Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 7744

PROJECT PRFORMANCE AUDIT REPORT

TANZANIA

TANZANIA INVESTMENT BANK (TIB)(LOANS 1172, 1498 AND 1750-TA)

AND

ITANGANYTA DEVELOPMENT FINANCE COMPANY LTD. (TDFL)

(LOAN 1745-TA)

MAY 4, 1989

Operations Evaluation Department

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

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ACRONYMS

ADS - African Development BankBOT - Bank of tknxaniaCDC - Comonealth Development. CorporationCIDA - Canadian International Development AgencyDEG - Deutsche Entvicklungagesellachaft (German Finance Company for

Investments in Developing CountriesEADB - East African Development BankEEC - European Economic Comanit$7EIB - European Investment BankERP - Economic Recovery ProgramFMO - Nederlandse Financierings Maatschappij Voor Ohtvikkelingsladen

N_V. (Netherlands Finanee Company for Developing Countries)KfW Kreditanstalt fer Wiederaufbau-NBC - National Bank of CommerceNDC - National Development CorporationNIC - National Insurance CompanyNORAD - Norwegian Agency for DevelopmentPCR - Project Completion ReportPPAM - Project Performance Audit MemorandumPPAR - Project Performance Audit ReportPR - President's ReportSAR - Staff Appraisal ReportSIDA - Swedish International 'evelopment AgencyTDFL - Tanzania Development Finnce Company Ltd.TIB - Tanzania Investment Bank

CURRN'Y EQUIVALENTS

Currency Unit = Tanzanian Shilling (T Sh) = 100 cents

1978: 1US$ W T Sh 7.71979: 1US$ T Sh 8.11980: 1US$ = T Sh 8.21981: 1US$ T Sh 8.31982s 1US$ - T Sh 9.31983: 1US$ T Sh 1i.11984: 1US$ = T Sh 15.31985: 1US$ T Sh 17.51986: 1US$ T Sh 32.71987: 1US$ T Sh 64.31988: 1US$ a T Sh 120.0

FISCAL YEAR

TDFL: January 1 - December 31TIB: July 1 - June 30

FO *1SIAL E ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A

Oke at 0secto4nelOpealsons Evauh

May 4, 1989

DOMANDUHM TO THE EECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECTs Project Performance Audit Report on TanzaniaTanzania Investment Bank (TIB) (Loans 1172, 1498and 1750-TA) and Tanganyika Development FinanceCampany Ltd. (TDFL Loan 1745-TA)

Attached, for information, is a copy of a report enitled 'ProjectPerformance Audit Report on Tanzania - Tanzania Investment Bank (TIB)(Loans 1172, 1498 and 1750-TA) and Tanganyika Development Finance CompanyLtd. (TDFL) (Loan 1745-TA)* prepared by the Operations EvaluationDepartment.

Attachment

This document has a estricted distribution and may be Used by socipients only in the perfortmanceof their ofciol duties. Its contents may not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY

ROJECT PEmORmANCE AUDIT -ERT

TANZANIA

ANZANIA IV1EIENT BANK (TI)(LOANS 1172. 1498 AND 1750-TA)

AND

TANGANMIA DEVELOIMNT FINANCE CGMPANT LTD. (TDFL)

(LOAN 1745-TA)

T AB. OF COTTs

Page No.

BASI~ DATA SHEETS .*...............................*......... 1iiEVALUKTION Sm~fAR .................................... Ix

PROJECT PERIORANCE A1ODIT HDfANil

I. 3ACGROUND ................ ............ 1

The Industrial Setting ........ ............... ........ 1Objéötlveg .................... ,. 4

II. PROGESS IN KMTING OBJECTVES ........................... 5

TID ................... .. .... ........... 5Institutional Development .................. .. ..... 5Sectoral Contribution ................................ 6

Tl ... 4....0 .... ..... 9........... ... ....*............ 8Institution Building and Sectoral Impact ............. 8

II. OPERATIONAL AND FINANCIAL PERFORMANCE .................... 9

TID .............. ...... ... ......... . ...... ....... 9Operations ........... ......................... 9Utilisation of Bank Funds ................-............ 9Financial Condition ............ ....... . ...... 10

TDF ......... . .. . ........ .. .. ........ 9......... .1Operations ........ . ........... ....... * ...... ...... 11Utiliaation of Bank Funds .................. . ......... 12Financial Condition ................................. 12

IV. FINDINGS AND ISSUES ...................................... 13

Bank Performance ......................................... 13Upact of Bank's Association ......................... 16Overall Assessment .................. . ... * ... ......... 17Outstanding Issues Requiring Initiatives by

Tanzanian Authorities ............... ................... 18Lessons of Experience and Recowendations ...... ,....... 20

This document has a restricted distribution and may be used by recipients only In the performanceof their official duties. Its contents may not otherwis be discsed without World Rank authoriation.

TABLE OF CONTENTS (cont'd)

Pae No.

ATTarsonmTS

1. Problems Affecting Industryt Bottlenecka, Causes andPolicy Igsues ........................... 25

2. TIB s Analysis of Approvals (Loene and Zquity) .............. 263. TIS t Lending and Equity Operations 1974-1987 ............... 274. TIB i Position of Operations Financed by Agency and

Special Pands (at of September 30, 1987) ............ 285. TIB : Balance Sheets 1980-1987 .............................. 296. TIB : Income Statements 1980-1987 ........................... 307. TIS : Financial Ratios 1980-1987 ............................ 318. TDFL: Lending and Equity Operations 1979-1984 ............... 329. TDFL: Balance Sheets 1979-1987 ........................... 33

10. TDPL: Incowe Statements 1979-1987 ........................... 3411. TDPL: Financial Ratios 1979-1987 ............................ 3512. TDFL: Sources and Uses of Funds 1979-1987 ................... 3613. TDFL: Analysis of Arrears 1979-1987 ....................... ,. 3714. TDFL: Portfolio Analysis .................................... 3815. TDYL: Collection Performuance 1982-1987 ...................... 39

PROJECT C LETION REPORT (TANZANIA IVESTMT BANK)

I. INTRODUCTION ............................................ 43

Background ......................... 43Project Objectives and World Bank Role ................. 45

II. MACROECONOMIC, INDUSTRIAL AND FIRANCIAL SETTING .......... 46

Background ............................................. 46The Industrial Sector ................................. 47The Financial Sector ................................... 49

III. INSTITUTIONAL PERFORMANCE ............................... 51

Developments During Implementation and Present Status .. 52Procedures ............................................. 53

IV. ALLOCATION OP THE LOANS .................................. 55

V. OPERATIONAL AND FINANCIAL PERFORMANCE .................... 56

Operations ............................................. 56Portfollo ........................... ....... 57Loans .................................................. 58Equity Investments .................... ................ 59Financial Performance and Condition .................... 59

VI* CONCLUSIONS .. ....................................... 60

TABLE OF CONTENTS (contd)

Page No.

PCR ANNRaS

1. Schedule of Cumulative Bank Disbursesents forLoan 1172-TA, Loan 1498-TA and Loan 1750-TA ............. 63

2. (1) Subprojects Financed Under Loan 1172-TA ................... 64(2) Subprojects Financed Under Loan 1498-T& ................... 65(3) Subprojects Financed Under Loan 1750-Th ................... 66

3. (1) Financial Characteristics of Subprojects FinancedUnder Loan No. 1172-TA ................................. 67

(2) Financial Characteristics of Subprojects FinancedUnder Loan No. 1498-TA .............................. 68

(3) Financial Characteristics of Subprojects FinancedUnder Loan No. 1750-TA .................................. 69

4. (1) Economic Characteristics of Subprojects FinancedUnder Loan 1172-TA .................................. 70

(2) Economic Characteristics of Subprojects FinancedUnder Loan 1498-TA ......... ....... ................... 71

(3) Economic Characteristics of Subprojects FinancedUnder Loan 1750-TA ....................................... 72

5. Summary Description and Present Status of SelectedSubprojects Financed Under Loans 1172-TA, 1498-TAand 1750-TA *...... ............... .......... 73

6. Analysis of Approvals (Loans and Equity) .................. 777. A Comparison of Actual and Forecast Operations

1980-1986 ..................... ....* ......... ..... 788. Schedule of Arrears Over 3 Months ......................... 799. Analysis of Equit. nvestments as at June 30, 1987 ........ 80

10. Projected and Actual Income Statement (1980-1986) ......... 8111. Comparison of Projected and Actual Balance Sheets

(1980-1988) .............. ,,.............................. 8212. Projected and Actual Sources and Uses of Funds

(1980-1986) .............................. ............... 8313. Projected and Actual Financial Ratios 1980-1986 ........... 84

PROJECT COMPLETION REPORT (TANGANTIEA DBVELOMHINT FINANCECOMAPNT LTD.)

I. INTRODUCTION .o............................ 87

Project Background ...................................... 87Project Objectives and World Bank Group Role ........... 88

II. MACROECONOMIC, INDUSTRIAL AND FINANCIAL OBJECTIVES ....... 89

Background ............ ....................... 89The Industrial Sector ......... . ........... 90The Financial Sector ....................... . 91

TABLE OF CONTENTS (cont'd)

Page No.

PCR (cont'd)

III. INSTITUTIONAL PEFORMANCE .................. 93

Developments During Project Implementation andPresent Status .............................. 94

Statt Training ........................ 94Procedures ....................... 94

IV. ALLOCATION OF Tn LOAN .................................. 95

V. OPEVATIONAL AND FINANCIAL PERFORMANCE .................... 96

operations .......... o................................... 96Financial Performance and Condition .................... 99

VI. CONCLUSIONS .................0.. ...... ... *........... 100

PCR AWRRWRR

1. Schedule of Cumulative Bank Disbursements .................... 1032. List of Subprojects Financed Under Loan 1745-TA .............. 1043. Financial Characteristics of Subprojects Financed

Under Loan No. 1745-TA ..................... *.*......*..... 1054. Economic Characteristics of Subprojects Financed

Under Loan No. 1745-TA ..... ... ....... ...... ..... . 1065. Summary Description and Present Status of Selected

Subprojects Financed Under Loan 1745-TA .................... 1076. Analysis of Approvals (Equity, Income Notes and Loans) ....... 1107. A Comparison of Actual and Forecast Operations (1979-1984) ... 1118. Schedule of Arrears Over 3 Months ............................ 1129. Analysis of Arrears (1983-1984) .............................. 113

10. Projected and Actual Income Statement 1979-1984 .............. 11411. Comparison of Projected and Actual Balance Sheetu

(1979-1984) ................................................ 11512. Projected and Actual Sources and Uses of Funds 1979-1984 ..... 11613. Projected and Actual Financial Ratios 1979-1984 .............. 117

APPENDICBS

1. Comments Received from the Borrower - Ministry ofIndustries and Trade ...... 119

2. Comments Received from the Borrower - TIB .................... 1273. Commen-Ls Received from the Borrower - TDFL ................... 141

PROJECT PERFORMANCE AUDIT REPORT

TANZANIA INVESTMENT BAm (TIB)(LOANS 1172, 1498 AND 1750-TA)

AND

TANGANYIYA DEVELOPMENT FINANCE COMPANY LTD. (TDFL)(LOAN 1745-TA)

This is a performance audit on the second, third and fourth loansto the Tanzania Investment Bank (TIB).1 and the first loan to TanganyikaDevelopment Finance Company Ltd. (TDFL). Loan li72 to TIB for US$15million was approved nA-October 1973 and was closed in December 1481, oneyear after the original date; loan 1498 also -for US$15 million was approvedin December 1977 and was closed in June 1983 on schedule; and loan 1750 forUS$25 million was approved in July 1979 and was closed in June 1986, twoyears behind schedule. The loan to TDPL was approved in June 1979 and wavclosed in December 1984, one year after the original date. A total ofUS$2.4 million of the loans to TIB and US$0.8 million to TDPL werecancelled. Because of the economic conditions of the country which haveaffected the financial situation of the institutions, and pending thedevelopment and implementation of action programs to restructure andrationalize the manufacturing sector, there has been no frrther lending tothese institutions.

The PPAR consists of the Project Performance Audit Memorandum(PPAM) prepared by the Operations Evaluation Department (OED) and theProject Completion Reports (PCR) for TIB and TDFL prepared by the AfricaRegional Office of the Bank, based on statistical information supplied bythe financial intermediaries. The PPAM is based on the attached PCRs,Staff Appraisal and the President's Reports, sector and economic reports,OED's forthcoming study *The World Bank and Tanzanias Review of aRelationship' (chapter on Tanzania's Industrialization Effort 1961-87), theloan documents, summaries of the Board discussions, study of the projectfiles and discussions with Sank staff. An OED mission visited Tanzania inMarch 1988 and discussed the affectiveness of the Bank's assistance withTIB and TDFL. Government officials, and representatives of the banking andbusiness community. Their kind cooperation and valuable assistance in thepreparation of this report is gratefully acknowledged.

11 The first credit to TIS in the amount of US$0 million, approved inFebruary 1974, was audited in 1981. See OND, PPAR No. 3881, Tanzania -

Tanzania Investment Bank (TIB) I (Cr. 460-TA), March 30, 1982.

The PCRs ably discuss the project experience with regard toimplementation, operatiop;s, financial performance and utilization of theBank's funds, elaborate on the financial condition of TIB and TDFL, andcomment on the Bank's role. The PPAM examines in some depth the functionsand the role of these financial intermediaries within the framework of thecountry's industrial strategy and policies, the success or failure indischarging their functions, the rationale for the Bank's involvement, thequality of the Bank's appraisal work and effectiveness of supervisioneffort, the Bank's influence on the institutions' decision-making processand lending pattern, the impact of the policy environment on subprojecLperformance, the deep-seated portfolio problems of the DFCs, and thefundamental conditions for institutional sustainability. The PPAM thendraws the lessons from the project experience, suggests specific macro- andmicro-economic actions to help rectify the situation, and makesrecommendations for potentially more effective courses of action to fosterthe development of sustainable financial intermediaries.

Copies of the draft PPAR were sent to the Government, the Coi-ralBank, and the financial intermediaries involved. Responses fr*m theMinistry of Industries and Trade, TIB and TDFL are reproduced as Appendicesto the PPAR.

PROJECT PERFORMANCE AUDIT REPORT

TANZANIA

TANZANIA INVESTNENT BANK (TIS)(LOANS 1172. 1498 AND 1750-TA)

BASIC DATA SEET

LIAN POSII.<Amunte In US* Mil.ot)

Ae of February 28. 1989Orilal Olebu~d Caei ed-id L~nd1U

Lesn 1172-TA 16.0 14.8' 0.4 14.8 0.0Lesn 14W-TA 15.0 13.9 1.1 18.4 0.5Loon 1760-TA 25.0 24.1 0.9 18.8 6.8

CUIIJLATIVE ESTIMATD Alm AC-TUAL DIUSEMENTS

(Lean 1172)

FY78 Y? FY7S FM7 FY8O FYS1 rFY82

Appraisal ME1e (U<18) 0.2 2.0 0.6 11.9 14.0 15.0 15.0Actu s <108 M> 1.6 6.0 10.6 18.2 18.4 14.1 14.8

A~el se 9 of Apprlsa* 1) 750a g 001 1601 110 90 94% 97%0ate of Final Olebreoe: mavet 30, 192

(Lean 1498)

FYO FS YSI FYQ2 FYMS FYS4

Appr*laal £Eimate (Un MJ 1.3 6.2 10.6 14.8 16.0 16.0Actual (U~8 m) 4.7 10.2 13.2 18.4 18.8 13.9Abl s I of App8ele (1) 8701 2001 122 94% 92 981

0Ste of Pinal Fesbureon6: Augus 22, 198

(Loa. 1750)

ag_0 FT81 FM FU Yf FYSS FY88 _

Appralsel Estlmte (Us m) 0.2 2.2 8.0 17.0 26.0 26.0 25.0Acual (UM3 M) - 1.8 9.4 18.8 20.1 22.7 24.1Ae6lal os 5 of Apprsleal (9) - 82 118% 1081 80 91 9aDato of Final Dløburoeæmnt: .oury 9, 1987

Appreteel 0s/80/78 1o/0s/7sBeerd Approval 10/83/71 10/23/78L*e An er~amn n/18/7s n/i2psEffeeIveness o2/8o/7 02/20/76Complotion f C"Meet 12/80p7 08/8/78L.an CIosInø 12/M1/M 12/81/91

&osa 148s)

Orlalnal RevIedfActual

Apprelsal 04/10/77 11/21/77soard Approval 12/0s/77 12/0s/77LeO Agreent 11/ne/ 12/29/77Efftlvness 04/»8/7 04/08/7Compten et Comitt.nto 18/81/80 1/81/80L.on CIesIng 8//88 s/80/8*

(Len 17so

original RevlmedfActual

ApproIfel 1atsops 06/22/798e4 Approvl 07/24/79 07'4/7

Loen Agement 08/20/7» 08/20/79Eff~ctveene 02/0/80 02/0s/80

Cowltoloo o celtmne 06/aO/s os/so/aLen ClosIng 0/80/4 0/80/8s

STAFF WUT(staff seeks)

(Loan_1172)

æ.4 FY75 RY76 FM? Ff719 FMT MO8 MOAI FfM ~FM FYS4 FYU FM8 FU7l Tota

PreapproaSl - e.g - - - - - - - - - - - - 5.sApprasl - 9.0 17.8 - - - - - - - - - - - 26.8Nego6lations 0.1 - 2.1 - - - - - - - - - - - 2.2supervlelen - - 18.2 5.0 8.1 1.5 0.1 0.1 - 0.1 0.7 - - 0.8 29.6other :- -_ 14 g _L _-_ .:. g . - - - - 1 7

To6l 0.1 14.8 84.5 5.1 8.2 1.5 0.1 0.1 0.1 0.1 0.7 - - 0.8 5.8

(staff weeke)

FI4 FMlZ f7t FM. FY79 YU E R F. FM EY -"M a*7.go

Pr oeppr.lsal - - 0.4 0.7 0.4 - - - - - - - - - 1.5Approsal 0.5 - - 22.4 6.8 - - - - - - - - - 28.2

legotløte - - - - 9.0 - - - - - - - - - 9.0suurwlen -- - - - 8.0 4.* 1.8 - - 0.1 0.4 0.1 12.6 1.7 29.6

Dthr .- ; ; -, . 22 K- -- -;--. -. z- .--- ; -.-To~al 0.5 - 0.4 28.8 24.2 4.s 1.6 - - 0.1 0.4 0.1 12.6 1.7 70.1

aL~e 17=0

FYS FY79 fY8 F!YI f! FY FM E affPE Total

Prp4a0lo0 1.8 0.7 1.1 - - - - - - - 8.6Approlssl - 1S.4 - - - - - - - - 18.4[ Ngotlatltio - 4.6 1.5 - - - - - - - - 6.1suporvlelen - - 14.0 18.4 8.0 8.8 4.4 9.8 10.4 8.4 67.806hr --;. .-7 .. ;_ -= - Sa-. 2-8 .:-. - ' :;- -LA1

Total 1.6 1.4 17.2 18.4 8.0 g.J 4.5 8.8 10.4 8.4 98.5

MIss~N DATA

no. of I. øf Soff D4 øftienthlYear gegg M epr

Appealsal (Ln. 1172) 0/7 8.0 8 0.0 10/ssprvlel 1 06/76 2.s 2 .0 0s/76

Suprvilston 1 r/Appealsl (La. 1498) 04M L. 8 7. u1/77supervletn II es/s 8.0 8 9.0 /78Supervlloen IV/AppaLsal ca. 1760) 1/78 2.5 2 5.0 04/79

supervale V 1"/7 2.6 1 2.s 02/0supervtsloe VI 08/81 2: 2 4.0 04/S1Supervlln VII 09/61 2.0 8 6.0 10/81supor"talon VIII 09/2 1.5 1 8.0 11/82supervIslen IX UM1s 2.0 1 2.0 0/84SuprvlIele X 11/84 1.0 1 1.0 12/84supervmlln XI 02/86 1.0 1 1.0 08/8cofpftle 09/87 8.0 1 8.0 02/88

01HER PROJECT DATA

Borroer: Gooernnt of TlzaiaExcutltg Agecy: Tønni Investe Bnk (TIB)

Fo los-on Projet.:

-vil.

PROJECT PEM SANCE AUDIT REPORT

TANZANIA

TANGANYIMA DEVLOP~hNT FINANCE COMPANY LTD. (TDFL)(LOAN 1745-TA)

BASIC DATA SEET

(Am~un"s le UU Mil l 1i>

As of Febuary 28. 1989,isnaiu Disbu d c*afflt. sE~d g~ ian

Lean 1745-TA 11.0 10.2 0.8 7.6 2.7

CULATIVE ESTIMATED AI ACTUAL DISMMSSEMBITS

FYGI FMS FY89 FMS FMS

Approsa Eeita~ (USS M) 4.8 8.0 10.5 11.0 11.0Actual (US* ir 8.7 8.0 8.2 9.9 10.2Acual as 1o Approsal (5) 80 765 765 905 2Det. of Flal 01*urømwn: May 8, 1885

PROJECT DATES

orleal ReIsed]A~øual

Board Approva 08/28/79 0/28/79Le~n Agre~men6 07/27/79 02/27/79Effee6 eness 11/01/78 11/01/79Completlo of Co=itm~nt 12/81/81 12/*1/81Le Cing 12/81/88 12/81/84

S7AFP DPUT

(s~aff ws~)

FY74 FY7S FY78 FMf Fl$ FY79 PY8O FYG1 FM5 ff FYG4 f5fi FYM ! Fg7Toto

Preparation 1.8 8.2 0.8 - 0.1 2.1 - - - - - - - - 8.0Appra~sal - - - - - 12.4 - - - - - - - - 12.4NHeolatlonm - - - - - 8.9 - - - - - - - - 8.9Supervll -. - - -Z 184 14 1.4 .2 6.9 .7 27 8.. 88.7TOal 1.8 8.2 0.1 - 0.1 18.4 18.4 1.4 1.9 .2 6.9 8.7 0.7 8.5 61.0

monthyr para Iisøke R~r'

Appralsi 11/78 2.0 2 4.0 08/79Suporvislon I 11/79 1.4 1 1.4 11/70Supervislon II L 07/M0 1.8 2 8.2 11/80SupervIslon III 12/01 1.7 1 1.7 12/81Supervlelon IV 0/U2 1.4 2 2.0 11/02Superviølon V 11/08 1.4 1 1.4 01/14Supervleléw VI 11/4 0.8 1 0.0 01/8Complatlon 02/86 0.0 1 0.0 12/80

OlTimt PROJECT DATA

Dorrower: Govaen of TanzaniaExecu~ing Agncy: Tanganylka Develop~en6 Finane Company Ltd. (TDFL)

Foilow-on Prolecta:None

A TDFL wa appraled for o seond Bank lean In July 1080; processing of the loan was pos~ponedIndsfInItely pending resolutlon of an Impa~e betwen the Government and the IW regardingmacrooconomle polley lseoe and a struc~ral adjustmsn6 program.

PROJECT PURORUANCE AUDIT RIPORT

TANZANIA

TANZANIA INVSTHENT BANK (TIB)(LOANS 1172, 1498 AND 1750-TA)

AND

TANGANYIMA DEVELOPMENT FINANCE COMPANT LTD. (TDFL)(LOAN 1745-TA)

EVALUATION SUIMARY

Introduction

I. A centrally directed strategy of Industrial development wasadopted by Tanzania's political leadership during the late 1960s to advancethe objectives of self-reliance, economic growth and ittucturaltransformation. The Government firmly believed that a strategy promotingresource-based, producer goods industries that would cater to basic needs,dubbed as the basic industry strategy, coupled with extensive stateinvolvement in the economy, could accelerate growth and achieve a moteequitable socio-economic development. The Bank originally endorsed thisapproach to industrial development, and even became its staunch supporterth%oughout the 1970s (PPAM, paras. 1-7).

ObJectives

ii. TIB's establishment in 1970 aimed at channelling all public Indus-trial.investment through a single state-owned banking institution, therebyensuring adequate vetting of projects, independent judgment on thetechnical, financial, and economic merits of the projects submitted forfinancing, and appropriate design of financing packages. In supportingTIB, the Bank sought to strengthen the institution to enable it to divacharge successfully this function, particularly in such dimensions asproject analysis, policies, procedures, management information systems, totransfer resources for investments within the framework of the basicindustry strategy, and to build up TIB's capacity to extend technicalassistance to project sponsors (PPAM, para. 8).

iii. TDFL was established in 1962 under the joint sponsorship of CDCand DEG, with PMO joining in 1965 and EIB more recently. TIB is a minority(242) shareholder. TDFL supports primarily privately owned manufacturingenterprises (70%). In associating with TDFL, the Bank aimed at increasingTDFL's effectiveness in resource allocation by providing policy,institutional and operational advice, and at transferring resources insupport of medium sized private enterprises catering to basic needs (PPAM,parn. 8).

Implementation Experience

iv. The implementat2on of all operations in-solving both institutionshas been satisfactory, as Institution building aspects and issuespertaining to financial and lending policies had been resolved duringappraisal and negotiations. However, TD1L complied only partially with acovenant to use the economic rate of return criterion in projectappraisals, and with a long delay to a deadline to prepare an operationsmanual (PPAM, para. 14; PCR - TDL, para. 1.06).

Results

v. Durirg the critical period of the 1970s., TIB was Involved only insome 202 of fie new industrial investments having been adroitly by-passedby investing parastatals which arranged tweir own financing with externalsources. In many instances, projects were presented to TIB iNt a very latestage of preparation, or even after the Government had comitted funds andequipment had been ordered, when rejection was not possible and changes inscope were difficult to make. Quite a few projects were also financed atthe Government's behest and risk without adequate vetting. Furthermore, asachieving a high level of Investment has been a major element in Tanzania'sindustrialization effort, and since its board has been dominated by highranking government officials, TIB was not entirely immune frominstitutional pressures in its decision-making process. Such practicesdefeated the most important purpose of TIB's institution, namely the exer-cise of an independent quality control function over project investmentdecisions (PPAM, para. 11).

vi. Both intermediaries have made commendable efforts to build uptheir organizational structures and appraisallsupervision capability;nevertheless, their technico-economic capacity has not been developed atthe requisite level. During the investment spree of the 1970s, both TIBand TDFL did not pay enough attention to design and issues affecting thelonger-term viability of subprojects (e.g., technology, market size, scaleeconomies, management capability, capital structure, import dependence.export potential) as well as to mounting constraints (e.g., prospectiveforeign exchange availability, irregular flow of domestic raw materials,wanting infrastructure). Cost and demand projections tended to be over-optimistic, as were implementation schedules. The potential impact of costoverruns, delays in implementation, and different product prices were nottested by sensitivity analysis. Apparently, subprojects were not subjectedto the critical review they warranted at the successive management reviewlevels. On occasion, projects sponsored by parastatals were approvedprematurely and without sufficient investigation regarding availability offinancial resources and implementation capability. Appropriate feedbackmechanisms were not developed to ensure that the lessons from earlieroperations were taken into account in appraisals of new projects. As aresult, the institutions" impact on project selection and design and, byextension, on the pattern of industrial Investment in the sector, has beensubstantially attenuated (PPAM, paras. 9-14, 25).

- xi

vii. In both institutions, approvals, comnatments and disbursements inreal terms peaked in 1979 and declined precipitously during the 1980s,reflecting the deterioration of economic conditions, lack of bankableprojects, and the drying up of external resources. Virtually all sub-projects that were supported were import substituting -- which is notsurprising given the thin domestic production base -- but most were alacheavily import dependent and few domestic resource based (PPM, paras. 15,18). About three-quarters of TIB's aubprojects and over one-quarter ofTDFL's involve parastatals, whose performance has been particularly weak.Both institutions find it extremely difficult to collect due to the weakfinancial position of most clients, affected by the poor state of theeconomy, the excessive and inefficient controls over economic activities,deficient project design, cost overruns, poor management, inadequate main-tenance, technical, local resource and infrastructural problems, andmounting indebtedness due to successive and dramatic devaluations (PPAM,paras. 17, 20). The performance of the subprojects financed by the Bankthrough both intermediaries has also been disappointing, and their sustain-ability remains uncertain (PPAH, paras. 16, 19).

Sustainability

viii. Though marginally profitable on paper, TIB's financial positionis not sound, since almost three-quarters of its portfolio is affected byarrears as a result of poor subproject performance. Quite a few projectsin its portfolio are under liquidation and, in view of the severestructural, management and liquioity problems faced by most client para-statals, TIB's financial condition can be ascertained only after a fullassessment of their true financial situation and prospects. The institu-tion is in urgent need to rehabilitate its portfolio, and TIB's sustain-ability as an institution therefore remains uncertain. But this wouldrequire, inter alia, weeding out unviable parastatals, resolving the issueof the denominated in foreign currencIes debt, financial restructuring,employing expatriate managemenz to man key positions on a long term basis,ensuring access to working capital, resolving pressing industrial, trade,and financial policy issues, and assuring operational independence -- atall order requiring tough political decisions and a substantial amount oftechnical capacity and financial resources. TDFL's situation is not verydifferent. TDFL's profitability has been negative since the early 1980s,over three-quarters of its portfolio is affected by arrears, while itscollections have not kept pace with the mounting arrears. TDFL faces thesame set of difficult issues as TIB, namely rehabilitation of its port-folio, improving the operating efficiency of its potentially viableclients, and restoration of its own financial viability. TDFL's sustain-ability is also uncertain and conditioned on the viability of its clients(PPAM, paras. 17, 20).

Findings and Lessons

ix. Although TIB is state owned and TDFL privately controlled, theirperformance has been equally poor and the net outcome well below what could

- X11, -

have been possibly achieved. Conceptually, support to TIB and TDFL satis-fied the Bank's policy directives to assist specialized institutions and,on these grounds, it would be difficult to fault its initial involvement.However, the uncritical endorsement of an industrialization strategy withdemanding requirements upon an emerging nation (PPAM, para. 2), and thecontinued support of TIB after the development of an environment fraughtwith difficulties affecting both sub-borrowers and the institution itselfis more difficult to rationalize. Evidently. Bank missions did not detectearly on the impact of the distortions of broader policies, as well as ofthe operational problems of parastatals, on the performance both of theintermediaries and their sub-borrowers (PPAM, paras. 21-23, 25, 26).

X. Progress in institutional development has been marginal, as bothinstitutions have hardly been able to develop to the desired level thecapacity for hard-nosed appraisals. Emphasis on expanding industrialfinancing without adequate regard to subproject viability and financialprudence, inadequate project vetting and approval processes, passing sub-project review by the Bank, and the acute systemic distortions have erodedboth institutions' effectiveness in resource allocation. Although topmanagement in both institutions was knowledgeable and experienced and haddeveloped a core of capable staff, their efforts to steer their respectiveinstitutions on the right course during these difficult times have beenfrustrated in a large measure by compelling environmental factors, thepolicy framework in particular. Indeed, the fact that TIB and TDPLoperated in a difficult environment has affected dramatically their perfor-mance and sectoral contribution. Furthermore, TIB and TDFL (as well as theBank for that matter) have not been able to pursue effectively policyissues which affected their sub-borrowers' performance and undermined theirown viability, nor have they been able to exercise fully their potentialinfluence on project formulation and the operating efficiency of para-statals (PPAM, para. 25).

xi. Considering the original obectives and expectations, the actualachievements by TIB and TDFL to date, their present financial impasse,unsettled prospects, and uncertain sustainability, it transpires that theBank's objectives largely were not met during its long association with TIBand TDFL, their contribution to improving investment allocation has beenmarginal at best, and the projects under review cannot be viewed as suc-cessful, albeit to some extent for reasons beyond the institutions' control(PrAM, paras. 24-26). Important issues requiring the attention of theTanzanian authorities to help restore the financial health of the inter-mediaries remain unresolved (see PPAM, paras. 27-30 and summary inpara. viii above).

xii. Bank appraisals were overly upbeat and reassuring, and thesupervision effort insufficient. It turns out, that TIB's capacity toselect economically justified and financially viable projects has beenoverstated. Bank appraisal and supervision missions did not question earlyon TIB's pattern of appraisals and depth of economic analysis, in particu-lar market analysis, sourcing of inputs, and the assumptions underlying

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calculations of economic rates of return, did not address the issue ofworking capital availability, and did not appreciate fully the impact ofpoor project conception, competent enterprise management, and economicpolicies and conditions on subproject performance. Missions apparently didnot discern early on the full extent of the problems faced by the DFCs'clients as a result of the deteriorating economic situation in the 1970s.Consequently, the Bank was not circumspect enough in its subproject reviewand subprojects were approved which later on proved financially andeconomically unviable. The Bank (and other multilateral and bilateralcreditors) were late in attempting to sensitize the intermediaries on theneed to reorient their lending policies and operations to reflect thechanging economic conditions.

xiii. DFC operations in Tanzania did Lot address policy and strategyquestions, as such matters were thought of as best be taken up in thecontext of the macroeconomic dialogue. But the dialogue during the concep-tion, preparation and disbursement of the loans to TIB and TDFL appears tohave been rather ineffective -- in contrast to the more constructive macro-economic dialogue in recent years, where the Bank and the Government areworking jointly to develop action programs to rationalize the industrialsector. Nevertheless, macroeconomic conditions and policies, as well asthe degree of independence of the financial intermediaries, have had anoverwhelming impact on the success or failure of subprojects. In retro-spect, it emerges that follow-on operations to TIB were launched ratherhastily, and without adequate regard for the deep-seated problems impactingon subproject performance and TIB's limited capacity to influence i apositive way investment allocation, perhaps in response to institutionalpressures for much needed resource transfers (PPAM, paras. 7, 21-23, 26).

xiv. The lessons of the Bank's experience, which affirm lessons drawnearlier from other DFC operations, as well as specific recommendations aredetailed in PPAM, paras. 31-40 and summarized below. The experience inTanzania reaffirms that a project is unlikely to succeed in an unconducivepolicy environment and economic milieu. This raises the question whetherthe Bank should be lending to sectors (or at all) if conditions are unin-viting, it is unable to exercise any influence, and project implementationand sustainability are likely to be impaired. Lending under such circum-stances would hardly be consonant with prudent banking policies and respon-sible development assistance (PPAM, para. 32).

xv. Political and social circumstances, cultural differences, andsocietal characteristics rather than the form of ownership per se appear toimpact more forcefully on, and can explain more convincingly, the observedvariations in institutional structure. development, management style, andfinancial performance of DECs. In view of the difficulties faced by state-controlled DFCs in many countries, their ro'.e and potential needs to be re-evaluated, and privatization as an alternative may have to be considered asan alternative (albeit not necessarily facile) in cases where state owner-ship turns out to be an unworkable option. However, whether private or

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public, no financial intermediary can reasonably be expected to performefficiently in a hostile policy and economic milieu (PPM, paras. 33, 34).Where public ownership is deemed serviceable, to preserve the independenceof the DFC, it is important that definitive rules be established regardingthe relationship between state-controlled financial intermediaries and thegovernment authorities concerned, assuring them of a degree of autonomysufficient to anable them to discharge effectively their functions, subjectto a system of ex-post accountability based on well and a priori definedand monitorable criteria to assess their performance (PPAM, paras. 33-35).

xvi. in connection with the operations of financial intermediaries, theevidence suggests the need for improving their appraisal and supervisioncapacity by focussing on fundamentals, e.g., by reviewing more carefullytechnical designs and capital structures, placing greater emphasis onpolicy parameters, demandisupply developments, the sourcing of inputs andthe prospective availability of foreign exchange, developing feedbackmechanisms, paying more than lip service to establishing the economic meritof subprojects by calculating thoughtfully and systematically economicrates of return, undertaking sensitivity analysis and risk assessment,devising realistic financing plans, and ensuring that sponsors have themanagement capability to set up and operate the project. Institution of acomprehensive and uniform data collection system, effective follow-upprocedures, particularly for subproject post-implementation performance,and determined collection efforts are essential to keep arrears withinacceptable levels. Also, action should be Laken early on to identifyclient problems and work out solutions, including provision of technicalassistance (PPAM, paras. 36, 40). Finally, the Bank has been lax indealing with the mechanical calculation of economic rates of return, andits own faith and commitment to compliance with this facet of subprojectappraisal in DFC operations needs to be reaffirmed, along with parallelefforts to dislodge macroeconomic and sectoral policy distortions in thecourse of its economic and sector dialogue (PPAM, para. 40).

xvii. With respect to conceptualization and design of DFC operations,experience points to the importance of sector work preceding projectpreparation, to the need for understanding political realities, attitudesand, more generally, of the way decisions are taken and implemented in aparticular environment, and to the expediency of linking project financingto actions already taken, rather than mere assurances of initiatives, anddelaying lending until there is convincing evidence of sustainable progressin the implementation of agreed upon action programs. Yielding to pres-sures to meet lending targets may well jeopardize the success of theproject. Collection of facts and fortitude in presenting them in undilutedform, including a discerning risk assessment, to the Regional Managementcan prevent the Bank's involvement in unsustainable projects (PPAM,paras. 37, 38).

,viii. With regard to the Bank's appraisal and supervision work,appraisals should be transparent and pay greater attention to policyissues, the economic milieu, and emerging trends, since the subprojects to

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be supported by the DFC are unlikely to succeed in an uninviting environ-ment. Bank appraisals should analyse more carefully the prospective demandfor investible funds and ground DFC lending on a fairly concrete projectpipeline. The Bank should be more circumspect in the review and approvalof subproject appraisals, should insist on frequent in-depth reviews of aDFC's portfolio either by competent external auditors or its own missions,and ensure continuity of the staff assigned for the supervision of aparticular DFC operation. Furthermore, since supervision is usually per-ceived by Bank staff as receiving less recognition compared to the morevisible and captivating appraisals, the Bank's incentive system needs to bereviewed. Emphasis on sound macroeconomic and industrial sector policieswould also help improve the sustainability of subprojects and, to thatextent, remove some of the underlying causes of the DFCs' portfolioproblems (PPAM, para. 39).

xix. Finally, the fundamental conditions for the sustainability of afinan,ial intermediary, whether private or public, are summarized in PPAM,para. 41.

PROJECT PERFORMANCE AUDIT MENORANDUM

TANZANIA

TANZANIA INVESTMENT BANK (TIB)LOANS 1172, 1498 AND 1750-TA)

AND

TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL)(LOAN 1745-TA)

I. BACXGROUND

The Industrial Setting

1. A centrally directed strategy of industrial development and policyframework was adopted in earnest by Tanzania's political leadership duringthe late 1960s to advance the objectives of self-reliance, economic growthand structural transformation.- Indlastry was seen as a powerful engine ofgrowth that could modernize the economy through more capital-intensive,higher-productivity processes, promoted within a protected environment.The government firmly believed that a rigorously pursued industrializationstrategy with emphasis on resource-based, producer goods industries thatcater to basic needs, dubbed as the basic industry strategy, coupled withan extensive state involvement in the economy, would accelerate growth andachieve a more equitable socio-economic development. The Bank originallyendorsed this approach to industrial development from its inception, andeven became its staunch supporter throughout- the 1970s..

2. The implementation of the adopted industrialization strategyimplied inter alias creation of effective organizational structures andplanning processes to ensure appropriate inter-sectoral (e.g., industry,.agriculture, infrastructure) and intra-sectoral (e.g., rational projectselection) allocation of resources; the substitution of an administrativeapparatus for the market mechanism to effect allocation decisions andimplement policy measures; development of public management capability toensure efficient project implementation and operation; significant levelsof investment in relatively large, capital-intensive and import-intensiveindustries; a constant and dependable stream of foreign exchange to financeimported capital and recurrent import requirements; a relatively largedomestic market to reap scale economies; and an adequate supply of tech-nically trained manpower, including manager&, to operate industrial under-takings -- a tall order. Considering Tanzania's level of development andthe demanding requirements of a basic industry strategy, it is arguablewhether the strat?gy could have been effectively implemented at theprojected pace and time frame.

3. Major setbacks set in and indeed the achievement of these goals inthe immediate future is far from assured. After two decades ofmisperceived and poorly implemented Inward-looking industrialization, and

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despite the injection of an inordinate amount of external financial andtechnical assistance, the industrial structute that has evolved to date isnot significantly different from that which existed in the early 1960s,real per capita income and wages in the mid-1980s are lower than in themid-1960s, thr balance of payments situation remains critical, and heavydependence on foreign inputs, financial resources, technology ad expertisepersists -- in defiance of the stated goals. A confluence of factors,encompassing an excessive -and poorly managed planning system, inadequatepolicies and ineffective institutional arrangements, extremely lowproductivity of the work force and of the investments undertaken and, tosome degree, external shocks, has led to the development of an inefficientindustrial structure which is incapable of generating the hoped forsustainable growth and transformation of the economy.

4. Real GDP grew at 3.32 annually during 1967-79 and at 1.72 through1986; it virtually stagnated during the first half of the 1980s, but pickedup in 1985-86. This compares with a 52 per annum growth in 1961-66.Investment in manufacturing was strong during 1967-79, growing at over 152annually in real terms, induced inter alia by substantial inflows ofofficial aid at concessionary terms. It tapered off in the early 1980s,and declined dramatically (by one half) by the mid-1980s, mirroring thedire economic difficulties afflicting the sector and the economy as awhole. Real value added in manufacturing increased 6.82 per annum in1967-79, but declined precipitously through the 1980. -- by about 52 perannum. During the same period, the share of manufacturing in GDP rose from9.5% to 122, but fell to 7.32 in 1986. Capacity utilization averagedaround 502 in the 1970s but dropped to 25? in the 1980s, due to over-design, heavy dependence on imported inputs, management and technicalproblems, poor maintenance, and insufficient infrastructure. Despiteindustrial investments amounting to some US$3 billion in real terms duringthe past two decades, labor productivity remains below the 1966 level.Real output per employee in manufacturing has been declining constantlysince the late 1960s, and by 1979 was 702 of the 1966 level; by 1986, ithad fallen further to 56Z. Real earnings per employee increased by 112between 1967 and 1973, but declined sharply thereafter; by 1979 they weremore than a quarter lower than in 1966, and by the mid-1980s only 302 ofthe 1966 level. Finally, exports of manufactures have been erratic,averaging 13Z of total exports during 1967-79 and 72 during 1980-86. Theygrew (from a small base) 82 annually in nominal terms during 1967-79 butdeclined by 72 a year throughout the 1980s. In real terms, manufacturingexports increased marginally in 1967-72 and have declined constantlythereafter through the mid-1980s.

5. The string of intractable problems afflicting industrial perfor-mance (for a summary in tabular form see Attachment 1), whose severityassumed unwieldy proportions during the 1980s, includes oversized or sub-optimal plant scale; completed but inoperative plant capacity due to lackof infrastructure; shortage of technical and managerial skills andcontinued reliance on expatriates; acute shortages of imported inputs dueto the lack of foreign exchange; low factor productivity due toovermanning, rigid labor laws, poorly maintained equipment, absence ofincentives to reward performance, and poor plant utilization; inadequate

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economic infrastructure (shortage of power and inadequate transport systemin particular) reflecting the poor inter-sectoral allocation of investmentand recurrent resources; under-capitalized and heavily indebted, if notvirtually bankrupt, parastatals due to poor management and performance,reinforced by successive drastic devaluations.1 The poor condition of theparastatals and their mounting indebtedness has in turn undermined theviability of TIB and TDFL, which display an extremely weak portfolio andare striving to remain aflost.2

6. Inadequate allocation of resources and deficient incentive struc-tures for the development of the agricultural sector, excessive administra-tive controls over economic activities, and the continued growth in thesize of the public sector without due regard to the limited administrativecapacity available distorted the pattern of development process and stifledprogress. Ineffective organizational structures and pl4nning processesincapable of ensuring proper coordination and inter- and intra-sectoralallocation of resources; ambitious investment programs, largely supportedby the largess of the Bank and sympathetic donors; poor project screeningprocedures and haphazard project selection; underestimation of the human,institutional and organizational capacity of the country; poor organiza-tional structure and performance of parastatals; and a distorted policyframework resulted tn the development of an industrial sector which isover-extended in relation to the size of the market and the country's tech-nological and skill (managerial, technical and lafor) capabilities. Thepolicias adopted ended up favoring industries linked to imported capital,skills and materials, rather than the use of domestic resources, therebycreating mounting pressures on the balance of payments at a time when,largely because of the anti-export bias, foreign exchange earnings weredwindling. Industrial investments made in the 1970s lacked selectivity,were grossly unproductive, and did not succeed in changing perceptibly theindustrial structure, as no effective mechanism was developed to ensurethat they interlocked and made the best use of available resources. Theflaws and underlying problems of the strategy became more forcefullyevident in the late 1970s and persist since then, suggesting that externaldependence in all its dimensions will continue well into the 19908.

7. In 1986, the government prepared an Economic Recovery Program(ERP), taking the first initial steps to rectify the distortions created by

11 Between 1966 and 1988, the shilling has depreciated dramatically: in1966 T Sh 7 - US$1; in 1988 T Sh 120 - US$1.

21 For details on the concept of the basic industrial strategy, policyframework, and the structure and performance of the manufacturing sectorsee: OED, The World Bank and Tanzania: Review of a Relationship,Chapter on *Tanzania's Industrialization Effort 1961-87' (forthcoming).The present condition of the manufacturing sector has been ablydiagnosed and analysed in a very recent World Bank sector studyentitled: Tanzania: An Agenda for Industrial Recovery, 1987, 3volumes. See also PCR - TIB, paras. 2.01-2.12.

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earlier policies in an attempt to reverse the protracted deterioration ofthe economy. The areas addressed include exchange rate policy, the traderegime and foreign exchange allocations, performance of parastatals, theagricultural marketing system, pricing policies, industrial restlucturing,transport sector efficiency and public expenditures. The government'sobjectives in the industrial sector aim at improving cap&eity utilization,rehabilitation of major industries, completion of on-going projects, and atensuring that resources are directed toward the more productive and effi-cient firms in the sector. The ERP envisages a recovery period of five toseven years.3 Furthermore, in the framework of an active macroeconomicdialogue, the Bank and the government have been working jointly in recentyears to develop specific action programs to rationalize the industrialsector, to be supported by sector leading. The proposed industrialrestructuring scheme envisages three phases. Phase I will involve adiagnostic study of selected subsectors and the identification of pressingissues both at the enterprise and subsector levels. During Phase II,rehabilitation and restructuring programs will be developed, includingtimetables for Implementation. Phase III will lead to the implementationof agreed action programs.4

ObJectives

8. TIB's establishment in 1970 aimed at channelling all public indus-trial investment through a single state-owned bankinl institution, therebyensuring adequate vetting of projects, independent judgment on thetechnical, financial, and economic meritp of the projects submitted forfinancing, and appropriate design of financing packages. 5 In supportingTIB, the Bank sought to strengthen the institution to enable it todischarge successfully this function, particularly in such dimensions asproject analysis, policies, procedures, management information systews, totransfer resources for investments within the framework of the basicindustry strategy, and to build up TIB's capacity to extend technicalassistance to project sponsors. TDFL was established in 1962 under thejoint sponsorship of CDC and DEG, with PND joining in 1965 and EIB morerecently. TIB is a minority (24Z) shareholder. TDFL supports primarilymedium scale privately owned manufacturing enterprises (702). In

3/ The government's program of policy and institutional reforms for 1987-90are outlined in Tanzaniat Policy Framework Paper, 1987-90,No. SecM87-1077, October 2, 1987, paras. 6-24.

4/ For details see PR No. P-4944, Industrial Rehabilitation and TradeAdjustment Program, November 22, 1988, paras. 93, 100-103. Recenteconomic developments and the impact of the ERP are discussed in Ibid.,paras. 12-19.

5/ The establishment of TIB, as well as of sectoral holding companies inthe early 1970s, also meant to curb the dominance of the NationalDevelopment Corporation, a quasi-DFC, which had been involved heavily inthe take-over of private enterprises after the nationalization as wellas in a wide range of new investments, and whose effectiveness had beenquestioned.

associating with TDFL, the Bank aimed at increasing TDFL's effectiveness inresource allocation by providing policy, institutional and operationaladvice, and at transferring resources in support of medium sized privateenterprises catering to basic needs.

II. PROGRESS IN HEETING OBJECTIVES

TIB

Institutional Development

9. Over the years, TIB has built up its organizational structure andappraisal/supervision capability, and has reduced substantially itsreliance on expatriate staff -- probably prematurely. Althoughprofessional staff increased from 31 in 1975 to 57 in 1988, due to shortageof engineers, TIB had not been able to build up its technical staff innumbers commensurate with the volume of its operations and needs for super-vision of problem projects. Accounting, including procedures, and itsmanagement information system have also improved (PCR - TIB,paras. 3.01-3.07.) TIB prepared guidelines for project pre-appraisals tofacilitate the pre-screening of applications, as well as a manual forproject appraisal, and introduced, though belatedly, new investmentcriteria to reflect the economic realities of the 1980s, emphasizingexport-oriented and energy-saving projects and investments leading toimproving the capacity utilization of existing industries. In 1987, TIB'sBoard approved a partial reorganization of its structure, the mostimportant change involving the creation of separate departments under theDirectorate of Project Supervision for projects under implementation,companies in operation, and debt management, to enhance the institution'sresponsiveness to the changing environment and operating needs (e.g.,growth of arrears, rise of cases in litigation), and to improve costeffectiveness. Also, the former Administration Directorate is expanded toManpower Development and Administration Directorate with the creation of aHi=an Resources Department, reflecting the emphasis on staff careerdevelopment, and the need to attract, motivate and retain qualifiedpersonnel in the wake of the high turnover over the years. These changesare in the right direction.

10. Two technical assistance credits (approved in 1975 and 1980,respectively) were channelled through TIB and financed consultancy servicesfor the preparation of pre-investment and feasibility studies, productivityand capacity utilization improvement studies, and training in projectpreparationlimplementation, management and related techniques in an effortto strengthen the capacity of local institutions (e.g., parastatals,government agencies, development banks), including the establishment of atechnical assistance unit in TIB. After some initial problems stemmingfrom the lack of experience by both the Bank and TIB in the management of acomplex program were sorted out, the first credit financed a total of 21feasibility studies (most of which were included in TIB's projectpipeline), 7 special studies (some of which were implemented), and trataing

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programs for some 400 public sector managers.6 The second credit (stillnot fully disbursed) has financed to date some 40 feasibility and specialstudies and training for over 800 managers covering subjects in management,in-plant activities including maintenance, export marketing, and projectimplementation. The pre-feasibility studies have been helpful inidentifying some potentially viable projects, but also some risky or non-viable ones. The impact of the implemented special studies on capacityutilization and efficiency improvement, involving mostly TIB's clients, haslargely been vitiated by the persistent economic difficulties and theresults are far from visible. TIB has benefited from the training providedto its own staff, although one would have expected TIB to have been moreeffective in its project identification and appraisal work, and to haveinfluenced in a more positive way sectoral investments, especially forprojects it financed. Nevertheless. TIB's Feasibility Studies Unit hasdeveloped capacity to prepare terms of reference for consultants to beengaged by public sector agencies, to evaluate feasibility studies preparedby consultants, and to assist in providing training to the staff ofparastatals.

Sectoral Contribution

11. The fact that TIB operates j.n a difficult environment has affecteddramatically its periormance and sectoral contribution. During thecritical period of the 19709, TIB was Involved only in some 202 of the newindustrial investments, having been adroitly by-passed by investing para-statals which arranged tteir own financing with external sources. In manyinstances, projects were presented to TIB at a very late stage of prepara-tion, or even after the government had committed funds and equipment hadbeen ordered, when rejection was not p-)ssible and changes in scope weredifficult to make. Quite a few projects were also financed at the Govern-ment's behest and risk without vetting. Furthermore, as achieving andsustaining a high level of investment has been a major element inTanzania's industrialization effort, and since its board has been dominatedby high ranking government officials, TIB was not entirely immune frominstitutional pressures in its decision-making process. Obviously, suchpractices defeated the most important purpose of TIB's institution, namelythe exercise of an independent quality control function over projectinvestment decisions.

12. During the investment spree of the 1970s TIB did not pay enoughattention to design and issues affecting the longer-tern viability ofsubprojects (e.g., technology, market size, scale economies, managementcapability, capital structure, import dependence, export potential) as wellas to mounting constraints (e.g., prospective foreign exchangeavailability, shortage of construction materials, irregular flow ofdomestic raw materials, wanting infrastructure). Cost and demandprojections tended to be over-optimistic, as were implementation schedules.The potential impact of cost overruns, delays in implementation, and

61 For details see OED, PCR No. 6732, April 8, 1987, Tanzania - FirstTechnical Assistance Project (Cr. 601).

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different product prices were not tested by sensitivity analysis.Apparently, subprojects were not subjected to the critical review theywarranted at the successive tiers of management. Appropriate feedbackmechanisms were not developed to ensure that the lessons from earlieroperations were taken into account in appraisals of new projects. Onoccasion, projects sponsored by parastatals were approved prematurely andwithout sufficient investigation regarding availability of financialretources and implementation capability. Finally, it was not until theearly 1980s that TIB began to place emphasis on project rehabilitation,moving away from financing new projects and using part of its foreignexchange resources to finance working captal requirements. As a result.TIB's actual impact on project selection and design and, by extension, onthe pattern of industrial investment in the sector, have been substantiallyattenuated.7

13. TIB (as well as TDFL for that matter) have not been able to pursueeffectively policy issues affecting enterprise performance with the respec-tive ministries, even though some of their top managers and board memberswere participating in influential committees (planning, budget allocation)that reviewed and approved parastatal investment programs and allocatedresources to individual projects. TIB-client seminars, conducted annuallyand attended by representatives of the ministries concerned, did dwell onthese issues; but they did not elicit action either. Finally, the finan-cial intermediaries have not been able to develop at the expected level(SAR - TIB II, para. 5.01) the so crucial in investment banking intimatebank-client relationship that would have enabled them to influence early onproject formulation and the operating efficiency of the parastatals,possibly because of a hands-off attitude, not unusual in relations amongpublic entities, and/or resistance by parastatal managers (e.g., because ofthe perception that the lending institution was encroaching on the manage-ment's autonomy). Thus, the DFCs' potential influence as financiers wasnot exercised fully.8

7/ An illusion of effective project vetting in the public sector wascreated by the establishment in the mid-1970s of a three-tigr evaluationprocess. All proposed projects by parastatals were scrutinized by TISCO(Tanzania Industrial Studies and Consulting Organization -- a publicentity), which prepared feasibility studies. This would ostensiblyensure the application of national criteria and avoid externalinfluences. Then, TIB would make its own *independent' projectanalysis, considering foreign exchange savingslearnings, financialviability, and socio-economic aspects. Finally, there was the review atvarious ministerial/Central Bank levels, each agency examining differentaspects of the project. Ultimately, however, the intended scrutinyproved to be perfunctory, and project appraisals were biased byconflicting investment criteria, bureaucratic expediencies, andavailability of foreign financing.

8/ For TIB's comments on PPAM, paras. 9-13 see Appendix 2.

TDFL

Institution BuildinA and Sectoral Impact

14. Over the years, TDFL has developed an organizational structureadequate for the volume of its operations, has updated its Financial andInvestment Policy Statement to reflect more fully the evolving economicconditions, as well as its own operational objectives and requirements, andhas prepared, albeit with long delay (PCR - TDFL, para. 1.06), comprehen-sive manuals and procedures for project appraisal and supervision. Itsprofessional staff rose from 20 in 1978 to 28 in 1980, but declined to 22in 1987 because of resignations or transfers to subsidiaries. This levelmay be adequate for the present depressed vclume of operations, albeitprospective portfolio restructuring operations are likely to be staffqintensive. Despite progress in building up managerial and staff capacity,TDFL's appraisal capability heretofore has not developed commensurately, inpart because staff lacked practical experience and was weak in engineeringand market analysis. As a result, analysis of demand, marketing and finan-cal aspects (e.g., highly leveraged capital structure) of projects turnedout to be not as thorough as was originally supposed, 9 and calculations ofeconomic rates of return to ascertain the economic merit of projects inmost instances were not performed. The management capability of sponsorsalso did not receive adequate attention and, often, project design has beenpoor. Nor the combination of local and foreign expertise on-its Board hasproven to be as advantageous to TDFL's lending operations as was expected.On the other hand, the Bank's laxity in its subproject reviews was notconducive to selection of local resource-intensive projects and to ascer-taining their economic merit and viability, a task of singular importancein a controlled economy with rank distortions of economic parameters andinterest rates playing virtually no role in resource allocation.10 TDFL'ssupervision and collection procedures and capacity were strengthened inrecent years (PCR - TDFL, para. 3.04), although the results of theseefforts are not yet fully noticeable (see PPAM, para. 20 below). Super-vision work has been handicapped by poor record-keeping procedures anddelays in reporting by many firms. As in TIB's case, the difficulteconomic environment and the alignment of TDFL's operations to the govern-ment's industrial strategy and policy framework have had an adverse impacton th, performance of the subprojects it financed, as well as on TDFLitsel-. Inadequate and partial appraisals also took their toll. Thus,TDFL's project vetting and approval processes, ,oupled with the acutesystemic distortions, have undermined its effectiveness in resource alloca-tion (see also PPAM, p4ra. 13).

91 SAR - TDFL, No. 2416, June 8, 1979, para. 3.14.

10/ See also PCR - TDFL, paras. 3.01, 6.02, 6.04.

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III. OPERATIONAL AND FINANCIAL PERFORMANCE

TIB

Operations

15. TIB's approvals, commitments and disbursements on loan and equityoperations during 1974-87 in nominal and real terms are shown in Attach-ment 3. They increased through the late 1970s, peaked in 1979, anddeclined dramatically during the 1980s, reflecting the deterioration ofeconomic conditions lack of bankable projects, and the drying up of TIB'sexternal resources.il Specifically, commitments in real terms almosttripled between 1974 and 1979, rising from T Sh 146 million to T Sh 385million; in 1987 they had declined to T Sh 34 million, or less than one-tenth of the 1979 level. The bulk of TIB's lending operations in recentyears has been in manufacturing, agro-industries and mining (852),Involving mostly parast.tals (62% in number and 732 in amount). In termsof the type of loans extended, new projects accounted for 56Z, expansionfor 22Z, rehabilitationldiversification for 19?, and loans for workingcapital for 32 in amount (Attachment 2. In addition, TIB has supportedprojects at the behest and risk of the ti6us (agency funds) which have notbeen subjected to appraisal, with commitments amounting to over T Sh 200million (Attachment 4). Virtually all subprojects cater to the domesticmarket, and most are heavily import-dependent.

Utilization of Bank Funds

16. There has been some delay in disbursing Bank funds and some can-cellations arising from difficulties in subproject implementation. Half adozen of the subprojects are still under implementation, and about one-third of the remaining have had cost overruns exceeding 10Z, and quite afew over 502, in part due to price increases, delays in construction due topoor implementation capacity of parastatals, transport problems, shortageof building materials or unrealistic implementation schedules, and costunderestimation. The profile (size, sectoral and regional distribution) ofthe 53 Bank supported subprojects, although apparently satisfactory, doesnot necessarily reflect judicious project selection or circumspect Bankreview prior to their approval (see PPAM, para. 21 below; PCR - TIB,paras. 4.01, 4.02 and Annexes 3 and 4). In terms of ownership, about 852in volume of the Bank funds were allocated to parastatals. Close to onehalf of these subprojects involved expcAsion/rehabilitation of existingenterprises, and their capital intensity varied widely reflecting sectoralcharacteristics. The subprojects financed cater almost exclusively to thedomestic market. Although the data are not always reliable, it appearsthat only one half of the Bank supported subprojects in operation areprofitable, albeit most of them marginally, reflecting the impact ofprevailing poor economic conditions and operational problems on capacityutilization and, to a considerable extent, TIBs quality of appraisals (see

11/ See also PCR - TIE, paras. 5.01-5.03. Over the years TIB has mobilizedforeign resources (tied and untied) from such official sources as ADB,IDA, KfW, NORAD, and SIDA.

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PPAM, paras. 10, 12). Ex ante financial and economic rates of return weresatisfactory, but ex post returns have not been calculated. Nevertheless,since most of the subprojects have incurred substantial cost overruns, havebeen operating at low capacities due to severe management, raw material,maintenance and infrastructural problems, and have enc-untered financialdifficulties, it is unlikely that the financial and economic rates ofreturn estimated at appraisal will be realised. 1 2 Indeed, the sustain-ability of many subprojects remains uncertain. On the whole, the perfor-mance of the subprojects financed by the Bank has been disappointing, notsurprisingly paralleling that of most other industrial parastatals in thesector.

Financial Condition

17. TIB's profitability throughout its extstence has been very low innominal terms, and has been declining in recent years. Its equity base inreal terms has been substantially eroded because of increasing financialcharges, administrative expenses, 13 provisions for bad debts, and therising proportion of non-performing assets (Attachments 5-7). Provisions,amounting to 27Z of the loan and equity portfolio, despite their size, donot fully reflect the poor quality of TIB's portfolio and their adequacycannot be established, since the scope and depth of the audits performed bythe Tanzania Audit Corporation (TAC) are very inadequate (see also PCR -TIB, paras. 5.07, 6.02). Though marginally profitable on paper, TIB'sfinancial position is not sound, since almost three-quarters of its port-folio is affected by arrears (involving two-thirds of the total number ofprojects) as a result of poor subproject performance (CR - TIB,paras. 5.04-5.07, 6.02). TIB has not been in a position to influence theoperating efficiency of parastatals, and finds it extremely difficult tocollect due to the weak financial position of most clients, resulting fromthe general deterioration of economic conditions, the excessive and ineffi-cient controls over economic activities, deficient project design, costoverruns, poor management (many firms are run by inexperienced political

12/ Calculations of economic rates of return implicitly assume, inter alia,realistic cost and market demand/supply projections, competent projectmanagement, appropriate capital structure, no time and cost overruns,efficient operation and no measurable deviation from projectedproduction build-up levels, uninterrupted flow of inputs andconsumables, adequate infrastructure (power, water, transport), andaccess to foreign exchange and institutional credit. This suggeststhat, even barring imponderables, a satisfactory ex ante economic rateof return per se does not guarantee project success, and thatappraisals should be pondering over the realism of these assumptionsand the chances of subsequent distortions occurring in light of thesurrounding circumstances and past project experience, since theyimpact significantly on the sustainability of the project's benefits.

13/ Administrative expenses rose from 1.9Z of average total assets in 1979to 3.7% in 1987, compared to a normal of 12-22 in financialintermediaries. For TIB's views see Appendix 2.

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appointees), inadequate maintenance, technical, local resource and infra-structural problems, and mounting indebtedness due to successive anddramatic devaluations. Quite a few projects in its portfolio are underliquidation and, in view of the severe structural, management and liquidityproblems faced by most client parastatals, TIB's financial condition can beascertained only after a full assessment of their true financial situationand prospects. TIB's sustainability as an institution therefore remainsuncertain as it faces the prospect of a financial collapse in view of theamount of prospective write-offs, and is in dire need to rehabilitate itsportfolio.14 But this would require, inter alia, weeding out unviableparastatals, resolving the issue of the denominated in foreign currenciesdebt, financial restructuring, employing of expatriate management to mankey positions on a long term basis, ensuring access to working capital,resolving pressing industrial, trade, and financial policy issues, andassuring operational independence -- a tall order requiring tough politicaldecisions.35 Moreover, the task exceeds TIB's financial and technico-economic capacity.

TDPL

Operations

18. TDFL's approvals, commitments and disbursiements on loan and equityparticipations during 1979-87 in nominal and real terms are shown inAttachment 8. Generally, they have been declining through 1986 but pickedup in 1987, reflecting the domestic economic difficulties, the economicuncertainty and uninviting climate for private investment, TDFL's de-emphasis on import-intensive projects and emphasis on rehabilitation ofexisting projects, and the shortage of foreign exchange resources. 16 Thus,commitments in real terms declined from T Sh 40 million in 1979 to T Sh 15million in 1986, to almost one-third; they increased measurably in 1987 toT Sh 24 million. About 87Z of TDFL's lending has been in manufacturing andagro-industries, involving primarily private enterprises (74% in number and692 in amount). New projects account for 40% of TDFL's portfolio in amountbut 27Z in number, whereas expansion/rehabilitation for 60% in amount but

14/ For TIB's comments see Appendix 2.

15/ TIB's approach is to review all problem projects, identify the rootcauses, and propose solutions. If the project is viable and managementis good, but undercapitalization or excessive debt is the problem, theremedy should be to provide additional funds or reschedule outstandingdebt. If the project is viable but management is a problem, expatriatemanagers would have to be hired for a long period. And if the projectis not viable, reorganization or dissolution perhaps is the onlyalternative.

16/ TDFL relies on its foreign shareholders for resources, which take theform of equity, bonds and lines of credit (see PCR - TDFL, para. 5.07).

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732 in number. Virtually all subprojects supported by TDFL are import-substituting. and a very large number excessively import-dependent (PCR -TDFL, paras. 5.01-5.03, 5.05, and Annexes 5, 6).

Utilization of Bank Funds

19. Although the Bank funds were committed on schedule, there was oneyear delay in disbursement due to delays in implementation (PCR - TDFL,para. 4.01). Almost all of the 21 Bank supported subprojects cater to thedomestic market, and about half depend heavily on imported inputs. One-fourth of the subprojects were new and the balance expansion/rehabilitationof existing firms. Subproject selection, design and location do not alwayssuggest thorough and impartial appraisal by TDFL, or the Bank's thoughtfulreview (see PPAM, para. 21 below; PCR - TDFL, paras. 3.04, 6.02). Therehave been substantial time and cost overruns due to foreign exchangerestrictions, shortages of construction materials, cumbersome administra-tive controls, and import licensing procedures. Most of the subprojectsoperate well below rated capacity, and only half are marginally profitable,reflecting the cumulative effect of the difficult economic situation andthe inadequate assessment during appraisals of key economic parameters andmarket analysis (for details see PCR - TDFL, paras. 4.02-4.04 andAnnexes 2-5). Economic rates of return were not calculated for themajority of the Bank financed subprojects, let alone for non-Bank supportedprojects, while calculations were perfunctory for those few on which theywere performed. The sustainability of half the subprojects remains uncer-tain and, on the whole, subproject performance for the most part has notbeen satisfactory, albeit to a certain extent for reasons beyond TDFL'scontrol.

Financial Condition

20. TDFL's profitability in the 1970s has been very low in nominalterms, but since 1982 it has turned negative due to mounting financecharges, slow upward adjustment of the controlled lending rates, steep riseof administrative expenses, and the substantial increase in non-performingassets (Attachments 9-11 and PCR - TDFL, paras. 5.04-5.08). TDFL's admin-istrative costs, at 3.71 of average total assets, are high and largelyreflect the impact of the declined volume of operations, while its spread,despite some improvement recently, remains very low. Over three-quarters ofits portfolio (one-third among its larger projects) is affected by arrears(Attacbmento 13, 14), while its collection performance (Attachment 15) hasnot kept pace with the mounting arrears.17 Since 1985, TDFL hasstrengthened its equity base through conversion of EIB bonds and incomenotes into share capital. This has restored TDFL's debt/equity ratio

17/ It is extremely difficult, if not impossible, to realize security inthe case of parastatals, while the process is extremely lengthy andtime-consuming in the private sector. On the other hand, to discouragewillful defaulters, who in effect take advantage of the high and tax-free unofficial rates by withholding repayment of their obligations,TDFL levies a minimum rate of interest of 3 per month on arrears.

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within the ceiling agreed with the Bank (3:1) and has resolved the issue ofTDFL's foreign exchange risk (PCR - TDPL, para. 5.07), but still leavesTDFL's financial position precarious due to the high proportion of arrearsaffecting its portfolio. Provisions, amounting to about 322 of the loanand equity portfolio, do not cover fully potential losses in view of thegrave situation of many of its clients who suffer from severe structural,management and liquidity problems. TDFL's true financial condition can bedetermined only after a full assessment of its clients' financial healthand prospects. fDFL faces the same set of difficult issues as TIB (PPAM,para. 17 above; PCR - TIB, paras. 6.01, 6.03), i.e. rehabilitation of itsportfolio, improving the operating efficiency of its potentially viableclients, and restoration of its own financial viability -- a taxingundertaking beyond TDFL's present financial resources and staff technico-economic capacity.

IV. FINDINGS AND ISSUES

Bank Performance

21. Bank appraisals were unjustifiably upbeat and reassuring,asserting repeatedly that TIB "is making positive contributions to theeconomic development of Tanzania through the selection and financing ofeconomically justified, financially viable and technically feasibleprojects.... 1 9 And although they voiced concern about the condition ofTIB's portfolio since the mid-1970s and acknowledged the existence ofgeneral policy and operational problems in the industrial sector whichaffected TIB-financed projects, they expressed optimism that these werebeing addressed by the Government and that they were not expected toendanger TIB's viability or to prevent it from operating effectively as afinancial intermediary.20 Bank appraisal and supervision missJons did notquestion early on TIA's pattern of appraisals and depth of economicanalysis, in particular market analysis, sourcing of inputs, and theassumptions underlying calculations of economic rates of return, did notaddress the issue of working capital availability, let alone provide forit, and did not appreciate fully the impact of poor project conception,competent management, and economic policies and conditions on subprojectperformance. Missions apparently had not been able to fathom early on thefull extent of the problems faced by the DFCs' clients and, as a result,

181 TDFL's external (private) auditors cannot be credited with having donean adequate job over the years in enlightening all parties concernedwith regard to the quality of TDFL's portfolio.

191 PR, TIB III, No. P-2173, November 21, 1977, para. 47; PR, TIB IV,No. P-2606, July 12, 1979, para. 51. Similar statements in SAR,TIE II, No. 849, October 6, 1975, para. 6.01; SAR, TIB III, No. 1730,November 21, 1977, para. 6.01; SAR, TIB IV, No. 2400, June 22, 1979,para. 3.09.

20/ PR, No. P-2173, November 2). 1977, para. 47.

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the Bank had no clear perception of their status. On the other hand, theBank has not been circumspect enough in its subproject review and,inevitably, economically unviable subprojects were approved (see also PCR -TIB, para. 3.04; PCR - TDFL, paras. 6.02, 6.04).

22. The Bank has not been able to influence TIB's lending pattern,e.g., by suggesting better balance between large and medium size sub-projects, capital-intensive and labor-intensive, import-intensive and localmaterial-intensive. More generally, the Bank (and other multilateral andbilateral creditors) did not sensitize early on the intermediaries on theneed to reorient their lending policies and operations to reflect thechanging economic conditions. DFC operations in Tanzania did not addresspolicy and strategy questions, taking as given the policy environment andsupporting import-substituting industrialization as perceived and appliedby the Government. As a result, there has been no macroecoomic or sectorconditionality, and lending to financial intermediaries was not used as avehicle to press for reforms on issues affecting directly enterprise per-formance (e.g., the pattern of and administrative mechanisms for foreignexchange and -credit allocation, cost-plus price setting practices,licensing, infrastructure bottlenecks) and, by extension, the DPCs them-selves. Such matters were thought of as best be taken up in the contextof the macroeconomic dialogue. But the dialogue during the conception,preparation and disbursement of the loans has been tentative and ineffec-tive -- in contrast to the more active macroeconomic dialogue in which theBank and the Government have been engaged in recent years in an attempt todevelop jointly workable action programs to restructure the industrialsector (PPAM, para. 7). Yet, macroeconomic conditions and policies, aswell as the degree of autonomy of the financial intermediaries, have had anoverwhelming impact on the success or failure of subprojects. In retro-spect, it emerges that follow-on operations to TIB were launched hastilyand in disregard of the deep-seated problems afflicting the sector whichimpacted on subproject performance, in the hope that somehow things wouldturn around.21 The Bank took a dim view of TIB's limited capacity toinfluence in a positive way the allocative pattern of investments, castingdoubts on the transparency of the Bank's appraisal and supervision reports,in the sense that industrial leading through financial intermediaries seems

21/ A strong correlation has been found between price distortions andgrowth rates in 31 borrowing countries, including Tanzanias thegreater the degree of price distortions in their economies, the lowertheir GDP growth rates were. "Pricing for Efficiency,6 Chapter 6 inWorld Bank, World Development Report 1983, 1984. In the context of itsAnnual Review (1987), OED found, not surprisingly, a similarly negativecorrelation between price distortions and the performance of (Bank-assisted) projects implemented in the seventies in the same group ofcountries. These findings confirm the conventional wisdom thatborrowers' economic policies and management do influence projectperformance and can undercut the positive contribution of individualprojects to economic growth.

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to have been prompted more by institutional pressures under the guise ofmuch needed resource transfers and less by a circumspect assessment of thepotential sectoral and institutional impact to be attained.22

23. The Bank's involvement with TDFL in 1979 may be justified grimafade by the heightened level of private investment activity in the late1970s, as reflected in the rise of new enterprise formation, suggesting

221 The Bank had acknowledged as early as 1975 that TIB's major problem was,the condition of its portfolio* (SAR - TIB II, para. 6.03). In 1977,with 39Z of TIB's portfolio affected by arrears, the SAR could statethat: 'since 50Z of the portfolio was outstanding in projects underimplementation, it is premature to make a judgment on the portfolio'soverall quality,' (SAR, TIB III, No. 1730, November 21, 1977,para. 4.04). By 1979, the SAR could make such untenable claims asOTIB's appraisal of projects is thorough (SAR - TIB IV, para. 2.15):'over the years TIB has developed its capability to make soundinvestment decisions and has thus been providing an independent checkon the firancial, technical and economic feasibility of projectssubmitted by parastatal organizations for financing. Its projectappraisal capability is thus making a useful impact on the quality ofresource allocation in Tanzania* (loc. cit., para. 2.01); 'despite thisgrowth [in operations), TIB's financial situation has remained verysound' (loc. cit., para. 2.32); 'since all these problem projects areparastatals, there are good prospects that TIB will recover most of theamounts from the relevant holding companies,' (PR, TIB IV, No. P-2606,July 12, 1979, para. 38). On a different plane, Bank staff argued that'most TIB-assisted projects utilize domestic raw materials' (PR,TIB III, No. 2173, November 21, 1977, para. 32), which was counter toreality. Furthermore, while the President's Report on TIB III (No. P-2173, November 21, 1977, para. 33) stated that 'over the past twoyears, TIB has considerably strengthened its follow-up capacity,* twoyears later the appraisal for TIB IV (SAR, No. 2400, June 22, 1979,para. 2.15) indicated that "in recent months, TIB has improved thequality of its project supervision by strengthening its staff and bypaying special attention to its problem projects' (emphasis added).Despite mounting arrears, Bank supervision reports rated TDFL'sperformance status as 1, i.e. problem free or incidence of minorproblems, through 1982, downgrading it suddenly to 3, i.e. majorproblems, only in 1983. Similarly, despite the deteriorating conditionof its portfolio and questions regarding its supervisionlcollectioncapability, TIB's ratings were 1 through 1980, 2, i.e. incidence ofmoderate problems, through 1984, and 3 only in 1985, based on the claimthat TIB and the Government were taking corrective action and thatprovisions were adequate. The portfolio problems nwere attributedlargely to implementation difficulties, the shortage of foreignexchange, import restrictions, and infrastructural problems, and seldomwas attribution made to management, technical, or other problemsrelating to inadequate project design and appraisals (see PPAM,pares. 12 and 14 above). Finally, despite deteriorating economicconditions, TDFL was appraised in 1980 for a second loan, but theoperation was aborted (see PPAM, para. 23).

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that private entrepreneurs were able to exploit market opportunities andproved to be remarkably resilient. The trend, however, had reversed itselffrom 1979 on, and by 1981 the number of establishments employing ten ormore employees had declined by 55Z, following massive closures, due to thedifficult economic conditions.23 Yet, the Bank appraised TDFL for a secondloan in 1980, an operation which never materialized because of the impassein the dialogue on macroeconomic issues and the change in the Bank'sposture vis-a-vis Tanzania. These developments underscore the significanceof the policy environment and emerging economic trends for the success ofindividual projects, and suggest that Bank appraisals should analyze morecarefully the prospective demand for investible funds and base DFC lendingon a more concrete project pipeline, and not rely on expectations that therole and the level of private investment in the sector will increase and onvague project ideas, as was the case with TDFL (SAR - TDFL, paras. 1.11.1.17, 3.37).

Impact of Bank's Association

24. Progress in advancing stated institutional objectives has beenwell below what could have been possibly achieved, while the performance ofthe subprojects financed by Bank funds in both institutions has been dis-appointing. Whether because of the adverse policy environment, intrusiveexternal intervention in project selection, errors of judgment, failure tosupervise effectively or to take a more critical stance on important sec-toral issues, or lack of receptivity by the borrower, the Bank's involve-ment has not had the hoped for catalytic effect and expected results, andits Impact on industrial development has been marginal -- at best. TheBank identified deficiencies in TIB's and TDFL's organizational and insti-tutional set-up and operations, provided constructive criticism, andcontributed to the formulation of skill upgrading programs. Nevertheless,emphasis by the financial intermediaries on expanding industrial financingwithout adequate regard to subproject viability and financial prudence,suggesting insufficient attention to project selection and design andfailure to consider factors affecting the sustainability of the venturesthey supported in the face of mounting constraints (see PPAM, paras. 12and 14), has resulted in poor performance of the subprojects supported,most of which are in dire need of rehabilitation and/or financial restruc-turing. The Bank, who was (or was supposed to have been) more sensitizedto the persistent macro- and micro-economic problems as a reult of itsextensive sector work and supervision missions, subjected these inadequatesubproject appraisals to a passing review, apparently due to staff con-straints, and as a result, its input and influence have been marginal.Socio-political considerations and institutional pressures also colored theDFCs' decisions to finance industrial undertakings, while the Bank took noinitiatives to ward off external pressures on the institutions' decision-making process. And since the local capacity to screen projects has alwaysbeen inadequate, projects undertaken at the behest of the government

23/ OED, World Bank and Tanzanias Review of a Relationship (Chapter onOTanzania's Industrialization Effort,* 1961-87), para. 24.

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(usually of fairly large scale, capital-intensive and import-intensive)were also implemented without due attention to their economic merit. As aresult of these circumstances, the financial position of the institutionsis critical, their sustainability remains uncertain, progress in achievingthe original institution-building goals, in particular a solid appraisalcapability, has been modest, and their ability to guide and influence theperformance of parastatals has been very limited. As it turned out, theBank's objectives largely were not met during its long association with TIBand TDFL, and its contribution to improving investment allocation has beenmarginal.

Overall Assessment

25. Conceptually, support to TIB and T'PL satisfied the Bank's policydirectives to assist specialized institutions and, on these grounds, itwould be difficult to fault its initial involvement. However, uncriticalsupport for an industrialization strategy with demanding requirements uponan emerging nation, and continued support of TIB after the development ofan environment fraught with difficulties and affecting both sub-borrowersand the institution itself is more diffict.it to rationalize. Evidently,Bank missions -- and the DFCs themselves -- did not detect early on thefull implications and impact of the distortions caused by the broaderpolicies, as well as of the operational problems of parastatals, on theperformance both of the intermediaries and their sub-borrowers (PPAM,paras. 21-23, 26). To all intents and purposes, progress in institutionaldevelopment has been marginal, as both institutions have hardly been ableto develop to the desired level the capacity for hard-nosed appraisals.The performance of the subprojects financed by Bank funds in both DFCs hasbeen disappointing, suggesting poor utilization of the Bank's funds. Thefinancial position of both institutions is precarious and their futuresustainability remains uncertain. The fact that these intermediariesoperate in a difficult environment has affected dramatically their perfor-mance and sectoral contribution, in particular in the exercise of an inde-pendent quality control function over project investment decisions in thepublic sector, more so than the circumstance that TIB is state owned andTDFL privately controlled. Furthermore, TIB and TDFL (as well as the Bankfor that matter) have not been able to pursue effectively policy issueswhich affected their sub-borrowers' performance and undermined their ownviability, nor have they been able to exercise fully their potentialinfluence on project formulation and on the operating efficiency of para-statals. Inadequate project vetting and approval processes reinforced bythe Bank's passing subproject review, coupled with acute systemic distor-tions, have eroded both institutions' effectiveness in resource allocation.Although top management in both institutions was knowledgeable andexperienced and had developed r. core of capable staff, their efforts tosteer their respective institutions on the right course during these 4tffi-cult times have been frustrated, in a large measure by compelling exogenousfactors. TIB and TDFL are in urgent need to rehabilitate their portfolios,improve their operating efficiency of their potentially viable clients, andrestore their own financial viability -- a task well beyond their presentfinanciai and technico-econamic capacity.

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26. In retrospect, the Bank's appraisal work has not been up to par,and its supervision effort has not been very effective. The Bank (andother multilateral and bilateral creditors) did not sensitize the interme-diaries on the need to reorient their lending policies and operations toreflect the changing economic conditions. Apparently, the missions made noserious attempt to discern the real causes of the intractable problemsparastatals were facing and to ascertain early on the real financial situa-tion of the two institutions; instead, they relied on second-hand informa-tion supplied by the intermediaries and on their assurances.24 Had thisbeen done, it is conceivable that the frequency of lending operations mayhave been lower, and that the latest TIB operations, and possibly the loanto TDFL, may have not been undertaken. Looking back, one wonders whetherthe staff's persistent optimism and reassuring attitude concerning theinstitutions' performance and financial health during the late 1970s (andin the early 1980s as well) were grounded on fact-based assessments or theywere slanted to reflect the Regional Management's beliefs or expectationsat that time. Considering the original objectives and expectations, theactual achievements by TIB and TDFL to date, their present financialimpasse, unsettled prospects, and uncertain sustainability, the projectsunder review cannot be viewed as successful, albeit to some extent forreasons beyond the institutions' control.

Outstanding Issues Requiring Initiatives by Tanzanian Authorities

27. One important issue that concerns TIB, TDFL and their clients isthat debt denominated in foreign currencies is expected to be repaid inhigh depreciated (and depreciating) Tanzanian shillings. which has createdan unbearable financial burden on the enterprises concerned and rendersextremely difficult the development of a restructuring plan. In principle,offering project sponsors the option of paying a fee to the government forassuming the foreign exchange risk (since DFCs cannot be expected to assumethe risk) appears to be warranted, particularly in countries with persis-tent balance of payments problems. Giving sub-borrowers a choice, insteadof imposing one scheme or another indiscriminately on them, would be moreeffective in promoting industrial investment and in ensuring their willing-ness to comply with the terms of repayment. Under such a system, sponsorswould be given the option of borrowing either in foreign exchange or inlocal currency; those who choose the latter would be charged an appropriatefee for being protected from the exchange risk. In addressing the presentimpasse, the Tanzanian authorities would be well advised to considerseriously pegging the liability of firms on outstanding foreign currencydenominated loans at some "reasonableu exchange rate, to be negotiatedbetween the Treasury and the DFCs and their sub-borrowers, taking into

24/ For instance, in the President's Reports of 1977 and 1979 (paras. 33and 38, respectively), there is an identical statement asserting that"TIB has conducted comprehensive reviews of each problem project, madespecific recommendations for resolving the causes of the problems andused its influence as a financier to ensure that appropriate steps aretaken in response to these recommendations. The actions have yieldedgood results....'

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Rccount the surrounding circumstances, with the difference to be forgivenand absorbed by the Treasury. To insist that enterprises repay debt atthirteen times the original amount (in 1982, T Sh 9.3 - US$1; in 1988,T Sh 120.0 = US$1), a dramatic depreciation of the local currency which toa large extent was the direct consequence of the Government's own policydecisions and management of the economy and over which enterprises had nocontrol, appears impractical, unfair, and counterproductive, the more sosince the bulk of the debt is owed by parastatals.25

28. Access to institutional credit for working capital is anothercritical issue faced by many DFC clients, emanating from the creditrestrictions and the bias in credit allocaticn favoring enterprisescatering to basic needs, producing revenue for the treasury, etc. Frozencredit ceilings for a long period under strong inflationary pressures,coupled with the additional financial requirements to service the risingindzbtedness in foreign currencies, has created severe liquidity problems.This has reduced the capacity of many firms to procure needed raw materialsand other inputs, even if they had access to foreign exchange, and hascontributed to continued underutilization of capacity and low supplyresponse, while it hampers the development of realistic reorganization-plans by financial intermediaries.

29. In order to restore their financial health, TIP and TDFL are inneed to rehabilitate their portfolios. This would require, inter alia,weeding out unviable parastatals, resolving the issue of the denominated inforeign currencies debt, financial restructuring, employing expatriatemanagement to man key positions on a long-term basis with a significantclaim on foreign exchange resources, ensuring access to working capital,resolving pressing industrial, trade, and financial policy issues, andassuring operational independence -- all demanding courageous politicaldecisions which, however, cannot be put off much longer.

30. The Tanzania Audit Corporation (TAC), because of a seriousnational shortage of accoatants and high turnover of qualified staff,cannot discharge effectively its auditing function over some 370 para-statals. In particular, when it comes to auditing the operations of finan-cial intermediaries, the scope and depth o' the audit remains extremelylimited. Accounting and auditing standar,s with respect to financialintermediaries therefore need to be improved. Better assessment of theintermediary's profitability, portfolio quality, adequacy of provisions forbad debts, etc., are needed by the managements of the intermediaries, by

25/ A related issue which has created consternation among DFC sub-borrowersis the treatment for tax purposes of the "loss' arising from therepayment of loans denominated in foreign currencies in depreciatedshillings. In a Technical Circular issued on July 18, 1987, theMinistry of Finance, Economic Affairs and Planning, ruled that such anexchange loss is of a 'capitalO nature and should be capitalized, "tobe taken into account when the asset is disposed of," and cannot beviewed as an expense in determining the firm's taxable income. Thematter deserves consideration by the responsible authorities.

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the authorities in charge of financial supervision, and by the majorcreditors. In general, improvement of financial information and of theaccounting profession responsible for preparing that information deservesurgent attention. To date, the authorities (and the Bank) have notfocussed on these important issues.

Lessons of Experience and Recommendations

31. The experience with TIB and TDFL adds new emphasis to lessonsdrawn from other DFC Bank operations. Many have wider implications whichwarrant the Bank's attention and suggest courses of action for potentiallymore effective interventions by governments and the Bank to foster thedevelopment of sustainable financial intermediaries.

32. The Tanzanian experience reaffirms that a pro.Ujct is unlikely tosucceed in a hostile policy environment and an unconducive economic milieu.This raises the question whether the Bank should be lending to sectors (orat all) if conditions are uninviting, it is unable to exercise anyinfluence, and project implementation and sustainability are likely to beimpaired. Would leading under such circumstances be consonant with prudentbanking policies and responsible development assistance?

33. Political and social circumstances, cultural differences, andsocietal characteristics rather than the form of ow4ership per se appear toaccount for, and explain more convincingly, the observed variations ininstitutional structure and development, management style and financialperformance among DFCs, as evidenced by the equally poor performance of TIB(state owned) and TDFL (privately controlled). State-owned institutionscan be as dynamic and efficient as privately owned if they are run byqualified managers, are allowed the requisite degree of autonomy indecision-making, and operate in an inviting en-ironment. The problem isthat in many instances state-controlled financial intermediaries sufferfrom the consequences of intrusive political interventions, the appointmentof unqualified top executives, and the social tasks thrust upon them thatdistort their behavioral pattern, reflecting narrow if not self-servingperception by the authorities of their role. Institutional inertia andlack of receptivity, reinforced by a weak policy framework and the Bank'sinability or reluctance to press more forcefully these issues, tend tofurrber stultify progress in promoting sound public financial interme-diaries.

34. In view of the difficulties faced by state-controlled DFCs in manycountries, a re-evaluation of their role and potential, establishment ofconditions for their sustainable growth, institution of performancecriteria, and development of arrangements to restructure the weak ones maybe in order. In this regard, the derivative implications of the form ofownership, viewed in the light of the prevailing local socio-politicalcircumstances and economic environment, deserve greater attention than theyhave received heretofore, and privatization may have to be considered as analternative (albeit not necessarily facile) if state ownership turns out to

12i - 21 -

be an unworkable option. Nonetheless, as already alluded, whether privateor public, no financial intermediary can reasonably be expected to performefficiently in an unconducive policy environment and economic climate.

35. Where the institution or public enterprise is viewed as service-able, to preserve the independence of the DFC, several positive courses ofaction suggest themselves. Thus, it is important that unequivocal rules beest&blished regarding the relationship between state-controlled financialintermediaries and the government authorities concerned, and such under-standings should be adhered to. Public DFCs should be assured of a degreeof autonomy sufficient to enable them to make investment, staffing andother management decisions free from political pressures; to establishappropriate salary scales and benefit packages to attract and retain highcaliber staff; to raise resources (domestic and foreign) on their owninitiative; and to set lending rates in line with costs and risks. At thesame time, a well-designed system of e' post accountability should beinstituted based on meaningful and monitorable criteria to assess theirperformance. Furthermore, given that composition, quality, continuity, andmodus operandi of the Board of Directors greatly affect a DFC's effective-ness and performance, due attention should be paid during selection to thequalifications, experience, non-allegiance to special interests,earnestness, and diversity (e.g., in terms of affiliation, skille, back-ground) of the appointees to enable the Board to provide guidance andensure impartial decision-taking based on strictly commercial principlesand free of self-serving influence.

36. In connection with the operations of financial intermediaries, theevidence suggests particular concerns and avenues for possible remedialaction. For example, there is room for improving appraisal and supervisioncapability by focussing on fundamentals affecting eubproject performance,e.g., by reviewing more carefully technical designs and capital structures,placing greater emphasis on sectoral and policy parameters, demandisupplydevelopments and marketing strategies, developing feedback mechanisms,paying more than lip service to establishing the economic merit ofsubprojects by calculating thoughtfully and systematically economic ratesof return, undertaking sensitivity analysis and risk assessment, and bydevising realistic financing plans, completion schedules and cash-flowprojections. The sourcing of inputs and the prospective availability offoreign exchange deserve full consideration. Care should also be taken toensure that sponsors have the management capability to set up and operatethe project, have a high enough stake in the project, and that politicalconsiderations and government guarantees do not dilute appraisal standards.Institution of effective follow-up procedures, particularly for subprojectpost-implementation performance, and determined collection efforts areessential to keep arrears within acceptable levels. Action should be takenearly on to identify client problems and work out solutions, includingprovision of technical assistance through referrals if required. In thisrespect, development of a more intimate and trusting bank-clientrelationship between the DFC and its sub-borrowers enables the lendinginstitution to provide guidance, to instill financial discipline, and tohave a more tangible impact on their operations and performance when

- 22 -

circumstances warrant such intervention. Finally, a comprehensive anduniform data collection system needs to be devised and enforced toascertain subproject performance and facilitate evaluation.

37. With respect to conceptualization and desi&n of DFC operations,the experience suggests that sector work preceding project preparation isessential as it enables the Bank to appreciate better the workings of thefinancial institutions and mechanisms in a country, to identify gaps andshortcomings in the industrial and financial structures and institutionalarrangements, and to design more purposeful projects. Deeper understandingof political realities, attitudes and, more generally, of the way decisionsare taken and implemented can help determine what is practicable andworkable. Also, when addressing institutional upgrading and policy issues,the Bank ought to take an unambiguous and unwavering stance, linkingproject financing to actions already taken rather than mere assurances ofprospective initiatives. And when there are strong and well-substantiateddoubts about the commitment and capability of the government and/or thefinancial intermediary to implement competently the various components ofthe project, the Bank should not hesitate to defer lending until it isconvinced that *astainable progress has been made in implementing agreedaction program4. Going ahead with a project prematurely can lead to fargreater problems than holding it up, and the success of the project shouldnot be compromised by pressures to meet lending timetables. Finally,collection of facts and fortitude in presenting them in undiluted form tothe Regional Management, including a discerning risk assessment, can go along way in preventing the Bank's involvement in unsustainable projects.

38. Further to the Bank's macroeconomic and sector dialogue, lendingto financial intermediaries should also be used as a vehicle to press forreforms on issues affecting subproject and, by extension, DFC performanceand sustainability through appropriate macroeconomic and/or sectorconditionality, albeit past experience has not been very encouraging. Inthe same vein, it is incumbent upon the management of financial interme-diaries to take up such issues with their parent ministries, and to raisethe awareness of the ag.acies concerned in appropriate fora (e.g., byorganizing seminars). External aid agencies lending to DFCs could alsoencourage policy-makers to initiate policy reforms through concertedaction.

39. With regard to the Bank's appraisal and supervision work,appraisals should be transparent and pay greater attention to policyissues, the economic milieu, and emerging trends, since the subprojects tobe supported by the DFC are unlikely to succeed in a hostile policyenvironment. Bank appraisals should analyze more carefully the prospectivedemand for investible funds and ground DFC lending on a fairly concreteproject pipeline, and not rely on vague project ideas and unsubstantiatedexpectations of future demand growth. The Bank should be more circumspectin the review and approval of subproject appraisals, questioning keyparameters and in particular the depth of market analysis conducted by theDFC. The Bank should insist on frequent in-depth reviews of a DFC'sportfolio either by competent external auditors or its own missions.

- 23 -

Continuity of the staff assigned for the supervision of a particular DFCoperation can ensure greater familiarity with the institution and itsenvironment and trigger timely interventions by the Bank. To be sure, notinfrequently, the Bank operates in particularly difficult environments. Insuch instances, staff should be encouraged to convey early on sensitiveissues to the top regional management and seek guidance. The lowreceptivity of the Government and the entities concerned to external advicemay continue to be a drawback to action-oriented initiatives, impelling theBank to take difficult decisions. But such decisions may be unavoidablewhen persuasion has not produced the desired results. Finally, emphasis onsound macroeconomic and industrial sector policies would also help improvethe sustainability of subprojects and, to that extent, remove some of theunderlying causes of the DFCs' portfolio problems.

40. More than lip service must be paid to establishing the economicmerit of subproiects. Economic rates of return need to be calculated at avery early stage of project appraisal, if they are to serve as a managementtool for guiding project selection or for improving project design (e.g.,by identifying potential economies of scope; ascertaining the optimal plantscale in the face of alternative technologies and skill mix, product mix,degree of product standardization, and production runs; types, degree ofprocessing and sourcing of inputs; plant location; balance between thedifferent processes of a unified operation). See also PPAM, para. 16,footnote 12. Yet, DFCs seem to remain unconvinced that this technique canadd measurably to their own effectiveness; or perhaps they do not fullyappreciate the need for establishing the economic efficiency of theirinvestments in environments where external and internal competition is theexception and distortions in key parameters are prevalent. Instead, calcu-lations are performed, though not always thoughtfully (and oftengrudgingly), only for relatively large Bank supported projects, only tosatisfy an imposed requirement, and only after the appraisal work has beencompleted. Moreover, economic rates are not always recalculated ex postand, even when they are, they are of questionable reliability and providevirtually no feedback on the actual economic merit of the projects sup-ported. The Bank has been lax in dealing with this issue- Clearly, itsown faith and commitment to rigorous compliance with this facet of sub-project appraisal in DFC operations needs to be reaffirmed. This does notmean to imply that the Bank should not pursue in parallel the dislodgmentof macroeconomic and sectoral policy distortions vitiating the industrialenvironment through its economic and sector dialogue (PPAM, para. 39).

41. Finally, the experience seems to suggest that a financial inter-mediary's sustainability is organically conditioned on an array ofimpacting internal and external factors, includings conception (e.g.,prospective role, market share, and strength of competition); humanresource development, including a competent, dynamic and resourcefulmanagement team and board; degree of independence in decision-making, morethe outcome of the government's perception of a DFC's role, the absence ofintrusive external interventions, and the institution of an effectivedefense mechanism rather than the form of ownership; development of anappropriate organizational structure, systems and procedures, work methods,

- 24 -

and a balanced structure of operations; ability to operate on sound bankingprinciples and financial discipline; rational selection of projects basedon thorough appraisals and close supervision of the projects financed;conducive economic environment, policy framewok, and institutionalarrangements (e.g., economic policy framework, regulatory apparatus, legalsystem) allowing for business-like sub-borrower conduct and performance,the development of a healthy portfolio, adequate ri-turns on the financialresources employed, and ability to mobilize resources; adaptability tochanging economic conditions and shifting parametere and judiciousguidanceloversight by creditors and parent ministries.

- 25 -

Attacbment 1

-U2 AFEfTii DCfRf1 UTT B . CAB . PDLICY ZB-

ggga ig aii% Pl lev Zmmumm

1. SCMCITY OP RAII Reduced import ~epiilItv to servic an Sincet (1) I.emr sai4ty w;iil ~aVATe~1ALS le oretended ;ndstral sear, the reult of in~ffimlenl to servie mede of e~ere~tendedGPAfE PAWTS ani-agricuitural palicy blease, exc~esive indselrial eector, end (6i) m~y firu auid

Invetmenti In Impora Intonivo indsrie. be inefflmIenl e alminabie Ca*esit, theand exgsnmu~ fatore. allocakan of rsurce huld be esleeehve.

2. DADEQIATE De to inmuffiunen vaab inotaat. Ov erl Ifra rutural ipre nte ars requirMd.DelRASTuMifuTWE inadeuats maintonance ad overal H -bser, sPecifla döbottIenecking fer parslevigr(Pm ATER, deteriorat4an. combined with loca4anl onterpriem (e.g., provielon of rmad and er

TRAPT) ~bolcee of firma qhich often rapn~ to g ratore) juftified oney if benei~ waldnon-euanamie ceideraliano. In additian. in e ~ 0d eornlially hig) lnvestmanl caute.tratporl, ther, are farge lneffieleniee inthe paratatal Gector.

3. EN0II Vr1ng lechnalogical ehoic. lack of preventive Röfored polM frasasork required to reardINAD1C cintenance poor quality control, eli related effectve mintonence and upgrading (rther

to ak tchnologicel caenbility and inadeate tha~ coinuing porha~s of n~. equipanl), forIaon%i4e eructerc. Rol af mid In provoiion adopoan of apropriate technogy. and ~r~

of Inadeate equpen. to enhane tschnological capablilty. ftadirelt nof ald fia..

4. DuAE~JATE Overeutended industrial eanter for the counltry%. rroaemnt ln aer-,. e, trade and laduelrimiTenLodwAL. tochnologicli cepabil ity: reng cholces of pol Moie ncm'am-y bul noö OuW eflt. Speelfle

gLA LAM indu~lroal ~biVilite. 4nd lc a empaillty aeure rmmaired for tchnologlal earIMg andAO lANAGERAL grath oer 6ima. lmaroeconamic and trade , educatian press. ebch i* a elp proecm.

CAPAOLITY policie and role of e*pautre~ often wore nobconducive to Indenous tehnologiceal capabi tu

Grouth.

8. 0 PAN SCALE, Exchange and inter~l rate and prico control Viahililty of fperating &arga trajeats e-@6

DNAP PfIATr polielm which rewarded larg-eed Impru and ta be asesmmad canidoring capital Cabe eM~RT AM CAPITAL capitel-intensive inveetsalel non-oconomic eunk. Far new projeots. edquate pllac

DIN~"TY tactore in paramtetal lnvetmnt. Na~~esa in frammuerk. inveatment appralal eapabilily

aess letof recurref need and markch 4se. and eid coordinatian In esunlie. Rol, ofRole of eld in the design and imple..ntaecmn of me develapuanl.large projete.

6. NUPPICIENT Depreed state of the cnm. ta prdue6 Reformod policy framsor~ limperta eDBORO quai ity. and high produlan cost ra=ulling in increaae GP gre th and aggregae dend

high pricee and oxceaive Capacity. Them. in and to Iier Ccat (and pricMs).tura, are dua to Oast pol icy inedequacies, over-epanolan of enpelty. and ezternal fachore.

7. VASTOFJL Duo ta pricing pol icls that do nol Wn"orege Improved overal 1 poliy frmamsork and beterUrILIZATM oaving in reeurce me, and to ndequate tchnologlei,al abiled 1bar. and

aP 11aUS t~ehnoloiceal chdie, equipanet Condilin and omnagerial capbility.tochnologieal capabiily.

C i orld eank, Rporh Ota. 8210. Tanania: An Amanda for Induat,imi Rever. June 0. 1987. Vol. 1, p. ag.

- 26 -Attachment 2

TANmANIA

TANZANIA INVESTMENeT SAPIt (TIU)

ANALYSIS OF APPROVALS (LOANS AND EcUm

As of December 81, 1987

No. of Aeoung~ inApre_eis 1 Uitilons 1

A. SZ OF LOANS OR EUITY (T Sh)Up to i million 88 16 20.6 11 to a ieillon 69 24 112.4 4

a to 7 milion 8 24 26.0 117 to 12 alilHon 82 12 304.0 12Over 12 mi IIon U .2 1.782.2 _2

Total 249* 2.41A 10

8. MATRITY OF LOANSUp to 8 years 66 28 290.4 18

6 to 7 years 70 29 687.6 28

7 to 10 yeara 78 33 908.2 87

Over 10 years 24 10 440.0 L9Tota 288 100 2.428.2 100

C. INTEREST RATESUp to ex p.e. - - - -

6 to U p.a. 7 a 19.0 18 to 10 p.a. 64 27 293.0 1210 to 121 p.a. 140 69 1,480.4 6012 to13 p.&. 7 a 140.0 6Over 18= p.. _20 _8 548.6 -

Total _28 r 2,428.2 1

0. SECTOR OF ACTIVITTManufacturing and Engineering 188 6 1,843.8 67Agriculture and Agro-Processng 26 11 169.7 7Ulning and Quarrying 16 6 291.6 11Flahing and Fish Procasaing 11 a 16.2 1Tourlum and Note# 20 8 100.7 4Forestry and Wood Processing 11 4 64.0 2Services, e.g. Tranaport,

Printing, etc. 27 11 198.2 .Total 249 100 2.4g4.1 1d0

E. SECTORPrivate 94 s8 688.4 27Publle 165 82 1.817.7 _7

Total 249 120 2.484.1 100

F. TYP! OF LOANS

New Projecta 178 s8 1,32.1 sSExpansion Projects 78 83 68.4 22Rohabilltation/Diversification 16 6 464.0 19Working Capita _ 8 80.9 _

Total 23 100 2.428.2 100

*Of which 11 equity Investmento.

Source: TID.

OEDMarch, 1imS

TAMMAIA

TANZANIA DNVESTMEN7 BA (M)TIB

LEINM AM ESqM oPER ONS 1974-1987(T Sh tililons)

Yoar endlne J 80. 974 197. 1076 L97? 1978 1979 LO U IMR L 1 1967 L

Loane 97.1 128. 18.4 809.S 389.7 80.2 888.0 811.0 150.0 107.0 112.0 18.0 210.0 119.0

Equity ,72 _0- 10.6 5.8 4.6 _L8JE 1.0 19-0 - -

Total 104.3 129.2 184.0 816.8 844.2 0.7 ., 81.0 161.0 12.0 112.0 18.0 210.0 119.0

(In real tea: 1980=100). 255.6 265.8 260.4 886.9 871.7 880.0 83.0 267.6 121.7 88.1 62.9 8.6 76.0 84.2

Lan* 64.8 181.4 120.8 48.1 226.Ø 310.0 880.0 801.0 180.0 112.0 92.8 179.0 2=0.0 116.6

Equity 5.2 .7~ 10.6 8.8 2.0 ..L'~- - 190 a - -

Total 59.5 112.1 181.4 46.9 22. s 8 18 0_. 801 0.0 1s 94.8 179.0 260.0 118.6

(n real tema: 1980=100)* 146.8 271.8 200.6 67.6 247.1 884.7 880.0 248.8 104.8 86.4 8.8 82.7 90.6 84.0

DISBURSEENTS

Lant 39.0 70.8 77.6 142.1 92.6 169.0 178.0 2.0 8.0 282.0 285.0 168.0 170.0 276.2

Ewlty . - . 5.1 0-6 10.0 6-0 1.0 6.0 .0 1.0 2.0 -

Total 48 70.S 78- 148.8 97 7 69 --S 1U80 241.0 224.0 237.0 240.0 169. 172.0 276.2

(In real tema: 1980=100)* 107.4 144.7 119.2 178.4 106.6 196.7 188.0 194.8 108.6 156.8 184.8 78.1 62.8 79.3

La End of 1987.• Manufactur1ng price Index.

sourea: TID.

oEMarch, 1988

- 28 -

Attachment 4

TANZANIA

TANZANIA INVESTMENT BANK (TIN)

POSITION OF OPERATIONS FINANCED BY AGENCY AND SPECIAL FUNDS

As of September 30, 1987(T Sh Millions)

1. Agency Funds*

Loans Approved 466.8Loans Camfitted 208.1Loans Disbursed 109.8Repayments 26.2Loans Outstandia 83.6

II. Special Funds

Loans Approved, Committedand Disbursed 1.9

*Comprise operations ffnanced by local and external funds,and involve projects that have not been subjected tonormal appraisal procedures, or otherwise fail to satisfyTIB's financing requirements, which TIE has undertaken atthe government's behest and risk and administers as anagent of the Treasury for a fee.

Sources TIB.

OEDMarch. 1988

TANZANIA

TANZANIA INVESTENT SANK& (TIB)

BALANCE 1I<ETS 1900-1987(T Sh millions)

- ffi1 LM 19æ æ æ m Lt

Current1 Aseeb.CaIh ø Short-Term Investmønte 482.9 488.8 870.9 887.0 411.6 *22.6 802.1 26.7

Other Current Asta 196.1 24J 5L 877.7 S8 .. 27 .... 7å21 L ITotal Current A~se6s 67.0 705.7 611.1 768.7 978.1 1,06.8 1,261.8 1,814.2

PortfolioLoans 667.5 610.1 971.7 1,171.8 1,886.4 1,882.6 2,056.9 2,44.2

Equity / 56. . 62.7 82. _,6 7..2* ... : 7,, 0Total Portfolio (Grose) 724.4 872.4 1,084.4 1,289.8 1,469.8 1,408.1 2,181.9 2,642.8

L~ss Cure6 imturl1es (122.6) (168.9) (167.6) (24.7) (889.2) (481.9) (616.6) (1,224.1)

Les* prøvl*søn 4.8) (22.6 (9.S) (M61 79.1) (98.3 Q06.9) (119.i>

Total Portfollo (Ne) 597.8 696.7 827.6 928.0 991.0 888.9 1,409.6 1,196.7

let FIxed Asse. 2.6 4.7 8.8 14.2 29.6 68.8 91.7 112.6

TOTAL ASSE 1.277.9 14M.1 1.487.5 1.705.9 X.9.7 1.967.5 2.74.0 8&16,.4

LABILTIES & NET WIH

Current L111 etl« 78.6 109.8 140.6 226.7 849.2 846.0 551.9 678.1

Lone-Ter e Brrowing 316.4 410.2 407.7 88.4 627.2 664.0 1,076.7 1,291.9

Fun 55.8 82.. . .1 ... 75 4 78.5 109.0 J.. ATotal Liabilitle 444.3 62.8 06.7 678.2 1,051.6 972.6 1,789.6 2,102.4

Ne6 WorthPald-in Capital 100.0 100.0 100.0, 100.0 100.0 100.0 100.0 100.0 >

Grante 69.7 68.O 644.0 868.0 081.0 685.2 702.0 78.2

Rtalned Earning 78-9 88.9 187.8 .-_M*_. 1Ma2 I2. .. X,4 9.. 8n

Total Ne Uorth 888.6 828.6 881.8 1,082.7 947.2 98.0 1,008.4 1,08.4 ir

TOTAL LIASILITIES A NET UMM 1.277.9 1.4MA 1.487.5 X.706. 1.9M.7 1.957.5 2.748.0 8165.4

Exclude the Special Fund Account.Includes InvestmentD in 70FL.

Source: TIS.

MEDNarch, 198

- 30 -

Attachment 6

TANZANIA

TANZANIA INVESTMENT BAK LM

INCOME STATEMENTS 1980-1987 /a

(T Sh Militons)

Year Ending June 30 1980 1981 1982 198 1984 1986 1986 1987 fb

INCOME

Interest Fees on Loans 66.0 69.8 106.4 140.6 177.9 204.4 297.6 744.4Commissions 2.9 2.8 0.6 1.6 0.4 1.1 1.9 0.2Income from Investments 15.7 20.6 15.7 16.6 22.6 16.6 8.0 7.2Other Incoe 0.4 0 2 1 8.1 9

TOTAL INCOME 87.0 118.0 124.5 162.4 202.0 228.2 810.6 754.6

EXPENSES

Finance Charges 24.5 26.7 83.4 36.1 84.7 52.6 97.8 282.9Administrative Expenses 7.0 10.7 18.1 16.6 16.6 27.0 80.8 49.7Depreciation 0.8 0.6 0.6 1.0 1.1 1.1 1.0 2.6Provisions 5.1 21.6 21.8 29.1 82.2 15.7 149.5 864.8Other Expenses L -= -1. -1-2 _ 2.

TOTAL EXPENSES 87.5 59.5 76.1 62.7 6.0 96.6 801.2 727.7

Net Profit before Taxes 49.5 53.5 40.4 79.7 116.0 126.0 9.4 26.9Provision for Income Tax 27.2 87.6 88.6 58.8 @7.7 70.5 8.0 18.

NET PROFIT 22.8 15.9 14.8 25.9 48.8 56.1 1.4 8.8

L Actuals exclude the Special Fund Account./ End of 1987.Le Includes foreign exchange losses and feasibility study cost write-offs.

Source: TIB.

OEDMarch, 1988

- 31 -

Attachment 7

TANZANIA

TANZANIA INVESTENT DAMI( (TIS)

FINANCIAL RATIOS 1980-1987

1980 198 1982 1988 1984 1985 198i 198?

Income Stat~mnt Elementsas % of Averag Total Assets

1. Totäl Income 8.6 8.4 8.6 10.2 10.9 11.5 18.2 28.62. Flnanco Charges 2.4 2.0 2.5 2.8 1.9 2.7 4.1 7.48. Adaleistra6lve Expensee 0.7 0.3 1.2 1.0 0.9 1.4 1.8 1.6

4. Net Profit (10s) 2.2 1.2 1.0 1.6 2.6 2.8 0.1 0.8

Profitabllty- Indicaetors (M

5. NetProfit (los)/YerEnd N~b Torth 2.7 1.9 1.7 2.5 8.1 6.7 0.1 0.A

6. Incom frem Loang/AvorageLoan PorollIo 11.2 12.6 11.9 18.1 14.2 16.0 17.6 80.8

7. Cos of D~J/Averag De* 7.7 4.8 7.7 7.8 6.1 6.6 8.9 18.0

Structural Ratlos and DobCoverage

8. Current Ratlö 9.2 6.4 4.6 8.4 2.8 8.1 2.8 2.79. Long-~e* Dol/Equity 0.4 0.5 0.5 0.4 0.9 0.8 1.9 1.2

10. Cumulattve Provislons *s 5of Loan and EquIty Portfollo 2.0 4.0 6.0 7.0 8.0 9.0 18.0 27.8

Source: TID.

OEDMarch, 1988

TANZANIA

TANGANVIKA DEVELOPMENT FINANCE COMPANY LTD. (iDFL)

LENDING AND E4UITY OPERATIONS 1979-1984(Amounts in T Sh *000s)

Year onding December 31 1979 1980 191 1982 1984 1985 19m 197

APPROVALS

Loane 89,982 41,815 34,300 11,000 6,060 16885 10,672 45,98 109,068Incom Notes 4,00 17,000 - 4,00 2,000 - - - -Equity 14, 644 7.900 - . 1.600 _6Q 000 2,34 4,0 -

Totae 1 09.278 66.515 34.30 23.Ml 9.WO~ 20,5 12.708650.173 109,05

(In real terms 1960=100)* 134.1 66.5 27.7 19.3 6.8 11.6 5.9 18.2 81.8

COMMIMENTS w

Loans 28,696 86,246 80,235 86,501 25,995 20,976 - 31,226 82,037Income Notes - 1,000 500 3,s - - - 2,000 -Equity 3,475 6,016 S. 748 74 S.m - 6.726

Total 82.37 43.28 94.825 40.744 26I738 26.L478 - 41.94 92&037

(In real terms 1960=100)* 89.7 43.3 27.7 82.9 17.6 14.9 - 15.2 23.8

DISBURSEMENTS

Loans 64,396 50,604 22,878 29,806 80,08 16,941 20,354 22,189 20,048Income Notes 2,600 2,64 500 4,000 4,187 - - - -

Equity 18.476 4,112 2,226 S.90 8.36 11730 280 4,278 2.184

Total 80.472 57.190 25.101 42,278 !!,!0 28.671 20.634 2,4 17 22.m

(In real terms: 1980=100)* 61.5 57.2 20.8 84.1 24.6 18.1 9.5 9.8 8.5 ft

*Manufacturing price ladex.

Sources TDFL.

OEDMarch, 1986

TAl~ANI

TANNIKA DEVELOPMENT FrANCE COWANY LTD. (IDFL)

8A.AlEMET 1979-19m7

YeaC ending December 81 1~7 IND1 igel, 1i8m im IN7

Cash and Short-Term Investmente 26,411 29,662 40,56 1,608 6,942 18,640 89,132 92,687 140,798

O~ler Currmt Asset £a 18,088 16,f8t 25,859 32,848 26,866 80,607 90,06 145,908 8*0,404

Portfol loEqulty 55,p7 59,467 61,682 70,649 72,08 8,081 85,840 87,968 89,802

Los, 148,66 128,418 174,665 197,697 207,726 255,161 180,470 879,240 4^@,878

lmese Not~ -11.88 14.12 14.852 1j.1j 2 21819 .og 14.494 1886a 12.889

Total Porfolo (Gro*) 210,711 252,02? 250,889 288,48 328,08 857,041 250,804 481,077 542,049

Icea Provelons 88658 10.658 12,1S' 24.07 8.491 48.f0e 48 5 .84&74 188.292Total Portfollo (Nt) 202,05R 241,869 288,731 262,411 287,58 810,8^1 201,709 396,855 378,757

nit Fixed Asets 19,872 22,10 25,483 28,488 28,582 82,589 84,854 84,217 88,969

Statf ~lousg Loans 50 _98 788 na 1i8 1.266 1128 -1.0 1.674

TOTAL ASSET3 261.94 8 4 1.287 80.742 8.927 670.192 876.521

LIABILTIES

Current .sbi lit.s 28,285 27,961 81,288 28,45 24,442 26,468 88,87 169,946 278,592

Long-Tra LlablItl**Ine . Not.. 80,000 80,000 80,000 80,000 80,000 80,000 12,500 12,888 12,888

Efn Bnda 29,818 27,058 22,742 28,315 20,90 82,488 - - -

LoU _8 882.9 99, 81 03048 .141 177.«8 10.941 2.2W 078

TOTAL ROINGS 146,279 189,998 202,58 20,858 242,416 290,802 118,441 277,184 348,96

Share Capita% 88,000 88,000 88,000 88,000 88,000 88,000 210,000 240,000 240,000

Reserv.o 8q. 4.8 9.476 __1 (4,1181 (11.488) -(8 (6,987f 18.91,900 92,80 97,426 88,010 88,884 ' 76,r47 204,611 288,068 2 e8,968

TOTAL UABILTIES A10 ES1ITY 810.784 881.267 .828.618 80.742. .- % 406.927 670.192 876.521

f, Debor. and curront maturItis of portfollo loans.

Sourco: TDFL.

OEDMarch, 1988

TANZANIA

TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD. (7DFL)

INCOME STATEWENTS 1979-1987(T Sh '~00s)

yoar endinG December 81 1979 1990 1981 1982 1988 1984 1m8 1986 1987

Interes6 12,604 18,274 19,767 22,018 28,780 38,148 29,210 50,875 25,89

DividAds 4,181 2,82 0,025 4,576 4,99 4,658 5,728 7,248 3,821

Directore/Managemenb Fes 4,245 7,178 6,082 7,778 4,089 4,962 9,998 6,370 8,926

Other Incos. 1.648 1.428 2.110 4.168 4.67,2 8.107 6.977 7.77 10.781

TOTAL INCOME 22.578 29f0 88.974 88. 40.420 49.965 61.908 71.070 98 427

Administrative Exponss a 4,788 7,148 9,160 9,077 10,889 11,780 14,211 17,693 82,294

Doubful Deb6 414 2,822 664 10,646 4,500 4,289 (910) 14,746 16,984

Finance Charges 10,340 18,723 16,88 9,009 18,627 21,698 26,403 41,205 47,971

Losel(Profit) on Disposi ofAdjs2tm~ns -.,.: . - . : .- 2.88 .(4591

16,492 23691 26,682 28,732 29,016 37,767 42,287 70,18 97,229

Profi6 I efore Ta 7,081 6,012 8,292 9,808 11,404 11,188 9,671 887 (802)

Tax 8.=8 8.082 8.650 7.570 2.547 7.887 2.108 2.786 S.M

Profit After Tax/(Losn) 8,88 2,980 4,742 11,854 8,857 8,861 7,668 3,620 (0,091)

Exchange Loss/(eln) - - - - - - - (79,5683)

Provislons 2.000 1 00 21.045 11.404 11.188 1.916 (88.147) 88.550

mot Profit/(Loss) ( 10.242 .991) (2,547) (7.87) 5.647 (82.547) 10.078)

/a Incuds doprociation..b Injluds provislon apinst om value of investents.

Sourco: TDFL.

MEDMarch, 1989

- 35 -

Attachment 11

TANZANIA

TANaANYIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL)

FINANCIAL RATIOS 1979-1987

1970 190 1981 1982 198 104 1965 1986 1937

Income fiatement Elementsas X of Average Total Assets

1. Total Inoe 9.6 10.4 10.6 11.9 12.2 18.2 12.7 10.6 11.02. Floance Charges 4.0 4.0 4.9 2.8 4.0 5.6 6.5 0.1 5.58. Adminierative Expenses 1.9 2.4 2.6 2.8 3.1 8.1 8.5 2.6 8.74. Net Profit (lose) 1.9 0.8 1.0 (8.0) (0.8) (2.0) 1.4 (4.9) (1.4)

Profitability Indicatore (M

6. ge Profit (0oes)/YearEnd Net Worth 4.2 1.1 8.8 (10.9) (8.0) (9.6) 2.7 (18.9) (4.0)

6. DIvidend Income/EquityPortfolio 7.5 4.6 9.6 6.5 6.6 5.5 6.7 0.2 4.2

7. Income from Loans/AverageLoan Portfolio 7.0 7.9 7.2 8.2 6.6 9.7 17.7 12.9 16.6

8. Cost of Dbt/Average Debt - 8.1 8.8 4.5 6.8 6.6 28.8 14.9 18.7

Liquidity and Creditworthiness

9. Current Ratio 1.7 1.7 2.1 1.2 1.4 1.9 1.9 1.5 1.710. Long-term Debt/Equity 1.6 2.1 2.0 2.8 2.6 8.5 0.5 1.1 1.511. Debt Service Coverage Ratio - - 2.9 1.7 2.9 2.4 - - -

Source: TDFL.

OEDMarch, 1988

TANZANIA

TANANIKA DEVEUIPENT FINANCE COMANY LTD. TDFL)

souRcM AND USES OF RAIDS 19794,97

Year onding December at 1070 16 1961 108 89 1984 1985 INS 1987

1URCES

Funds from Operatlons 7,668 9,528 10,850 21,8)6 16,885 22,518 15 77 18,488 17,494Loan Repayment 18,479 14,788 16,862 24,697 28,107 88,822 84,724 58,469 104,070New Equity 48,000 - - - - - 6,000 80,000 -Loans 46,519 46,641 21,498 17,322 20,819 18,198 16,041 88 -Other / - 1.082 9 **271 5.18 442

Subtotal 114,720 72,805 50,710 8,595 60,781 74,912 S07,618 107,475 122,006

-erations

Equity 18,477 4,118 2,225 6,967 3,869 11,780 280 4,278 2,184Loans and Income Notes 71161 58.068 22.676 Mso$ 84220 16.941 20854 22.189 20

6,116 57,201 25,101 42,278 87,600 26,671 20,684 26,417 22,760

Repayment of Borrowings 410 - 6,467 18,566 9,860 15,682 84,882 96,100 76,124Fixed Assets 5,8809 2,90 4,181 1,952 8,187 4,945 8,078 1,120 1,108Taxes and Dividends 1,401 1,250 8,200 8,519 4,871 8,411 8,748 4,692 5,289Other& 98 427 201 47 567 188 15 - as

Subtotal 92,054 61,888 41,190 66,847 55,564 57,872 64,605 128,588 107,062

Increase/Decreane In Funds 21,772 10,987 9,520 (8,752) 6,177 17,040 48,000 (21,068) 14,044

Includes staff housing losn. sale of Investments and fixed assets.Includes creditors (income notes and EIB bond interest), staff housing loan. and deferred taxation.

urces TDFL.

rch, 1988

TANGANYKKA DEVELCPMENT PINANCE COMPANY LID. (FI.)

ANALYSIS OF ARREARS 1979-1987

1,979 IM 1961 1M82 1998 1g"- LES IS4U

1. Tei Numbr of Loans in Por6føllo 82 82 74 70 60 67 76 76 72

2. Nuber of LanAff~eced by Arrre 6 16 16 84 81 87 88 26 25

8. Exposure Ratio 7% 18% 245 48 62% 6"5 0% 84% 845

4. Toal F Otsandla g Leon P rfolo21(7 Sh '000) 28,000 98,440 150,829 215,849 228,000 272,000 227,822 494,767 718,404

6. Portolo Affecte by Arreara (T $h '000) 6,000 88,400 66,000 110,000 116,000 160,000 180,000 886,000 S50,000

0. Exposuro Ratio 20% 40% 48 S1 60" 69% 0m1 725 775

7. Arrearo Over 8 »l~th (Principal AInteresi, T Sh '000) 8,000 8,000 12,000 85,000 26,000 88,000 60,000 90,000 226,000

8. Arrears s % of Total TDFL Portfolo 125 a1 85 10m 115 14% 221 18 s1

some: tFT..

march, 1996

TANZANIA

TANAYIA DEVEPMENT FMNAM COMWNY LTD. MFL)

PORTFOLIO ANALYSIS

AD of December a1. 1987(T Sh 000.>

Portfol o Affectadby Arrear*

Nuber of Total ArroareL Arrears of Arreara of Arreare of Arreare ofProject Cateor Projecte Affn 0-8 monthe 84 montho 6-12 monthe 1-2 y=ars Over 2 yeast

A. Operatina Prolects

Profitable Projcte 6 56,82 6,848 84,768 12,874 f,89 82

Unprofltable Projecta Lh 18 186.189 12.985 41.m 26.518 89.»9 51.a27

Subtota 19 220,618 19,828 76796 88,892 44,198 67,889

9. Proleete Under Implementation 6 4,8m 1.912 8.962 1.458 1.110 1.62

Total 24 228.124 21.240 79j767 40.845 48.0 59.014

C. Profltable/Publies 2 21,110 8,092 18,010 2,878 722 -

Unprofltabl*jPublile 4 44,849 797 897 . -

Under Impleentation/Publle 1 8,644 575 688 806 1,62

N.B.: Projecte In Secilon C ar* included In A and 8 abov*.

a Arreara of principal and Interost. 0S: Includes companles under Ilquldation.

Source: TOFL.

OEDMarch, 1988

- 39 -

Attachment 15

TANZANIA

TANGANIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL)

COLLECTION PERFMANCE 1982-1987(T Sh *000)

1982 L~8 I98 19n18

1. Arreare at Beginning of Year 18,882 29,018 40,840 60,864 48,164 90,158

2. AmountIng Falling Du.Principal 20,26 29,471 44,167 46,692 89,884 1m8,20Inter~6 28.100 28.749 26678 42.29f 88.021 14.780

40,726 6,220 70,840 87,87 177,855 297,98

8. Total Rocoverable Collchion 60,107 8,888 111,480 148,751 225,119 888,091

4. Cach 80,494 46,198 50,610 100,87 109,994 109,596

6. Reschdule

Principal - - - - 20,112 20,112Inter~ _8-.2-0 8.20

- - - - 28,872 28,872

6. Total Collection 80,494 45,198 S0,616 100,87 188,866 182,987

7. Arreare at End of Year 29,618 40,40 60,864 48,164 90,18 2U8i124

8. 4/8 (5) sig 62 465 675 49 208

9. 4 s/8 () • - - - 05 84%

10. 6/1 (s) - - - - o81 20

Source: lDFL.

OEDMarch, 1988

- 41 -

PROJECT COMPLETION REPORT

TANZANIA

TANZANIA INVESTMENT BANK (TIB)(LOANS 1172, 1498 AND 1750-TA)

February 1988

Industry and Energy OperationsSouthern Africa Department

* 43 -

PROJECT COMPLETION REPORT

TANZANIA

TANZANIA INVES7HENT BANK (TIB)(L*NS 1172, 1498 AND 1750-TA)

1. LaNTODUCTION

Background

1.01 The Tanzania Investment Bank (TIB) was established in 1970 as a-wholly Government-owned institution to provide term financing for medium-

and large-scale investments in the productive sectors, and technicalassistance to projects. Since many of the larger projects have beenpromoted by parastatals with equity financing provided directly through thebudget, TIB's main role in Tanzania's financial sector has been to provideloans for larger-scale investments undertaken by the parastatal sector. Asof June 30, 1986, the authorized share capital of TIB was T Sh200 millionof which T Sh.00 million was paid in and held by Government (602), theNational Bank of Commerce (NBC - 302) and the National InsuranceCorporation (NIC - 101). 1

1.02 The Bank Group first assisted TIB in 1974 with a line of credit ofUS$6 million (IDA Credit 460-TA), which was reviewed in a ProjectPerformance Audit Report (No.3881) dated karch 30, 1982. This was followedby three lines of credit, together with an EEC Special Action Credit for atotal of US$70 million. TIB has also administered two IDA technicalassistance credits: Credit 601-TA for US$6 million and Credit 1060-TA forSDR8.4 million. The three lines of credit, which were IBRD loans (Nos.1172-TA, 1498-TA and 1750-TA), accounted for US$55 million and are thesubject of this report. Implementation of these three repeat operationsspans a decade (1976 to 1986), but since the performance of TIB prior to1980 was partly covered in the above-mentioned Project Performance Audit,this report focuses mainly on the period 1980-1986. The EEC Special ActionCredit is not referred to separately in this report, since the performanceunder this credit is considered to be the same as under Loan 1750-TA.

1.03 Loan 1172-TA for US$15 million was approved on October 28, 1975,signed on November 12, 1975, and became effective on February 20, 1976.The purpose of the loan was to finance part of TIB's foreign exchangerequirements to cover its commitments through December 31, 1977. The loanwas made to TIS st an interest rate of 8.52 p.a., repayable in accordancewith a schedule conforming substantially to the aggregate of theamortization schedules applicable to the subloans. The maximum repaymentperiod was set at 15 years. It was agreed that TIB would onlend theproceeds of the loan at its lending rate prevailing at the time ofsubproject authorization and that it would pass on the foreign exchangerisk to subborrowers. In accordance with TIB's policy statement, its

1/ Both NBC and NIC are wholly Government-owned.

-44 -

minimum interest rate was to substantially reflect the cost of capital inTanzania. Consistent with this policy, TIB was charging a minimum rate of10% p.a. for up to 15 years. While this rate was not positive in realterms (inflation was about 152 p.a. between 1975-77), it was in line withother rates in Tanzania and it enabled TIB to have an adequate spread. Anindividual subproject free limit of US$400,000, with an aggregate freelimit of US$3 million equivalent was agreed upon. An additional feature ofthe loan was a limitation on TIB's debt:equity ratio, which was not toexceed 3:1. There were no other features of the loan that were of specialinterest. The loan was fully committed by June 1978 and the loan wasclosed one year later than anticipated on December 31, 1981.

1.04 Loan 1498-TA for US$15 million was approved about two years lateron December 6, 1977, signed on December 28, 1977, and became effective onApril 3, 1978. As with the previous loan, the purpose of this loan was tofinance part of TIB's foreign exchange needs up to December 1980. Theterms and conditions of the loan were similar to Loan 1172-TA, except thatthe Bank interest rate was 7.92 p.a. and the minimum onlending rate TIBagreed to charge its subborrowers was increased to 11Z p.a. In recognitionof the improved quality of TIB's appraisal work, the free limit forindividual subprojects was increased to US$800,000 and the aggregate freelimit to US$7 million equivalent. The loan was fully committed and closedas scheduled on December 31, 1980 and June 30, 1983, respectively.

1.05 Loan 1750-TA was the Bank's fourth line of credit to TIB. TheIBRD loan amount was US$25 million, and it was agreed at negotiations thatsince TIB needed additional resources, US$15 million from the EEC SpecialAction Fund allocated to Tanzania would also be lent to TIB. The loan wasapproved on July 24, 1979, signed on August 20, 1979, and became effectiveon February 5, 1980. As with the previous loans, the main purpose was toprovide foreign exchange resources for TIB's commitments up to June 30,1983. It was also felt that the Bark's continued association with TIB wasjustified in order to enable it to influence the channelling of funds intofinancially sound and economically viable projects and to improve TIB'soverall performance. The terms and conditions of the loan were the same aswith the previous loan including the Bank's interest rate, but the freelimit was furth6r increased to US$1 million and the aggregate limit to US$8million. The EEC Special Action Credit, which was administered by IDA, wason standard IDA terms to the Government and onlent to TIB on termsequivalent to the IBRD loan. The main issue during negotiations was TIB'sinterest rates and the problem posed by a Bank of Tanzania (BOT) circularin 1978, which directed banking institutions to adopt a new schedule ofinterest rates. This directive required that TIB lower its rates to mediumand large-scale industry from 112 p.a. to 102 p.a. The issue thatconcerned the Bank was how the process of interest rate determination wouldbe conducted, particularly whether, as in the past, TIB's Board would havethe authority to make future interest rates changes or whether BOT wouldhenceforth determine TIB's interest rate structure. During negotiations,the Bank was informed that BOT would set TIB's interest rates, but it wasagreed that since funds from external sources are exempt from the BOTdirective, TIB would charge 112 p.a. for all onlending from the Bank loanand EEC Credit. The loan was fully committed two years later thananticipated on June 30, 1985, and closed a year later on June 30, 1986.The EEC Special Action Credit was also closed on June 30, 1986, about threeyears later than anticipated.

-45 -

1.06 While project implementation for Loans 1172-TA and 1498-TA wassmooth, with initial disbursements ahead of schedule, by the time thefourth loan became effective, the economic situation in the country haddeteriorated significantly. This was reflected in TIB's financialperformance and operations, including loan approvals, which starteddeclining rapidly. Annex I shows a schedule of cumulative Bankdisbursements for all three loans. Throughout the period under review, TIBwas in compliance with all loan covenants, except those relating to auditedfinancial statements. These statements, which were prepared by theTanzania Audit Corporation, were often submitted late and were deficientin certain standard information required by the Bank from all DFC clients(para 3.07).

Project Objectives and World Bank Role

1.07 The objective of all three operations was to provide foreignexchange resources to TIB for investments in, inter alia, medium and large-scale industries, agro-business and tourism. It was also the Bank'sobjective to assist in TIB's institutional strengthening, particularly inimproving its project analysis capabilities and procedures. It was feltthat the Bank's continued association with TIB would enable the Bank toinfluence the channelling of funds into financially sound and economicallyviable projects and improve their overall performance. These objectiveshave met with limited success. Today, over three-quarters of TIB'sinvestments are in unprofitable or problem projects. While this is mainlydue to the difficult economic situation in the country, it is also due tothe fact that in the face of deteriorating economic conditions, TIB hasbeen unable to allocate scarce resources effectively due to Governmentpolicies. One of the Government's main objectives, during the severalyears of economic deterioration, has been to keep the larger enterprises inthe country afloat; therefore, these enterprises have benefitted from theGovernment's foreign exchange allocations. Many of these enterprises havebeen unviable, and as a result large amounts of credit have been allocatedto negative value-added activities. The Bank's objective of financingsound investments and improving TIB's effectiveness in resource allocationhave, therefore, been largely undermined. The Bank, however, did make acontribution towards strengthening TIB institutionally. In line with Bankrecommendations, TIB recruited competent expatriates and Tanzanianprofessionals and developed an active and effective staff training program,which benefitted from the IDA technical assistance credits. The Bank alsohad an important impact on TIB's policies and procedures, includingdividend policies, reporting and management information systems,supervision and debt collection, and project appraisal methodology, andalso helped TIB reorient its lending towards rehabilitation of its existingportfolio. However, inspite of improvements in appraisal methodology,with the benefit of hindsight it is clear that the economic viability ofinvestments was not properly assessed, particularly their long-termviability in a continuously deteriorating environment.

-46-

II. UACROECONOMIC, INDUSTAIAL AND FIANCIAL SETTING

Background

2.01 At independence in 1961, Tanzania was one of the poorest countriesin the world. Almost solely dependent on subsistence agriculture and a fewestate crops, the country had a very modest industrial base and a verysmall number of educated and trained personnel. For the first six yearsafter independence, the Government's development objectives resembled thoseof many other less developed countries, stressing growth in per capitaincome and national self-sufficiency in skilled manpower, based on marketforces and capital intensive agricultural projects. This approach, in theGovernment's view, led to unacceptable economic and social conditions, suchas widening income differentials and unequal opportunities for advancementin the rural areas. In response to this situation, the nationaldevelopment strategy was reassessed in 1967. The new priorities,enunciated in the Arusha Declaration, were directed toward establishing asocialist society and led in the late 1960s to the nationalization oflarge-scale industry, commerce and finance, the creation of numerousparastatal bodies, the formation of Ujamas (cooperative) villages, thedecentralization of Government (1972), and the mass campaign ofvillagization (1974-76).

2.02 Between 1966 and 1973, Tanzania's performance in terms of growth,domestic resource mobilization and income distribution was satisfactory.During this period, real GDP grew by 4.4Z p.a., the gross investment raterose above 20Z and gross domestic savings fluctuated around 15-18% of GNP.In 1974, a severe drought and a drastic increase in import prices,especially oil, triggered a serious economic crisis in Tanzania. Thiscrisis exposed some of the longer-term weaknesses related to dwindlingdomestic savings, low productivity of investments, parastatalinefficiencies, and declining exports. The Government restricted importsand froze wages in an attempt to manage the short-term situation. Thesemeasures, aided greatly by the coffee boom in 1977 and by increasedexternal financing, were able to keep the economy in balance until 1978. Anew balance of payments crisis occurred in 1978 due tos relaxation inimport controls without compensatory exchange rate management; fallingcoffee prices; and a poor performance from the agricultural sector. Thefiscal situation further deteriorated following the outbreak of war withUganda in 1979. Inflation accelerated from 112 to 282 and growth inaggregate output slowed to 3.3% p.a. between 1978 and 1980 as compared with5.2% p.a. between 1970 and 1978. In addition to the series of externalfactors, the economic downturn of the country has in large measure been theresult of underlying weaknesses in the management of the economy,particularly with respect to incentives in the agricultural sector,exchange rate and trade policies, administrative controls, expansion of thepublic sector, and implementation of a poor industrial strategy.

2.03 Tanzania's economic crisis has deepened since 1980, with GDP percapita (which is now estimated at US$240) falling at an average of 2.5Zp.a. Exports declined by about 10Z between 1979-1980 and 1981-1982 (when

- 47 -

exports averaged US$488 million) while imports were kept stable at overUS$1.1 billion by additional foreign financing. By 1981-82 foreignfinancing had become at east as important as exports as a source offinancing the import bill. By 1983, Tanzania had virtually no access tointernational creditors and exports had declined by an additional 20Zcompared with 1981-82. Tanzania had to adjust to its external imbalance bya major reduction in imports, which declined by 30 percent (in valueterms). After several years of economic deterioration, the situation inTanzania today continues to be characterized by sluggish growth, highinflation and low productivity. The country's physical and socialinfrastructure has also deteriorated over the years, and transportationbottlenecks now impinge on every sector of the economy.

2.04 In an effort to address the country's economic problems, theGovernment launched "Economic Survival Plans8 in 1980 and 1981, but it wasnot until 1982, with the introduction of a *Structural i-Ijustment Program,"that a comprehensive approach to resolving them wa. initiated. Themeasures taken to revamp the economy (including cuts in the budget andimports, some trade liberalization and devaluation) represented a move inthe right direction, but were not unfficient to improve resource allocationand lay the basis for economic recovery. In October 1985, the newGovernment formed under President Hwinyi took further measures to tacklethe deepseated problems of the Tanzanian economy. A more pragmaticapproach to economic policy has now emerged following the launching of anew Economic Recovery Program (ERP). The basic objectives of the ERP areto increase the rate of growth of output, rehabilitate the country'sinfrastructure, and xestore external balance. The main features of the ERPinclude: (a) sustained action on the exchange rate to eliminate theovervaluation of the Tanzanian shilling by mid-1988; (b) supporting fiscaland monetary policies consistent with an IMF program; (c) measures toreduce price controls, improve foreign exchange allocation, and reform thetrade regime; (d) policies to improve the performance of the main sectors;and (e) interest rate adjustment, with the objectives of achievingpositive real rates by end-1988. The Government's initiatives are beingsupported by the Bank'o Multisector Rehabilitation Project and the IFStandby Arrangement. The first year of implementation of the ERP is nowcomplete, and the effects on the economy are beginning to show. Over thepast year, the economy has grown by about 3-4Z; adequate to generate amodest growth in per caipita income. A sound foundation for recoveryappears to have been established, and the prospects for durable economicgrowth are good provided Government sustains progress on sectoral policyand institutional reform, and adequate amounts of foreigu exchange areavailable for key inputs Eor domestic production and rehabilitation.

The Industrial Sector

2.05 At independence, Tanzania had an extremely limited industrialsector dominated by private firms. Three major features have characterizedthe sector since then: (i) rapid expansion followed by a sharp decline;(ii) a diversification in output towards consumer goods; and (iii) a majorshift in ownership from the private to public sector. The share ofmanufacturing in GDP rose from just under 4Z in 1961 to 121 in 1978 beforeregistering a sharp decline. After using a massive amount of investmentresources during the 1970s and early 1980s (over US$2 billion), Tanzania's

-48 -

industry now produces only about 3Z of the country's GDP (measured at worldprices), although for much of the seventies as much as one-third of allinvestments were channeled to industry. Tanzania's manufacturing sector,which at world prices produced only US$56 million worth of value-added in1984, utilized an estimated US$420 million worth of recurrent inputs, ofwhich US$290 million were (direct and indirect) imports. The averagecapacity utilization rate of the sector as a whole is in the range of20-30Z.

2.06 The overall decline in industrial output is directly related tothe drop in export agriculture, which has meant fewer materials to processand less foreign exchange to pay for imports of the needed spare parts andintermediate goods. Government policies resulting in an overvaluedexchange rage, administrative allocations of diminishing foreign exchangeresources, restrictive import licensing, and price controls, have alsocombined to produce an inefficient, over-protected industrial sector. TheBank's recent Industrial Sector Report "Tanzania: An Agenda for IndustrialRecovery" (Report No. 6357-TA) indicates that while there would beproductivity gains across-the-board by increases in capacity utilization inindustry, far greater benefits would be derived from reallocating existingresources from firms that produce &t negative value-added to otherindustrial firms producing at positive value added (whether efficiently ornot).

2.07 The main objectives of the Government's three-yvar StructuralAdjustment Program (AP) in 1982 as it related to industry was inter alia,to cut back on new capacity creation, encourage industrial rehabilitationin selected priority enterprises, double manufactured exports, and improveparastatal efficiency. However, structural, operational and managerialinefficiencies in the sector continue to persist; infrastructuralbottlenecks remain; and the availability of raw materials and inputs isconstrained. Equally important, resource misallocations persist,particularly regarding foreign exchange and credit. Although the recentexchange rate adjustments and the decontrol of prices have reduced somewhatthe skewed set of incentives facing industry, the distortions in the traderegime and the foreign exchange allocation mechanism are still substantial,resulting in highly variable rates of effective protection acrossindustries. The Bank's recent industrial sector report spelled out anindustrial reorientation strategy aimed at emphasizing efficiency andproductivity. The main elements of the strategy includes ()intersectoral reorientation, where agriculture (the most productive sectorand higher foreign exchange earner) together with infrastructure, wouldhave access to a large share of resources, while industry would have asubstantive supportive role; (ii) reorientation within industry away frominefficient industries to productive ones; (iii) reorientation of resourcesaway from new investments toward rehabilitation; (iv) reorientation ofresources towards smaller-scale firms; (v) balance between the private andparastatal sectors; (vi) reduced import-substitution and increased exportorientation; and (vii) technological capability development. The Bankintends to follow up this study with a policy-based industry and tradeadjustment lending operation, which would initiate the process forrestructuring of the industrial sector and support the trade liberalizationmeasures envisaged under the Multisector Rehabilitation Project.

- 49 -

The Financial Sector

2.08 Tanzania's banking system comprises a central bank - the Bank ofTanzania (BOT), and ten financial institutions: two comercial banks, fourdevelopment banks, a savings bank, a housing bank, an insurance company anda national provident fund. One of the commercial banks, the National Bankof Commerce (NBC), enjoys a virtual monopoly in the mobilization andallocation of short-term funds. All the institutions are fully state-ownedexcept for tbet (i) East African Development Bank (EADB), which is mainlyowned by the Governments of Kenya, Tanzania and Uganda; (ii) TanganyikaDevelopment Finance Company Limited (TDFL), which is jointly owned by TIBand three development finance institutions from the U.K., the FederalRepublic of Germany, and the Netherlands; and (iii) Cooperative and RuralDevelopment Bank, which is owned by the Government, cooperatives and BOT.Tanzania has no private capital market and there are no plans to start one.

2.09 Almost every aspect of the Tanzanian financial sector is statecontrolled, with the market playing practically no role. Monetary andcredit policies and targets are determined in the Government's annualFinance and Credit Plan, which indicates the distribution of creditclassified by economic activity and borrower, with explicit allocationsmade for the Central Government, public enterprises and the rest of theeconomy. Over 902 of the credit allocated is absorbed by the Governmentand public enterprises. Through the Finance and Credit Plan, theGovernment provides priority ranking of borrowers by economic activity. Atpresent, emphasis is placed on meeting the credit requirements of theagricultural and export-oriented sectors.

2.10 One of the main issues affecting the financial sector in Tanzaniais the significant misallocation of credit. The objective of keeping manylarge unviable enterprises afloat has resulted in the provision of largeamounts of credit to negative value-added activities. Many factors havebeen important in determining the significant misallocation of financialresources in the economy, including inter alias (a) interest rates, whichare discussed in the following paragraph; (b) limited competition in themobilization and allocation of financial resources (NBC enjoys a virtualmonopoly in the mobilization and allocation of short-term fluads); (c)rescheduling practices and lack of recognition and appropriate absorptionof losses by the financial institutions; (d) political pressures ingranting loans and provisions of Government guaraatees for certain types ofloans; and (e) administrative allocation of foreign exchange. Under thesecircumstances, the imposition of aggregate credit ceilings for the economyhas had the unintended effect of leaving many efficient firms out of theofficial credit allocation system. The form of ownership, with thedominance of the 1,arastatal sector in industry has resulted in the privatesector receiving a very small share of the credit. Many private firms havehad to turn to informal credit markets and pay exorbitant interest rates.Firms in the private sector have also had problems in raising equity due tothe lack of a private capital market, and therefore, tend to be over-leveraged, particularly in debt denominated in foreign currency. Thesuccessive devaluations of the past few years have had a serious negativeimpact on their debt servicing abilities. This exposes one of the seriousproblems of Tanzania's financial sector, which is its inability to mobilizeterm deposits and its resulting excessive dependence on external resourcesto finance investment.

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2.11 The structure and level of interest rates have been a majordeterrent to raising domestic resources. Interest rates are determinedadministratively anC a detailed structure of deposit and lending rates forall financial institutions is prescribed annually by BOT. Different ratesare set by Government for different borrowers depending on economicactivity, ownership (foreign versus local), location (urban versus rural),and loan amount. Interest rates have been negative in real terms since atleast 1975, but it was not until 1980 that they became substantiallynegative. There was no general adjustment of interest rates between July1982 and October 1985 inspite of an average inflation rate of 30Z p.a. andinterest rates which remained negative in real terms by about 172. SinceOctober 1985, interest rates have been adjusted upwards four times, withthe last adjustment taking place in April 1987. The last adjustment ininterest rates has made rates substantially less negative. Inflation todayis still estimated to be about 30Z p.a. and nine to twelve-month depositrates are 17.752, savings rate is 21.5Z, the maximum commercial banklending rate is 292; and the lending rates for medium- and large-scaleindustries are 28-29Z. The strongly negative level of interest rates overthe past several years has resulted in reduced savings, lending rationing,and capital flight. Savings deposits in real terms have declined since1980. The structure of interest rates has also contributed to a distortedallocation of financial resources because of the disparities in rates paidby different users, particularly those paid by clients of financialinstitutions compared to others who are forced to pay rates as high as 70Zfrom the informal markets. In addition, the same rates have been chargedto both borrowers of local and foreign currency loans, even though thelatter also have to bear the foreign exchange risk. It appears that TIBand Government have now agreed, in principle, that in view of the foreignexchange risk, different interest rates for local and foreign currencyloans will be charged.

2.12 The deterioration of economic conditions and the controls imposedon the financial sector have combined to contribute to the practicalinsolvency of Tanzania's main financial institutions. As with otherfinancial institutions. TIB has suffered a substantial deterioration in thequality of its portfolio over the years. Many of TIB's investments are inenterprises that are dependent on imported raw materials, and many of theseenterprises tend to be over-leveraged in term debt denominated in foreigncurrencies. Over the years, the profitability of many of these enterpriseshas been undermined by: (i) the shortage of foreign exchange and resultingshortage of imported raw materials; (ii) successive devaluations of theTanzanian shilling, which have increased their debt burden; (iii) pricecontrols; and (iv) restrictions on overdraft facilities. The lack of fullrecognition by TIB of the extent of the economic losses incurred byclients, and the continuing misallocation of credit by TIB to finance thelosses of inefficient enterprises has further compounded the problem. Thelevel of interest rates imposed on TIB has also had a negative effect onTIB's financial performance and its ability to efficiently allocateresources, and successive devaluations and the high levels of inflation ofthe past years have eroded TIB's capital base and increased itsindebtedness.

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III. INSTITUTIONAL PERFORMANCE

3.01 The following institutional changes occurred during appraisal andnegotiations of the three Bank loans:

(i) Restrictions on Debt. It was agreed under all three loans thatTIB would limit its debtsequity ratio to 331, since TIB's policystatement does not set a debt:equity limit on its capitalstructure. During negotiations of Loan 1750-TA it was agreedthat TIB and the Bank would review this ratio whenever it appearedthat the limit would impose a constraint on TIB's operations. TIBhas benefitted from substantial grants over the years, so thisratio has not been binding. However, once TIB makes the necessarywrite-offs, it would need to be recapitalized.

(ii) Free Limit Restrictions. The free limit on subloans was increasedwith each successive Bank loan in recognition of the improvedquality of TIB's appraisal work and the increased costs ofimported equipment and materials. The individual subproject freelimit was increased from US$400,000 under Loan 1172-TA toUS$800,000 under Loan 1498-TA and US$1 million under Loan 1750-TA.The aggregate free limit correspondingly increased from US$3million to US$7 million and then to US$8 million.

(iii) Special Fund Investments. During appraisal of Loan 1172-TA, oneof the major issues was the treatment of TIB's ordinary versusspecial operations; the former being at TIB's risk and the latter,financed from special funds, at Government's risk. One of theproblems was that some donors had provided their funds as specialfunds without realizing that TIB was exempt from the risk. Toensure that TIB take the appropriate responsibility, since aportion of its operations were being financed from special fundsat the time, the Bank suggested that TIB abolish the distinctionor, alternatively, use the special funds for projects on which TIBdid not want to take the risk, At negotiations, it was agreedthat the only distinction between ordinary and special operationswould be that the latter would be made at concessionary terms.The special operations would, as with ordinary operations, have tomeet TIB's financing criteria and TIB would have to bear the risk.It was also agreed that TIB would manage a new type of fund onbehalf of the Government. The operations financed out of thismanaged fund would not be appraised by TIB and would not be atTIB's risk.

(iv) Interest Rates. During appraisal and negotiations of Loan1750-TA, TIB's interest rates became a major issue, because BOTissued a directive requiring all financial institutions to chargeinterest rates according to a prescribed schedule. Subloansfinanced out of foreign lines of credit were exempt from thisdirective. The rates to be charged were lower than the prevailingrate of 11? p.a. charged by TIB for all types of industry and

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estate loans. The prevailing rate, though negative in real terms(inflation was 152 p.a. during 1975-77), was in line with otherrates and enabled TIB to have an adequate spread, and wasconsidered acceptable by the Bank. The BOT directive raised someimportant concerns for the Bank, namely: (i) the criteria to beused to determine TIB's interest rates; (ii) the frequency withwhich interest rates would be reviewed; and (iii) the manner inwhich disputes on the level of rates between TIB and BOT would beresolved. During negotiations it was emphasized to the Bank thatBOT's Act enabled it to set the framework of interest rates forTIB and that henceforth, BOT would be responsible for determiningTIB's rates. It was agreed that Bank funds would continue to beonlent at 112 p.a. since they were exempt from the BOT directive,but funds from local sources would have to be lent at the lowerrates.

Developments During Implementation and Present Status

3.02 Management and Orianization. Over the years, TIB has undergoneseveral changes in its organizational structure, senior management andstaffing. These changes have been effected without any seriousdisruptions, and throughout, TIB has managed to maintain its reputation asa well-managed institution with generally well-trained and capable staff.Up to 1984, TIB's senior management consisted of a Managing Director and aGeneral Manager. The former was responsible for policy matters andexternal affairs, and the latter for the day-to-day management of the Bank.In July 1984, TIB's Act was amended to abolish the position of ManagingDirector. The General Manager, therefore, is now responsible for allpolicy and management issues. He is assisted by five directors, onetreasurer and a chief internal auditor. Around the time the first loan(Loan 1172-TA) was appraised in 1975, TIB's total professional staffnumbered 31, nine of which were expatriates. TIB relied heavily onexpatriates funded by bilateral aid for engineering and other technicalskills. Today, TIB's total professional staff amounts to 56, with farfewer expatriates. The depressing economic situation and the uncertainprospects for the future have the potential to hurt staff morale andconfidence, but TIB has managed to maintain most of its capable managerialand technical staff by providing incentives such as promotions andtraining. TIB management has been responsive to the economic environmentover the years and has given increasingly greater importance to projectsupervision, and the staff assigned to this activity has significantlyincreased. In 1984, a special Debt Management Unit was created to reviewall projects with serious arrears. Bank supervision missions have playedan important role in redefining lending strategies, identifying weaknessesin staffing skills, and recommending improvements in organizationalstructure.

3.03 Staff Training. TIB managed to maintain active and effectivestaff training psograms throughout the period under review. It has fundedthese programs mrinly through IDA technical assistance and bilateral aid.Many of these programs have involved training courses abroad and at theEastern and Southern Africa Management Institute in Arusha.

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Procedures

3.04 Appraisals. At the time TIB was appraised for the first Bank loanin 1975. TIB's appraisal division consisted of eight professionals, half ofwhom were expatriates. The quality of appraisals was consideredsatisfactory, but in need of improvement, particularly in carrying outsensitivity analysis on key assumptions and assessing the impact of costoverruns caused by delays in implementation. Over the years, with Bankassistance, appraisal procedures have improved, but in reviewing thecondition of TIB's portfolio it is evident that mistakes were made ins (a)approving projects that were heavily dependent on imported raw materials;(b) accepting overly optimistic assumptions for assessing the viability ofprojects, particularly assumptions on shadow exchange rates, prices,demand, capacity utilization, etc.; and (c) improperly assessingschedules of implementation and evaluating the cost of delays. Appraisalprocedures, therefore, need further improvement, particularly in assessingthe economic viability of the investments financed.

3.05 Supervision. Over the years, with the gradual deterioration ofthe loan portfolio, TIB has been paying greater attention to supervisionactivities. In 1984 a special Debt Management Unit was established tofollow-up chronic arrears cases. With the help of this unit, TIB hasstrengthened its efforts at debt collection, loan reschedulings,restructurings, and as a last resort, court proceedings. In addition toin-house reviews, TIB has used the services of the Tanzania IndustrialStudies and Consultancy Organization (TISCO) to review the criticalweaknesses of projects and recommend measures to increase productivity andefficiency. The quality of the TISCO reports has been generally good. TheBank made an important contribution towards strengthening TIB'ssupervision. It recommended: (i) increasing in-house legal capabilitiesto expedite legal action against chronic defaulters; (ii) strengtheningthe Project Department, responsible for project supervision, by assigningadditional staff from other departments; (iii) implementing a debtrecovery action plan; and (iv) streamlining reporting.

3.06 Procurement and Disbursement. TIB's procurement and disbursementprocedures are satisfactory. TIB requires competitive quotations for allprocurement involving TSh 100,000 or more. Disbursements are made on thebasis of the pre-determined implementation programs for each project, andafter sponsors' contributions have been made and all preconditions met.

3.07 Accounts and Audit. TIB's bookkeeping and accountingprocedures are largely adequate. TIB has generally submitted its quarterlyand half-yearly reports (which are quite detailed) on time. However, itsaudited accounts are usually late, due to the delays on the part of theTanzania Audit Corporation (TAC), which is responsible for auditing theaccounts of the parastatals. The quality of the audit carried out by TAChas been generally satisfactory, but often deficient in certain standardinformation required by the Bank from its client DFCs. This information,inter alia, includes: (i) statements classifying the investment portfoliointo companies that are profitable, unprofitable, including underliquidation, or under implementation (ii) comments on the adequacy of

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provisions for losses on portfolio investments; (iii) auditors'examination of the Statement of Shareholders' Equity; and (iv) scope ofexamination by auditors on supplementary data. Each year the Bankcosmented on the adequacy and presentation of the audited statements, butfor the most part, the comments were unheeded.

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IV. ALLOCATION Of TE LOANS

4.01 As Table 4.1 shows, the total PuAmber of subloans approved underthe three .IBRD loans being reviewed was 53 and the total amount disbursedwas US$52.6 million. Seven of the subloans were for financing workingcapital. The total number of subprojects assisted by the Bank loans was46, since 9 of the subloans provided supplementary financing to coveroverruns and finance expansions of previously approved subprojects.Thirty-five of the subloans financed were above the free limit and subjectto the Bank's subproject review and approval procedAre. In its subprojectreviews, the Bank made useful comments on the technical and financialaspacts of projects, and thereby contributed to improvements in TIB'sappraisal methodology. The size of the subloans (excluding working capitalloans) ranged from about US$60,000 to Quality Garage, a private concernengaged in building bus bodies and cargo bodies for trailers and vans andin which TIB also had an equity investment, to about US$3.8 million in atannery. The subloans carried an interest rate of about 10 to 112 p.a.The following table summarizes data on subprojects under the three loans,and Annexes 2-7 provide more detailed data:

Table 4.1: Summary Data on Subproiects 1)

La.1172-TA Ln.1498-TA Ln.1750-TA Total

1. No. of subloansfinanced 14 11 28 53A-Subloans 11 8 14 33B-Subloans 3 3 7 13C-Subloans - - 7 7

2. Average SubloanSize (US$1000) 1,039.9 1,261.5 814.9 961.5A-Subloans 1,277.5 1,590.8 1,201.1 1,317.5B-Subloans 168.5 383.7 359.7 323.9C-Subloans - - 507.3 507.3

3. Z of Projects with 27 11 21 21Sales exported 2/

4. I of Projects Using 55 66 87 74Primarily LocalRaw Materials 1

5. I of Profitable 30 80 62 54Projects 2/ (4) (6) (13) (25)(No. of Projects)

11 Excludes cancellation.gL Based on projects for which data is available. Excludes "C" loans.

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4.02 The subprojects covered a wide range of activities includingmanufacturing, tourism, transport and agriculture. About 60? of thesubprojects are located in Dar-es-Salaam and 46? were for the expansion orrehabilitation of existing enterprises. About one fourth of thesubprojects depended primarily on imported raw materials and most of theoutput produced was for the domestic market. Precise data on the actualcosts of subprojects, rates of return and investment costs per job isfrequently not available for the older projects, although it is possible tonote general profitability or lack of profitability of the 46 projects forwhich data is available. Twenty-four subprojects appear to be operatingprofitably, nine are unprofitable, and 11 are still under implementation.Those projects still under implementation have experienced serious delaysand frequently have amassed arrears, their future profitability must bequestioned. While the majority of subprojects (25 of 46) for which data isavailable are operating profitably, the first results of 1987 indicate thatabout six of the subprojects will experience losses in 1987 due to currencydevaluations. The present status of a few selected subprojects is shown inAnnex 5. From the available data it would appear that, in general, theBank-financed subprojects have performed slightly better than TIB's overallportfolio; however, it should be noted that it is the more profitableenterprises that tend to submit data and therefore the percentages arebiased.

V. OPERATIONAL AND FINANCIAL PERFORMANCE

Operations

5.01 From the date of its establishment in November 1970 up to June 30,1986, TIB had approved about TSh 2.310 billion in loans and equityinvestments in about 244 projects (Annex 6). TIB'S lending activities havebeen the major focus of its activities, accounting for about 97? of itstotal approvals. The loans have been for large-scale investments, withabout 70% of the total value of loans approved being over TSh 12 million(US$200,000). TIB'S financial commitment in a single project has notgenerally exceeded 202 of its net worth, which is presently TSh 1.0billion. Details on the maturity of loans and interest rates charged areshown in Annex 7.

5.02 The manufacturing sector has been 'he main recipient of TIB'Sloans and equity investments, accounting for 69% of the total amountsapproved. The remaining 31? has been fairly evenly distributed amongst theother sectors, with services accounting for 9?, agriculture 8%, mining 7?,tourism 4? and fishing and forestry 3?. Seventy-four percent of the amountof loans and equity investments approved were in the public sector. Newprojects accounted for 58? of the total amount of loan approvals;expansion of projects accounted for 23?, rehabilitation and diversificationfor 15?; and working capital for 4?.

5.03 A summary of TIB's actual and forecast operations during theperiod 1980 - 1986 is shown in Annex 7. TIB's total loan and equityapprovals declined by 66? from TSh 333 million in 1980 to TSh 112 million

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by 1984. In 1986 approvals increased to TSh 210 million, but since most ofTIB's loans are denominated in foreign currency, this increase reflects themajor devaluation that occurred between 1984 and 1986 rather than an actualincrease in approvals. Measured in US dollar terms, approvals declined by88Z from US$40 million in 1980 to US$5 million in 1986. Between 1980 and1983 the actual approvals, commitments and disbursements were significantlylower than appraisal estimates, especially in 1982 and 1983. The patternof approvals has mirrored the economic situation in the country with theeconomic crisis being the main reason for the sharp and steady decline.Due to the foreign exchange shortages, TIB adopted an operational strategywhich focussed on lending for rehabilitation and for projects whichdepended more on local raw materials, but the latter type of projects werehard to find.

Portfolio

5.04 As of June 30, 1986, TIB's total outstanding portfolio amounted toTSh 2.132 billion consisting of about TSh 2.057 billion in loans and aboutTSh 75 million in equity investments. In contrast to TIB's loan portfolio,its equity portfolio, which is significantly smaller and invested in theprivate sector, has performed satisfactorily. As shown in the table belowas of June 30, 1986, 49% of the value of TIB's loan portfolio and 4Z of thevalue of equity investments were in operating companies that wereunprofitable.

Table 1: Summary Status of TIB Portfolio(Amounts in TSh Million)

Loans Equity 1)Amount Amount

No. of Our- No. of Out-Companies standina % Companies standing 2

Operating Companies

Profitable 32 770 23 6 55 73Unprofitable 1 47 1,617 49 2 3 4

Subtotal 79 2,387 72 8 58 77

Companies Under Implementation

On Schedule 31 8 410 12 1 17 23Behind Schedule 13 531 16 -- -- **

Subtotal 21 941 28 1 17 23

TOTAL 100 3,328 100 9 75 100

1/ Includes income notes.2/ Includes all companies in arrears and also under liquidation.3/ These projects have interest in arrears of 3-12 months.

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The reasons for the poor performance of the loan portfolio include thegeneral deterioration in economic conditions and the increased liabilitiesof subborrowers due to the devaluations that have occurred over the lastfew years. While the country's critical foreign exchange situation hasbeen partly responsible for capacity underutilization and the poorperformance of some projects, manr of TIB's clients, particularly in theparastatal sector, have been able to obtain import licenses from BOT forimportation of raw materials, so their poor performance has been attributedto other factors including: (a) poor management and maintenance of capitalequipment; (b) transportation bottlenecks affecting procurement of localraw materials and marketing of finished goods; and (c) inadequate supplyof inputs, such as power, water, etc., and local raw materials. Many ofTIB's projects have also suffered from implementation delays due tot (a)inadequate project planning and implementation capabilities of theparastatal sector; (b) chronic transportation problems; and (c)shortages of building materials. This has resulted in large cost overruns,and for the parastatals, which are almost entirely dependent on Governmentfunding, arrangements for additional funding have often been difficult andtime consuming. Of the 49 unprofitable projects in the portfolio, nineinvolve companies under liquidation. These include Tanzania AviationLimited, an air charter service company whose airplanes were grounded dueto the lack of spare parts, two saw mills, three leather goods industries,a seed processing company, and two other companies involved in mining andagriculture.

Loans

5.05 As of December 31, 1986, TIB'S loan portfolio amounted to TSh 3.33billion in 100 companies, of which 47 were operating at a loss and 13 werebehind schedule in implementation. This seriously affected TIB's loanarrears, which amounted to TSh 1.8 billion (in principal and interest) asof December 31, 1986. The principal outstanding in the affected projectswas TSh 2.56 billion, amounting to 77Z of the total loan portfolio. Theamount in arrears was 54% of the total loan portfolio. Annex 8 shows adetailed schedule of arrears over three months. The following tablesummarizes the deterioration in the loan portfolio over the past decade.

Table 2: Comparative Analysis of Arrears

As of Year Ending June 30, June 30, June 30, Dec.311977 1982 1984 1986

Total TIB Outstanding LoanPortfolio (TSh million) 295 981 1,386 3,328

Portfolio Affected by Arrears(TSh million) 114 413 539 2,558

Exposure Ratio (Z) 39 42 39 77Arrears of Over Three Months

(principal) (TSh million) 9 133 322 1.796Arrears as I of Total

TIB Portfolio 3 14 23 54

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Around the time Loan 1172-TA was being appraised, in mid-1975, TIB's loanportfolio consisted of 37 projects totalling TSh 122 million. At the timeabout 352 of the total number of loans and about 40% of the totaloutstanding portfolio was affected by arrears. As of June 30, 1986, thetotal number of loans affected Iy arrears had risen to 68% and theportfolio affected by arrears to 77Z. The reasons for the poor qualityof the portfolio are given in the previous paragraph, but the deteriorationis also due to the fact that the portfolio has been decreasing in realterms and as profitable loans have been repaid, the portfolio has been leftwith a higher concentration of non-performing loans. Despite TIB'sintensified efforts at debt collection, especially over the last fouryears, the portfolio has continued to deteriorate.

Equity Investments

5.06 There has been no significant increase in TIB's equity investmentssince 1980. Annex 9 gives an analysis of TIB's equity investments as ofJune 30, 1986. As of June 30, 1986, TIB's equity portfolio amounted toabout TSh 75 million, of which TSh 44 million was invested in the TanzaniaDevelopment Company Limited (TDFL) and TSh 17 million was invested in a1002 owned subsidiary (Raslimali Ltd.,), which was formed for the purposeof constructing and owning a TIB office building. The remaining TSh 14million was invested in seven predominantly privately owned companies,including four engineering and metal product enterprises, a soft drinkbottling company, a hotel, and an air charter company. TIB's ownership inthese seven companies range from 192 in Afro Cooling (a firm engaged in themanufacture of car radiators) to 26.82 in the Morogoro Hotel. TIB's equityportfolio, though small, is performing well. As of June 30, 1986, therewere two companies that were unprofitablet West Lake Bottlers, a bottlingcompany which has suffered due to the lack of inputs, and the TanzaniaAviation Company, which was discussed in para 5.04.

Financial Performance and Condition

5.07 TIB's projected and actual income statements, balance sheets,sources and uses of funds, and financial ratios for 1980-1986 are presentedin Annexes 10-13. TIB's income statements indicate that it was profitableup to FY86 inspite of the poor quality of the portfolio, mainly because TIBwas able to operate on high spreads, having benefitted from loans on highlyconcessional terms. TIB was also able to keep its administrative costslow. In more recent years, the profitability of TIB has been inflated,since provisions for bad debt have not adequately reflected the increasingrisks of the portfolio and interest income on non-performing loans havecontinued to accrue. In FY86, TIB's profit was reduced to TSh 1.4 million,a significant decrease from its TSh 56 million level in FY85. Thisrepresented almost no return on average total assets as compared to 2.62 inFY84 and 2.82 in FY85. This poor return was due mainly to the fact thatprovisions for bad debt increased significantly and finance chargesincreased due to.the major devaluation that took place during the year.Inspite of the increase in provisions in FY86, the level of provisions(cumulative provisions were 131 of the outstanding loan and equityportfolio) still appears to be inadequate, in view of the high risk ofTIB's portfolio. Some of the loans will have to be written off entirely. Itis clear, therefore, that TIB has not yet fully recognized the large losses

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incurred by the lack of productivity of many of its client firms. TIB'sprofitability is, therefore, more notional than real. It is worth notingthat TIB's adminstrative costs throughout the period under review haveranged between 0.8Z and 1.42 of average total assets and have been amongthe lowest in the Bank-assisted DFCs in the Africa Region. TIB's debt-equity ratio has also remained well below the limit of 3:1 agreed with theBank. As of June 30, 1986, this ratio was 1.5:1. TIB's liquidity positionis also comang under severe strain. As of June 30, 1986, its current ratiowas 2.331, but its quick ratio (cash and short-term investments divided bycurrent liabilities) was only 0.5:1.

5.03 TIB's approvals are projected to average TSh 400 million (US$6.7million) p.a. over the next five years, representing a significant declinein US dollar terms. As of December 15, 1986, TIB had a pipeline of 32projects with a total investment cost of TSh 1,758 million and requiringTIB financing of about TSh 720 million over the next two years. As of June30, 1987, TIB had only TSh 58 million (about US$970,000) in local resourcesavailable for commitment and no foreign exchange resources. To meet itsadditional local resource needs. TIB will approach the National InsuranceCorporation (NIC) and the National Providend Fund for local currency loansfor future lending to clients. In order to increase the equity base, TIBhas appealed to Treasury to pass on to TIE as equity funds that Treasuryhas received as grants. However, the prospects of obtaining foreignexchange resources in the immediate future appear slim and TIB will not beable to undertake its planned operations. These operations, which focus onthe rehabilitation, modernization and expansion of existing projects, arecritical to the improvement of TIB's portfolio.

VI. CONCLUSIONS

6.01 TIB is an interesting example of a well-managed DFC operating in adifficult environment. The Bank, under all its lines of credit, focussedon strengthening TIB internally and did not concentrate enough on theeffectiveness and efficiency of TIB's project lending in the face of adeteriorating economic conditions. Very little economic analysis wascarried out on the subprojects financed and the implications on TIB'sperformance of the broader macro-economic issues, particularly thoserelating to interest and exchange rates, were not sufficiently analyzed.Inspite of TIB's knowledgeable and experienced management and capablestaff, the institution has been unable to greatly influence the pattern ofinvestments in the public sector or efficiently allocate scarce resources.Its role as a promoter of financially and economically sound investments inthe public sector has been greatly undermined by economic distortions,rigidities and inefficiencies in the financial sector, and Governmentintervention. The lesson to be drawn from this experience for the Bank isthat the economic environment is critical to the success of DFC operations,since it is difficult to separate good projects from bad ones when thereare severe distortions. It is also crucial for DFCs to be able to operateindependently and to determine investment decisions on the basis ofrigorous economic and financial assessments.

6.02 Today, TIB faces increasingly serious financial problems withoutnew injections of equity and foreign exchange resources needed to

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rehabilate its portfolio. Prospects for improving its role as a promoterof preductive economic activities will not improve, however, unless thepressing industrial, trade and financial policy issues are resolved.Substantial policy reforms are necessary as well as the development of aprogram for rehabilitating, restructuring and closing down of industrialenterprises. TIB could play a useful role in the restructuring process.The Government's Economic Recovery Program emphasizes policies to improvethe performance of the main sectors and the Bank and the IM have beenactively involved in assisting the Government in the recovery effort. Anyfuture assistance to TIB should follow significant progress masde intackling the broader issues of the economy and should aim to support TIB'sreorientation in policy towards: (a) consolidation of its existingportfolio through rehabilitation of viable projects; and (b) newinvestments that contribute to foreign exchange savings and earnings, andfor which rigorous appraisals based on realistic assumptions indicate higheconomic rates of return.

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ANMX 1

TANF.ANYI. IUmItmWuf BANK

Seted,ue of Cumlative k Dsbur.e aew . for Lnes 1172-TA, LsM 1498~A and Los. 1750"A

InnD Loan 1t724A L 1se 49"4A Loan 1750~APlaent year Appratual actual as 2 Apprftsal aAtua1 ss 3 Appalsa Actal as 3and Somester Estteates Actual of Appratsal Estiontes Atul of Apprasal Estiates Actual of Appatsal

VY76

tat (July-ec.1975)2nd (Ja-June,1976) 0.2 1.5 8

177

let 0.8 2.52.0 6.0 300

R178

let 4.0 7.22nd 6.5 10.5 162

VY79

let 9.4 12.9 b.4 0.22nd 11.8 13.2 11 1.3 4.7 362

1st 13.6 13.5 3.2 6.916.4 '1.5 92 5.2 10.2 196 0.2 • -

mi

1*£ 15.0 13.5 - *.0 13.0 - 0.8 - -2ad 15.0 14.1 94 10.8 13.3 122 7.2 1.8 82

1T82

let 15.0 14.4 97 12.5 13.2 - 5.0 4.02nd ¯ 15.0 14.6 97 14.3 13.4 94 8.0 9.4 118

lat 15.0 14.6 - 15.0 13.5 - 12.0 12.2 -2nd -- -- 15.0 13.8 93 17.00 1.3 108

lst - - - 15.0 13.9 - 21.0 19.6 -2nd - - - 15.0 13.9 93 235,0 20.0 80

1185

let - - - - - - 25.0 21.0. -2nd - - - - - -- 5.0 32.7 91

."86

let - - - - - - 25.0 22.7 912nd - - - - - - 25.0 2.1 96

AF6IE.eptent~er 22. 1957

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ANNEX 2Table 1

TANZANIA

TANZANIA INVESTMENT BANK (TIB)

Subprojects Financed Under Loan 1172-TA I/(in US$)

Subproject Date Amount Amount AmountSubproject Name No. Authorized Authorized Cancelled Disbursed

1. Saburi Industries A-1 2/76 818,312 27,596 790,7162. Tanzania Coastal Shipping A-2 2/76 735,295 2,956 732,3393. Tanganyika Tegrey Plastics A-3 2/76 1,043,478 2,608 1,040,8704. South. Cashewnut Project A-5 2/76 1,212,121 - 1,212,1215. Aluminium Africa Limited A-6 3/76 2,418,380 188 2,418,1926. Tanganyika Weaving Mills A-T 3/76 691,634 - 691,6347. Moproco Limited* A-8 6/76 1,615,000 21,765 1,593,2358. Mwanza Tanneries A-10 12/76 410,000 - 410,0009. Tabora Spinning Mil A-11 5/77 3,785,889 - 3,785,88910. New Africa Hotel Limited A-12 8/77 1,210,072 178,727 1,031,34511. Mbeya Cement Co. Limited A-13 6/79 373,765 27,487 346,27812. Tanzania Autoparts Limited B-1 2/76 236,024 30,122 205,90213. Quality Garage B-2 2/76 60,099 - 60,09914. Tanzania Aviation B-3 5/77 239,521 - 239,521

Total 14,849,630 291,490 14,558,140

1/ Subprojects A-4 and A-9, involving loans of US$400,000 and US$963,855 to CottonWool Products and Kibo Paper Industries respectively were entirely cancelled.

AF61ESeptember 23, 1987

- 65 -

ANNEX 2

TANZANIA

TANZANIA INVESTMENT BANK (TIB)

Subprojects Financed Under Loan 1498-TA

IBRD TotalSubproject Amount Amount Amount

ame of Projects No. - - Anthorized Disbursed Cancelled(USS000)

1. Highland Soap and Allied A-1 2,315 2,287 88Products

2. KIO0 Ltd. A-2 3,625 3,608 173. Tanzpep Bottlers Ltd. A-3 1,575 1,575 -4. Rubber Reclaim Co. A-4 742 192 5505. Metal Products A-5 1,646 1,646 -6. Calico Textiles Ltd. A-6 1,937 1,937 -7. Dodoma Railway Hotel A-7 140 130 108. Mvanza Fishnet Manufacturing A-8 1,348 1,348 -9. Garment Manufacturers Ltd. B-1 188 188 -10. Tanzania Printers Ltd. B-2 638 638 3811. Tropical Products Supply Ltd. B-3 360 325

14,574 13,877 1,127

AF6ESeptember 18, 1987

- 66 -

ANNEX 2Table -3

TANZAliA

TANZANIA INVESTMENT BANK (TIB)

Subprojects Financed Under Loan i750 TA 2/(in USO)

Sub-project Date Amount Amount Amount

Subproject Name No. Anthorised Authorised Disbursed Cancelled

1. Kibo Match Corp.Ltd. A-2 02/80 1,686,747 1,618,050 68,697Kibo Match Corp.Ltd.(supplemental subloan) A-2 '9/82 858,370 858,370 0

2. Dodoes Railway Hotel A-3 63/80 839,840 827,511 12,3293. Kibo Paper Industries Ltd. A-4 04/80 3,900,000 3,669,344 230,6564. General Tyre (HA) Ltd. A-S 06/80 4,217,000 3,017,008 1,119,9925. Calico Textile lad. Ltd. A-6 09/80 150,800 150,800 06. Traile:p & Lavloaders A-7 09/80 1,097,470 415,771 681,699

Manufacturing Ltd.7. Rio Ltd. A-8 05/81 855,000 756,693 98,3078. Anto-fech Ltd. A-9 06/82 1,170,000 1,170,000 09. Nibo Paper Industries Ltd. A-10 12/82 361,710 356,410 5,300

(supplemental subloan)10. Tanzania Shoe Co. A-11 02/83 1,072,970 1,054,101 18,86911. Friendship Textile A-l2 05/83 1,300,000 1,279,655 20,345

Will Ltd.12. Anche Mueds Ltd. A-13 10/83 601,9451/ 601,945 013. Kibo Match Corp. Ltd. A-14 11/84 1,000,000 1,000,000 014. Tanpack Industries Ltd. A-15 04/85 1,241,570 1.241,570 015. Afro Textile Ind. Ltd. 1-1 02/80 722,891 722,156 73516. Kioo Ltd. B-2 07/80 224,325 223,737 58817. Tanzania Film Co. B-3 01/81 95,304 93,401 1,90318. Kibo Metal 6 Furniture B-5 02/82 76,400 61,333 15,067

Works Ltd.19. Tanzania Cigarette Co.Ltd. B-6 11/82 858,370 835,54 22,82620. Fish Products Supplier B-7 06/83 115,700 115,700 0

Ltd.21. Woodlands Ltd. B-8 07/85 825,480 825,480 022. Tanzania Shoe Co. C-1 10/81 1,000,000 984,655 15,34523. Tanzania Cables Ltd. C-2 10/81 241,000 230,257 10.74324. Shah Industries Ltd. C-3 10/81 60,000 59,008 99225. Tanzania Pharmaceutical Ind.C-4 10/81 693,000 692,730 27026. Metal Products Ltd. C-5 11/81 645,000 583,952 61,04827. Aluminium Co. Africa Ltd. C-6 06/82 963,860 962,932 92828. Calico Textiles Ltd. C-7 07/82 193.140 37,823 155,317

27,067,892 24,445,936 2,621,956

It Includes an increase of $24,945 granted 09/84.subprojects A-i and B-4 were entirely cancelled.

AF61EDecember 16, 1987

- 67 -

ANM 3

Table 1

i II å 0

114

m g.u n m min $m

i~

d E

! Il ik iII 4jj

W~ t~3 0. -- -all

-68-

1ANM 3

Table 2

11 .

3 mig %

Nid

4 94 1 &K~

- 69 뿔

。．】，…’.-.!; !;-

m Vw n lm Mo mn~ *~300 aulam Jim t-* 001191AV vig~ 191m ZZI 0 ez 0 a" fibysøl-p~ ovw 9-4 *ft-D £III~ ti

'110 tz 0 0 0 mm §laud 03" 1-« ouw~tw oY-tun *titnill salt t 1 000. ont cool W1i, oonlom ti 00% wi wi a" «gu ti-v *Pin,o3 z~ wx~ *il

I I Tø wi go¥-"n mengs-o-sse Iolm ti-v *P" i"Fii "lap m% 101rsz - itstlot 1901fer uo, ;q£ 61 0 06 wi øm wieligl Og£ 61133*1 1 1-¥ "lit ftýoolde virm *6

Orø) £*Q LOZ C64,99 1Z6'et w-S olev 0 og 001 3*"M 01-V solý*ogn n~ R(61 6L1 "I 004*sc mlil 001,91 6 0 001 wl SoTog~ pø" S-T

- - - iLt ~05 og is »"&¥m vu~11un *9

*Ml sso,"l gLe* Gel stilet i 1 0 0 5* tg 1~9 P" valilv enID~" -5nn1191 igslu Col 0 wi wi gui- om A~T3 sab-wri ql" *1,

Afz Etz m t W91 i vti 0 0 wttoiddlqs

IRZ stz it ow.9 <W s 001 9*61 w 111 wi 0039~22 ufflus-os-mo uodowaz vi" In 196tz #/t i ogt wilis W91ý1 wilgt te 0 01-< wi *Sun. I-T 60133691101 ¥"gus *1

-10W.RU)11m33¥ 1661W3"dy p*leøj2 (Inqør Md TRýis, 3090 39 uinigt Gøjgs jo mm olmå s jo odt4 -Oadm

-foad iglo& 30 9393 ulum

U901 jo~ P~U 633,0Poldm to "lliljolsik1m0 3

TAMMEIANga LTNI A

Beofoite Charagtorgettco of SubpEojes finauced Une Loan 1498-TA

1ND ftain 9 Local kte of rotal Projeet Cot sntSubpro- teoeoe Type ot i ftbite Ram 9 of sea& tatre et cp pe Job Cr

Scbprojoct jet No. Actitvty loc0t ton Project OunareIdp Ntartal BapoteOd Apprtalau ¥Dcal taFig TOM Appr. Actua sted

1. fitshland Snap A-1 Soap Mbs Nev 0 0 5 14 29,740 33,000 62.740 thu

acd AlIted Products2. umoo Liited A-2 Glas* Deus-Samaaa empanmton 0 80 0 10.6 10,62 43,121 53,747

3. Tanspep Bottile Lted., A-3 Soft Drinks Dar-n-Salm Nav 0 60 0 13 32.00

4. Iubber aectat* Co. M-4 Dubber Dar-a-Salaam seu 100 98 0 37 --

3. ktatl Produc *-5 Stect Dar-es-SalM ERpaaton 26.4 0 so~. 21 -

6. CattCo TextIlew A-6 Tetela& Dar-ua-SUam 11pax~to 6 80 0 19 39,940 27,000 66.940 9-

7. Ddam etitay tnu A-7 Betet lada.. EIpaao 100 me na 15

8. nasha ftabtu anfac. A-8 Ptobrata tuansa Espaelow 0 0 0 9.3 14.19 i,08 25,427 557

9. Garant Nautart.tLd., 9-1 Garments DP6-9-Salaa Espfnsion 0 100 0 U -

10. tna Printes L.td., -2 Paper Dar-a-Salasa apaastoa 0 100 0 41 -

ta. Tropicel P~roaee 5-3 Plastic Boecle. Der--Saaa Epanatan 0 90 se 40 8,966 2,820 11.76

Spply Uitecd

A0611Deember 16. 1987

TAKIA INTE12 ! ~ MI

&e~ c Caagncterkotice of 8bpoetg nca eod Uader La 1750.TA

I1ND 3 Loca Rate of total ~oject taploy-Supro- tEonoai Typ of a pubite U n of Salew actura at Coots at Comlto4- Geat Cofit Pr JobSubpmejct je No. actity kocatLo Project etip Naortals fmported Appataal local fore Total) Created Appra16al Actost... ...--.......................... _____(.I -.. (- t ( 0Tb. 0- -- -T.0.-8. Nibo aetch Corp.Ltd. A-2 P ~prn.onfact. Nabi Diversttcattga 100 90 25 15.6 43.595 54.965 98.560 427Babo Natch Corp.1,d. A-2 Paper mact. MuIÄi Divoratiteatton 100 90 25 15.6 •--- h ab-. rn- 427(epplea~tal abloam)

2. Sedena tallvay Natel -3 Notal Sedern .u 0 8s3. Eibe Paper led. Ltd. A-4 Dapr arna- 6~paasto5 7 90 0 -43 13,725 32.275 46,000 676~onufacturong Sal~.

4. Oaral tyre (C Led. A-5 Tire f~nct. Au~a Ik Empaes4on 26 0 0 31.7 fs a ms 3635. Callco Tot. lad.Ld. t-6 Teatla Di~- Ia ESpaton 100 00 0 28 ms na 9.600 279manatactutia SalaaN6. Tratlera 6 Louoadere A-7 Tirck tratt Da - krw 0 91 0 44 70.600 61.20m 131.600 60 187 02Nafotaeturing Ltd. manuetuttag Saloam7. Ltee Ltd. 4-8 C ooate 01a.e Dr-ea R0h3nbtDu-ioroaote 100 80 0 mi 631 7,541 8.172 0NaKufacturtag Salana

15. Aute-Nach Ltd. A-9 aute paet a. Dt-se- Now 53 12.3 0 22.6 27,633 37,301 6496 250 t/ Ä.9. tbo Paper ld. Ltd. &-10 taper mig. St-rn- ~apaslon 7 90 0 16.4 54l00 1.900 7.500 375(mupplenaatal *GbIoan) Salaato. tanaffta So Company A-1 Shu mig. Der-o~- bablttatlen 0 75 0 0 2.000 2,000Slaam

I. Nraenmdshp Teattle &-12 Textile afg. Ser-wa- mahablittattem 80 0 14.~15 12,00 *6.65KIll Ltd. Salaa12. Anca fud Ltd. A-13 Vac flaäk afg. Dar-a~ muv 100 50+ 0 44 97.030 394$Slaan 703 913. Kabe Match Corp.Ltd. A-14 papar afg. Nashi DIvoerltlcation 100 90 014. Tapack lduieca Ltd. A-15 Paper idS. Ser-rn- E Upaso. 49 5 (phase 1) 0 I8,1 not co~ploteSala 800 (pbao 2)15. Aro Tex. bd. Ltd. D-t Towl efg. Dar - Exp*a*o 100 77 0 20.7 6.986 5,914 12.900 185.3

16. ItCo Ltd. 8-2 Container Olasw St-~s- Rehab/lepr~Covsat 100 80 0 10.6 8.172 0Nanufacturi~g Salaa87. Tansanta ita Company 5-3 Nfg./photogaph Dar-rn- Nov 0 na. no. 15.3 not completeSecord Sel~ai

1. tåbo Ntala a Fratgäre S-5 vurattura alg. No n Epanaon 100 94 0 36.9 2.336 1.384 3,749 60 23Uoths Limited19. Tansata Cigar~*9e 3-6 CIarett* mig. Datre- Espans&C 0 95 0 20 18.000 18,000 &$,600Company Ltattd Selwee20. pFöb Produecs 5-7 Träull%g Noaa Eepkn~son 800 100 0 34.4 3,935 1.308 5.246 0.08Supplir LINIted21. ~ ~odlande Ltd. 8-5 Samåll mat KIW 100 100 0 30.0 TSb33,300 Us 33b 33.3dW *83.63pli1- 0$ 336aujaro g

A 6 1~aeer 16. 1987

- 73 -

ANNEX 5Page 1 of 4

TANZANIA

TANZANIA INVESTMENT BANK

Summary Description and Present Status of Selected SubprojectsFinanced Under Loans 1172-TA, 1498-TA and 1750-TA

Loan 1172-TA

1. Mbeya Cement Companv. Subloan A-13 for US$373,765.42. Mbeya CementCompany Limited (MCCL), a wholly owned subsitdiary of Tanzania SarujiCorporation, produces and sells cement. The purpose of the IBRDsubloan was to assist in the financing of the construction of thecement factory. Expected to became operational in 1980, the projectwas not completed until late 1983 largely because of the non-availability of a reliable power supply. Total project costs,estimated at approximately TSh 524,825,000, were over TSh 700,000,000.MCCL has been operating at around 20 percent of capacity, withbreakeven estimated at about 50 percent of capacity. Production hasbeen constrained by lack of foreign exchange, raw materials,affordable and available fuel, and trained personnel. Equipment isaging and will need to be replaced. The project has been veryunprofitable. As of December 31, 1986, interest arrears on the TIBloan amounted to TSh 69.1 million (including principal and interest).TIB is conside-ing rescheduling the loan.

2. Tanzania Coastal Shilping Lines. Subloan A-2 for US$732,338.44. TCSLwas established by the Government in 1971 to provide cargo andpassenger transport along the coast of Tanzania. TCSL has receivedthree loans from TIB. The IBRD subloan, made in 1975, financed thepurchase of the Mwenge, a used cargo boat with a carrying capacity of2,100 tons. The company's operational performance ever since thispurchase bas been unsatisfactorys TCSL has experienced serious lossesevery year except 1978. (Although financial results as of June 1987indicate large profit, these results have been distorted by improperrecording of bilateral assistance received from Norway in the form ofspare parts, which were accounted for as revenue. Norwegianassistance will end at end-1987). The losses have been due in largepart to low freight rates and passenger fares fixed by the Governmentand, to a smaller degree, to lack of dry docking facilities. Theseervicing of the TIB loan has been satisfactory, except for that ofthe Mwenge loan. Given the poor performance of the boat, TIB was ableto persuade the Government to sell the ship for TSh 12.1 million in1986 and give the proceeds to TIE. TIB is negotiating with theGovernment on the settlement of the rest of the loan, which as ofOctober 1987 had a cumulative balance of TSh 108 million (includinginterest arrears).

- 74 -ANNEX 5Page 2 of 4

3. Tanganyika Tegry Plastics. Subloan A-3 for US$1,043,478.00. TIP wasestablished in 1962 to manufacture polyvinyl-chloride and polyethylenepipes, bags, films, bottles and containers. The company is a whollyowned subsidiary of the National Chemical Industries, a publiccompany. The IBRD subloan was made in 1976 for the purchase ofadditional machinery. Project completion was delayed from January1977 to July 1978 due to procurement problems. Capacity utilization,projected at appraisal to reach 75 percent by 1978 and remain at thatlevel thereafter, has been about 30 percent because of shortages ofraw materials due to foreign exchange constraints. In 1983, TIB gaveanother loan to TIP for rehabilitation. Although the rehabilitationprogram was implemented on schedule, TIP experienced losses in 1984and 1985, due again to shortages of raw materials. Under thissubproject, 53 jobs have been created at a cost of TSh 212,800 perjob. TIP has repaid the TIB loan.

Loan 1498-TA

4. Highlands Soap and Allied Products. Subloan A-1 for US$2,375,000.Highland Soap and All1ed Products (HSAP) is a private, limitedliability company incorporated in 1877. The purpose of the -BRDsubloan was to finance the erection of a soap-making factory at Mbeyato produce laundry and toilet soap for the domestic market. IFC alsoparticipated in this project. Production has been curtailed by lackof raw materials; HSAP was unable to produce laundry and toilet soapin the entire second half of 1986 primarily due to lack of causticsoda. Because of liquidity problems that resulted from productionstoppage, HSAP was unable to service TIB debt and at end-1986 hadarrears (interest and principal) amounting to over TSh 60 million.The company had asked TIB to consider a moratorium on repayment until1988, which TIB has rejected; TIB has proposed rescheduling the loan.

5. Dodoma Railway Hotel. Subloan A-7 for US$130,000; also subloan A-3under Loan 1750-TA for US$827,511. These subloans were extended toassist in the financing of the construction of the Dodoma RailwayHotel, a new project under the aegis of the Tanzania RailwaysCorporation (TRC), a public company. Project implementation has runinto serious problems, and has been delayed about five years, due inpart to consultant problems. Construction was completed in October1987. In the past, TRC has met its TIB obligations promptly, butrecently has experienced problems and as of September 1987 has arrearsof TSh 55.4 million (largely principol). TIB is working with TRC tosolve the problems.

6. Calico Textile Limited. Subloan A-6 for US$1,937,000; also subloan C-7 under Loan 1750-TA for US$37,823. Calico Textile Limited (CTL) wasregistered in Tanzania in 1960. Ownership is 1002 private, many ofwhom are foreign. The first IBRD subloan was made to assist in thefinancing of machinery and equipment to produce higher qualitymaterials. Because CTL was experiencing serious problems in gettingforeign exchange with which to buy the needed Imported raw materials,the second IBRD subloan was extended for working capital. CTL isstill experiencing difficulties in getting raw materials, with the

- 75 -

ANNEX 5Page 3 of 4

corresponding effect on production and sales. The 1986 devaluation ofthe Tanzania Shilling increased TCL's liabilities in terms of foreignloans, which has aggravated the liquidity position of the company andled to arrears of TSh 60 million (principal and interest)

Loan 1750-TA

7. Kibo Paper Industries Limited. Subloan A-4 for US$3,669,344 andsubloan A-10 for US$356,410. Kibo Paper Industries (KPI) is aparastatal engaged in the manufacturing of packaging materials andcorrugated paper. KPI has received three loans from TIB, which havebeen and continue to be serviced on time. IBRD extended subloan A-4to assist in the purchase and installation of machinery to use in theexisting facility; subloan A-10 was a supplemental subloan. Thecompany is profitable, although recent sales have been lower thanplanned, due largely to lower production caused by shortage of someraw materials (PI has been operating at about 25 percent of capacityin 1986; in previous years about 60 percent). KPI is in the processof rehabilitating its facilities, which should help to alleviateproduction problems by reducing down-time for old machinery. KPI hasrecently experienced some difficulties in meeting its debt serviceobligations to TIB, and now is about TSh 9 million in arrears.

8. General Tyre (E.A.) Limited. Subloan A-5 for US$3,017,008. GeneralTyre was founded in 1969. Ownership is about 74 percent public, withthe rest owned by General Tire International of the US. IBRD subloanA-5 was granted to assist in the expansion of General Tyre in order toproduce truck and radial tires. General Tyre has been profitable,although operations have been constrained by shortages of naturalrubber and nylon. In 1987, General Tyre expects to increaseproduction to 66 percent of installed capacity. Until recently, .t iscurrent on its loan obligations to TIB, but as of September 30, 1987,it has arrears of TSh 24.8 million (largely principal).

9. Tanzania Shoe Company Limited. Subloan A-11 for US$1,054,101. In1968, the Bata Shoe Company (East Africa) Limited was renamed theTanzania Shoe Company, and placed under the management of the NationalDevelopment Corporation. In 1979, controls of the company wastransferred to the Tanzania Leather Associated IndustriesCorporation, a holding parastatal for leather and associatedindustries. TSC also has received working capital loan from TIB.IBRD subloan A-11 was extended to assist in the rehabilitation of thecompany, specifically for the purchase of equipment and spare parts.At the time this subloan was granted, TSC had been servicing its TIBobligations satisfactorily. However, as of September 10, 1987, TSC isin arrears of TSh 119.5 million (including interest and principal),mainly due to low production steaming from lack of raw materials,absenteeism machinery breakdowns, and, to some extent, poormanagement. TIB does not foresee a rapid clearing of these problems.

10. Tanzania Cimarette Company Limited. Subloan B-6 for US$835,544.Tanzania Cigarette Company (TCC) was incorporated in 1965.. It is a

-76-ANNEX 5age of 4

public company owned by the Treasury Registrar. IBRD subloan B-6 wasmade for the expansion of cigarette making and packaging facilities.TCC is profitable, and has been able in 1984 and 1985 to declare adividend. However, production has been constrained by lack of rawmaterials and down-time resulting from old machinery. Arehabilitation program is underway. TCC has been servicing the TIESloan sat4efactorily.

11. Kibo Metal and Furniture Works, Limited. Subloan B-5 for US$61,333.Kibo Metal and Furniture Works (DI) is a private company,incorporated in 1976. NFV is engaged in furniture making, primarilyof metal furniture. TIB granted a loan to Kibo Metal in 1978 toassist in the expansion of the company through purchase of additionalequipment and machinery. The costs of expansion proved to be largerthan expected, due to inaccurate estimates, additional machinery, anddelays in implementation, and the IBRD subloan was extended to assistin meeting the additional costs. While the company made a profit in1985, it experienced losses in 1986 due in large part to shortages ofmetal. Despite the weak financial condition, EM has been able toservice TIB obligations satisfactorily, although as of September 30,1987, EMW had minor arrears of TSh 1.6 million. The TIR loan shouldbe repaid within the year.

12. Kioo Limited. Subloan A-9 for US$756,693 and subloan B-2 forUS$223,737. Kioo Limited is a private company engaged in themanufacturing of glass containers. IBRD subloan A-9 was made tofinance the installation of a metal recuperators subloan B-2 was madeto finance import of moulds for glassmaking. These projects were inlarge part cost-saving in nature, so no new employment wasanticipated. Capacity utilization has been increasing, averagingabout 76 percent in the last half of 1986. Kioo has been profitable,although problems of liquidity are increasing due to currencydevaluation in 1986 and to the Government requirement that importsupport funds from Treasury be covered by 100 percixt cash. Kioo isexpected to be marginally profitable in the future.

- 77 -

AlNNE 6TANZANIA

TANZANIA INVESTMENT BANK <TIB)

Analysis of Avrovals (Loans and Equity)

Dp to June 30. 1986

No. of Approvals 2 Amounts in Hillion* %

A. SIZE OF W0ANS OR EMUITY <Taba)

Up to l million 38 16 20.5 1I to 3 million 59 24 112.4 53 to 7 million 58 24 265.0 117 to 12 million 32 13 304.0 13Over 12 million 57 23 1.608.2 70

Total 244 2,310.1 100

B. NATURITT OF LOANS

Up to 5 years 65 28 370.9 165 to 7 yara 69 30 662.6 297 to 10 years 75 32 778.7 35Over 10 years 24 10 440.0 20

Total 233 100 12252.2 100

C. INTEREST RATES

Up to 5 p.a. - - -5 to 8% p.a. 7 3 19.0 18 to 10% p.a. 64 28 298.0 1310 to 12Z p.a. 140 60 1,460.4 6512 to 13% p.a. 7 3 140.0 6Over 13% p.a. 15 6 334.8 15

Total 233 100 2.252.2 100

D. SECM0R OP ACTIVT

Xansfacturing and Engineering 135 55 1,582.8 69Agriculture and Agro-Processing 26 11 189.7 8Nining and Quarying 14 6 168.5 7Vishing and Fish Processing 11 5 16.2 1Touriem and Hotels 20 7 100.7 4Porestry and ood Processing 11 5 54.0 2Services, e.g. Transport, 27 11 198.2 9

Printing, etc..

Total 244 100 2.310.1 100

E. E

Private 92 38 621.9 27Public 152 62 1.688.2 73

Total 244 100 2.310.1 100

F. TYPE OP LOANS

Nev Projects 124 53 1.307.6 58Expansion Projects 77 33 521.9 23Rehabilitation/Diversification 14 6 341.8 15Working Capital 18 8 80.9 4

Total 233 100 2.252.2 100

AF61ESeptember 8, 1987

cr Sh KLi~m

19E0 1981 1982 1983 19m 19B6

Year Jn 3ojected ctu Projected Atual Projectd A~u P ojectedctual cA

1aa 398.0 333.0 398.0 311.0 398.0 150.0 398.0 107.0 112.0 185.0 210.02qf0 2.0 2- 2*0 3.0 2.0L 19.0 -

T~oal 400.0 333.0 400.0 331.0 400.0 151.0 400.0 126.0 112.0 185.0 210.0ao

1aan 381.6 380.0 398.0 301.0 398.0 130.0 398.0 112.0 92.8 179.0 250.0

~1,ty 2.0 -LO -2.0 - 2.0 19.0 2.0 -

T 383.6 380.0 400.0 301.0 400.0 1o.0 400.0 131.0 94.8 179.0 250.0

Imn 320.7 173.0 391.3 235.0 413.5 223.0 394.1 232.0 235.0 168.0 170.0

Fquty 2.0 10.0 .0 6.0 20 1.0 2.0 5.0 5.0 ,. 2.0

11tal 322.7 183.0 393.0 241.0 415L5 224.0 396.7 237.0 240.0 iba.0 172.0

As pmjected far lam 1750-R

TANZANIA

TANZANIA INVESTMENT BANK (TIB)

Schedule of Airears Over 3 Months

(As of December 31, 1986)

Outstanding Portfolio TotalArrears1/ Arrears of Arrears of Arrears of

No. of Over 3 - 12 1 - 2 Over

Projects Amount 3 Months Monthsl/ Yearsl/ 2 Years-(TSh Million)

OPERATING PROJECTS

Projects Without Problems 32 769.6 - - - -

Projects With Moderate Problems2/ 14 656.5 162.8 162.8 - -

Projects With Major Problcms3/ 14 367.7 295.5 127.8 86.3 81.4

Projects With Chronic Problems4/ 19 593.2 854.5 24%.9 159.9 448.7

Subtotal 79 2,387.0 1,312.8 536.5 246.2 530.1

PROJECTS UNDER IMPLEMENTATION

Projects on Schedule5/ 8 409.5 18.7 18.7 e- -

Projects Behind Schedule: 13 531.0 465.0 185.0 109.5 170.5

- with moderate problems 7 166.- 44.5 31.8 12.7 -

- with major problems 6 365.0 420.5 153.2 96.8 i 170.5

Subtotal 21 940.5 483.7 203.7 109.5 170.5

TOTAL 100 3,327.5 1,796.5 740.2 355.7 700.6

1/ Arrears of principal and interestT/ Projects with atrears of 3 to 12 months

S/ Projects with arrears of 12 to 24 anntheT/ Projects with arrears of over 24 months3/ Arrears of interest only; no principal in arrears

AF61ESeptember 30, 1987

TANZANIA

TANZANIA INVESTMENT BANK

Analysis of Equity Investments as at June 30, 1987

Amount TIB Most RecentPreference Ordinary Ownership Profit FY87Shares Shares Share Before Tax Dividend-(TSh Million)- (%) - (TSh Million)-

l. Profitable Companies

1. TDFLIf 20.0 24.0 23 0.9 -2. Metal Products Ltd. - 3.5 18 69.0 1.33. National Engineering Co. 1.0 - 17 10.0 0.24. Tanzania Auto Parts 1.3 - 40 - 0.25. Afro Cooling System 1.0- - 19 0.5 n.a* on6. Morogoro Hotel 3.7 - 23.8 0.2 - c

II. Unprofitable Companies

1. West Lake Bottlers - 1.5 21 -

III.Companies Still UnderImplementation

1. Rasilimali Hotel - 17.0 100 - -

IV. Companies Under Liquidation

1. Tanzania Aviation Ltd., - 2.0 36 - -

TOTAL 27.0 48.0

1/ TSh 24 million in ordinary shares and TSh 20 million in the form tf income rates.

A~NI 10

rn-81

m ] v a 232.§

a 21, iil

1i3 221. 11 1 a1 111111 J 2

-82-

AN1 1

Kli K aug -

-~In

-no

'00.1 e n- -81nf

4ra

axil

ri

(T Sh la)

19 19- 19g2 195 __9

Yer Endn .kk~ 30 ProjectdAual Prjectd actual tojectud lctkul tPojected >:ual ctual Actual lctaul

fems frozpera~ 59.6 21.1 80.6 36.4 98.2 38.9 114.8 49.2 142.2 142.1 157.6

1ca payent 61.3 60.5 O0 63.5 OLO 87.3 135.0 142.6 141.8 207.4 216.2

Loa/G ts 178.0 223.7 24.0 153.7 250.0 71.7 198.0 117.0 152,9 561.1 126.3

Otherf 53.8 - 31.3 - 31.5 0.5 21.6 6.3 1.8 0.1 -

SUBr~ -W 1393 '2U T8T.T Tiia Ww TIM. lv7 .

lun nighå.s 320.7 170.8 391.3 231.5 413.4 218.5 394.7 229.3 169.7 177.1 170.6

~dty Intmets 2.0 9.7 2.0 5.8 2.0 - 2.0 5.1 1.2 0.7 1.5

DIvide Taes 19.2 4.8 i4.8 2.8 34.2 - 42.7 - 43.2 75.8 70.0

epaymnt of Enwings 24.1 25.6 28.4 35.6 29.4 38.7 31.1 56.5 117.6 61d.2 149.3

Eixmd pmse 0.5 0.2 0.5 1.6 0.7 2.5 0.7 1.0 2.5 1.0 4.6

Otlw 3.0 0.4 3.3 8.4 3.6 2.1 4.0 7.2 14.4 23.8 25.4

a;r369a .114 WT WT W3 47!42 299. M6 M6 421.4

Increase/(Decrease) In Fuds (16.8) 93.8 (14.4) (32.1) (1.6) (63.3) <5.8) (16.0) (84.1) (24.1) (7.7)

al Incudes sale of fied maets. actuls eind the Specal 1d Acunt.

Fl E ~cIuding arent nturdtif.

TANZANIA

TAMANIA INVESTHRNT DAM (TIB)

Projected and Actual Finaneial Ratios 1980-1986 1/

1980 1981 1982 1983 1984 1985 1986Projected Actual Projected Actuel Projected Actual Projected Actual iual Actual Actual

Income Statement Blementsas 2 of Average Total Assets

1. Total Income 8.6 8.5 9.5 8.4 10.0 8.6 10.2 10.2 10.9 11.3 13.22. noiace Charges 1,8 2.4 3.0 2.0 3.4 2.5 3.4 2.3 1.9 2.7 4.13. Administrative Bapenses 0.8 0.7 0.8 0.8 0.8 1.2 0.9 1.0 0.9 1.4 1.34. Net Profit (loss) 2.0 2.2 2.5 1.2 3.0 1.0 3.8 1.6 2.6 2.8 -

Probability Indicators (Z)

5. Net Profit (1osa)/TearEnd Het Worth 3.5 2.7 4.3 1.9 4.8 1.7 5.5 2.5 5.1 5.7 -

6. Income from Lane/AverageLoan Portfolio 11.1 11.2 11.2 12.5 11.1 11.9 11.1 13.1 14.2 15.0 17.6

7. Cost of Debt/Average Debt 6.3 7.7 6.0 6.8 6.6 7.7 6.5 7.3 5.1 6.6 8.8

Structural Ratios and DebtCoverage

8. Current Ratio 6.4 9.2 4.2 6.4 3.0 4.6 2.2 3.4 2.8 3.1 2.39. Long-term Debt/Equity 0.5 0.4 0.6 0.5 0.8 0.5 0.9 0.4 0.9 0.8 1.510.Cumulative Provisions as 2.8 2.0 3.0 4.0 3.2 6.0 3.4 7.0 - 8.0 9.0 13.0

2 of Loan and Equity Portfolio

1/ As projected for Loan 1750-TA

W

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PROJECT COMPLETION REPORT

TANZANIA

TANGANYIKA DEVELOPMENT FINANCE COMPANY LTD. (TDFL)(LOAN 1745-TA)

December 1986

Industrial Development and Finance DivisionEastern and Southern Africa Projects Department

'.87*

PROJECT COMPLETION REPORT

TANZANIA

TANGANTIKA DEVELOPHENT FINANCE COMPANY LTD. (TDFL)(LOAN 1745-TA)

I. INTRODUCTION

ProJect Background

1.01 The Tanganyika Development Finance Company Limited (TDFL) wasestablished in 1962 as a private limited liability company under theTanzania companies ordinance. The authorized capital of TDFL is T Sh 145million of which T Sh 100 million has been issued and T Sb 88 million hasbeen paid in. At present, 342 of TDFL's paid in capital is held by theNetherlands Finance Company for Developing Countries (PHD), 27Z each by theTanzania Investment Bank (TIB) and the German Finance Company forInvestments in Developing Countries (DEG), an# 122 by the CommonwealthDevelopment Corporation (CDC). Foreign governmental development agenciesthus hold the majority ownership in TDFL. TDFL's main role in Tanzania'seconomic system is to finance capital investments In medium scale privatelyowned manufacturing enterprises. It identifies investment opportunitiesand promotes these by bringing together interested investors, technical

partners, and other local and . teign financiers. It also provides equity. financing to supplement investments by project sponsors, and is the main

institution in Tanzania which provides such equity funds for non-parastatalprojects.

1.02 The World Bank Group's involviment'with TDFL began In 1975 whenTDF-L first requested Bank Group financial assistance. The Bank did not

* provide assistance at the time because it was not clear whether theGovernment of Tanzania would guarantee such financial assistance. TDFLapplied again for Bank support In 1977, by which time it had been clarifiedat the highest level of Government that private sector investment,especially in medium-scale industrial enterprises, was important forimplementing Tanzania' s Basic Industrial Development strategy. A recon-naissance mission which visited Tanzania in May 1978 found that plannedprivate sector investment was in fact on the increase as a result of thisclarification, and that TDFL had a clear and Important role to play Inpromoting and assisting such Investment. The mission found that theGovernment was also ready to support and guarantee Bank assistance to TDIL.

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1.03 A Bek mission appraised TDL in November 1978 (Appraisal ReportNo. 2416-TA) and recommended a US$ 6.0 million line of credit to financethe foreign exchange component of TDFL's loan and equity Investments duringa three year period (TDIL FY79-FY81). The investments to be financedIncluded medium scale industrial, transportation, agro-processing andtouriso projects. During negotiations, at TDFLs request, the loan wasincreased to US $11.0 million. The loan was approved on June 28, 1979,signed on July 27, 1979 and became effective on November 1, 1979. The loanwas made to TDFL at an Interest rate of 7.9 2 p.a., repayable in accordancewith a schedule conforming substantially to the aggregate of theamortization schedules applicable to the subloans. The maximum repaymentperiod was set at 15 years. ToIL agreed to on-lend the protteds of theloan at a minimum interest rate of 112 p.a., which was positive in realterms giving TDFL an adequate spread, and to pass on the foreign exchangerisk to sub-borrowers. It was also agreed that for any portion of the loanthat TDFL Intended to use for equity investments, a satisfactory plan ffrcovering foreign exchange risk would be presented to the Bank. Otherimportant features of the loan included an individual subproject free limitof US$250,000 with an aggregate free limit of US$3.5 million, and the useof the economic rate of return criterion in appraising subprojects abovethe free limit . All equity investments made out of the proceeds of theloan would require prior Bank approval. TDFL also agreed to maintain adebt-equity not exceeding 3:1 aud to prepare a satisfactory operationsmanual by December 1979.

1.04 During FY79, operational and financial results were significantlyhigher than expected with investment approvals about 48% higher thanestimated at appraisal and net profit almo3t 702 higher. The growth in

approvals resulted from both an increase in the number of projects financedand in the financial assistance per investment. This reflected the backlogof suppressed demand for investment capital by the private sector, causedby years of uncertainty about the role of private enterprise. Due to thishigher level of operations, TDFL had almost fully committed the loan ofUS$11.0 million one year after loan effectiveness.

1.05 The need for a second line of credit to meet TDFL's foreigncurrency resource requirements was identified during the first Banksupervision mission, and in July 1980 An apppraisal was undertaken. The

appraisal team recommended a credit of US$15 million consisting of: US$12.5million to finance TDFL's equity investments and loans; US$2.4 million forimportation of raw materials and spare parts; and US$0.1 million fortechnical assistance. The second line of credit was approved fornegotiations by the Loan Committee in December 1980, but was postponedindefinitely, pending resolution of an impasse between the Government andthe Bank and IMF regarding macro-economic policy issues and a StructuralAdjustment Program. By this time, the economic situation in the countrystarted deteriorating and this had a negative Impact on TDFL's performance.

Project Objectives and World Bank Group Role

1.06 The main objectives of the project were: (1) to Increase theeffectiveness of TDFL In resource allocation in Tanzania, by providing itwith policy, institutional and operational advice; and (ii) to contributeto the foreign exchange resources available for medium-sized investments in

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the productive sectors. Under this project, by providing foreign exchangeresources to TDFL for private sector Investments, the Bank played anImportant role in promoting private sector development In Tanzania. Thebank's objectives of Improving TDFL's Institutional capabilities were metwith mixed results. In line with the Bank's recommendations, TDFLrecruited competent expatriates and Tanzanian professionals and Improvedits staff training. However, other Bank recomendations relating to:(1) utilization of the economic rate of return criterion in projectselection; and (i) preparation of an operations manual by December 1979were not successfully Implemented. In most Instances, the economicanalyses of subprojects were either not undertaken at all or Inadequatelyprepared, and the preparation of the operations manual was delayed byseveral years; it was not completed till 1984. The Bank's objective ofImproving TDFL's effectiveness in resource allocation has been largelyundermined by the difficult financial situation that the country has beenfacing for the past several years (paras. 2.01 to 2.14).

II. MACROECONOMIC. INDU3TRIAL AND FINANCIAL OBJECTIVES

Background

2.01 At Independence in 1961, Tanzania was one of the poorestcountries in the world. Almost solely dependent on subsistence agricultureand a few estate crops, the country had a very modest industrial base,which accounted for less than 5% of Gross Domestic Product (GDP), and avery small number of educated and trained personnel. For the first sixyears after Independence, the Government's development objectives resembledthose of many other less developed countries, stressing growth in percapita income and national self-sufficiency in skilled manpower, based onmarket forces and capital intensive agricultural projects. This approach,in the Goverament's view, led to unacceptable economiz atd socialconditions, such as widening income differentials and unequal opportunitiesfor advancement In the rural areas. In response to this situation, thenational development strategy was reassessed in 1967. The new priorities,enunciated in the Arusha Declaration, were directed toward establishing asocialist society and led in the late '1940's to the nationalization oflarge-scale industry, commerce and finance, the creation of numerousparastatal bodies, the formation of Ujamaa (cooperative) villages, thedecentralization of Government (1972), and the mass campaign ofvillagization (1974-76)

2.02 Between 1966 and 1973, Tanzania's performance in terms of growth,domestic resource mobilization and income distribution was satisfactory.During this period, real GDP grew by 4.42 per annum, the gross investmentrate rose above 20% and gross domestic savings fluctuated around 15-182 ofGNP. In 1974, a severe drought and a drastic increase in import prices,especially oil, triggered a serious economic crisis In Tanzania. Thiscrisis exposed some of the longer term weaknesses related to dwindlingdomestic savings, low productivity of investments, parastatalInefficiencies, and declining exports. The Government restricted Importsand froze wages in an attempt to manage the short-term situation. Thesemeasures, aided greatly by the coffee boom In 1977 and by increased

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external financing, were able to keep the economy in balance until 1978.

A new balance of payments crisis occurred in 1978 due to: relaxation inimport controle'Vithout compensatoty exchange rate management, fallingcoffee prices, and a poor performance from the agricultural sector. Thefiscal situation deteriorated further following the outbreak of war withUganda in 1979, Inflation accelerated from 11% to 28% and growth inaggregate output slowed to 3.3% per annum.

2.03 After several years of economic deterioration, the situation inTanzania today can be characterized, at best, by sluggish growth, highinflation and low,productivity. GDP contracted in the three years 1981-83,and although growth in the range of 2-3% is estimated for 1984 and 1985,this is insufficient to reverse the deterioration of most other indicatorsof the country'a economic well-being. With the population growing at over3% a year, per capita income has continued to fall. Agricultural outputgrew by 2.3% over 1980-85 as a result of an expansion in food cropproduction, sufficient to offset the continued fall In the output of exportcrops. Industrial output fell by 15% p.a. over the same period, andcapacity utilization in industry declined to very low levels. Thecountry's physical and social Iafrastructure has also suffered and trans-portation bottlenecks impinge on every sector of the economy. Fiscalpolicy has been tightened and inflation has eased since 1984, but thecontracting revenue base has meant a fall in budgetary allocations to theeconomic and general services of the Government. Exports have continued todecline, thereby reducing Tanzania's ability to finance imports, to thepoint that imports are no longer sufficient for the normal functioning ofthe economy.

2.04 In an effort to address the coutry's economic problems, theGovernment launched "Economic Survival Plans" in 1980 and 1981, but it wasnot until 1982, with the introduction of a "Structural Adjustment Program"(SAP), that a comprehensive approach to resolving them was initiated. InOctober 1985, e new Government was formed under President Myinyi with afresh mandate to tackle the deepseated problems of the Tanzanian economy.A more pragmatic approach to economic policy is now emerging, and newpolicy initiatives were announced in the budget on June 19, 1986. Theemphasis of actions taken so far has been on macroeconomic adjustment.Since the beginning of April 1986 the Tanianiav shi"ling has been devaluedby 60% against the US dollar. This has improved agricultural exportincentives and producer price incentives. Fiscal and monetary policies,consistent with an IMF program have been reflected in the budget for1986/87. If they are to have the desired effects on economic performance,they need to be underpinned by sectoral policy reform, as well as bygreater availability of foreign exchange for key inputs for domesticproduction and rehabilitation.

The Industrial Sector

2.05 At Independence, Tanzania had an extremely limited industrialsector which was dominated by private firms. Three major features havecharacterized the sector since then: (i) rapid expansion followed throughby a sharp decline; (ii) a diversification in output; and (iii) a majorshift in ownership from private to public hands. The share ofmanufacturing in GDP rose from just under 41 in 1961 and reached a peak of

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12% in 1978 before registering a charp decline. After using a massiveamount of Investment resources during the 1970's and early 1980's (overUS$2 billion), Tanzania's industry now produces only about 32 of thecountry's GDP (measured at world prices), while using almosat one-third ofthe country's total imports. The average capacity utilization rate of thesector as a whole is in the range of 20-30%.

2.06 The overall decline in industrial outpat is directly related tothe drop In agricultural exports, which has meant fewer materials toprocess and lss foreign exchange to pay for imports of thE'needed spareparts and intermediate goods. Government policies resulting in anovervalued exchange rate, administrative allocations of diminishing foreignexchange resources, restrictive import licensing, and a price controlsystem, have also combined to produce an inefficient, over-protectedindustrial sector.

2.07 The Government launched the three-year St;uctural AdjustmentProgram (SAP) in 1982 to cope with the crisis. The main objectives of theSAP were inter alia to cut back on new capacity creation, encourageindustrial rehabilitation in selected priority enterprises, doublqmanufactured exports, and improve parastatal efficiency. However, becauseof the lack of adequate funding and the slow pace of policy reforms, theindustrial sector, like the rest of Tanzania's economy, is still in acritical state. Based on data collected by recent Bank missions toTanzania, it is estimated that a reallocation of resources from the moreinefficient industrial activities to the more efficient ones .could provideannual benefits (in increased value added) exceeding US$200 million in 1984prices, even with the present structure of installed capacity. To achievethese benefits, however, major policy reforms would be required toencourage enterprises to expand efficient activities and to contract orabandon inefficient ones. The Government has recently adopted some ofthe necessary policy changes and the Bank is supporting this processthrough a continuing dialogue and the Multisector RehabilitationOperation. In cooperation with the Bank and the IMV, specific incentiveand institutional measures have been developed for 1986/87.

The Financial Sector

2.08 Tanzania's financial system comprises a Central Bank, namely theBank of Tanzania (BOT), and ten other financial institutions: twocommercial banks, four development banks, a savings bank, a housing bank,an insurance company and a nalAonal provident fund. All the institutionsare fully state-owned except for: (i) East African Development Bank(EADB), which is mainly owned by the Governments of Kenya, Tanzania andUganda; (ii) Tanganyika Development Finance Compnay Limited (TDFL), whichis jointly owned by the Tanzania Investment Bank (TIB) and threedevelopment finance institutions from the U.K., the Federal Republic ofGermany, and the Netherlands; and (iii) Cooperative and Rural DevelopmentBank (CRDB) which is owned by the Government, cooperatives and BOT.Tanzania has no private capital market and there are no plans to start one.

2.09 Monetary.and credit policies and targets are determined in theGovernment's annual Finance and Credit plan. This plan indicates thedistribution of credit classified by economic activity and borrower, with

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explicit allocations made for the Central Government, -ublic enterprisesand the rest of the economy. Over 902 of tih credit allocated is absorbedby the Government and public enterprises. Through the finance plan, theGovernment provides priority ranking of bereere by economic activity.At present, emphasis is placed on meeting th credit requirements of theagricultural and export oriented sectors.

2.10 Interest rates are determined administratively and a detailedstructure of deposit and lending rates for all financial institutions isprescribed annually by the Bank of Tanzants (30T). Interest rates havebeen negative since at least 1975, but it was not till 1980 that theybecame substantially negative. There was no general adjustment of interestrates between July 1982 and October 1985 inspite of an average Inflationrate of 302 p.a. and interest rates which remained negative in real terms,averaging about 171. :n October 1985, interest rates were raised by 1.014.5%. Twelve-month deposit rates are now 7.52, savings rates are 102, themaximum commercial bank lending rate is 14%, and the lending rate forspecialized financial institutions is 162. The strongly negative level ofinterest rates has had a negative effect on savings and lending and hasalso resulted in capital flight. The parallel market exchange rate, anindication of capital flight, has depreciated during the past two yearsfrom T Sh 60 per US dollar to T Sh 140-160 at present (compared with anofficial exchange rate of T Sh 40 per US dollar). The structure ofinterest rates is geared to support priorities established b theGovernment. Thus, rural, small-scale, farming, domestic and exportactivities pay one or two percentage points less than large-scaleindustrial and foreign controlled activities.

2.11 Almost every aspect of the Tanzanian financial sector is statecontrolled, with the market playing almost io role. This has seriousnegative implications for resource allocation, mobilization of savings,credit and equity for the private sector. The lack of a private capital

. market poses a special problem for raising equity. Firms tend to be overleveraged, with serious financial implications for their debt service iftheir loans are in foreign currency and the Tanzanian shilling is devalued.

2.12 The deterioration of economic and financial conditions, discussedin the previous paragraphs have seriofsly affected TDFL's performance.

. Much of TDFL's investments are in enterprises which are dependent onimported raw materials. Moreover, some of these enterprises tend to beoverleveraged due to the difficulties in raising equity, and have most oftheir term debt denominated in foreign currencies. Over the years, theprofitability of many of these enterprises has been undermined by: (1) theshortage of foreign exchange and resulting shortage of imported rawmaterials; (ii) successive devaluations of the Tanzanian shilling, whichhave increased their debt burden; (iii) price controls; and (iv)restrictions on overdraft facilities. The controls on TDFL's interestrates have also affected TDFL's ability to efficiently allocate resources.The substantially negative interest rates have tended to encourageover-investment in fixed capital.

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III. INSTITUTIONAL PERFORMANCE

3.01 The following Institutional changes occurred during appraisal,negotiations and project Impleaentation:

(1) Management and Invibtment Policy Statement: At the time, ofappraisal, TDPL's existing policy statement existed only as a guide t6 theManagement and Board, and Its clauses were not binding. On the Bankesrecommendation, a revised policy statement which could not be changedwithout prior consultation with the Bank, was adopted by the Board prior tonegotiations. The following additions and amendments were incorporatedinto the statement: (a) an increase to the single maximum Investment limitper project to T Sh 12.0 million; (b) an Increase in the normal maximumcontribution to a project's capital cost to 60%; and (c) a clausespecifying that TDFL would protect, itself against exchange risks arisingfrom foreign currency borrowings.

(ii) Free Limit Restrictions: In documents submitted to the LoanCommittee, it was proposed that the individual free limit on sub-loans beUS$250,000, with an aggregate free limit of US$2.0 million. Atnegotiations, TDFL indicated that these amounts were too restrictive andrequested that these free limits be increased to US$500,000 and US$4.0million, respectively. Since this project was the first operation withTDFL, it was agreed that the individual free limit of US$250,000 wasappropriate and that the aggregate free limit should be US$3.5 million.

(iii) Economic Analysis of Projects: Prior to this loan, TDFL'sevaluation of projects did not include an economic analysis. TDFL agreedto calculate the economic rate of return for all projects that exceeded thefree limit. (Section 3.03 of the, Loan Agreement). However, in manyprojects, this was either not done at all or improperly calculated.

(iv) Operations Manual: Although procedures for project promotion,appraisal and superv0s on were well documented by TDFL in various internaldocuments, the Bank recommended that these be compiled as an OperationsManual to facilitate easy reference and training of new staff. TDFL agreedto prepare an Operations Manual by DecemSer 3f, 1979. (Section 3.09 of theLoan Agreement). However, TDFL was considerably lste in complying withthis covenant. The manual was finally comoleted In 1984.

(v) Restriction on Equity Investment: It was agreed at negotiationsthat a limit on equity investments amounting to TDFL's paid-up capital plusunimpaired reserves would be incorporated into TDFL's new PolicyStatement. Tt was also agreed that income notes, while having many of thefeatures of equity, would nevertheless not fall within the category ofunimpaired paid-up share capital, surplus and free reserves". The Bank

agreed to modify this covenant if it proved to be unduly constraining onTDFL's equity operations. TDFL also indicated that it would discuss withthe Government the possibility of selling off some of its equityInvestments or establishing a mutual fund.

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Developments During Project Implementation and Present Status

3.02 Management. TDFL is a well-managed institution and the staff isgenerally well-trained and capable. There was a change in TDFL managementin 1901 and the General Manager, the Controller of Investments, and theSecretary were replaced. The change in management was accomplished with nodisruption to TDFL's operations. The present Managing Director has vastexperience in development banking and provides compettnt leadership. Atthe time of appraisal there were 21 professional staff, of which 2 wereexpatriates. At present, TDFL has 20 professionals all of which areTanzanians. The majority of TDFL's professional staff is well trained andcapable. However, staff morale is low due to the decreasing level ofTDFL's activities, low-salaries, and uncertainties about TDFL's future(paragraphs 5.03-5.07). TDFL is likely to lose some of its keyprofessional staff to the private sector or positions outside the country.

Staff Training

3.03 TDFL has maintained an active staff training program mainlythrough sending staff overseas on short-term specialized training courses.The Loan Agreement was amended to allocate an amount of US$25,000 fortraining. Recently, however, the training program has suffered a set backdue to the lack of foreign exchange and sponsors, especially for exchangeprograms with DFCs overseab.

Procedures

3.04 (i) Appraisals: At the time TDFL was appraised for the Bank loan,the economic appraisal of subprojects was virtually nonexistent. Toimprove the quality and procedure of appraisals, Bank loan covenantsincluded the preparation of an Operations Manual by December 31, 1979, andthe use of the economic rate of return criterion for projects exceedingloan amounts of US$250,000. Over the past few years, with Bank assistance,appraisal procedures have improved, but in reviewing TDFL's portfolio it isevident that mistakes were made at appraisal in: (a) approving projectsthat were heavily dependent on imported raw materials; (b) permittingprojects to be located at ill-suited sites, where both the delays inconstruction of the factories and non-availability of raw materialsresulted in several operational problems; and (t) accepting over ambitiousassumptions for assessing the viability of projects. Appraisal procedures,therefore, need improving and TDFL will have to pay more attention to thelonger term prospects of the enterprises it finances and their economicviability.

(ii) Supervision: During implemertation, at the Bank's recommendation, aSupervision Manual was prepared to assist TDFL in improving the quality ofsupervision reports. Supervision efforts, however, remained weak, and theenforcement of loan covenants was sometimes lax. In 1982 the SupervisionDepartment was reinforced with several project officers who were moved outof the Appraisal and Investigations Department. With increasing loanarrears, a Debt Collection Task Force was created in 1983 and replaced by aLitigation Task Force to try and further improve collections. The TaskForce's main functions include: (1) systematically monitoriug defaulters;(ii) enlisting the support of the National Bank of Commerce in denyingoverdraft facilities to willful defaulters; (iii) enforcing defaulters to

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sign promissory notem; and (1v) proceeding with court cases against willfuldefaultets. In addition to the Task Force,the Department of Supervisionhas begun mounting Intensive loan recovery operations.

(i1) Procurement and Disbursement: Project sponsors are responsible forthe procurement of items financed by TDFL. Procurement is made on thebasis of competitive qpotations from at least three suppliers.Disbursements are made on the basis of the predetermined Implementationprograms for each project, and after sponsors' equity has been paid in andall preconditions have been set.

(iv) Accounts and Audits: TDFLe annual accounts are audited by Coopersand Lygriand, a firm of international repute. The audits have beensatisfactory, but have usually been submitted late to the Bank due todelays in preparing the accounts.

IV. ALLOCATION OF THE LOAN

4.01 The Bank loan was almost fully committed within one year of loaneffectiveness, but disbursements lagged behind for a number of reasonsincluding: (1) delays in implementation resulting from the Government'srestrictions on Imports and delays in delivery of machinery and equipment;(ii) project sponsors' decisions to defer investments given the foreignexchange crisis, even though the subloans were already approved; and(iii) failures on the part of project sponsors to obtain foreign exchangefinancing to supplement the subloans approved by the Bank. The closingdate of the Bank loan was extended to December 31, 1984, and by thenUS$10.16 million or 92% of the original loan was fully disbursed. Theremaining balance was cancelled in May 1985 (Annex 1). The Bank loanfinanced twenty-one subloans, and a small amount of funds (US$14,784) wasdisbursed for training of TDFL staff.

4.02 Twenty-eight subprojects were originally approved by the Bank forfinancing, but seven were cancelled (Annex 2). Fifteen of the subprojectsfinanced were above the free limit and subject to the Bank's subprojectreview and approval procedure. In its subproject reviews, the Bank madeconstructive comments on the quality of projects, resulting in, inter alia,improvements in TDFL's appraisal methodology, notably for the economicappraisal. The size of the subloans ranged from US$48,193 for a printingpress to US$1.45 million for a cement factory. The subloans carried aninterest rate of 11% p.a. for an average term of seven years including atwo-year grace period.

4.03 The financial and economic characteristics of the subprojectsfinanced under the Bank loan are summarized in Annex 3 and 4 respectively.Among the twenty-one subprojects are eight metal processing factories, twotextile mills, two agro-processing projects, a furniture plart, a slipway,a fishnet manufacturing plant, a paper processing plant and a printingpress. About 522 of the projects are located in Dar as Salaam, Tanzania'sprincipal commercial and industrial center, and six are located in Mwanza.Thirteen of the twenty-one subloans financed were for the expansion of

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existtng projects, three subloans financed the rehabilitation of existingenterprises; and five subloans financed new projects. The total Investmentcost per subproject ranged from US$12 million for plant and equipment toproduce paper boards for the Kibo Natch Corporation to about US$122,000for a printing press. As a proportion of total investment cost perproject, TDFL financing ranged from 10% for the Kibo Match Corporationproject to 1002 for a soft drink bottling project, a wholly-ownedsubsidiary of TDFL. About half of the projects financed depended primarilyon Imported raw materials. Most of the output produced was for thedomestic market. Only Lhe two agro-processing projects aimed at exportingmost of their output. Employment creation data is available for twentysubprojects. These projects generated about 3,000 new jobs at an averageinvestment cost per job of about US$40,000. The investment cost per jobranged from about US$2000 for a cement project to US$329,000 for anenamelvare factory. The latter project involved expansion of existingcapacity. The investment costs per job have been high due mainly to costover-runs resulting from delays in Implementation, and to the fact thatexpansion projects typically require only marginal increases in the labourforce.

4.04 Of the 20 projects for which data is available, 11 are operatingprofitably. Nine of the subprojects were Implemented on schedule withactual costs reasonably close to appraisal estimates. The Implementationof eleven projects lagged behind schedule, leading to cost overruns. Oneproject is still under Implementation. Delays in Implementation were dueto var*,ous reasons including lack of building materials, delays inprocurement of Imported raw materials and spare parts, and in a-number ofcases, underestimation of project costs, which necessitated mobilization ofadditional funds. Two of the projects ceased operations due to the lack ofspare parts. The present status of a few selected subprojects is shown inAnnex 5.

V. OPERATIONAL AND FINANCIAL PERFORMANCE

Operations

5.01 From the date of its establishment in 1962 up to September 30,1985, TDFL had approved about T Sh 547 million in loans and equity to some226 projects. Annex 6 gives a summary of TDFL's approvals. The majorityof the number of TDFL loans and equity investments were below T Sh 1million and accounted for 392 of the amounts approved. In terms of valuehowever, approvals were dominated by loans and equity of between T Sh 1 to5 million; accounting for about 52% of the total amount approved.Large-size loans of T Sh 10-12 million accounted for only 62 of the amountapproved. None were approved over T Sh 12 million in line with TDFL'spolicy of limiting its financial commitment In a single project to T Sh 12million. Details on the maturity of loans and interest rates charged are

- shown In Annex 6.

-97 -

5.02 In terms of sectoral distribution, TDFL's Ppprovals covered awide variety of economic activities including manufacturings tourism,agriculture and agro-processing, mining, forestry and wood processing, andacquaculture. Manufacturing was by far the principal activity financed;accounting for 66% of the total amount approved. Tourism and hotelsfollowed: accounting for 152 of the amounts approved. Seventy-four percentof the number of loans and equity investments approved ware in the privatesector, and this accounted for 692 of the total amounts approved. Newprojects accounted for 40% of the total amount of approvals; expansion ofprojects accounted for 572; and rehabilitation and diversification for 32.

5.03 A sumar:y of TDFL's actual and forecast operations during theimplementation period 1279-1984 is shown In Anne 7. TDFL's total loan andequity approvals declined from T Sh 109 million In 1979 to T Sh 20 millionin 1984; a decline of about 82%. During the five year period under review,total approvals, commitments and disbursements were about 502, 60% and 402respectively below the levels projected at appraisal. The main reason forthis sharp and steady decline in operations was the economic crisis inTanzania. Due to the foreign exchange shortages, TDFL sought to financeprojects which depended more on local raw materials, but few such projectswere submitted for approval.

5.04 Portfolio. As of December 31, 1984, TDFL's portfolio amounted toT Sh 357 million consisting of T Sh 272 million in loans and income notes,and T Sh 85 million in equity investmevts. The following table summarizesthe status of the portfolio. As shown in the table b.low, 48% of the valueof TDFL's loan portfolio and 33% of the value of equity investments were inunprofitable projects. During the time of appraisal, 302 of the totalvalue of TDFL's equity and loan portfolio (in operating projects) were inunprofitable projects. By December 1984, this had increased to about 502.Nearly half of these unprofitable projects depend mainly on imported rawmaterials and their poor financial performance is thus largely attributedto the foreign exchange crisis in Tanzania. The poor performance of theothers is due to various factors including poor management, over-investmentin fixed assets, inadequate equity, technical problems, poor projectdesign, inadequate supplies of locally produced raw materials, andinadequate marketing arrangements. Of the 50 unprofitable projects,14 involve companies under litigation afid liuidation. These include anair charter service company whose airplanes were grounded due to the lackof spare parts, an enamelvare manufacturing plant that depends entirely onimported inputs and a na-'1 manufacturing company that also lacks spareparts.

- 98 -

Table Is Summary Status of TDFL Portfolig(Amounts in T Sh '000)

m s*/ EquityNo. o WMunt No. of Amount

Projects outands A Outstanding

operatiPJ Projects

Profitable Projects 22 124,664 46 30 42.241 50Unprofitable Projectgb/ 30 130.072 48 20 8172 33

Subtotal 254736 707

Projects UnderImplementation 5 17,242 6 3 14,647 17

STAL 57 271,978 100 53 85,060 100

a/ Income Notes included.

/ Includes companies under liquidation.

5.05 Loans. As of December 31, )84, TDFL's loan portfolio amountedto T Sh 272 million in 57 companies, of which 30 were operating at a loss.This seriously affected TDFL's loan arrears. As of December 31, 1984 thetotal amount of principal and interest in arrears over three months wasT Sh 60.9 million. The principal outstanding in the affected projects wasT Sh 160 million, amounting to 59% of the total loan portiolio. The amountin arrears was 22% of the total loan portfolio. During appraisal, thisexposure ratio was considerably lower at 25%. The number of loans affectedby arrears as of December 31, 1984 wav 37, representing 65% of the totalnumber of loans in the portfolio. Arrears of over I year amounted to 56%of the total amount in arrears. In addition to the problems cited in theprevious paragraph, arrears have also resulted due to willful default. Toa certain extent this has been exacerbated by the economic situation in thecountry and the problems associated with enforcing payments through thecourt system. As discussed in paragrap 3.04(i), TDFL has given specialemphasis to debt collection efforts. (Annexes 8 and 9). The results ofthese efforts are not available.

5.06 Equity investments. As of December 31, 1984, TDFL's equityportfolio amouneto T-Sh 85 million in 53 companies. TDFL ownership inthese companies range from 3% in the Kilimanjaro Textile Ltd Company to

- 100% in four wholly owned subsidiaries. These subsidiaries are RuahaBottling Company Ltd., Hotel and Tours Management Ltd., Perma-Sharp Ltd(all of which are operating profitably) and Enterprises Ltd., which isoperating at a loss. A fifth subsidiary, TanL.ania Aviation Ltd, which Isnot fully owned by TDFL, Is under liquidation. TDFL does expect to recovera substantial portion of its investment through the sale of the company'sassets. TDFL's overall equity portfolio is in poor condition. As ofDecember 31, 1984 only 30 companies (562) were operating profitably; 3 were

- 99 -

In the Iaplementation stage; and 20 were unprofitable. TDFL has taken dueaccount of the status of these winprofitable projects in asking itsprovisions against the portfolio. In 1284, TDFL's return on Its equityportfolio was about 5.52.

Financial Performance and Condition

5.07 TDFL's projected and actual income statements, balance sheets,sources and uses of funds, and financial ratios for 1979-1984 are presentedin Annexes 10-13. TDFL's profitability has steadily deteriorated since1982 due largely to (1) the provisions made against doubtful debts andreductions in the value of equity investments; (11) the increase in loanInterest arrears; and (111) the decrease in the volume of operations. In1984, the provision made against doubtful debts and diminution In the valueof equity Investment was T Sh 11.2 million. A large proportion of theprovision related to the Tanzanian Aviation Ltd subsidiary, which was underliquidation. In 1984, TDFLts losses amounted to T Sh 7.3 million, withaccumulated losses at T Sh 11.5 million. TDFL has not declared dividendssince 1979; moreover the dividends declared to foreign shareholders from1976 to 1979 have not been repatriated as the Bank of Tanzania has not beenable to allocate the necessary foreign exchange. The gradual deteriorationin TDFL's profitability as well as the devaluations in the Tanzanianshilling have had an adverse impact on TDFL's financial structure. Due toaccumulating losses, TDFL's equity declined from a high of T Sh 97.4million in 1981 to T Sh 76.5 million in 1984. At the same time, due to thedevaluations, the local currency equivalent of TDFL's external borrowingsIncreased. (Although the exchange rate risk on IBRD and EIB lines ofcredit is passed on to subborrowers, TDFL absorbs part of the risk on loansfrom CDC and EIB bonds. This practice is in violation of its policystatement which stipulates that TDFL should adequately protect itselfagainst exctange risks arising from foreign currency borrowings). As aresult, TDFL's debt to equity ratio has been steadily increasing, and in1984 was 3.5:1, exceeding the ceiling of 3:1 agreed with Bank as perSection 4.06 of the Loan Agreement. A ltter was sent in November 1984requesting an amendment to the Loan Agreement to increase the ratio ceilingto 4:1. The Bank indicated that such an increase would not solve theproblem, since TDFL would find it difficult to maintain such a ratiowithout resolving matters relating to: (1) Government assuming the foreignexchange risk on TDFL's borrowings from CDC and EIB; (i) conversion of EIBbonds into common stock; and (iii) prospects and timing of increases inTDFL's equity. TDFL's foreign shareholders have been reluctant to increasetheir subscription to enlarge TDFL's equity base, because they have notbeen able to repatriate dividends. As of December 31, 1984, TDFL's currentratio and debt service coverage were adequate at 1.9 and 2.4 respectively.

5.08 In the past year, TDFL's financial position improved, largely dueto the decrease in the provisions for investments which resulted from theeventual sale of the Tanzania Aviation company's assets. Accumulatedlosses at year end were reduced from T Sh 11.5 million In 1984 to T Sh 5.8million in 1985. However. TDFL's financial forecasts for the next fiveyears show a continued decline, due mainly to the low level of operations.Without additional foreign exchange resources and improved loan recoveries,TDFL faces a risk of financial collapse.

- 100 -

VI. CONCLUSIONS

6.01 TDFL has an important role to play in the development of theTanzanian economy. It is the main financial intermediary providingassistance to medium-sized private sector enterprises. Its ability tocarry-out this role has, however, been severely curtailed by variousconstraints prevailing in a difficult economic environment. Prospects forenhancing TDFL's role and its effectiveness in the promotion anddevelopment of productive economic activities will not improve until the

pressing industrial policy issues are resolved. The Bank is currentlydiscussing these policy issues with the Government in the context of an

industrial sector report. Substantial policy reforms are necessary as -Uell

as the development of a program for rehabilitating, restructuring andclosing down of industrial Onterprises. The Government recently adopted

some of the necessary policy changes and in cooperation with the Bank and

the IMF specific incentive and policy measures have been developed for

1986/87. The Bank should now give serious consideration to assisting TDFL

again. Without the needed foreign exchange resources, TDFL's institutional

capabilities and financial viability will be further eroded.

6.02 Under Loan 1745-TA the Bank helped institute important policy

changes in TDFL. However, the Bank's objective of providing term financingto productive economic investments has not been substantially met. As

discussed in the report, exogenous factors were mainly to blame for the

shortcomings of several of the projects financed. With the benefit of

hindsight, it is also clear that: (i) too many of the investments financed

were import intensive; (ii) the economic appraisals of the subprojects were

not adequately carried out by TDFL or properly reviewed by the Bank; and

(iii) the project should have provided for the financing of workingcapital.

6.03 TDFL faces a risk of financial collapse and weakening of the

institutional capabilities that have been established, unless (i) themacro-economic policies in the country are improved; (ii) TDFL obtains

additional foreign exchange resources to assist its existing investments

currently in distress and to resume its normal level of operations; and

(111) TDFL improves its debt recovery. Any future assistance to TDFL

should aim to support TDFL's reorientation in policy towards: (1)

consolidation of its existing portfolio through rehabilitation of existing

projects, and financing of spare parts and imported raw materials to

increase capacity utilization; and (ii) new investments that contribute toforeign exchange savings and earnings.

- 101 -

6.04 The Bank, through its supervision efforts, assisted TDFL inreorienting its policies, and made useful recommendations regarding projectsupervision and debt collection. However, several subprojects above thefree limit, which were economically not viable, were approved. While thismay have reflected in part poor economic appraisal by TDFL and insufficientreview by the Bank. one of the,lessons to be learnt from this project forfuture DFC operations is that it is difficult to separate good projectsfrom bad ones when there are severe distortions in the economy. In suchcases, the typical ERR calculations may fail to reflect fully the extent ofthe distortions. Therefore, it may be safer to defer lending for this typeof projects until'the most extensive distortions in the economy have atleast begun to be tackled through a process of policy reform.

- 103 -

AM= I

TANZANIA

TANGANTIYA DEVELOPMENT FINANCE COMPANT LTD (TDgL)

Schedale of Cumulative Bank Disbursements

Cmulative Disbursements Actual DisbursementIBRD . (US$ million) As 2 of

Fiscal Year Appraisal Appraisaland Semester Estinates Actual Estimates

1981

1st (July-*Pecember 1980) 0.70 0.68 972nd (January-June 1981) 4.60 3.70 80

1982

1st 5.60 5.60 1002nd 8.00 6.00 75

1983

1st 9.50 7.53 792nd 10.25 8.15 80

1984

lst 11.0 9.13 832nd 9.90 90

1985

1st 9.97 912nd 10.16 1/ 92

Undisbursed balance of US$837,872 cancelled effective May 3, 1985

- 104 -

AfRfE 2

TAWNIK EOMWt FIM 0 ~N L2iED

Ust of 9Sroect fn ~d d amn No. 1745 - I.

i m () s- AuMM- o 9xolcf woseetlb. ~mu dta~. U .d DIk~ ÖD

1. lanm~ka eunmer F&~tory Ltd. A - 1 11/ 23,855 245,50 18,552. H~g Foa & F=niture Ltd. A -2 9/» 292,771 - 32,7713. hzna mg bles Ltd. A -3 11/ 938,916 938,507 4094. iti ratch Oxpationi Ljited A - 4 878,313 877,723 5905. Callo 'T~ Indus~tris Ltd. A- 5 90,614 903,24 3606. mm Fisnt nfactu Ltd. A -6 87,952 681,217 6757. Almadini Aria -imnitse A -7 421,687 410,287 11,4008. Tan S & S QuarriesLtd. A-8 " 542,169 5u,887 -9. 2 d cmpn Ld. A -9 12179 542,168 538,%963 3,5

10. Fanitue Ingries Ltd. A -10 542,169 541,120 1,06911. Pam-African nterris Ltd. A -11 1/79 570,0 - 570,012. Pattex Knt~ -aufactuers (T) Ltd. A -12 3/80 361,446 33,339 -13. XI1anjaro T=Wie Corporatimn Ltd. A -13 0 g 602,410 - 602,41014. Ferm ~ (T) Ld. A -14 5/80 843,000 843,000 -15. bx~kreef Gold m~ni. Ch. Ltd. A -15 8/ 602,410 - 602,41016. uh &~tting Co. Ltd. A -16 1/82 312,500 310,20B 2,29217.. 1L e Indumtries Ltd. A -17 4/M 365,854 - 365,85418. Twmana 0*t:d Tools Ltd. A -18 10/80 287,500 285,701 1,79919. Tna 0in Coalmny Ltd. A -19 1/81 964,000 - 964,00020. Tw~anin Prtland Puo~ nt Co. Ltd. A -20 " " 1,445,783 1,435,964 9,81921. m~ganyka Wattle Company ltd. A -21 5/83 515,464 515,464 -22. Nyanza Qurries Ltd. 5- 1 11/79 20,964 M6,445 34,51923. 1mnz Printi Centre Ltd. B - 2 % " 48,193 47,680 51324. Jays NMtal Puna~ Ltd. B - 3 12/79 240,^4 220,689 20,27525. 'nai~ Inustrles Ltd. B-4 1/80 67,590 64,452 3,13826. Te Cas & ~bes Ltd. B-5 3/80 101,205 101,159 4627. cmen~ Fery Ltd. B-6 5/80 61,446 61,787 -28. Hetoxide (T) Ltd. B - 7 9/80 122,000 - 122,00029. T~unfz Ed 25,000 14,784 10,216

13,806,295 10,162,130 3,644,165

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-107- ANNEX 5Page 1 of 3

TANZANIA

TANGANTIRA DEVELOPMENT FINANCE COMPANY LIMITED (TDFL)

SUMMARy DESCRIPTION AND PRESENT STATUS OF SELECTED

SUBPROJECTS FINANCED UNDER LOAN 1745-TA

1. Kibo Mtch Corporation Limited. Subloan $878.313. Kibo HatchCorporation (KMC) was established in 1962 to manufacture safetymatches. The company is owned 252 by TDFL, 222 by private Tanzanianinvestors and 432 by foreign investors from Kenya and the UnitedKingdom. In the 1970's KMC diversified its operations to include apulp and paper mll. an agro-forestry business and a sisal farm. TheWorld Bank subloan, approved in 1979, financed the purchase ofmachinery and equipment to manufacture duplex paper boards for use aspackaging material. Due to unrealistic Implementation schedules., andfaulty specifications for machinery at the time of appraisal, projectImplementation was delayed for two years. As a result cost overrunswere substantial, and total project costs exceeded appraisal estimatesby 45 percent. The project to now profitable and operating at 752capacity. The company has been vble to meet its debt service obliga-t1ons to TDFL. The project has created 130 new jobs at an investmentcost per job of US$75,400. This high figure reflects the cost overrunsand the level of automation of the plant.

2. Mwanza Fishnet Manufacturer's Lt,. Subloan $687,952. 7he company wasestablished in 1964 to manufacture acrylic fishing nets. TDFL owns 29%of the company's shares; 511 is held by a group of private Tanzanian

investors (who also manage the company) and 20% by a private Japananesecompany (who arrange for the procurement of machinery and rawmaterials). TDFL made its initial loan and equity investments in thecompany in 1974 to facilitate a modest expansion/rehabilitationprograms. The World Bank subloan, approved in 1979, financed thepurchase of imported machinery and equipment needed to increaseccpacity. A shortage of building materials delayed projectimplementation for nine months. Operations have been hampered bythelack of foreign exchange to import raw materials. The factoryoperates for less than 3 months a year and capacity utilization is only

15%. As a result, the company is only marginally profitable and its

debt service obligations to TDFL are being met by payments from the

private Tanzanian investors. 140 new jobs were created at aninvestment cost per job of US$14,800.

3. Rotian Seed Company Limited. Subloan $542,168. The company, which wasestablished in 1979 to cultivate seeds and flowers for export, is ownedby a groa of Dutch and Tanzanian corporations and Investors. Theprimary sponsor, with 602 of the shares, is a Dutch agro-businesscorporation whose Tanzanian subsidiary manages Rotian's operations.Other shareholders are FMD, the Netherlands Finance Corporation,Agricultural and Food Corporation (NAFCO) and a private TanzanianInvestor. The subloan, approved in 1978, financed the importation offarm equipment, plant and machinery for growing and processing theseeds. Implementation of this project was substantially delayed by

- 108 - AMNE 5Page 2 of 3

more than 4 years due to legal proceedings related to acquisition ofdisputed fare property. This led to a change In project scope anddesign and resulted In costs escalating by over 40. Seme minor delayswere also experienced as a result of the temporary suspeto ofdisbursements by ISID to Tanzania In 1983, following Tanzania's delayIn meeting overdue IID debt repayments. Farm production has beenbelow appraisal estimates, because of a decrease In acreage cultivatedand lower yield rates caused by Inadequate rain fall In recent years.Although lotian Is only marginally profitable it has met its financialobligations to TFL promptly, and its prospects for the future lookbright. The number of employees fluctuates between 425 people to 1,240people at peak season. Using an average of these two figures, theInvestment cost per job amounts to US$5,900.

4. Aluminium Africa Limited. Subloan $421,687. The company, which wasestablished in 1960, manufactures aluminium cooking utensils andgalvanised roofing sheets and pipes. It is owned by the NationalDevelopment Corporation (601) and a group of Asian Investors based inKenya, who also provide the company with management services. In 1976,TDFL provided a loan to finance part of the costs of establishing adivision to manufacture a asbestos cement roofing sheets. The initialproject design was poorly conceived, and as a result the project sitehad to be changed. This led to considerable delays in Implentation andcost overruns. The World Bank subloan, approved In 1979, was part of afinancing package to enable the project to be completed. The fundswere used to Import 6 months stock of raw materials and equipment andalso to finance part of the local construction costs. Productioncommenced in 1981, but output has fallen far short of appraisalestimates, with capacity utilization between 15 to 35 percent. Onceagain, the cause is the lack of foreign exchange to Import rawmaterials. The project has bee,a making losses, but thecompany's debtservice obligations to TDFL are being met adequately. The projectcreated 140 new jobs at an investment cost per job of US$21,400.

5. Ruaha Bottling Company Ltd. Subloan $312,500. The company was estab-lished in 1972 by TDFL and a group of non-resident businessmen tobottle and distribute a line of soft drinks under licence from the ColaCola Company. In 1973, TDFL bought out its partners and Ruaha BottlingCompany became a full subsidiary, managed.by TDFL staff. The company'sperformance for the first five years was satisfactory and its profitscontributed significantly towards TDFL's earnings. However, poormaintenance of machinery and lack of spare parts re-vulted in frequentbreakdowns, and by 1980 the company's profitability started declining.World Bank subloan, approved in 1982, financed 50% of the foreignexchange cost of rehabilitating the plant and equipment; the other 501was to have been financed by EI, but due to the lapse in the EI8 lineand difficulties in securing alternative financining, the projectexperienced considerable delays in Implementation. The resulting costoverruns amounted to over 901. Financing to complete therehabilitation progra was recently secured from DEC, a developmentfinance company from the Federal Republic of Germany. The prospectsfor the project are good and Rusha Bottling Company, Ltd. should beable to service its debt obligations satisfactorily. When completed,the project will create 76 new jobs at an investment cost per job ofUS$12,600.

- 109 - ANNEX 5Page 3 of 3

6. Tanganytka Wattle Company Limited. Subloan $515,464. The company wasset up In 1948 by the Commonwealth Development Corporation for the pur-pose of growing wattle trees and processing wattle extract from itsbarks for export. In 1969, TDFL made an equity Investment In thecompany and acquired 162 of the shares. The company has siace diversi-fied into farming of maitse and wheat, livestock and forestryproducts.In 1982, TD?L made a convertible local currency loan to the company tofinance a rehabilitation/consolidation program. In 1983, due to diffi-culties i obtaining letters of credit to Import equipment and spareparts, the company requested TDFL to convert the undisburted balanceInto a foreign currency loan. This was arranged by mans of the WorldBank subloan and approved in 1983. Implementation of the project hasproceeded on schedule and should be completed in 1986. The company isprofitable and a significant foreign exchange earner. When completed,the project should on average create 100 new jobs at an investment costper job of US$17,200.

7. Perma-Sharp Tanzania) Limited. Subloan $843,000. The company wasestablished in 1969, with a 35Z ahareholding by TDFL, to manufacturerazor blades. In 1972, TDFL bought out the other investors and tookcontrol of the company. The bar.-_ of razor blade Imports in 1973,gave the company monopoly statues and ensured profitability. In 1980,the company decided to expand its capacity in order to meet

unsatisfied local demand and to export possible surpluses. The Worldlank subloan, approved in 1980, financed the Importation of machineryand equipment for the company's expansion program. Projectimplementation was delayed considerably because of changes in locatingthe new plant, the slow pace of construction, and defective machinery.Cost overruns exceeded 1002. The plant is expected to start productionby end 1986. The company has sufficient raw materials for one year'sproduction, but it is heavily dependent on Imported inputs, and withanticipated foreign exchange shortages in the country for the foresee-able future, furture prospects do not appear good. When completed, theproject will create 85 new jobs at an Investment cost per job of$165,100, reflecting the cost overruns.

8. Patte Knitwear Manufacturing Limited. Subloan $361,466. The companywas established in 1971, to manufature knitted garments. TDFL provided34% of the equity, and the remainder .was provided by a group ofTanzanian investors. In 1980, the company decided to establish aspinning and dyeing plant that would produce acrylic yarn for use asa raw material in their knitting operations. The World Bank subloanhelped to finance part of the foreign exchange costs of importingmachinery and equipment. Additional financing was provided for byequity contributions from TDFL, FMD and the Tanzanian investors, andcredit financing was provided by the machinery supplier. Minor delaysin project Implementation were experienced because of a lack of

building materials, but there were no cost overruns. Commercial pro-duction commenced in 1982, but output has fallen far short of appraisalexpectations for a number of reasons; Including; the shortage offoreign exchange to import raw materials; inefficiencies due to poorplant design and the quality of machinery; and competition from cheapImported second hand knitwear. The project is unprofitable and willcontinue to decline unless the economy Improves. As a result of lowproduction levels, no new jobs have been created.

- 110 -

TANEANIA ANNEX 6

TANGANTIKA 9WdLOPMENT PINANCE COMPANT LIMITEDAnalsis of A9orovels (ultv. r9cow Notes and Loans)

A. SIZE OF LOANS Number of AmotsOR IQUITY AT.Sho.) Approvall I in '000 2

Up to I allon 89 39 49,113 9I to 3 aillion 74 33 141,024 263 to 5 million 35 16 141,533 265 to 7 allliaw 14 6 87,227 167 to 10 aillion 11 5 94,558 1710 to 12 million 3 1 34,030 6Over 12 million - - - -

TOTAL 26 15 547.485 100

B. MATURITY OF LOANS

Up to 5 years 140 68 271,991 595 to 7 years 48 23 116,201 257 to 10 years 17 8 56,901 12Over 10 years 2 1 17 836 4TOTAL

C. INTEREST RATES

Up to 5% p.a. -- - -

5 to 82 p.a. 17 8 18,490 48 to 10% p.a. 88 43 100,843 2210 to 122 p.a. 94 45 322,611 70

12 to 132 p.a. 7 3 19,585 4Over 132 p.a. 1 1 1,400 -TOTAL 207 100 462.929 100

D. SECTOR OF ACTIVITY

Manufacturing 142 64 362,716 66Agriculture & Agro-Processing 12 6 40,785 8Mining & Quarrying 7 3 15,811 3Fishing & Fish Processing 5 2 7,234 1Tourism & otels 33 15 79,574 15Forestry & Wood Processing 7 3 11,640 2Various Services e.g. transportand printing 15 7 23.335 5TOTAL O547,485

B. SECTOR

Private 168 74 375,441 69Public/State Owned 58 26 172,044 31TOTAL 226 100 547 485 100

F. TYPE OF PROJECTS

New Projects 62 27 225,564 40Expansion Projects 95 42 306,469 57Rehabilitation/Diversifieation 69 31 15,452 3TOTAL 226 10485 Iu

l一二’！付

112 -

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pcc~ AU~P~ bl i ý

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10 48X slug 3JW Ilm lln 1^40~1~ P~ 4904 9,7M .0^

24 10,m 11,706

sub~ 34 147.316 5?-,%3 13,87 11,420 18,86 uvo

pr~ ulder3 12,U5 3,281 943 749 m al

T~ 37 L%,301 60^4 14,640 ä,1(0 19,5% 14,461

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- 113 -

An!Z 9

m m emfi - a~hm a a .)

Yr ig b~Dm~r 31 183 114

1. TIta 4brLo n ofo D 57

2. Nr f L Afc by Amir 3 37

3. bprn== Ra~Io 62

4. T~a IML Ofnf=lirf lam PartoHo 1b 2= 111Ud bh 272= U1m

5. otfolt~o Afted by Ars Th 115 z~11J ab 160 ut11Um

6. rea aio

7. Arsars of Our 3 Nknth (prit) Th 26 t1~m Mi 38 m111~

8. rs e n Of bta1. M oo lt 149

Ar1 af mr 3 gth

Tt~ LKA E~hf FD ~MB LDiEM1D (L)

Proected ad ~ctual 1In Statt 1979 - 198(T ". 0(0)

Tr 9lh a 31 199 1m igl im lm im

P'udf balle~ fallctel ~ ~ffjeto

- 11,= 12,6 15,791 18,274 20,^6 19,757 26,141 22,018 37 2170 33,14

l UMiv~ 4,^5 4,181 6,0 2,825 8,665 6,025 11^, 4~6 1A015 4,049i fntonw/Iklme. 3,80 4,245 4,90 7,176 5,00 6,2 5,0 7,778 6,00 4.m 4,92

-29t .10 1_543 2.01 . 2.110 2 4.163, 2' 4.M M

UTl . 21,46 22,93 29,642 29,703 3,68 33,974 4,%9 3,40 529M ,40 4,3

- Aebog tie Bqau 2f 4,452 4,73 6,424 7,148 8,037 9,160 8,~5 9.077 9.6 10,0 11,9- i m 541 414 541 2,2 541 664 54 10,66 541 4.l 49

-N~I iM 10d 1,203 1323 4 i t. 9~ 2DJM 1. 21^

- ~'tft ~in 1h 6,32 7,081 9,474 6,012 13,8% 8,292 17,273 9,= 21,6W Il,4 Hel.fi-~.~ 3,61 4,203 UM 6,212 3550 777 M~ 5 972 2~ i

- Prfit M97r 12st

- ,216. 1 1.653 -. .AM .M1> .1966 2105, .205 fl 11.18

- mtofttAIt Ms) 2,23 3,^83 3,53 1v 5,692 3,242 7,536 (9,891) 9,5 (2.547) (7,33)

1/ ib Pme~.cd. . mm Iw fr P 84'k.~.a. dqftcc.~,.

kf~. pro... sleinst q~ theal of eeenb~.

TAtNEANIATANGANTIKA DEVuneO#PWT FINAmCB OPANt LTc JTDL)

Compartiom of Projeeted and Attnal Ban e Sheuta (979 1984)

(TSHS '000)

tear fedag Decoebr 31 1979 1980 1981 §982 1963 1996 /1

Projecteåd tual Projeted-Actuem Projeted ae l Proetd-aual t Meteda

£88818

and Short Tarm aomatmåte 7,903 26,411 3,962 29,562 1,076 40,508 6,258 1,608 4,032 6,942 1,640

- Other Corrent Accete /2 24,082 11,038 26,814 16,685 31,868 25,859 38,705 32,348 44,8~1 26,36 w~,307

fortfotto- qUtT 61,190 55,557 87,123 59,457 117,305 61,682 148,994 70,649 '18,310 72,508 83,061

- Laea i3,200 141,566 151,643 128,418 192,842 174,555 228,998 197,697 20,333 207,72 233,461

-eteotes s en.588 - 14 152 - 14652 - 1 a 2819 8 19 i

Total fortfolto (Go~) a> 2480,7r; 2m7 2,02 I TIfC4T ,O:51 UT5 93 3

Lco prlt fta 9 874 8 658 ta 527 10 658 13 427 k21I8 133ni 240897 5739m 33491 46 W1 >0

Total Fortfolto (not) nt. *~ T ~5,-~ Tfl."-; CT3I ffig! ik.7 fiff1 t ~.,- T ~.- T ~.' NCM Ti ~.- t

- Mot plud A*ete 20,886 19,872 20,595 22,160 20,354 25,433 20,113 26,463 19,872 28,5332 3,339

8 M.ff Nouateg Lem 44 540 859 958 964 736 1 059 783 1 544 1 340 .

10TAL A~8 188101 3I0,92 331,267

LIAI2LIT188Omernt Libtitties 12,669 23,235 19,685 27,861 18,825 31,233 23,862 28,345 35,053 24,442 2,46

lanT.Trlaieb tmblttes- aeaeNoten 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 30,800

- ti honda 28,100 29,813 28,100 27,058 28,100 22,742 28,100 23,315 28,100 20,90% 32,436

-tm a34.835 36 966 48 304 82 935 808 785 998016 143 712 503 043 586025 141 350 1728MG

TOTAL 801O 0INGS 42,"3 s46,279 8 m 93, * icf 5-d W iw.ffli O YI- MIWE

w Capie 60,000 88,000 106,000 88,000 110,fl0 88,000 145,000 88,000 170,O . 88,9N0 8,0006 ,227 900 3 380 4.850 5.37 9476 8 060 980 52 X 3

iÉffi ff ffi38 9388 15,26 , 8,10 TI

1TTAL LIABILITIS 4 BQITf 218,035 261,914 279,469 310,734 350,982 331,267 428,734 323,613 491,137 350,742 192,33

/l No Proj~mttn uere made for 1T 84/2 Deton and current aturttlen of portfoljo loong

TAINGAlITIKA UVU8ANEUiT VIU*MCE COMPANT LIlUTD(9LProjectedand Atua Source and Ueh oftunde 1979 - 1

(TSNs '00)

Tear 9di Daemeber 31 1979 1980 1981 982 e~ 59S4Proected hg" ProectedAua_ Proe ictmnI Projected Actute

- Punds from operattons 14,192 7,688 18,065 9,526 22,395 10,850 23,864 31,376 30,211 e6,835 22,513- Lo. epsmente 9,%8 13,479 15,224 94,738 18,366 18,362 23,610 24,897 30,477 23.107 ,822

- ~., Eg.1ty 20,000 48,000 40,0m0 - 10,000 - 33,000 - 2o000 • •• Lomsa 42,477 45,519 18,236 48,k41 61,244 21,48 38,220 17,322 36,60 20,819 13.98

-Other.f 20 - 35 - 45 - 55 - 63 1,032 379

- A810TAL @6,237 554,726 92,060 72,805 112,240 50,710 122,749 63,395 119,323 40,761 74,912

Mattom• Lqity 16,050 13,477 23,933 4,113 30,182 2,223 31,689 8,967 32,316 3,3M9 55.730

- Lacua Icomc notes 44 731 71 641 36 99 33068 64809 2387lö 46603 J306 67 921 34220 56 945

- Repmt of Borrowing 98 410 767 - 4,267 8,467 767 18,556 767 9,=80 153.02* • ized Assets 7,190 5,839 250 2,980 30 4,131 300 1,952 390 3,167 4,943

• Tasm 6 Kividend. 4,348 1,491 4,613 1,250 6,868 3,200 10,00 3,3519 2,523 4,375 8,411• Other 2/8 96 7 427 8,200 291 om= 47 8200 337 163

• 10320TAL 81,311 92.954 %,001 61,838 115,126 41,190 117,567 66,347 124,349 3$,384 37,872

• loeuesse//Dsreasmta r~mds 4,946 21,772 (3,941) 10,967 (2,866) 9,320 5,182 (3,732) (5,326) 5,177 57,040

1/ Kncines staff ~iesing loans; sal of Inveatmente ond fåned assetc./ nelodse etoditorm (~asOe »otu. and 118 bond Interest), staff housng loan and deferred tamtion.

TAMEAUIA

TANCAIITIKA UBVILOPMSBIT FiiNAæ NC PAUT LTD. (9L>

0recitd n Atee ieses seo w-90

3979 1980 191 92 93 8

se f g

8. 9otal mene~ 11.5 9.5 11.5 10.4 11.6 P0.8 11.5 1.9 FM.5 12.2 3.3

3. Fieee Chargu 5.4 4.0 4.9 4.8 4.5 4.9 4.7 2.8 4.5 4.0 5.8

3. A~ateetteMs eem 2.7 L.9 2.6 2.4 2.6 2.8 2.3 2.8 2.1 3.1 3.1

4. at frwfit (ee) .2 1.9 1.4 0.3 1.8 1.0 1.9 (3.0) 2.1 (0. (2.0)

5. Ikt Vrufit (1s)/Tr. &nd let brt 3.7 4.2 3.4 1.8 4.9 3.3 4.9 (0.9) 5.64 (3.0) (9.6)

6. u*wtdeI tenee /Eg.tty 7fftfolig 7.4 l.5 7.2 4.8 7.4 9.8 1.6 6.5 7.7 6.8 s.s7. lee^ fee Lees/Av. 1oe Prtfolio 7.5 7.0 7.6 7.9 7.6 7.2 7.6 8.2 7.5 .. 9.7

8. Cest f Wet/Avergp oebt 8.2 - 0.2 8.1 7.9 8.3 7.8 4.5 7.9 6.3 8.6

LteeIdtv se Crediteethiese

9. Caret lette 2.5 1.7 .6 1.7 l.8 2.1 1.9 1.2 1.3 .4 1.910. ea-m eb~t/Bgety 2.3 1.6 1.5 2<1 1.9 2.0 1.7 2.3 8.5 i. 3.s

18. Seb Serite sveerage etto , 3.3 - 2.8 - 2.3 2.9 4.0 1.1 3.8 2.9 2.4

- 119 -

TB Ut~ED MEnu oF TA hA^omEm OF < WIW A D.1Uam Pg* i of 6

C~ mi de-- *VUA". DAA ES SALA~ P. 0. omTda s.: 41US *DIW. DA SAL M .

Tuksasse: WVsorrIsI9

'-r- eesnd as uh t.c"k miifflm*~utba e a~ne p.ass

a.r. .... c/D.10/t ~ - 20th ~o, 1989

COM nrUS RCEIVEC POM TRE BORRER

The Divisioni Chief,Operwainm ~luatin Dep~rtmnt,World Esk,1818 R skreet, N, V.,Vashintan1, D.C. 20433,

(i$ention: Ditr indæ"'" N4miCadIl

Deff sir#

E TANZANIA INl|!1*Bal (CTB)(Los 1172, 1498 m 1750 • TA-

AlTAUG~Nk[ MEiLOPmæ!I KL~lCCOPAr LT. mm 'Nm) UAo 1745 -GMO)!T -PBØmMNCE A~DI BE=R

piese refer to the above eabjet.

I have etudied the draft project pwfrmance ~lIt geport (PPAR)you gabdtited to m far comat.

i hereby a ind.t &V obscrvabions and co~nts on the reporbp(Éteched).

I would like to ebend V ~ratitde for gLvng me en opportunityto see the- draft and gLvin me a ohæne to comnt on it. It is iVa: re hope that aV casents will be of some use to yoa.

øks for your oo-operatian.

(3. s. homv'n)for PRNCPA SWEA

- 121 - - APPMDI 1

Page 2 of 6

cOUi'0' æU E PRO.TET PDBURAUC EDE2 EORT

IUVNOPNT PsINcI co. »L!EZD.

1. I is true that indntry ao sen a a p~erful ngine ~ ot grmuh.

h elemæt of racte itensity vas not olealy addemed to ab

initift. S repart stateg that mre capital intensive- tff~e

logies vere desired. dn a mtter ot fnt ith indespena one

of the ar objetiveg mas to areate mare ~efploimnt. Ilit

in this is that labor intensive te~onologtes vre ore desirable.

It is the import sab"titutian inantrial straef vhich ~aed in

capital intensive indstries contray to the miøation of

eployment generation objetive.

2. in the report the ~port - abstitutia Imnatrial

etrategf is taken av synanymous to basia industrial strateg.

Wis is basically not the situatin. *ile aort subtitutio

indastrial trateg i geared tomards the estabishet at indos-

stries ioh will prodmoe hat the ecoza used to impart* basio

ind.str.al stratef f ius at establishing indutries hiah pro~oe

basio inputs and ms= onun~ items based aa loa3ky available

rav ~ateriale. h baio industrial strate hav been taken as an

alternative trate8 after the failure of the import subtitution

trateff.

lxmhtutional avelaoent:

la the report MTI is com~nan for redaoing substantially.its reliance

on 'xpatriøte staff. ctfrtu~ey this aohiøve~ent is negtively

qualified by the report by the statement frobab~y rerm orelyn.

Due report should have quanified this. Is it premare in te

of time ar qumtity nd qality of epert.. Is tøere a time schedule

for 1oalisatia? The reprt should have come - =t ole~ily an hav lang

is eough ad hov, mny o hiah ~rilla are requred to be suffi<ient.

122- APNDIX 1Pagae 3 ofT -6

Financial Ccndi-tions:

Pwa 17 of the report there is a recomendation to rehabilitate

TIB portfolio to save it from financial collapse,

Water alia the report list the following as the measures:

(a) "Weding out unviable parastatales

(e wanders wby the recommendation has limited itself

to parastatals aWl* TI is financing projects and not

institutions.

See PPAM, (b) "Resolving the issue of the denominated in fareigm currencypara. 27 debts" No where in the report is this issue takled.

(o) "gpoying of expatriate managemet to man key positions

an a long term basisn. As a footnote to what the report

term as "bough political decision" this position is reconfirmed

by he following statement:.

"If a project is viable but management is a problem expatriate

managers would have to be hired far a long period".

Eipatriate is seen and propagated as solution to management

VrobleIM and infact the question of duration is stressed 4ongperiod,

This looks like a biased a preconceived solution* Shecountry has trained and has a pool of technically capablemanagers. Se recomendation should be change of management bydifferent ways including local managers recruitment. agpatriate

recruitment to us is a last resolt due to the foreigm exchange

implications.

- 123 APPNDIX 1Page 4 of 6

IV. WIllZDiaID IS5ES

gek perfarmnce:

KOrld Mk IRolvemnt in TID and TDEL ham been assessed on the

follwing poraitors-

(a) Uhilisation of its itnds;

(b) efetivene«ss of ite loan polioie;

(o) in appaisail and mup~rvision missiona effectiveness and

conceptualizatin of the aritical iulie at both micro and

maro eoonfic levels.

(C) »ility to Infinence nanal policies and re^tion of

oanduciee policy nuviramt and economic milia.

The reprt after asessing the above paramtors has canlued

that the *arld Bonk bau contributed subtantively tOlard the

poor pformanoe of M and TDEL. ge tend to con to this

obsevation cn the foLowing Grouds:.

(i) m vwrld h«nk bas been quite slippery on settrng up ri

f£r bankaility of projects. it has a stereoype appraisal

criteria Which do not take into coonideration the different

coutries sociopolitico ---sonei environmens.

(ii) Wprried appraisal missioens s

The bank ha« tended to coumiusion h=ried appraisals of its

loan. Te mision Members somt~ies do have a pjire

preconceived ideas and conolusiona about the assigment.

T .has created sometimes conficting appratsal remilts

with respect to the sam project. The foonote en page 16

number 19 is a olear Oawe in point (a) while in 1975 the

k stated among the major problmg of M is "he conditin

of it8 ortfolioef. In 1977 the ~ conl~uded that it nis

Prev~ure to m=ke a judg~ment on the portfoliogns". 1ich is whioh?

- 124 - APPENDIX 1page 5 of76

aw come in 1975 the bank was able to judge the portifolio

of T33 n3Y to fiA out too years latter that it, was Vream-

Inwe to judge even by 1977.

(b) In 1979 the Baks staff appaisal Report (sAR) put on

record that naIis appraisal of project is thorough"*

j*thermore in jne, 1979 another SAR found that "TIB has

improved the quality of its project supervision by strang-

theming its staff%. 3 the sAR under disacussion quite an

opposite view is being presented to the extend of recommending

epatriate staffs.

GLven these observations one fails to apprectiate the bankls

capability to execute its responsibility and becomes incapable

of implemeting suggested solutions.

Leesons of apecience and RommendatiOnP

1s A very valid statement has been made in para 33 page 21 in

respect to form of ownerahip. We concur with position presented that

it is the socio political circumstance4 cultural differew;v and

society's characteristics which tend to influence the nature and

extend of institutionalisation and not the ownership pattern.

"astate owned institutions tan be as dynamio and efficient as

private owed if thq are run by qualified managers". privatisation

is been considered as an alternative (albeit not .ecessarily facile).

2. MIch as we appreciate the repart% questioning the modi -operand4

of poard of DLreotars and the appointment Irocedures we would like

to record that there is a wave of obange at the soment of late the

, tendency have being to get people with relevant qualifications

and expecience in Dard of DLrectors. C.1. are becomdng a necessary

prerequisite for appointment into a Board.

- 125 - APPENDIX 1Page 6 of 6

on part of management the Government has already directed

parastatals to advertise all posts of Chief Eecutives.

We hope that by this method the most competent and qualified

resource persons will be given the responsibility to run the

state owned firms.

GfEAL COMMNTS:

The project performance audit report is a litazy of problems ranging

from the bankts weakness, DX;st malfunctioning and generosity of

donors. We anticipated that the report would have enumerated major

achievements of the DMs, problems arising from the operations of the

DICs and for each problem a reconmded solution or alternative

approaches, She report ts first attachment is on problems as if there

are no positive achievements at alle mile identified problems include:.

(a) Inadequate allocation of resources

(b) Deficient incentive structures;

(c) Ineffective organizational structures;

(d) Ambitions investment programs;

(e) Largess of the World Bnk;

(f ) eympathetic donnors;

(g) Poar project screening procedures;

(h) Haphaard project selection;

(i) Ari-export BLas;

(j) inability of Dpos to influence macro economic policy issues.

If the report is to be of any meaningful impact an TIB and TDVL futureSee PPAM,paras, performance the suggestion of solutions or alternatives rather than to over32-41.

shadow their achievement with problems some not of their own making is of

fundumental importance.

- 127 -

APPENDIX 2Page 1 of 12

TANZANIA IN SBANKP.O. Box 9373 Dar as Salamn United Repubic of Tannis

CeAe "WVETMW1W OTdephous 3MRS

COMMTS RECEIVED FROM THE BORROWER - TIB

1st March, 1989

TIB/OR/60/8

Mr. Alexander Nowicki,Division Chief,Policy-Based Lending, Industry,Public Utilities and Urban Sector#Operations Evaluation Department,The World Bank,1818 a Street, N.V.*WASHINGTON, D.C. Z0433,U.S.A.

Dear Mr. Novicki,

Re: UIS COMMENTS ON TIB DRAFT PROJECT P8RFORMANCE AUDITRAPORT (PPAR)

Thank you for' your letter dated 10th January, 1989. Iregret very much that I have been able to reply to it onlynow. The PPAR indeed raised very important issurs which TISthought it had to consider thoroughly before communicatingto you our comments on it.

Enclosed herewith is our commentary on the PPAR. Ourobservations, I trust, will be found to be self explanatory.I sincerely hope that in compiling the final PPAR, yourDepartment will give consideration to out comments.

Yours faithfully,TANZANIA INVESTMENT BANK

h C. RbambeGEBRA1 MANAGER

c.c. Mr. Gilman RutihindaPrincipal SecretaryMinistry of Finance, Economic Affairsand PlanningP.O. Box 9111DAR ES SALAAN

coc. Mr. B. HchomvuAg. Principal SecretaryMinistry of Industries and TradeP.O. Box 9503DAR E8 SALAAM

c.e. Mr. M.. Ritomarti c.c. Mr. Ian C. PorterDeputy Governor Resident RepresentativeBank of Tenzania World BankP.O. Box 2939 P.O. Box 2054DAR ES SALAAM DAR ES SALAAM

Ota Conepeadw daoud be edeed to th Gmal Muang:so

- 129 - APPENDIX 2Page 2 of 12

TANZANIA INVESTMENT BANK

COMMENTS ON THE WORLD BANK PROJECT PERFORMANCE AUDIT REPORT ONTANZANIA INVESTMENT BANK.(LOANS 1172. 1498 AND 1750-TA)

1.0 INTRODUCTION

TIB has in the first place specific remarks about the

two documents forming the Project Performance Audit

Report (PPAR), that is the Project Performance Audit

Memorandum (PPAM) and the Project Completion Report

(PCR). These are set out in parts 2.0 and 3.0

hereinafter, and they either make corrections of

certain specific factual errors or dispute some of the

deductions made from the stated findings.

In part 4.0 are general observations about the PPAR,

but in particular the views held and conclusions drawn

by the World Bank's Operations Evaluation Department in

the PPAM, most of which regrettably TIB has found

totally unacceptable.

TIB's comments are restricted to the remarks that

affect it.

2.0 SPECIFIC REMARKS ON PROJECT PERFORMANCE AUDIT MEMORANDUM

2.1 THE PREFACE AND BASIC DATA SHEETS (PAGES (i)-(vii)

TIB has no comments on this part of the Report and

is in agreement with the statements and figures

therein.

2.2 THE EVALUATION SUMMARY (PAGES (ix)-(xv)

2.2.1 TIB's Shareholding-in TDFL:

The second sentence of paragraph (iii)

should be corrected to read as follows:-

"TIB is a 24.17% shareholder". This should

be corrected also at page 6 of the PPAM,

Para 7.

APPENDIX 2-130 - Page 3 of 12

2.2.2 TIB's independence in approving projects:

All the statements made in para (v) at

page (x) about TIB are basied on completely

false facts. TIB has never had to approve

projects for funding because of government

pressure or influence, either through

government representatives on the TIB Board

or in any other way whatsoever.

The Report fails to cite a single instance

to substantiate the allegation of practices

that have defeated TIB's role of

"exercising an independent quality control

function over project investment decisions".

Rather, TIB can cite clear cases of

government sponsored projects which TIB

rejected either because they were submitted

at an advanced stage when TIB could not

have good opportunity to appraise them or

because they were not viable. Neither did

TIB fear, nor were there any pressure

tactics from the government. These

projects include:

(a) Mbagala Sheet Glass Project

(W) Mbeya Textiles Project

(c) Nyanza Salt Mines Project (vacuum plant)

(d) Mwanza Container Glass Project

(e) Light Source Project

- 131 - APPENDIX 2Page 4 of 12

Besides, the predominant presence of high

ranking officials on the TIS Board has

never had the negative effect of eroding

TIB's Independence and self reliance in

approving projects. Members of the TIS

Board are appointed by' the shareholders,

namely, the Treasury, the National Bank of

Commerce and the National Insurance

Corporation in the respective proportion of

60%, 30% and 10%, in accordance with the

provisions of the TIB Establishment Act,

which stipulates as follows:

"All Directors shall be persons

experienced in economic and financial

matters or in banking".

TIB notes with concern that such an

important report as the PPAR could draw

conclusions from unproven assumptions about

TIB. These assumptions, unfortunately, are

belaboured on the PPAM in para 11 and on

their strength, incorrect remarks are

repeated here and there in the Report.

Each of these remarks are commented on

appropriately in -these comments, and in the

part on general remarks TIB more clearly

dwells on the matter as a whole.

2.2.3 TIB's capability to appraise Profects

jpage (x) Para vi)

The remarks made about TIB in this part of

the Summary (which are elaborated in

paras 9-14 of the PPAM), are incorrect.

- 132 - APPENDIX 2Page 5 of 12

Observations like "Ouring the investment

spree of the 1970*s. both TIB and TDFL did

not pay enough attention to design and

issues affecting longer-term viability of

projects"; or "The potential impact of cost

overruns, delays in implementation and

different product prices were not tested by

sensitivity analysis"; "TIB has supported

projects at the behest and risk of the

fiscus which have not been subjected to

appraisal" cannot have been based on proven

findings of fact. For one thing, the PPAM

itself in para 15 at page 9 confesses that

the factors that principally dislocated the

viability of the TIB financed projects were

such that neither TIB's nor any other

appraisal expertise could have predicted.

(TIB's comments on these factors appear

later).

For another, TIB has a specific Project

Appraisal system, as is observed in the PCR

at page 11 in para 3.04. This system is

known to the World Bank and has been

useful, although TIB accepts that there is

room for improvement.

In view of the above, TIB registers its

disappointment at the fashion in which the

PPAM seeks to project TIB as so lacking in

project appraisal capabilities that even

the elementaries of this discipline, such

as sensitivity analysis, feedback

mechanisms, project design,' implementation

schedules, etc. are completely lost on it.

- 133 -

APPMNDIX 2Page 6 of 12

This simplistic analysis sets the trend for

so many distortions of facts about TIB's

operations, and it so dounplays the real

factors leading to the operational problems

experienced today that TIB is compelled to

make comments on it again in the general

remarks.

2.2.4 Parastatal vs. Private Project Performance

(ParA Vii at Page xi)

TIS does not agree with the assertion that

parastatal subprojects have been

particularly weak compared to non-parastatal

subprojects. Both groups have been facing

similar periormance problems; and it is not

true that TIB would be facing less

operational problems if it had discriminated

in favour of the private sector. The Report

should at least have singled out the

problems that affect the performance of

parastatal subprojects exclusively, if any.

This distinction, wherever it appears in the

Report, should be removed.

2.2.5 Sustainability (Pace xi Para viii)

TIB agrees that it faces liquidity problems

at the moment and accepts as valid the

proposed measures against this. particularly

the need to resolve the issue of the foreign

currency denominated debt. However, the

remark "Though marginally profitable on

paper" should be reworded to read "Though

recently TIB has been only marginally

profitable...." etc. The reason is that TIB.

has been quite profitable in real terms (not

on paper) for a long period, and it was only

recently, on account of having had to

provide for doubtful debts that TIB is only

marginally profitable.

- 134 - APPENDIX 2Page 7 of 12

2.2.6 Findings and Lessons (Page xi -ara ix)

TIB disagrees with the opening remark that

its performance has been poor at all times.

TIB's profitability has been good all along,

and became poor only in recent years.

2.2.7 on UnrLd_Bank/TIB Association (Page xii)

Again, as in para 2.2.3 above. TIB is

disappointed that the Report in essence

passes Judgement on the Project Appraisal

capabilities of TIB. the World Bank and all

other agencies associated with the approval

of the subprojects conceived in happier days

in the economic developmenti of the country,

by looking at the failures that are almost

exclusively' a result of subsequent

unpredictable developments.

On the capability of TIB to appraise

projects and the extent to which this has

contributed to the failure of subprojects,

the Report regrettably has inconsistencies.

For instance, having observed that TIB lacks

even the simplest skills in project

appraisal, the Report concedes, at page xii,

that TIB has a knowledgeable and experienced

top management, a developed core of capable

staff, whose efforts however were frustrated

in a large measure by compelling

environmental factors!

The Report's success in noticing what went

wrong is not so surprising, considering it

had the benefit of hindsight. TIB feels

this success should not be celebrated as a

disclosure of what the Report views as TIB's

hitherto unnoticed incompetence and lack of

foresight.

- 135 - APPENDIX 2Page 8 of 12

2.2.8 Key Parameters in project appraisal/

evaluation (pages xiii-xv)

TIB agrees with the Report on what

parameters should be considered in

appraising a project. The implication

however that TIB either was oblivious of

these parameters or did not apply them in

evaluating projects is rejected by TIB.

At the risk of being repetitive, TIB

considers such an outlook rather simplistic

as a _ay of reviewing the real problems that

the Report set out to address.

2.3 THE PROJECT PERFORMANCE AUDIT REPORT ITSELF

2.3.1 Background

TIB has no comments and generally agrees

with what is stated in this part.

2.3.2 Institutional Development (pages 5 to 6)

(a) The opening remark of para 9 should be

amended to remove the impression that

TIB's localisation efforts were made

prematurely. In reality. TIB reduced

its reliance on expatriates after

suitable replacements had been

recruited. The only problem TIB has had

in the past is that of retaining local

engineers.

(b) The phrase $projects under supervision*

in para g should read 'Projects under

Implementation'.

- 136 - APPENDIX 2Page 9 of 12

(c) On page 6, th, remark that TIB's

training activities did not help it to

be more effective in project

identification and appraisal work is

untrue. TIB holds the view that

training activities have tremendously

assisted in improving the skills of our

professional staff.

2.3.3 Sectoral Contribution (Panes 6-8)

(a) The remarks in para 11 and 12 have

already been commented upon in

para 2.2.3. and will be again referred

to in the general remarks. This

paragraph should be rewritten to

reflect the true situation. TIB's

independence in assessing those

projects submitted to it is proven, and

there is no case of premature approval

as claimed.

(b) Para 13, too, should be rewritten.

Contrary to what is stated in the

Report, there are several useful major

policy decisions which the government

passed in response to the

recommendations of the TIB Clients

Seminars. There has also been

effective influence on policy decisions

through TIS representation on various

committees.

(c) There exists effective TIB-Client

relationships, contrary to the remark

in para 13. TIB used to organize annual

clients' seminars which brought

together all its clients.

137 - APPENDIX 2Page 10 of 12

TIB has full representation on all

subprojects Boards of Directors and

officers of the Bank pay quarterly

physical visits to these projects. TIB

feels this kind of relationship cannot

fairly be descrIbed as being based on

"a hands-off attitude" as stated in the

Report. The paragraph should be

reuritten to reflect the influence of

TIB as a financier on the operations bf

the subprojects it financed.

2.3.4 Financial Condition (Para 17 at Baae 11)

Although rIB generally agrees with the

observation that its equity base has been

eroded, and that its profitability has been

low in recent years, what is stated in

connection with administrative expenses is

incorrect.

Administrative expenses have never been a

contributing factor in the erosion of the

equity base or low productivity. This has to

be corrected, as indeed the PPAR does not

give any reason to disprove what appears in

the PCR at page 17 that TIB has been able to

keep its administrative costs low.

2.3.5 Findings and Issues (Part IV) paae 13-25

This part of the Report, in the opinion of

TIB, contains ordinary findings which any

analyst with the benefit of hindsight would.

see. TIB feels that the Report has unfairly

passed judgement on its performance and that

of the World Bank at the time when the bulk

of the present problems could not be

foreseen.

- 138 - APPENDIX 2Page 11 of 12

This shortcoming in analysis should be kept

in mind by all the addressees of the Report

lest damage of no small proportion results

from such conclusions as "In retrospect, it

emerges that follow-on operations to TIB

were launched hastily and in disregard of

the deep-seated problems afflicting the

sector. etc." (Para 22. page 14).

The remarks about the auditing capabilities

of the Tanzania Audit Corporation (TAC) are

not completely true. There have been

differences of opinion between TAC and the

World Bank on matters of principle, but this

does not mean TAC has not been thorough in

its audit.

3.0 SPECIFIC REMARKS ON THE PROJECT COMPLETION REPORT

TIB finds the PCR as representing a correct appraisal of

the operations of TIB and the World Bank/TIB association

over all these years. The PCR resulted from, an actual

field study/review of the situation, and it arrives at

conclusions that are borne out by facts. TIS commends

the positive and forward looking attitude of the

compilers of the PCR.

4.0 GENERAL COMMENTS ON THE AUDIT REPORT

4.1 Shortcomings in Analysis

TIS cannot accept the style of analysis adopted by

,the compilers of the Audit Report (excluding the

Project Completion Report). It is an analysis

bound to be negative in attitude, as the compilers

neglected to remind themselves that:

- 139 - APPENDIX 2Page 12 of 12

(a) Hindsight makes situations appear too obvious

to an analyst when the same cannot be observed

by the most analytical experts who did not have

that benefit. This benefit has unfortunately

obsessed the compilers of this Report, and as a

result they devote so much of the Report'

towards passing unfair Judgement on the role

played by TIB and the World Bank over the years.

(b) Given the weight-of the Report, the findings in

it had to be bas(d on proven facts and not mere

assumptions as it has been demonstrated in the

earlier part of this commentary. In so far as

it seeks to.prove wrong all previous World Bank

study missions that worked closely with TIB, it

should be rejected.

(c) TIB has a Ckarter, embodied in the

establishment statute, the Tanzania Investment

Bank Act. In it, TIB's mission is defined, and

if the compilers had examined it closely, the

Charter does not predetermine any bias in

favour of the public as opposed to the private

sector. As said in (b) above, however. TIB is

assessed throughout the Report as having been

chartered to cater for the parastatal sector.

That the bulk of its clientele is parastatal

merely reflects the national development policy

trend of the period, when public enterprises

were the vehicles of development.

- 141 -

APPENDIX 3

TANGANYIKA DEVELOPMENT FINANCE COMPANY LIMITEDTDFL Buildift ReS. Office PloK No. 1009 Upea Road and Ohio Str".

Tdsphm Dw a Selm 2gM-4, 312U-7. P.O. Box 347. De a Salm. TemuiTebs 41153 Ca A Tdpm. DEVFIN Dw a Selbm.

COMMTS RECEIVED FROM THE BORROWER - TDFL

Ref No.37/89/C/T/35 20th February 1989

Hr Alexander NowickiDivision ChiefPolicy-Based Lending. Industry,Public Utilities and Urban SectorsOperations Evaluation Department

The World Bank1818 H Street,N.W.Washington, D.C. 20433U.S.A

Dear Mr Nowicki,

Re: Tanzania Investment Bank (TIB) (Loans 1172, 1498 and1750-TA) and Tanganyika Develpment Finance Co.Ltd (TOFL)(Loan 1745-TA) Project Performance Audit Report

Thank you for your letter of 10th January and for sending to mea copy of draft PPAR. I am sorry I was unbble to respond toyou earlier than today as I was away in the Far East for a monthfrom where I returned last week.

I have hurridly gone through the draft and do not have any commentsI look forward to receive a copy of the final report.

Yours sincerely,

J K ChandeChairmanBoard of Directors

Dbmsm J.1. Chand0 (Cha) (TamAn) O.F. Mbowe (Maanw), (Tamunian) J.C. Robombs, (Tanoulaa)D.auts easilushaft Per Wintuaftelsh (D.3.O.)(WWes Gemea). W.H.. Diller(West Omn=a), PJ. Bys (Dutch).P leandering laepp Voor Outwikkefelgduaet N.V. (.M.0.) (Dutch). A. Van Daum (Briti,hO.W. Browa (Briis).