00 3.241750-TA 1979 TIB Tanzania Investment Bank 25.00 14.25S-24-TA 1979 Tanzania Dar es Salaam Port Engineering 2.50 0.25987-TA 1980 Tanzania Tanzania Rural Dev. Bank 10.00 9.89

1007-TA 1980 Tanzania Pyrethrum 10.00 7.151015-TA 1980 Tanzania Grain Storage and Milling 43.00 39.361037-TA 1980 Tanzania Smallholder Tea 14.00 12.581056-TA 1981 Tanzania Seventh Education 25.00 24.581060-TA 1981 Tanzania Technical Assistance II3 11.00 8.161070-TA 1981 Tanzania Coconut Pilot3 6.60 4.961133-TA 1981 Tanzania Export Rehabilitation Program3 47.10 5.821173-TA 1982 Tanzania Telecommunications I3 25.30 25.301199-TA 1982 Tanzania Songo-Songo Petroleum II3 20.30 4.101206-TA 1982 Tanzania Technical Assistance III3 12.00 10.561229-TA 1982 Tanzania Sao Hill Forestry-Phase I13 12.00 12.001271-TA 1982 Tanzania Urban Water Supply (Suppl.)3 4 4.00 4.001312-TA 1983 Tanzania Dar es Salaam Sewerage and 22.50 22.50

Sanitation 4Total 275.74 41.49 723.94of which has been repaid 29.94 - 10.70Total now outstanding 245.80 41.49 713.24Amount sold .09of which has been repaid .09

Total now held by Bank and IDA1 245.80 41.49 713.24Total undisbursed 72.35 1.12 287.91 361.38

1 Net of exchange adjustments.2 Since these projects have recently been completed, loan/credit

accounts will soon be closed.3 Sixth replenishment; approximate US$ equivalent of SDR's.4 Not yet effective.

38 -

ANNEX IIPage 2 of 16

B. SUMMARY STATEMENT OF BANK LOANS FOR COMMON SERVICES GUARANTEEDBY KENYA, TANZANIA AND UGANDA AS OF MARCH 31, 1983

(US$ million)Loan Amount (less cancellations)No. Year Borrower Purpose Bank' Undisbursed

Seven loans fully disbursed 135.80

638-EA 1969 EAHC Harbours 35.00 0.52865-EA 1972 EAHC Harbours 26.50 0.35914-EA 1973 EAPTC Telecommunications 32.50 0.281204-EA 1976 EADB Development Finance 15.00 0.95

Total 244.80 2.10

of which has been repaid 80.99

Total now outstanding 163.81

Amount sold 24.36

of which has been repaid 24.36 0.00

Total now held by Bank 163.81

Total undisbursed 2.10 2.10

lNet of exchange adjustments.

- 39 -ANNEX IIPage 3 of 16

C. PROJECTS IN EXECUTION'(As of March 31, 1983)

There are currently 41 projects under execution in Tanzania.

AGRICULTURE SECTOR

Credit No. 454-TA - Geita Cotton Project: US$17.5 million

Credit of January 17, 1974; Date of Effectiveness -

April 5, 1974; Closing Date - December 31, 1982

The project was completed on schedule and credit account will be

closed. Most of the civil works, including roads construction have been

completed and trial results have established an effective spray regime

although viable packages for fertilizer use have not been identified. The

project was involved in the villagization process, land use planning and

the establishment of block farming. Staff continuity and higher level

staff training have been good. However, most appraisal targets have notbeen achieved. Cotton production is now declining. A Project CompletionReport is under preparation.

Credit No. 652-TA - Fisheries Development Project: US$9.0million Credit of July 12, 1976; Date of Effectiveness -October 12, 1976; Closing Date - December 31, 1981

The Project faced major implementation difficulties, including a

delay in the procurement of boats for the Kigoma Commercial Center, a major

shortfall in the purchase of boats for the coastal centers and apostponement of procurement of lake transport facilities. There were

problems affecting the quality of wooden boats constructed under theproject and delivered to the coastal center. After considerable discussion

of a possible extension of the project, project activities were terminatedon December 31, 1982.

Credit No. 606-TA - National Maize Project: US$18.0 million

Credit of Janury 29, 1976; Date of Effectiveness - May 28,1976; Closing Date - December 31, 1982

The project was redesigned in order to intensify project

activities during a three-year extension period from July 1979 to June

1982; however, this redesign had little impact on the production of food

crops because of drought conditions. Inadequate research, extension and

'These notes are designed to inform the Executive Directors regarding

the progress of projects in execution and in particular to report anyproblems which are being encountered and the action being taken to remedythem. They should be read in this context, and with the understanding that

they do not purport to present a balanced evaluation of strengths and weak-nesses in project execution.

-- 40 -

ANNEX IIPage 4 of 16

prices also discouraged proper crop husbandry. Construction of staffhouses and village stores was delayed due to shor tage of bui]Ldingmaterials. The December 1982 mission found no improvement in projectimplementation and project activities were terminated on sche!Lule.Credit account will soon be closed.

Credit No. 580-TA - Dairy Development Project: US$1.0.0million Credit of August. 15, 1975; Date of Effectiveness -

November 13, 1975; Closing Date - March. 31, 1983

The project has begun to show overall improvemetnt in itsimplementation. Milk production, technical parameters and budgetingcontrol have improved, and production cost has been reduced. The largeprice increase in July 1980 was responsible in great part for the improvedfinancial position of the dairies. However, implementation problemsremain, and the closing date has not been extended past March. 31, 1983.

Loan No. 1307-TA - Sao Hill Forestry Project (Phase I):US$7.0 million Loan Df July 12, 1976; Date of Effectiveness -

October 12, 1976; Closing Date - June 30, 1982

This first phase project has been completed. While the ClosingDate was not formally postponed, disbursement of committed amountscontinued until September 30, 11982. Credit account will be closed.

Credit No. 658-TA - Tobacco Processing Project: US$8.0million Credit of September 16, 1976; Date of Effectiveness -

February 15, 1977; C:Losing Date - December 31, 1981

The Closing Date of t:his Credit was December 31, 1981. However,the credit account was kept open to allow the project authorities to submitbelated withdrawal applications for two eligible expenditures - securitylighting and firefighting equipment. Credit accotnt is now being closed.

Credit No. 703-TA ancl Credit No. 703-5-TA - Tabora RuralDevelopment Project: US$1.2.0 million Credit 2 of May 11,1977; Date of Effectiveness - November 11, 1977:;Closing Date - June 3i0, 1]983

Overall project implementation has improved with the easing ofcement shortages and the improved arrangement for diesel fuel supply.Specifically, the agriculture, land. use, and roads components are makingsatisfactory progress and the water resource development has improved.With close supervision, disbursement of credit funds has also improved.The Government has submitted proposals for restructuring and extending theproject beyond the current Closing Date. These proposals were reviewedduring a supervision mission in October 1982. However, the mission foundsome deterioration in the key crop and livestock components of the projectand concluded that an extension would not be justified. Project accountwill be closed on schedule.

2 Credit No. 703-5-TA (US$4.;3 million) is financed under the specialCIDA arrangements; Credit no. 7133-TA is an IDA Credit of US$7.2 million.

- 41 -

ANNEX IIPage 5 of 16

Credit No. 801-TA - Second Cashewnut Development Project;US$27.5 million Credit of June 14, 1978; Date of Effectiveness -October 2, 1978; Closing Date - December 31, 1984

Factory construction is satisfactory. However, the project isseriously affected by technical, managerial, and financial problems.Particularly, the inadequate supply of raw nuts is worrisome. In addition,the appointment of key staff and the maintenance of up-to-date accounts atexisting cashewnut factories continue to pose difficulties. The prospectsfor operation of the new facilities at full capacity are rather poor.

Credit No. 802-TA - Tobacco Handling Project: US$14.0 millionCredit of June 14, 1978; Date of Effectiveness - January 5, 1979,Closing Date - April 30, 1983

The project has faced major difficulties. Despite the low volumeof tobacco handled, TAT's administrative costs remain very high. Tobaccolosses during handling remain significant and TAT's ability to organize andfollow through on corrective measures has been limited. It has hence beenagreed that the project should be scaled down and terminated on schedule onApril 30, 1983.

Credit No. 803-TA - Mwanza/Shinyanga Rural Development Project:US$12.0 million Credit of June 14, 1978; Date of Effectiveness -March 5, 1979; Closing Date - December 31, 1984

Although some infrastructure components are proceedingsatisfactorily, and housing and vehicles have been provided, the project'sagricultural components are not making significant progress. This is duenot only to problems of project implementation but also to general factorsaffecting the entire agricultural sector such as the pricing ofagricultural produce and inputs, marketing problems, input supplyconstraints, and deficiencies of agricultural services (e.g. research,extension and credit). The Government has submitted proposals for projectredesign and a joint IDA/IFAD mission visited Tanzania in December 1982 todiscuss these proposals with the Government and project staff. Theredesign proposals were amplified during the mission, and it was agreed inprinciple that the greatly reduced investment program should beimplemented.

Credit No. 987-TA - Tanzania Rural Development Bank (TRDB)Project: US$10.0 million credit of October 24, 1980; Effective-ness Date - May 18, 1981; Closing Date - December 31, 1983

TRDB is facing growing financial and managerial problems, due inpart to the pervasive problems of the agricultural sector. TRDB ispreparing programs to deal with the issues.

- 42 -

ANNEX IIPage 6 of 16

Credit No. 1007-TA - Pyrethrum Project: US$10.0 millionCredit of October 24, 1980; Date of Eff'ectiveness - April 20,1981; Closing Date -- December 31, 1985

The Tanganyika Pyrethrunm Board's operating costs are proving muchhigher than expected at appraisal and it may not be possible to reduce themsufficiently in the course of the project to ensure economic production.The closure of the extraction plant at Mafinga will result in importanttransport savings for TPB; however, these will not be significant enough toimprove prospects for the crop. Urgent steps are to be taken to reduce theoperating costs of TPB and to improve the marketing of its products.Expenditures for certain new investments (e.g. headquarters building forTPB, staff housing and possibly some road improvement) are to beeliminated.

Credit No. 1037-TA - Smallholder Tea Project: U'S$14.0 millionCredit of August 20, 1980; Effectiveness Date - April 27, 1981;Closing Date - June 30, 1985

The project started slowly due to delays in appointing theGeneral Manager and the Chief Engineer. Some start has been made in thetea nursery and fuelwood plant'ing. The Ukalawa factory site has beenselected but the construction of tlhis facility may be delayed, pending asignificant increase in tea production.

Credit No. 1070-TA - Coconut Pilot Project: US$6.8 millionCredit of October 24, 1980; Date of Effectiveness - April 20,1981; Closing Date - March 31, 1986

Implementation of the project is progressing well, largely due tothe quality of staff in the field. However, the Mainland Govenment hasdecided to allocate only TSh 3 million of the TSh 9.5 million in localcurrency needed for the project: in 1982/83. Management is hence attemptingto resolve this problem.

Credit No. 1015-TA - Grain Storage and Milling Project:US$43.0 million Credit of April 15, 1981; Date of Effectiveness -

July 15, 1981; Closing DaLte - June 30, 1987

Because of the uncertainties regarding the organizationalstructure and future responsibilities of the National Milling Corporation(NMC), project implementation has been substantially delayed. Detailedproposals for the reorganization of cereals handling and distribution arestill being discussed in Tanzania. The Bank will now suggest thatGovernment provide adequate re-design proposals which will then beappraised.

Credit No. 1229-TA - Sao Hill Forestry Project (Phase II):US$12.0 million Credit of May 19, 1982; Date of Effectiveness -March 16, 1983; Closiag Date - December 31, 1987

This credit, which is a follow-up to the first phase project,became effective on March 16, 1983. The afforestation program consisting

-- 43 -

ANNEX IIPage 7 of 16

of planting, replanting, weeding, pruning and fire break maintenance arebeing implemented well; however, the ancilliary and support services areexperiencing some difficulties.

EDUCATION SECTOR

Credit No. 607-TA - Fifth Education Project: US$11.0 millionCredit of January 29, 1976; Date of Effectiveness - March 23,1976; Closing Date - June 30, 1982 _

Overall project completion has reached 65% and about $6.3 millionhave been disbrused. However, because of the domestic financial

constraints, the shortage of building materials and the dispersed locationsof the village staff housing program, it will not be possible to completethe project as planned. The Credit account will soon be closed.

Credit 861-TA - Sixth Education Project - US$12.0 millionCredit of January 22, 1979; Date of Effectiveness - June 25,1979; Closing Date - June 30, 1985

Civil works are underway at two vocational training centers andthree technical secondary schools and are due to start on the Dar es SalaamSchool of Accountancy. Implementation is slow with resultant costincreases. However, all components (with the possible exception of thepostponed MANTEP - management training for education personnel) areexpected to be completed by project closing date.

Credit 1056-TA - Seventh Education Project: US$25.0 millionCredit of September 26, 1980; Date of Effectiveness -December 29, 1980; Closing Date - December 30, 1986

Implementation is proceeding slowly due to (i) staff constraintsin the Project Implementation Section; (ii) delay in Government decision onlocation and staffing of the Coordinating Unit for Research and Education;(iii) delay in staffing and equipping of the National Examination Counciland of the Tanzania Elimu Supplies; and (iv) shortages of materials.However, in Zanzibar, work on the new Teacher Training College is ahead ofschedule, staff houses are now available at the Nkrumah Training Collegeand preliminary surveys of sites have been made.

TOURISM SECTOR

Credit No. 860-TA - Tourism Rehabilitation Project: US$14.0million Credit of January 22, 1979; Date of Effectiveness -August 24, 1979; Closing Date - June 30, 1983

Project implementation generally is progressing much slower thananticipated at the time of appraisal mainly due to delays in execution ofbuilding works for hotel rehabilitation. All posts for technicalassistance staff have been filled. The construction site identified for theHotel and Tourism Training Institute (HTTI) proved to be unsuitable becauseof size and shape, thereby delaying implementation of this component. Analternative site has been located and preparation of preliminary design is

-- 44 -

ANNEX IIPage 8 of 16

about to start. Improvements to the airport terminal were clropped becausethe Government was able to secure bilateral financing for a new passengerterminal building. Vehicles for anti-poaching aLctivities have beenreceived and allocated to TANAPA and the Ngorongoro ConservationAuthority. The Closing Date will need to be postponed if IDA involvementis to continue.

TRANSPORT SECTOR

Credit No. 507-TA - Highway Maintenance Project: US$10.2million Credit of August 21, 1974; Date of Effectiveness -

November 20, 1974; Closing Date - December 31, 1982

After a slow start, project implementation improved and allequipment procured through IC'B has been delivered. However, it becamenecessary to recast the project by amending its scope to address organiza-tional problems encountered in its implementation. The previous ClosingDate of December 31, 1980 has been postponed to December 31, 1982 to allowadequate time for completion of the project. However, withdrawalapplications will be accepted up to June 30, 198:3 to allow an orderlytermination of project activities.

Credit No. 743-TA - Trucking Industry Rehabilitationand Improvement Project: US$15 million Credit ofNovember 3, 1977; Date of Effectiveness - April 3, 1978Closing Date - June 30, 1983_

Although implementation has been slow due to delays in creatingRegional Transport Companies and in procuring trucks, improvement has beenrecorded recently with the delivery of all original estimates of trucks andthe Government's contribution to the National Trucking Company for equityin the transport companies has been increased. Technical assistance hasbeen extended since 1978; currently about 15 experts are assisting in theproject implementation. All five regional trucking companies were createdin early 1981 and a Board of Directors was appointed, with adequatemanagement staff to support it. They are all operational and have recordedprofits between 12-25% for the first half of the current financial year.

Credit No. 876-TA - Fifth Highway Project; US$20.0 millionCredit of March 2, 1979; Date of Effectiveness - December 3,1980; Closing Date - December 31, 1984 _

This is a follow-up to credit No. 507-TA in the maintenance ofthe national trunk road system. A-l three key advisers and six key localstaff are now in post. However, technical assistance for the MorogoroTraining School has yet to be recruited and an action program forrecruitment and training of staff has yet to be prepared. All 120 studentsare receiving training in various engineering colleges overseas and aremaking good progress. Contract:s for the supply of road maintenanceequipment have recently been awarded and some of the equipment have beendelivered.

- 45 -

ANNEX IIPage 9 of 16

TELECOMMUNICATIONS SECTOR

Credit No. 1173-TA - Telecommunications I Project; US$27.0million Credit of March 4, 1982; Date of Effectiveness -November 1, 1982; Closing Date - June 30, 1986

This credit became effective on November 1, 1982. Physicalimplementation of the project is well underway. TPTC's financial position

is also considered acceptable.

PORTS SECTOR

Credit No. S-24-TA - Dar es Salaam Port Engineering Project:US$2.5 million Credit of February 27, 1980; Date of Effectiveness- August 13, 1980; Closing Date - June 30, 1983

Project implementation is progressing well. The consultants have

submitted a number of reports and drawings to the Tanzania Harbours Author-

ity (THA) for their review and comment. The only major problem is one ofcoordination concerning the commissioning of the new oil jetty which re-quires that the pipe work link to the refinery and the existing network be

completed and ready for use at the same time as the jetty. THA has beenasked to decide on who will design and carry out the actual site work, as

well as finance the foreign exchange costs. The original Closing Date of

September 30, 1981 was postponed a second time in order to complete projectwork.

URBAN SECTOR

Credit No. 732-TA - Second National Sites and Services Project:US$12.0 million Credit of Novemger 3, 1977; Date of Effective-ness - April 3, 1978; Closing Date - June 30, 1984

The project was reshaped in 1981 to accelerate progress, to trimthe scope, complexity and cost to a more achievable level commensurate withemerging experience of actual implementing capacity and to recognize newlyrecreated city councils, which did not exist at the time of projectappraisal. Some problems are still being experienced due to shortages oftrained and experienced management and manpower and equipment and spares,

but overall progress is satisfactory. All civil works contracts have beenlet and 83% of the work has been completed. Special units have beenrecently established to address the continuing problem of consolidationunder the first project and to initiate cost recovery. Progress is evidenton both fronts. Collections are now underway in all Urban I sites and arestarting up in Urban II sites as works are completed.

WATER SUPPLY SECTOR

Loan No. 1354-TA - Urban Water Supply Project: US$15.0 millionLoan of Janury 5, 1977; Date of Effectiveness - March 2, 1977;Closing Date - December 31, 1984

The Borrower's performance under the project has generally beengood. Water treatment and distribution facilities have been largely

- 46 -

ANNEX IIPage 10 Of 16

completed. Establishment of a National Urban Water Authority (NUWA) whichis to own and operate major urban water supply systems in the country, wasapproved by the Parliament in April 1981. Implementation of the projecthas, however, been dominated by the poor performance of the main civilworks contractor for the Mindu dam. After being given severalopportunities to improve his performance, the contractor was dismissed inAugust 1981 and a new contract: was awarded to the second lowest evaluatedbidder at the time of the original contract award in December 1978. Inview of the major delays and problems which have affected the completion ofthe dam, the project's foreign exchange cost increased by about US$11.0million over the appraisal estimate. Completion of the project is beingfinanced by a supplementary credit from IDA (US$4 million) and a grant fromCIDA (US$3.2 million). US$3.8 million is being provided fronl Ln. 1354-TAby diverting funds intended for other project comiponents..

Credit No. 1271-TA - Urban Water Supply Project(Supplementary): US$4.0 million Credit of December 9, 1982;Closing Date - December 31, 1984 _ _ _

This credit is not yet effective.

Credit No. 1312-TA - Dar es Salaam Sewerage and SanitationProject: US$22.5 million Credit of December 21, 1982; ClosingDate - December 31, 1987

This credit is not yet effective.

ENERGY SECTOR

Credit S-27-TA - Songo Songo Petroleum Exploration Project:US$30.0 million Credit of June 30, 1980; Date of Effectiveness -September 12, 1980; Closing Date - September 30, 1982

Drilling of the onshore well under the project has been abandonedbecause of various technical di'fficulties which were aggravated by manage-rial problems, particularly the absence of close and effective projectcontrol. Drilling of the offshore well has been completed. The credit hasbeen fully disbursed and credit: account will be closed.

Credit 1199-TA - Songo Songo Petroleum II: US$20.0 millionCredit of January 13, 1982; Date of Effectiveness -February 23, 1982; Closing Date - December 31, 1983.

This credit became effective on February 23, 1982. Drilling andtesting of the second well, Well SS-8, is now virtually completed. TheAssociation and the OPEC Fund have agreed to finance a third well forpurposes of confirming the extent of the natural gas reservoir at SongoSongo.

- 47 -

ANNEX IIPage 11 of 16

INDUSTRIAL SECTOR

Loan No. 1498-TA - Tanzania Investment Bank: US$15.0 millionLoan of December 28, 1977; Date of Effectiveness -April 3, 1978; Closing Date - June 30, 1983

This loan is now fully committed and disbursements are proceedingsatisfactorily.

Loan No. 1750-TA3 - Tanzania Investment Bank: US$25.0 millionLoan of August 20, 1979; Date of Effectiveness - February 5,1980; Closing Date - June 30, 1984

Commitments and disbursements are progressing satisfactorily.In the light of the difficult situation in Tanzania, particularly thesevere foreign exchange shortage, TIB is revising its operational strategyto focus in the near-term on providing funds which would enable projects toreplace, balance, or modernize their machinery and equipment, improvecapacity utilization, promote exports, and otherwise assist improvement ofbalance of payments. TIB is also being encouraged to use a portion of theBank's loan, on an exceptional basis, to meet part of the requirements forimported inputs of some of its high-priority projects which are likely toface very low capacity operation, or even closure, following meagreallocation of foreign exchange.

Loan No. 1128-TA - Mwanza Textile Project: US$15.0 millionLoan of June 19, 1975; Date of Effectiveness - October 6,1975; Closing Date - December 31, 1981

Project implementation performance has been acceptable and alltechnical installations are now operating satisfactorily. The NationalTextile Corporation (TEXCO), the holding company for state-owned textilemills, has agreed to institute an immediate action progam to improve theoperating performance of existing mills. The project was technicallycompleted in October 1978 with a savings of about US$1.7 million. In orderto utilize this amount for rehabilitation of the existing facilities, whichare essential parts of the project, and in order to finalize disbursementson the awarded contracts, the Closing Date was postponed by six months toDecember 31, 1981. The remaining balance under the loan was cancelled onFebruary 1, 1982.

Credit No. 601-TA - Technical Assistance Project: US$6.0million Credit of January 9, 1976; Date of Effectiveness -September 14, 1976; Closing Date - December 31, 1982

The project was designed to assist the Government in implementingits program of economic development through financing preinvestment andfeasibility studies for projects in the productive sectors, special studiesfor improving efficiency and capacity utilization investments, and training

3In addition, a US$15.0 million EEC Special Action Credit in supportof this project is being administered by IDA.

-- 48 -

ANNEX IIPage 12eOf 16

for Tanzanians in project preparation, implementation, evaluation andrelated techniques. The credit is fully committed and virtually completelydisbursed. The credit account will soon be closed' and the remaining smallundisbursed balance will be cancelled.

Loan No. 1385-T-TA/Loan No. 1386-TA - Morogoro ]:ndustrialComplex: US$11.5 million Loan on Third Window Terms and US$11.5million Bank loan, both of April 6, 1977; Date of Effectiveness- July 6, 1977; Closing Date - December 31, 1982

Project implementation is proceeding satisfactorily in spite ofsome initial delays in the appointment of consultants and start-up ofprocurement. Because of some delays in the start-up of individualcomponents of the Industrial Complex, the project was not completed in July1982 as scheduled. Revised capital cost estimates are only slightly higherthan those contained in the Appraisal Report. The most recent supervisionmission for this project recommended that the Closing Date be postponed toJune 30, 1984 to permit construction and equipping of an effluent treatmentplant to serve the Morogoro Induastrial Estate as well as the MorogoroTextile Mill which is being constructed.

Credit No. 833-TA/Loan No. 1607-TA - Morogoro Textile Project:

US$20.0 million Credit and US$25.0 million both of June 29,1978; Date of Effectiveness - May 7, 1979; Closing Date -June 30, 1985

Project implementation is progressing satisfactorily in spite ofsome problems encountered with t:he awarding of the civil works contract.No further delay is anticipated in project complet:ion.

Credit No. 875-TA/Loan No. 1650-TA - Mufindi Pulp and PaperProject: US$30.0 million credit and US$30 million Loan, bothof April 6, 1979; Date of Effectiveness -- April 15, 1980;Closing Date - Decembe!r 31], 1983

Overall project implementEation, including arrangements forproject management, has improved. Project completion is now expected bymid-1984. Project cost has been significantly reduced with savings incivil works, equipment and particularly in erection. The rebidding of themechanical, electrical and instrumentation installaLtion contract (MEI) hasresulted in savings of about US$9 million. However, supplementary foreignfunds will be required to finance the conversion of the mill's boilers toburn wood fuel as well as coal and ciil, to provide additional start-uptechnical assistance, and to provide sufficient fuel, materials and othersupplies for the first three years cf mill operation.

Loan No. 1745-TA - Tanganyika Development Finance Company, Ltd.(TDFL) Project: US$11.0 million Loan of July 27, 19791; Date ofEffectiveness - November 1, 1979; Closing Date - December 31,1983 _

The loan is fully committed and disbursement is proceedingsatisfactorily. However, there has been a deterioration in the quality ofTDFL's portfolio because of the foreign exchange constraints. An

- 49 -

ANNEX IIPage 13 of 16

increasing number of TDFL assisted enterprises which mainly depend onimported input are operating at less than break-even capacity. As aresult, arrears in the loan portfolio have increased in the past year.

Credit No. 1060-TA - Second Technical Assistance Project: US$11millon Credit of October 24, 1980; Date of Effectiveness -February 10, 1981, Closing Date - June 30, 1985

As of March 31, 1983, 24% of consultants' services allocation hasbeen committed for 9 projects. Commitments and disbursements under thetraining component are proceeding satisfactorily. The Technical AssistanceUnit is functioning efficiently. Some of the previous problems of delayedsubmission of subprojects on training have been overcome.

Credit No. 1206-TA - Third Technical Assistance Project: US$12.0million equivalent Credit of March 4, 1982; Closing Date -June 30, 1987

This credit became effective on April 1, 1982. TheFAO/Government contract for the supply of the major portion of consultingservices was signed in January 1983 and the Technical Assistance AdvisoryCommittee was established in March 1983. However recruitment of experts isstill at an early stage.

EXPORT REHABILITATION PROGRAM

Credit No. 1133-TA - Export Rehabilitation Program: US$50.0million Credit of April 24, 1981; Date of Effectiveness -May 12, 1981; Closing Date - March 31, 1983

Performance in achieving the stated agricultural objectives ofthe project has been generally disappointing. In other policy areas,recent Government actions show some improvements. Important steps remainto be taken on pricing, decentralization of internal distribution andensuring greater accountability in public sector organization.

EAST AFRICAN COMMUNITY

There are currently four projects in execution in the EastAfrican Community. 4

4Since October 1, 1977, the East African Community loans (excludingthe East African Development Bank) have been disbursed on the basis ofseparate national guarantees. The agreed allocation of undisbursedbalances for each loan, as proposed in a report to the Executive Directorsdated December 29, 1977 (R77-312) and approved on January 12, 1978, isgiven in this Annex. The Closing Date for loans 638-EA, and 865-EA havepassed. However, since the amount allocated to and guaranteed by eachPartner State is clearly identified under the terms of the Agreement signedon January 25, 1978 as proposed in the above report (R77-312), we arecontinuing disbursements.

-- 50 -

ANNEX IIPage 14 of 16

Loan No. 638-EA - Seconld Harbours Project: US$35.0 millionLoan of August 25, 19693; Date of Effectiveness - December 16,1973; Closing Date - December 31, 1977

Loan No. 865-EA - Thirtd Harbours Project: US$26.5 millionLoan of December 18, 1972; Date of Effectiveness - April 16,1973; Closing Date - June 30, 1978

The Second Harbours project included financing for five generalcargo berths and a single bay tanker terminal for the Port of Dar esSalaam; two general cargo berths and a bulk cement wharf for Mombasa; tugs,lighters, cargo handling equipment, offices, housing and general improve-ments for both ports. The Third Harbours project included three new deepwater berths, modernization of two berths and a lighterage quay, a training;school building and central repair area for Dar es Salaam; mnodernization ofseveral berths and a lighterage quay, construction of a tug berth, coldstorage facilities and a trai ning building in Mombasa and improvement of alighterage quay in Tanga. Construction of all major project elements hasbeen completed and a joint project completion report was issued in January1979. Because of shortage of funds under both :Loans, the following minorproject elements have not been submitted for Bank financing: the secondphase of modernization of the lighterage quay and a training school for Dares Salaam, modernization of t:he 'Lighterage quay and a training school forMombasa. Locally financed contracts have been awarded for these projectelements with the exception of the modernization of the lighterage quay inMombasa. General cargo throughput has increased above appraisal forecastsfor Dar es Salaam, and cargo handling productiviLty has improved withincreasing throughput; howevetr, port labor productivity has stagnated inMombasa where general cargo throughout has decl-ined considerably. Legis-lation to establish a Tanzania Harbours Authority and a Kenya Ports Author-ity has been enacted. Management of Ports in both countries is competent.Since work under the projects has been compledted, the remaining balance ofUS$516,897.23 under Loan 638--EA and US$349,884.28 under Loan 865-EA werecancelled on November 10, 1982. The agreed allocation of undisbursed fundsof October 1, 1977 between the countries concerned is given below:

For Loan No. 638-EA (US$ milLion)

Kenya 0.7Tanzania 0.6

Total 1.3

For Loan No. 865-EAk

Kenya 1.7Tanzania 0.3

Total 2.0

- 51 -

ANNEX IIPage 15 of 16

Loan No. 914-EA - Third Telecommunications Project: US$32.5

million Loan of June 22, 1973; Date of Effectiveness -

September 19, 1973; Closing Date - December 31, 1979

The project included provision for procurement of local telephone

exchange equipment, cables and subscriber apparatus, microwave and UHF/VHF

systems and multiplex equipment, interurban cables and wires, automatic

switching and signalling equipment, telegraph, telex and data equipment,

and training. All project items have been completed; the undisbursed

balance of US$284,975.20 under the loan will soon be cancelled and the loan

account closed. The agreed allocation of undisbursed funds as at October

1, 1977 among the countries concerned is as follows:

US$ million

Kenya 2.4Tanzania 3.5Uganda 0.1

Total 6.0

Loan No. 1204-EA - East African Development Bank: US$15.0million Loan of March 1, 1976; Date of Effectiveness - June 7,1976; Closing Date - June 30, 1983

The environment within the Community has continued to have a

negative impact on EADB operations. Level of operations both for appraisal

and supervision has been depressed, but there has been some improvement in

the state of the portfolio with the arrears affected portfolio falling from

50% as of June 30, 1977 to 43% as of June 30, 1979. Some US$13.65 million

of the loan has been disbursed to date.

- 52 -

ANNEX IIPage 16 of 16

D. STATEMENT OF IFC INVESTMENT IN TANZANIAAS OF MARCH 31, 1983

Fiscal Amount in US$ MillionYear Obligor Type of Business Loan Equity Total

1960 & Kilombero Sugar 'Food Processing 3.96 0.70 4.661964 Company

1978 Highland Soap and Soap Manufacture 1.38 0.36 1.74Allied ProductsLimited

1979 Metal Products Household Utensils 1.33 0.18 1.51Limited

Total gross commitments 6.67 1.24 7.91

Less cancellations, terminations,repayments and sales 4.17 0.69 4.86

Total commitments now held by IFC 2.50 0.55 3.05

Total undisbursed. 0.06 - 0.06

- 53 -

ANNEX III

TANZANIA

MUFINDI PULP AND PAPER MILL - TECHNICAL ASSISTANCE

AND ENERGY CONVERSION PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

Section I: Timetable of Key Events

(a) First Association mission to review project. April 1975

(b) Approval of original Bank Group Financing. January 1979

(c) Effectiveness of Bank Group Financing. April 1980

(d) Departure of appraisal mission. February 1983

(e) Completion of negotiations. April 1983

(f) Planned date of effectiveness. July 1983

Section II: Special Association Implementation Actions

None.

Section III: Special Conditions

(a) SPM would prepare annual marketing plans, the first of which wouldbe ready by March 31, 1984 (paragraph 62).

(b) A detailed training program for SPM personnel would be submitted tothe Association for its review by December 31, 1983 and a personnelcompensation and incentive scheme would be submitted by June 30, 1984(paragraph 71).

(c) The Government would allow SPM to retain in a foreign exchange accounta portion of its export earnings sufficient to meet its operatingimport requirements (paragraph 75).

TANZANIAMUFINDI PULP AND PAPER PROJECT

Proposed Technical Assistance and Energy Conversion ProjectProject Implementation Schedule

1979 1980 1981 1982 1983 1984 1985 1986

1 2 3 4 _1 2 3 1 2 4 1 34 12 3 4 1 2 3 4 1 2 3 4 2 3 4

A. MUFINDsI PULP & PAPER PROJECT

Site Preparation ~11111Civil Construction lot III I IIII l l

Equipment Erection los- -l-s-l-st

Staort-up PM 2 Ioii iii sill

Start-up PM 1 0I IIllE I rn

Railway Spur & Sidings --- ~~ Power Line Il l a NR la

Township LJ - - n -

Escarpmnent Road n IIII I Il 11 NORU m mi

C. PROPOSED PROJECT

1 Operating Manaigement

- Contract Finalizaition

- Financing Committrnent

- Organizaition Visit by Contractor

- Contractor Mobilizing

- Start-up & O peration ail Assist ajnce- , - I - mI II - I

2. Energy Conversion

- Order Equipment-Boiler Revision Construction

- Fuelwood Harvesting TrialsZ

- First Delivery at Fuel Wood4

- Boiler Fired on Oil/Coal

- Boiler Fired on Wood -i i

0 lIClumucum 1 1 Appraisal EstimateX EO Current Estimate or Actual Worldl Bankr-24813

- 55 -ANNEX V

TANZANIA - MUFINDI PULP AND PAPER PROJECTPROPOSED TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT

Capital Cost of Mufindi Project(USS million)

Appraisal Revised Estimate a/Local Foreign Total Local Foreign Total _

Civil Works 6.6 15.5 22.1 14.2 25.1 39.3 16.7Machinery Equipment

& Spares 2.8 77.0 79.8 6.9 83.7 90.6 38.6Erection 6.0 15.8 21.8 9.6 25.6 35.2 15.0Construction Overhead 3.4 6.4 9.8 6.2 10.3 16.5 7.0Eng. & Project Mgmt. 3.0 15.6 18.6 2.3 26.5 28.8 12.3

Total Plant Cost 21.8 130.3 152.1 39.2 171.2 210.4 89.6

Logging Capital 0.6 3.5 4.1 1.1 10.4 11.5 4.9Railway Spur 2.1 - 2.1 1.0 - 1.0 0.5Senior Staff Housing b/ 1.3 0.3 1.6 - - - -Pre-Operating Expense 1.5 0.8 2.3 4.4 1.5 5.9 2.5Tech. Assist. & Training 2.2 7.2 9.4 1.3 4.6 5.9 2.5

Subtotal 7.7 11.8 19.5 7.8 16.5 24.3 10.4

Base Cost Estimate 29.5 142.1 171.6 47.0 187.7 234.7 100.0

Physical Contingencies 2.9 14.1 17.0 1.2 3.3 4.5Price Escalation 6.6 22.5 29.1 1.8 2.0 3.8

Installed Cost 39.0 178.7 217.7 50.0 193.0 243.0

Working Capital 4.0 2.7 6.7 4.8 5.2 10.0Interest DuringConstruction 15.1 12.2 27.3 17.8 5.6 23.4

Total Financing Required 58.1 193.6 251.7 72.6 203.8 276.4

a/ February 1983.b/ Now included in township.

- 56 -

Al1NEX VIPage 1 of 3

TANZANIA - MUFINDI PULP AND PAPER PROJECT

PROPOSED TECHNICAL ASSISTANCE AND ENERGY CONVERSIOC. PROJECT

Projection of Paper Prices

Tanzania has been imnporting most of its paper requirements fromSweden and Canada under bilateral Trade Agreements. As the quantity of itsimports are fairly small they are being bought at spot prices; these pricesfluctuated widely and therefore cannot be reliable indicators of long-termprices. Accordingly, the financial and economic projections are based onf.o.b. paper prices from Canada, which is one of the Jargest exporters ofpaper in the world, and the c i.f. prices in India , which imports largequantities of paper and pays freight charges very close to those paid byTanzania for its paper imports.

The following table shows the price history for newsprint, f.o.b.Canada, and the actual c.i.f. pric:es in India:

Newsprint Prices(Current US$/ton)

FOB Canada CIF India

1975 2861976 2861977 3141978 335 4441979 352 4751980 440 5541981 533 6161982 533 6511983 467 600

Source: Paper Trade Journal and Government of India.

The above data are illustrated in the graph below which also showsthe anticipated price trend. In general pulp and paper prices have beenrising sharply since 1979 due t:o the higher cost of wood and energy whichtogether accunt for about 60% cf production cost. In the past year, however,because of oversupply and inventory drawdown., f.o.b. prices have declined byabout 15%, and in the first quarter of 1983 have returned to the levels ofmid-1980. It is anticipated that in about two years the supply/demandsituation will he in balance and prices will return to their previous trend.In the case of newsprint, it is anticipated that by 1985, when the Mufindi

- 57 -ANNEX VIPage 2 of 3

mill would be starting production, the international price f.o.b. Canada will

reach US$550/ton. Equivalent prices for other grades are US$600/ton for

sackkraft and US$925 for printing and writing paper. The correspondingc.i.f. prices at Dar es Salaam, landed prices (after addition of the

prevailing 15% import duty) and the ex-mill prices are shown below in both1985 and 1982 US dollars.

700

projected 1985

600_ price US$550/ton

500_ actual CIF India -. 4CurrentUS$/Ton _

400_

300_ actual FOB North America

200 I I I I75 76 77 78 79 80 81 82 83 84 85 86

Projected Prices for Paper Sold(US$/ton)

PrintingNewsprint Sackkraft & Writing

DemandProjected 1985 fob North America 550 600 925Ocean Freight and Insurance 125 125 150cif Dar es Salaam 675 725 1,07515% Duty 100 109 161

Landed Dar es Salaam 775 836 1,236Inland Freight from Mill to Dar es Salaam 30 30 36

Mill Net in 1985 US$ 745 804 1,200Mill Net in 1982 US$ 610 650 980

(discounted at 7% per year)

- 58 -

ANNEX VIPage 3 of 3

Newsprint Sack.kraft

ExportProjected 1985 fob North America 550 600Ocean Freight and Insurance 125 125cif India 675 725Export Discount on Mufindi Products 50 50Ocean Freight from Dar es Salaam 70 70Inland Freight from Mill to Dar es Salaam 30 30Mill Net in 1985 US$ 525 575Mill Net in 1982 US$ 430 470

(discounted at 7% per year)

Industry DepartmentMarch 1983

- 59 -

TANZANIAMUFINDI PULP AND PAPER PROJECT \ M.X V

Proposed Technical Assistance and Energy Conversion ProjectSouthem Paper Mills Company Limited Corporation and Managemrent Organization

- - uBoMano3a - - -n1l - - - -s.s- - -

I I I I5050 Sr55 c 5005 551505E 5.5 5 05

'~ ~ ~ ~ ~~ S Sr 55 S5 Sr ' S,55

005' 55051 S,0 5

55,5,5

550055t

Wcod ffl 6 | S a LOW10: [ Houllnil S 01 9 w, G9 M0555555l 5,555 P05555

M | | 5 55MC N ecou05l

~~~Sr-SSrSr50 SOsoet 55555 (55 s,0 5505-545t5M

- 60 -

ANNEX VIIIPage 1 of 2

TANZANIA - MUFINDI PULP AND PAPER PROJECTPROPOSED TECHNICAL ASSISTANCE AND ENERGY CONVERSION 2ROJECT

Operating Management Contract

A. Training Incentive Fee

Payment of the US$600,000 training fee will be paid after achievingthe following milestones:

1. Upon completing training for Tanzanian candidates to fill 106key operating positions , and preparation of the operating andmaintenance manuals - US$250,000.

2. Upon replacement of 50% of the Contractor's personnel (146positions) with trained Tanzanians while maintaining productionand sales volume at no less than 90% of the agreed learning1 /curve for 90 days aflter replacement - US$175,000.

3. Upon replacement of 90% of the Contractor's personnel withtrained Tanzanians while maintaining production and sales volumeat not less than 90% of agreed learning curve for 180 days afterthe replacement - US$175,000.

B. Production Incentive Fee

Payment of the production incentive fee is based on achieving salesof on-grade paper at a specified percentage of the agreed learning curve.For sales between 90% and 100% of the curve, the contractor will receiveUS$30/ton. Above 100% he will receive US$50/ton. The sales targets for bonuspayments are calculated on a cumulative basis for each 365 day period afterthe start-up of the first paper machine, and assume the two machines start sixmonths apart. The accumulated tonnage on which the bonus is paid is asfollows:

1/ The agreed learning curve states that for each paper machine, the averagerate of sales during each consecutive 365 day period after the start-up ofeach machine will be:

365 day period % of 30,000 tpa capacity1 40.12 58.03 78.04 88.05 95.0

- 61 -

ANNEX VIIIPage 2 of 2

365 Day Calculation Period US$30/Ton US$50/Ton

First period 14,400 to 16,000 tons Over 16,000 tonsSecond period 43,200 to 48,000 tons Over 48,000 tonsThird period 82,800 to 92,000 tons Over 92,000 tonsFourth period 129,600 to 144,000 tons Over 144,000 tons

Fifth period 180,000 to 200,000 tons Over 200,000 tons

The bonus is paid at the end of each calculation period and tonnage

on which bonus was paid in preceding periods is deducted. If the start-up of

the second machine is delayed past the six months planned, agreed adjustmentsare made to the above figures. Production must be achieved within agreed unit

consumption of chemicals and electric power. Adjustments are agreed forchanges in the grade mix.

C. Timetable for Contractor's Personnel

TIMETABLE OF CONTRACTOR PERSONNEL

Category No. of MIen Man-months

Stothert Yr.1 Yr.2 Yr.3 Yr.4 Yr.5 Yr.6 Total

Senior Management 5 50 60 50 48 32 24 264Production management 2 16 24 18 2 - - 60

Technical 2 20 24 24 4 - - 72

Woodlands 2 20 24 14 2 - - 60

Training 4 28 48 20 - - - 96

Sub-Total Stothert 15 134 180 126 56 32 24 552

SPB

M4anagement & Technical 8 26 36 46 78 84 42 312Superintendents 8 24 92 96 96 83 49 440Foremen 20 30 210 240 228 135 45 888Mill Operators 63 40 599 712 255 38 - 1,644Mill Maintenance 30 87 360 332 96 50 18 943W4oodlands Maintenance 2 20 24 24 10 - - 78

Sub-Total SPB 131 227 1,321 1,450 763 390 154 4,305

Grand Total 146 361 1,501 1,576 319 422 178 4,857

Industry DepartmentMarch 1983

- 62 -

ANNEX IX

TANZANIA - MUFINDI PULP AND PAPER PROJECTPROPOSED TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT

Cost Estimate of Proposed Project(US$ Million)

Local Foreign Total Z

Operating Management Services; and TrainingOperating Management Contract

Man-months Rates - 1.3.1 13.1 33.2Reimburseable Costs 3.5 2.6 6.1 15.4Sales and Training Incentives - 2.0 2.0 5.0

Overseas Training - 0.7 0.7 1.8Advisory Services - 0.5 0.5 1.3

Subtotal 3.5 18.9 22.4 56.7

Energy Conversion ComponentBoiler Conversion

Equipment and Machine - 1.5 1.5 3.8Erection 0.2 0.4 0.6 1.5Civil Works 0.1 0.3 0.4 1.0Engineering - 0.3 0.3 0M8

Fuelwood harvesting, chipping & delivery 0.3 4.0 4.3 10.9equipment

Subtotal 0.6 6.5 7.1 18.0Import Requirements - 1 0.0 10.0 25.3

Base Cost Estimate 4.1 35.4 39.5 100.0

Physical Contingencies 0.4 1.2 1.6Price Escalation 0.5 3.4 3.9

Total Financing Requirement 5.0 40.0 45.0

Industry DepartmentMarch 1983

- 63 -

ANNEX X

TANZANIA - MUFINDI PULP AND PAPER PROJECTPROPOSED TECHNICAL ASSISTANCE AND ENERGY CONVERSION PROJECT

Disbursement of IDA Credit

Calendar Year Fiscal Yearand Quarter and Quarter By Quarter Cumulative

1983 III 1984 I 0.1 0.1IV II 1.7 1.8

1984 I III 0.8 2.6II IV 0.8 3.4

III 1985 I 0.8 4.2IV II 0.8 5.0

1985 I III 1.0 6.0II IV 1.2 7.2III 1986 I 1.3 8.5IV II 1.5 10.0

1986 I III 1.3 11.3II IV 1.0 12.3III 1987 I 1.0 13.3IV II 0.8 14.1

1987 I III 0.4 14.5II IV 0.4 14.9III 1988 I 0.4 15.3IV II 0.4 15.7

1988 I III 0.4 16.1II IV 0.4 16.5III 1989 I 0.3 16.8IV II 0.3 17.1

1989 1 III 0.3 17.4II IV 0.2 17.6III 1990 I 0.2 17.8IV II 0.2 18.0

Industry DepartmentMarch 1983

-64- ANNEX XIPage 1 of 7

TANZANIA - IMUFINDI PULP AND PAPER PROJECTPROPOSED TECHNICAL ASSISTANCE AND ENERGY COTVERSION PROJECT

Assumptions Used in Financial Projections and Projected Financial Staements

1. Start-up of Paper Y .achi.ne No. 2: July 1984; Start-up of Paper MachineNo. 1: January 1985.

2. Capacity Build-up for each Paper Machine.Calendar Year PM1 - PM2 Total

1984 - 25 131985 50 60 551986 70 76 731987 83 88 861988 93 97 951989 100 100 1001990 100 100 100

3. The financial analysis is done in current terms through 1988 and inconstant 1988 terms thereafter. The yearly escalation rates used are given below:

Paper Prices Manufacturing CostsForeign Domestic Foreign Domestic

1984 7.5 8.0 7.5 8.01985 7.0 6.9 7.0 6.91986-1988 6.0 7.0 6.0 7.0

4. Project Life: 16 years after the attainment of full production

5. Technical Assistance for Operating Management

Payment for each year has been estimated as follows:

1983 1.984 1985 1986 1987 1988-- (in current US$ million) …

Foreign 3.9 4.7 5.2 3.2 2.2 1.3Local 0.8 0.9 1.0 0.6 0.4 0.3

Total 4.7 5.6 6.2 3.8 2.6 1.6

- 65 -ANNEX XIPage 2 of 7

6. Production Costs

a) Unit Consumption (per ton of final product)

Printing & Sack & LinerNewsprint Writing Kraft Board

Pulp Wood (US$19/m3) 3.2 4.6 5.4 5.4Chemicals (1982 US$) 14.5 89.3 59.2 59.2

b) Total'Consumption (at 100% capacity)

In Constant 1982 of Which of WhichUnit Annual US$ Million Direct Indirect

Input Price Variable Fixed Total Foreign % Foreign %

FuelFuel Wood 100,000 m3 US$14/m3 1.4 - 1.4 - 50Oil 2,500 tons US$235/ton 0.6 - 0.6 63 37

Power 76,000 MWh US$36.3/MWh 2.4 0.4 2.8 - 30Spare Parts &Consumables 1.3 1.2 2.5 50 25

Labor 654 man-years - 1.2 1.2 -Administration &Overhead - 2.2 2.2 20 10

Total 5.7 5.0 10.7

c) Unit production costs by grade are as follows (1982 US$):

Printing & Sack- LinerNewsprint Writing Kraft Board

Wood 60.8 87.4 102.6 102.6Chemicals 14.5 89.3 59.2 59.2Other Variables 95.0 95.0 95.0 95.0Fixed 83.3 83.3 83.3 83.3

Total 253.6 355.0 340.1 340.1

7. Amendment to Subsidiary Loan Agreement

(i) The grace period of existing loans will be extended by two years and thefirst repayment will be December 1986;

(ii) All funds from the Government will be transferred into equity;(iii) Loan portion of SIDA and IDA will be converted to GOT's equity contribution

to SPM by the end of 1983.

8. Recurrent Cost

US$4 million is scheduled to be spent as recurrent cost, of which US$3million is for replacement of logging and fuelwood capital.

9. Financing Plan for Mufindi II

All funds are assumed to be passed on as equity for SPM.

- 66 - ANNEX_XPage 3 of 7

TANZANIA - MUFINDI PULP AND PAPER PROJECTProjected Sales Volume and Revenue

1984 1985 1986 1987 1988 1989 1990

Domestic SalesVolume

Newsprint 4,300 4,500 4,800 5,100 5,300 5,600 6,000Printing & Writing 3,200 12,700 13,400 14,100 14,900 15,800 16,600Sackkraft 8,900 9,400 9,900 10,400 11,000 11,600Kraft Liner _ 1,700 1,800 1,900 2,000 2,100 2,200

Sub-total 7,500 27,800 29,400 31,000 32,600 34,500 36,400

Export Sales Volume

Newsprint - 800 4,800 7,300 8,800 8,600 7,400Sackkraft - 4,400 9,800 13,100 15,500 16,900 16,200

Sub-total - 5,200 14,600 20,400 24,300 25,500 23,600

Total Paper Sales Volume 7,500 33,000 44,000 51,400 56,900 60,000 60,000

Capacity Utilization (1) :L2.5% 55% 73% 85.6% 95% 100% 100%

Aniual Net Mill Sales Revenue(US'; million in current terms)

Domestic Paper Sales 6.7 27.6 31.3 35.3 39.7 42.1 44.3Export Paper Sales - 3.2 9.5 14.0 17.7 18.6 17.3Pulp Sales Revenue -- 0.6 1.0 1.1 1.2 1.2 1.2

Total 6.7 31.4 41.8 50.4 58.6 61.9 62.8

- 67 -

ANNEX XIPage 4 of 7

Annual AmountUnit Price 1982 1988

Manufacturing Cost Unit Quantity (1982 Prices) Prices Prices(US$) (US$ million)

Wood m3 280,000 19 5.3 8.4Chemical 3.4 5-3Fuel: Wood BDT 38,300 31.4 1.4 2.2

Oil tons 2,500 235 0.6 0.9Power MWh 76,000 36.3 2.8 4.3

Spare Parts & Consumables 2.5 3.8Labor (654 manyears) 1.2 1.9Administrative & Overhead 2.2 3.4

Total Direct Manufacturing Cost 19.4 30.2

The cost of fuelwood delivered to the mill is estimated as follows:

Cost of Fuelwood Delivered to Millsite(excluding depreciation)a/

Item US$/Green Ton

Piling residue after logging 0.60Chipping 8.30Transporting chipped residue to mill 4.40Overhead 0.40Contingency 2.00

Total 15.70 b/

a/ Depreciation of equipment is estimated at US$9.00/green ton.bI This is the cost per green ton at 50% moisture content. The cost per

bone dry ton is double this or US$31.40.

-68 ANNEX XIPage 5 of 7

Projected Income Statement a/(US$ Million)

1984 1985 1986 1987 1988 1989 lQ90

Net Sales Revenue

Domestic Paper Sales 6.7 27.6 31.3 35.3 39.7 42.1 44.3Export Paper Sales - 3.2 9.5 14.0 17.7 18.6 17.3Pulp Sales Revenue - 0.6 1.0 1.1 1.2 1.2 1.2

Sub-total 6.7 31.4 4L.8 50.4 58.6 61.9 62.8

Manufacturing Costs

Wood 2.4 3.6 5.5 6.7 8.0 8.4 8.4Chemicals 0.4 2.7 3.6 4.3 5.0 5.2 5.3Fuel and Power 0.6 3.2 3.9 6.0 7.0 7.4 7.4Other Materials 0.9 2.4 2.9 3.3 3.7 3.8 3.8Labor 0.7 1.5 L.6 1.7 1.8 1.8 1.9Admin. and Overhead 1.3 2.8 2.9 3.2 3.3 3.3 3.4OMC 4.6 5.5 6.1 3.7 2.5 1.6 -

Sub-total 10.9 21.7 26.5 28.9 31.3 31.7 30.2

Depreciation and Amort. 4.2 17.0 17.7 18.0 18.3 18.5 18.7Operating Income (8..4) (7.3) (2.4) 3.5 9.0 11.7 13.9Interest on Loans - 9.5 8.9 8.2 7.5 6.8 6.2Income Before Tax (8.4) (16.8) (11.3) (4.7) 1.5 4.9 7.7Accumulated Losses (8.4) (25.2) (36.6) (41.2) (39.7) (34.9) (27.2)

Taxes - - -

Net Income (8.4) (16.8) (11.3) (4.7) 1.5 4.9 7.7

Accumulated Met Income (8.4) (25.2) (36.6) (41.2) (39.7) (34.9) (27.2)

a/ Error due to roundings.

ANNEX XI-69 - Page 6 of 7

Projected Cash Flow Statement(US$ Million)

1983 1984 1985 1986 1987 1988 1989 1990

Cash Generation

Net Income - (8.4) (16.8) (11.3) (4.7) 1.5 4.9 7.7Deprec. and Amort. - 4.2 17.0 17.7 18.0 18.3 18.5 18.7Interest - - 9.5 8.9 8.2 7.5 6.8 6.2

Sub-total - (4.2) 9.7 15.3 21.5 27.3 30.2 32.6

Capital Funds

Equity 1 (Existing) 44.2 22.3 - - - - - -

Equity 2 (Proposed) 4.0 8.0 11.0 11.0 3.0 2.0 1.0 -Total Long-Term Debt 53.9 16.5 - - - - -

Sub-total 102.1 46.8 11.0 11.0 3.0 2.0 1.0 -

Total Cash Available 102.1 42.6 20.7 26.3 24.5 29.3 31.2 32.6

Capital Expenditure

Plant 98.1 38.8 - - - - - -

Recur. Cap. Expend. - - 4.0 4.0 4.0 4.0 4.0 4.0Other Cap. Expend. 2.0 2.0 2.0 2.0 - - - -

Total Cap. Expend. 100.1 40.8 6.0 6.0 4.0 4.0 4.0 4.0

Debt Service

Interest on Loans - - 9.5 8.9 8.2 7.5 6.8 6.2

Principal Repayment - 1.6 1.6 4.4 7.3 7.3 7.3 5.7

Sub-total - 1.6 11.1 13.3 15.5 14.8 14.1 11.9

Change in Work. Capital - 0.9 2.3 1.4 1.4 0.6 1.1 -

Total Cash Required 100.1 43.3 19.4 20.7 20.9 19.4 19.2 15.9

Ann..Net Cash Surplus 2.0 ( 0.7) 1.3 5.6 3.6 9.9 12.0 16.7Accum. Cash Surplus 2.0 1.3 2.6 8.2 11.8 21.7 33.7 50.4

Debt ServiceCoverage (Times) - (2.6) 0.9 1.1 1.4 1.8 2.1 2.7

APTPFYX Xi

Page 7 of 7- 70 -

F'rojected Balance Sheet a/(US$ Million)

1982 1S83 1984 1985 1986 1987 1988 1989 1990

Assets

Current AssetsCash D/ - 2.3 2.3 4.5 10.4 14.6 24.4 37.3 53.9Accounts Receivable - - 0.6 2.8 4.2 5.3 6.3 6.6 6.6Inventories - - 0.9 2.0 2.5 3.2 3.6 3.8 3.8

Sub-total - 2.3 3.8 9.3 17.1 23.1 34.3 47.7 64.3

Fixed Assets

Plant 139.5 237.6 276.4 276.4 276.4 276.4 276.4 276.4 276.4Recurr. Cap. Expend. - - - 4.0 8.0 12.0 16.0 20.0 24.0Other Cap. Expend. - 2.0 4.0 6.0 8.0 8.0 8.0 8.0 8.0

Total Cap. Expend. 139.5 239.6 280.4 286.4 292.4 296.4 300.4 304.4 308.4Less Deprec. & Amort. - - 4.2 21.2 38.9 56.9 75.2 93.7 112.4

Net Fixed Assets 139.5 239.6 276.2 265.2 253.5 239.5 225.2 210.7 196.0

Total Assets 139.5 241.9 280.0 274.5 270.6 262.6 259.5 258.4 260.3

Liabilities

Current Liabilities

Payables - - 1.3 3.2 4.1 5.0 5.8 6.0 6.0Current Maturities - 1.6 1.6 4.4 7.3 7.3 7.3 5.7 5.7Sub-total - 1.6 2.9 7.6 L1.4 12.3 13.1 11.7 11.7

Long-term Debt (excl.current portion) - 29.8 82.4 97.3 92.9 85.6 78.3 71.0 65.3 59.6

EquityShare Capital 109.7 157.9 188.2 199.2 210.2 213.2 215.2 216.2 2:L6.2Retained Earnings - - (8.4) (25.2) (36.6) (41.2) (39.7) (34.9) (27.2)

Sub-total 109.7 157.9 179.8 174.0 173.6 172.0 175.5 181.4 189.0

Total Liabilitiesand Equity 139.5 241.9 280.0 274.5 270.6 262.6 259.5 258.4 260.3

Ratios

Current Ratio 0.0 1.4 1.3 1.2 1.5 1.9 2.6 4.1 5.5Debt/Equity 21/79 34/66 35/65 35/65 33/67 31/69 29/71 26/74 24/76

a/ Error due to roundings.b/ Includes cash in operations.

- 71 -

ANNEX XIIPage 1 of 2

TANZANIA - MUFINDI PULP AND PAPER PROJECTPROPOSED TECHNICAL ASSISTANCE AND ENERGY CONWERSION PROJECT

Assumptions for Economic Analysis

1. Shadow Prices: Major input, and output prices. The economic costs andbenefits have been valued at international price, tradeable items at border prices,and non-tradeable items through application of conversion factors. Under theassumption of an overall shadow exchange rate of TSh 18.6 to the US Dollar, thegeneral conversion factor of 0.5 has been used for all the non-tradeable inputitems except for unskilled labor. For unskilled labor, a conversion factor of 0.25has been applied. It is estimated that on average, 27% of input costs are indirectforeign cost. Prices of output used in economic analysis are international prices,that is, f.o.b. Dar es Salaam for exports and c.i.f. Dar es Salaam for imports.2. Capital Cost and Disbursement Schedule: Based on the same assumptionsused in the financial analysis, project cost and payment schedule have beenprojected as follows:

(In million constant 1982 US$)

Plant Town and RoadLocal Foreign Total Local Foreign Total

1983 20.9 63.9 84.8 7.3 18.4 25.71984 7.0 18.9 25.9 2.5 5.6 8.1

27.9 82.8 110.7 9.8 24.0 33.8

Economic costs of plant, township and road, based on a shadow exchange rate ofTSh. 18.6 per US$1.00, would be as follows:

Local Foreign Total

Plant a/ 22.9 82.8 105.7Town and Road b/ 2.7 8.4 11.1

25.6 91.2 116.8

a/ 35% of local cost has been assumed to be non-tradeable items and 3% of totalcost has been assumed to be unskilled labor and subjected to correspondingconversion factors.

b/ 25% of cost of township and 50% of cost of road are assumed to be borne bySPM Project.

- 72 -

ANNEX XLIPage 2 of 2

3. Project Start-up and Capacity Utilization: The same assumptions havebeen made as in the Financial Projections.

4. Project's Domestic and Export Market: The same assumptions have beentaken as in the Financial Projections. Consequently, SPM's production from PM2(newsprint and printing and writing paper) will be absorbed completely by thedomestic market in the year 1996. However, for simplicity, mid-point between 1990and 1997 has been taken (year 1994) as an average for 1990-1997 period forcalculation of product mix, product value and operating costs. Similarly, 1998 wastaken as an average year for the period after 1998.5. Sensitivity tests have been made on the economic rate of return vis-a-vissales revenue, manufacturing costs and capacity utilization as shown below:

IMufindi Project - Sensitivity Tests on Economic Rate of Return

Variations (%) Full Cost (%) Sunk Cost (%)a/

Base Case 6.1 19.8Sales Revenue

+10 7.6 22.4+20 8.7 25.0-10 4.4 16.7-20 2.7 13.6

Manufacturing Costs+10 5.7 18.9+20 5.1 18.0

Capacity Utilization-10 4.8 17.4-20 3.6 15.2

a/ Sunk cost including expenditures that have been incurred up to MIarch 1983.

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